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February 2020

New York's Appellate Division Reverses Award of Attorneys' Fees Against a Surety Under New York's Little Miller Act Where the Surety Defeated a Portion of the Claim

Last week, in an appeal in which CSG filed an amicus curiae brief on behalf of the Surety & Fidelity Association of America (“SFAA”), New York’s Appellate Division, First Department, reversed a trial court’s award of attorneys’ fees to a payment bond claimant pursuant to New York’s “Little Miller Act”, State Finance Law § 137.

In Franco Belli Plumbing & Heating & Sons, Inc. v. Citnalta Construction Corp., the plaintiff, Franco Belli, entered into a subcontract with Citnalta Construction Corp. for the performance of certain plumbing work in connection with a public improvement. Franco Belli sought, among other things, to recover over $615,000 under a payment bond executed by Travelers Casualty and Surety Company of America (“Travelers”) on behalf of Citnalta pursuant to State Finance Law § 137 (which requires that payment bonds be executed in connection with public improvement contracts exceeding $100,000.00).

By the time of trial, Franco Belli had reduced its claim significantly. Following a four-day bench trial, the trial court issued a 50-page opinion in which it rejected roughly half of Franco Belli’s remaining claims. Nevertheless, the trial court awarded Franco Belli attorneys’ fees on its payment bond claim against Travelers, pursuant to State Finance Law § 137(4)(c), which authorizes a court to award “reasonable attorneys’ fee[s]” to either the claimant or payment bond surety, but only “when, upon reviewing the entire record, it appears that either the original claim or the defense interposed to such claim is without substantial basis in fact or law.”

As the basis for awarding attorneys’ fees, the trial court focused upon two defenses that neither Citnalta nor Travelers ultimately advanced at trial, rather than the defenses that Citnalta and Travelers actually litigated (and which were largely successful). The trial court also accused Citnalta and Travelers of having “made factually baseless defenses and misrepresentations throughout this litigation”, without further elaboration.

On appeal, Citnalta and Travelers argued that, in awarding Franco Belli its attorneys’ fees, the trial court improvidently failed to consider the “entire record”, as required by § 137(4)(c). SFAA’s amicus brief discussed the contradiction between the trial court’s decision and the legislative intent and policy underlying § 137(4)(c), which was intended to dissuade both sureties and claimants from asserting frivolous claims and defenses. SFAA’s brief also discussed how affirming the trial court’s award of attorneys’ fees to Franco Belli would effectively treat § 137(4)(c) as a fee-shifting statute that unfairly penalizes sureties for merely asserting defenses in good faith. Exposing sureties to fee awards for merely defending a claim in good faith would increase the cost of public improvement bonding in New York, to the detriment of contractors, their subcontractors and material suppliers, municipal owners, and the public at large.

In its Decision and Order, the Appellate Division reversed the attorneys’ fee award, holding that “the [trial] court improvidently exercised its discretion in awarding plaintiff attorneys’ fees pursuant to State Finance Law § 137(4)(c).” After “reviewing the entire record”, as required by § 137(4)(c), the appellate court concluded that “it does not appear that the defense [asserted by Travelers] was ‘without substantial basis in fact or law’.”

The First Department’s decision is both noteworthy and welcome, given the proclivity of many claimants to seek (or threaten to seek) attorneys’ fee awards pursuant to § 137(4)(c) simply because a claim has not been paid. Such claims often are asserted inappropriately, in reaction to the surety’s exercise of its rights to defend the claim, hold the claimant to its burden of proof, and litigate defenses in good faith. The Franco Belli decision confirms that an award of attorneys’ fees as against a surety pursuant to § 137(4)(c) must be premised upon the “entire record”, and that § 137(4)(c) is not intended to punish a surety merely for asserting defenses in good faith, even if these defense ultimately are unsuccessful (particularly where, as in Franco Belli, the surety’s defense of the claim as a whole was mostly successful, and did not lack a substantial basis in fact or law).

Armen Shahinian, Adam P. Friedman, and Scott W. Lichtenstein prepared the amicus curiae brief on behalf of SFAA.

1 Franco Belli Plumbing & Heating & Sons, Inc. v. Citnalta Constr. Corp., __ N.Y.S.3d __, 2020 WL 716715 (App. Div. 1st Dep’t Feb. 13, 2020). The factual discussion is taken from the trial court record.

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