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INGALLS IRON WORKS CO. v. FEHLHABER CORP.

January 13, 1972

The INGALLS IRON WORKS COMPANY, a corporation, Plaintiff,
v.
FEHLHABER CORPORATION, a corporation, et al., Defendants


Pollack, District Judge.


The opinion of the court was delivered by: POLLACK

POLLACK, District Judge.

This motion seeks recovery of attorneys' fees from the proceeds of a New York State Court of Claims judgment in favor of the Fehlhaber-Terry joint venture (Fehlhaber), the general contractor for a section of the Gowanus Expressway construction project. Fehlhaber sued the State for the value of additional work ordered for the project and certain expenses. This Court has previously ruled that Fehlhaber holds all funds received in connection with this project as the trustee of the statutory trust thereof created by N.Y. Lien Law Art. 3-A (McKinney 1966). Ingalls Iron Works Company v. Fehlhaber Corporation, 327 F. Supp. 272 (S.D.N.Y. 1971).

 The law firm of Jarvis & Pilz represented Fehlhaber in the Court of Claims litigation; its fee was set by agreement at 20% of any award, plus disbursements. The Court of Claims awarded Fehlhaber $574,428 for the additional work and expenses, *fn1" Fehlhaber Corp. v. State of N.Y., 63 Misc. 2d 298, 312 N.Y.S. 2d 123 (Ct. Cl. 1970), modified, 64 Misc. 2d 167, 314 N.Y.S. 2d 574 (Ct. Cl. 1970) (correcting erroneous award of interest), and although the State appealed the major part of the determination, it chose not to appeal a portion of the judgment on which the award totalled $101,821. Warrants for this amount were transmitted to Fehlhaber's attorneys, who, in October, 1971, transferred them to Fehlhaber. It is on the amount derived from these warrants that the attorneys claim a lien, N.Y. Judiciary Law § 475 (McKinney 1968), which they ask this Court to allow in an amount of approximately $21,212. *fn2"

 An order of this Court, dated October 13, 1970, restrained diversion or distribution of any of the trust assets including the proceeds of the claim against the State; any monies derived therefrom were to be held by Fehlhaber subject to this Court's exclusive control. The order included a provision that "Payment may be made on account of the Attorneys Lien of Jarvis & Pilz for fees and disbursements, upon notice to the parties hereto and on Order of the Court therefor." *fn3"

 Ingalls Iron Works Co., as a representative of the class of potential beneficiaries, successfully sought enforcement against the general contractors of the Lien Law statutory trust, Lien Law § 77 (1); it now contends that the moving parties are not entitled to assert an attorney's lien and to be paid out of the proceeds of the Court of Claims recovery. Ingalls argues that the requirements in Lien Law § 71(2) (a-e) that trust beneficiaries' claims must be satisfied before trust assets are used for any other purpose necessitates subordination of the attorney's lien, *fn4" that the trust beneficiaries' claims are senior because they were prior in time to any lien the attorneys can claim, and that the attorneys waived any lien they might otherwise have had by delivering the warrants to Fehlhaber. Finally, Ingalls requests that, in the event the lien is allowed, an alleged right of the trust beneficiaries to surcharge Fehlhaber for a diversion of trust assets be preserved.

 The question at issue is whether payment of compensation for services and expenses to the attorneys of a general contractor out of the proceeds of a judgment which the attorneys have recovered for work done by the general contractor on a state contract is inconsistent with the contractor's statutory duty as Lien Law trustee to preserve and account for the trust fund. New York law controls resolution of this question. In re McCrory Stores Corp., 19 F. Supp. 691, 693 (S.D.N.Y. 1937).

 There is no dispute that the moving attorneys were employed by Fehlhaber and that they rendered the services which led to realization of the trust asset represented by Fehlhaber's right of action against the State. Lien Law § 70(1). The amount to be paid to Fehlhaber may reach as much as $710,000, after conclusion of the appeal proceedings mentioned above, supra n. 1. Meanwhile, as stated, $101,821. has been collected enhancing the fund (subject to proper expenses of collection) out of which the trust beneficiaries may seek satisfaction of their claims. The suit against the State was undeniably necessary and clearly for the benefit of the class protected by the Lien Law and in reality in the nature of a class claim.

 The language of the Lien Law, previous decisions interpreting that statute, equitable principles, and the realities of the statutory scheme all make it clear that the attorney's lien is entitled to satisfaction out of the monies received on the award of the Court of Claims and made available to the trust. *fn5"

 The statutory trust provisions do not per se override the lien of an attorney on a recovery which his services have effected. The Court of Appeals has indicated in dicta that attorney's fees may be allowed out of the fund created by the suit of the general contractor as representative of the class of trust beneficiaries, Caristo Construction Corp. v. Diners Financial Corp., 21 N.Y. 2d 507, 515, 289 N.Y.S. 2d 175, 236 N.E. 2d 461 (1968) (Breitel, J.) (no fees allowed since general contractor had paid all claims and thus the action could not be classified as representative); Walker Process Equipment, Inc. v.A.C. Kaestner, Inc., (Sup. Ct. Westch. County) 164 N.Y.L.J. No. 68 at 20 (issue of Oct. 6, 1970) held on the basis of Caristo that "attorneys fees are a proper charge against the fund" created by a suit brought by one of the trust beneficiaries to enforce the trust. *fn6"

 The fact that Fehlhaber's action was not in technical terms asserted to be brought in its capacity as statutory trustee does not affect its fundamental character nor the propriety of allowing attorney's fees to be charged against the recovery.

 The purpose of the statutory trust mechanism is to safeguard the rights of persons participating in a construction project by requiring that a contractor or subcontractor act "as fiduciary manager of the fixed amounts provided for [construction] operations." See 1959 Report of N.Y. Law Rev. Comm. at 214, quoted in Frontier Excavating, Inc. v. Sovereign Construction Co., 30 A.D. 2d 487, 489, 294 N.Y.S. 2d 994, 997 (4th Dept. 1968), appeal denied, 24 N.Y. 2d 991, 302 N.Y.S. 2d 820, 250 N.E. 2d 228 (1969). Aquilino v. United States, supra, n. 5, emphasizes that in its essentials a contractor's trust resembles any other trust relationship. 10 N.Y. 2d 271, 280-281, 219 N.Y.S. 2d 254, 176 N.E. 2d 826.

 Nor does Aquilino directly foreclose recognition of the attorney's lien, as Ingalls argues. The Court of Appeals there held that the funds received by a general contractor did not constitute "property" or "rights to property", Int. Rev. Code of 1954 § 6321, to which a prior federal tax lien could attach, *fn7" since such funds were held by the contractor as trustee until all claims were satisfied. In the course of its opinion the Court stated that "There is no good reason to suppose that the Legislature, by declaring payments to a contractor to be 'trust funds', did not intend thereby to avoid the very same possibilities of harm to the statutory beneficiaries as was intended by the rule against diversion of the funds of an express trust." Id. at 279, 219 N.Y.S. 2d at 260, 176 N.E. 2d at 831 (emphasis added).

 New York recognizes the right of a trustee's attorney to recover for services for a trustee creating a fund for trust beneficiaries *fn8" and the right of the trustee himself to charge the fund for the amount of legal expenses incurred in the trust's interest. Woodruff v. New York, L.E. & W. Ry., 129 N.Y. 27, 29 N.E. 251 (1891), *fn9" III A. Scott, Trusts § 188.4. Neither expenditure is regarded as a diversion or as wrongfully harmful to the interest of the beneficiaries. *fn10"

 The fund received from the Court of Claims must be devoted to payment of trust claimants until all claims are satisfied; this fact alone denudes plaintiffs' charge of unfairness of much of its force. *fn11" Moreover, there is no chance of the contractor being unjustly enriched by allowing the fund recovered to be surcharged for attorney's ...


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