UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
January 13, 1972
The INGALLS IRON WORKS COMPANY, a corporation, Plaintiff,
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,
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.
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."
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,
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.
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.
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,
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
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),
III A. Scott, Trusts § 188.4. Neither expenditure is regarded as a diversion or as wrongfully harmful to the interest of the beneficiaries.
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.
Moreover, there is no chance of the contractor being unjustly enriched by allowing the fund recovered to be surcharged for attorney's fees. Fehlhaber's conduct did not create the expense of collection of additional monies from the State.
More importantly, Fehlhaber has no right to any funds except in its status as residual beneficiary. To the extent that there is a surplus after all the outstanding trust claims have been satisfied, the attorney's fees reduce the surplus the contractor would otherwise obtain.
To the extent that the fund is insufficient to satisfy trust claims, either before or after subtraction of attorney's fees, all that has occurred is that the beneficiaries have borne the cost of creation of a fund for their benefit; it would be unduly harsh and grossly unfair to interpret the statute to require the contractor, as trustee, to bear the cost of recovering a judgment from the Court of Claims under such circumstances.
Baldwin Kitchen Cabinet Corp. v. Artz, 27 Misc. 2d 265, 209 N.Y.S. 2d 39 (Sup. Ct. Nassau County 1960), modified on other grounds, 15 A.D. 2d 560, 222 N.Y.S. 2d 950 (2d Dept. 1961), and Naiztat Iron Works v. Tri-Neck Construction Corp., 62 Misc. 2d 228, 308 N.Y.S. 2d 427 (Sup. Ct. Kings County 1970), cited by Ingalls, are distinguishable. In the former case, a prior mechanic's lien against the property owner had been filed and prevailed over the attorney's lien, and the mention of the statutory trust provisions was properly dictum.14 See 27 Misc. 2d at 266, 209 N.Y.S. 2d at 41 ("The lien of the subcontractor, however, had been filed one month earlier [than the attorney's lien arose] and takes precedence."). In the latter case, a contractor attempted to deduct the cost of administering the construction project itself from the amount shown by an accounting to be due to subcontractors. To extend the reach of these decisions to bar recovery of attorney's fees, -- the cost of producing a fund delivered to the trust -- out of monies which otherwise would not have been available to the trust at all, would run counter to the objectives of the Lien Law and the tenets of trust law generally.
Nor can Ingalls assert a temporal priority entitling it to the status of senior lienor. An attorney's lien attaches when the cause of action to which it relates is commenced, Judiciary Law § 475. In re City of New York (United States v. Coblentz), 5 N.Y. 2d 300, 306-307, 184 N.Y.S. 2d 585, 157 N.E. 2d 587 (1959), cert. denied, 363 U.S. 841, 80 S. Ct. 1606, 4 L. Ed. 2d 1726 (1960). The lien prevails over the claims of creditors of the attorney's client, Matter of Peters, 271 App. Div. 518, 521, 67 N.Y.S. 2d 305 (3d Dept. 1946), modified on other grounds, 296 N.Y. 974, 73 N.E. 2d 560 (1947), but does not supersede "a prior charge against the specific fund upon which the attorneys' lien has attached." Bacon v. Schlesinger, 171 App. Div. 503, 504, 157 N.Y.S. 649, 650 (1st Dept. 1916), aff'd mem., 224 N.Y. 690, 121 N.E. 854 (1918); see also In re Carver Houses, 114 N.Y.S. 2d 707, 709 (Sup. Ct. N.Y. County 1952); Baldwin Kitchen Cabinet Corp. v. Artz, supra, (prior mechanic's lien), In re Brooklyn Bridge Southwest Urban Renewal Project, 31 A.D. 2d 895, 297 N.Y.S.2d 835 (1st Dept. 1969) (lien of City of New York, unpaid rent).
The New York Courts have denied Ingalls' claim to a mechanic's lien on the ground that the lien filing was untimely, Ingalls Iron Works Co. v. Fehlhaber, Inc., 29 App. Div. 2d 29, 285 N.Y.S. 2d 369 (3d Dept. 1967), aff'd mem., 24 N.Y. 2d 862, 301 N.Y.S. 2d 95, 248 N.E. 2d 923 (1969). Ingalls' only status is as a trust beneficiary, and its assertion of temporal priority rests on the provision of § 71(5) of the Lien Law that "For the purposes of this article, every trust claim shall be deemed to be in existence from the time of the making of the contract . . . out of which the claim arises and . . . the rights of each member of the class of beneficiaries accrue [at the same time]."
Under New York law, a trust beneficiary does not acquire the additional status of a mechanic's lienor; instead "[he] becomes a beneficiary of a trust when one comes into being by virtue of a status created by law." Harman v. Fairview Associates, 25 N.Y. 2d 101, 105, 302 N.Y.S. 2d 791, 794, 250 N.E. 2d 209, 210 (1969). His claim is junior to that of one holding a mechanic's lien resulting from the same construction project, Onondaga Commercial Dry Wall Corp. v. 150 Clinton St., 25 N.Y. 2d 106, 302 N.Y.S. 2d 795, 250 N.E. 2d 211 (1969); Hall v. Blumberg, 26 A.D. 2d 64, 270 N.Y.S. 2d 539 (3d Dept. 1966). In Onondaga, the Court of Appeals commented that "it seems fairly clear that the trust provisions of the Lien Law . . . were intended to supplement and not to supersede the much older provisions dealing with the creation and enforcement of traditional mechanic's liens." 25 N.Y. 2d at 111, 302 N.Y.S. 2d at 798, 250 N.E. 2d at 213.
Although the holdings in Onondaga and Hall rested primarily upon § 79 of the Lien Law ("Nothing in this article shall prevent the enforcement of any lien as provided in articles two and three of this chapter and neither such lien nor any satisfaction obtained thereby, shall be deemed a diversion of trust assets or an unauthorized preference."), it is hard to adopt their view of the relationship of liens and trust claims to that urged by Ingalls. While an attorney's lien is not set forth in terms in either Article 2 or Article 3 of the Lien Law, it is of equal dignity with such liens. It is difficult for this Court to believe that the New York Courts would treat mechanic's liens and attorney's liens differently when a competing trust beneficiary is involved than when the liens were merely competing against one another for priority. It is worthy of note that in Onondaga the lienor was held to prevail although he would otherwise have been a trust beneficiary and his claim exhausted the monies otherwise available to the trust. Here, as discussed earlier, the attorneys' efforts have enlarged the fund. In effect, the claim of temporal priority is merely a restatement of Ingalls' view that payment of the attorneys is unfair or not in accord with the provisions of Article 3-A, a view rejected above.
For the reasons discussed, the Court cannot accept the contention that payment of the attorneys for their services is a diversion of trust assets, and there is no reason to postpone the issue of possible surcharge of Fehlhaber to an accounting proceeding that promises to be sufficiently complex and vigorously contested in its own right. No surcharge of Fehlhaber is justified by these facts; Caristo and Woodruff indicate, on the contrary, that if Fehlhaber were to pay the fees itself, it might claim a right to surcharge the fund to the extent that the monies recovered were paid to trust beneficiaries.
Ingalls' last argument is that a waiver of the attorney's lien has occurred. The purpose of the rule that an attorney's charging lien is waived if the attorney delivered the proceeds of the judgment to his client without exercising his lien is to avoid any misleading of third parties as to the status of the proceeds. Goodrich v. McDonald, 112 N.Y. 157, 19 N.E. 649 (1889). Here, all parties had notice of the claimed lien and the money was paid over to Fehlhaber in compliance with the Court's order of October 13, 1970. There has been no prejudice to third parties here. Matter of King, 168 N.Y. 53, 57-58, 60 N.E. 1054 (1901). Ingalls' arguments to the contrary are not consonant with requirements of good faith in the light of the facts of the previous proceedings and the negotiations which accompanied them, n. 3, supra.17
No one has seriously challenged the propriety of the twenty per cent figure claimed pursuant to the lien. The proof of the scope and extent of the services amply sustains the amount claimed. The sum is reasonable and is well within the range of what a New York Court would allow. See Walker Process Equipment, Inc. v. A.C. Kaestner, Inc., supra, (materialman's attorney allowed fee of 25%).
Settle order on notice in conformity with F.R. Civ. P. 54(a).