The opinion of the court was delivered by: POLLACK
Jurisdiction herein is based on diversity of citizenship and requisite amount in controversy.
This litigation results from a series of commercial transactions connected with the construction of a section of the Gowanus Expressway in Brooklyn, New York, hereafter called the "Gowanus Job". What began as an innocent sale of structural steel by the plaintiff to the project, evolved into a very complex controversy that has festered and dragged on for more than a decade. After numerous negotiations and agreements spanning several years, the parties proceeded to a variety of litigation in the state and federal courts. Until now, none of these have resulted in complete satisfaction to the plaintiff for the materials supplied. The extended submissions to this Court make it understandable why Chief Judge Foley stated at an earlier stage of this litigation "that it seems inconceivable so much case law and text discussion could arise from a simple factual base, namely, the supply of steel by the plaintiff manufacturersupplier to a highway improvement and construction job." Ingalls Iron Works Co. v. Fehlhaber Corp., 275 F. Supp. 623, 624 (N.D.N.Y. 1967).
Plaintiff, hereinafter called "Ingalls", is a corporation organized and existing under the laws of the State of Delaware, with its principal office and place of business at 620 Fourth Avenue South, Birmingham, Alabama. Plaintiff is and at all material times has been duly qualified to do business in the State of New York since November 4, 1931. Defendant Fehlhaber Corporation, hereinafter called "Fehlhaber", is a corporation organized and existing under the laws of the State of New York and has its principal place of business at New Rochelle, New York. Defendant Terry Contracting, Inc., hereinafter called "Terry", was "dissolved by proclamation" in December, 1969 for failure to pay its franchise tax, but it continues to exist as a corporation organized and existing under the laws of the State of New York for the purposes of this civil action; it formerly had its principal office and place of business at 11-11 34th Avenue, Long Island City, New York. Defendant Fehlhaber-Terry, a joint venture, hereinafter called the "Joint Venture", was formed in 1960 by Fehlhaber and Terry to undertake the Gowanus project and continues to exist for the purposes of this civil action. Terry had done business with Ingalls prior to 1960.
Also named as defendants originally were two bonding companies, Aetna Casualty and Surety Company (Aetna), American Employers Insurance Company (American Employers), and X, Y, and Z, transferees of funds allegedly due plaintiff. These bonding companies are no longer before the Court. There has been no identification herein of X, Y and Z.
Ingalls brought this action in the United States District Court for the Northern District of New York in 1965.
The complaint alleged three counts. As we shall see, the third was dismissed before trial and the remaining two were tried. The first and most vigorously prosecuted one is for enforcement of a New York statutory trust. The complaint asserts that the Joint Venture entered into a construction contract with the State of New York for the construction of a public highway improvement; that Terry on behalf of the Joint Venture arranged for the purchase from the plaintiff of designated structural steel items; that a trust relationship arose by virtue of Article 3-A of the Lien Law of the State of New York, §§ 70 et seq., wherein the Joint Venture and its members as the "contractor" on the Gowanus Job were statutory cotrustees and the plaintiff was a statutory beneficiary.
The second count, premised on the same allegations as the first, is for enforcement of an express trust established, allegedly for plaintiff's benefit, by the Joint Venture agreement.
The third count, again based upon the same allegations, was for breach of labor and material bonds given by Aetna and American Employers to Fehlhaber, Terry, and the Joint Venture guaranteeing prompt payment due to all persons supplying the contractor on the Gowanus Job or a subcontractor with labor and materials employed and used in carrying out the contract.
The complaint seeks in substance, to compel an accounting by the various defendants named herein; to identify and recover trust assets; to set aside any unauthorized payments, assignments or other transfers of trust funds; to enjoin further diversions of trust assets by Fehlhaber or Terry; and to recover damages for breaches of trust. The complaint also seeks to fix the amount of plaintiff's trust claim at $1,601,377.62 and demands a judgment therefor against the defendants in said sum with interest from November 28, 1960.
The defendants Fehlhaber and the Joint Venture denied liability and asserted the bar of the statute of limitations as a further defense. Additionally, these defendants counterclaimed against plaintiff for damages for wrongful filing of spurious liens alleged to have occasioned harm to the said defendants.
The said defendants asserted a cross-claim against defendant Terry for judgment over against it in the event that any judgment is obtained against them since, they say, their liability could arise only out of Terry's violations of the Joint Venture Agreement.
Defendant Terry appeared and filed an answer to the complaint (not to the cross-claim), but presently is in default. Terry did not appear and was not represented at the trial.
Summary judgment dismissing the complaint as to all defendants except Terry was requested in the early stages of the litigation. Judge Foley granted summary judgment as to the third count, enforcement of the labor and material bonds, since the applicable New York law required allegation and proof of the filing and enforcement of a mechanics lien as a condition precedent. 275 F. Supp. at 628. This Ingalls could not do. See Ingalls Iron Works Co. v. Fehlhaber Corp., 24 N.Y. 2d 862, 301 N.Y.S. 2d 95, 248 N.E. 2d 923 (1969), aff'g, 29 A.D. 2d 29, 285 N.Y.S. 2d 369 (1967).
Judge Foley refused to grant summary judgment to the defendants as to the rest of the complaint on the ground that there were many issues of fact in a confused situation which must be resolved in order to deal with the complicated questions of law. 275 F. Supp. at 627. Following this ruling, and in October 1967, the defendants Fehlhaber and the Joint Venture moved for change of venue of the action, to transfer the suit from the Northern District to this District pursuant to 28 U.S.C. § 1404(a). The motion was granted on April 3, 1968 and in this District, because of the complexity of the suit, it was assigned, pursuant to local Calendar Rule 2, to one judge for all purposes.
The events here began innocently enough when the State of New York decided to do a number of improvements on the Gowanus Expressway in Brooklyn for which substantial construction contracts would be let. Terry's president, Richard Terker, approached Fehlhaber's chief engineer, Samuel Winterberg, about bidding jointly on one of the contracts. The two firms would be complementary in the contemplated work of foundation strengthening and viaduct widening. At that time, Terry was recognized as one of the best steel erection concerns in the New York area and Fehlhaber specialized in heavy foundation construction work. Fehlhaber and Terry had never collaborated and as it turned out never did again.
On January 27, 1960, Fehlhaber and Terry signed a "Prebidding and Joint Venture Agreement" under which they agreed to prepare and submit jointly a bid for contracts F.I.G.E. 60-2 and F.I.G.E. 60-3 relating to the Gowanus Expressway improvements. Under the agreement, the parties constituted themselves as joint venturers for, and only for, the performance of the Gowanus Expressway contract awarded to them.
On March 17, 1960, the Joint Venture formally submitted a bid to the State of New York for contract F.I.G.E. 60-2, approximately eight-tenths of a mile of expressway, from 20th Street to 36th Street along Third Avenue in Brooklyn. In order to prepare its bid, the Joint Venture had asked for a number of price alternatives from prospective subcontractors and materialmen including Ingalls. On March 21, 1960, a letter of intent was sent on behalf of the Joint Venture to Ingalls specifying prices and quantities of steel which the Joint Venture intended to order when the Joint Venture received the award of a formal contract by the State of New York. On March 25th Ingalls addressed an acknowledgment of the letter of intent to the Joint Venture, referring to the letter as an award contingent upon the receipt of the formal contract. On March 30th Ingalls confirmed to the Joint Venture the standard terms applicable to the order reciting that the full contract price of the materials would be due and payable on the tenth of the month following shipments.
The contract with the State for a total amount in excess of $11-million was formally awarded to the Joint Venture on April 8, 1960, and a formal agreement entered into. The Joint Venture thus became the "contractor" on the Job.
A formal joint venture agreement superseding the earlier "Prebidding and Joint Venture Agreement" was signed on May 10, 1960. The Joint Venture leased offices and began work on the project.
By an arrangement made between themselves and contained in the Joint Venture Agreement, the joint venturers allocated the work being undertaken in the name of the Joint Venture. Fehlhaber assumed responsibility for certain aspects of the Job, such as the pipe for piling, while Terry assumed responsibility for other items, such as the procurement and installation of the structural steel. Following this out, when payment requisitions submitted to the State produced payments to the Joint Venture for materials supplied, the Joint Venture was to deposit the money in a Joint Venture account and was required then to make payment to Terry or to Fehlhaber as the case might be so that the venturer supervising the particular supplier would then receive payment from that venturer. These arrangements of the venturers inter sese were not communicated to Ingalls in connection with the order for the steel. Moreover, as we shall see later, such arrangements are in derogation of the purposes and objects of the Lien Law.
The steel was sold to the State of New York, F.O.B. Ingalls' fabricating plants in Alabama and Pennsylvania. It was then to be shipped to the Job in New York City consigned to the State of New York, c/o Terry Contracting, Inc. Three million dollars of steel was involved in the Job.
Beginning in July 1960 there were numerous communications between the parties about the method of payment for the steel being furnished. Ingalls, of course, preferred to be paid as soon as possible. Terry (as was later to become obvious) had neither the capital nor access to credit to pay Ingalls such enormous sums prior to receiving payment from the State.
Some time prior to September 1960, discussions took place between Ingalls and representatives of Terry relative to obtaining progress payments from the State of New York as soon as steel for this Job was delivered from the mills to Ingalls' fabricating plants. On Joint Venture letterhead, a communication was addressed to the State's Supervisory Engineers, Madigan-Hyland, listing items of steel totalling more than $308,000 invoiced by Ingalls to Terry as having been delivered from the mills to the fabricating shop and requesting payment on the ground that "under the terms of the specifications, payment will be made under these items for the furnishing of such materials and delivering to the shop for fabrication".
On October 4, 1960, Madigan-Hyland wrote to the New York State Department of Public Works advising it of the request for payment for steel delivered to the fabricating shop and quoting the specifications and interpreting them to mean that payment would be made as the material was delivered to the shop for fabrication.
On November 29, 1960, the State Department of Public Works wrote Madigan-Hyland its decision that partial payment would be made to the contractor upon delivery of steel to the shop for fabrication. On November 30, 1960, the Joint Venture was notified that items delivered to the Ingalls' fabricating shop would be included in the estimate submitted to the State for payments and that "it will be necessary for us to receive detailed receipted bills furnished by your [the Joint Venture's] supplier".
On December 8, 1960 Ingalls having been notified of the contents of Madigan-Hyland's November 30th letter stated that in order for Ingalls to furnish receipted copies of invoices Terry should furnish it first with letters acknowledging that marking "Payment Received" on the invoices and passing of title to the steel would be "subject to the condition subsequent that payment should be made by us to you for said steel within a reasonable time". In response to this, on December 22, 1960, Ingalls received a telegram from the project engineer of Terry acknowledging that Ingalls' invoices to Terry for material although stamped paid in full were in fact not paid; that the stamp was applied only for the convenience of expediting partial payments and that the only evidence of payment would be canceled checks referring to the subject invoices.
Ingalls then submitted five receipted invoices totalling $638,776.59 and other receipted invoices were similarly sent from time to time thereafter. These invoices were transmitted to Madigan-Hyland for inclusion in estimates to the State, the letter of transmittal in each case being on Joint Venture letterhead and signed for the Joint Venture by Bernard Lippe, the project engineer.
Madigan-Hyland forwarded the estimates to the Department of Public Works with letters of transmittal containing the language that the estimates covered work performed by the contractor under the contract and enclosed paid invoices with mill invoices attached received from the contractor. Madigan-Hyland states that this material was included in the estimate in accordance with instructions of the Department of Public Works of November 29, 1960.
So far as the receipted invoices from Ingalls were concerned, it was clearly understood by the parties hereto that the steel was not yet shipped to the job site but was in Ingalls' plant for fabricating. Moreover, the invoices had not in fact been paid and the "paid in full" stamp was applied by Ingalls only for the convenience of procuring advance payments from the State. However, Fehlhaber assumed (incorrectly) that the money for the steel that was so obtained from the State by the Joint Venture and was then turned over to Terry was being paid by the latter to Ingalls and that the receipted invoices were being satisfied accordingly. The first such receipted invoices were issued on December 22, 1960. Ingalls expected to be paid 90% of the invoices' face amount (i.e., the full amount less the State's ten percent retention) by the middle of January 1961.
Unfortunately, Ingalls did not receive the money it expected in January. On January 17, 1961 Ingalls was told by Terry that no money had been received from the State relating to the steel furnished by Ingalls but that $105,000 was expected shortly; $105,669.31 was paid to Ingalls on January 31st. Terry told Ingalls that because of unexpected job expenses it had incurred, time and indulgence would be needed to pay further sums. Actually, Terry received nearly $500,000 on January 23, 1961 from the Joint Venture which was substantially for the Ingalls steel.
The total amount of the receipted invoices given by Ingalls appears to be approximately $919,700. The State of New York paid the Joint Venture a total of $827,793 (90% of $919,770) for the steel referred to in these receipted invoices.
The facts are that in 1961 Terry diverted in excess of $1,500,000 of the money it received from the Joint Venture; this was inclusive of the amounts represented by the receipted invoices payable to Ingalls. Terry was engaged on jobs other than the Gowanus project and diverted funds generated on one job to pay ...