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August 11, 1995

INTEREL ENVIRONMENTAL TECHNOLOGIES, INC., on behalf of itself and all other persons entitled to share in funds allocated for the improvements and reconstruction of the Glen Cove Codisposal/Energy Recovery Facility, Plaintiffs, against UNITED JERSEY BANK, ISLAND RECYCLING AND ENVIRONMENTAL CORP., CITY OF GLEN COVE, THE GLEN COVE INDUSTRIAL DEVELOPMENT AGENCY and ALLSTATE INSURANCE COMPANY, Defendants.

ARTHUR D. SPATT, United States District Judge

The opinion of the court was delivered by: ARTHUR D. SPATT

SPATT, District Judge:

 The plaintiff INTEREL Environmental Technologies, Inc. ("Interel") brings this diversity action on behalf of itself and as a representative of approximately twenty five other subcontractors to recover monies allegedly due for construction work performed for the defendants. Presently, before the Court is the plaintiff's motion for a preliminary injunction to enjoin the defendant Allstate Insurance Co. ("Allstate") from withdrawing monies held in a fund that has been allegedly designated to pay the plaintiff and the other subcontractors for their construction costs.

 1. Financing and Rehabilitating the City of Glen Cove Co-Disposal/Energy Recovery Facility.

 The City of Glen Cove Co-Disposal/Energy Recovery Facility (the "Facility"), located in Glen Cove, New York, is a modern day "waste-to-energy" plant. Owned by the City of Glen Cove ("City" or "Glen Cove"), the Facility essentially recovers energy from the burning of municipal solid waste (garbage) and sewer sludge collected from the City and other towns in Nassau County. The heat from the burning is captured, transformed to electricity, and used to power the Facility, which also includes a Water Pollution Control plant for treating certain wastewaters discharged and collected by Glen Cove.

 In July 1991, the Facility was temporarily shut down because it failed to meet certain air emission standards that had been set forth in a 1990 Consent Order entered into between, among others, the New York State Department of Environmental Conservation ("DEC") and Glen Cove ("Consent Order"). The Consent Order required that certain improvements be made at the Facility in order to reduce the emission of air pollutants from the Facility. Glen Cove received bids for an operator of the Facility, and chose the defendant Island Recycling and Environmental Corp. ("Island Recycling") to operate the Facility.

 Glen Cove and Island Recycling entered into a management agreement on July 20, 1992 ("Management Agreement"), pursuant to which Island Recycling agreed to "operate, maintain and manage" the Facility as an independent contractor for a term of twenty years, commencing on August 1, 1992. In order to meet the requirements of the Consent Order and to otherwise comply with the environmental statutes and regulations governing the Facility, Article 10 of the Management Agreement provides that Island Recycling shall rehabilitate the Facility by reconstructing whatever is necessary to bring the Facility into conformance with the Consent Order, at its sole cost and expense. The parties call this reconstruction and any accompanying improvements the "Improvements" to the Facility. Island Recycling was also required to obtain a $ 2 million performance bond in favor of the City.

 To finance the reconstruction at the Facility, Island Recycling borrowed funds from the defendant Glen Cove Industrial Development Agency ("Agency"), a New York public benefit agency, which raised the funds by issuing special obligation revenue bonds. According to the plaintiff, the defendant Allstate is the sole or majority bondholder. In exchange for raising the funds to finance the reconstruction, the Agency and Island Recycling entered into a lease agreement dated April 1, 1993 ("Lease Agreement"), pursuant to which title to all Improvements in the Facility are held by the Agency, and the Improvements are leased to Island Recycling in exchange for rent payments made to the Agency.

 At the same time that Island Recycling and the Agency entered into the Lease Agreement, the City granted a sub-license of the Facility from Island Recycling to the Agency, and approved an assignment of certain payments Island Recycling was to receive from the City under the Management Agreement to the Agency.

 The proceeds raised from the bond issue were to be used to pay for the construction costs at the Facility. Pursuant to a trust indenture between the Agency and the defendant United Jersey Bank as Trustee ("Trust Indenture"), a $ 12 million fund was established for the purpose of paying for the construction of Improvements at the Facility ("Fund"). According to the section 3 of the Lease Agreement and a procedure outlined by the United Jersey Bank ("Trustee" or "Bank"), requests for reimbursements of work at the Facility by subcontractors were to be first submitted to Island Recycling for approval. If approved by Island Recycling, the reimbursement request would be submitted to engineers hired by Glen Cove for approval. If approved by Glen Cove, Island Recycling would submit the reimbursement request to the Trustee, which would pay the money to Island Recycling, who in turn would pay the subcontractor.

 According to the plaintiff, on August 16, 1993 the Bank represented to Island Recycling's subcontractors that it was ready to start making payments from the Fund to Island Recycling for payment of the reconstruction costs.

 2. The Island Recycling-Interel Contract and Events Precipitating the Present Dispute.

 In an agreement dated September 30, 1993 (the "contract"), Island Recycling agreed to purchase and the plaintiff Interel agreed to install certain air pollution control and related equipment. The price for the job was $ 1,735,433.

 Relying on the contract and the other agreements governing the Facility and payment for the reconstruction, namely the Management Agreement, Lease Agreement, and Trust Indenture, Interel commenced work at the Facility. From September through December, 1993, Interel submitted applications for four progress payments to Island Recycling for work performed at the Facility. Each application for payment was approved by Island Recycling, then included in a disbursement request to Glen Cove which was approved by Glen Cove's engineers, and ultimately paid from the monies in the Fund.

 In January, 1994, a new administration took office in Glen Cove. According to Interel, the new mayor, Thomas Suozzi, opposed reopening the Facility. Eventually, a dispute arose between Glen Cove and Island Recycling and the City refuses to authorize the Bank to release monies from the Fund to pay Island Recycling or its subcontractors for work performed at the Facility.

 On May 18, 1994, Interel submitted its fifth requisition to Island Recycling in the amount of $ 583,268 for work performed in January, 1995, prior to the time Glen Cove decided to stop paying for any further construction costs. The requisition was approved by Island Recycling, and sent to the Glen Cove engineers for approval. The engineers approved the requisition, and on July 29, 1994 recommended to the City that Interel's requisition be paid. Glen Cove, however, has not sought the release of Fund monies to Island Recycling so that Interel's requisition can be paid.

 In addition to this amount, Interel contends that Island Recycling also approved an additional $ 296,626 in requisitions, but has not submitted these requisitions to the City for approval. Interel blames the lack of payment of its reimbursement requests on the dispute between Glen Cove and Island Recycling.

 According to Interel, because the monies in the Fund are designated to pay for the reconstruction costs of the Facility, the Fund constitutes a trust asset under section 70.1 of the New York State Lien Law. In Interel's view, it and the other subcontractors it represents are entitled to a lien on the Fund pursuant to the Lien Law, to the extent of the amount they are owed by Island Recycling for work performed at the Facility.

 On June 17, 1994, Interel filed its notice of lien with the Nassau County Clerk. It also commenced an article 78 proceeding in the New York State Supreme Court, Nassau County to compel the City of Glen Cove to approve and release the monies in the Fund held by the Bank. That action is still pending.

 3. Interel's Complaint.

 Interel alleges that the defendants now intend to withdraw the money in the Fund in order to redeem some or all of the bonds. According to section 3.05(d) of the Lease Agreement, approximately $ 4.5 million dollars in the Fund were reserved, and are prevented from being disbursed to Island Recycling until, among other things, Island Recycling provides the Bank with a confirmation by the DEC that the Facility is in compliance with the Consent Order and that certain other improvements have been constructed at the Facility. The language of Section 3.05 of the Lease Agreement states that:

(d) Notwithstanding any provisions to the contrary contained herein, $ 4,396,359 shall not be disbursed from the Series A Account of the Project Fund and $ 136,092 (representing a portion of the underwriter's discount) shall not be disbursed from the Series A Account of the Issuance Costs Fund pursuant to this Section 3.05 until such time that, in addition to all other provisions and certificates required under this Section 3.05, (i) the Company receives and provides the Trustee with a true copy of a written confirmation from the DEC stating that the Company has the Facility as required by the Order on Consent and that the Company may resume accepting Processible Water (as defined in the Management Agreement) at the Facility for the purposes of incineration, and (ii) a certification is submitted to the Trustee by an Independent Engineer stating that the installation of the improvements to the north furnace train of the Facility are in substantial compliance with the Company's design criteria as outlined in the Plans.
In the event that Company is unable to comply with the requirements of this subsection on or before July 31, 1995, such undisbursed funds, together with an amount equal to ten percent (10%) of said undisbursed funds which shall be withdrawn from the Debt Service Reserve Fund, shall be used to redeem Series A Bonds pursuant to the provisions of Section 3.01(b) of the Indenture.

 Thus, in the event Island Recycling cannot provide such assurances by July 31, 1995, the $ 4.5 million reserved in the Fund, plus 10% of the undisbursed funds, can be withdrawn and used to redeem the bonds held by Allstate.

 Because of the imminence of the bond redemption and the resulting depletion of the Fund, Interel sought relief in this Court, notwithstanding its pending article 78 action in the state court. For some reason, Interel decided not to move in the pending, prior state action. Rather, it commenced a new action in the federal court based on diversity jurisdiction on July 24, 1995, seven days prior to the redemption date and simultaneously filed an Order to Show Cause seeking to enjoin the bond redemption.

 According to Interel, if the money is withdrawn to redeem the bonds, it and other subcontractors will not be paid for the work they performed at the Facility. Interel contends that such action by the Bank and Allstate would be a violation of the trust asset created by the Lien Law for the benefit of the subcontractors.

 Interel's complaint sets forth six causes of action. The first is a claim under Article 3-A of the New York State Lien Law. Because the Lien Law requires that actions to enforce trusts created under the statute must be undertaken in a representative capacity for all of the subcontractors and materialpersons, Interel has brought this action as a class action, allegedly representing all of the other subcontractors who are owed money which is to be paid from the Fund.

 The second cause of action seeks to foreclose on a mechanic's lien it has filed upon the Facility. The third and fourth causes of action state claims for breach of contract by the defendant Island Recycling. The fifth and sixth causes of action state claims for unjust enrichment ...

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