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PRECISION TESTING LABS., LTD. v. KENYON CORP. OF A

August 26, 1986

PRECISION TESTING LABORATORIES, LTD., a New York corporation, ASHER HIESIGER, d/b/a PRECISION TESTING LABORATORIES, ASHER HIESIGER, and ARTHUR ELLIS, Plaintiffs,
v.
KENYON CORPORATION OF AMERICA, a Colorado corporation, and LAWRENCE B. KENYON, Defendants



The opinion of the court was delivered by: COOPER

IRVING BEN COOPER, D.J.

Plaintiffs, two individuals and a corporation engaged in the business of developing emissions systems for foreign automobiles, bring this action pursuant to 28 U.S.C. § 1332 for damages based on breach of an alleged joint venture agreement. They name as defendants an individual and a corporation wholly owned by him engaged in the same business. The case was tried to the Court on February 10 to February 14 and was bifurcated (the issue of liability to be determined first, damages reserved pending our decision thereon). At the conclusion of the trial decision was reserved. Post trial memoranda were filed on April 8, 1986.

 FACTS

 Plaintiffs Hiesiger and Ellis and defendant Kenyon are all involved in the "gray market" automobile business. Through the "gray market" luxury imported automobiles may be purchased by consumers at prices substantially below retail prices offered by dealer of the manufacturers.

 Standards for vehicle pollution emissions are less stringent in Europe than they are here; (Tr. 27-38) *fn1" safety standards with respect to bumpers, door beams, headlights and door locks are different. (Tr. 36-37) Consequently, European manufacturers who export automobiles to the United States modify the cars in Europe with U.S. regulations. These modified automobiles are much more expensive than their Europena counterparts.

 An alternative means of selling luxury foreign automobiles is to import the vehicles before they have been conformed to U.S. standards and then have them converted in the U.S. to satisfy Department of Transportation ("DOT") and Environmental Protection Agency ("EPA") regulations. It was discovered that through this latter method, the automobiles could be manufactured as much lower prices than automobiles that are covered in Europe and sold by dealers in this country. The process of importing these European vehicles, converting in Europe and sold by dealers in this country. The process of importing these European vehicles, converting them in the U.S., and selling them here is what is known as the "gray market." (Tr. 13-14)

 There are two procedures for bringing a foreign automobile into compliance with U.S. standards. The first involves modification of one particular vehicle. The process works as follows: the nonconforming vehicle is purchased in Europe and transported to the U.S. At the U.S. Customs Port of Entry, the importer of record declares that the vehicle will be brought into compliance with safety and emissions regulations within 120 days and fills out various forms. The vehicle is them released to the importer of record who brings it to a compliance center where safety and emissions modifications are performed. The next stop of the automobile is the emissions test laboratory; the results of the tests determine whether the vehicle returns to the compliance center for more work, or whether it can be made available for use or sale. The automobiles must pass a 50,000 mile standard. (Tr. 56)

 At the same time as the automobile is following that path, massive paperwork is being processed by both the DOT and the EPA. Both of these organizations must review all the forms submitted to them, the EPA further reviews the results obtained by the emissions test laboratory. The DOT and EPA them each reject the automobile for failing to meet their requirements or approve it; in the case of the latter, a release letter is sent to Customs which issues a notice of duty liquidation and admits the vehicle into commerce in the U.S. (Ex. 3; Tr. 25-35, 38-58) The average time period from when the vehicle is first purchased in Europe until it is admitted into commerce is six months. (Tr. 48-49)

 The second method for bringing European automobiles into compliance with U.S. standards is called the Small Volume Manufacturers Certification Program. (Tr. 55) It was designed to benefit smaller European manufacturers who export less than 10,000 cars per year to the U.S. by lessening the onerous requirements for testing. Pursuant to the program, a manufacturer who imports less than 10,000 vehicles of one type per year for sale in this country and who agrees to abide by federal regulations and to pay certain taxes (Tr. 131) could have a prototype automobile tested by a 4,000 mile standard instead of a 50,000 mile standard. The emissions laboratory projects the emission levels of the car at 50,000 miles based on the emission levels at 4,000 miles. (Tr. 56-57) If the manufacturer has been designated a member of Small Volume Manufacturers Program and if the prototype vehicle passes the 4,000 mile test, the manufacturer is empowered to modify nonconforming vehicles without the necessity of any further emissions test; each individual vehicle need not be separately tested for emission levels. (Tr. 59) If the vehicle passes, the small volume manufacturer is granted a license to place his system on all similar nonconforming cars. (Tr. 133) In short, this method of conforming automobiles is much more than efficient and economical.

 Plaintiff Hiesiger is a New York attorney who has been working as a real estate investor since the 1950's. (Tr. 10-11) In 1982, he turned some of his efforts toward the business of importing foreign automobiles through the gray market. (Tr. 12) Early that year he invested $50,000 in purchasing five Porsche automobiles which were each individually modified and sold. (Tr. 15) In late 1982 and early 1983 he considered getting involved in a project to import the Volkswagen Beetle from Mexico. In connection with those plans, a prototype vehicle was brought to New York and arrangements were made for Hiesiger to meet the person in charge of the certification program, defendant Kenyon. (Tr. 67-68)

 Kenyon, once a motor vehicle mechanic, formed defendant Kenyon Corporation of America ("KCA") sometime in 1981-82 (exact date unspecified) in order to conduct engineering and compliance work on European vehicles imported into the U.S. (Tr. 749) Beginning in 1982, Kenyon worked with an engineer named Clause Liphardt on developing an emissions control system that would replicate the work done by European manufacturers who import cars to this country. (Tr. 750-51) Although by March 1983 Kenyon had certified a vehicle pursuant to the Small Volume Manufacturers Program (Tr. 755); however, the company's application to be a member of that program had been granted in the spring of 1983. (Tr. 760)

 The relationship between Kenyon and Lipardt is noteworthy. According to the deposition testimony of Liphardt, when he first met Kenyon the defendant was unsuccessfully using a very basic, undeveloped system in attempting to pass a certificate car. (Ex. 131 at 19-20) After reviewing Kenyon's problems, Liphardt designed a new meritorious system which he shared with Kenyon. (Ex. 131 at 21-22) It is clear that Liphardt, not Kenyon, was solely responsible for that system and its engineering. (Ex. 131 at 23-24)

 The first meeting between Hiesiger and Kenyon took place in March, April or May of 1983. (Tr. 70, 754) At that time Kenyon was performing engineering work for one Albert Mardikian pursuant to a Small Volume Manufacturers Certificate program. (Tr. 70-72, 757) Kenyon represented to Hiesiger that he and his engineer Liphardt had the capability to perform all work required for certification. (Tr. 72) Soon thereafter, Hiesiger ceased his involvement in the Volkswagen Beetle project. (Tr. 76)

 The next meeting between Hiesiger and Kenyon, which occurred one to two months after the first, took place at Hiesiger's apartment at 31 West 11th Street in Manhattan. At trial, each party recalled different aspects of their conversation at that time. Kenyon remembered that Hiesiger stated he did not want to purchase KCA, though at an earlier time he had expressed such an interest, because the asking price of $30,000 was too high. (Tr. 759-50) He also recollected a general discussion pertaining to the "Bosch-Lambda" components (Tr. 761), an emissions technology which gives the engine in a car a great amount of power, low amount of emissions, and high mileage. (Tr. 116-17)

 Hiesiger's memory of the meeting focussed on the suggestion by Kenyon of a partnership between Hiesiger, Kenyon, Liphardt and Jerry Ellison, the chief laboratory technical of the Mardikian organization. (Tr. 85) Hiesiger had responded that he "would be very glad to see such an organization and would make every effort to bring Ellison on board if [Kenyon] would make an effort to bring Clause [Liphardt] on board." (Tr. 86)

 Liphardt was not interested in getting involved in the suggested arrangement (Tr. 98, so, according to Hiesiger, Kenyon then suggested that he, Hiesiger and Ellison proceed to modify systems for three Porsche automobiles. Heisiger offered to pay for the vehicles, hire out work space in Magansett, Long Island, pay for necessary parts, provide a testing facility in Pennsylvania, and pay for a $7,500 bond needed to import the vehicles (Tr. 99-100§ All in all, in June or July 1983 (Tr. 106), Hiesiger paid $100,000 in purchasing the three Porsches in Kenyon's name. (Tr. 103-04) Of that money, $4,000 was paid directly to Kenyon to reimburse him for a deposit he had made on one of the automobiles. (Tr. 102) An additional $40,000-50,000 was expended between July and September 1983 (Tr. 106) to pay for technicians and for insurance and testing costs. (Tr. 106) Hiesiger testified that Kenyon came to the Long Island facility three or four times in August 1983 to work on the cars together with Ellison and several other. (Tr. 108) The vehicles were not successfully brought into conformity and the protect was abandoned in September 1983. (Tr. 110)

 Kenyon's memory of the events surrounding the Porsche episode diverges. According to Kenyon, in July (1983, three Porsches were ordered which were to be sold to Hiesiger. (Tr. 764-66) Although Kenyon did not perform any conversion work on those vehicles, Hiesiger paid him $5,000 for safety parts and for some technical consulting work with Ellison. (Tr. 767) Their dealings with respect to the Porsches, Kenyon testified, terminated in August 1983. (Tr. 768)

 In September 1983 plaintiff Precision Testing Laboratories, Ltd. ("PTD") was incorporated with Hiesiger as the sole shareholder for the purpose of doing research and development in emissions systems, manufacturing conversion kits, and buying and selling foreign automobiles in need of compliance. (Tr. 323, 335-56; Ex. E) It was Hiesiger's testimony that in the same month PTL was formed, he and Kenyon again met. (Tr. 112) He stated that Kenyon then informed his that he had come into the possession of a vehicle built by Liphardt which had only failed a small part of the EPA test, and he had learned the secrets of the technology. (Tr. 124) At the conclusion of that meeting, Hiesiger agreed to and did arrange laboratory time at no cost to Kenyon or to Hiesiger, who was allowed free time from the owner in consideration for past work performed by Hiesiger for the owner) Tr. 135-36) to conform a Mercedes-Benz 500 series automobile purchased by Kenyon's mother. It is undisputed that Hiesiger also provided to Kenyon from September 1983 to July 13, 1984 the use of one of the 400 apartments he owned, located at 218 West 10th STreet in Manhattan, rent free. (Tr. 120, 768) Hiesiger had used the apartment to house people associated with his various businesses. (Tr. 121) Hiesiger maintains that he could have received $600 per month to rent the apartment (Tr. 123); Kenyon testified that HIesiger did not ask him to pay rent (Tr. 769), that he wanted a lease but Hiesiger would not provide one (Tr. 796-97), that he only lived there half of the time (Tr. 772), and that he paid rent on a second apartment in Gladstone, New Jersey where he resided the other half of the time. (Tr. 770-72; Ex. R, S)

 According to Hiesiger, Kenyon's efforts on the Mercedes-Benz 500 did not meet with success; Kenyon reported that although he was achieving good results, they were insufficient to bring the car to certification level. (r. 134) It was at this time that plaintiff Ellis entered the picture

 Of the three individual parties involved in this lawsuit, we were most impressed with the testimony and demeanor of Ellis. We find him to be an honest, upright man, successful in his field, who was trying to work out an arrangement mutually beneficial to everyone concerned. Although he suffered a lapse of memory with respect to several significant items, on balance we credit his testimony as the most credible of the three.

 Ellis is a 51 year old man who owns and operates Texas Coach Company (and three interrelated firms) in Houston, Texas where he converts foreign automobiles to U.S. standards and does research and development for nonconforming European automobiles. (Tr. 535-36) Before meeting either Hiesiger or Kenyon, Ellis had successfully created emission control systems for 25 cars using the individual modification and testing procedure. (Tr. 551) He had also produced two vehicles which were accepted as prototypes for the Small Volume Certification Program. (Tr. 556)

 Hiesiger and Ellis first became acquainted in August 1983 when Hiesiger travelled to Texas Coach Co. in Houston to meet Ellis. (Tr. 114, 558) Hiesiger was impressed with the size and scope of the factor. (Tr. 114) In the course of their discussions during that visit, Hiesiger expressed considerable interest in the Small Volume Certification Program. (Tr. 115, 558) He was aware of the proliferation of cars being imported through the "gray market" and wanted to sublicense for a profit a certificate of conformity, if he could obtain one, to those whose cars needed to be passed. (Tr. 125) In the autumn of 1983, only a company called Village Imports had obtained such a certificate of conformity; they had accomplished it by the efforts of Arthur Ellis. (Tr. 129)

 Sometime between September and November 1983, Hiesiger sent Ellis one of the three Porsches he had earlier imported in connection with his arrangement with Kenyon. Ellis certified the car pursuant to the one time pass option (not through a certificate of conformity) (Tr. 116, 559), for which Hiesiger paid Ellis $5,500. (Tr. 362, 559)

 Thus, by the fall of 1983, Hiesiger was involved in one working relationship with Kenyon and in a separate working relationship with Ellis. Coincidentally, Ellis and Kenyon met each other for the first time at a Washington, D.C. EPA conference in November 1983 relating to "gray market" importing of foreign automobiles (Tr. 561, 774) where Ellis appeared as a representative for PTL. (Tr. 330-31) They sat in the same row on the airplane following the conference and discussed their respective involvement in the compliance industry. (Tr. 562)

 During this time period, the professional relationship between Hiesiger and Ellis continued to develop. This was evidenced by Hiesiger's payment to Ellis of $10,000 for research in connection with compliance work. (Tr. 363) Kenyon, who was not then involved in any of the Hiesiger-Ellis affairs, was never advised of this transaction. (Tr. 364)

 In the end of December 1982, a meeting was held at Hiesiger's apartment attended by all three parties. *fn2" (Tr. 139, 562, 777) After some preliminary discussions, they agreed to meet the next day. The testimony of Ellis and of Kenyon as to what took place at that second meeting support each other. Ellis stated:

 Mr. Kenyon came and brought a satchel or bag of...[e]mission control parts... and started discussing what he had done.

 He also said that he had his company listed as a [small volume] manufacturer but that he had not been able to produce a certificate, and that further he didn't know if he could, and that further that even if he did he didn't know if he could administer it.

 I listened to him and began to make a decision as to whether I would work with him. I told his that -- and Mr. Hisiger -- that my decision was that we would look further into it, that we would examine it closer. I invited him to come to Texas and bring the parts so that we could put them on the car, one of my cars, and do some preliminary testing, whereupon he agreed, and we decided that we would continue further on this study in Houston, Texas.

 (Tr. 564)

 Kenyon testified that:

 I described the parts, I told them how they worked, and we talked generally about technology...Mr. Ellis told me that he, too, was working on a 500 Mercedes, but not with these components, and he would be very interested to see how these components work. . . He invited me down to Texas to show him the parts on a vehicle and demonstrate to him that, in fact, they would work.

 (Tr. 779)

 Kenyon further testified as to the detailed information he and Ellis exchanged that day. (Tr. 780-82)

 Kenyon did not remember any verbal contribution by Hiesiger (Tr. 783); Ellis recalled that Hiesiger "encouraged [them] generally." (Tr. 566) Hiesiger remembered Kenyon's production of the bag of components (Tr. 141); a technical discussion between Ellis and Kenyon (Tr. 142); and an agreement for Kenyon to travel to Texas so as to enable Ellis to test Kenyon's components. (Tr. 144-45) Hiesiger further testified that the following discussion took place:

 [Kenyon] said, "You know, looking at [Hiesiger] at this point, I wouldn't know what to do with a certificate of conformity if I had it. I need you fellows. You have business experience and expertise. Art [Ellis] has the technical expertise. I am essentially a promoter, a salesman. If you guys put this together, I will sell the hell out of this thing. i will sell kits all over the United States. The three of us together make on hell of a team. Let's do this together."

 [Hiesiger] said to Larry, "I agree with you, I think that this makes even a better team than the one we though about earlier of Jerry Ellison and you and me and Clause. Art has proven that he can get certificates. He has done it before. As for being a salesman, you are the worlds best salesman...

 As for me, I do think I have some organization business experience. I have an office, I have staff, we have people, we can lend our efforts, we can led what money we can make avoidable to it. I think this thing will work."

 (Tr. 142-44)

 We find it significant in the extreme that such a vital claimed conversation, going to the very hear of the formation of an alleged joint venture, was remembered by Hiesiger only. Not even the co-plaintiff, Ellis, expressed a memory of any such discussion. We find that although there might have been some allusion as to the three of them working together, no agreement was ever approached. To the contrary, the upshot of the meeting was that Ellis and Kenyon would get together without Hiesiger to exchange mutual information.

 Hiesiger testified that on January 5, 1984, the parties met again; there s no indication of the outcome of that meeting. On the same date Hiesiger paid Ellis $20,000 to develop a system on a Mercedes-Benz 280 automobile. Once again, Kenyon was never advised of this transaction. (Tr. 364)

 In mid-January 1984, Kenyon travelled to Houston with his components. (Tr. 567, 784) After installing them into a vehicle, it was brought to Automotive Research Testing Laboratory ("ARTL") for tests. (Tr. 570, 785) The results were satisfactory, and Kenyon and Ellis decided to go forward with further experience on the new system. (Tr. 571) Before leaving Texas the next day, Kenyon and Ellis had a discussion relating to their future relationship. At trial, both testified that they ad at that time expressed their joint desire to work together and to sell or convey 50 percent of the stock of KCA to Ellis. (Tr. 577, 787) Kenyon testified that he had insisted their agreement be subject to clearing by his attorneys and to a further meeting. He also stated that Hiesiger, as a friend, should be allowed to use any certificate obtained for an unspecified number of vehicles. (Tr. 787) Ellis, on the other hand, testified that Kenyon had not been interested in discussing the participation of Hiesiger. (Tr. 577)

 After Kenyon returned to New York, Ellis continued experimenting with the system Kenyon had brought. There were a number of problems therein, many of which Ellis was able to rectify. (Tr. 578-79( For instance, one of the important components employed to regulate emissions is called a "catalytic converter." Although Kenyon had originally used a DeLorean converter, Ellis discovered a German one called the 317 Zeuna Starker which the parties used on the car that after passed certification. (Tr. 579-81) Another example concerns the air pump, a device that pumps air into the exhaust system, thereby diluting and burning away emissions. (Tr. 582-83) An air pump, however, is expensive and its mounting and proper operating are hard to insure. Consequently, before ever meeting Kenyon, Ellis had developed emission control systems that did not sue an air pump, he discussed with Kenyon applying that technology to Kenyon's system. (Tr. 584) Indeed, the certification car did not have an air pump. A third series of discussions focused on a part called the "fuel block" which acculates fuel. Although Kenyon was able to explain to Ellis the function of this component in a general way only, Ellis' research revealed its true inner workings. (Tr. 585-86) The fourth significant part which the two discussed was the "fuel pressure regulator" the reengineering of which Ellis believed was the key to developing a successful car without an air pump. Ellis agreed to spend whatever time was necessary in developing the regulator, encouraged by works from Kenyon such as, "I know you can do it." Eventually, Ellis did re-engineer the fuel pressure regulator. (Tr. 587-88)

 Sometime between the middle and end of January 1984, Hiesiger went to Houston to visit Ellis and to observe the progress being made as Ellis developed Kenyon's system. Ellis told Hiesiger that he needed financial help (Tr. 589-91); around January 20th, Hiesiger placed $100,000 on deposit on a bank account in the name of Ellis Compliance Corporation to enable Ellis to develop a certificate system using the Kenyon technology. (Tr. 146-47) This transaction was never reported to Kenyon. (Tr. 591) Hiesiger testified that the $100,000 that was advanced was in connection with the parties' project (which the three had never formally defined) but was not an obligation of the project. (Tr. 346-47)

 On January 21, 1984, Ellis signed a letter agreement prepared by Hiesiger. (Ex. D) The letter stated:

 January 21, 1984

 Dear Asher -

 This is to confirm our understanding concerning dealings beginning in August 1982 to date.

 You have paid to me $135,500 in furtherance of certain research projects dealing with the development of emissions control systems for various automobiles, including Porsche 930 Turbo, Mercedes 500 and others. Of this amount $5500 was paid for a system developed for a 930 Turbo delivered to you. The balance of $130,000 remains open. Until such time as proper value has been received for these sums paid, and additional agreements to be prepared by your tax counsel are signed by us, I pledge the following assets:

 (1) The receivables of Texas Coach Company

 (2) The parts inventory of Elco Parts Company

 (3) The stock of Ellis Enterprises Int'l, Inc.

 (4) My anticipated 1/2 interest in Kenyon Corporation

 (5) My personal guarantee.

 Sincerely, Arthur L. Ellis ...


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