author: Read, J.

text:
    [968 NE2d 947, 945 NYS2d 593]
    Daniel Ryan, Respondent, v Kellogg Partners Institutional Services, Appellant.
    Argued February 7, 2012;
    decided March 27, 2012

      POINTS OF COUNSEL

      Peckar & Abramson, P.C., New York City (Kevin J. O’Connor of counsel), for appellant.
    I. Daniel Ryan’s breach of contract claim should never have gone to the jury because of the existence of the signed employment application and employee handbook, his admission that his bonus compensation was discretionary, and because of overwhelming evidence that no such verbal agreement existed. (Smalley v Dreyfus Corp., 40 AD3d 99; Hall v United Parcel Serv. of Am., 76 NY2d 27; Kaplan v Capital Co. of Am., 298 AD2d 110, 99 NY2d 510; Hunter v Deutsche Bank AG, N.Y. Branch, 56 AD3d 274; Namad v Salomon Inc., 74 NY2d 751; Truelove v Northeast Capital &

      Advisory, 268 AD2d 648, 95 NY2d 220; Gruber v J.W.E. Silk, Inc., 52 AD3d 339; Weiner v Diebold Group, 173 AD2d 166.) II. Daniel Ryan’s testimony concerning the alleged oral promise by Kellogg Partners Institutional Services to pay him additional bonus compensation made clear that it was supported by past consideration and was unenforceable at law; the submission of this claim to the jury, as well as the use of a patently objectionable jury charge, was reversible error. (James V. Aquavella, M.D., P.C. v Viola, 17 NY3d 741; Clark v Bank of N.Y., 185 AD2d 138, 81 NY2d 760; Transamerica Realty v Winokur, 248 AD2d 250; Raymond Babtkis Assoc. v Tarazi Realty Corp., 36 AD2d 694; Matter of Express Indus. & Term. Corp. v New York State Dept. of Transp., 93 NY2d 584; Umscheid v Simnacher, 106 AD2d 380; Rehill v Rehill, 306 NY 126; Kastil v Carro, 145 AD2d 388; Matter of Crea, 27 NY2d 339; 20 E. 74th St. v Minskoff, 308 NY 407.) III. Under the very terms of Daniel Ryan’s alleged oral agreement, as purportedly “amended,” it is barred by General Obligations Law § 5-701 because it could not be performed within one year. (Mirchel v RMJ Sec. Corp., 205 AD2d 388; Weisse v Engelhard Mins. & Chems. Corp., 571 F2d 117.) IV The trial court’s decision to permit Daniel Ryan to hold himself out as the poster child of financial health, while simultaneously limiting Kellogg Partners Institutional Services’ ability to challenge that testimony, left the jury with a false picture and resulted in a manifestly unjust decision. (Gropper v St. Luke’s Hosp. Ctr., 234 AD2d 171; Kaplan v Capital Co. of Am., 298 AD2d 110; Namad v Salomon Inc., 74 NY2d 751; Crooms v Sauer Bros. Inc., 48 AD3d 380.) V Daniel Ryan’s cross motion for attorney’s fees pursuant to Labor Law § 198 was completely without basis under the law and should have been denied. (Truelove v Northeast Capital & Advisory, 95 NY2d 220; Pachter v Bernard Hodes Group, Inc., 10 NY3d 609; Gottlieb v Kenneth D. Laub & Co., 82 NY2d 457; Hunter v Deutsche Bank AG, N.Y. Branch, 56 AD3d 274.)

      Law Offices of Thomas S. Rosenthal, New York City (Thomas S. Rosenthal of counsel), for respondent.
    I. The evidence fully supports the jury’s verdict that Kellogg Partners Institutional Services breached its contract with Daniel Ryan. (Szczerbiak v Pilot, 90 NY2d 553; Cohen v Hallmark Cards, 45 NY2d 493; Blum v Fresh Grown Preserve Corp., 292 NY 241.) II. No provision in Kellogg Partners Institutional Services’ application or handbook operates by law to bar Daniel Ryan’s claim for his guaranteed, non-discretionary bonus or otherwise subjects that bonus to Kellogg’s discretion. (Murphy v American Home Prods.

      Corp., 58 NY2d 293; Sabetay v Sterling Drug, 69 NY2d 329; Cron v Hargro Fabrics, 91 NY2d 362; Weiner v Diebold Group, 173 AD2d 166; Gruber v J.W.E. Silk, Inc., 52 AD3d 339; Mirchel v RMJ Sec. Corp., 205 AD2d 388; Vetromile v JPI Partners, LLC, 706 F Supp 2d 442; Guggenheimer v Bernstein Litowitz Berger & Grossmann LLP, 11 Misc 3d 926; Cohen v Lord, Day & Lord, 75 NY2d 95; Smalley v Dreyfus Corp., 40 AD3d 99.) III. No provision of the General Obligations Law applies to bar Daniel Ryan’s claim for breach of contract. (23/23 Communications Corp. v General Motors Corp., 257 AD2d 367, 93 NY2d 805; Matter of Sheldon E. Goldstein, PC. [Riverso], 276 AD2d 321; Miranco Contr., Inc. v Perel, 29 AD3d 873; Admae Enters. v Smith, 222 AD2d 471; Kuhl v Piatelli, 31 AD3d 1038; Rogoff v San Juan Racing Assn., 54 NY2d 883; Immediate v St. John’s Queens Hosp., 48 NY2d 671; Cron v Hargro Fabrics, 91 NY2d 362; Weiner v Diebold Group, 173 AD2d 166; Umscheid v Simnacher, 106 AD2d 380.) IV The trial court’s evidentiary rulings do not warrant a remand for a new trial. (Porter v Saar, 260 AD2d 165; Campbell v Rogers & Wells, 218 AD2d 576; People v Dillenbeck, 115 AD2d 331; Coopersmith v Gold, 89 NY2d 957; Crooms v Sauer Bros. Inc., 48 AD3d 380; Kaplan v Capital Co. of Am,., 298 AD2d 110; Namad v Salomon Inc., 74 NY2d 751; Gropper v St. Luke’s Hosp. Ctr., 234 AD2d 171.) V The jury’s finding that Kellogg Partners Institutional Services breached the contract to pay Daniel Ryan $175,000 warrants the court’s judgment that Mr. Ryan is entitled to the award of attorney’s fees because Kellogg violated article 6 of the Labor Law. (Pachter v Bernard Hodes Group, Inc., 10 NY3d 609; Giuntoli v Garvin Guybutler Corp., 726 F Supp 494; Miteva v Third Point Mgt. Co., L.L.C., 323 F Supp 2d 573; Wright v Wright Stucco, 50 NY2d 837; Tierney v Capricorn Invs., 189 AD2d 629; Watson v Prentice-Hall, 50 AD2d 1077; Truelove v Northeast Capital & Advisory, 268 AD2d 648.)
   OPINION OF THE COURT

Read, J.

In early 2003, plaintiff Daniel Ryan was approached about leaving his employment with the brokerage firm where he had worked since 2000 to join Kellogg Partners Institutional Services LLC (Kellogg), a broker-dealer then being formed to trade stocks for institutional investors. In 2002, Ryan earned roughly $270,000, consisting of salary and a bonus for work performed in 2001, paid out in February 2002; for the first six months of 2003, he earned approximately $195,000 in salary and a bonus for work performed in 2002, paid out in February 2003. Ryan testified that he told Kellogg’s managing partner that he “wanted a package of $350,000” to change jobs. According to Ryan, the managing partner assured him this “would not be a problem,” but asked him if he would accept his compensation for calendar year 2003 split into two parts, consisting of a salary of $175,000 and a guaranteed bonus of $175,000, which would be paid out in late 2003 or early 2004. Ryan agreed, and began work at Kellogg on July 14, 2003 as head floor broker.

On June 21, 2003, before starting his employment at Kellogg but after he accepted the job, Ryan signed an employment application. A section captioned “Acknowledgments” declares as follows:

“I understand that [Kellogg Group LLC] and I fully expect that I shall have a successful career with the firm, but I further understand that is [szc] neither an offer of employment nor employment itself, nor any of [Kellogg Group LLC’s] policies or procedures, carry any guarantee of employment for any length of time and that my employment, compensation and benefits are at will and can be terminated, with or without cause or notice, at any time, at the option of [Kellogg Group LLC] or myself.”

Similarly, Kellogg Group LLC’s employee handbook includes a “Receipt” signed by Ryan on February 18, 2004, which states that

“I understand that Kellogg Group LLC is an ‘at will’ employer and as such[,] employment with Kellogg Group LLC is not for a fixed term or definite period and may be terminated at the will of either party, with or without cause, and without prior notice. No supervisor or other representative of the company (except the President) has the authority to enter into any agreement for employment for any specified period of time, or to make any agreement contrary to the above. In addition, I understand that this Handbook states Kellogg Group LLC’s policies and practices in effect on the date of publication. I understand that nothing contained in the Handbook may be construed as creating a promise of future benefits or a binding contract with Kellogg Group LLC for benefits or for any other purpose.”

Kellogg did not begin trading operations on the floor of the New York Stock Exchange until October 2003. Ryan received an extra two weeks’ pay in late 2003, but no other bonus payment was forthcoming. According to Ryan, he and the managing partner had “a few conversations” about this. Then in February 2004, the managing partner asked Ryan if he would be willing to forgo the agreed-upon bonus for a year, and accept it for work performed in 2004 instead, to be paid out in late 2004 or early 2005. The managing partner gave as his reason that Kellogg had started up “a little bit later” than anticipated. Ryan replied that he “wasn’t very happy about it,” but would “take one for the team and take the guarantee for the 2004 year instead of 2003.” At the time, business at Kellogg was “steadily improving, picking up new accounts.”

Ryan claims to have discussed with the managing partner “many times” in late 2004 and early 2005 that he was “waiting for [his] bonus.” The managing partner put him off, telling him to “[r]elax” and reassuring him that Kellogg was “going to get [to] the bonuses soon.” Then, on February 3, 2005, the managing partner offered Ryan a $20,000 bonus for work performed in 2004. Ryan rejected this overture as unacceptable. Five days later, on February 8, 2005, the managing partner fired Ryan at a meeting also attended by the chief compliance officer. Ryan was handed a separation agreement, which provided for a payment to him of $20,000 and included a release of Kellogg from any and all claims or causes of action. Ryan refused to sign this document.

On March 9, 2005, Kellogg filed a Uniform Termination Notice for Securities Industry Registration (Form U-5) with the National Association of Securities Dealers, Inc. (NASD), indicating that Ryan’s employment had been terminated for cause; namely, insubordination and disparagement of Kellogg. The managing partner testified that he learned before February 8, 2005 that Ryan had made derogatory comments about him and the firm subsequent to February 3, 2005, but chose not to mention this at the termination meeting. Instead, he “spoke about the importance of chemistry in the firm and how [he] did not feel that [his] vision of what the firm was all about and where it was going was consistent with [Ryan’s] vision.”

Ryan testified that he was “shocked” when he learned the day after he was fired that he was being accused of badmouthing Kellogg. While the managing partner and the chief compliance officer urged him to sign the separation agreement so as to avoid the filing of a negative U-5 form, Ryan declined because $20,000 “was a fraction of what [he] was owed,” and he did not think it “fair[ ] that [he] was being pressured to sign something so [Kellogg] wouldn’t put something false” on the form. For his part, the managing partner countered that he just “wanted to give [Ryan] the opportunity to resign” rather than “have on his record that he was terminated.”

In a complaint filed May 26, 2005, Ryan alleged, as relevant to this appeal, causes of action for failure to pay wages in violation of Labor Law §§ 190 through 198 and breach of contract. Supreme Court conducted a jury trial in the spring of 2009, at which the managing partner in every conceivable way contradicted Ryan’s testimony on the topic of bonuses; in particular, he told the jury that the subject simply “did not come up” during the course of bringing Ryan on board at Kellogg, and that bonuses were discretionary only. The judge submitted Ryan’s Labor Law and contract claims to the jury, which unanimously found that Kellogg had breached an oral agreement to pay Ryan a guaranteed bonus of $175,000, and, by a 5-1 vote, that Kellogg had not willfully withheld this payment.

Kellogg moved for judgment notwithstanding the verdict or for a new trial on numerous grounds, and Ryan cross-moved for various kinds of relief, principally a judgment notwithstanding the verdict on his claim for willful violation of the Labor Law and attorney’s fees pursuant to Labor Law § 198 (1-a). Kellogg challenged whether Ryan had adduced sufficient proof that the firm agreed to pay him a non-discretionary bonus, and, alternatively, claimed that the alleged oral agreement was unenforceable anyway in light of sections 5-701 (a) (l), 5-1103 and 5-1105 of the General Obligations Law.

Supreme Court concluded that there was an enforceable oral agreement in light of Ryan’s testimony, which was “accepted by the jury” (2010 NY Slip Op 33771[U], *10). As an initial matter, the judge decided that Kellogg had waived reliance upon any provisions of the General Obligations Law by failing to plead them as affirmative defenses in its answer. But in any event, she noted, Ryan testified “that the non-discretionary bonus was in consideration of his agreement to work for Kellogg for the remainder of 2003,” and “that Kellogg’s agreement to pay him the non-discretionary bonus in 2004 was in consideration for his agreement to work at Kellogg throughout 2004.” As a result, “the consideration was contemporaneous and forward looking,” and “[t]he oral agreement. . . was not supported solely by past consideration, thus the failure to reduce the agreement to a writing did not violate [General Obligations Law] § 5-1105 as a matter of law.” (Id.)

Additionally, Supreme Court held there was no violation of General Obligations Law § 5-701 (a) (1) because both Kellogg’s original agreement to pay Ryan a non-discretionary bonus in 2003 and the later agreement to pay him the bonus in 2004 were capable of being performed in a year’s time. And because Ryan testified that the agreement to pay him the bonus in 2004 was supported by “separate and new consideration, i.e., Ryan’s agreement to work at Kellogg through 2004,” it was “not merely a modification of Kellogg’s 2003 agreement to pay Ryan a non-discretionary bonus, and in these circumstances [General Obligations Law] § 5-1103 [was] not controlling” (id. at *11 n 5).

Supreme Court also denied both parties’ motions with respect to declaring the jury verdict against the weight of the evidence. First, “[t]he jury was absolutely entitled to believe Ryan’s testimony and disbelieve [the managing partner’s] testimony concerning whether the agreement was made and breached” (id. at *12). Further, “viewed in the light most favorable to Kellogg, the jury . . . was entitled to determine that Kellogg’s refusal to pay Ryan the bonus was based on [its] belief that no bonus was due, and . . . not based on malice or ill will toward Ryan” (id. at *13).

Next, the judge rejected Kellogg’s contention that Ryan’s “acceptance” of the employee handbook and knowledge of the course of dealing in the industry proved that he must have known that any bonus promised by the managing partner was necessarily optional (id.). Supreme Court pointed out that the parties “sharply disputed” the general course of dealing in the industry, especially with respect to bonus offers made to induce sought-after prospects in the financial services industry to change jobs, as well as the date when Ryan was actually given the handbook, and that, in any event, “there was no showing that either party relied upon the handbook’s provisions” (id. at *13, *14). As a result, in the judge’s view the jury could have rationally relied upon Ryan’s testimony.

Finally, the judge decided that Ryan was entitled to reasonable attorney’s fees pursuant to Labor Law § 198 (1-a) because “[w]ith the jury’s verdict, [he] . . . prevailed on his unpaid wages claim” (id. at *19). By judgment entered February 24, 2010, Supreme Court awarded Ryan the total sum of $379,956.65, consisting of the $175,000 awarded by the jury, statutory interest, attorney’s fees in an amount stipulated by the parties and costs.

The Appellate Division affirmed, with two Justices dissenting (79 AD3d 447 [1st Dept 2010]). The court essentially adopted the trial court’s reasoning, commenting, in particular, that Ryan’s breach-of-contract claim was not barred by the handbook or employment application because “[t]hose documents did not clearly indicate that bonuses [were] discretionary, and whether the $175,000 payment was intended to be a discretionary bonus or earned income was a factual question for determination by the jury” {id. at 448 [citations omitted]). The dissenters would have reversed and dismissed the complaint “on the ground that [Ryan’s] breach of contract claim [was] barred by the employment application he signed and the employee handbook” {id. at 449 [Friedman and McGuire, JJ., dissenting]). Kellogg appeals as of right by virtue of the two-Justice dissent, and we now affirm.

The parties agree that Ryan worked at Kellogg as an at-will employee with an annual base salary of $175,000; they also agree that Ryan and the managing partner reached an oral agreement about how much Ryan would be paid in 2003 if he joined Kellogg—i.e., there was no writing memorializing Ryan’s bargained-for compensation. Ryan testified that he accepted Kellogg’s job offer before he filled out the employment application on June 21, 2003, and that he gave his then employer two weeks’ notice; he started work at Kellogg on July 14, 2003. Concomitantly, the managing partner testified that he extended the job offer to Ryan in late May or mid-June. What is contested is whether, as a matter of fact, this job offer included a guarantee to pay Ryan a non-discretionary bonus of $175,000 in late 2003 or early 2004 in order to attract him from an established securities firm to Kellogg, a start-up venture at the time; and whether the managing partner in early 2004 asked for and received Ryan’s consent to delay this bonus payment for a year until late 2004 or early 2005 on the understanding that Ryan would remain at Kellogg through 2004. Ryan testified that this is what happened; the managing partner claimed that Ryan was making it all up.

The jurors clearly believed Ryan. Kellogg now pursues two principal lines of argument to convince us that we should nevertheless reverse the Appellate Division’s order and dismiss the complaint or, alternatively, order a new trial: first, that there was insufficient evidence to support the jury’s verdict because statements in the employment application and employee handbook negate Ryan’s alleged expectation of or entitlement to a guaranteed or non-discretionary bonus; second, that the oral agreements respecting the bonus, if, in fact, entered into by the parties (which Kellogg strenuously denies), are unenforceable because the General Obligations Law mandates that any such agreements would have to have been reduced to a writing by an agent of Kellogg in order to be valid. Kellogg also disputes Ryan’s right to attorney’s fees pursuant to Labor Law § 198 (1-a).

The “Acknowledgments” section of the application, signed by Ryan on June 21, 2003, confirms his understanding that he was going to work at Kellogg as an at-will employee—i.e., that he was not guaranteed employment for any period of time, and that his employment, compensation and benefits were subject to termination by either party at any time and for any reason or for no reason at all. But in this lawsuit, Ryan does not assert or rely on any alleged right to continued employment, compensation or benefits from Kellogg; rather, he asks to be paid the compensation that he says he was promised by Kellogg at the outset of his employment in 2003, and again in early 2004, in exchange for work that he thereafter performed in reliance on these promises. Nothing in the application allows Kellogg to escape paying an at-will employee such as Ryan the remuneration he claims to have earned before he was fired.

Similarly, the “Receipt” in the employee handbook, signed by Ryan on February 18, 2004, only confirms his understanding that he was an at-will employee; specifically, Ryan acknowledged that his employment at Kellogg Group LLC was not for a fixed term or specified period of time and might be “terminated at the will of either party, with or without cause, and without prior notice” unless Kellogg Group LLC’s president agreed otherwise. The “Receipt” also recited that Ryan understood that nothing in the handbook “creat[ed] a promise of future benefits or a binding contract ... for benefits or for any other purpose.” The handbook does not say that oral compensation agreements are unenforceable, or mention bonuses at all, although there is no dispute that Kellogg awarded annual bonuses. In short, there are no statements in the handbook that bar Ryan’s recovery on his breach-of-contract and Labor Law claims for compensation alleged to be due and owing him (cf. Ñamad v Salomon Inc., 74 NY2d 751 [1989] [where written four-year employment contract unambiguously vested employer with discretion regarding amount of bonus compensation to be awarded, employer entitled to summary judgment dismissing employee’s breach-of-contract suit seeking additional bonus payments]; Hall v United Parcel Serv. of Am., 76 NY2d 27 [1990] [employee not entitled to bonus where he did not receive annual participation notice, a precondition to vesting of bonus payment under employer’s written bonus plan]; Tierney v Capricorn Invs., 189 AD2d 629 [1st Dept 1993], lv denied 81 NY2d 710 [1993] [employee may not recover compensation over and above what was specified in written three-year employment contract where he signed acknowledgment that agreement stated parties’ entire understanding and could only be amended by signed writing]; Smalley v Dreyfus Corp., 40 AD3d 99, 106 [1st Dept 2007], revd on other grounds 10 NY3d 55 [2008] [employee not entitled to bonus where language in employee handbook authorized specified managers to “modify or annul any individual award, at their sole discretion, with or without notice, at any time”]; Hunter v Deutsche Bank AG, N.Y. Branch, 56 AD3d 274 [1st Dept 2008] [plaintiffs’ breach-of-contract claims lacked merit where unambiguous language of their employment contracts and employee handbook made bonus awards solely and completely matter of employer’s discretion]). In any event, here the employee handbook specifically disavows any intention on Kellogg’s part to have its provisions integrated into the employment contract (cf. Kaplan v Capital Co. of Am,., 298 AD2d 110 [1st Dept 2002], lv denied 99 NY2d 510 [2003] [employee handbook, which stated that bonus compensation was purely discretionary, specified that handbook’s terms alone would govern employment relationship unless modified in writing by specified individuals]).

Moreover, the jury heard differing accounts as to whether Ryan was even presented with an employee handbook before February 18, 2004, which is after the oral agreements were alleged to have been struck, or what any earlier-received handbook might have said. The chief compliance officer, who headed up human resources at the time Ryan was hired, testified that he customarily gave copies of the employee handbook to new hires. Ryan, however, denied receiving an employee handbook when he started at Kellogg in July 2003. The chief compliance officer also stated that he revised the handbook at some time after July 2003 and before February 2004, and that “[o]ff the top of [his] head” he did not recall what revisions he may have made in addition to changing the references to the firm to reflect its new name. Kellogg did not introduce a circa 2003 version of the handbook into evidence.

Next, assuming Kellogg did not waive any defenses to Ryan’s breach-of-contract and Labor Law claims, the statutory provisions it adduces specify that certain kinds of agreements must be expressed in a signed writing in order to bind the party against whom enforcement is sought—i.e., agreements incapable of being performed within a year of their making (General Obligations Law § 5-701 [a] [1]; see Cron v Hargro Fabrics, 91 NY2d 362, 366 [1998] [“As long as (an) agreement may be fairly and reasonably interpreted such that it may be performed within a year (of its making), the Statute of Frauds will not act as a bar however unexpected, unlikely, or even improbable that such performance will occur during that time frame” (internal quotation marks omitted)]); agreements made without consideration to change, modify or discharge an existing contract or obligation (General Obligations Law § 5-1103); and agreements premised on past consideration (General Obligations Law § 5-1105). The oral agreements described by Ryan to the jury, though, do not fit into any of these categories; therefore, Kellogg may not successfully defend against their enforcement on the ground there was no signed writing.

Ryan testified that he left his well-paying job at another securities firm to join Kellogg in reliance upon the managing partner’s promise that his compensation package for 2003 would consist of a base salary of $175,000 and a guaranteed, non-discretionary bonus of $175,000 to be paid to him in late 2003 or early 2004. There was clearly, then, consideration for this oral employment contract, which was capable of being performed within a year. But even if Ryan had been unemployed when Kellogg hired him, his subsequent performance would have constituted consideration (see Grossman v Schenker, 206 NY 466, 468 [1912] [“Even when the obligation of a unilateral promise is suspended for want of mutuality at its inception, still, upon performance by the promisee a consideration arises ‘which relates back to the making of the promise, and it becomes obligatory’ ” (quoting Willetts v Sun Mut. Ins. Co., 45 NY 45, 47 [1871])]). As a result, General Obligations Law § 5-701 (a) (1) and § 5-1105 are not implicated.

Ryan also testified that in early 2004, the managing partner sought his consent to delay the payment of his already-earned bonus until late 2004 or early 2005 upon the understanding that Ryan would stay on at Kellogg through the end of 2004. This oral agreement was likewise supported by consideration on Ryan’s part and capable of being performed within a year; Kellogg essentially agreed to do what it was already bound to do—pay Ryan a $175,000 bonus for his work as a floor broker at the firm, but at a later date than originally bargained for by the parties. Again, General Obligations Law § 5-701 (a) (1) and § 5-1105 do not come into play if Ryan’s testimony is accepted by the jury, as it was.

Kellogg also cites General Obligations Law § 5-1103, apparently on the theory that

“[t]he alleged oral ‘amended agreement’ described by Ryan—to take a $6,730.77 bonus in 2003 in lieu of $175,000, and to require Kellogg to still pay the full $175,000 at the end of the following year—[was] not only an attempt to modify his prior (alleged) ‘guaranteed bonus’ agreement, but also a post hoc effort to orally modify the agreed upon at will arrangement with Kellogg.”

But Ryan never testified that he agreed to accept a bonus of $6,730.77 (two weeks’ pay, given his base salary of $175,000) in lieu of the bonus that was already due and owing to him as of the end of 2003. He agreed to, and did, remain at Kellogg through 2004, but Kellogg was certainly still free to fire him at any time during 2004. Further, the one-year delay in payment, if viewed as a modification without consideration, benefitted Kellogg, not Ryan and so, because not in writing, was unenforceable by Kellogg (see e.g. Matter of Crea, 27 NY2d 339 [1971] [where son owed money to father-testator’s partnership, oral modification without consideration did not terminate son’s liability and therefore debt should have been included in estate as asset]).

Finally, Truelove v Northeast Capital & Advisory (95 NY2d 220 [2000]) does not bar Ryan from recovering attorney’s fees pursuant to Labor Law § 198 (1-a), as Kellogg contends. Truelove brought suit under article 6 of the Labor Law to recover the unpaid balance of a bonus he was awarded by his employer in December 1997, payable in quarterly installments during 1998. He alleged that this bonus amounted to “wages,” which Labor Law § 190 (1) defines as “the earnings of an employee for labor or services rendered, regardless of whether the amount of earnings is determined on a time, piece, commission or other basis.” Truelove, who resigned after the first bonus installment payment was made, claimed that his employer violated Labor Law § 193 by enforcing an express condition in its bonus plan predicating payment of each quarterly installment on continued employment. Section 193 prohibits an employer from making “any deduction from the wages of an employee” unless permitted by law or authorized by the employee for certain payments made for the employee’s benefit (see Labor Law § 193 [1] [a], [b]).

We concluded that Truelove’s bonus did not fall within the meaning of “wages” in section 190 (1) because it constituted “ [discretionary additional remuneration, as a share in a reward to all employees for the success of the employer’s entrepreneurship,” whereas “the wording of the statute, in expressly linking earnings to an employee’s labor or services personally rendered, contemplat[ed] a more direct relationship between an employee’s own performance and the compensation to which that employee [was] entitled” (95 NY2d at 224). We also rejected Truelove’s argument that he acquired a “vested right to the bonus payments once [his employer] declared that a bonus would be paid and calculated the amount of that bonus” (id. at 225). Citing our decision in Hall (supra), we noted that “the [employer’s] bonus plan explicitly predicated the continuation of bonus payments upon the recipient’s continued employment status” (id.).

Unlike the situation in Truelove, Ryan’s bonus was “expressly link[ed]” to his “labor or services personally rendered” (95 NY2d at 224); namely, his work as a floor broker for Kellogg. Further, Ryan’s bonus had been earned and was vested before he left his job at Kellogg; its payment was guaranteed and non-discretionary as a term and condition of his employment (see Giuntoli v Garvin Guybutler Corp., 726 F Supp 494, 509 [SD NY 1989] [“bonus payments, already due and vested . . . fall within the definition of wages in § 190”]). Since Ryan’s bonus therefore constitutes “wages” within the meaning of Labor Law § 190 (1), Kellogg’s neglect to pay him the bonus violated Labor Law § 193 (see Pachter v Bernard Hodes Group, Inc., 10 NY3d 609, 617 [2008]), and entitles Ryan to an award of attorney’s fees under Labor Law § 198 (1-a).

We have considered Kellogg’s remaining arguments and find them to be without merit. Accordingly, the order of the Appellate Division should be affirmed, with costs.

Chief Judge Ltppman and Judges Ciparick, Graefeo, Smith, Pigott and Jones concur.

Order affirmed, with costs.

      . Kellogg is (or was at the time) a subsidiary of Kellogg Group LLC.

      . The managing partner testified that Ryan received a bonus of $10,000 for work performed in 2003, but Ryan’s W-2 forms did not support this.

      . Within 30 days after termination of an associated person’s registration for any reason, a securities firm must file a Form U-5 with the Financial Industry Regulatory Authority, Inc. (FINRA [NASD’s successor, as of July 26, 2007]), and at the same time provide a copy to the former employee (see Financial Indus. Regulatory Auth., Inc. v Fiero, 10 NY3d 12, 14 n [2008]; FINRA Manual, Bylaws, art Y § 3 [a] [formerly NASD Manual, Bylaws, art Y § 3 (a)]).

        (n. cont’d)

      . Section 5-701 (a) (1) of the General Obligations Law, captioned “Agreements required to be in writing,” provides that an agreement will not be recognized or enforceable if it is not in a writing signed by the party sought to be bound when “[b]y its terms [the agreement] is not to be performed within one year from the making thereof.”

      . Section 5-1103 of the General Obligations Law, captioned “Written agreement for modification or discharge,” states that an agreement to modify or discharge an obligation does not require consideration if expressed in a writing signed by the party to whom the obligation is owing.

      . Section 5-1105, captioned “Written promise expressing past consideration,” provides that a promise based on past consideration is enforceable if there is a writing signed by the party to be bound, and “the consideration is expressed in the writing and is proved to have been given or performed and would be a valid consideration but for the time when it was given or performed.”

      . The managing partner readily acknowledged that he considered “north of” 100 candidates for the job he offered Ryan.

      . Under former Labor Law § 198 (1-a), an employee who prevailed on a wage claim was entitled to recover “reasonable attorney’s fees and, upon a finding that the employer’s failure to pay the wage . . . was willful, an additional amount as liquidated damages equal to twenty-five percent of the total amount of the wages found to be due.” The law was amended in 2009 to shift the burden to the employer to “prove[ ] a good faith basis to believe that its underpayment of wages was in compliance with the law” in order to avoid liquidated damages (see L 2009, ch 372, § 1); and in 2010, liquidated damages were increased from 25% to 100% of the total amount of wages found to be due (see L 2010, ch 564, § 7).

      . There is a section in the handbook captioned “Compensation,” which addresses only annual performance reviews, the payment of salaries on a biweekly basis, the manner of distribution of paychecks and time records.


source: Caselaw Access Project

author: Ciparick, J.

license: Public Domain

text:
    [968 NE2d 428, 945 NYS2d 191]
    New York State Psychiatric Association, Inc., et al., Respondents, v New York State Department of Health, Appellant.
    Argued February 8, 2012;
    decided March 29, 2012

      POINTS OF COUNSEL

      Eric T. Schneiderman, Attorney General, New York City (Simon Heller, Barbara D. Underwood and Richard Dearing of counsel), for appellant.
    I. The 2006 amendments to Social Services Law § 367-a (1) (d) (iii) created only a one-year coinsurance enhancement program for psychiatrists, as the 2008 clarifying legislation confirmed. (Matter of Sutka v Conners, 73 NY2d 395; Frank v Meadowlakes Dev. Corp., 6 NY3d 687; People v Mitchell, 15 NY3d 93; Matter of Losurdo v Asbestos Free, 1 NY3d 258; Matter of Albano v Kirby, 36 NY2d 526; Matter of ATM One, LLC v New York State Div. of Hous. & Community Renewal, 37 AD3d 714; EFS Med. Supplies v Dowling, 252 AD2d 99; Matter of Scotsmen Press v State of N.Y. Tax Appeals Trib., 165 AD2d 630; Miller v Youakim, 440 US 125; Matter of Chatlos v McGoldrick, 302 NY 380.) II. Even if the 2008 legislation had changed rather than clarified prior law, the legislation would satisfy due process because it impairs no vested rights. (Matter of Hodes v Axelrod, 70 NY2d 364; Alliance of Am. Insurers v Chu, 77 NY2d 573; Germania Sav. Bank v Village of Suspension Bridge, 159 NY 362; Matter of Kaye v Whalen, 44 NY2d 754; Colonial Penn Ins. Co. v Heckler, 721 F2d 431; Brown v Apfel, 192 F3d 492; Flemming v Nestor, 363 US 603; Matter of White Plains Nursing Home v Whalen, 53 AD2d 926, 42 NY2d 838; Canisius Coll. v United States, 799 F2d 18.)

      Moritt Hock & Hamroff LLP, Garden City (Robert L. Schonfeld, Seth P. Stein and Robert M. Tils of counsel), for respondents. I. As the 2006 amendment to Social Services Law § 367-a (1) (d) (iii) was unambiguous in placing psychiatrists on the 100% list for reimbursement, the New York State Department of Health’s interpretation of the 2006 amendment is contrary to the traditional principles of statutory construction and should be rejected. (Matter of Roosevelt Raceway v Monaghan, 9 NY2d 293; Matter of Russo v Valentine, 294 NY 338; H & H Reins. Brokers v Hermitage Ins. Co., 254 AD2d 328; Lorillard Tobacco Co. v Roth, 99 NY2d 316.) II. The 2008 amendment to Social Services Law § 367-a (1) (d) (iii) impermissibly destroys vested property rights and is unconstitutional. (Matter of Roosevelt Raceway v Monaghan, 9 NY2d 293; Beverly Community Hosp. Assn. v Belshe, 132 F3d 1259; EFS Med. Supplies v Dowling, 252 AD2d 99; Matter of Honeoye Cent. School Dist. v Berle, 72 AD2d 25, 51 NY2d 970; Oberlander v Perales, 740 F2d 116; Matter of White Plains Nursing Home v Whalen, 53 AD2d 926; RR Vil. Assn., Inc. v Denver Sewer Corp., 826 F2d 1197; Matter of Kaye v Whalen, 44 NY2d 754; Colonial Penn Ins. Co. v Heckler, 721 F2d 431; Brown v Apfel, 192 F3d 492.)
   OPINION OF THE COURT

Ciparick, J.

In this appeal, we are asked to consider whether the 2006 amendment to the Social Services Law found in a budget bill implementing a coinsurance enhancement for the benefit of psychiatrists who treat patients eligible for both Medicare and Medicaid was intended to be permanent or whether the amendment was intended only to provide a limited one-year enhancement. We conclude that the Legislature only intended to provide for a one-time coinsurance enhancement, limited to the 2006-2007 fiscal year.

L

Plaintiff New York State Psychiatric Association, Inc. represents psychiatrists who treated patients eligible for both Medicare and Medicaid, referred to herein as dual eligibles, from April 2007 to April 2008. Defendant New York Department of Health (DOH) is responsible for administering Medicaid in New York and for implementing and enforcing Medicaid reimbursement rates. In New York State, claims for medical care for dual eligibles are first submitted to the Medicare Part B program and the balance, i.e., the deductible and the coinsurance amount is paid by Medicaid. Prior to 2003, Medicaid paid 100% of this balance amount to providers. In 2003, the New York State Legislature amended Social Services Law § 367-a (1) (d), curtailing the deductible and coinsurance payments for the majority of providers to 20%. A limited number of providers continued to be covered at 100%. Psychiatrists, however, were not among them. (See L 2003, ch 63, part Jl, § 1 [amending Social Services Law § 367-a (1) (d) (ii); adding id. § 367-a (1) (d) (iii)], 2003 McKinney’s Session Laws of NY, at 576-577.)

In 2005, the Legislature amended section 367-a (1) (d) (iii) to include “a physician” on the list of itemized providers that would receive 100% reimbursement. Simultaneously, the Legislature enacted Laws of 2005, chapter 12, § 9, which set forth the methodology for the provision of the “2005 coinsurance enhancement.” For the period between April 1, 2005 and June 30, 2005, the Legislature, “[notwithstanding any provision of law to the contrary,” capped the coinsurance enhancement distribution to physicians at “an aggregate amount not to exceed five million dollars.” (L 2005, ch 12, §§ 8, 9 [a], 2005 McKinney’s Session Laws of NY, at 113-114.)

In 2006, the Legislature again amended section 367-a (1) (d) (iii) to include “a psychiatrist licensed under article one hundred thirty-one of the education law” on the list of itemized providers that would receive 100% reimbursement. As in 2005, the Legislature, in the same bill, enacted Laws of 2006, chapter 109, part C, § 2, which set forth the methodology for the provision of the “2006-2007 coinsurance enhancement.” For the period between April 1, 2006 and March 31, 2007, the Legislature, “ [notwithstanding any provision of law to the contrary,” capped the coinsurance enhancement distribution to psychiatrists at “an aggregate amount not to exceed two million dollars.” (L 2006, ch 109, part C, §§ 1, 2 [a], 2006 McKinney’s Session Laws of NY, at 477-478.)

From April 1, 2006 to March 31, 2007, DOH distributed the prescribed $2 million in available funds to all the eligible psychiatrists pursuant to the mechanisms set forth in Laws of 2006, chapter 109, part C, § 2. After April 1, 2007, DOH resumed applying the 20% default rule.

In December 2007, plaintiffs New York State Psychiatric Association, Inc. and four individual psychiatrists who provided services for dual eligibles after March 31, 2007 commenced this hybrid declaratory judgment action/CPLR article 78 proceeding seeking a declaration that licensed psychiatrists were entitled to the full Medicaid reimbursement and seeking full payment of coinsurance amounts for services rendered after March 31, 2007, plus attorney’s fees. Plaintiffs argued that the amendment of section 367-a (1) (d) (iii) provided for 100% reimbursement for psychiatrists beginning on April 1, 2007 and had set no termination date. While the lawsuit was pending, in April 2008, the Legislature once again amended section 367-a (1) (d) (iii), this time by removing the reference to psychiatrists altogether (L 2008, ch 58, part C, § 53, 2008 McKinney’s Session Laws of NY, at 539). It included the following language:

“Medical assistance payments shall not be made pursuant to the amendments made by section one of this act for services provided on and after April 1, 2007 by psychiatrists licensed under article 131 of the education law, or as co-insurance enhancements to payments made to such psychiatrists on and after April 1, 2007” (see L 2008, ch 58, part C, § 54 [amending L 2006, ch 109, part C, § 2], 2008 McKinney’s Session Laws of NY, at 540).

Plaintiffs amended their complaint to challenge the 2008 legislation as improperly retroactive in violation of their due process rights. Plaintiffs then moved in Supreme Court for summary judgment and defendant cross-moved for summary judgment. Supreme Court granted the cross motion and dismissed the complaint, finding that the claim was time-barred (see New York State Psychiatric Assn. v New York State Dept. of Health, 23 Misc 3d 1106[A], 2009 NY Slip Op 50607[U] [Sup Ct, Nassau County 2009]) and that “plaintiffs lack a cognizable property interest in an enhanced coinsurance payment based on services provided by psychiatrists to Dual Eligibles, beginning on April 1, 2007” (2009 NY Slip Op 50607[U], *11). The Appellate Division modified finding some claims time-barred and holding that the amendment to the Social Services Law imposed a continuing duty on DOH to reimburse psychiatrists who performed services for dual eligibles at 100% after March 31, 2007 (see New York State Psychiatric Assn., Inc. v New York State Dept. of Health, 71 AD3d 852, 855-856 [2d Dept 2010]). The court further opined that the 2008 legislation was impermissibly retroactive and impaired the vested rights of plaintiffs to reimbursement {see id. at 855). The matter was remitted to Supreme Court to determine attorney’s fees and to enter judgment declaring the 2008 legislation unconstitutional. Defendant DOH appeals as of right on constitutional question grounds from the final Supreme Court judgment to bring up for review the non-final Appellate Division order. We now reverse and grant judgment declaring that the 2006 amendment to the Social Services Law provided for a one-time coinsurance enhancement, limited to the 2006-2007 fiscal year.

IL

To begin, we must determine the legislative intent surrounding the 2006 amendment to Social Services Law § 367-a (1) (d) (iii) and other provisions contained in the same act of a budget bill by looking at the actual words of the act. It is well settled that “[a] statute or legislative act is to be construed as a whole, and all parts of an act are to be read and construed together to determine the legislative intent” (McKinney’s Cons Laws of NY, Book 1, Statutes § 97; see also Frank v Meadowlakes Dev. Corp., 6 NY3d 687, 691 [2006]). Furthermore, “[e]ach section of a legislative act must be considered and applied in connection with every other section of the act, so that all will have their due, and conjoint effect” (McKinney’s Cons Laws of NY, Book 1, Statutes § 98, Comment, at 221-222 n 23; see also Matter of Kaplan v Peyser, 273 NY 147 [1937]). To determine the intent of a statute, “inquiry must be made of the spirit and purpose of the legislation, which requires examination of the statutory context of the provision” (Matter of Sutka v Conners, 73 NY2d 395, 403 [1989]).

With this framework in place, plaintiffs argue that the 2006 amendment to section 367-a (1) (d) (iii) is clear and unambiguous on its face and that interpreting the amendment by its plain language requires reimbursement payments to psychiatrists at the rate of 100% after March 31, 2007. Defendant argues that the 2006 amendment created only a one-year coinsurance enhancement program for psychiatrists and that the legislative intent is clearly demonstrated by the plain language of the act as a whole. Plaintiffs further argue that, had the Legislature intended only for a one-year reimbursement enhancement for psychiatrists, there would have been no need to amend section 367-a (1) (d) (iii). Plaintiffs contend that the provision delineating how psychiatrists would receive the $2 million disbursement pursuant to Laws of 2006, chapter 109, part C, § 2 would have been sufficient standing alone and accordingly the 2006 amendment to section 367-a (1) (d) (iii) was intended to provide for a permanent benefit. While plaintiffs’ proposed interpretation may have some merit, we disagree.

The 2006 amendment to Social Services Law § 367-a (1) (d) (iii), which added psychiatrists to the list of providers not subject to the 20% reimbursement rule for services provided to dual eligibles, was part of a 2006-2007 budget bill. The preamble of the bill provides: “This act enacts into law major components of legislation which are necessary to implement the state fiscal plan for the 2006-2007 state fiscal year” (L 2006, ch 109, § 1, 2006 McKinney’s Session Laws of NY, at 476). Immediately following the amendment to section 367-a (1) (d) (iii), contained in section 1 of part C of the act, there is a provision, section 2 of part C, that regulates the calculation of the “2006-2007 coinsurance enhancement.” Subdivision (a) of the section begins: “Notwithstanding any provision of law to the contrary, medical assistance payments made in compliance with the amendments made by section one of this act shall be calculated in accordance with the methodology set forth in this section” (2006 McKinney’s Session Laws of NY, at 477). Pursuant to that section—section 2 (a)—the enhancement, as directed by section 1, was “not to exceed two million dollars” and payments were to be made “during the period April 1, 2006 through March 31, 2007” (id. at 477, 478).

Reading the two provisions together, as we must, and applying the principles of statutory construction that an act is to be construed as a whole and that each section must be considered and applied in connection with every other section in the context of the 2006-2007 budget bill, it is clear that the intent of the Legislature was for the enhanced payments to psychiatrists to be temporary and only apply to the 2006-2007 fiscal year. Plaintiffs’ reading would create fiscal consequences extending far into future years, while DOH’s proposed construction is the better reading of the statute as it comports with the legislative purpose that prompted the enactment—a temporary, one-year, coinsurance enhancement program to benefit psychiatrists.

Furthermore, plaintiffs’ argument that the amendment to section 367-a (1) (d) (iii) is clear and unambiguous on its face ignores the fact that the amendment is part of a budget bill and that the mechanism set forth in section 2 of the Laws of 2006, chapter 109, part C clearly refers to the amendment in section 1, indicating that the amendment is not to be read separately from the paragraph that follows. Moreover, the fact that one part of a bill may appear unambiguous read in isolation from the balance of a bill does not preclude us from further inquiring into the intent of the Legislature. We have stated:

“There is, of course, no more persuasive evidence of the purpose of a statute than the words by which the legislature undertook to give expression to its wishes. Often these words are sufficient in and of themselves to determine the purpose of the legislation. In such cases we have followed their plain meaning. When that meaning has led to absurd or futile results, however, this Court has looked beyond the words to the purpose of the act. Frequently, however, even when the plain meaning did not produce absurd results but merely an unreasonable one plainly at variance with the policy of the legislation as a whole this Court has followed that purpose, rather than the literal words” (New York State Bankers Assn. v Albright, 38 NY2d 430, 437 [1975] [internal quotation marks omitted], quoting United States v American Trucking Assns., Inc., 310 US 534, 543 [1940]).

Finally, plaintiffs’ argument that there was no need to amend section 367-a (1) (d) (iii) is unavailing. In 2005, in order to implement a similar “enhancement” for physicians, the Legislature amended section 367-a (1) (d) (iii) in precisely the same manner. In that same bill, the Legislature passed Laws of 2005, chapter 12, § 9, which was in most respects identical to Laws of 2006, chapter 109, part C, § 2. Like section 2, section 9 provided for a “2005 coinsurance enhancement” for physicians and set forth a mechanism to distribute monies “not to exceed five million dollars” (L 2005, ch 12, § 9 [a], 2005 McKinney’s Session Laws of NY, at 113, 114). The similarities between the 2005 amendment and the 2006 amendment clearly indicate that the Legislature intended a one-time benefit for physicians in 2005 and for psychiatrists in 2006-2007.

The subsequent 2008 amendment to Social Services Law § 367-a (1) (d) (iii) is not a substantive change in the law as argued by plaintiffs, but merely confirms the legislative intent of the 2006 amendment, resolving the dispute over the meaning of the amendment that had arisen. As such, since we are determining this appeal on statutory interpretation grounds, we need not address plaintiffs’ constitutional arguments regarding the purported retroactive effects of the 2008 legislation.

Thus, we conclude that the placement of an amendment creating an enhancement program for psychiatrists in a budget bill and the inclusion of a methodology for its implementation immediately following clearly indicates that the Legislature intended for the coinsurance enhancement to be a one-time enhancement limited to the 2006-2007 fiscal year only.

Accordingly, the judgment appealed from and the order of the Appellate Division brought up for review should be reversed, with costs, and judgment granted to defendant declaring in accordance with this opinion.

Chief Judge Lippman and Judges Graffeo, Read, Smith, Pigott and Jones concur.

Judgment appealed from and order of the Appellate Division brought up for review reversed, etc.

      . The provision covering limited categories of specifically designated services include services provided by ambulance carriers, psychologists and certain claims certified by DOH or other state agencies.

      . During this period, pursuant to the strictures of section 2, psychiatrists were reimbursed at a rate less than 100%.

      . All these amendments—the 2003 amendment, the 2005 amendment, the 2006 amendment and the 2008 amendment—were contained in budget bills submitted by the Governor pursuant to article VII of the New York Constitution, designed to implement a state fiscal plan for the relevant fiscal year and defining revenue consequences therein.

      . The 2005 legislation included a sunset provision (L 2005, ch 12, § 14, 2005 McKinney’s Session Laws of NY, at 118) that was not present here. However, that sunset provision in 2005 was arguably necessary because, unlike the 2006 enhancement for psychiatrists which was for the entire fiscal year, the enhancement for physicians was only for a three-month period.


author: Ciparick, J. Chief Judge Lippman (dissenting in part).

text:
    [968 NE2d 439, 945 NYS2d 202]
    Mount Vernon City School District, Respondent-Appellant, v Nova Casualty Company, Appellant-Respondent, et al., Defendant.
    Argued February 14, 2012;
    decided April 3, 2012

      POINTS OF COUNSEL

      Law Office of Neil B. Connelly, Esq. PLLC, White Plains (Neil B. Connelly of counsel), for appellant-respondent.
    I. The entire contract price for the Mount Vernon City School District public improvement was a trust fund under article 3-A of the Lien Law. (Aquilino v United States of Am., 10 NY2d 271; Gramatan-Sullivan, Inc. v Koslow, 240 F2d 523; City of New York v Cross Bay Contr. Corp., 93 NY2d 14.) II. The Mount Vernon City School District participated in the diversion of trust assets. (Matter of RLI Ins. Co., Sur. Div. v New York State Dept. of Labor, 97 NY2d 256; City of New York v Cross Bay Contr. Corp., 93 NY2d 14; Onondaga Commercial Dry Wall Corp. v 150 Clinton St., 25 NY2d 106; Aquilino v United States of Am., 10 NY2d 271.) III. The Mount Vernon City School District’s diversion of Lien Law article 3-A trust funds discharged Nova Casualty Company on the performance bond. (Roel Partnership v Amwest Sur. Ins. Co., 258 AD2d 780; Smith v Molleson, 148 NY 241; Midland Steel Warehouse Corp. v Godinger Silver Art, 276 AD2d 341; Central Fed. Sav. & Loan Assn. of Nassau County v Pergolis, 173 AD2d 587; Matter of Union Indem. Ins. Co. of N.Y., 220 AD2d 339; United States Fid. & Guar. Co. v Braspetro Oil Servs. Co., 369 F3d 34.) IV The Mount Vernon City School District violated the terms of the bond. (Smith v Molleson, 148 NY 241; Abiele Contr. v New York City School Constr. Auth., 91 NY2d 1; Aron v Gillman, 309 NY 157; Sutton v East Riv. Sav. Bank, 55 NY2d 550; Legend Artists Mgt. v Blackmore, 273 AD2d 91; Caristo Constr. Corp. v Diner’s Fin. Corp., 21 NY2d 507; Aquilino v United States of Am., 10 NY2d 271; Zuckerman v City of New York, 49 NY2d 557.) V The decisions below contradict prior decisions by the Court of Appeals. (LeChase Data/Telecom Servs., LLC v Goebert, 6 NY3d 281; Aspro Mech. Contr. v Fleet Bank, 1 NY3d 324; Matter of RLI Ins. Co., Sur. Div. v New York State Dept. of Labor, 97 NY2d 256; Caristo Constr. Corp. v Diners Fin. Corp., 21 NY2d 507.) VI. The decisions below present a conflict among the Departments of the Appellate Division. (Kemper Ins. Cos. v State of New York, 70 AD3d 192; Matter of RLI Ins. Co., Sur. Div. v New York State Dept. of Labor, 97 NY2d 256; Canron Corp. v City of New York, 89 NY2d 147; Aquilino v United States of Am., 10 NY2d 271; City of New York v Cross Bay Contr. Corp., 93 NY2d 14.) VII. The issues presented are novel and of public importance. (Canron Corp. v City of New York, 89 NY2d 147.)

      Cohen & Perfetto, New York City (Andrea Tersigni and Anthony L. Tersigni of counsel), for respondent-appellant.
    I. All of the Mount Vernon City School District’s attorneys’ fees and expenses are recoverable under both the subject construction contract and bond. (City of Elmira v Larry Walter, Inc., 150 AD2d 129; United States Fid. & Guar. Co. v Braspetro Oil Servs. Co., 369 F3d 34; Hooper Assoc. v AGS Computers, 74 NY2d 487.) II. Even in the absence of any attorneys’ fee provision, the Mount Vernon City School District is still entitled to recover all of its attorneys’ fees and litigation expenses since DJH Mechanical Associates’ breach necessitated litigation against another party. (Jamaica Commodity Trading Co. Ltd. v Connell Rice & Sugar Co., Inc., 766 F Supp 138; Jones v Morgan, 90 NY 4.)
   OPINION OF THE COURT

Ciparick, J.

On this appeal, we are called upon to determine whether defendant Nova Casualty Company (Nova) is discharged from its surety obligation to plaintiff Mount Vernon City School District (the School District) on the bases that the School District allegedly violated New York’s Lien Law by improperly diverting construction contract payments constituting trust fund assets to a nonbeneficiary and breached the terms of the parties’ performance bond. We hold that under the facts of this case, Nova has not demonstrated that discharge of its surety obligation is warranted. We also consider whether the School District is entitled to attorneys’ fees expended in the prosecution of this litigation, and conclude that the request for attorneys’ fees was properly denied.

L

On December 26, 2003, the School District and defendant DJH Mechanical Associates, Inc. (DJH) contracted for DJH to perform heating, ventilation and air conditioning (HVAC) work at A.B. Davis Middle School for a price of $919,000. The contract mandated that the School District make progress payments to DJH based upon DJH’s application for payment for work performed during the preceding calender month. The School District was permitted to terminate the contract if DJH, among other things, failed to furnish adequate assurance that DJH could complete the work.

The contract also required DJH to obtain a performance bond, which DJH secured from Nova, a compensated surety. The performance bond incorporates the terms of the underlying construction contract and provides that “[t]he Surety shall not be liable to the Owner or others for obligations of the Contractor that are unrelated to the Construction Contract, and the Balance of the Contract Price shall not be reduced or set off on account of any such unrelated obligations.”

As relevant to the School District’s cross appeal, the contract between the School District and DJH further provides:

“The costs of finishing the Work include, without limitation, all reasonable attorney’s fees, additional title costs, insurance, additional interest because of any delay in completing the Work, and all other direct and indirect and consequential damages incurred by the Owner by reason of the termination of the Contract as stated herein.”

The performance bond as it relates to legal costs provides that

“[t]o the limit of the amount of this Bond, but subject to commitment by the Owner of the Balance of the Contract Price to mitigation of costs and damages on the Construction Contract, the Surety is obligated without duplication for: . . .
“[ajdditional legal, design professional and delay costs resulting from the Contractor’s Default, and resulting from the actions or failure to act of the Surety.”

In June 2004, while the contract work was underway, the School District received a notice to withhold/release payment (notice of cross-withholding) from the Department of Labor (DOL). The notice stemmed from DOL’s investigation of alleged prevailing wage violations by DJH on a previously performed public works project and requested that the School District withhold $863,197.40 in contract payments pending completion of the investigation. A November 2004 application summary indicates that DJH had submitted nine applications for progress payments. In January 2005, DOL gave the School District notice that it could release $649,197.40 to DJH, but directed the School District to send the balance of $214,000 to DOL in satisfaction of DJH’s debt. The president of DJH signed a provision of the notice assigning to DOL $214,000 in earned progress payments. The School District subsequently remitted that amount to DOL. Work ostensibly progressed but at a very slow pace and, in July 2006, the School District terminated its contract with DJH due to the contractor’s failure to substantially complete the HVAC work. When the School District turned to Nova to perform under the bond and fund the work left remaining upon DJH’s default, Nova disclaimed liability and refused to complete the project.

The School District commenced this breach of contract action against Nova, seeking damages for the cost of completing the project and also attorneys’ fees, and against DJH, seeking damages for its failure to complete the contracted-for work. DJH defaulted.

Nova answered and moved for summary judgment, arguing, among other things, that the School District violated article 3-A of the Lien Law by diverting $214,000 of trust fund assets reserved for completion of the HVAC work to satisfy debts incurred on the Mahopac project. Nova contended that but for the improper payment to DOL, the School District would have had sufficient funds to complete its HVAC project and Nova’s surety obligation would not have been triggered. Nova further alleged that the School District breached the performance bond by “illegally reducing the contract funds,” thereby discharging Nova from its duty to perform. In response, the School District admitted that it released $214,000 to DOL upon DJH’s authorization, and. asked the court to search the record to grant it partial summary judgment on the issue of Nova’s liability.

Supreme Court declined to grant either party summary judgment. In denying Nova’s motion, the court observed that the instant case was distinguishable from Matter of RLI Ins. Co., Sur. Div. v New York State Dept. of Labor (97 NY2d 256 [2002]), where the surety had completed the project at issue and was therefore subrogated to the rights of article 3-A trust fund beneficiaries. The court stated that “if Nova had undertaken to complete DJH’s performance, it would have been subrogated to the rights of both Plaintiff and DJH, and if the $214,000.00 payment involved payment of underpaid wages on an unrelated job, Nova would have a claim against Plaintiff for improper diversion of trust assets” (30 Misc 3d 1231 [A], 2008 NY Slip Op 52725[U], *11 [2008]). As Nova did not complete DJH’s performance, it “therefore . . . has no right as a subrogee to unpaid contract . . . and trust fund monies” (id. at *13). The court determined that questions of fact remained as to whether the payment to DOL was an improper diversion of trust fund assets and whether the payment violated the bond by increasing Nova’s risk of liability.

Both Nova and the School District appealed, and Supreme Court ordered bifurcated trials. The liability phase was tried before a jury in March 2009. The jury returned a verdict in the School District’s favor, finding that DJH breached its contract with the School District by failing to complete its work and waived its right to terminate the contract.

The issues before Supreme Court post-trial were: (1) whether the School District’s $214,000 payment to DOL relieved Nova of liability under the performance bond and (2) whether the School District could recover attorneys’ fees for completing the project and prosecuting its claim in this litigation. Supreme Court held that the School District’s payment to DOL did not excuse Nova’s performance under the bond. The court again emphasized that Nova had not completed performance, and thus had “no right as a subrogee to [the] unpaid Contract Price or any Trust Fund monies that were wrongfully diverted” (30 Misc 3d 1233[A], 2009 NY Slip Op 52793[U], *11 [2009]). Supreme Court rejected Nova’s argument that the payment violated the performance bond by increasing its liability, because the $214,000 at issue was due to DJH for its past performance. As the School District had not terminated its contract with DJH at the time of payment, the School District was permitted to pay DOL at DJH’s request in lieu of paying DJH directly.

With regard to the School District’s claim for attorneys’ fees, the court held that the bond allowed only for attorneys’ fees incurred in the completion of the project, not for expenditures made in pursuit of this litigation. Quoting United States Fid. & Guar. Co. v Braspetro Oil Servs. Co. (369 F3d 34, 77 [2d Cir 2004]), which Supreme Court found “had a clause identical to” the clause at issue here, it held that “ £[i]t was not unmistakably clear that the use of the term [££]legal costs” in the Bond[ ] was intended to obligate the Suret[y] to pay . . . attorneys’ fees in litigation between the Suret[y] and the Obligee[ ] over the Bond[ ]’ ” (2009 NY Slip Op 52793DJ], *14). The parties then stipulated to the amount of attorneys’ fees owed for completion of the project, and Supreme Court entered judgment for a set sum in the amount of $121,940.16 in favor of the School District.

Nova and the School District both appealed, and the Appellate Division affirmed (see Mount Vernon City School Dist. v Nova Cas. Co., 78 AD3d 1028, 1029 [2d Dept 2010]). The court agreed that because “Nova was not a fully paying and performing surety ... it did not succeed to the rights of the owner or the Lien Law article 3-A trust beneficiaries” (id.). Thus, the School District’s allegedly improper payment did not allow Nova to avoid liability under the performance bond. The court further held that, “since the $214,000 represented a sum earned by DJH as a progress payment under the contract, Nova failed to establish, as a matter of law,” that the School District breached the performance bond (id. at 1030). Finally, the court concluded that “neither the contract nor the performance bond contain unmistakably clear language obligating Nova to reimburse [the School District] for its attorney’s fees in this litigation” (id. [internal quotation marks and citation omitted]).

We granted Nova’s motion and the School District’s cross motion for leave to appeal (16 NY3d 707 [2011]) and now affirm.

IL

As a general rule, a surety may assert affirmative defenses to an obligee’s claim of breach of contract based on the obligee’s noncompliance with the terms of the performance bond or material alterations to the terms of the underlying contract (see 23 Lord, Williston on Contracts § 61:31 [4th ed]; Tishman Westwide Constr. LLC v ASF Glass, Inc., 33 AD3d 539, 540 [1st Dept 2006]). “Under general contract rules, an obligation may not be altered without the consent of the party who assumed the obligation. [As] [suretyship is a contractual relation . . . the [obligee] and the principal debtor may not alter the surety’s undertaking to cover a different obligation without the surety’s consent” (Bier Pension Plan Trust v Estate of Schneierson, 74 NY2d 312, 315 [1989]). Thus, where an obligee—in the context of a construction contract, the owner—materially alters the terms of the contract and increases the risks imposed on the surety by such acts as modifying the duties of the principal-contractor, extending the time for the principal’s performance, or making overpayments or premature payments, the surety may be discharged (see id,.; see also Restatement [Third] of Suretyship & Guaranty § 37 [l]-[3]; Egan, Discharge of the Performance Bond Surety, in Gallagher, Suretyship, at 12-1-12-3 [1993] [hereinafter Egan]).

Though it was the early rule in New York that a surety obligation is “strictissimi juris, and [the surety] is discharged by any alteration of the contract. . . whether material or not, and . . . whether it is or is not to [the surety’s] injury” (Page v Krekey, 137 NY 307, 314 [1893]), we have declined to apply the rule to compensated sureties in the context of construction contracts (see St. John’s Coll., Fordham v Aetna Indem. Co., 201 NY 335, 341-342 [1911], citing Guaranty Co. v Pressed Brick Co., 191 US 416 [1903]; see also 23 Lord, Williston on Contracts § 61:5 [4th ed] [“(t)he corporate compensated surety is not favored with the solicitude shown the private, uncompensated surety”]). In such a case, discharging the surety is in appropriate where the purported alteration cannot “be said to affect the surety adversely or to have any effect whatever upon the contract or the defendant’s obligation” (St. John’s Coll., Fordham at 342; see also Egan, at 12-1 [“(A) compensated surety is usually obligated to demonstrate affirmatively actual prejudice arising from the act of the obligee. In the absence of actual prejudice, the compensated surety usually remains bound”]). It is incumbent on the surety seeking to be discharged to demonstrate that an obligee’s act has so prejudiced it that its obligation is impaired (see Restatement [Third] of Suretyship & Guaranty § 49).

Here, Nova argues primarily that the School District’s payment to DOL of $214,000 in contract funds violated the Lien Law, and that the improper diversion constituted a breach of contract, which substantially increased Nova’s risk of loss on the performance bond. As such, Nova submits, it was discharged from its duty to perform. Reserving judgment on whether the payment indeed constituted a Lien Law violation, as that issue was not squarely decided by the courts below (see 78 AD3d at 1030), we nonetheless conclude that any such violation would provide no grounds, on the record before us, for Nova’s discharge.

Under article 3-A of the Lien Law, funds received by an owner and/or contractor in connection with a contract for a public improvement must be held in trust to ensure payment of trust beneficiaries, namely, subcontractors, architects, engineers, surveyors, laborers and materialmen, as well as payment of taxes and expenses incurred by the construction (see Lien Law § 70 [1]; § 71 [2]; see also Caristo Constr. Corp. v Diners Fin. Corp., 21 NY2d 507, 512 [1968]). “[0]nce a trust comes into existence, its funds may not be diverted for non-trust purposes [and] [u]se of trust assets for any purpose other than the expenditures authorized [by statute] . . . constitutes an improper diversion of trust assets, regardless of the propriety of the trustee’s intentions” (Matter of RLI Ins. Co., Sur. Div. v New York State Dept. of Labor, 97 NY2d 256, 263 [2002], citing Canron Corp. v City of New York, 89 NY2d 147, 154 [1996]; see Lien Law § 72). This “prohibition against diversion of funds to purposes unrelated to a particular improvement was intended to eradicate the practice of ‘pyramiding,’ in which contractors use loans or payments advanced in the course of one project to complete another” (Matter of RLI, 97 NY2d at 264).

However, whether the School District’s payment of contract funds to DOL as DJH’s assignee violated the Lien Law is irrelevant to Nova’s surety obligation, because Nova did not perform by funding completion of the work upon DJH’s default as required under the performance bond. As such, and as found by the courts below, it is not subrogated to the rights of the article 3-A trust beneficiaries as a completing surety and lacks capacity to raise any alleged violation of the Lien Law. This case is therefore wholly distinguishable from those cases on which Nova relies, where we allowed subrogees of trust beneficiaries to assert superior claims to trust assets and recognized their right to invoke the Lien Law to challenge wrongful diversions (see Matter of RLI, 97 NY2d at 263-265 [surety that had completed construction of a public improvement project on behalf of a defaulting contractor had a right to funds still in possession of the project owner superior to a claim filed by DOL]; Caristo, 21 NY2d at 510-511 [general contractor who, upon subcontractor’s default, paid suppliers and other subcontractors pursuant to a payment bond was entitled to trust funds improperly diverted to the defendant factor]).

Furthermore, Nova has not established that the payment adversely affected or, for that matter, had any effect whatsoever on its surety obligations. Nova repeats the conclusory assertion that its “loss on the Bond was substantially increased,” but does not illustrate how or to what extent. Rather, Nova has contended that had the $214,000 not been remitted to DOL, those funds could have been applied to the cost of completion of the HVAC work. Yet, the $214,000 consisted of earned funds due to DJH for its past performance on the contract and, presumably, was already accounted for. The payment was neither in excess of what was owed nor made prematurely, both of which could have exposed Nova to a greater risk of loss (see Egan, at 12-3). In short, even assuming that the payment of $214,000 to DOL, rather than DJH, was an improper diversion, it does not appear that the payment committed Nova to a dollar more than that amount for which it bonded DJH. As the payment neither materially altered the contract nor impaired Nova’s surety obligation, Nova’s discharge is unwarranted (see Becker v Faber, 280 NY 146, 152 [1939] [surety not discharged of “that part of the original obligation which still remains and which remains untouched and unaffected” by-an act of the creditor]).

The dissent opines that in so holding we “facilitate [ ] the School District’s participation in [the] long-prohibited practice [of ‘pyramiding’]” (dissenting op at 40). However, nothing we have said condones that practice or insulates the School District from any claims that may properly be asserted by an article 3-A trust beneficiary who, as a result of the School District’s payment of contract funds to DOL, was left unpaid. We simply conclude that Nova, which bears the burden of establishing grounds for its discharge, has yet to show how its surety obligation was impaired. Even if, as the dissent concludes, “[fit is difficult to fathom . . . [that] all trust claims had been paid” (id. at 43), we cannot release Nova from the very obligation it contracted to undertake on a hunch. Nova did not demonstrate that the transfer of funds to DOL resulted in any workers, subcontractors or other article 3-A trust beneficiaries having unpaid claims for which the School District reimbursed them, or that such reimbursement was part of the damages claimed against Nova. Though the dissent finds that we “fail[ ] to provide any explanation whatsoever regarding how the diversion of $214,000 that could have been applied toward the completion of the HVAC job did not harm the surety’s interests” (id. at 44), it is neither our, nor the School District’s, burden to do so.

Nova also contends, however, that the School District breached the terms of the performance bond, which provided that “the Balance of the Contract Price shall not be reduced or set off on account of [DJH’s] unrelated obligations.” To be sure, the unpaid wage claim arising from the Mahopac project was an obligation unrelated to the contract between DJH and the School District. While the $214,000 payment to DOL ultimately satisfied that obligation, however, the School District owed that amount to DJH for completed work. Indeed, the record reflects that the $214,000 was a portion of a larger sum due to DJH based on the School District’s approval of the contractor’s fifth through ninth applications for progress payments. Thus, the contract price was not reduced or set off on account of DOL’s notice of cross-withholding; rather, it was reduced incrementally in proportion to the work performed, as the contract prescribed.

We thus conclude that the School District did not breach the terms of the performance bond, and that the alleged illegal diversion of trust funds did not excuse Nova’s performance. As surety, Nova breached the performance bond by refusing to complete the project.

m.

On its cross appeal, the School District argues that the lower courts erred by declining to award the School District attorneys’ fees that it incurred in the prosecution of this action because the construction contract and bond at issue provide for recovery of all attorneys’ fees, and because Nova’s breach occasioned the lawsuit. “Under the general rule, attorneys’ fees and disbursements are incidents of litigation and the prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties or by statute or court rule” (Matter of A.G. Ship Maintenance Corp. v Lezak, 69 NY2d 1, 5 [1986]). “[T]he court should not infer a party’s intention to waive the benefit of the rule unless the intention to do so is unmistakably clear from the language of the promise” (Hooper Assoc. v AGS Computers, 74 NY2d 487, 492 [1989] [emphasis added]; see also United States Fid. & Guar. Co. v Braspetro Oil Servs. Co., 369 F3d 34, 74 [2004]).

Here, paragraph 6 of the bond provides that Nova “is obligated without duplication for” “[additional legal, design professional and delay costs resulting from the Contractor’s Default, and resulting from [Nova’s] actions or failure to act.” The underlying construction contract, which is incorporated by reference into the performance bond, provides: “The costs of finishing the Work include, without limitation, all reasonable attorney’s fees, additional title costs, insurance, additional interest because of any delay in completing the Work, and all other direct and indirect consequential damages incurred by the Owner by reason of the termination of the Contract” (emphasis added). The School District contends that these dual provisions, and particularly the broad phrase “all reasonable attorney’s fees,” are inclusive of the expenditures made for purposes of this litigation. However, under a precise reading of the contractual language, which our rule requires, the disputed fees are outside the scope of the agreements, because they were not incurred as a result of the termination of the construction contract, but rather as a result of Nova’s breach of its surety obligation. Given the lack of “unmistakably clear” language indicating an intent to provide for an award of attorneys’ fees incurred in litigation arising out of Nova’s failure to perform, the School District’s request for attorneys’ fees must be denied.

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

Chief Judge Lippman (dissenting in part).

In 1930, when the Legislature enacted the predecessor to article 3-A of the Lien Law, it recognized a need to prohibit the damaging practice of “pyramiding” in the construction industry. Because the majority facilitates the Mount Vernon City School District’s (the School District) participation in this long-prohibited practice and inexplicably ignores the surety’s right to be discharged from the performance bond where the School District breached the bond, thereby depriving the surety of the benefit of its bargain under basic contract principles, I respectfully dissent.

We have explained that “[i]n the case of a contractor, the so-called trust fund provisions of the Lien Law prohibit [ ] diversion, to purposes unrelated to a particular improvement, of contract payments from the owner which were intended to pay the expense of that improvement, including the cost of labor and materials” (Aquilino v United States of Am., 10 NY2d 271, 275 [1961] [discussing the predecessor to the current version of article 3-A]). In the same spirit, the successor and current provision, article 3-A’s prohibition on diverting trust fund assets serves the “remedial purpose of ‘ “insuring] that funds obtained for financing of an improvement of real property and moneys earned in the performance of a contract for . . . [an] improvement will in fact be used to pay the costs of that improvement” ’ ” (Matter of RLI Ins. Co., Sur. Div. v New York State Dept. of Labor, 97 NY2d 256, 263 [2002] [citations omitted and emphasis added]). The School District clearly thwarted the purpose of this rule by ensuring that the money earned in the performance of the heating, ventilation and air conditioning (HVAC) contract would be used to pay the costs of the Mahopac School District project.

Although a school district following the direction of the Department of Labor (DOL) may seem to be cast in a more sympathetic light than a surety seeking to disclaim liability for completing a project upon the default of a construction company, the majority misapprehends the nature of the Lien Law. As the majority acknowledges, it is of no import that the School District may have thought it was acting properly in following the directive of the DOL, because the rule prohibiting diversions of trust assets applies regardless of the intentions of the diverter (see RLI, 97 NY2d at 263). Additionally, while the majority properly acknowledges the surety’s rights to discharge under certain circumstances {see majority op at 36), it ignores that such circumstances arose in this case, triggering these rights, and concludes that the surety here was not entitled to discharge and was responsible for completion of the HVAC job.

Lien Law § 72 (1) provides that

“[a]ny transaction by which any trust asset is paid, transferred or applied for any purpose other than a purpose of the trust . . . before payment or discharge of all trust claims with respect to the trust, is a diversion of trust assets, whether or not there are trust claims in existence at the time of the transaction, and if the diversion occurs by the voluntary act of the trustee or by his consent such act or consent is a breach of trust.”

“Only after all trust claims have been paid or discharged does a beneficial interest in the remaining balance vest in the trustee owner or contractor” (RLI, 97 NY2d at 263). In Kemper Ins. Cos. v State of New York (70 AD3d 192, 196 [3d Dept 2009]), the court held in favor of the surety where the contractor defaulted and the State, having responded to an Internal Revenue Service (IRS) notice of levy by paying contract funds to the IRS in satisfaction of the contractor’s outstanding tax obligations, rendered the remaining trust funds insufficient to pay for the completion of the project. Just like the contractor in Kemper, DJH “[did] not have a sufficient beneficial interest in the moneys, due or to become due . . . under the contract, to give [it] a property right in them, except for whatever balance, if any, might later remain after all claims had been paid,” and the School District was not entitled to send the $214,000 anywhere other than for use on the HVAC project (id. at 197 [internal quotation marks and citations omitted]). When the surety in Kemper completed the job, the State’s payment “did not include the sum that had been turned over to the IRS, and the funds paid were insufficient to complete the work and cover [the surety’s] payments to laborers, suppliers, and others under the payment bonds, causing [the surety] to suffer a loss” (id. at 194). That the surety in this case did not complete the HVAC project makes no difference. The same principle applies here; when the School District made the payment to the DOL, Nova’s risk of suffering a loss increased and it was therefore relieved of its obligations. It makes little sense to require a surety to complete a job when it is fully aware that the project owner has already diverted (in this case nearly a quarter of the total) funds designated to pay for the project, in violation of the Lien Law, and there is a very real possibility that the surety would suffer a loss if it were to complete the job.

Here, the School District has most recently claimed that the payment of $214,000 to DOL was not a diversion of trust assets because all claims had been paid. Nowhere in the School District’s briefs to this Court is this argument mentioned. Rather, the School District argued that the “payment of the subject funds was for a trust purpose—to pay for work performed by DJH on the School’s project,” and accused the surety of “[trying] relentlessly to spin the [School District’s] payment ... as one for non-trust purposes, arguing that because the payment was apparently used by DJH and the DOL for a purportedly unrelated project it was, allegedly, for a non-trust purpose.” Then, at oral argument, the School District abruptly abandoned that view and partially adopted the surety’s position (which it had decried in its brief) that the funds were used for a non-trust purpose. The School District argued that all trust claims had been paid at the time the payment to DOL was made, and that DJH was free to spend those funds as it pleased, thereby implying that the funds were indeed used for a non-trust purpose, but that such use was allowed under the circumstances. The School District has either been unable or unwilling to commit to one of these two contradictory positions and that is because neither is reasonable. The majority saves the School District from its “flip-flopping” by concluding erroneously that “whether the School District’s payment of contract funds to DOL as DJH’s assignee violated the Lien Law is irrelevant to Nova’s surety obligation” (majority op at 37). It is difficult to fathom, however, that with respect to the incomplete HVAC project, all trust claims had been paid.

Contrary to the majority’s view (that the violation of the Lien Law is “irrelevant”) the School District’s violation of the Lien Law matters, and it matters a great deal. The majority first acknowledges that a surety is not obligated to complete a construction job if it can demonstrate that it has a right to discharge due to the actions of another party, then inexplicably goes on to state that Nova has no right to rely on the School District’s violation of the Lien Law as a basis for discharge because it is not a completing surety. But Nova does not claim that it is “subrogated to the rights of the article 3-A trust beneficiaries as a completing surety” (see majority op at 37), nor does it argue that it has the same rights as a completing surety, and it certainly does not “lack[ ] capacity to raise any alleged violation of the Lien Law” (id. ) as the majority suggests. Rather, Nova simply asserts, and rightly so, that it has the same rights as any other surety—rights that are enforceable well before any possibility of completion arises. Nova was no longer under any obligation to complete the HVAC project once the School District illegally diverted the funds to the DOL. Nova is, of course, entitled to raise the issue insofar as it supports Nova’s legitimate breach of contract defense that, in making the payment, the School District breached the performance bond and discharged Nova from its obligation to complete the project upon DJH’s default.

The Lien Law violation is highly relevant, especially where, as here, the performance bond contains a provision in essence prohibiting diversions of trust fund assets. The plain language of the performance bond demonstrates that the surety sought to insulate itself from “obligations of the Contractor that are unrelated to the Construction Contract.” That language is unambiguous and should be enforced. That the $214,000 was earned as a progress payment does not render the diversion any less a violation of the performance bond’s prohibition on reducing or setting off the balance of the contract price for any of DJH’s unrelated obligations. The majority is under the impression that because the funds paid were earned (and therefore did not represent prepayment or overpayment of contract funds) the performance bond was not violated. However, prepayment and overpayment are simply examples of actions that would have violated the School District’s obligations to the surety. They are not the only actions that would entitle the surety to discharge. Indeed, the majority fails to provide any explanation whatsoever regarding how the diversion of $214,000 that could have been applied toward the completion of the HVAC job did not harm the surety’s interests and did not violate the performance bond. By sending the funds elsewhere, the School District certainly satisfied DOL’s request but it also made it impossible for those funds to be used to complete the HVAC project, thereby increasing the risk that DJH would run out of money prior to finishing the job. The School District was not entitled, after having increased the risk of DJH’s default, to then recover from the surety on a breach of contract theory. As I cannot agree with the majority’s reasoning that Nova has not demonstrated its entitlement to be discharged from its obligations under the performance bond which the School District breached, I respectfully dissent and would modify the Appellate Division’s order to dismiss the School District’s complaint.

Judges Graffeo, Read, Smith and Pigott concur with Judge Cipajrick; Chief Judge Lippman dissents in part in a separate opinion in which Judge Jones concurs.

Order affirmed, without costs.

      . The project was later determined to be a contract with the Mahopac School District (the Mahopac project).

      . Article 3-A provides that funds
      “received by an owner for or in connection with an improvement of real property in this state, including a home improvement loan, or received by a contractor under or in connection with a contract for an improvement of real property, or home improvement, or a contract for a public improvement in this state, or received by a subcontractor under or in connection with a subcontract made with the contractor for such improvement of real property including a home improvement contract or public improvement or made with any subcontractor under any such contract, and any right of action for any such funds due or earned or to become due or earned, shall constitute assets of a trust for the purposes provided in section [71]” (Lien Law § 70 [1]).
      Section 71 (1) provides that trust assets held by an owner “shall be held and applied for payment of the cost of improvement.” Trust assets held by a contractor or subcontractor “shall be held and applied for [certain specified] expenditures” including “payment of claims of subcontractors, architects, engineers, surveyors, laborers and materialmen” who are trust beneficiaries; payment of payroll and other project-related taxes; payment of project-related benefits, wage supplements and surety bond premiums; and payments to which the owner is entitled (see id. § 71 [2] [a]-[f); [5]). Pursuant to section 72, any transfer or application of funds to a purpose other than those specified in section 71 (1) and (2) is a diversion of trust assets. Such misappropriation constitutes larceny (id. § 79-a).

      . The construction contract between DJH Mechanical Associates (DJH) and the School District was incorporated by reference into the performance bond and the School District had certain contractual obligations to Nova Casualty Company (Nova) (and vice versa) because the bond was executed for the School District’s benefit:
      “[a] suretyship arrangement is, at its core, the confluence of three distinct, yet interrelated, obligations. These obligations are embodied in the tripartite relationship of principal obligor [here, DJH] and obligee [here, the School District]; obligee and secondary obligor [here, Nova]; and secondary obligor and principal obligor. When a secondary obligor is bound to pay for the debt or answer for the default of the principal obligor to the obligee, the secondary obligor is said to have suretyship status. In other words, in transactions giving rise to suretyship status, the secondary obligor [here, Nova] is answerable to the obligee [here, the School District] in some way with respect to a duty, the cost of which, as between the principal obligor and the secondary obligor, ought to be borne by the principal obligor” (Chemical Bank v Meltzer, 93 NY2d 296, 302 [1999] [citations omitted]).

        (n. cont’d)

      . Indeed, the majority seems to acknowledge that this is not an exhaustive list (see majority op at 36 [noting that “where an obligee . . . increases the risks imposed on the surety by such acts as modifying the duties of the principal-contractor, extending the time for the principal’s performance, or making overpayments or premature payments, the surety may be discharged” (emphasis added)]).