SpecRite Design, LLC v. Elli N.Y. Design Corp. et al

Filing 33

MEMORANDUM AND OPINION re: 24 MOTION to Stay Counts 1 and 2 of the Complaint. MOTION to Dismiss Cross-Claims. filed by J. Kokolakis Contracting, Inc, Liberty Mutual Insurance Company: Specrite Design, LLC ("Specrit e" or "Plaintiff") brings this action against Elli N.Y. Design Corp. ("Elli"), J. Kokolakis Contracting Inc. ("Kokolakis"), and Liberty Mutual Insurance Company ("Liberty Mutual," collectively, the "D efendants"), alleging that Elli breached an agreement under which Plaintiff performed labor and furnished materials in connection with a contract for a public improvement project. Specrite also seeks to foreclose on a lien and asserts a claim ag ainst the discharge of lien bond acquired to insure it (the "Lien Foreclosure Claims"). Before the Court is Kokolakis and Liberty Mutual's motion to stay Counts I and II of the Complaint, pending the outcome of a related action in New York County Supreme Court. For the reasons stated above, Kokolakis and Liberty Mutual's motion to stay Count I and Count II of the Complaint is GRANTED. The clerk of this Court is respectfully directed to terminate the motion, Doc. 24. The parti es are directed to attend a status conference on August 9, 2017 at 11:30am to discuss a discovery schedule for the balance of the Counts. ( Status Conference set for 8/9/2017 at 11:30 AM before Judge Edgardo Ramos.) (Signed by Judge Edgardo Ramos on 7/20/2017) (jwh)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
SPECRITE DESIGN, LLC,
Plaintiff,
– against –

OPINION AND ORDER

ELLI N.Y. DESIGN CORP., J. KOKOLAKIS
CONTRACTING, INC., LIBERTY MUTUAL
INSURANCE COMPANY, AND JOHN DOES 110, JOHN DOES 10-20,

16 Civ. 6154 (ER)

Defendants.

Ramos, D.J.:
Specrite Design, LLC (“Specrite” or “Plaintiff”) brings this action against Elli N.Y.
Design Corp. (“Elli”), J. Kokolakis Contracting Inc. (“Kokolakis”), and Liberty Mutual
Insurance Company (“Liberty Mutual,” collectively, the “Defendants”), alleging that Elli
breached an agreement under which Plaintiff performed labor and furnished materials in
connection with a contract for a public improvement project. Specrite also seeks to foreclose on
a lien and asserts a claim against the discharge of lien bond acquired to insure it (the “Lien
Foreclosure Claims”). Before the Court is Kokolakis and Liberty Mutual’s motion to stay
Counts I and II of the Complaint, pending the outcome of a related action in New York County
Supreme Court. For the reasons set forth below, Kokolakis and Liberty Mutual’s motion is
GRANTED.

I.

Background
A.

Factual Background 1

On August 2, 2012, Kokolakis entered into a public improvement contract (the
“Contract”) with the Dormitory Authority for the State of New York (“DASNY”) for a project
known as the Bronx Mental Health Redevelopment, Children’s Center, Bronx, New York (the
“Project”). Complaint (“Compl”), Doc. 1, ¶¶ 8, 16; Trif Decl. Ex A, at 1‒2. On April 28, 2014,
Kokolakis entered into an agreement (the “Subcontract”) with Elli wherein Elli agreed to
fabricate and install architectural woodwork, casework, and millwork for the Project. Answer at
8; Trif Decl. Ex. A, at 23. The Subcontract expressly allows Kokolakis to “deduct any monies
due or to become due” to Elli in case of Elli’s default. Id. at 14. Sometime thereafter, Elli, in
turn, entered into an agreement with Specrite (the “Specrite Subcontract”) pursuant to which
Specrite agreed to furnish certain labor and materials for the Project. Compl. ¶ 8.
Elli allegedly breached the Specrite Subcontract by failing to pay Specrite the full amount
due for labor performed and materials furnished for the Project. Id. at ¶ 11. On March 14, 2016,
Specrite filed with the DASNY a Notice of Lien for Public Improvement (the “Lien”), claiming
that Elli owed $109,763.91 for work performed under the Specrite Subcontract. Id. at ¶¶ 13‒14.
Subsequently, Liberty Mutual issued a bond, bearing the bond number 015049636, discharging
the Lien (the “Discharging Bond”). 2 Id. at ¶ 18.

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The following factual background is based on allegations in the Complaint, and the declaration, memoranda, and
exhibits submitted in connection with the motion to stay. Evidence outside of the pleadings maybe considered by a
court to determine factual issues in examining a motion to stay. Kappel v. Comfort, 914 F.Supp. 1056 (S.D.N.Y.
1996).
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Kokolakis and Liberty Mutual claim that the bond was issued by Kokolakis as principal and Liberty Mutual as
surety. Mem. Supp. Mot. Stay, at 3.

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B.

Related State Action

On March 21, 2016, Elli filed a contract breach claim against Kokolakis and Liberty
Mutual in the Bronx County Supreme Court (“State Court Action”), seeking to recover
$221,716.77 due under the Subcontract. Trif Decl., Ex. B. On June 27, 2016, Kokolakis and
Liberty Mutual filed an answer to the state court complaint, denying the breach claim, and
counterclaiming that Elli breached the Subcontract by, among other things, “performing its scope
of work in a poor and unworkmanlike manner and failing to cure its defaults under the
Subcontract.” Id., Ex. C, at 6.
On September 12, 2016, the State Court Action was transferred to New York County
pursuant to the parties’ stipulation. Id., Ex. D. On July 7, 2016, the parties commenced
discovery in the State Court action. Id., Ex. E & F.
C.

Procedural History

On August 3, 2016, Specrite filed this action to recover money due under the Specrite
Subcontract. Compl. (Doc. 1). In the Complaint, Specrite asserts eight causes of action, two of
which are relevant to this motion: Count I is a claim for foreclosure of the Lien, and Count II is
a claim to recover under the Discharging Bond (together with Count I, the “Foreclosure
Claims”). Id. at 3‒5. Elli answered on September 29, 2016. Doc. 20. In the same document,
Elli also asserted cross-claims against Kokolakis and Liberty Mutual for breach of the
Subcontract, asking to recover $221,716.77. 3 Id.
On October 25, 2016, Kokolakis and Liberty Mutual filed the instant motion to stay the
Foreclosure Claims. Doc. 28.

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Kokolakis and Liberty Mutual also moved to dismiss the cross-claims brought by Elli. Doc. 24. On Nov. 23,
2016, the parties submitted a stipulation to withdraw the cross-claims and motion to dismiss cross-claims. Doc. 28.
Therefore, the Court will not address Elli’s cross-claims.

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II.

Legal Standards
A stay is “not a matter of right,” even where irreparable injury might result. Virginian

Ry. Co., 272 U.S. 658, 672 (1926). Rather, it is “an exercise of judicial discretion,” and “[t]he
propriety of its issue is dependent upon the circumstances of the particular case.” Id. at 672‒73.
Yet the Court’s discretion is not unguided. Kappel v. Comfort, 914 F.Supp. 1056, 1058
(S.D.N.Y. 1996). A court may stay proceedings in one suit to abide by the proceedings in
another even if the parties or the issues in the two cases are not identical. Caspian Investments,
Ltd. v. Vicom Holdings, Ltd., 770 F.Supp. 880, 884 (S.D.N.Y.1991) (citing Landis v. North Am.
Co., 299 U.S. 248, 254 (1936)).
Courts examining motions to stay consider five factors 4: “(1) the private interests of the
plaintiffs in proceeding expeditiously with the civil litigation as balanced against the prejudice to
the plaintiffs if delayed; (2) the private interests of and burden on the defendants; (3) the interests
of the courts; (4) the interests of persons not parties to the civil litigation; and (5) the public
interest.” Royal Park Invs.SA/NV v. Bank of Am. Corp., 941 F. Supp. 2d 367 (S.D.N.Y. 2013);
see also Tradewinds Airlines v. Soros, 2009 WL 435298 (S.D.N.Y. 2011) (staying a civil case
pending the disposition of a contested default judgment before the Superior Court of the State of
North Carolina). In balancing these factors, courts must make a case-by-case determination, in
which the basic goal is to avoid prejudice. Volmar Distributors, Inc. v. New York Post Co., 152
F.R.D. 36, 39. (S.D.N.Y. 1993). “The proponent of a stay bears the burden of establishing its
need.” Clinton v. Jones, 520 U.S. 681, 708 (1997).

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In Kokolakis and Liberty Mutual’s memorandum in support of their motion to stay, they cite to the seven-factor
test in De Carvalhosa v. Lindgren, 546 F.Supp.228, 230 (S.D.N.Y. 1982). Mem. Supp. Mot. Stay, at 3. However,
De Carvalhosa concerns a motion for a stay where there is a federal proceeding and a similar cause of action
pending in state court. Here, the instant federal action and state action involve different parties and different causes
of action. See Mem. Supp. Mot. Stay, at 3‒4. In any event, if the Court applied the seven-factor test, the outcome
would be no different.

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III.

Discussion
A.

The Balancing of Interests and Prejudice to the Parties

Section 5 of New York State’s Lien Law provides that persons performing labor for or
furnishing materials to a contractor or the subcontractor for a public improvement project, upon
timely notice, could file a mechanics’ lien for the value of the labor performed. McKinney’s
Lien Law §5. There is no dispute that Lien Law §5 applies to this action, and the parties agree
that the Lien and notice were timely filed. Compl. ¶4; Mem. Supp. Mot. Stay, at 3. Both parties
also agree that the amount of the lien fund‒‒the amount due from Kokolakis to Elli under the
Subcontract‒‒determines what Specrite can recover under the Lien Foreclosure Claims. The
parties’ dispute centers on the point at which we look to see how much is in the lien fund.
Kokolakis and Liberty Mutual assert that because the Subcontract expressly allows
Kokolakis to utilize earned and unearned funds to cure any default on Elli’s part, Kokolakis has
the right to use monies otherwise payable to Elli‒‒i.e., the lien fund‒‒to pay for any work
required to cure the default. Mem. Supp. Mot. Stay, at 5‒6. Therefore, if the State Court
determines that Elli defaulted, it could find that the lien fund was properly depleted as a result of
Kokolakis’s subsequent efforts to cure the default. Reply Mem. Supp. Mot. Stay, at 4‒5 (citing
Scarsdale Nat. Bank & Trust Co. v. U.S. Fid. & Guar. Co., 264 N.Y. 159 (1934)). In that event,
the argument continues, a stay here is appropriate because the State Court Action may render the
instant action moot if there is nothing left in the fund. Mem. Supp. Mot. Stay, at 5‒6.
In contrast, Specrite argues that under Lien Law §5, the Lien Foreclosure Claims turn on
the amount due from Kokolakis to Elli at the time the lien was filed—here on March 14, 2016—
not whether there was a subsequent default by Elli. Mem. Opp. Mot. Stay, at 3‒4 (citing
American Radiator Co. v. New York, 223 N.Y. 193 (1918)). In other words, Specrite contends

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that if the lien fund was sufficient to satisfy its (Specrite’s) Lien as of March 14, 2016, it is
immaterial whether Elli subsequently defaulted. Specrite contends that the existence and extent
of a lien fund is “an extremely fact sensitive issue,” and that “careful attention must be paid to
the timing of the filing of the liens, as well as when any alleged default occurred.” Id. at 4.
Kokolakis has the better of the argument. Courts have uniformly held that under Lien
Law §5, 5 the right to a lien can only be enforced to the extent of the amount “due or to become
due to the contractor or subcontractor on whose credit the labor and materials are furnished
under his contract.” Hempstead Concrete Corp. v. Elite Assocs., Inc., 203 A.D.2d 521, 523
(1994); see also Harsco Corp., Patent Scaffolding Co. Div. v. N.Y. City Dep’t of Gen. Servs.,
1993 WL 138829, at *3 (S.D.N.Y. Apr. 23, 1993) (holding that a lienor who supplied materials
to a subcontractor is “restricted in his claim to satisfaction out of whatever amount, if any, is due
and unpaid from the contractor to the subcontractor.”). The upshot of the foregoing is that under
New York law, a party supplying materials to a subcontractor has only a derivative lien, being
substituted to the right of the subcontractor. See Rukeyser v. Fountain & Choate, Inc., 185 A.D.
263, 267 (1st Dep't 1918) (“In the absence of fraud between the general contractor and his
subcontractor . . . one performing labor or furnishing materials to the latter becomes entitled, by
subrogation only, to his right to file a mechanic's lien for money due or to grow to from the
former . . . ”). 6 Here, even though the Lien was discharged by the issuance of Liberty Mutual’s

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The Court, sitting in diversity, shall apply New York law on substantive matters such as the interpretation of
payment bonds for public works projects. Gasperini v. Center for Humanities, Inc., 518 U.S. 415, 427 (1996).

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To be sure, there may be instances in which this statutory scheme renders unfair results, as when an innocent
subcontractor goes unpaid because the general contractor has defaulted. This important limitation of Section 5 of
the Lien Law has not gone unnoticed. See Graham Architectural Prod. Corp. v. St. Paul Mercury Ins. Co., 303 F.
Supp. 2d 274, 279 (E.D.N.Y. 2004) (noting that “if nothing is due on the contract between the contractor and the
public entity, an individual supplying materials or labor for the project cannot have a lien under § 5”) (citing Upson
v. United Eng’g & Contracting Co., 72 Misc. 541, 544 (Sup. Ct. 1911)); see also Chittenden Lumber Co. v.
Silberblatt & Lasker, Inc., 288 N.Y. 396, 400 (1942) (commenting on § 5: “the courts, and apparently the
Legislature, recognized the fact that ‘if . . . the contractor owes no money . . . then laborers employed by the

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surety bond, the same test for the validity of a lien and the amount in the lien fund applies. “The
filing of a bond does not extinguish the lien but merely shifts it from the public funds to the
bond.” Chelsea Equip. & Servs. Corp. v. N.Y. City Health & Hosps. Corp., No. 96 CIV. 0147
(MBM), 1997 WL 790581, at *3 (S.D.N.Y. Dec. 24, 1997). Accordingly, an action to enforce a
discharged lien is in substance an action to test the validity of the lien and to enforce the lien to
the extent it is valid. Id.
Applying the foregoing, Kokolakis is right that the State Court Action, which will decide
whether or not Elli has defaulted, and how much Kokolakis spent or will spend to cure the
default, will determine the existence and extent of the lien fund. Plaintiff relies exclusively on
American Radiator Co. v. New York, 223 N.Y. 193, 198 (1918), for the argument that it is
entitled to whatever was in the lien fund‒‒up to the amount of his claim‒‒at the time it filed the
lien. Mem. Opp. Mot. Stay, at 3‒4. However, in that case, the court reached the conclusion that
a contractor’s subsequent default did not terminate subcontractor’s rights under the lien because
the contract expressly provided that progress payments that had been certified “shall be made in
installments.” Hence, American Radiator is inapposite.
This case is more akin to Scarsdale Nat. Bank & Trust Co. v. U.S. Fid. & Guar. Co., 264
N.Y. 159, 163 (1934). In that case, as in the instant case, the contract allowed the owner to apply
earned monies to complete the project in case of the contractor’s default. In Scarsdale Nat.
Bank, the contract provided:

subcontractor, like persons furnishing materials to the subcontractor, may go unpaid’”) (quoting Devitt v. Schottin,
274 N.Y. 188, 194 (1937)). It is for this reason that in 1938, the New York legislature enacted Section 137 of the
Finance Law, which provides that, for any “contract for the prosecution of a public improvement for . . . a public
benefit corporation,” a condition to the approval of such contract is “a bond guaranteeing prompt payment of
moneys due to all persons furnishing labor or materials to the contractor or any subcontractors in the prosecution of
the work provided for in such contract.” Nouveau Indus. Inc. v. Liberty Mut. Ins. Co., 2011 WL 10901796, at *1
(S.D.N.Y. Sept. 7, 2011) (citing N.Y. State Fin. Law § 137(1)). However, the parties agree that § 137 is
inapplicable in this case. Doc. 31, at 2; Doc. 32.

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“If the work to be done under this contract shall be abandoned by the contractor .
. . the commission shall thereupon have the power to complete or contract for the
completion of the work . . . . The expenses, losses or damages so charged shall in
addition to any other indemnification provided for elsewhere in this contract, be
deducted and paid by the commission out of such moneys as may be due or may
at any time thereafter grow due to the contractor under and by virtue of this
contract, or any part thereof.”
Scarsdale Nat. Bank, 264 N.Y.at 162.
Similarly, in this case, the Subcontract between Kokolakis and Elli provides that should
Elli at any time default, Kokolakis shall “have the right to [r]emedy the default by . . . correcting,
furnishing, performing or otherwise completing the work . . . , and deducting the cost . . . from
any monies due or become due to [Elli].” Trif Decl. Ex. A, at 14.
Therefore, if the State Court determined that Elli had defaulted, Kokolakis would be
entitled to utilize monies earned by and unpaid to Elli to do the work properly, and the amount of
the lien fund would be the difference between the cost of completion and monies earned and
unpaid to Elli at the time of the default. Thus, if Kokolakis expended more money to complete
the Project than it owed to Elli, there would be nothing in the lien fund, and Specrite would have
no right to recover under the Lien. If this happened, the Lien Foreclosure Claims would be
rendered moot.
Additionally, the Court is not persuaded by the argument that Specrite is not a party in
the State Court Action and thus should not be bound by the decision in that court. It is well
settled that a non-party could be bound by a judgement on the same issue if its interests are
derivative from a party in the previous action. See Bernhard v. Bank of Am. Nat. Trust & Sav.
Ass'n, 19 Cal. 2d 807, 812 (1942). Specifically, issue preclusion applies if “(1) the issue in
question was actually and necessarily decided in a prior proceeding, and (2) the party against
whom the doctrine is asserted had a full and fair opportunity to litigate the issue in the first

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proceeding.” Colon v. Coughlin, 58 F.3d 865, 869 (2d Cir. 1995). Here, Specrite’s right under
the Lien is derivative of Elli’s right under the Subcontract. As plaintiff in the State Court Action,
Elli has the opportunity to fully litigate its rights and remedies against Kokolakis, which, as
noted, will determine the existence and extent of the lien fund, and will be binding on Specrite.
See Greco v. Local.com Corp., 806 F. Supp. 2d 653 (S.D.N.Y. 2011) (holding that res judicata
barred plaintiff’s derivative claim against the same defendant when another plaintiff in the prior
action vigorously prosecuted the claim). Moreover, Specrite can still request information related
to the existence and extent of the lien fund through subpoenas. Reply Mem. Supp. Mot. Stay, at
6; see also Mem. Opp. Mot. Stay, at 5.
The Court notes that Kokolakis has not made any showing of how long the State Court
Action would take to resolve. Nevertheless, once a decision is reached in the State Court, which
has been in discovery for over a year, the stay would be automatically lifted, and Specrite can
proceed with its Lien Foreclosure Claims in this Court. Moreover, any loss caused by the stay
will be monetary in nature, and therefore will be susceptible to an award of interest. Wing Shing
Prod. (BVI) Ltd. v. Simatelex Manufactory Co., 2005 WL 912184, at *2 (S.D.N.Y. Apr. 19,
2005). Accordingly, this factor weighs for a stay.
B.

The Court’s Interests

Courts grant stays where judicial efficiency will be promoted or the possibility of
conflicts between different courts will be minimized. Catskill Mountains Chapter of Trout
Unlimited, Inc. v. U.S. E.P.A.., 630 F.Supp.2d 295, 304 (S.D.N.Y. 2009) (quoting N.Y. Power
Auth. v. United States, 42 Fed. Cl. 795, 799 (Fed. Cir. 1999)). Maintaining an efficient docket
falls within “the power inherent in every court to control the disposition of the causes on its
docket with economy of time and effort for itself, for counsel, and for litigants.” Louis Vuitton

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