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Federal Insurance Company v. Turner Construction Company

March 29, 2011

FEDERAL INSURANCE COMPANY, PLAINTIFF,
v.
TURNER CONSTRUCTION COMPANY, DEFENDANT,
AND NEW YORK CITY ECONOMIC DEVELOPMENT CORPORATION, AS ASSIGNEE OF TURNER CONSTRUCTION COMPANY, INTERVENOR-DEFENDANT.



The opinion of the court was delivered by: John F. Keenan, United States District Judge

Opinion and Order

Before the Court is Plaintiff Federal Insurance Company's ("Federal" or "Plaintiff") motion for partial summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure and Intervenor-Defendant New York City Economic Development Corporation's ("EDC") cross motion for summary judgment and leave to amend its Answer to include a direct cause of action against Federal. For the reasons that follow, Federal's motion for summary judgment is granted. EDC's motion to amend is denied as moot.

I.Background

A.The Contract

The following facts are undisputed unless otherwise noted. EDC is a non-profit company that acts as a development consultant for the City of New York. In a contract dated August 27, 2004, EDC engaged Defendant Turner Construction Company ("Turner"), a New York corporation, to provide construction management services for a modernization project involving the New York Cruise Terminal. (Decl. of Cynthia Murray ("Murray Decl."), Ex. 1). With EDC's approval, on April 5, 2006, Turner entered into a subcontract with non-party Pile Foundation Construction Co., Inc. ("Pile") whereby Pile agreed to perform marine structures work on the Cruise Terminal, specifically widening Pier 88 and rehabilitating its supporting piles, for a fixed fee of $21,044,180.*fn1 (Murray Decl., Ex. 2). In connection with the subcontract, Pile obtained a payment bond and a performance bond (the "Performance Bond") in the amount of $21,044,180 from Federal, an Indiana corporation located in New Jersey. Pursuant to the terms of the Performance Bond, if Pile defaulted on its obligations under the subcontract, Federal would either complete the subcontract work or pay Turner for the cost of completion. The Performance Bond names Pile as the principal, Federal as the surety, and Turner as the obligee. (Decl. of Vincent C. Miseo ("Miseo Decl."), Ex. 1).

The relationship between Turner and Pile became contentious fairly quickly, as Turner expressed dissatisfaction with Pile's performance. Pursuant to Article XI of the subcontract, upon three days written notice, Turner had the right to terminate Pile if Pile was found to be in default, for example, by failing to supply materials or meet deadlines. (Murray Decl., Ex. 2 at EDC 3346-47). On January 4, 2007, Turner issued a notice of default informing Pile that its failure to cure various problems would result in termination of the contract. (Murray Decl., Ex. 7). The parties entered into negotiations to resolve the problems giving rise to Pile's default, and Federal retained Lovett Silverman Construction Consultants as a construction consultant to assist Pile in preparing a new work schedule. (Decl. of Dmitri V. Konon ("Konon Decl.") ¶ 53; Ex. K). Ultimately, Turner and Pile executed a memorandum of understanding ("MOU") dated April 3, 2007 confirming that Turner would withdraw the January 4, 2007 default notice and extend the deadline for Pile's substantial completion of work from May 25, 2007 to August 1, 2007. Federal consented to the April 3, 2007 MOU by its signature. (Murray Decl., Ex. 10).

B.Payment Dispute

Soon after execution of the April MOU, a separate issue arose with respect to payment under the subcontract. This dispute is best understood in the context of EDC's practices for funding municipal projects and approving project contracts. The various witnesses offer confused accounts of the process, but Dmitri Konon of EDC, who served as the Project Manager for the Cruise Terminal project, the person in the best position to testify as to how EDC conducts its business, explained at his deposition as follows.

Vendors wishing to do business with the City of New York must submit a sworn Vendor Information Exchange System ("VENDEX") questionnaire to the Mayor's Office of Contract Services disclosing certain information the City uses to ensure that it selects "responsible" vendors. VENDEX questionnaires are valid for three years. The Cruise Terminal project was funded by the City of New York. In order to get money from the City for contract work, EDC generally registered the contract in question with the Comptroller's office. (Murray Reply Decl., Ex. 2 at 28). The process for registering a Cruise Terminal contract with the Comptroller was straightforward: Turner would submit an approval letter to EDC summarizing the terms of a proposed subcontract, and Mr. Konon would decide whether to accept or reject the subcontract. At this point, the proposed subcontractor's VENDEX disclosures would help EDC to determine whether it was a responsible vendor that should be approved for City-funded work. After deciding to accept a subcontract, EDC would submit it to the Comptroller.*fn2 Although it is not clear that the rules governing public procurement contracts apply to EDC, which is not a City agency, this description is consistent with the requirements for City contracts found in the Rules of the City of New York*fn3 and the New York City Charter,*fn4 which provide that VENDEX forms should be reviewed and approved contracts should be filed with the Comptroller prior to beginning work. Although the contract between EDC and Turner was duly registered, (id. at 12), EDC did not consistently register subcontracts for the project. (Id.at 36).

Pile submitted a bid to Turner for the marine structures work, and Turner forwarded an approval letter to EDC. (Murray Decl., Ex. 3). At the time of approval in 2006, Pile had a valid VENDEX form on file with the Mayor's Office. (Konon Decl., Ex. L). There is no evidence indicating whether EDC reviewed Pile's VENDEX prior to approving the subcontract, but that approval is tantamount to a finding that EDC deemed Pile to be a responsible vendor. EDC's next step logically would be to submit the subcontract to the Comptroller for registration in order to fund Pile's $21 million of marine structures work. However, EDC had received from the City a so-called "blanket registration" of $25 million with which to start construction work on the Cruise Terminal. (Murray Reply Decl., Ex. 2 at 24-25). It is not clear whether this occurred inadvertently, but instead of registering the subcontract, EDC paid Pile out of the $25 million blanket registration funds. (Id. at 28-29). EDC does not dispute that at the time it approved Turner's subcontract with Pile, it did not notify Turner, Pile, or Federal that payment of the full contract price was contingent on the contract being registered with the New York City Comptroller. (Pl. Local R. 56.1 Statement ¶ 9; Def. Local R. 56.1 Statement ¶ 9).

Pile's work progressed for more than one year, during which it earned and was paid $13,858,830. (Pl. Local R. 56.1 Statement ¶ 15; Def. Local R. 56.1 Statement ¶ 15). In approximately May or June of 2007, EDC experienced a budget crunch. Mr. Konon testified:

At that point we questioned why there was so little funding remaining in the contract when we had this $25 million blanket registration, we had a Pile Foundation contract of $21 million and we had other subcontractors and other people working and at that period of time is when we discovered that the Pile Foundation's contract hadn't been registered but had been getting paid through the $25 million blanket registration but that money had now been exhausted. And at that point we were told [by EDC's contracts or budget group] that we needed to register the Pile Foundation's contract to keep the money flowing on the project. (Murray Reply Decl., Ex. 2 at 29-30).

Meanwhile, during a compliance check, EDC realized that Pile's VENDEX form had expired. (Konon Decl. ¶ 67; Ex. M). At EDC's request, Pile submitted an updated VENDEX form dated May 14, 2007. In that form, Pile certified that no principal owner, officer, managerial employee, or the company itself had been investigated by any government agency in the previous five years. (Murray Decl., Ex. 14 at 5). EDC reviewed the VENDEX in conjunction with the New York City Department of Investigation ("DOI"). DOI sought further information about Pile's involvement in any investigations; from Pile's response, EDC learned that Pile and its principal, Anthony Rivara, had been subpoenaed in 2006 in connection with an investigation in the Eastern District of Virginia regarding corrupt practices in the marine supply industry. (Murray Decl., Ex. 15).

Thus, EDC was confronted with two problems: first, the discovery that Pile's updated VENDEX form was inaccurate caused it to reevaluate its previous, albeit implicit, determination that Pile was a responsible subcontractor; and second, it felt it could not belatedly register a subcontract entered into with a potentially irresponsible vendor, meaning that it could not secure funds from the City to pay that subcontractor. Nevertheless, EDC insisted that the potentially irresponsible vendor continue work on the Cruise ...


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