Tutor Perini Building Corp. v. SLAYTON VENTURES, LLC

Background

Tutor Perini Building Corp. (TPBC) was hired by George Washington Bridge Development Venture LLC, which was not a party because it was in bankruptcy, to perform construction work on the George Washington Bridge Bus Station renovation project. TPBC alleged that the developer failed to pay more than $29 million in progress payments and retention funds because project money was diverted to related entities, the developer’s owners, lenders, legal fees, and other expenses.

TPBC asserted claims under Article 3-A of the New York Lien Law, which protects certain construction funds for contractors and other beneficiaries; claims for conversion and constructive fraud against the developer affiliates; and a request for a declaration that TPBC’s rights were superior to the lenders’ rights. The defendants filed four motions to dismiss: one by the developer affiliates, one by the senior lenders, one by the co-lenders, and one by Upper Manhattan Empowerment Zone Development Corporation.

Subject-Matter Jurisdiction

The developer affiliates argued that the court lacked diversity jurisdiction because DVCI CDE XIII LLC was a citizen of Arizona and therefore was not diverse from TPBC. TPBC asked the court to remove DVCI instead of dismissing the entire action.

The court applied the rules governing parties whose absence might prevent a case from being fairly resolved. It found little risk of prejudice from DVCI’s removal because TPBC sought to recover funds from each recipient separately, the other defendants would not become liable for DVCI’s alleged diversions, and the other lenders could protect interests aligned with DVCI. The court therefore held that DVCI was not an indispensable party, granted TPBC’s motion to drop DVCI, and concluded that diversity jurisdiction existed over the remaining parties. The court also denied TPBC’s motion to add new defendants to establish federal-question jurisdiction.

Article 3-A Representative-Action Requirement

The court held that TPBC’s complaint sufficiently stated that it was bringing the Article 3-A claim for all trust beneficiaries. Although TPBC ultimately would have to meet the federal class-action requirements or join all beneficiaries, the court found that this issue did not require dismissal at the pleading stage. The defendants’ motions to dismiss based on TPBC’s failure to pursue a representative action were therefore denied.

The court also held that TPBC plausibly alleged that the developer was both an owner and a contractor for purposes of the Lien Law, that TPBC was the developer’s subcontractor, and that the developer affiliates diverted funds from a contractor trust benefiting TPBC. The court denied the developer affiliates’ motion to dismiss the Article 3-A claims.

Claims Against the Lender Defendants

The court granted the lenders’ motions to dismiss the Article 3-A claims. Under the court’s reading of New York law, a plaintiff seeking to recover trust funds from a recipient must plead that the recipient knew the funds were trust assets. TPBC’s complaint did not allege that the lenders knew the funds they received had trust status or had been unlawfully diverted.

The complaint also identified rental income as another possible source of payments to the lenders and included few facts about specific transactions, the timing of the payments, or the lenders’ knowledge of TPBC’s nonpayment and the developer’s financial problems. The court therefore found no plausible basis to infer the required knowledge. It did not reach the lenders’ separate argument that TPBC had failed to allege that they received trust funds. The Article 3-A claims against the lenders were dismissed with prejudice.

Declaratory-Judgment Claim

TPBC sought a declaration that provisions of the ground lease made it a third-party beneficiary and subordinated the lenders’ rights to its rights. The bankruptcy court had already decided that TPBC was not a third-party beneficiary of the ground lease, after TPBC had a full and fair opportunity to litigate that issue.

The court applied issue preclusion, which prevents a party from relitigating an issue already decided in an earlier proceeding, and held that the bankruptcy ruling defeated the central premise of TPBC’s declaratory claim. Because TPBC had appealed the bankruptcy ruling, however, the court dismissed the declaratory claim without prejudice to TPBC’s ability to assert it again if that ruling were overturned.

Conversion Claim

The court denied the developer affiliates’ motion to dismiss TPBC’s conversion claim. It held that TPBC plausibly alleged a possessory interest in specific trust funds and alleged conduct beyond simple failure to pay a contract debt, including diverting funds to the developer’s principals, legal fees, and other expenses. The conversion claim was therefore not duplicative of TPBC’s separate contract claim against the developer.

Constructive-Fraud Claim

The court granted the developer affiliates’ motion to dismiss TPBC’s constructive-fraud claim. TPBC alleged that the developer and its owners made statements during arbitration proceedings about not planning to file for bankruptcy and about TPBC not being at risk of nonpayment. But the complaint did not identify which defendants made the statements and improperly grouped together entities, individuals, an employee, and Doe defendants without alleging each person’s role.

Because TPBC had already amended its complaint twice and had been warned that another amendment ordinarily would not be allowed, the court dismissed the constructive-fraud claim with prejudice and without leave to amend.

Disposition

Judge Engelmayer granted TPBC’s motion to drop DVCI. He granted the motions of the senior lenders, co-lenders, and UMEZ; those claims were dismissed with prejudice as to the Article 3-A claims and without prejudice as to the declaratory claim. He granted in part and denied in part the developer affiliates’ motion: the constructive-fraud claim was dismissed with prejudice, while the remaining claims against those defendants survived.