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Reliance Insurance Co. v. Lott Group

July 06, 2004


On appeal from the Superior Court of New Jersey, Burlington County, Docket No. BUR-L-00255-95.

Before Judges Newman, Parrillo and Hoens.

The opinion of the court was delivered by: Hoens, J.A.D.


Argued November 17, 2003

Defendant Steven Cucinotti appeals from an order granting summary judgment in favor of plaintiff Reliance Insurance Company. The order appealed from entered judgment in favor of Reliance and against Cucinotti individually in the amount of $331,943.68 together with interest and costs, based upon the trial judge's determination that Cucinotti was subject to and in violation of the New Jersey Construction Trust Fund Act. See N.J.S.A. 2A:44-148. Because this appeal raises issues of first impression, we address the contentions of the parties at some length.

The facts on which the claims are based are not disputed. The Lott Group, Inc. was a general contractor which, at all times relevant, engaged in business as a general and electrical contractor on public projects. From 1991 through late 1992, plaintiff Reliance issued payment and performance bonds on Lott's behalf in favor of each of the public entities with whom Lott had entered into contracts. As is required for public projects, the bonds ensure both the completion, or performance, of the work and payment to laborers, materialmen and suppliers. See N.J.S.A. 2A:44-143.

In October 1990, Frank W. Lott IV, both personally and in his capacity as the chief executive officer of Lott Group, Inc. and Lott Holdings, Inc., together with Lance C. Lott, Susan Lott and Denise Lott, executed a continuing Indemnity Agreement in favor of Reliance in partial consideration for issuance of the bonds. Included in that agreement was the Sixth Paragraph, which impressed a trust upon all contract funds in favor of Reliance. That paragraph of the Indemnity Agreement provided, in relevant part, as follows:

SIXTH: That the entire contract price of any contract referred to in a Bond or Bonds, whether in the possession of the Undersigned or another, shall be and hereby is impressed with a trust in favor of Surety for the payment of obligations incurred for labor, materials and services in the performance of the contract work for which Surety would be liable under such Bond or Bonds and for the purpose of satisfying the conditions of the Bond executed in connection with the contract.

Following execution of the Indemnity Agreement, Reliance began to issue payment and performance bonds requested by Lott for its work on public projects. Contracts for work by the Lott corporations on three such projects are relevant to the issues before us. They are: (1) the 1991 contract between Lott and R.M. Shoemaker for electrical work on the construction of the Monmouth County Correctional Facility (Shoemaker contract); (2) the 1992 contract between Lott and Trenton State College relating to construction of a music building (Trenton State contract); and (3) a 1991 contract with the United States Coast Guard (Coast Guard Contract).

Late in 1992, the Lott corporations began to experience financial difficulties and began to fall behind in payments they were required to make for labor, material and other costs attributable to the three bonded projects. As a result, individuals and entities that had furnished labor, materials or supplies for the projects and to whom payment was outstanding began to make claims upon Reliance pursuant to the terms of the bonds. In addition, Frank Lott, recognizing that his company was in serious jeopardy of being declared in default*fn1 under the bonds, contacted Reliance in an effort to secure assistance in meeting his obligations. As a result, Reliance began paying claims and agreed to provide Lott with a cash infusion in order that his companies could meet their general payroll obligations.

At about the same time as the claims were beginning to be filed with Reliance and while he was requesting financial assistance from Reliance, Frank Lott retained the services of Steven Cucinotti, a consultant. Lott and Cucinotti had known each other for many years, having first met at a time when Lott was starting his business and Cucinotti was part owner and operator of an electrical supply and distribution company. The two had remained friends since that time. At all times relevant, Cucinotti was the president and majority shareholder of a Delaware corporation, Developmental Resources Group, Inc. (DRG), and of its wholly owned subsidiary, Frazier Development Company. DRG, according to Cucinotti, was a management company which performed consulting work for troubled businesses and Frazier Development Company was a construction company.

When Cucinotti was retained, Lott was facing the termination by his bank of a $1.5 million line of credit because of his financial difficulties. As a result, Frank Lott contacted Cucinotti to elicit Cucinotti's help in resolving Lott's financial problems in general or in replacing the line of credit. Cucinotti advised Lott to immediately draw down the $800,000 then remaining on the line and to deposit it into a new account at a different bank in order to create a secure fund to use as working capital. In January 1993, Lott contacted Cucinotti to advise him that the line had been closed, apparently before he had been able to transfer the funds, and to tell Cucinotti that he was unable to collect approximately two to three million dollars in payments owed to him for work performed on a variety of projects,*fn2 which was significantly compromising the cash flow of the business.

Lott then entered into a general consulting agreement with DRG, the business entity of which Cucinotti was the majority, if not the sole, owner and president. Pursuant to their agreement, Cucinotti would assist Lott in devising a way to address his financial crisis so that Lott would be able to complete all of his unfinished construction projects, if possible, while at the same time minimizing Lott's personal exposure to Reliance and to other bonding companies under the continuing indemnity agreements.

Cucinotti was aware that all of the construction projects in which Lott and his company were involved were publicly-funded projects and that all of the payments Lott received were public monies, including all of the funds generated by the contracts for which Reliance had posted bonds. In fact, as a part of the consulting agreement with Lott, Cucinotti reviewed the status of all of the on-going projects, analyzed the financial records of the Lott Group and became familiar with the payment history on all of Lott's projects, including the Shoemaker and Trenton State contracts.

Cucinotti was also aware that, in spite of his advice to the contrary, Lott had contacted Reliance to elicit its assistance. As a part of his consulting services, Cucinotti attended and participated in several meetings during which Lott and representatives of Reliance discussed the bonded projects, the status of payments to Lott, the outstanding obligations Lott owed in connection with those projects and the indemnity agreements that Lott and his family members had executed in their personal capacities. Cucinotti was aware that Reliance had ...

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