MEMORANDUM DECISION GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT
STUART M. BERNSTEIN, Bankruptcy Judge.
The plaintiff Pavarini McGovern, LLC ("Pavarini") was retained as general contractor by the debtor and defendant Waterscape Resort LLC ("Waterscape") to construct a building (the "Project") in Manhattan. Allegedly owed approximately $11 million, Pavarini commenced this class action adversary proceeding contending that Waterscape diverted certain trust fund monies owed to Pavarini and, ultimately, the subcontractors that worked on the Project. (See Complaint, dated June 10, 2011 (ECF Doc. # 1).)
A. The Deal
1. The Loan Agreements
On or about June 11, 2007, U.S. Bank, National Association and USB Capital Resources, Inc. f/k/a USB Capital Funding Corp. (collectively "US Bank") made the following loan facilities available to Waterscape to refinance pre-existing debt and fund the construction of the Project, a 45-story hotel and condominium building located at 66-70 West 45th Street in Manhattan:
Loan AmountConstruction Loan $100,112,566 Project Loan $ 9,180,486 Acquisition Loan 2$ 31,321,306 USB Loan $ 8,653,589
(Affidavit of Gary D. Houston in Connection with Pavarini McGovern LLC's Motion for Summary Judgment, sworn to Aug. 3, 2012 ("Houston Affidavit"), at ¶ 4 (ECF Doc. #60).) The Acquisition and USB Loans were fully funded at the closing; the Construction and Project Loans were advanced as construction progressed. (Id.) The Construction Loan was to fund "a portion of the actual hard costs" (see Amended and Restated Construction Loan Agreement, dated June 11, 2007 ("Construction Loan Agreement"), at 1, ¶ C),
2. Funding the Project
Pursuant to the Construction Loan and Project Loan Agreements, U.S. Bank agreed to make monthly advances to Waterscape to fund Project costs. (See Construction Loan Agreement at §§ 3.1 & 3.2; Project Loan Agreement at §§ 3.1 & 3.2.) Waterscape requested advances by submitting monthly Draw Requests to U.S. Bank containing copies of, among other things, invoices of the Project contractors and vendors. (Houston Affidavit at ¶ 9.) The Draw Requests had to be accompanied by a Draw Request Certification that contained affirmative representations by Waterscape to U.S. Bank that, among other things, the funds being drawn would be applied to fund the Project as specified in the requisition. (Id. at ¶ 10.) Once approved, U.S. Bank transferred the funds to Waterscape.
3. The Construction Agreement
On June 28, 2007, Waterscape entered into a contract with Pavarini that designated Pavarini as the Construction Manager for the Project. (See Construction Management Agreement, dated June 28, 2007 ("CM Agreement").)
Waterscape was not in privity with the subcontractors; it paid Pavarini and Pavarini was responsible for paying the subcontractors. Pavarini agreed to provide Waterscape with the necessary paperwork to submit Draw Requests to U.S. Bank for funds with which Waterscape could make periodic payments to Pavarini as work was completed. (See id. at Art. 12.) Among other things, Pavarini was required to submit monthly requests for payment (requisitions) to Waterscape. These monthly requests constituted an express representation by Pavarini, inter alia, that to the best of its knowledge, the payment requested was for work on the Project and that the work performed thus far complied with the CM Agreement. (See id. at Art. 12.1.4.) Within five business days after receipt of Pavarini's request for payment, Waterscape had to issue a Certificate for Payment or notify Pavarini in writing why it was withholding the Certificate. (See id. at Art. 12.2.) If Waterscape issued a Certificate of Payment, it was required to pay Pavarini within five but no later than thirty days of receipt of the Application of Payment, in full, irrespective of whether it disputed the amounts due Pavarini. (See id. at Arts. 12.3.1 & 19.5.)
B. The Dispute Between the Parties
The dispute between the parties centers on two sets of events. First, U.S. Bank funded certain requisitions but Waterscape failed to remit all of the funded proceeds
1. The Funded Requisitions
Pavarini submitted forty-two correspondingly numbered requisitions to Waterscape. Waterscape submitted Draw Requests to U.S. Bank for the first forty requisitions. US Bank funded all or part of the forty Draw Requests, but Waterscape did not turn over the entire funded portion to Pavarini. The shortfall, $4,458,616.97 (the "Shortfall"), represents what Pavarini has characterized as diverted trust funds. (See Frederick Affidavit at ¶ 15.) Pavarini also submitted a draft of Requisition no. 41 in the amount of $815,022, which U.S. Bank did not fund and Waterscape did not pay. (Id. at ¶ 16.) On December 22, 2010, after Waterscape terminated the CM Agreement,
Although Waterscape has not specifically accounted for the Shortfall, it has offered evidence that it used all monies received by U.S. Bank per the Draw Requests to pay trust fund expenses. According to Waterscape, it received $85,157,163.64 in advances from U.S. Bank pursuant to the Construction Loan. (See Verified Statement Pursuant to Lien Law sworn to Nov. 11, 2011 ("Verified Statement"), at 16 & Ex. E (p. 57 of 91).)
2. The Condominium Sales Proceeds
In addition to the funded Draw Requests, Waterscape received $14,510,340.00 from the sale of certain condominium units. (See Verified Statement at 17 & Ex. F (p. 58 of 91).) As noted earlier, it paid the net proceeds to U.S. Bank at each closing to reduce U.S. Bank's loans. (Id. at 16.) Although the Verified Statement does not indicate how the proceeds were applied, Waterscape's disclosure statement said that they were used to pay back the
C. This Bankruptcy
Waterscape commenced this chapter 11 case on April 5, 2011. On June 9, 2011, Pavarini filed a proof of secured claim in the amount of $10,833,132.59, plus interest, and commenced this adversary proceeding the next day. The Complaint includes seven counts, but the last four were directed at U.S. Bank and have been dismissed by stipulation. (See Stipulation and Order Dismissing Claims Against U.S. Bank National Association and USB Capital Resources, Inc. f/k/a USB Capital Funding Corp., dated Aug. 13, 2012 (ECF Doc. #51).)
Three counts remain against Waterscape as well as other defendants, and Pavarini has moved for partial summary judgment on Counts I and II. In Count I, Pavarini seeks a declaration that the estate holds only bare legal title to any and all trust funds, including the Trust Assets,
Approximately one month after Pavarini commenced the adversary proceeding, Waterscape confirmed its Second Amended Plan of Reorganization ("Plan"). (See Order Approving Disclosure Statement and Confirming Plan of Reorganization, dated July 21, 2011 ("Confirmation Order") (ECF/Main Case Doc. #128).)
The $11 million contribution to the Trust Fund Account was not an arbitrary amount, and reflected a settlement. Waterscape's original plan essentially provided
The dispute was eventually resolved by U.S. Bank's agreement to carve $11 million out of the hotel sale proceeds to fund the Trust Fund Account. This sum was selected because it rounded up and therefore exceeded Pavarini's approximate $10.8 million claim. All Class 3 claims would be deemed to be disputed, (Plan at § 4.3), and the Class 3 claimants would continue to litigate their rights primarily in non-bankruptcy fora. (Id. at § 5.6(c).) Once a Class 3 Claim was finally resolved, the claim would be allowed and receive payment from the Trust Fund Account. (Id. at § 4.3(c).)
The sale of condominium units, other than those covered in the Verified Statement, was first addressed shortly before confirmation. On May 31, 2011, the Court authorized Waterscape to consummate the pending sales of units 38A, 38B, 38C and 39B free and clear of liens, claims, interests and encumbrances, which would attach to the net proceeds thereof with the same force, effect and validity. (Order Granting Authority to Debtor to (A) Assume and Consummate Pending Sale Agreements for Condominium Units; and (B) Make and Consummate New Sales of Condominium Units, dated May 31, 2011 ("Condo Sale Order"), at ¶ B (ECF/Main Case Doc. # 82).) In addition, Waterscape was authorized to make future sales free and clear of liens, claims, interests and encumbrances at certain minimum prices without further order of the Court, with any liens, claims, interests and encumbrances similarly attaching to the net proceeds. (Id. at ¶ C.) The net proceeds would be held in a separate escrow account pending further order of the Court. (Id. at ¶ F.) Lastly, U.S. Bank and the mechanics lienors were required to deliver releases of any liens of record at the closing. (See id. at ¶ E.)
Under the Plan, the Condo Sale Order continued to govern sales under contracts entered into prior to the Effective Date. The proceeds of post-Effective Date sale contracts, as well as any remaining sale proceeds from pre-Effective Date transactions, were to be distributed pursuant to a "waterfall." (See Plan at § 5.2(a).) Waterscape was required to deposit the first $2 million in the Class 5 Condominium Reserve Account, which would ultimately be transferred to the Class 5 Reserve Account for the benefit of the unsecured creditors. (Id. at § 5.2(a)(iv) & (v).) Once the Class 5 Condominium Reserve Account was fully funded, additional sale proceeds would be deposited into the Secured Claim Reserve Account for payment in order of priority, first to satisfy the balance of the U.S. Bank claims that comprised Class 1 and Class 2, (id. at § 5.2(a)(vii)), and then to satisfy the Allowed Class 3 Claims. (Id. at §§ 5.2(a)(viii) & 5.3.) After any disputed Class 3 Claims were resolved and Allowed
The sale of the hotel closed on January 20, 2012 — the Effective Date of the Plan. (See Debtor's Second Post-Confirmation Report and Notice of Effective Date of the Debtor's Confirmed Second Amended Plan of Reorganization, dated Jan. 20, 2012, at ¶ 3 (ECF/Main Case Doc. # 306).) Waterscape used the proceeds from the hotel sale and pre-Effective Date condominium sales to pay U.S. Bank $109 million in partial satisfaction of its claims, fund the $11 million Trust Fund Reserve Account and fund the $3 million Class 5 Reserve Account. (Id. at ¶ 4.)
D. Pavarini's Motion
On June 25, 2012, Pavarini moved for partial summary judgment on Counts I and II of the Complaint. As noted, the substance of Pavarini's claims is that Waterscape diverted trust assets, including the Shortfall and the proceeds of the condominium sales that Waterscape admittedly paid to U.S. Bank outside of the Plan. Waterscape concedes that the money it requisitioned from U.S. Bank and the net proceeds from the sale of the condominium units constituted trust funds. (See Verified Statement at 16-17 (scheduling the payments received from U.S. Bank and the condominium sales proceeds as trust funds).) It argues, however, that it did not divert these funds because it used them to pay other trust fund obligations. Furthermore, even if it diverted trust funds, it restored the diverted funds through the establishment of the $11 million Trust Fund Account under the Plan.
Each side cites to provisions of the CM Agreement in support of their respective positions regarding, among other things, the timing of payments, the obligation to make payment notwithstanding a dispute and the right to set off. However, the parties' contract claims have been committed for resolution to the DRB or other non-bankruptcy courts, and the Court offers no view on those issues. The Complaint raises only Lien Law questions, and the parties have not contended that the Lien Law presents a set of default rules that can be modified by contract between an owner and general contractor. Accordingly, the Court will limit the discussion to the Lien Law.
A. Standards Governing Motion
Rule 56 of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding by FED. R. BANKR.P. 7056, governs summary judgment motions. "The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to a judgment as a matter of law." FED.R.CIV.P. 56(a).
The parties must cite to the parts of the record that support or undercut the assertion that a fact is not disputed. FED. R.CIV.P. 56(c). Under our local rules, the movant must submit a "short and concise statement in numbered paragraphs" of the undisputed material facts, Bankr.S.D.N.Y. R. ("LBR") 7056-1(b), and the opposing party must submit a statement controverting those material facts that it contends are disputed. LBR 7056-1(c). In each instance, the movant and opposing party must include a citation to admissible evidence that supports or controverts the undisputed nature of material fact. LBR 7056-1(e). The latter requirement allows the Court and the parties to focus on what is and is not in dispute, and provides a roadmap that permits the Court to go directly to the cited evidence to determine whether it supports the statement.
Neither side complied with LBR 7056-1. Pavarini submitted a twenty page, seventy two paragraph statement that contained no more than a handful of citations to any evidence submitted with the motion. (See Pavarini McGovern, LLC's Statement of Undisputed Facts in Support of Its Motion for Partial Summary Judgment, dated June 25, 2012 ("Pavarini 7056 Statement") (see ECF Doc. #35).) Waterscape's statement failed to cite any controverting evidence although it contended that many of Pavarini's factual statements were disputed. (See Waterscape Resort LLC's Responses to Pavarini McGovern LLC's Statement of Undisputed Facts, dated Aug. 3, 2012 (ECF Doc. # 50).) The failure to comply with LBR 7056-1(e) increased the burden on the Court by requiring it to hunt through the substantial record created by the parties to determine what was and was not in dispute. In the end, the Court has disregarded the parties' statements, and the only undisputed facts are those identified in this opinion.
B. Disposition of the Motion
Under Article 3-A of the New York Lien Law, an owner holds in trust the funds received in connection with a contract for the improvement of real property, as well as any rights of action with respect to those funds. N.Y. LIEN LAW § 70(1) (McKinney 2009). The assets of the trust include, among other things, the funds received and the rights of action for payment under a building loan contract, N.Y. LIEN LAW § 70(5)(a), and "consideration for a conveyance recorded subsequent to the commencement of the improvement and before the expiration of four months after the completion thereof." N.Y. LIEN LAW § 70(5)(d). The trust comes into "existence from the time of the making of the contract ... out of which the claim arises." N.Y. LIEN LAW § 71(5). It continues "with respect to every asset of the trust until every trust claim ... has been paid or discharged, or until such assets have been applied for the purposes of the trust." N.Y. LIEN LAW § 70(3).
The use of trust funds for non-trust purposes constitutes a diversion, and if done voluntarily by the trustee, is also a breach of trust. N.Y. LIEN LAW § 72(1); see In re Elm Ridge Assocs., 234 F.3d 114, 125 (2d Cir.2000); Aspro Mech. Contracting, Inc. v. Fleet Bank, N.A., 1 N.Y.3d 324, 773 N.Y.S.2d 735, 805 N.E.2d 1037, 1039 (2004). The failure to maintain the books and records required by the Lien Law regarding the trust creates a presumption that trust funds have been diverted, see N.Y. LIEN LAW § 75(4), but the presumption is only a "permissible inference" and does not shift the burden of proof. See Truax & Hovey, Ltd. v. Grosso (In re Grosso), 9 B.R. 815, 826 (Bankr.N.D.N.Y. 1981) (quoting People v. Rosano, 50 N.Y.2d 1013, 431 N.Y.S.2d 683, 409 N.E.2d 1357, 1358 (1980)). Furthermore, the trustee is not required to segregate the trust assets, and "may treat the trust funds as running bookkeeping balances rather than as segregated accounts." Fentron Architectural Metals Corp. v. Solow, 101 Misc.2d 393, 420 N.Y.S.2d 950, 952 (N.Y.Sup.Ct.1979); accord Caristo Constr. Corp. v. Diners Fin. Corp., 21 N.Y.2d 507, 289 N.Y.S.2d 175, 236 N.E.2d 461, 463 (1968); N.Y. LIEN LAW § 75(1) & (2).
2. Count I
According to Pavarini's moving memorandum of law, Count I seeks a declaration that neither Waterscape nor its estate has a vested interest in the Missing Trust Funds aggregating $14,441,244.07. (Pavarini Memo at 10.) The Missing Trust Funds roughly correspond to the proceeds of the pre-petition condominium sales
Initially, Waterscape argues that Count I has nothing to do with the Missing Trust Funds and instead, concerns only the Trust Assets, i.e., the net proceeds from the condominium unit sales made
Although Waterscape is correct that Count I does not expressly refer to the earlier condominium unit sales identified in the Verified Statement, other allegations in the Complaint refer generally to the use of condominium sale proceeds to repay U.S. Bank, (Complaint at ¶¶ 48 & 49), and these allegations are incorporated by reference into Count I. (Id. at ¶ 62). These allegations are sufficient to bring the question of the Missing Trust Funds within the relief sought through Count I. Furthermore, Waterscape concedes that these condominium sale proceeds as well as the proceeds received in connection with the Construction Loan Draws constituted trust funds under the Lien Law. As such, Waterscape held bare legal title, and Pavarini is entitled to partial summary judgment on Count I to that extent.
3. Count II
Pavarini also seeks partial summary judgment on Count II directing Waterscape to turn over all diverted trust funds to Pavarini for the benefit of itself and the subcontractors. As noted, the so-called diverted funds fall into two categories: the Shortfall and the Missing Trust Funds. In each case, the motion presents two questions. First, has Pavarini demonstrated as a matter of law that Waterscape diverted trust funds? Second, if a diversion occurred, is Pavarini entitled to a turnover order or other relief?
a. The Shortfall
Pavarini has failed to demonstrate as a matter of law that Waterscape diverted the Shortfall. Waterscape drew $85,157,163.64 in Construction Loan proceeds from U.S. Bank, and Pavarini concedes for the purpose of its motion that Waterscape paid $85,226,259.57 in trust fund expenses, or $69,095.93 more than Waterscape received from U.S. Bank. The Lien Law "expressly vests discretion in the trustee `to determine the order and manner of payment of any trust claims and to apply any trust asset to any purpose of the trust.'" Aspro Mech. Contracting, 773 N.Y.S.2d 735, 805 N.E.2d at 1040 (quoting N.Y. LIEN LAW § 74(1)), and Waterscape had the discretion to use the U.S. Bank Draws to pay other trust fund expenses. Thus, even if I credited Pavarini's contention that it is entitled to a presumption of diversion, Waterscape rebutted the presumption by offering evidence — which Pavarini does not dispute — that an amount greater than all of the U.S. Bank Draws was used to pay trust expenses. See Mike Bldg. & Contracting, Inc. v. Just Homes, LLC, 27 Misc.3d 833, 901 N.Y.S.2d 458, 478-79 (N.Y.Sup.Ct.2010).
Pavarini primarily relies on the provisions of the CM Agreement to argue that Waterscape was required to pay the Shortfall to Pavarini without offset and regardless of any disputes. While the failure to pay the Shortfall to Pavarini arguably breached the CM Agreement, it did not constitute a diversion or breach of trust. Furthermore, any breach claims must be pursued before the DRB.
b. The Missing Trust Funds
According to the Verified Statement, "the net sale proceeds for each [condominium] unit after adjustments and closing costs were paid directly to [US Bank] at the closings to reduce the loan amounts." (Verified Statement at 17.) Initially, it is no excuse that Waterscape never had possession of the Missing Trust Funds, or that they were paid directly to U.S. Bank at each closing in accordance with the parties' loan documentation. (See Assa Affirmation at ¶ 34.) A trustee cannot avoid a diversion claim by pledging trust funds to a transferee who is not a beneficiary of the trust under the Lien Law. See Caristo Constr. Corp., 289 N.Y.S.2d 175, 236 N.E.2d at 463 (factor impermissibly received trust funds from its debtor-trustee in payment of outstanding credits); Palm Beach Realty Co. v. Kangieser, Inc., 36 Misc.2d 1058, 233 N.Y.S.2d 641, 643 (N.Y.Sup.Ct.1962) (use of trust funds to satisfy bank loan constituted diversion), aff'd without op., 19 A.D.2d 862, 243 N.Y.S.2d 413 (1963); cf. In re Dunwell Heating & Air Conditioning Contractors Corp., 78 B.R. 667, 671 (Bankr.E.D.N.Y.1987) ("[A] prior perfected secured creditor in accounts receivable is not entitled to its interest in that collateral until trust beneficiaries under Article 3-A of the N.Y. Lien Law have been satisfied in full from those assets traceable to the improvements to which they contributed as subcontractors.").
Although the Verified Statement did not disclose how the proceeds were allocated (which U.S. Bank obligations were paid), the Disclosure Statement revealed that they were used primarily if not entirely to satisfy the Project Loan. (Disclosure Statement at 17.) The use of trust funds to pay the Project Loan was improper, and constituted a diversion for two reasons. First, the payment of the Project Loan was not a "cost of improvement." A "cost of improvement" includes:
N.Y. LIEN LAW § 2(5) (emphasis added).
According to Pavarini, the U.S. Bank mortgages did not exist prior to the time Pavarini's rights attached. Pavarini contends that its trust claim arose when the parties signed the CM Agreement on June 28, 2007 because that is the contract out of which its claim arises. See N.Y. LIEN LAW § 71(5). The Project Loan was not recorded until July 3, 2007. Pavarini reasons that as a result, the payment of the Project Loan was not a "cost of improvement" within the meaning of the Lien Law. (See Pavarini Memo at 17; Reply Memorandum of Law in Further Support of Pavarini McGovern, LLC's Motion for Partial Summary Judgment, dated Aug. 17, 2012, at 6-7 (ECF Doc. # 59).)
Pavarini's argument equates the term "lien" used in section 2(5)'s definition of "cost of improvement" with the "trust claim" referred to in section 71(5). However, the two are not synonymous, and "an Article 3-A trust beneficiary does not have to have a lien or be a lienor." Harman v. Fairview Assocs., 25 N.Y.2d 101, 302 N.Y.S.2d 791, 250 N.E.2d 209, 210 (1969); accord Ingalls Iron Works Co. v. Fehlhaber Corp., 337 F.Supp. 1085, 1091
Second, even if the repayment of the Project Loan was a "cost of improvement," the use of trust funds was still a diversion because U.S. Bank never filed a Notice of Lending. Section 73(2) of the Lien Law states:
N.Y. LIEN LAW § 73(2). The purpose of the Notice of Lending is to inform trust fund beneficiaries that trust funds may be used to repay a lender, and to that extent, will not be available to pay other trust fund beneficiaries. See Aspro Mech. Contracting, 773 N.Y.S.2d 735, 805 N.E.2d at 1040 (filing a notice of lending promotes "the legislative intent to assure `public notice of any transaction of the owner, contractor or subcontractor that may lead to depletion of funds available for future trust claims, even where the depletion merely repays advances that were in fact used to pay trust claims accruing at an earlier [d]ate [citation omitted].'"); Caristo Constr. Corp., 289 N.Y.S.2d 175, 236 N.E.2d at 466 ("The function of a notice of lending, according to the Law Revision Commission, which drafted the legislation, is to inform prospective suppliers and subcontractors that `trust assets receivable by the trustee at a later stage of the improvement have been anticipated for current expense' [citation omitted]."). The repayment of such a "cost of improvement" in the absence of a Notice of Lending or other notice to trust beneficiaries precludes the trustee from asserting this defense to a claim of diversion. Spectrum Painting Contractors, Inc. v. Kreisler Borg Florman Gen. Constr. Co., 54 A.D.3d 748, 864 N.Y.S.2d 61, 62-63 (2008). Here, Pavarini contends that Waterscape never filed a Notice of Lending, and Waterscape has not disputed this either. Accordingly, this defense is not available to Waterscape.
While Pavarini has demonstrated as a matter of law that Waterscape diverted the Missing Trust Funds, Waterscape has established a defense of partial restoration. A trustee or its assignee may defend against a diversion claim by showing that the diverted funds have been restored, and that the funds are available to pay trust claims. See Caristo Constr., 289 N.Y.S.2d 175, 236 N.E.2d at 464 (if the transferee of diverted funds had used its own funds "to pay trust claims and there
The restoration defense is based on the principle that the "law is not designed to impose a penalty upon a violator so as to create a windfall of double repayment for creditors." Travelers Indem., 263 N.Y.S.2d at 266; accord Raisler Corp., 397 N.Y.S.2d at 673. Moreover, voluntary restoration serves the same purpose as an order directing one liable for diversion to post security to assure the proper distribution of trust assets, or furnish assurance in any other manner that trust funds will be available to pay trust claims. N.Y. LIEN LAW § 77(3)(a)(v); see Palm Beach Realty Co., 233 N.Y.S.2d at 641 (directing owner who diverted trust funds to post security to protect beneficiaries' interests pursuant to N.Y. LIEN LAW § 77(3)(a)(v)). In either case, the spirit of the Lien Law is fulfilled and trust beneficiaries can rely on the restored fund for the payment of their claims.
The settlement that led to the funding of the $11 million Trust Fund Account was intended to restore the trust up to that amount. That $11 million was carved out of the hotel sale proceeds to resolve Pavarini's objections to the use of hotel and condominium sale proceeds to satisfy the U.S. Bank claims under the Plan. The amount of the Trust Fund Account was based on the amount of Pavarini's claim, and reestablished the trust in a segregated account that cannot be disbursed without further Court order. The terms of the Plan also allowed Waterscape to pay the proceeds from the condominium sales governed by the Condo Sale Order and future sales to U.S. Bank.
Pavarini nevertheless contends that the restoration defense is not available unless "the [restored] funds thereby brought to the improvement are shown to have been used for the purposes of the trust." (Pavarini Reply at 11 (quoting Raisler Corp., 397 N.Y.S.2d at 673).) Pavarini reasons that Waterscape cannot invoke the restoration defense because no part of the Trust Fund Account has yet been paid to any trust beneficiaries, but the language it quotes it misreads. As the Raisler court explained in the next sentence:
Raisler Corp., 397 N.Y.S.2d at 673 (emphasis added).
Here, $11 million in Missing Trust Funds has been restored and is "available in the form of present cash to meet future trust claims as they mature." If Waterscape must pay Pavarini another $11 million after escrowing $11 million from its sale proceeds for the same purpose, it will suffer a double penalty. While the Court does not condone Waterscape's diversion, its punishment will be the costs of this litigation which, post-confirmation, will ultimately be borne by its members. See Travelers Indem., 263 N.Y.S.2d at 266 (If the defendant proves the restoration defense, "its punishment for the infraction will be the expense of this lawsuit and not liability to the plaintiff, which will have lost nothing by reason of the alleged improper financial dealings").
iii. The Balance of the Missing Funds
The Trust Fund Account did not fully restore the Missing Trust Funds. The condominium sales reported in the Verified Statement exceeded $11 million, and Waterscape has failed to offer any evidence that the net difference — $3,441,244.07
Pavarini's demand that Waterscape turn over any Missing Trust Funds to Pavarini is premature. The Lien Law provides security for the payment of contractor and subcontractor claims, but the right to payment depends on the law of contracts as well as the Plan. Pavarini's Class 3 claim was deemed to be disputed, and the Plan left the resolution of those disputes to the DRB. While the Missing Trust Funds are not implicated by the express provisions of the Plan, the intent was to require the trust beneficiaries to fix their claims in non-bankruptcy fora and then to seek payment pursuant to the terms of the Plan.
Furthermore, there are other remedies that may be more appropriate to the extent that any further remedy is necessary. First, the Class 3 claimants can also look to the proceeds of future condominium sales to satisfy their claims. Waterscape stated at oral argument that the U.S. Bank debt had been refinanced, and the Class 3 mechanics lien claims now have the first right to payment from future sales of the condominium units. (Transcript of Hearing, held Aug. 21, 2012, at 6 (ECF/Main Case Doc. #390).) Thus, there may be sufficient security or other assurances of payment that no further relief is necessary or warranted.
Second, the Lien Law prescribes remedies for a diversion other than the immediate payment of diverted funds to trust
Accordingly, while Waterscape has established only a partial restoration defense, the appropriate remedy with respect to the balance of the Missing Trust Funds cannot be determined on the state of this record. Pavarini has failed to establish as a matter of law that it is entitled to the turnover of any portion of the Missing Trust Funds at this time, and its motion for partial summary judgment is also denied to that extent.
The Court has considered the other issues raised by the parties, and to the extent not specifically addressed are found to lack merit. The parties are directed to settle a proposed order consistent with this decision and contact chambers to schedule a conference at which to discuss further proceedings in this matter.