2010 WL 4807548 (2d Dep’t, Nov 23, 2010)The School District entered into a contract with DJH Mechanical to perform HVAC at a middle school. Nova issued the required performance and payment bonds for DJH.DJH failed to complete the contract. After Nova refused to perform under the bond the school district completed the work. The school district sued Nova for breach of its performance bond, and Nova defended on the grounds that its bond had been discharged. A jury awarded $105,000 to the school district and both parties appealed. The appellate court affirmed the rulings of the trial court.

Nova appealed from the denial of its motion for summary judgment that it had no liability because the school district’s payment of $214,000 to the Department of Labor in response to a notice of cross-withholding was (1) a diversion of trust funds under Art. 3-A of the Lien Law, (2) a breach of the underlying contract and bond, and (3) wrongful release of retainage in violation of General Municipal Law Sec 106-b(1).

The court held that Nova had not shown as a matter of law that the payment to the DOL was improper resulting in Nova’s being relieved of liability under its bond.

The court rejected Nova’s argument, based on Matter of RLI Ins. v. DOL, that the school district’s payment of the cross-withholding notice at DJH’s request was wrongful. Nova had not performed any work, and apparently had not paid any claims under its payment bond. As a result the court held that Nova could not assert the subrogation rights which were the basis of the decision in favor of the surety in RLI.

The court held that payment of the cross-withholding as requested by DJH did not as a matter of law breach the contract or performance bond.

As to Gen Mun L 106-b(1), the court held that while this statute permits a public owner to withhold funds, it did not create a private right of action available to Nova for the school district’s failure to retain the funds.

The school district appealed from the denial of its demand for attorney’s fees. The court denied the appeal on the grounds that neither the contract or bond contained “unmistakably clear” language obligating Nova to reimburse the school district for its attorney’s fees.