RLI Ins. Co. v. N.Y. State Dep’t of Labor, 97 N.Y.2d 256 (2002)
A surety that completes a public improvement project and pays all trust beneficiaries is equitably subrogated to the rights of the owner and beneficiaries, giving it priority over the Department of Labor’s cross-withholding for wage violations on an unrelated project, up to the amount of the surety’s expenses.
Summary
RLI Insurance Company, as a surety, completed a school renovation project after the original contractor defaulted and paid all subcontractors and suppliers. The Department of Labor (DOL) sought to cross-withhold funds due under this project to satisfy wage violations by the contractor on a prior, unrelated project. The New York Court of Appeals held that RLI, as surety, had superior rights to the remaining project funds under the principles of equitable subrogation and Lien Law Article 3-A, because it completed the project and paid all trust beneficiaries. This prevents the diversion of funds intended for the completed project.
Facts
D.C. White Company Inc. contracted with the Queensbury Union Free School District for renovations (the Queensbury Project) and obtained performance and payment bonds from RLI. White defaulted, and the School District terminated the contract. RLI, as surety, completed the project, expending over $176,000 to do so and paying all Lien Law Article 3-A trust beneficiaries. The School District owed $135,250 for the completed work.
The DOL served the School District with a Notice of Withholding for $19,150.15 based on prevailing wage violations on the Queensbury Project and a Notice of Cross-Withholding for $27,000.23 based on wage violations on a prior, unrelated “Albany Project.” The School District released $89,099.62 to RLI but withheld the balance per DOL’s directives.
Procedural History
RLI initiated a CPLR Article 78 proceeding to compel DOL to withdraw its Notice of Cross-Withholding and to prevent the School District from releasing funds to DOL under that notice. The Supreme Court denied the petition, prioritizing DOL’s claim. The Appellate Division affirmed, reasoning that Labor Law § 220-b(2)(a)(1) intends to allow DOL to seize funds from any public entity holding funds owed to a contractor with wage violations, regardless of the project. The Court of Appeals granted leave to appeal.
Issue(s)
Whether a surety that completes a public improvement project and pays all trust beneficiaries has priority to remaining project funds over the Department of Labor’s cross-withholding of those funds to satisfy wage violations arising from an unrelated project.
Holding
Yes, because under equitable subrogation principles and Lien Law Article 3-A, a completing surety that has fully satisfied its obligations has a superior right to the remaining funds over DOL’s cross-withholding for violations on an unrelated project.
Court’s Reasoning
The Court reasoned that Lien Law Article 3-A creates a trust for funds received by a contractor for a public improvement, with the purpose of ensuring that those funds are used to pay for the costs of that improvement. These trust assets come into existence even before funds are “due or earned” by the contractor. Labor Law § 220-b(2)(a)(1) allows DOL to cross-withhold only from payments “due or earned,” meaning the Lien Law trust arises first.
The Court emphasized the comprehensive nature of Lien Law Article 3-A, which includes even unmatured rights to future payment as trust assets. Because DOL’s right to cross-withhold attaches only to payments “due or earned” by the contractor, the article 3-A trust, which can arise earlier, takes precedence.
The Court rejected DOL’s argument that RLI’s rights are limited to those of the contractor, explaining that RLI is equitably subrogated to the rights of both the owner and the trust beneficiaries, including laborers and materialmen. The court quoted Pearlman v. Reliance Ins. Co., 371 U.S. 132, 141 (1962): “the surety, having paid the laborers and materialmen, is entitled to the benefit of all these rights to the extent necessary to reimburse it.” Therefore, RLI’s rights are not limited to those of the defaulting contractor.
The Court distinguished City of New York v. Cross Bay Contr. Corp., 93 N.Y.2d 14 (1999), noting that in that case, the surety had not yet completed payment of all valid claims. Here, RLI fully performed its obligations and is not competing with a conceded article 3-A trust beneficiary. Public policy also favored RLI’s position because forcing sureties to pay for obligations they did not bond would increase costs on public improvement projects.
The Court concluded that the DOL’s right to *file* notices of withholding and cross-withholding remains intact. However, in this case, the balance due under the contract was less than the amount RLI expended to complete its obligations. Thus, RLI is entitled to vacatur of the cross-withholding.