Waterscape Resort LLC

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: 	:
:
WATERSCAPE RESORT LLC, 	: 	Chapter 11
: 	Case No. 11-11593(SMB)
Debtor. 	:
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MEMORANDUM DECISION GRANTING MOTION TO
ENFORCE PLAN AND DIRECTING PAYMENT IN
ACCORDANCE WITH DRB FINAL ACCOUNTING
A P P E A R A N C E S:
LAZARUS & LAZARUS, P.C.
Attorneys for Reorganized Debtor
240 Madison Avenue, 8th Floor
New York, NY 10016
Harlan Mitchell Lazarus, Esq.
Of Counsel
BARTON LLP
Attorneys for Pavarini McGovern, LLC
420 Lexington Avenue
New York, NY 10170
Eric W. Sleeper, Esq.
Of Counsel
STUART M. BERNSTEIN
United States Bankruptcy Judge:
The plaintiff Pavarini McGovern, LLC (“Pavarini”) was retained as general contractor by
the debtor and defendant Waterscape Resort LLC (“Waterscape”) to construct a building in
Manhattan. Following the determination of its claim pursuant to a contractual alternative dispute
resolution (“ADR”) procedure, Pavarini moved to enforce the provisions of the Second Amended
Plan of Reorganization (“Plan”) and compel the payment of its claim. Waterscape opposed the
motion, but for the reasons that follow, the motion is granted.
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BACKGROUND
The background to this bankruptcy case is discussed at length in Pavarini McGovern,
LLC v. Waterscape Resort LLC (In re Waterscape Resort LLC), 483 B.R. 601 (Bankr. S.D.N.Y.
2012) (the “Prior Decision”). I assume familiarity with the Prior Decision and highlight the
facts relevant to the current dispute.
Waterscape owns property located at 66-70 West 45th Street in Manhattan. On June 28,
2007, it entered into a Construction Management Agreement with Pavarini (the “CMA”)1 that
designated Pavarini as the Construction Manager in connection with the project (the “Project”) to
build a 45-story hotel and condominium building on Waterscape’s property. The CMA provided
that Pavarini would receive progress payments through a requisition procedure based on the
work performed by its subcontractors. If Waterscape disputed the work, it nonetheless had to
pay the requisition and thereafter submit the dispute to the Dispute Resolution Board (“DRB”),
the specialized ADR forum selected by the parties in the CMA:
Costs for disputed Work shall be funded by [Waterscape] with the normal
requisition process. 	Within 10 business days of the submission of a requisition
[Waterscape] shall provide notice to [Pavarini] of any disputed portion of a
requisition. 	[Waterscape] may submit the matter to the DRB for resolution.
However, the subject payment will not be delayed and will be made 50% by the
Owner as a Change Order and 50% from the Contingency pending resolution by
the DRB. 	Once the DRB decision is made, the GMP or Contingency will be
adjusted and or credited as appropriate.
(CMA Art. 19.5 (emphasis added).)
The “pay first” principle also applied to the DRB resolutions. The written resolution of
the DRB was “binding upon the Parties for the duration of the Project through completion and
1 	The CMA is annexed as Exhibit 2 to the Affidavit of William Frederick in Support of Pavarini McGovern,
LLC’s Motion for Partial Summary Judgment, filed June 25, 2012 (Adv. Proc. 11-02248, ECF Doc. # 35).
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Final Payment.”2 (CMA Art. 18.4.3; accord CMA Art. 18.5.3 (“The resolution of the DRB shall
remain binding upon the Parties until contradicted by entry of judgment by a court of competent
jurisdiction, or until otherwise agreed by the Parties in writing.”).) Although the losing party had
the right to challenge the DRB resolution through litigation, it had to pay the winning party first:
No earlier than sixty (60) days after completion of the Project and Issuance of
Final Payment, either Party may challenge the results of any DRB resolutions
through litigation. The time for challenging the results of the DRB resolutions is
meant to be a “cooling off” period subsequent to completion of resolutions by the
DRB.
(CMA Art. 18.4.3; accord CMA Art. 18.5.3) (“No earlier than sixty (60) days after completion
of the Project and issuance of final payment, either Party may appeal any resolution of the DRB
by initiating litigation.”)
Waterscape discharged Pavarini as Construction Manager and purported to terminate the
CMA in September 2010 when the Project was nearly complete. The purported termination did
not, however, affect the jurisdiction of the DRB which continued until Final Payment was made.
(CMA Art. 18.1.7) (“[T]he DRB shall continue in existence for the duration of the construction
of the Project and through final payment.”); accord Waterscape Resort, LLC v. Pavarini
McGovern, LLC, N.Y. Cty. Index No. 652035/10, bench decision at 3-5 (N.Y. Sup. Ct. Dec. 20,
2011) (concluding that Waterscape was required to submit claims to the DRB, and the DRB
retained jurisdiction until final payment).3
2 	“Final Payment” meant “the last payment to Construction Manager, including Retainage, in connection
with the Project.” (CMA, Ex. B at 80.)
3 	A copy of the supreme court’s bench decision is annexed as Exhibit 1 to the Affidavit of Eric McGovern in
Support of Motion to Enforce the Dispute Resolution Board's Final Decision and Direct Payment of Pavarini
McGovern, LLC’s Class 3 Claim, dated Mar. 12, 2014 (“McGovern Affidavit”) (ECF Doc. # 560).
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A. 	This Bankruptcy and the Plan
Waterscape commenced this chapter 11 case on April 5, 2011. On June 9, 2011, Pavarini
filed a proof of secured claim in the amount of $10,833,132.59, plus interest, which
corresponded to its filed mechanic’s lien. This sum included the amounts that Pavarini owed to
the subcontractors it had hired to do the work on the Project. Many of the subcontractors also
filed their own mechanics’ liens. As a result, approximately $20 million in mechanics’ liens
were filed against Waterscape’s property although roughly half that amount, at most, was
actually due.
Waterscape filed its initial plan in May 2011. (See Debtor’s Plan of Reorganization,
dated May 6, 2011 (the “Original Plan”) (ECF Doc. # 43).) Waterscape proposed to sell the
hotel portion of the Project for $126 million, and pay the net proceeds to its secured lender (the
“Bank”). Pavarini objected, contending that the sale proceeds were trust funds under Article 3-A
of the New York Lien Law, and Waterscape could not divert them by paying the Bank ahead of
the trust beneficiaries, specifically Pavarini.
Pavarini also objected because the Original Plan required a “Final Order” prior to the
allowance or payment of a Class 3 claim. As originally proposed, Final Order meant:
an order, judgment, decree or decision of a court or other dispute resolution forum
of competent jurisdiction which has not been reversed, stayed, modified or
amended and as to which: (i) the time to appeal from, or to seek review or
rehearing has expired, (ii) no appeal, review, certiorari or rehearing is pending,
and (iii) the order, judgment, decree or decision has become conclusive of all
matters adjudicated therein and is in full force and effect.
(Original Plan, § 1.4 at 5-6.) The definition suggested that there could be no Final Order while
judicial review was pending, and Pavarini contended that it was entitled to payment under the
CMA after the DRB ruled and before judicial review.
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Waterscape eventually confirmed a different Plan on July 21, 2011 that resolved
Pavarini’s objections as well as other concerns. (See Order Approving Disclosure Statement and
Confirming Plan of Reorganization, dated July 21, 2011 (“Confirmation Order”) (ECF Doc. #
128).) 	First, the overlapping mechanics’ lien/trust fund claimants (i.e., Pavarini and the
subcontractors) were placed in Class 3, (Plan at § 4.3), and the Bank and Waterscape agreed to
carve out $11 million from the hotel sale proceeds to fund an $11 million Trust Fund Account to
pay the Class 3 claims. (Id. at §§ 4.1(b), 5.3.) The $11 million contribution was arrived at by
rounding up Pavarini’s $10.8 million claim. The amount was considered sufficient to discharge
all of the claims asserted by Pavarini and the subcontractors. Waterscape’s counsel acted as the
escrow agent for the Trust Fund Account. (Id. at § 5.3.)
Second, the Plan established a claims resolution procedure that was designed to by-pass
the bankruptcy court although the Court also retained jurisdiction over the claims resolution
process. Each Class 3 claim was deemed to be disputed, and Pavarini and the subcontractors
would liquidate the allowed amount of their claims in non-bankruptcy fora as if the bankruptcy
had never been filed. In Pavarini’s case, this meant the DRB. The Plan provided, in pertinent
part:
Either prior to or following the Effective Date, the Allowed Amount, if any, of
each alleged Class 3 Claim shall be determined by settlement or Final Order in the
ordinary course in a court, the Court, Dispute Resolution Board (“DRB”) or other
dispute resolution forum of competent jurisdiction pursuant to the parties’
contracts and applicable laws and procedures.
(Id. at 4.3(b) (emphasis added).) The Final Order (or settlement) rendered the disputed Class 3
claim an Allowed Claim, and the Plan required Waterscape to pay the full amount of the
Allowed Claim within 60 days “from the Trust Fund Reserve Account described in section 5.3
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hereof, the Secured Claim Reserve Account, new financing, and general funds of the Debtor.”
(Id. at § 4.3(d).)
Third, the definition of Final Order was modified at the Court’s suggestion to add the
following sentence: “‘Final Order’ with respect to Class 3 Claims shall be determined in
accordance with the parties’ existing contractual rights and state law.” The modified definition
was intended to preserve the position Pavarini took (and Waterscape opposed) regarding its right
to payment under the CMA once the DRB ruled and prior to judicial review. In other words, the
DRB final resolution constituted the Final Order that allowed the claim and required its payment
under the Plan. In addition, § 4.3(b) was modified to expressly refer to the DRB.
B. 	The DRB’s Final Accounting and Pavarini’s Motion
Between 2009 and 2013, the DRB rendered roughly 50 resolutions and supplemental
resolutions and over 200 partial resolutions. (McGovern Affidavit, Ex. 2 at 1.) Some favored
Pavarini while others favored Waterscape. In April 2013, Pavarini submitted a request for its
overall monetary claim that required the DRB to take into account all of its prior resolutions.
(Id. at 1-2.) On March 11, 2014, the DRB issued its 97-page Final Accounting in which it
concluded that Waterscape owed Pavarini $8,093,655.92. 4 (Final Accounting at 97.) This sum
consisted of $5,160,130.00 in principal and $2,933,516.92 in interest through March 11, 2014.
The final number reflected over $3 million in settlements reached with subcontractors, (Final
Accounting at 89), and absent these settlements, Waterscape would have owed that much more
to Pavarini under the Final Accounting. Interest accrued on the principal balance at the annual
4 	A copy of the Final Accounting is annexed as Exhibit 2 to the McGovern Affidavit.
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rate of 15% or $2,120.61 per day, and Waterscape was directed to pay Pavarini within 30 days,
or by April 10, 2014. (Final Accounting at 97.)
After the Final Accounting was rendered, Pavarini made the pending motion to enforce
the DRB’s Final Accounting and direct payment. Although Waterscape has characterized the
motion as one seeking a mandatory injunction, Pavarini is only asking the Court to enforce the
Plan. In essence, Pavarini argues that the Final Accounting is the Final Order allowing its
disputed claim, and under the unambiguous terms of the Plan, Waterscape must now pay it.
Furthermore, Waterscape cannot seek review of the DRB resolutions, including the Final
Accounting, until 60 days after it pays.
In its opposition, Waterscape contends that Pavarini received Final Payment under the
CMA when the $11 million Trust Fund Account was funded, and Waterscape is now free to
challenge the DRB resolutions. (Reorganized Debtor’s Objection to the Motion by Pavarini
McGovern, LLC to Enforce the Dispute Resolution Board’s Final Decision and Direct Payment
of Pavarini McGovern, LLC’s Class 3 Claim, dated Mar. 27, 2014 (“Waterscape Objection”), at
¶ 4 (ECF Doc. # 564).) Furthermore, Waterscape argues that Pavarini is judicially estopped from
arguing that Waterscape did not make the Final Payment called for under the CMA because it
repeatedly and successfully took the position that the money in the Trust Fund Account belonged
to Pavarini and Waterscape had no interest in it. (Id. at ¶¶ 24-26, 30.) Finally, Waterscape
maintains that under the Prior Decision, a claim had to be “finally resolved” before payment
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from the Trust Fund Account and Pavarini’s claim has not been finally resolved because it is
subject to judicial review. (Id. at ¶¶ 13-14.) 5
DISCUSSION
This is a contract dispute. “A written agreement that is clear, complete and subject to
only one reasonable interpretation must be enforced according to the plain meaning of the
language chosen by the contracting parties.” Brad H. v. City of New York, 951 N.E.2d 743, 746
(N.Y. 2011). Where a contract is unambiguous, extrinsic evidence concerning the parties’
course of conduct is irrelevant. TNT USA Inc. v. DHL Express (USA), Inc., No. 09–CV–0481
(JS) (ARL), 2012 WL 601452, at *6 (E.D.N.Y. Feb. 23, 2012); Nat’l Abatement Corp. v. Nat’l
Union Fire Ins. Co., 824 N.Y.S.2d 230, 232 (N.Y. App. Div. 2006); 239 East 79th Owners Corp.
v. Lamb 79 & 2 Corp., 818 N.Y.S.2d 194, 195 (N.Y. App. Div. 2006).
Waterscape does not contend that the CMA is ambiguous on the issue raised by
Pavarini’s motion. The CMA plainly requires Waterscape to pay Pavarini the amount directed
by the DRB before it can challenge the DRB decision. Instead, it mainly argues that the funding
of the Trust Fund Account represented the Final Payment within the meaning of the CMA, and
then contradicting itself, argues that it does not have to pay Pavarini until the DRB decision has
been affirmed by a final order of a court of competent jurisdiction.
As discussed in the Prior Decision, Article 3-A of the New York Lien Law requires the
owner hold all funds received in connection with the improvement of real property in trust and
apply those funds to the costs of improvement. 483 B.R. at 610-11. The hotel sale proceeds that
5 	As noted, Waterscape also argued that Pavarini was seeking a mandatory injunction to which it was not
entitled, but the argument mischaracterizes the relief that Pavarini is seeking.
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the initial plan proposed to pay to the Bank were received at the closing in connection with the
improvement of Waterscape’s property, and Pavarini’s and the subcontractors’ unpaid claims
represented costs of improvement. Accordingly, Waterscape was obligated upon receipt to hold
the hotel sale proceeds in trust for the benefit of Pavarini and the subcontractors. Pavarini
challenged the proposed payment to the Bank arguing that it amounted to a diversion under the
Lien Law. The establishment of the Trust Fund Account resolved Pavarini’s objection by
requiring Waterscape to hold enough money in trust to pay the trust fund beneficiaries while
allowing it to pay the balance of the proceeds to the Bank.
The funding of the Trust Fund Account did not, however, constitute payment to Pavarini
under the Plan. “Payment” refers to the “[p]erformance of an obligation by the delivery of
money or some other valuable thing accepted in partial or full discharge of the obligation.”
BLACK’ S LAW DICTIONARY 1243 (9th ed. 2009); accord WEBSTER’ S THIRD NEW I NTERNATIONAL
DICTIONARY (UNABRIDGED) 1659 (1981) (“the act of paying or giving compensation: the
discharge of a debt or an obligation”). The funding of the Trust Fund Account may have
discharged Waterscape’s Lien Law obligation to hold the hotel sale proceeds in trust, but it did
not discharge Waterscape’s obligation to pay Pavarini its Allowed Claim. Instead, the Plan
provided that all of the Class 3 claims were deemed disputed, and would not be paid until they
were determined by a Final Order. Waterscape’s argument that equates the funding of the Trust
Fund Account with the payment of a claim ignores the terms of its own Plan.
Nor is Pavarini judicially estopped from arguing that the funding of the Trust Fund
Account constituted the Final Payment under the CMA. “Judicial estoppel is designed to prevent
a party who plays fast and loose with the courts from gaining [an] unfair advantage through the
deliberate adoption of inconsistent positions in successive suits.” Wight v. BankAmerica Corp,
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219 F.3d 79, 89 (2d Cir. 2000); accord Zedner v. United States, 547 U.S. 489, 504 (2006); New
Hampshire v. Maine, 532 U.S. 742, 749 (2001); Bates v. Long Island R.R. Co., 997 F.2d 1028,
1037 (2d Cir. 1993), cert. denied, 510 U.S. 992 (1993). The doctrine is intended “to preserve the
sanctity of the oath by demanding absolute truth and consistency in all sworn positions,” and
“protect judicial integrity by avoiding the risk of inconsistent results in the two proceedings.”
Bates, 997 F.2d at 1037-38.
The application of judicial estoppel is discretionary, and three factors generally inform
the Court’s discretion. First, the party’s position must be “clearly inconsistent with its earlier
position;” second, the party must have “succeeded in persuading a court to accept that party's
earlier position;” and third, “the party seeking to assert an inconsistent position would derive an
unfair advantage or impose an unfair detriment on the opposing party if not estopped.” New
Hampshire v. Maine, 532 U.S. at 750-51; accord Zedner v. United States, 547 U.S. at 504; see
Uzdavines v. Weeks Marine, Inc., 418 F.3d 138, 148 (2d Cir. 2005). The Second Circuit has
taken a fairly narrow view of the doctrine, stating that judicial estoppel is limited “to situations
where the risk of inconsistent results with its impact on judicial integrity is certain.” Uzdavines
v. Weeks Marine, Inc., 418 F.3d at 148 (quoting Simon v. Safelite Glass Corp., 128 F.3d 68, 72
(2d Cir. 1997)).
The earlier proceedings on which Waterscape bases its judicial estoppel argument
pertained to Waterscape’s motion to move the Trust Fund Account to another bank. After the
Trust Fund Account was funded, Waterscape, the Bank, Pavarini, John Civetta & Sons, Inc. (a
subcontractor), and Troutman Sanders, Waterscape’s counsel, entered into an escrow agreement
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(the “Escrow Agreement”).6 Troutman Sanders agreed to act as the escrow agent for the Trust
Fund Account and maintain the escrow at either JP Morgan Chase Bank or Capital One Bank.
(Escrow Agreement at ¶ 1.) The Escrow Agreement could only be modified in a writing signed
by all of the parties. (Id. at ¶ 5(b).)
Several months later, Waterscape wanted to transfer the escrowed funds to another bank
as part of an effort to cement a new banking relationship. (See Escrow Motion at ¶ 7.) Pavarini
objected. (See Objection of Pavarini McGovern, LLC to Debtor’s Motion for Authority to
Modify the Class 3 Creditors’ Trust Fund Reserve Account Created Pursuant to the Debtor’s
Confirmed Plan and to Transfer Funds Therein to a New Depository Bank, dated June 14, 2012
(“Escrow Opposition”) (ECF Doc. # 363).) It argued that the escrowed funds were not
Waterscape’s to use for its personal benefit such as to enhance a banking relationship with a
different bank. (See id. at ¶ 3.) Rather, the money belonged to the Class 3 claimants and
Waterscape had no vested interest in the funds beyond the bare legal title held by a trustee. (Id.
at ¶ 7.)
The Court denied the Escrow Motion from the bench on June 26, 2012. (Order Denying
Debtor’s Motion for Authority to Change Depository Bank for the Trust Fund Reserve Account
Created Pursuant to the Debtor’s Confirmed Plan, dated July 17, 2012 (ECF Doc. # 374).)
Although no transcript is available, Waterscape’s counsel stated in an email sent shortly after the
hearing that the Court denied the motion because “the issue raised by the motion is governed by
6 	A copy of the Escrow Agreement is annexed as Exhibit B to the Debtor’s Motion for Authority to Change
Depository Bank for the Trust Fund Reserve Account Created Pursuant to the Debtor’s Confirmed Plan, dated Jan.
31, 2012 (“Escrow Motion”) (ECF Doc. # 362).)
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the parties’ escrow agreement and not a matter for the Court’s intervention.” (Email from Lee W.
Stremba, Esq. to the Court, dated July 17, 2012, 4:49 P.M. (ECF Doc. # 373).)
Judicial estoppel does not apply to Pavarini’s current position for two reasons. First, the
Court did not adopt the arguments asserted by Pavarini. Instead, it declined to intervene in an
effort by one party to modify a contract over the objection of another party where the contract
stated that it could only be modified in a writing signed by all of the parties. Second, the
position that Pavarini now takes is not “clearly inconsistent” with the one it took in opposing the
Escrow Motion. During the earlier proceedings, Pavarini argued that it was a beneficiary of the
Trust Fund Account, and Waterscape held no more than bare legal title. Its position comported
with well-settled law under Article 3-A of the Lien Law as well as trust law that the trustee has
no property interest in the trust funds beyond bare legal title, and equitable title resides in the
unpaid beneficiaries. Prior Decision, 483 B.R. at 611 (“The trustee holds bare legal title to the
trust funds, and an equitable interest vests in the balance of the trust funds only after all trust
claims have been satisfied.”); Coyne Elec. Contractors, Inc. v. United States (In re Coyne Elec.
Contractors, Inc.), 244 B.R. 245, 253 (Bankr. S.D.N.Y. 2000) (The money “owed JIB represents
Lien Law trust funds, equitable ownership of those funds resides in JIB as a Lien Law
beneficiary, and the debtor holds, at best, bare legal title.”); see RESTATEMENT (THIRD) OF
TRUSTS § 42, cmt. a (2003). Pavarini never argued during the Escrow Motion that the funding of
the Trust Fund Account constituted payment to the trust fund beneficiaries.
Finally, Pavarini does not have to await judicial review of the Final Accounting before it
can get paid. As Waterscape conceded at oral argument, Pavarini is entitled to payment now
under the unambiguous terms of the CMA. Instead, it argues that Pavarini’s right to payment
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under the CMA was modified by the Plan. 7 Quite the opposite, the modifications to the Plan
were designed to preserve Pavarini’s contractual right to payment in accordance with the terms
of the CMA, not change them. The CMA unambiguously requires Waterscape to pay Pavarini
upon the conclusion of the DRB proceedings and prior to any judicial review. The DRB’s Final
Accounting constitutes the Final Order under the Plan just as it would if no bankruptcy had ever
been filed, and the Allowed Amount of Pavarini’s Class 3 claim is the amount fixed by the DRB.
Furthermore, Waterscape cannot challenge the DRB resolutions until it pays Pavarini’s allowed
claim and waits 60 days.
Waterscape’s dismay with the CMA’s “pay first” principle is understandable. It contends
that the DRB got it wrong, (Affirmation of Richard Migliaccio, Esq. in Objection to the Motion
by Pavarini McGovern, LLC to Enforce the Dispute Resolution Board’s Final Decision and
Direct Payment of Pavarini McGovern, LLC’s Class 3 Claim, filed Mar. 27, 2014, Ex. 1 (ECF
Doc. # 565), and fears that if it successfully challenges the DRB’s resolutions, it will have to
chase Pavarini for a refund of the Final Payment. Nevertheless, this is the bargain the parties
made, and the Court’s duty is to enforce it according to its terms.
Accordingly, the Escrow Agent is directed to pay to Pavarini from the Trust Fund
Account the sum of $8,093,655.92 plus interest at the annual rate of 15% on the principal
balance of $5,160,130.00 accruing from March 11, 2014 to the date of payment. If the Trust
Fund Account does not have sufficient monies to satisfy Pavarini’s allowed claim, Waterscape is
7 	Waterscape also relied on language in the Prior Decision stating that a Class 3 claim would be paid when it
was “finally resolved.” (Waterscape Opposition at ¶ 13) (quoting Prior Decision, 483 B.R. at 608). The language is
taken out of context. It was describing in general terms when Class 3 claims would be paid, and cited section 4.3(c)
of the Plan which contains the Final Order requirement. The phrase “finally resolved” was intended as a short hand
reference to the requirement of a Final Order, and did not decide that Pavarini could not be paid until a court of
competent jurisdiction determine the amount of its allowed claim. That issue was not before the Court.
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directed to pay the difference to Pavarini from “the Secured Claim Reserve Account, new
financing, and general funds of the Debtor.” (Plan at § 4.3(c).)
Settle order on notice.
Dated: New York, New York
April 9, 2014
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge
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