author: Smith, J.

text:
    [661 NE2d 967, 638 NYS2d 394]
    West-Fair Electric Contractors et al., Plaintiffs, v Aetna Casualty & Surety Company et al., Defendants.
    Argued October 24, 1995;
    decided December 7, 1995

      POINTS OF COUNSEL

      Ernstrom & Dreste, Rochester (J. William Ernstrom and Martha A. Connolly of counsel), for Aetna Casualty and Surety Company, defendant.
    I. A pay-when-paid provision in a subcontract does not violate the public policy of New York as set forth in the Lien Law because it is a contractual risk-shifting mechanism, not a lien waiver. (West-Fair Elec. Contrs. v Aetna Cas. & Sur. Co., 49 F3d 48; David Fanarof, Inc. v Dember Constr. Co., 195 AD2d 346; Architectural Sys. v Gilbane Bldg. Co., 760 F Supp 79; Met Painting Co. v Dana, 90 Misc 2d 289; Schaghticoke Powder Co. v Greenwich & Johnsonville Ry. Co., 183 NY 306; Curialle & Co. v Kenray Realty Corp., 25 Misc 2d 745; Soll v Camardella, 277 App Div 1004; Electric City Concrete Co. v Phillips, 100 AD2d 1; Regal Lbr. Co. v Buck, 157 Misc 2d 376; Strain & Son v Baranello & Sons, 90 AD2d 924.) II. Aetna is not liable to Coppola under the payment bond because Aetna’s liability is contingent upon Gilbane’s duty to pay Coppola. (General Phoenix Corp. v Cabot, 300 NY 87; Pearlman v Reliance Ins. Co., 371 US 132; Hall & Co. v Continental Cas. Co., 34 AD2d 1028, 30 NY2d 517; Eckstein v Massachusetts Bonding & Ins. Co., 281 NY 435; Burdick Assocs. Owners Corp. v Indemnity Ins. Co, 166 AD2d 402; MacKennan v American Cas. Co., 169 AD2d 709; Matter of Fidelity & Deposit Co. v Parsons &Whittemore Contrs. Corp., 48 NY2d 127; Kipp Bros. v Hartford Acc. & Indem. Co., 63 Misc 2d 788; Riverside Iron Works v Insurance Co. of N. Am., 156 AD2d 919; Lamparter Acoustical Prods. v Maryland Cas. Co., 64 AD2d 693.)

      Max E. Greenberg, Trager, Toplitz & Herbst, New York City (George N. Toplitz, Kalvin Kamien and Regina C. Saat of counsel), for Gilbane Building Company, defendant.
    I. In New York, a subcontractor is given a lien by subrogation to the contractor’s rights, his rights being derivative of those of the principal contractor. The subcontractor-lienor, to the extent of its interest, is a statutory assignee. (Tibbetts Contr. Corp. v O & E Contr. Co., 15 NY2d 324; Genesee Lbr. & Coal Co. v Bonarigo, 259 NY 651; Arrow Iron Works v Greene, 260 NY 330, 698; International Harvester Co. v Whelan, 274 NY 162; Sexauer & Lemke v Burke & Sons Co., 228 NY 341; Strain & Son v Baranello & Sons, 90 AD2d 924; Spruck v McRoberts, 139 NY 193; Tubridy v Wright, 144 NY 519.) II. New York decisional law upholds the validity of pay-when-paid condition precedent clauses. (David Fanarof, Inc. v Dember Constr. Corp, 195 AD2d 346; Schuler-Haas Elec. Corp. v Aetna Cas. & Sur. Co., 49 AD2d 60, 40 NY2d 883; Crown Plastering Corp. v Elite Assocs., 166 AD2d 495; Architectural Sys. v Gilbane Bldg. Co., 760 F Supp 79.) III. No authority exists either under New York’s Lien Law or case law to support the District Court’s decision that the pay-when-paid condition precedent clauses violate Lien Law § 34 and public policy of the Lien Law. (Rotodyne, Inc. v Consolidated Edison Co., 85 Misc 2d 347, 55 AD2d 600; Bell v Fox, 138 App Div 569; Paturzo v Shuldiner, 125 App Div 636; Thompson-Starrett Co. v Brooklyn Hgts. Realty Co., 111 App Div 358; Bossert v Poerschke, 51 App Div 381; G & H Plumbing & Heating Co. v Kew Mgt. Corp., 39 Misc 2d 483; Raymond Concrete Pile Co. v Federation Bank & Trust Co., 288 NY 452, 289 NY 650, 290 NY 611; Sexauer & Lemke v Burke & Sons Co., 228 NY 341.) IV. A decision declaring the pay-when-paid provision invalid would effectively deny Gilbane rights accruing under a prior contract which is prohibited under the constitutional proscription against impairment of obligations of contracts. (Kleila v Kleila, 50 NY2d 277; Chambers v Chambers, 122 Misc 2d 671; Worthen Co. v Kavanaugh, 295 US 56; Edwards v Kearzey, 96 US 595; Von Hoffman v City of Quincy, 4 Wall [71 US] 535; Bronson v Kinzie, 1 How [42 US] 311; Ogden v Saunders, 12 Wheat [25 US] 213; Sturges v Crowninshield, 4 Wheat [17 US] 122; Dartmouth Coll. v Woodward, 4 Wheat [17 US] 518; Rotodyne, Inc. v Consolidated Edison Co., 55 AD2d 600.) V. Aetna’s duty as surety to make payment under the payment bond is contingent upon the duty of its principal, Gilbane, to make such payments. (Lamparter Acoustical Prods. v Maryland Cas. Co., 64 AD2d 693; Eckstein v Massachusetts Bonding & Ins. Co., 281 NY 435; F.W. Sims, Inc. v Federal Ins. Co., 788 F Supp 149; MacKennan v American Cas. Co., 169 AD2d 709; Crown Plastering Corp. v Elite Assocs., 166 AD2d 495; Schuler-Haas Elec. Corp. v Aetna Cas. & Sur. Co., 49 AD2d 60, 40 NY2d 883.)

      Welby & Welby, White Plains (Thomas H. Welby and Michael E. Greenblatt of counsel), for L.J. Coppola, Inc., plaintiff.
    I. The purported condition precedent, if enforced, would operate as an unlawful waiver of the right to enforce a mechanic’s lien. (Electric City Concrete Co. v Phillips, 100 AD2d 1; Matter of Delaware Towers v Siegfried Constr. Co., 41 Misc 2d 227; Matter of Schiavone Constr. Co. [Fischer & Porter Co.], 181 AD2d 580; Matter of Storick v M. E. Realty Co., 226 App Div 674; Tibbetts Contr. Corp. v O & E Contr. Co., 15 NY2d 324; Arrow Iron Works v Greene, 260 NY 330, 698; International Harvester Co. v Whelan, 274 NY 162; Strain & Son v Baranello & Sons, 90 AD2d 924; Rotodyne, Inc. v Consolidated Edison Co., 85 Misc 2d 347, 55 AD2d 600; Met Painting Co. v Dana, 90 Misc 2d 289; Schaghticoke Powder Co. v Greenwich & Johnsonville Ry. Co., 183 NY 306.) II. Aetna, as a compensated surety, owes Coppola an independent duty and should be estopped from refusing to pay Coppola the sums that are justly due. (McClare v Massachusetts Bonding & Ins. Co., 266 NY 371; Graybar Elec. Co. v Seaboard Sur. Co., 157 Misc 275; Area Masonry v Dormitory Auth., 64 AD2d 810; Schuler-Haas Elec. Corp. v Aetna Cas. & Sur. Corp., 49 AD2d 60, 40 NY2d 883; Manufacturers Hanover Trust Co. v Green, 95 AD2d 737; Standard Brands v Straile, 23 AD2d 363; Lamparter Acoustical Prods. v Maryland Cas. Co., 64 AD2d 693; MacKennan v American Cas. Co., 169 AD2d 709; Eckstein v Massachusetts Bonding & Ins. Co., 281 NY 435.) III. The purported condition precedent was not intended to shift the risk of nonpayment to Coppola. (Hartford Acc. & Indem. Co. v Wesolowski, 33 NY2d 169; Crown Plastering Corp. v Elite Assocs., 166 AD2d 495; Schuler-Haas Elec. Corp. v Aetna Cas. & Sur. Co., 49 AD2d 60, 40 NY2d 883; Colonial Roofing Corp. v John Mee, Inc., 105 Misc 2d 140; David Fanarof, Inc. v Dember Constr. Corp., 195 AD2d 346; Architectural Sys. v Gilbane Bldg. Co., 760 F Supp 79; Action Interiors v Component Assembly Sys., 144 AD2d 606; Dyer Co. v Bishop Intl. Eng’g Co., 303 F2d 655.) IV. The underlying decision is not an unconstitutional impairment of contractual obligations. (Chambers v Chambers, 122 Misc 2d 671; Rotodyne, Inc. v Consolidated Edison Co., 85 Misc 2d 347, 55 AD2d 600.)

      Bryant, O’Dell & Basso, LLP, Syracuse {Linda E. Alario of counsel), for General Building Contractors of New York State, Inc., and another, amici curiae.

    I. A contract clause that creates a condition precedent to payment does not violate the public policy of New York under Lien Law § 34. (Marsh v Thomson Realty Corp., 174 AD2d 218; Van Clief v Van Vechten,
      130 NY 571; Philan Dept. of Borden Co. v Foster-Lipkins Corp., 39 AD2d 633, 33 NY2d 709; Contelmo’s Sand & Gravel v J & J Milano, 96 AD2d 1090; Powers v City of Yonkers, 114 NY 145; Nassau Suffolk Lbr. & Supply Corp. v Bruce, 177 Misc 825, 265 App Div 879; Boljen v Ellegaard, 181 Misc 326; Firth v Rehfeldt, 30 App Div 326, 164 NY 588; Jespersen-Kay Modular Constr. v Clinton Ave. Paul Place Houses, 85 Misc 2d 721.) II. Coppola could have foreclosed its lien against the owner’s interest in the property. (Matter of Schiavone Constr. Co. [Fischer & Porter Co.], 181 AD2d 580; Matter of Storick v M. E. Realty Co., 226 App Div 674; Maltby & Sons Co. v Boland Co., 152 App Div 596; Contelmo’s Sand & Gravel v J & J Milano, 96 AD2d 1090.) III. A surety’s liability is contingent on the duty of the contractor to make payment to the subcontractor even though the surety bond created an independent obligation to the subcontractor. (McClare v Massachusetts Bonding & Ins. Co., 266 NY 371; Lamparter Acoustical Prods. v Maryland Cas. Co., 64 AD2d 693; Schuler-Haas Elec. Corp. v Aetna Cas. & Sur. Co., 49 AD2d 60, 40 NY2d 883; David Fanarof, Inc. v Dember Constr. Corp., 195 AD2d 346; Riverside Iron Works v Insurance Co. of N. Am., 156 AD2d 919; Russo Trucking & Excavating v Pennsylvania Resource Sys., 169 AD2d 239; Equitable Lbr. Corp. v IPA Land Dev. Corp., 38 NY2d 516; Levine v Shell Oil Co., 28 NY2d 205; Westinghouse Elec. Corp. v New York City Tr. Auth., 82 NY2d 47; Heyert v Orange & Rockland Utils., 17 NY2d 352.)

      Hendrick, Phillips, Schemm & Salzman, of the Georgia Bar, admitted pro hac vice, and Altieri, Kushner, Miuccio & Frind, P. C, New York City (Denis B. Frind of counsel), for American Subcontractors Association and another, amici curiae.

    I. The subcontracts between appellant Gilbane and appellees did not shift to appellees the credit risk of the owner’s default. (Schuler-Haas Elec. Corp. v Aetna Cas. & Sur. Co., 49 AD2d 60, 40 NY2d 883; F.W. Syms, Inc. v Federal Ins. Co., 788 F Supp 149; Riverside Iron Works v Insurance Co. of N. Am., 156 AD2d 919; Architectural Sys. v Gilbane Bldg. Co., 760 F Supp 79; David Fanarof, Inc. v Dember Constr. Corp., 195 AD2d 346.) II. If the payment provisions of the subcontract are interpreted to shift to the subcontractor the credit risk of the owner’s default, such contract provision is unenforceable pursuant to section 34 of the Lien Law of the State of New York. (Rotodyne, Inc. v Consolidated Edison Co., 85 Misc 2d 347, 55 AD2d 600; Matter of Storick v M. E. Realty Co., 226 App Div 674.) III. Notwithstanding the "pay-when-paid” language of the subcontract, the surety, having delivered an unequivocal guarantee of payment, is liable to the appellees. (Standard Brands v Straile, 23 AD2d 363; Kasen v Morrell, 6 AD2d 816; Schuler-Haas Elec. Co. v Aetna Cas. & Sur. Co., 40 NY2d 883.)
   OPINION OF THE ,COURT

Smith, J.

Two questions of law have been certified to us from the Second Circuit Court of Appeals (West-Fair Elec. Contrs. v Aetna Cas. & Sur. Co., 49 F3d 48):

1. Whether a pay-when-paid provision in a subcontract, which transfers the risk of an owner’s default from a general contractor to a subcontractor, violates New York public policy as set forth in the Lien Law; and
2. Whether a surety’s liability is contingent on the duty of a contractor to make payment to a subcontractor when the surety bond created an independent obligation to that subcontractor.

We answer the first question in the affirmative and do not reach the second question.

This dispute among the parties arose in connection with a construction project in White Plains, New York. The owner of the construction project entered into a contract with defendant Gilbane Building Company, the general contractor, to build a development known as the Westchester Pavilion. The general contractor entered into various subcontract agreements with subcontractors, including West-Fair Electric Contractors and L.J. Coppola, Inc., to perform specified tasks on the construction project.

The general contractor also obtained a payment bond from defendant Aetna Casualty & Surety Company (Aetna) which named the general contractor as the principal, and the owner of the construction project as the obligee. The payment bond provided that upon the satisfaction of certain conditions (not applicable to the circumstances of this case):

"The above named Principal and Surety [Aetna] hereby jointly and severally agree with the Owner that every [subcontractor] claimant as herein defined who has not been paid in full before the expiration of a period of ninety (90) days after the date on which the last of such claimant’s work or labor was done or performed * * * may sue on this bond for the use of such claimant, prosecute the suit to final judgment for such sum or sums as may be justly due claimant, and have execution thereon.”

Plaintiff L.J. Coppola, Inc. substantially completed the mechanical and plumbing work specified in its subcontract with the general contractor by October 1993. Although the general contractor paid plaintiff with funds received from the owner through the end of October, the owner subsequently became insolvent and the general contractor did not make any further payments to plaintiff. Plaintiff commenced an action in Federal District Court against Aetna and against the general contractor, seeking the rest of the sums due under the subcontract. Plaintiff’s complaint alleged that the general contractor owed a duty to pay under the subcontract and that the general contractor would be unjustly enriched unless plaintiff received the full subcontract price. Plaintiff sued Aetna pursuant to the payment bond.

Defendants moved for summary judgment, arguing that section 3.2 of the subcontract contained a pay-when-paid provision which limited the general contractor’s liability to the sums the general contractor received from the owner. Section 3.2 of the subcontract agreement provides in relevant part:

"it is specifically understood and agreed that THE PAYMENT TO THE TRADE CONTRACTOR [plaintiff] IS DEPENDENT, AS A CONDITION PRECEDENT, UPON THE construction manager [the general contractor] RECEIVING CONTRACT PAYMENTS, INCLUDING RETAINER FROM THE OWNER”.

Defendants claimed that because the owner had not made any further payments to the general contractor, the general contractor had no obligation to pay the subcontractor. Aetna argued that as a surety, its payment obligation under the bond was contingent on the general contractor’s liability. Since the general contractor had no obligation to pay plaintiff, Aetna maintained it also owed no obligation to plaintiff under the payment bond.

Plaintiff cross-moved for summary judgment and argued that the pay-when-paid provision merely fixed a time for payment, rather than placing the risk of nonpayment by the owner on the subcontractor. Plaintiff further argued that the payment bond issued by Aetna unconditionally provided for payment to plaintiff after 90 days if the general contractor failed to pay plaintiff within that time.

The District Court granted plaintiff’s summary judgment motion and awarded plaintiff the sums due under the subcontract; defendants’ summary judgment motions were denied. The District Court reasoned that pay-when-paid provisions indefinitely suspended subcontractors’ enforcement rights under the Lien Law because the subcontractor could obtain payment only after the owner paid the general contractor. If the owner failed to pay the general contractor, payment to the subcontractor would never be due and the subcontractor would never be able to enforce its mechanics’ lien. The District Court voided the pay-when-paid provision as against the public policy of New York State and held that the provision operated as an improper waiver of plaintiff’s right to enforce its mechanics’ liens. The court also held Aetna liable under the payment bond because Aetna had assumed a direct obligation to plaintiff by the plain language of the bond.

Defendants appealed to the Second Circuit Court of Appeals which certified the questions before us. We accepted the certified questions for review (85 NY2d 890).

We reject plaintiff’s argument that the pay-when-paid provision in section 3.2 of the subcontract merely fixed a time for payment. A contract provision stating that payment will occur upon a stipulated event will be construed as a time for payment provision unless there is express language to the contrary in the contract (Schuler-Haas Elec. Co. v Aetna Cas. & Sur. Co., 40 NY2d 883, 885). In Schuler-Haas, we held that the pay-when-paid provision fixed a time for payment because the document containing the provision lacked express language imposing a condition on the general contractor’s legal responsibility to pay. In contrast, the face of the subcontract here explicitly makes payment from the owner to the general contractor a "condition precedent” to any payment to plaintiff. Since the unambiguous language of section 3.2 places the risk of the owner’s inability or failure to pay the general contractor squarely upon plaintiff, the pay-when-paid provision here cannot be construed as a time for payment clause. Because Schuler-Haas did not involve a pay-when-paid provision which required subcontractors to assume the risk that an owner would fail to pay the general contractor, we must now decide whether the pay-when-paid provision here violates public policy as stated in the Lien Law.

Defendants argue that the District Court erred in divining the true nature of New York’s Lien Law. Defendants contend that a subcontractor’s right as a lienor is subrogated to that of the general contractor and that plaintiffs lien rights are measured and restricted by that of the general contractor. Consequently, defendants claim, the District Court improperly enlarged the liability of the general contractor by holding the general contractor liable to plaintiff when the general contractor could not recover from the owner. Defendants also argue that plaintiff has not been deprived of any Lien Law rights because plaintiff retained the ability to file and, in fact, filed a mechanics’ lien against the construction project property.

The Lien Law provides that article 2, which governs mechanics’ liens, "is to be construed liberally to secure the beneficial interests and purposes thereof’ (Lien Law § 23). The Lien Law also provides, "Notwithstanding the provisions of any other law, any contract, agreement or understanding whereby the right to file or enforce any lien created under article two is waived, shall be void as against public policy and wholly unenforceable” (Lien Law § 34).

Senator James H. Donovan, a sponsor of the bill which the Legislature ultimately enacted as Lien Law § 34, described the impetus behind this legislation:

"Since the year 1897 the Legislature has recognized the need to afford protection to those who furnish work, labor and services or provide materials for the improvement of real property. Throughout the succeeding years changes in the law have been enacted to clarify, enlarge and perfect the right of those who improve real property to be paid. The Lien Law has been the sole vehicle through which such interests may gain a measure of protection * * *. It has become prevalent in the construction industry to require contractors, subcontractors, materialmen and laborers to sign contracts or subcontracts containing clauses which waive the right of the signator to file or enforce his mechanic’s [sic] lien. This legal barrier is thus imposed long before any work is performed or materials furnished. The surrender of such protective rights as a prerequisite to obtaining a contract or subcontract is repugnant, against public policy and should be void” (Mem of Senator Donovan, L 1975, ch 74, 1975 NY Legis Ann, at 341).

It is evident from the foregoing that New York’s Lien Law is remedial in nature and intended to protect those who have directly expended labor and materials to improve real property at the direction of the owner or a general contractor.

A subcontractor may file a mechanics’ lien for the value or the agreed price of the labor or materials furnished at the request or consent of the owner’s contractor (Lien Law § 3). Lien Law § 4, which governs the scope of the liens which may be filed, states:

"If labor is performed for, or materials furnished to, a contractor or subcontractor for an improvement, the lien shall not be for a sum greater than the sum earned and unpaid on the contract at the time of filing the notice of lien, and any sum subsequently earned thereon. In no case shall the owner be liable to pay by reason of all liens created pursuant to this article a sum greater than the value or agreed price of the labor and materials remaining unpaid, at the time of filing notices of such liens, except as hereinafter provided” (Lien Law § 4 [1]).

Subcontractors may enforce their mechanics’ liens against the property specified in the notice of lien and any person liable for the debt upon which the lien is founded (Lien Law §§ 24, 41). Consequently, the Lien Law grants the subcontractor an independent right, separate and apart from a general contractor’s remedies, to file and enforce a mechanics’ lien against a person liable for the debt upon which the lien is founded, such as the owner, and the real estate being improved. However, the owner’s liability to the subcontractor is limited to the unpaid portion of the value or agreed to price of the improvements at the time the lien is filed (see, Lien Law § 4 [1]). Thus, in the event the general contractor fails to pay a subcontractor with the sums the owner has already paid, the Lien Law protects owners from paying more than the value of the improvements, or the contract price.

In accordance with the concern expressed by the Legislature that those who directly improve real property should be paid, the Lien Law favors subcontractors’ liens over those of the general contractors in the foreclosure of mechanics’ liens against real property. Upon the sale of property on which both subcontractors and general contractors have liens, Lien Law § 56 requires that the sales proceeds be paid to subcontractors ahead of general contractors. Thus, although the subcontractor’s recovery against the owner is limited by the balance due on the general contract, the subcontractor’s right to recover is not in subrogation to the general contractor’s rights.

We hold that a pay-when-paid provision which forces the subcontractor to assume the risk that the owner will fail to pay the general contractor is void and unenforceable as contrary to public policy set forth in the Lien Law § 34. By contrast, a pay-when-paid provision which merely fixes a time for payment does not indefinitely suspend a subcontractor’s right to payment upon the failure of an owner to pay the general contractor, and does not violate public policy as stated in the Lien Law.

As a matter of contract law, the owner and the general contractor are liable to plaintiff for the work plaintiff has been authorized to perform, and performed, under the subcontract agreement. However, a pay-when-paid provision as a condition precedent requires plaintiff to defer payment for its work until the general contractor has been paid by the owner. As the owner here has become insolvent, the owner may never make another contract payment to the general contractor. Because the lack of future payments by the owner is virtually certain, plaintiff’s right to receive payment has been indefinitely postponed, and plaintiff has effectively waived its right to enforce its mechanics’ liens. The waiver has occurred by operation of the pay-when-paid provision because mechanics’ liens may not be enforced until a debt becomes due and payable (see, Matter of Schiavone Constr. Co. [Fischer & Porter Co.], 181 AD2d 580).

We reject defendants’ contention that plaintiff retains any meaningful rights under the Lien Law by virtue of plaintiff’s ability to file a mechanics’ lien against the improved property. The Lien Law distinguishes between the right to file and the right to enforce mechanics’ liens and prohibits any contract, agreement or understanding waiving either right (Lien Law § 34). The Lien Law also provides that subcontractors may file and enforce their mechanics’ liens against the persons liable for the debt giving rise to the lien, in addition to rights in the real property (Lien Law §§ 24, 41). Plaintiff has waived its rights to enforce mechanics’ liens against the general contractor and the owner as persons liable for the sums due under the subcontract, because the debt is uncollectible and will remain uncollectible until the owner has paid the general contractor.

Consequently, the pay-when-paid provision here extinguishes plaintiff subcontractor’s ability to enforce a lien against the owner. The pay-when-paid provision creates this result by preventing the subcontractor from establishing the existence of a present amount, due and unpaid, arising from the subcontractor’s performance and owed by the general contractor. The establishment of such a debt is a necessary element of the subcontractor’s cause of action to enforce its lien against the owner (see, Schiavone, supra).

We do not find the reasoning or the results in the authorities cited by defendants persuasive. The Court in David Fanarof, Inc. v Dember Constr. Corp. (195 AD2d 346) does not appear to have considered whether the pay-when-paid provision at issue there operated as a waiver of rights in violation of Lien Law § 34. Moreover, the Fanarof Court relied on dicta from Schuler-Haas Elec. Corp. v Aetna Cas. & Sur. Co. (49 AD2d 60, affd 40 NY2d 883, supra), an Appellate Division writing involving a pay-when-paid provision which fixed a time for payment, a situation wholly different from the circumstances here (see, Fanarof, supra, at 346). Since this case involves the public policy of New York, we decline to consider the Maryland authorities cited by defendants, which interpret Maryland law (see, Gilbane Bldg. Co. v Brisk Waterproofing Co., 86 Md App 21, 585 A2d 248; Architectural Sys. v Gilbane Bldg. Co., 760 F Supp 79).

Having concluded that the general contractor’s liability to plaintiff is not contingent on the owner’s contract payments, it is unnecessary for us to determine whether Aetna owes an independent or contingent duty to pay plaintiff under the payment bond. Accordingly, certified question No. 1 should be answered in the affirmative, and we need not reach certified question No. 2.

Chief Judge Kaye and Judges Simons, Titone, Bellacosa, Levine and Ciparick concur.

Following certification of questions by the United States Court of Appeals for the Second Circuit and acceptance of the questions by this Court pursuant to section 500.17 of the Rules of the Court of Appeals (22 NYCRR 500.17), and after hearing argument by counsel for the parties and consideration of the briefs and the record submitted, certified question No. 1 answered in the affirmative, and certified question No. 2 not answered as academic.

      . The District Court consolidated plaintiff’s action with a lawsuit brought by West-Fair Electric Contractors, another subcontractor on the same project. West-Fair subsequently settled with the general contractor and withdrew from the case. Coppola is the only remaining plaintiff in the Federal action.

      . Section 34 also contains two exceptions to the general prohibition against waivers, neither of which is applicable here. A written waiver to file a mechanics’ lien is not void for public policy where the waiver is required in exchange for payment for labor performed or materials furnished, or, upon the subordination, release or satisfaction of a lien made after a notice of lien has been filed.


source: Caselaw Access Project

author: Levine, J.

license: Public Domain

text:
    [661 NE2d 972, 638 NYS2d 399]
    In the Matter of Selma K. Friedman et al., Respondents, v Beway Realty Corp. et al., Appellants.
    Argued October 18,1995;
    decided December 7, 1995

      POINTS OF COUNSEL

      Kirkpatrick & Lockhart LLP, New York City (Gerald A. Novack and Alan S. Brodherson of counsel), for appellants.
    I. The court below erred in ruling, as a matter of law, that petitioners’ minority status may not be considered. (Matter of Cawley v SCM Corp., 72 NY2d 465; Matter of Fulton, 257 NY 487; Ray Copper Co. v United States, 268 US 373; Jones v Healy, 184 Misc 923, 270 App Div 895; Matter of Marcus [Macy & Co.], 273 App Div 725; Matter of Deutschmann [American Tel. & Tel. Co.], 281 App Div 14; Matter of Silverman [Hoe & Co.], 282 App Div 252; Matter of Fleischer, 107 AD2d 97; Matter of Blake v Blake Agency, 107 AD2d 139.) II. The court below erred as a matter of law when it reduced McGraw’s discount for lack of marketability. (Matter of Seagroatt Floral Co. [Riccardi], 78 NY2d 439; Matter of Malvica [Mid-Island Radiology Assocs.], 170 AD2d 681.) III. The court should have denied petitioners’ request for interest and expenses and should have awarded respondents their fees and expenses.

      LeBoeuf, Lamb, Greene & MacRae, L.L.P., New York City (Milton S. Gould and Steven E. Levitsky of counsel), for respondents.
    I. Business Corporation Law § 623 allows the court wide discretion in determining "fair value”. (Matter of Endicott Johnson Corp. v Bade, 37 NY2d 585; Matter of Cawley v SCM Corp., 72 NY2d 465.) II. Justice Parness correctly rejected a minority interest discount. (Abbot v American Hard

      Rubber Co., 33 Barb 578; People v Ballard, 134 NY 269; Matter of Timmis, 200 NY 177; Anderson v International Mins. & Chem. Corp., 295 NY 343; Matter of Cawley v SCM Corp., 72 NY2d 465; Fe Bland v Two Trees Mgt. Co., 66 NY2d 556; Matter of Blake v Blake Agency, 107 AD2d 139; Matter of Raskin v Walter Karl, Inc., 129 AD2d 642; Matter of Fleischer, 107 AD2d 97; Laserage Technology Corp. v Laserage Labs., 972 F2d 799.) III. The courts’ marketability discount of 21% was more than adequate. (Matter of Raskin v Walter Karl, Inc., 129 AD2d 642; People v Sugden, 35 NY2d 453; Matter of Wind v First Rockaway Coast Corp., 190 AD2d 811; Hoyt v Hoyt, 166 AD2d 800; Matter of Taines v Barry One Hour Photo Process, 123 Misc 2d 529, 108 AD2d 630; Matter of Walt’s Submarine Sandwiches [Basile], 173 AD2d 980, 78 NY2d 860; Kalisch v Kalisch, 184 AD2d 751; Matter of Joy Wholesale Sundries, 125 AD2d 310; Matter of Fleischer, 107 AD2d 97; Matter of Blake v Blake Agency, 107 AD2d 139.) IV. The court properly awarded respondents interest on the fair value of their shares. (Matter of Joy Wholesale Sundries, 125 AD2d 310; Matter of Blake v Blake Agency, 107 AD2d 139; Matter of Dimmock v Reichhold Chems., 41 NY2d 273; Matter of Mohasco Corp. [Adler], 188 AD2d 407; Matter of Shore [Parklane Hosiery Co.], 67 AD2d 526.)
   OPINION OF THE COURT

Levine, J.

Petitioners are minority stockholders in nine family owned close corporations, each of which had as its sole asset a parcel of income-producing office, commercial or residential real estate in New York City. In 1986, the board of directors and the requisite majority of stockholders of each corporation voted to transfer all of its property to a newly formed partnership. Petitioners voted their shares against the transfers and, pursuant to Business Corporation Law § 623, timely elected to exercise their appraisal rights and receive the "fair value” of their shares in each corporation. When the corporations failed to offer to purchase their shares, petitioners commenced this proceeding to have a judicial determination of the fair value of the shares {see, Business Corporation Law § 623 [h]).

In the first phase of a bifurcated valuation trial, Supreme Court determined the net value of the leasehold interest in an office building held by one of the family corporations, a decision not now disputed. The parties then stipulated to the net asset values of the remaining corporations. It is undisputed that, based on the percentages of each petitioner’s stockholdings in the nine corporations, her proportionate share of the aggregate net asset values of all nine corporations was $15,200,833.

The second phase of the trial was devoted to a determination of the fair value of petitioners’ shares in the nine corporations, given the net asset values previously fixed. At the conclusion of the trial, Supreme Court rejected the testimony of petitioners’ expert, who had essentially arrived at his opinion of fair value by simply applying petitioners’ fractional corporate stock ownership to the aggregate corporate net asset values. The court reasoned that this approach ignored the effect of the lack of marketability of the corporate stock and "valued these shares as if petitioners were co-tenants in the real estate rather than corporate shareholders”.

Instead, Supreme Court adopted the net asset-based valuation methodology employed by Kenneth McGraw, the corporations’ expert. McGraw’s technique was, first, to ascertain what petitioners’ shares hypothetically would sell for, relative to the net asset values of the corporations, if the corporate stocks were marketable and publicly traded; and second, to apply a discount to that hypothetical price per share in order to reflect the stocks’ actual lack of marketability. As to the first step in this valuation process, Supreme Court accepted the comparability of one group of publicly traded shares suggested by Mc-Graw, that is, of real estate investment trusts (REITs). Mc-Graw suggested that REITs shares traded primarily in direct relation to each REIT’s net asset value and, hence, the mean discount between REIT net asset values per share and REIT stock prices (which McGraw found was 9.8%) could be applied to determine what petitioners’ stocks were worth if they were marketable. Thus, McGraw opined that the hypothetical value of the dissenters’ shares here, if marketable and publicly traded, would be 9.8% less than their net asset value per share.

For the second step in McGraw’s valuation process he applied a discount to reflect the illiquidity of petitioners’ shares, i.e., that a potential investor would pay less for shares in a close corporation because they could not readily be liquidated for cash (see, Matter of Seagroatt Floral Co. [Riccardi], 78 NY2d 439, 445-446). The primary unmarketability discount recommended by McGraw was 30.4%. According to McGraw, that figure represented the mean reduction in price per share when ordinarily publicly traded shares in "compárative” corporatians became unregistered and thus, restricted shares, which could only be sold in private placements. The corporations’ expert then exacted an additional 14.6% discount in the value of the shares, which he based upon the existence of restrictions on transfer contained in stockholder agreements covering the shares of all nine corporations.

Although Supreme Court approved of the net asset valuation methodology of the corporations’ expert as a generally valid approach to determining the fair value of petitioners’ shares, it found various flaws in McGraw’s evaluation and modified the values accordingly. First, the court eliminated the initial 9.8% discount from each petitioners’ share in the aggregate net asset value of the corporations. The court based this upon Mc-Graw’s testimonial concession that the discrepancy between net asset value per share and price per share in REITs actually represented for the most part the minority status of the REIT shares traded. Thus, the court reasoned, to reduce petitioners’ share of net asset value by 9.8% would in effect impose a discount based upon petitioners’ status as minority stockholders, a result the court concluded violated New York precedents (citing Matter of Raskin v Walter Karl, Inc., 129 AD2d 642; Matter of Blake v Blake Agency, 107 AD2d 139, lv denied 65 NY2d 609).

Second, Supreme Court rejected McGraw’s rationale for the imposition of a second unmarketability discount of 14.6% based upon stockholder agreement restrictions, as factually "unpersuasive”. Finally, the court found that McGraw’s 30.4% unmarketability discount actually included "a minority interest factor which is implicit in any minority stock holding”. Consequently, the court considered it necessary to eliminate that factor from the value equation. It did so by reducing the 30.4% discount by 9.4%, which the court regarded as the discount McGraw had testified reflected the minority status of the shares traded in comparable REITs. Thus, Supreme Court only applied a 21% discount for unmarketability against each petitioner’s proportionate share of the aggregate net asset value of the corporations, resulting in a fair value determination of each petitioner’s total stock interests of $2,008,682.

The Appellate Division affirmed for the reasons stated by Supreme Court.

I

The corporations’ primary argument for reversal is that Supreme Court erred as a matter of law in refusing to take into account in its fair value determination the financial reality that minority shares in a close corporation are worth less because they represent only a minority, rather than a controlling interest. Although the corporations’ argument may have validity when corporate stock is valued for other purposes, it overlooks the statutory objective here of achieving a fair appraisal remedy for dissenting minority shareholders. Mandating the imposition of a "minority discount” in fixing the fair value of the stockholdings of dissenting minority shareholders in a close corporation is inconsistent with the equitable principles developed in New York decisional law on dissenting stockholder statutory appraisal rights (a position shared by the courts in most other jurisdictions), and the policies underlying the statutory reforms giving minority stockholders the right to withdraw from a corporation and be compensated for the value of their interests when the corporate majority takes significant action deemed inimical to the position of the minority.

Several principles have emerged from our cases involving appraisal rights of dissenting shareholders under Business Corporation Law § 623 or its predecessor statute. (1) The fair value of a dissenter’s shares is to be determined on their worth in a going concern, not in liquidation, and fair value is not necessarily tied to market value as reflected in actual stock trading (Matter of Fulton, 257 NY 487, 492). "The purpose of the statute being to save the dissenting stockholder from loss by reason of the change in the nature of the business, he [or she] is entitled to receive the value of his [or her] stock for sale or its value for investment” (id., at 494 [emphasis supplied]). (2) The three major elements of fair value are net asset value, investment value and market value. The particular facts and circumstances will dictate which element predominates, and not all three elements must influence the result (Matter of Endicott Johnson Corp. v Bade, 37 NY2d 585, 587-588). (3) Fair value requires that the dissenting stockholder be paid for his or her proportionate interest in a going concern, that is, the intrinsic value of the shareholder’s economic interest in the corporate enterprise (Matter of Cawley v SCM Corp., 72 NY2d 465, 474). (4) By virtue of the 1982 amendment to Business Corporation Law § 623 (h) (4) (L 1982, ch 202, § 9), fair value determinations should take into account the subsequent economic impact on value of the very transaction giving rise to appraisal rights, as supplemental to the three basic value factors (net asset, investment and market values). (5) Determinations of the fair value of a dissenter’s shares are governed by the statutory provisions of the Business Corporation Law that require equal treatment of all shares of the same class of stock (Matter of Cawley, supra, at 473).

Further, contrary to the corporations’ contention here, there is no difference in analysis between stock fair value determinations under Business Corporation Law § 623, and fair value determinations under Business Corporation Law § 1118. The latter provision governs the rights of minority stockholders when the corporation has elected to purchase their interests, also at "fair value”, following their petition for corporate dissolution under Business Corporation Law § 1104-a for oppressive majority conduct. The corporations’ opposing argument is that considerations of the oppressive conduct of the majority stockholders enter into fair value considerations conducted under Business Corporation Law § 1118; therefore, the cases decided under that section are distinguishable and not authoritative for fair value considerations under Business Corporation Law § 623. The corporations’ position in this regard is untenable because their basic underlying assumption — that oppressive majority conduct enters into the court’s fair value equation under section 1118 — is in error. As we stated in Matter of Pace Photographers (Rosen) (71 NY2d 737), once the corporation has elected to buy the petitioning stockholders’ shares at fair value, "the issue of [majority] wrongdoing [is] superfluous * * * [fjixing blame is material under [Business Corporation Law] § 1104-a, but not under [Business Corporation Law§ ] 1118” (id., at 746; see also, Matter of Seagroatt Floral Co., 78 NY2d, at 445, supra).

Thus, we apply to stock fair value determinations under section 623 the principle we enunciated for such determinations under section 1118 that, in fixing fair value, courts should determine the minority shareholder’s proportionate interest in the going concern value of the corporation as a whole, that is, " 'what a willing purchaser, in an arm’s length transaction, would offer for the corporation as an operating business’ ” (Matter of Pace Photographers [Rosen], 71 NY2d, at 748, supra, quoting Matter of Blake v Blake Agency, 107 AD2d, at 146, supra [emphasis supplied]).

Consistent with that approach, we have approved a methodology for fixing the fair value of minority shares in a close corporation under which the investment value of the entire enterprise was ascertained through a capitalization of earnings (taking into account the unmarketability of the corporate stock) and then fair value was calculated on the basis of the petitioners’ proportionate share of all outstanding corporate stock (Matter of Seagroatt Floral Co., 78 NY2d, at 442, 446, supra).

Imposing a discount for the minority status of the dissenting shares here, as argued by the corporations, would in our view conflict with two central equitable principles of corporate governance we have developed for fair value adjudications of minority shareholder interests under Business Corporation Law §§ 623 and 1118. A minority discount would necessarily deprive minority shareholders of their proportionate interest in a going concern, as guaranteed by our decisions previously discussed. Likewise, imposing a minority discount on the compensation payable to dissenting stockholders for their shares in a proceeding under Business Corporation Law §§ 623 or 1118 would result in minority shares being valued below that of majority shares, thus violating our mandate of equal treatment of all shares of the same class in minority stockholder buyouts.

A minority discount on the value of dissenters’ shares would also significantly undermine one of the major policies behind the appraisal legislation embodied now in Business Corporation Law § 623, the remedial goal of the statute to "protect[ ] minority shareholders 'from being forced to sell at unfair values imposed by those dominating the corporation while allowing the majority to proceed with its desired [corporate action]’ ” (Matter of Cawley v SCM Corp., 72 NY2d, at 471, supra, quoting Alpert v 28 William St. Corp., 61 NY2d 557, 567-568). This protective purpose of the statute prevents the shifting of proportionate economic value of the corporation as a going concern from minority to majority stockholders. As stated by the Delaware Supreme Court, "to fail to accord to a minority shareholder the full proportionate value of his [or her] shares imposes a penalty for lack of control, and unfairly enriches the majority stockholders who may reap a windfall from the appraisal process by cashing out a dissenting shareholder” (Cavalier Oil Corp. v Harnett, 564 A2d 137, 1145 [Del]).

Furthermore, a mandatory reduction in the fair value of minority shares to reflect their owners’ lack of power in the administration of the corporation will inevitably encourage oppressive majority conduct, thereby further driving down the compensation necessary to pay for the value of minority shares. "Thus, the greater the misconduct by the majority, the less they need to pay for the minority’s shares” (Murdock, The Evolution of Effective Remedies for Minority Shareholders and Its Impact Upon Evaluation of Minority Shares, 65 Notre Dame L Rev 425, 487).

We also note that a minority discount has been rejected in a substantial majority of other jurisdictions. "Thus, statistically, minority discounts are almost uniformly viewed with disfavor by State courts” (id., at 481). The imposition of a minority discount in derogation of minority stockholder appraisal remedies has been rejected as well by the American Law Institute in its Principles of Corporate Governance (see, 2 ALI, Principles of Corporate Governance § 7.22, at 314-315; comment e to § 7.22, at 324 [1994]).

II

We likewise find no basis to disturb the trial court’s discretion in failing to assign any additional diminution in value of petitioners’ shares here because they were subject to contractual restrictions on voluntary transfer. As we noted in Matter of Pace Photographers (Rosen) (supra), a statutory acquisition of minority shares by a corporation pursuant to the Business Corporation Law is not a voluntary sale of corporate shares as contemplated by a restrictive stockholder agreement and, therefore, "the express covenant is literally inapplicable” (71 NY2d, at 749). Nor is there any reason to disturb Supreme Court’s award of prejudgment interest.

III

While we have concluded that Supreme Court correctly applied the legal doctrines respecting fair value determinations of dissenting minority stockholders’ shares in the instant case, we find error in the court’s calculation of the unmarketability discount which must be applied here. As previously explained, Supreme Court generally adopted the net asset valuation approach of McGraw, the corporations’ expert, and his two-step evaluation process. However, the court added back the 9.8% discount McGraw took in the first step of that process because the court concluded that it actually represented a minority discount. Then, when it reached the second step of the evaluation process, the court removed what it regarded as the same minority discount from the 30.4% unmarketability discount McGraw applied at that stage. Thus, Supreme Court added back McGraw’s minority discount twice, once in each of the stages of the process. Apparently, this was based upon the court’s erroneous finding that McGraw arrived at the 30.4% discount by analyzing privately transacted sales of stock "with restrictive sale provisions and [McGraw] found that they exhibited a median discount of 30.4 percent relative to net asset value” (emphasis supplied). Supreme Court further reasoned that, because the sales McGraw analyzed were of minority shares, his unmarketability discount also must have contained an element of reduced value because of their minority status. The evidence in the record does not support the foregoing conclusions. In actuality, McGraw did not arrive at the 30.4% discount by comparing shares with "restrictive sale provisions” to their net asset values. He calculated the unmarketability factor by comparing the purchase prices of registered, publicly traded minority shares in comparative corporations, to the purchase prices of the same class of minority shares in the same corporations that were unregistered and, therefore, not publicly traded but purchased under trading restrictions in private placements. Because McGraw in his calculations always compared the prices of a marketable set of minority shares to the prices of a set of minority shares when the same stock was unmarketable, the difference in prices of the shares did not contain any additional minority discount element, and the discount was solely attributable to the difference in the marketability of the shares in the same stock.

Thus, Supreme Court erred in removing a nonexistent minority discount element from the reduction in value of petitioners’ shares McGraw attributed to their lack of marketability. It is unclear, however, as to whether Supreme Court would have accepted in full McGraw’s 30.4% discount as a proper reflection of diminution in value due to unmarketability had the court been aware that it did not also reflect a reduction in value due to the shares’ minority status. Because of this uncertainty, the matter must be remitted to Supreme Court for a new determination of the appropriate discount for unmarketability of petitioners’ shares and a recalculation of fair value when that discount is applied to the proportionate net asset value of petitioners’ stockholdings in the nine corporations.

Accordingly, the order should be reversed, without costs, and the matter remitted to Supreme Court for further proceedings in accordance with this opinion.

Judges Simons, Titone, Bellacosa, Smith and Ciparick concur; Chief Judge Kaye taking no part.

Order reversed, etc.

      . As earlier described, the actual mean minority discount McGraw derived from his REIT study was 9.8%, not the 9.4% the court applied to reduce McGraw’s recommended unmarketability discount. None of the parties to this appeal has raised any objection based upon this discrepancy.

      . E.g., Brown v Allied Corrugated Box Co., 91 Cal App 3d 477, 486, 154 Cal Rptr 170; Cavalier Oil Corp. v Harnett, supra, at 1144 (Del); Hickory Cr. Nursery v Johnston, 167 Ill App 3d 449, 521 NE2d 236, 239-240; Eyler v Eyler, 492 NE2d 1071 and); Woodward v Quigley, 257 Iowa 1077, 133 NW2d 38, 43, mod 257 Iowa 1104, 136 NW2d 280; Matter of McLoon Oil Co., 565 A2d 997, 1004-1005 (Me); Rigel Corp. v Cutchall, 245 Neb 118, 511 NW2d 519.


author: Chief Judge Kaye.

text:
    [661 NE2d 978, 638 NYS2d 405]
    Robert T. Buran et al., Respondents, v John Coupal, Appellant. (Action No. 1.) Robert T. Buran et al., Respondents, v Janet Coupal, Appellant. (Action No. 2.)
    Argued November 30,1995;
    decided December 21, 1995

      POINTS OF COUNSEL

      J. Byron O’Connell, Plattsburgh, for appellants in the two above-entitled actions.
    I. There is no excusable mistake. (Belotti v Bickhardt, 228 NY 296; Brand v Prince, 35 NY2d 634; Timmermann v Cohn, 204 NY 614; Ward v Warren, 82 NY 265; Trustees of Freeholders & Commonalty v Kirk, 84 NY 215; Bliss v Johnson, 94 NY 235; Reid v City of New York, 274 NY 178; Rasmussen v Sgritta, 33 AD2d 843; Kromholz v Notey, 121 AD2d 668.) II. The effect of the decisions of the courts below has been to deny Janet Coupal due process of law and to take her property rights.

      Saxer Anderson Wolinsky & Sunshine, P. C. (David C. Buran, of the Vermont Bar, admitted pro hac vice, of counsel), for respondents in the two above-entitled actions. I. The court below correctly held that the third prong of the relation back doctrine was satisfied, since plaintiffs’ delay in serving Mrs. Coupal was (1) due to the fact that her status as a purported coadverse possessor was not clear to plaintiffs (and thus was due to an excusable mistake), (2) Mrs. Coupal had actual knowledge of plaintiffs’ claim within the limitations period under such circumstances that it was inconceivable she could have been misled into believing that plaintiffs opted not to sue her, and (3) there was no conceivable way Mrs. Coupal could have been prejudiced. (Brock v Bua, 83 AD2d 61; Mondello v New York Blood Ctr., 80 NY2d 219; Duffy v Horton Mem. Hosp., 66 NY2d 473; Virelli v Goodson-Todman Enters., 142 AD2d 479; Burnett v New York Cent. R. R. Co., 380 US 424; Cornwell v Robinson, 23 F3d 694; Keller v Prince George’s County, 923 F2d 30; Kilkenny v Arco Mar., 800 F2d 853, cert denied sub nom. Kilkenny v Atlantic Richfield Co., 480 US 934; Keller v United States, 667 F Supp 1351, 930 F2d 920; Wandrey v Service Bus. Forms, 762 F Supp 299.) II. The description in defendants’ deed was far worse than inadequate, it simply did not describe the disputed property, and thus, could not have given plaintiffs’ notice of any ownership claim of Mrs. Coupal. III. The decision below should be affirmed even if the relation back doctrine is found not to apply, because service upon John Coupal broke Ultimate Investment Services’ chain of privity, making it impossible for it to tack prior possessions to its own to meet the requisite statutory period of possession. (Belotti v Bickhardt, 228 NY 296.) IV. The decision below should be affirmed even if the relation back doctrine is found not to apply, since the record is without any evidence that defendants intended to transfer the disputed property to their corporation, Ultimate Investments Services, and thus tacking is not allowed. (Melbourn v Kukla, 237 App Div 834, 886; Rogoff v Vanderbilt Sons’ Corp., 263 App Div 841, 290 NY 666.) V. Even if Mrs. Coupal’s adverse possession defense is found to be valid, under no circumstances would Mr. Coupal be helped by that fact, nor would Mrs. Coupal acquire rights greater than as a one-third co-owner as tenant in common with plaintiffs. (V.R.W., Inc. v Klein, 68 NY2d 560; Adams v Holt, 141-AD2d 481.)
   OPINION OF THE COURT

Chief Judge Kaye.

This case calls upon us to address a doctrine which "continues to bedevil the courts” (McLaughlin, 1990 Supplementary Practice Commentaries, McKinney’s Cons Laws of NY, Book 7B, CPLR C203:3, 1995 Cum Ann Pocket Part, at 28). Under what circumstances does an amended complaint adding a new defendant, united in interest with the original defendant, relate back to the initial complaint for Statute of Limitations purposes? In particular, must the party seeking leave of court to add a new defendant show "excusable mistake” for the failure to have named the new party originally, or is a mistake alone enough?

Concluding that New York law requires merely mistake — not excusable mistake — on the part of the litigant seeking the benefit of the doctrine, we hold that plaintiffs’ second complaint relates back to their original complaint and is therefore timely, thus defeating defendants’ claim of adverse possession.

I.

In 1962, plaintiffs Robert and Arlene Buran purchased a one-acre lot in Beekmantown, New York, the deed to which conveys property rights extending north into the waters of Lake Champlain. Five years later, defendants John and Janet Coupal obtained property known locally as Dickson’s Farm which abuts the Burans’ lot at its northeast corner. Since— unlike the Burans’ waterfront property — Lake Champlain is not otherwise accessible from Dickson’s Farm, the Coupals in 1973 erected a concrete seawall jutting diagonally across the border of their own lot and over the Burans’ property into the waters of the lake.

Unhappy with the seawall, the Burans in 1979 brought a lawsuit for trespass, naming only John Coupal as defendant. Though omitting any reference to his wife in his first two answers, in September 1982, John Coupal filed an "amended amended” answer, for the first time arguing that he owned the lot with his wife as a tenant by the entirety and that the Burans’ complaint should be dismissed for failure to name Janet Coupal as a necessary party. Shortly after filing this answer, however, the Coupals transferred ownership of their lot to Ultimate Investment Services Incorporated, Ltd., a corporation they owned and controlled.

After the Burans served a summons on Ultimate Investment, the lot was in 1984 reconveyed to the Coupals. The Burans then filed a second complaint in 1989, this time against Janet Coupal as co-owner. Both complaints contained substantially the same allegations as to the nature of the Coupals’ trespass, the only substantive difference being the addition of Janet Coupal as a party defendant. As an affirmative defense to the second lawsuit, Coupal asserted that she and her husband were by then the owners of the disputed property, having adversely possessed it for a period of 10 years.

After consolidation of the two actions in 1992 and a jury trial, Supreme Court ordered removal of the seawall within 120 days and restoration of the land to the Burans, and the Appellate Division affirmed. Both lower courts rejected defendants’ contention that Janet Coupal had become owner of the property under the doctrine of adverse possession. Focusing, as did the Appellate Division, on the legal question whether plaintiffs’ 1989 complaint against Janet Coupal relates back to the allegations contained in the 1979 complaint against her husband, we agree that defendants failed to meet their burden of proving the affirmative defense of adverse possession.

II.

As codified in New York’s Civil Practice Law and Rules, what is commonly referred to as the relation back doctrine allows a claim asserted against a defendant in an amended filing to relate back to claims previously asserted against a codefendant for Statute of Limitations purposes where the two defendants are "united in interest” (CPLR 203 [b]; see also, CPLR 203 [e] [relation back of new claims against same party]).

Aimed at liberalizing the strict, formalistic pleading requirements of the past century (see, Shaw v Cock, 78 NY 194; Harriss v Tams, 258 NY 229) or the "sporting theory of justice” condemned by Roscoe Pound (see, Schiavone v Fortune, 477 US 21, 32-33 [Stevens, J., dissenting]), while at the same time respecting the important policies inherent in statutory repose (see, Duffy v Horton Mem. Hosp., 66 NY2d 473, 476-477), the doctrine enables a plaintiff to correct a pleading error — by adding either a new claim or a new party — after the statutory limitations period has expired. The doctrine thus gives courts the "sound judicial discretion” (Duffy, 66 NY2d at 477) to identify cases "that justify relaxation of limitations strictures * * * to facilitate decisions on the merits” if the correction will not cause undue prejudice to the plaintiffs adversary (Lewis, The Excessive History of Federal Rule 15 (c) and Its Lessons for Civil Rules Revision, 85 Mich L Rev 1507, 1512 [1987]).

As we observed in Duffy v Horton Mem. Hosp. (66 NY2d at 477), however, allowing the relation back of amendments adding new defendants implicates more seriously these policy concerns than simply the relation back of new causes of action since, in the latter situation, the defendant is already before the court. Recognizing this difference, in Mondello v New York Blood Ctr. (80 NY2d 219, 226), we recently adopted the three-part test enunciated in Brock v Bua (83 AD2d 61) now prevailing in the Federal and State courts for determining when the doctrine would permit the addition of a new party to relate back to an earlier pleading.

Under this standard, the three conditions that must be satisfied in order for claims against one defendant to relate back to claims asserted against another are that:

"(1) both claims arose out of same conduct, transaction or occurrence, (2) the new party is 'united in interest’ with the original defendant, and by reason of that relationship can be charged with such notice of the institution of the action that he will not be prejudiced in maintaining his defense on the merits and (3) the new party knew or should have known that, but for an excusable mistake by plaintiff as to the identity of the proper parties, the action would have been brought against him as well.” (Brock v Bua, at 69 [citations omitted].)

Mondello involved claims of negligence brought first against a hospital and later against a blood bank arising from plaintiffs’ infection with the HIV virus after receiving a blood transfusion. In applying the Brock test to the facts of that case and rejecting the argument that the hospital and the blood bank were sufficiently united in interest to support application of the doctrine, we had no occasion to consider the scope of the requirement under the third prong, or whether the failure of plaintiff’s counsel to name the blood bank originally was "excusable” (80 NY2d at 230). Here, by contrast, since it is undisputed that the first and second prongs of the Brock test are satisfied, we now address the issue explicitly left open in Mondello and decide that excusability of the mistake is not an absolute requirement under New York law (see, Virelli v Goodson-Todman Enters., 142 AD2d 479, 482-484 [applying Brock’s third prong, but declining to accept excusability requirement]).

Though patterned largely after the Federal relation back rule (Mondello, 80 NY2d at 226), the test articulated in Brock differs from its Federal counterpart in one crucial respect: it contains, as an additional requirement, that plaintiffs omission of the party in the original pleading be excusable. In marked contrast to Brock’s third prong, rule 15 (c) of the Federal Rules of Civil Procedure merely requires that the new party "knew or should have known that, but for a mistake concerning the identity of the proper party, the action would have been brought against the party” (Fed Rules Civ Pro, rule 15 [c] [3] [B]). Thus, unlike Brock, "the Federal rule does not qualify the nature of the mistake” (Virelli, 142 AD2d at 483; see also, Livingston Export Corp. v M/ V Ogden Fraser, 727 F Supp 144, 147 ["The only additional condition precedent to invoking the New York relation back doctrine is excusable neglect.”]).

Underscoring the difference is the fact that, though omitted from the text of rule 15 (c), language similar to "excusable mistake” is used in other provisions of the Federal rules. Rule 6, for example, permits parties to make late filings "where the failure to act was the result of excusable neglect” (Fed Rules Civ Pro, rule 6 [b] [emphasis added]; see also, Fed Rules Civ Pro, rule 13 [¶] [amended counterclaim may be filed upon showing of excusable neglect]). It is thus plain that, at least with respect to the Federal rule on which New York’s own three-part test was premised, there is no requirement of "excusable” mistake (see also, Schiavone v Fortune, 477 US 21, 31, supra).

In fact, the "excusable mistake” requirement appears to have originated as a judicial gloss imposed on rule 15 (c) in a category of Federal decisions denying plaintiffs the benefit of the doctrine on grounds that they deliberately failed to identify the proper party who was known to them at the time (see, e.g., Bruce v Smith, 581 F Supp 902; Jacobs v McCloskey & Co., 40 FRD 486), or where the proposed new defendant had no notice of the pendency of the action such that the defendant could not reasonably have expected to have been sued (see, e.g., Kilkenny v Arco Mar., 800 F2d 853; Keller v Prince George’s County, 923 F2d 30). In both situations, the courts properly rejected application of the doctrine on the ground either that there was no "mistake” — i.e., that plaintiffs knew of the existence of the proper parties at the time of their initial filing, or that application of the doctrine would unduly prejudice the defendant’s rights. As described in a passage from Moore’s Federal Practice cited in Brock (83 AD2d at 69), these cases rest on the sound conclusion that:

"it is often plaintiff’s own dilatory conduct that is most relevant in assessing whether the prospective party knew, or should have known, that plaintiff simply made a mistake in failing to name the prospective party as a defendant. Thus, plaintiff’s own inexcusable neglect would appear to be a proper consideration in a Rule 15 (c) determination” (3 Moore, Federal Practice 15.15 [4], at 15-168 [2d ed 1995] [emphasis added]).

Despite the existence of this judicially created exception to the doctrine for reasons of lack of notice or bad faith, it is apparent that apart from excusability of the mistake, the Brock test already provides an independent ground for denying application of the doctrine in these cases — absence of mistake under the first prong or operative prejudice to the defendant under the second. Adding the word "excusable” to the third prong effectively converts what are already valid considerations under the first and second prongs into an independent factor under the third (see, Bruce v Smith, 581 F Supp 902, 906, supra; Note, Schiavone v Fortune: A Clarification of the Relation Back Doctrine, 36 Cath U L Rev 499, 511 [1987]).

Moreover, addition of the word "excusable” also improperly deemphasizes what the United States Supreme Court has called the "linchpin” of the relation back doctrine — notice to the defendant within the applicable limitations period (Schiavone v Fortune, 477 US 21, 31, supra). As explained in , Virelli, Brock’s "excuse qualification * * * shifts the focus away from the primary question of whether the new party had actual notice of the claim” (142 AD2d at 483).

Indeed, requiring courts to determine in each case whether the plaintiff’s mistake was "excusable” unwisely focuses attentian away from what Brock assumed to be the primary consideration in such cases — whether the defendant could have reasonably concluded that the failure to sue within the limitations period meant that there was no intent to sue that person at all "and that the matter has been laid to rest as far as he is concerned” {Brock, 83 AD2d at 70).

Even more troubling, however, is that the excusability test often punishes the plaintiff for even minor drafting errors— precisely the situation that warrants application of the doctrine. As Virelli observed in rejecting addition of the word "excusable” to the third prong, "[plaintiff’s only explanation for the misidentification is that the attorney who drafted the summons and complaint had never seen the descriptive announcement. * * * [S]imilar excuses have been rejected outright in Brock and its progeny” (142 AD2d at 483). Indeed, the practical effect for New York litigants has been to render the relation back doctrine meaningless in all but rare circumstances (see, e.g., Sandor v Somerstown Plaza Assocs., 210 AD2d 212 [relying on third prong in dismissing plaintiff’s claims]; Iannarone v Faucetta, 204 AD2d 396 [same]; Hernandez v William J. Scully, Inc., 203 AD2d 245 [same]; Smith v Cutson, 188 AD2d 1034 [same]; Sucese v Kirsch, 177 AD2d 890 [same]; County of Rockland v Spring Val. Water Co., 134 AD2d 317 [same]). Surely, such a result is not in keeping with modern theories of notice pleading and the admonition that the Civil Practice Law and Rules "be liberally construed to secure the just, speedy and inexpensive determination of every civil judicial proceeding” (CPLR 104).

This is not to say, however, that removing the excusability requirement from the third prong would prevent a court from refusing to apply the doctrine in cases where the plaintiff omitted a defendant in order to obtain a tactical advantage in the litigation. When a plaintiff intentionally decides not to assert a claim against a party known to be potentially liable, there has been no mistake and the plaintiff should not be given a second opportunity to assert that claim after the limitations period has expired (see, Note, The Relation Back of Claims Against Third-Party Defendants, 7 Cardozo L Rev 281, 304 [1985]). Similarly, a court would be justified in denying a plaintiff the benefit of the doctrine in order to prevent delay or disruption in the normal course of the lawsuit. Application of the doctrine in such circumstances would likely result in prejudice to the adversary and, as noted above, bar application of the doctrine under the second prong.

III.

Applying these principles to the facts before us, we agree with the Appellate Division that the trial court acted within its discretion in permitting relation back of the 1989 complaint against Janet Coupal to the 1979 claims against her husband. In that it is undisputed that Janet Coupal had notice of the action against her husband, the question whether the Burans’ mistake in failing to name her initially was "excusable” was immaterial. Adding her as a party resulted in no delay or prejudice. As co-owner of the property, Janet Coupal was at all times united in interest with her husband who was timely served and had a full opportunity to make an investigation within the limitations period.

In fact, any prejudice or bad faith in this case is attributable entirely to the acts of the defendants. At the very time that John Coupal was amending his answer to add the defense that his wife was a necessary party, he and his wife were transferring their property to Ultimate Investment in an obvious effort to delay resolution of the Burans’ claims. Thus, given that Janet Coupal was aware that trespass allegations were being made against her with respect to the disputed seawall at least as early as 1982 when she actively participated in transferring (and later retransferring) the property, the claims against her were properly permitted to proceed on their merits.

Accordingly, the order of the Appellate Division should be affirmed, with costs.

Judges Simons, Titone, Bellacosa, Smith, Levine and Ciparick concur.

Order affirmed, with costs.

      . Given our conclusion that the relation back doctrine applies to the circumstances of this appeal, we need not reach the ground principally relied upon by the trial court in dismissing the Coupals’ adverse possession defense — that the two-year interval during which Ultimate Investment held title to Dickson’s Farm defeated any claim of adverse possession.

      . As husband and wife and tenants by the entirety/co-owners of Dickson Farm, jointly and severally liable for each other’s acts with respect to the property, it is plain that the Coupals are "united in interest” for purposes of the relation back doctrine (compare, Mondello v New York Blood Ctr., 80 NY2d 219, supra).


author: Simons, J.

text:
    [661 NE2d 984, 638 NYS2d 411]
    In the Matter of Joan McManus, Appellant, v Board of Education of the Hempstead Union Free School District et al., Respondents.
    Argued November 29, 1995;
    decided December 21, 1995

      POINTS OF COUNSEL

      Robert Saperstein, Melville, for appellant.
    I. Respondents cannot extend appellant’s probationary period by the artifact of labeling a vacant position as acting. (Matter of Lezette v Board of Educ., 35 NY2d 272; Matter of Ward v Nyquist, 43 NY2d 57; Matter of Brewer v Board of Educ., 51 NY2d 855; Matter of Board of Educ. v Nyquist, 45 NY2d 975; Ricca v Board of Educ., 47 NY2d 385; Matter of Nixon v Board of Coop. Educ. Servs., 168 AD2d 952; Matter of Roberts v Community School Bd., 66 NY2d 652.) II. The Court below misconstrued the holding in Matter of Roberts v Community School Bd. (Mat

      ter of Brewer v Board of Educ., 51 NY2d 855; Matter of Dionisio v Board of Educ., 96 AD2d 1041, 63 NY2d 862.) III. Respondents have engaged in a pattern of violating the tenure laws. (Ricca v Board of Educ., 47 NY2d 385.) IV. This action is not barred by waiver and estoppel. (Matter of Roberts v Community School Bd., 66 NY2d 652; Matter of Armstrong v Board of Educ., 72 AD2d 601; Matter of Mulvey v Board of Educ., 72 AD2d 584; Matter of Baer v Nyquist, 34 NY2d 291; Matter of Lindsey v Board of Educ., 72 AD2d 185; Matter of Greco v Board of Educ., 98 AD2d 721; Noce v Kaufman, 2 NY2d 347; Matter of Feinerman v Board of Coop. Educ. Servs., 48 NY2d 491; Matter of Juul v Board of Educ., 55 NY2d 648; Matter of Abramovich v Board of Educ., 46 NY2d 450, 444 US 845.)

      Berkman, Henoch, Peterson & Peddy, P. C., Garden City (Michele Gapinski of counsel), for respondents.
    I. Petitioner did not acquire tenure by estoppel. (Matter of Roberts v Community School Bd., 66 NY2d 652; Ricca v Board of Educ., 47 NY2d 385; Matter of Nixon v Board of Coop. Educ. Servs., 168 AD2d 952; Matter of Board of Educ. v Nyquist, 59 AD2d 76, 45 NY2d 975; Matter of Lindsey v Board of Educ., 72 AD2d 185; Greenspan v Dutchess County Bd. of Coop. Educ. Servs., 96 AD2d 1028.) II. Petitioner’s claim is barred by waiver and estoppel. (Matter of Abramovich v Board of Educ., 46 NY2d 450, 444 US 845; Matter of Moore v Board of Educ., 116 AD2d 273; Matter of Kelland v Commissioner of Educ. of State of N. Y., 96 AD2d 969; Jacobs v Bernstein, 156 App Div 263; Rose v Spa Realty Assocs., 60 AD2d 937; Chautauqua County Fedn. of Sportsmens Club v Caflisch, 15 AD2d 260; Simmons v Westwood Apts. Co., 46 Misc 2d 1093, 26 AD2d 764; Columbia Broadcasting Sys. v Stokely-Van Camp, Inc., 522 F2d 369; Kilstein v Agudath Council, 133 AD2d 809; Gray v Met Contr. Corp., 4 AD2d 495.)
   OPINION OF THE COURT

Simons, J.

In this CPLR article 78 proceeding petitioner seeks to annul a resolution of respondent which terminated her employment as Hempstead Middle School Principal and to be restored to that position. She claims that she could not be terminated summarily because she acquired tenure by estoppel when the Board permitted her to serve as Principal for more than three years, one year as "Acting” Principal and two additional years following her appointment to a probationary term as Principal. Supreme Court dismissed the petition and the Appellate Division affirmed. We now reverse.

I

Petitioner Joan McManus is a career educator and certified school administrator who has been employed by respondent Hempstead Union Free School District for 26 years. In July 1989, the position of Middle School Principal became vacant. A month later the Board appointed petitioner "Acting” Middle School Principal while a search was conducted to find a replacement. After a year’s search, the Board concluded petitioner was the preferred candidate. On August 17, 1990 it appointed her to the position with a two-year probationary period and adjusted her status accordingly.

In May 1991, questions arose concerning petitioner’s tenure date and the District sought the advice of the New York State Department of Education. It informed respondent that (1) petitioner’s probationary period began in August 1990, (2) that notwithstanding the Board’s resolution purportedly setting her probationary period at two years, petitioner was required to serve a three-year probationary appointment and (3) that she was not entitled to earn credit for substitute service, commonly known as "Jarema” credit. Based on this ruling, petitioner was notified by letter dated July 11, 1991, that her probationary period ran from August 1990 to August 1993. She raised no objection at the time.

In May 1993, the Superintendent informed petitioner that he was not recommending her for tenure as Principal of the Middle School and the Board subsequently voted to accept the Superintendent’s recommendation to terminate her. This proceeding followed.

In dismissing the petition, Supreme Court relied on Matter of Roberts v Community School Bd. (66 NY2d 652) and held that the year as Acting Principal did not count as part of petitioner’s probationary period because only teachers may claim substitute, or "Jarema”, credit. Alternatively, it concluded that petitioner was foreclosed from claiming that she had acquired tenure because she failed to object to the Board’s July 11, 1991 letter fixing the commencement and expiration of her probationary period. The Appellate Division unanimously affirmed.

II

In general, "estoppel” is a bar which precludes a party from denying a certain fact or state of facts exists to the detriment of another party who was entitled to rely on such facts and had acted accordingly (Nassau Trust Co. v Montrose Concrete Prods. Corp., 56 NY2d 175, 184). Tenure may be acquired by estoppel when a school board accepts the continued services of a teacher or administrator, but fails to take the action required by law to either grant or deny tenure prior to the expiration of the teacher’s probationary term (Matter of Gould v Board of Educ., 81 NY2d 446, 451; Matter of Lindsey v Board of Educ., 72 AD2d 185, 186).

Under the provisions of Education Law § 3012 (1) (b), principals must serve a three-year probationary period to achieve tenure. Petitioner maintains, however, that the Board artificially extended her three-year "probationary period” by appointing her an "acting” principal during her first year of service and commencing her official three-year probationary period thereafter. She maintains that inasmuch as she had served in the position for a total of three years, she had acquired tenure by estoppel before the Board acted in August 1993 to deny her tenure and terminate her employment as Principal.

Although we have not interpreted Education Law § 3012 (1) (b), we have addressed the related issue of whether a probationary period under former Education Law § 2569-a can be extended by delaying the formal appointment of a qualified teacher to an available position which the teacher already fills (see, Ricca v Board of Educ., 47 NY2d 385). Petitioner there contended that his probationary period began when he became eligible for appointment and assumed the duties of the position, and that he had obtained tenure by virtue of the board’s acquiescence in his continued employment more than three years later. We concluded that he had established tenure "by operation of law.” Construing the tenure rules broadly in favor of the teacher to foster the purposes they were designed to effectuate, academic freedom and the protection of competent teachers from fear of dismissal, we held that "a school district may not artificially increase the length of the probationary period established by State Law, either directly or indirectly by unduly delaying the formal appointment of a teacher to a particular position which that teacher in fact fills” (Ricca, 47 NY2d, at 392).

Although Ricca addressed a section of the Education Law governing teachers rather than administrators, the policy considerations we announced there apply equally to this case. Much like the petitioner in Ricca, Joan McManus was eventually appointed on a probationary basis to a position which she had been filling for almost a year. Inasmuch as probationary periods are employed to determine if appointees are "competent, efficient and satisfactory” for purposes of recommending tenure, there is no reason why petitioner’s service following hér initial appointment should be considered anything less than time accrued towards reducing the official three-year probationary period the statute requires. Tenure evaluations can be made after three years regardless of the title under which the probationer serves and a Board may not undermine the policies behind the tenure system and artificially extend the probationary period by designating a position "acting” or "temporary”.

Decisions of the Commissioner of Education lend support to this view. Thus, the Commissioner has stated:

"The Board cannot deny tenure and other rights and privileges to appellants simply by refusing to designate appellants by a specific title * * * Merely calling the act of the Board an 'assignment’ rather than an 'appointment’ does not help the situation. Such a procedure is not compatible with the procedures of the Education Law” (Matter of Still-man (2 Ed Dept Rep 294, 296)

and in Matter of McPhillips (13 Ed Dept Rep 95, 97) he ruled:

" '[I]n case of a vacancy, an appointment * * * must be made for a probationary period of three years. There is no legal authority for a "temporary” appointment’ ” (see also, Matter of Sullivan, 5 Ed Dept Rep 62; Matter of Susskind, 5 Ed Dept Rep 187; Matter of Murphy, 8 Ed Dept Rep 101; Matter of Cardo, 8 Ed Dept Rep 182).

While the Commissioner’s decisions are not binding on us, they are persuasive authority and support our present interpretation of Education Law § 3012 (see, Matter of Lezette v Board of Educ., 35 NY2d 272, 281).

Respondents rely on Matter of Roberts v Community School Bd. (66 NY2d 652, supra), as did the courts below. Roberts involved "Jarema” credit, i.e., credit accrued as a substitute teacher and applied towards reducing the probationary period following a permanent appointment (Education Law §§ 2509, 2573). The courts in Roberts correctly noted that the statute does not apply to administrative or supervisory personnel, and there is no similar statute which does. But "Jarema” credit is not the issue in this case. Petitioner was filling a position left vacant by the termination of the prior Middle School Principal, and was by definition, not acting as a "substitute”, i.e., one taking over a position on behalf of another who is either temporarily unable to perform the duties on a short-term basis because of sickness, leave of absence or similar reasons (see, Matter of Axel v Board of Educ., 56 AD2d 598, 599; see also, Matter of Brewer v Board of Educ., 51 NY2d 855, 858). She was appointed to a vacant position and our denial of relief to administrative personnel in Roberts is not controlling.

Ill

Alternatively, respondents contend that the petitioner should be estopped from claiming she acquired tenure because she failed to challenge the probationary dates contained in the Superintendent’s letter of July 11, 1991. They maintain that by failing to object, petitioner misled the Board into relying on the dates in the letter and it lost the opportunity to conduct a timely tenure determination before expiration of the three-year period. It also contends that in failing to object to the probationary period dates contained in the letter, petitioner waived her right to contest them.

Petitioner cannot be estopped from asserting a state of facts that were known to all parties throughout the transaction. She is asserting a legal conclusion arising out of these facts, not seeking relief on the basis of something concealed from the Board, and a school board cannot be misled as to the legal significance of facts within its own knowledge (Gould, 81 NY2d, at 451, supra).

Nor do we find petitioner has waived her right to claim tenure by estoppel. "While a teacher may waive a right to tenure (see, Matter of Feinerman v Board of Coop. Educ. Servs., 48 NY2d 491), such waivers must be knowingly and freely made; they should not be implied or presumed (see, id., at 497; Matter of Baer v Nyquist, 34 NY2d 291, 299). There is no evidence in this case that petitioner knew of her right to probationary appointment and knowingly waived it and she cannot be held to have waived rights of which she was unaware (see, Gould, 81 NY2d, at 452, supra; Hadden v Consolidated Edison Co., 45 NY2d 466, 469; Werking v Amity Estates, 2 NY2d 43, 52).

In sum, petitioner’s probationary period includes the year she served as "Acting” Principal. By permitting her to serve beyond three years in the same position, respondent Board of Education acquiesced in her obtaining tenure and petitioner acquired tenure by estoppel.

Accordingly, the order of the Appellate Division should be reversed, with costs, the petition granted and the matter remitted to Supreme Court, Nassau County, for a determination of back pay and other relief resulting from petitioner’s wrongful termination.

Chief Judge Kaye and Judges Titone, Bellacosa, Smith, Levine and Ciparick concur.

Order reversed, with costs, petition granted and matter remitted to Supreme Court, Nassau County, for further proceedings in accordance with the opinion herein.


author: Per Curiam. Bellacosa, J.

text:
    [661 NE2d 988, 638 NYS2d 415]
    In the Matter of Director of the Assigned Counsel Plan of the City of New York, Appellant. Hillel Bodek, Respondent. The People of the State of New York, Respondent, v James Townsend, Defendant. (And Other Criminal Actions).
    Argued October 17, 1995;
    decided December 21, 1995

      POINTS OF COUNSEL

      Paul A. Crotty, Corporation Counsel of New York City (Julian L. Kalkstein, Leonard Koerner and Larry A. Sonnenshein of counsel), for appellant.
    I. County Law § 722-c, which authorizes the provision of expert services necessary for the defense of an indigent defendant, and which sets a limit of $300 per matter except in "extraordinary circumstances” was not enacted to provide a vehicle whereby a particular social worker could perform mental health evaluations at $100 per hour and, in virtually every matter he handled, charge thousands of dollars and thereby secure a yearly remuneration that exceeded the salary of every single other 18-B expert, Judge and elected official in the State of New York when the same services are available at far less cost. (People v Louis, 161 Misc 2d 667; Ake v Oklahoma, 470 US 68; Matter of Werfel v Agresta, 36 NY2d 624; People v Perry, 27 AD2d 154; United States v Durant, 545 F2d 823; People v Gallow, 171 AD2d 1061, 77 NY2d 995; United States v Oliver, 626 F2d 254.) II. The City, as a nonparty to a criminal action, has a right of appeal to an order from the Criminal Court directing it to pay the fee of an expert appointed pursuant to County Law § 722-c. (Matter of Werfel v Agresta, 36 NY2d 624; Brady v Ottaway Newspapers, 97 AD2d 451, 63 NY2d 1031; People v New York Cent R. R. Co., 29 NY 418; Matter of New York City Dept. of Envtl. Protection v New York City Civ. Serv. Commn., 78 NY2d 318; Matter of Abrams [John Anonymous], 62 NY2d 183; People v Schonfeld, 74 NY2d 324; Matter of Byrnes v County of Monroe, 128 Misc 2d 700; Corkum v Bartlett, 46 NY2d 424; Matter of Guardian Life Ins. Co. v Bohlinger, 308 NY 174.)

      King & Spalding, New York City (Brian Rosner of counsel), for Hillel Bodek, respondent.
    The May 12, 1993 orders directing the City to compensate a defense expert appointed by the trial court pursuant to County Law § 722-c are not reviewable on appeal. (Matter of Werfel v Agresta, 36 NY2d 624; People v Ward, 199 AD2d 683; Matter of Kindlon v County of Rensselaer, 158 AD2d 178; Byrnes v County of Monroe, 129 AD2d 229; People v Elliot, 98 Misc 2d 424; People v Louis, 161 Misc 2d 667.)

      Malvina Nathanson, New York City, for New York State Association of Criminal Defense Lawyers, amicus curiae.

    Under the enabling legislation and the effectuating plans, rules and regulations, the City must pay the section 722-c vouchers as approved by the trial courts. (Matter of Kindlon v County of Rensselaer, 158 AD2d 178; Byrnes v County of Monroe, 129 AD2d 229; People v Perry, 27 AD2d 154; Ake v Oklahoma, 470 US 68; Matter of Werfel v Agresta, 36 NY2d 624.)
   OPINION OF THE COURT

Per Curiam.

In Matter of Werfel v Agresta (36 NY2d 624), this Court held that an order issued pursuant to County Law §§ 722 and 722-b regarding an assigned criminal defense attorney’s compensation is not subject to appellate review. This appeal requires us to consider the appealability and reviewability of compensation orders issued pursuant to County Law § 722-c.

The dispute arises out of services that were rendered by respondent Hillel Bodek, a certified social worker, in connection with several criminal cases that were pending before the Supreme Court in New York County. In each instance, Bodek had been appointed by the court to provide professional services to indigent defendants and the court directed that the City of New York pay him at a rate of $100 an hour for those services. In seven of the eight cases, the court also found "extraordinary circumstances” justifying significant departures from the statutory norm of $300 per case (see, County Law § 722-c).

The Director of the Assigned Counsel Plan for New York City asked the two Supreme Court Justices who had issued the compensation orders to reconsider them, particularly in light of contemporary budget constraints and the $45 maximum hourly rate for social workers prescribed by the Chief Administrator of the Courts (see, 22 NYCRR 127.2 [b]). Her requests for relief, which were made through informal letters and a formal motion (see, 22 NYCRR 127.2 [b]), were unsuccessful.

Following the denial of all of her fee reduction requests, the Director attempted to appeal from the Supreme Court’s various "orders.” The Appellate Division consolidated the appeals and affirmed. Conceding that the challenged orders might technically be appealable by the Director, an aggrieved nonparty, the Court nevertheless declined to consider the appeals’ merits, holding that the orders were not reviewable under Matter of Werfel v Agresta (supra). This Court subsequently granted the Director leave to take a further appeal.

Initially, we note that, with respect to the appealability question, there is no meaningful distinction between the County Law '§§ 722 and 722-b assigned-counsel compensation order sought to be appealed in Matter of Werfel v Agresta (supra) and the County Law § 722-c assigned-expert compensation orders sought to be appealed here. Nonetheless, the rationale in Werfel does not pose an impenetrable barrier to appealing these challenged orders, since the analyses in more recent cases such as Matter of Abrams (John Anonymous) (62 NY2d 183), Matter of Hynes v Karassik (47 NY2d 659) and Matter of Cunningham v Nadjari (39 NY2d 314) are fatal to the continuing validity of that rationale in the present context (cf., Matter of Santangello v People, 38 NY2d 536; Matter of Alphonso C., 38 NY2d 923).

Despite the technical appealability of the challenged orders, however, the Appellate Division did not err in refusing to entertain the merits of the Director’s challenge. As is indicated in the final paragraphs of Werfel (supra, at 627), trial court orders granting or denying increases in the statutorily recommended fees under County Law §§ 722, 722-b and 722-c "provide no basis for justiciable review.” Such orders are essentially administrative in nature and, accordingly, are not amenable to judicial review on the merits by an appellate panel (cf., Matter of Harvey v County of Rensselaer, 83 NY2d 917 [addressing court’s power under County Law § 701 to award compensation for services performed by Special Prosecutor’s associates]).

Although the point is not dispositive, we note that formal appellate review of these compensation orders is impractical, since the appeals courts are several steps removed from the circumstances in which the services were rendered and are therefore not well positioned to assess the wisdom of the Trial Judges’ discretionary choices. To the extent that the trial courts’ unreviewable discretion produces truly anomalous consequences or patterns of abuse in particular situations, the problem can and should be addressed through the available administrative tools.

Accordingly, the order of the Appellate Division should be affirmed, without costs.

Bellacosa, J.

(concurring). Judge Smith and I also vote to affirm, but only under the constraint of Matter of Werfel v Agresta (36 NY2d 624) on the nonjusticiable reviewability point and for these separately stated reasons.

The genesis of this exceptional compensation controversy is a long-standing practice of some Supreme Court Justices in Manhattan using a social services expert to provide the court with help in connection with a series of criminal cases. No one questions the right and need for the Judges to receive this assistance or the entitlement of experts to be properly compensated.

In the assembly of the cases now before us, the certified social worker was appointed, and after completion of the services, he submitted separate applications for court-ordered compensation. In seven of the eight cases, the courts found that the "extraordinary circumstances” statutory standard warranted compensation greatly in excess of the $300 prescribed maximum per case (see, County Law § 722-c). The courts also ordered the City of New York to pay at a rate of $100 an hour for services rendered in each of the separate criminal proceedings, a factor itself more than double the rate reflected in the Chief Administrative Judge’s rule (22 NYCRR 127.2 [b]). The City of New York was never a party to the payment proceedings and was never afforded any opportunity to contest the fee requests or ordered payments. In total, the social worker was awarded in excess of $28,300 for just these cases — 10 times greater than the statutory and rule maxima that would have totalled only $2,400.

Appellant, the Director of the Assigned Counsel Plan for New York City, became obligated, pursuant to the judicial orders, to pay the fees out of budgeted New York City appropriations. She sought at the earliest opportunity an initial review from the Justices who in the first instance ordered the payments. She requested that the courts at least adhere to the $45 per hour maximum rate for social workers prescribed by the Chief Administrative Judge (22 NYCRR 127.2 [b]). In each case, the trial courts granted reconsideration but adhered to their original orders. The Director’s further attempt at review, pursuant to the Rules of the Chief Administrator (22 NYCRR 127.2 [b]), was rejected by the Justices on the ground that they were the sole, unreviewable adjudicators of these compensation matters.

The Director then appealed four separate orders of Supreme Court that respectively denied seven applications of review or reconsideration of ordered payment vouchers for expert services. The Appellate Division consolidated the appeals and affirmed (207 AD2d 307). That Court treated the orders as appealable by affirming, but then ruled that they were "nevertheless not reviewable” under Matter of Werfel v Agresta (36 NY2d 624, supra) (id., at 308). This Court granted leave to appeal and we agree unanimously under recent precedential developments that Matter of Werfel v Agresta (supra) is not a bar to appealability.

Matter of Hynes v Karassik (47 NY2d 659), Matter of Abrams (John Anonymous) (62 NY2d 183) and Matter of Codey (Capital Cities, Am. Broadcasting Corp.) (82 NY2d 521) justify our treating, these compensation orders made pursuant to County Law § 722-c as civil, rather than criminal in nature. They in no way affect the criminal proceeding or judgment itself and are entirely collateral to and discrete from the criminal proceeding (see, Matter of Hynes v Karassik, 47 NY2d 659, 661, n 1, supra). The express authorization for ordering the compensation at issue is also located in a civil compilation of statutes, County Law § 722-c. Thus, the appealability threshold issue is different from Werfel (see also, Matter of Harvey v County of Rensselaer, 83 NY2d 917; Yalango v Popp, 84 NY2d 601).

The other half of the Werfel equation — justiciable review-ability even under the peculiar and narrow circumstances of this intractable controversy — continues, however, to confound and block desirable and realistic solution. It is for that reason that we must join in the affirmance result.

County Law § 722-c provides that a court may authorize expert services in connection with the prosecution of an action against an indigent defendant. The statute provides that "[t]he court shall determine reasonable compensation for the services and direct payment to the person who rendered them or to the person entitled to reimbursement. Only in extraordinary circumstances may a court provide for compensation in excess of three hundred dollars'” (emphasis added).

In Matter of Werfel v Agresta (36 NY2d 624, supra), this Court, inter alla, addressed the reviewability aspect of an assigned counsel compensation order made pursuant to County Law § 722-b, a statute similar, but not identical, to County Law § 722-c. This Court was divided, but held that the Appellate Division lacked power to review the lawyer’s request to increase the allowance made pursuant to County Law §§722 and 722-b. The Court held further that the assigned attorney had no right to relief under CPLR article 78 and stated that fixing compensation for assigned counsel "might” be characterized as "administrative.”

While the civil proceeding and appeal are undeniably properly before this Court and some different procedural and juridical features from Werfel are present, we can discern no principled legal, route to overcome its binding precedential effect on the justiciability and reviewability issue.

Distinctive features include that the Director and the municipal payor in this case were never parties in these matters originally, as attorney Werfel was in his case; nor did the appellant or City have any opportunity to contest, participate in or challenge the payment proceedings. They reasonably relied from the outset on statutory and formal administrative rule caps, limits and standards, and assigned counsel Werfel took his assignment with binding knowledge of the limitations of his statutory service. Arguably, the proceeding to challenge the excessive fees here is not essentially "administrative,” as in Werfel, because a statute and a regulation with prescribed standards and limits appear to have been facially and egregiously overridden in this case. Yet, with all that said, the equal application and general rationale of the justiciabilityreviewability bar erected in Werfel compel adherence on stare decisis grounds alone.

We would like to emphasize, however, that the lack of any judicial review or appropriate check-and-balance of unilateral trial court action in these public services and public fiscal matters is unfortunate. As this case demonstrates, substantial fiscal consequences to a municipality are in play, as well as serious inter- and intra-branch tensions and contests relating to completely unchecked power of the purse and compensation authority.

It seems entirely fitting, proper and appropriate that some specific regulatory and review power with respect to "extraordinary circumstances” public services payments situations be explicitly invested in the Appellate Division or the Chief Administrative Judge or both (see, e.g., People v Perry, 27 AD2d 154, 163; Yalango v Popp, 84 NY2d 601, 607-608, supra). As this case demonstrates, unless the legislative and the judicial branches exercise their available and appropriate regulatory powers (see, e.g., NY Const, art VI, § 28; Judiciary Law § 212) to promulgate effective mechanisms for some review of such matters, a provider may be unilaterally rewarded far in excess of extant statutory or rule authorizations and limitations. This imprudent potentiality, no less the actuality, reflected so dramatically by the intractable situation underlying this controversy, should be remedied for the sake of sound procedure and the protection of the public purse.

Judges Simons, Titone and Levine concur in Per Curiam opinion; Judge Bellacosa concurs in result in a separate opinion in which Judge Smith concurs; Chief Judge Kaye and Judge Ciparick taking no part.

Order affirmed, without costs.