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Current Developments in the Commercial Divisions of the
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Posted: March 10, 2015

Court Certifies Class of Lien Law Beneficiaries

On February 24, 2015, Justice Demarest of the Kings County Commercial Division issued a decision in ECD NY, Inc. v. Britt Realty, LLC, 2015 NY Slip Op. 25052, certifying a class of beneficiaries of the Lien Law Article 3-A trust funds.

In ECD NY, the plaintiffs sought certification of a class of “all beneficiaries of the Lien Law Article 3-A trust funds received by Britt Realty, LLC and North 7-8 Investors, LLC in connection with the development project located at North 7th Street and North 8th Street, in Brooklyn, New York (the “Project”); iii) directing Britt and North 7-8 to provide a list of all Lien Law Article 3-A trust beneficiaries to ECD; and iv) determining the method of notice to the members of the class.” The court granted the motion, explaining:

Article 3-A of the Lien Law creates trust funds out of certain construction payments or funds to assure payment of subcontractors, suppliers, architects, laborers, as well as specified taxes and expenses of construction. New York courts have held that the primary purpose of Article 3-A is to ensure that those who have directly expended labor and materials to improve real property at the direction of an owner or general contractor receive payment for work performed. Section 70(2) of the Lien Law provides that funds received by an owner in connection with each improvement constitute a separate trust and the owner is the trustee thereof. Further, any transaction by which any trust asset is paid, transferred or applied for any purpose other than a purpose of the trust before payment or discharge of all trust claims with respect to the trust, is a diversion of trust assets.

Pursuant to Lien Law § 77(1), an action under Lien Law Article 3-A must be brought as a representative action for the benefit of all beneficiaries of the trust, and the practice, pleadings, forms and procedure shall conform as nearly as may be to the practice, pleadings, forms and procedure in a class action as provided in article nine of the civil practice law and rules. However, this section also provides that the requirement of numerosity, pursuant to CPLR § 901(a)(1) may be waived at the discretion of the Court. Plaintiff asserts that the class should be certified as all beneficiaries of the Lien Law Article 3-A trust funds received by Britt Realty, LLC and North 7-8 Investors, LLC in connection with the development project located at North 7th Street and North 8th Street, in Brooklyn, New York. Plaintiff has stated that it has identified at least one other subcontractor that is owed payment by Britt and North 7-8 in connection with the Project, but has not identified this party.

Defendants argue that class action certification is not warranted because plaintiff has failed to satisfy the numerosity requirement of CPLR § 901(a)(1) and has failed to adduce any evidence of a class. Defendants assert that the numerosity requirement should not be waived because plaintiff has failed to identify any similarly situated parties. Defendants’ argument must fail as absence of information regarding other potential members of a class is not fatal to an action under Article 3-A of the Lien Law. Presumably defendants’ compliance with their obligations to disclose records under Lien Law § 76 will provide the information necessary to identify members of the proposed class.

Section 77(1) of the Lien Law permits any party with a trust claim to bring an action to enforce the claim on behalf of all the potential beneficiaries. Maintaining this action as a class action is, in accordance with the intent of the Lien Law, superior to other available methods because it eliminates the risk of inconsistent determinations of the claims of the individual members of the class and avoids the unnecessary costs and delays of multiple lawsuits. The policy favoring class certification in cases like that herein is so strong in New York that the failure to comply with the requirements of CPLR Article 9 is not fatal to certification, but may be cured upon notice to potential trust beneficiaries.

Plaintiff has successfully established the prerequisites to class action certification in the context of Article 3-A other than numerosity, namely that (1) there are questions of law or fact common to the class which predominate over any questions affecting only individual members, (2) the claims or defenses of the representative party are typical of the claims or defenses of the class, and (3) the representative party will fairly and adequately protect the interests of the class. As noted by the plaintiff, with respect to the question of commonality or predominance set forth in CPLR § 901(a)(2), the questions of law raised in this action are identical among potential class members, specifically, whether a trust was formed, whether trust funds were diverted, and whether the class members are beneficiaries of the trust. Defendants argue that plaintiff fails to establish the prerequisite of commonality because only plaintiff has filed a mechanic’s lien against the Project. This argument must fail because Lien Law § 71(4) provides that there is no requirement that a beneficiary of trust assets file a valid lien or even have the right to file a lien as a condition precedent to application of Article 3-A.

With respect to the prerequisite of typicality set forth in CPLR § 901(a)(3), plaintiff’s claims that it performed work on the premises constituting permanent improvements thereto, that the work was not paid for, and that the defendants diverted trust funds, are virtually identical to the claims of potential class members. As for the prerequisite of adequacy of representation set forth in CPLR § 901(a)(4), plaintiff asserts that it will fairly and adequately protect the interests of the proposed class because its claim for damages, in the amount of $708,603.00, is substantial and because plaintiff has the same rights and interests as the other members of the class. Furthermore, if plaintiff’s claim is successful, all creditors who establish valid trust claims will share pro rata in the trust funds which are recovered in this action.

(Internal quotations and citations omitted) (emphasis added).

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