Opinion
Case No. 5-98-CV-70.
March 6, 2001.
ORDER
In accordance with the Opinion of this date;
IT IS HEREBY ORDERED that SCS Group, L.C. Objections (Dkt. No. 245) of the Written
Summary of Performance Abatement Services, Inc. is DENIED.
IT IS FURTHER ORDERED that Performance Abatement Services, Inc.'s Motion for Preliminary Injunction, Temporary Restraining Order and Constructive Trust (Dkt. No. 227) is DENIED.
OPINION
Defendant/Counter-Plaintiff/Cross-Defendant.
This matter is before the Court to determine whether to grant Plaintiff Performance Abatement Services, Inc. (hereafter "PAS") a preliminary injunction and/or constructive trust which would freeze settlement monies paid by Defendant Lansing Board of Water and Light (hereafter "BWL") to Defendant/Counter-Plaintiff SCS Group, L.C. (hereafter "SCS").
This request was originally presented by way of PAS' Motion for Preliminary Injunction, Temporary Restraining Order and Establishment of Constructive Trust (Dkt. No. 227), filed on January 5, 2001. On January 8, 2001, the Court issued an Order which denied a temporary restraining order and required expedited briefing on the issue of the preliminary injunction.
After receipt of the expedited briefing, the Court ordered on February 6, 2001 that a preliminary injunction hearing would be heard on March 1, 2001 at 9:00 a.m. The Court's Order of February 6, 2001 also limited argument and presentation of evidence at the hearing and required the filing of written summaries.
Prior to the hearing, the Court received and reviewed written summaries-one filed by PAS and another filed jointly by SCS, BWL, Jerome Williams, Robert Greenlees, and William Wysocki. The Court also received written Objections by SCS filed at 4:16 p.m. on February 28, 2001. The Objections challenged PAS' written summary based on the Federal Rules of Evidence. At the hearing, the Court overruled the Objections to permit the parties to offer pertinent documentary evidence, including settlement agreements. The Court did so because under Federal Rule of Civil Procedure 65 the district court may consider inadmissible evidence in ruling on motions for preliminary injunctions. See 11A Wright and Miller, Federal Practice and Procedure § 2949; In re DeLorean Motor Co., 755 F.2d 1223, 1230 n. 4 (6th Cir. 1985); United States v. O'Brien, 836 F. Supp. 438, 441 (S.D.Ohio 1993). As such, those Objections are overruled and the Court considers all written and oral testimony offered in this matter in determining the preliminary injunction issue.
FACTS
On November 26, 1997, B WL and SCS entered into a written contract for the demolition and salvage of the Ottawa Station Development Project. By that contract, SCS agreed to complete the demolition and salvage and BWL agreed to pay SCS $2,686,000.00. (Defendant's Exhibit 11.)
Thereafter, SCS subcontracted with PAS to complete the asbestos removal portion of the prime contract. PAS, after beginning the work, fell behind the contract schedule and reported to SCS that the Project contained undisclosed asbestos.
Apparently either a failure to disclose asbestos by BWL and/or faulty performance by PAS has caused disputes to arise between B WL, SCS, PAS and International Fidelity Insurance Company (the bonding company on the subcontract) (hereafter "Fidelity") about payment on this Project. These disputes resulted in the filing of this lawsuit by PAS on May 21, 1998 and cross and counterclaims between the parties.
In December 2000, parties to this action engaged in facilitative mediation. As a consequence of the mediation talks, SCS, BWL, Fidelity and a second bond company (Deerfield Insurance Company) entered into a settlement agreement on January 24, 2001. (Defendant's Exhibit 10a.) As part of the settlement agreement, the parties agreed to mutual releases. BWL and Deerfield also agreed to pay $1.8 million to SCS in exchange for SCS' promise to indemnify them for all losses and liability associated with this suit and to defend BWL in the suit. Payment of that sum has apparently been wired to "Arent Fox Kintner Plotkin Kahn, PLC" as attorneys for SCS. (SCS' Memorandum, Exhibit 2 at 2; SCS' Memorandum at 2 n. 3.) Fidelity agreed as part of the settlement agreement to guarantee SCS' obligations under the agreement. The agreement further stated that there were no third-party beneficiaries of the agreement and that the parties did not intend by the agreement to settle or resolve any controversy with PAS. Incidentally, according to A.M. Best, Fidelity is rated as a Type N insurance company with an A-rating and has reported assets of 25-50 million dollars. (Defendant's Exhibit 9.)
On or about December 20, 2000, Robert Greenlees, through his attorneys, filed a Verified Complaint with the Wayne County Circuit Court. (Plaintiff's Exhibit 12.) Therein, he swore that he is "the Resident Agent, a Managing Member, the Tax Matters Partner, the Executive Vice President, an employee of and 17.74% owner of SCS Group, L.L.C." ( Id. at ¶ 2.) He also swore that "Defendant [Jerome] Williams has . . . treated the assets of Defendant SCS as if the assets were his own and for his own personal account." More particularly, he swore that Defendant Williams had withdrawn "a check in the amount of $150,000 drawn off of the Defendant SCS account for Defendant Williams to make an investment with Tax Investment Services on or about November 30, 1998, a check in the amount of $150,000 drawn off of the Defendant SCS account for Defendant Williams to make an investment with Sweetwater Development Trust on or about December 11, 1998, an unknown amount to the Richard Services Company Limited in Belize, Central America, and payments received from U.S. Dismantlement L.L.C." ( Id. at ¶ 54.) Greenlees failed to indicate in the Verified Complaint how he knew, if he did, that these transfers were for Williams' personal benefit and whether SCS was compensated by Williams for the transfers.
PAS seeks recovery in this lawsuit of at least $2.7 million in unpaid compensation. (Second Amended Complaint at 35.) According to Plaintiffs expert, Robert Herbert, a cost estimate of the total amount owed for PAS' services as of June 2001 is $3,400,284.28. (Herbert Affidavit of Feb. 28, 2001.) PAS' damages have been calculated both based on the original subcontract price for its services and adjustments for additional work. The subcontract dated January 7, 1998 awarded PAS $1,298,000.00 in exchange for asbestos abatement as scheduled in the subcontract. (PAS' Memorandum, Exhibit 8 at 1.) According to PAS' area manager, Edward Champagne, PAS has been paid only $859,547.00 of the original price and the last payment was received in October 1998. (PAS' Memorandum, Exhibit 9.) The remainder of the subcontract was not paid, according to the affidavit of Robert Nicholson, because of the failure of SCS to complete the job. (PAS' Exhibit 9 at 95.) The remainder of the damages sought by PAS is for additional services performed which PAS believes are in excess of those contemplated by the subcontract. According to PAS, these additions were not contemplated by the subcontract and were necessitated by Defendants' conduct. (See Second Amended Complaint.) PAS has cited the depositions of Edward Champagne, Michael Ring and Robert Nicholson for the proposition that PAS was misled by BWL concerning the asbestos removal specifications and drawings for the subcontract. (Champagne Dep. at 73-78; Ring Dep. at 50-52, 121-128; Nicholson Dep. at 39-42. See also Affidavit of Richard Jenkins.) The depositions cited support a conclusion that BWL withheld hundreds of important documents and drawings from bidders. (Id.) One cannot tell from the depositions, though, whether the disclosures made in other drawings were sufficient.
Meanwhile, SCS asserts that PAS owes it between $951,979.00 and $1,143,530.00. These figures were derived from the Report of Expert George R. Robinson. (Defendant's Exhibit 1.) Robinson is a licensed professional engineer who was employed by SCS to render opinions relating to demolition, contract administration, cost analysis and physical engineering in this case. Robinson has some forty-six years of experience in the construction industry. His experience includes road building projects, boiler projects, demolition projects and asbestos abatement. This experience also includes some thirty years of work in contract administration and scheduling of labor and contract costs. Robinson has previously testified as a structural engineer and contracting expert before state courts and federal administrative courts. He has significant practical experience as listed in his curriculum vitae. Robinson formed his opinions in this case following review of the contracts, technical drawings, contract minutes, contract orders and change requests, and his interviews of Jerome Williams and Robert Greenlees. As of the writing of the Report, Robinson had spent some 163 hours in formulating his opinions.
Robinson's Report contains a description of the 80,000 square feet, I-level building and the equipment which was the subject of the Project. It also contains a time-line describing the speed of the performance in relation to the contracting schedules. It also contains computations for losses caused to SCS in the following categories: 1. Scrap Price Drop (which is a computation of loss allegedly caused to SCS because the project delay resulted in resale of the scrap metals at a lower price because of a drop in scrap metal prices in the intervening period); 2. SCS' idle equipment (which is a computation of the cost of having machinery present at times when SCS was allegedly unable to use the machinery because of PAS' delays); 3. asbestos-covered wire removal (which is the cost of removing asbestos from wire which SCS allegedly incurred because PAS refused to do the removal as outside the subcontract); 4. SCS' lost productivity costs (which are costs for paying labor which was less productive, figured at 25 percent less productive, because of PAS' alleged delays in performance); and 5. SCS' lost supervision costs (which are the costs for paying supervisors for extended supervision allegedly due to PAS' delayed performance). Robinson has given a range of figures rather than an exact figure for SCS' losses. The range is due to the fact that Robinson did not come to a conclusion as to whether PAS was owed monies by SCS and BWL for additional work on the small boilers involved in the Project.
PAS' expert, Robert Herbert, a claims consultant, takes the position in his Affidavit that SCS is not owed the monies claimed by Robinson. (PAS' Reply, Exhibit 13.) According to Herbert, Robinson's analysis is predicated on the assumption that PAS was responsible for delay in the Project. According to Herbert, since SCS and BWL, not PAS, were responsible for the delay, PAS has no liability to SCS for the construction delays.
On the issue of delay, PAS cites to deposition testimony by Robert Nicholson, Edward Champagne, and Michael Ring (the project coordinator for BWL) for the proposition that delay in the project was caused by the failure of BWL to originally disclose drawings and specifications showing that boilers contained more than a single layer of insulation and metal to be removed. According to these deposition witnesses, this was an important fact which was not disclosed to PAS and which caused PAS to perform more work than was originally contemplated by the subcontract.
George Robinson contradicted those witnesses in his hearing testimony by indicating that the drawings disclosed to PAS did in fact indicate the nature of the boilers and the extent of asbestos removal required. Edward Champagne, called by PAS at the hearing, however, contradicted Robinson in opining that the drawings did not disclose the nature of the boilers.
PAS' witnesses also dispute the calculations contained in the Robinson Report. Specifically, PAS disputes SCS' idle equipment costs as far less than $356,804. PAS calculates this figure at about $70,000 based on the use of different equipment than that scheduled by PAS and based on a reduced depreciation rate. PAS also claims that it was understood as part of the contract that it would not be responsible for consequential and incidental damages including lost productivity and lost salvage value. In particular, Paragraph 7 of the Amendments (Schedule B) to the subcontract specifically provided that neither party would be liable for consequential and incidental damages of any kind. PAS also questions why $90,000 for wire stripping is included in SCS' calculation of damages because, according to PAS, wire stripping was not included in the subcontract (i.e., PAS believes that the wire should have been simply discarded).
At hearing of this matter, the Court heard testimony from Edward Champagne and George Robinson as described above. The Court also heard from Jerome Williams (owner of SCS). Williams testified that SCS had sufficient assets to satisfy a multi-million dollar judgment in favor of PAS. Williams also testified that the funds paid as part of the BWL settlement were deposited in his lawyers' trust account and that he and SCS did not have access to those funds. During argument, counsel for SCS also indicated, by way of an apparent promise, that those funds would not be transferred overseas.
LEGAL ANALYSIS
In reviewing a preliminary injunction motion under Federal Rule of Civil Procedure 65, this Court is required to consider four factors: (1) Plaintiff's likelihood of success on the merits; (2) the irreparable harm that could result to Plaintiff if the injunction is not issued; (3) the possibility of substantial harm to others caused by the requested injunction; and (4) the impact on the public interest. Basicomputer Corp. v. Scott, 973 F.2d 507, 511 (6th Cir. 1992). This evaluation focuses on all four factors — rather than any particular factor. In re De Lorean Motor Co., 755 F.2d 1223, 1228-30 (6th Cir. 1985).
1. Likelihood of Success on the Merits
This is a curious place to begin the analysis. The likelihood of success on the merits is a complicated issue which will, at the end of the day, depend on a detailed analysis of the conflicting claims about contract performance and delay, asbestos removal, boiler engineering and the reading of unclear specifications and drawings. Nevertheless, at this juncture and largely because PAS has not been paid all funds originally due on the face of the subcontract, the Court believes that the PAS is likely to prevail on the merits at least to the extent of the difference between the subcontract price and the amount actually paid PAS (approximately, $434,000). The extent that PAS may recover for additional work or may be liable to SCS for delayed performance is, at this time, too speculative to determine with certainty. Therefore, this factor favors, though only slightly, granting PAS relief.
2. Irreparable Harm
The loss of an ability to collect a money judgment is not usually regarded as irreparable harm under Rule 65. This point was underscored recently by the United States Supreme Court's decision in Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund Inc., 527 U.S. 308 (1999). Therein, the Supreme Court, in reaffirming the principles of its earlier decision in DeBeers Consolidated Mines, Ltd. v. United States, 325 U.S. 212 (1945), held that the district court had no authority under Rules 64 and 65 and under federal statute to prevent an unsecured debtor from transferring assets overseas even if it would defeat collection of judgment later. The Supreme Court said that the exercise of that power before judgment would be to "craft a `nuclear weapon' of the law" without congressional mandate. Id. at 332-33. The Supreme Court did however discuss three exceptions to this general rule: (1) where the movant has an established legal or equitable right to the property; (2) where the injunction is necessary to preserve the Court's ability to provide equitable relief as to an equitable action; and (3) where Congress has specifically provided authority to do so.
As to the third exception listed by the Supreme Court, there is no allegation here that Congress has specifically created an exception to the Grupo and DeBeers rule which applies in this case. Upon review of the law, the Court determines that there is no statute of Congress which applies to create an exception in this case.
As to the second exception listed above, PAS claims that its cause of action for quantum meruit is equitable in nature and that a freeze of the assets in question is necessary to preserve the efficacy of the equitable remedy. It is true that under Michigan law quantum meruit is an equitable doctrine. See Reynolds v. Polen, 564 N.W.2d 467, 471(Mich.Ct.App. 1997) (stating that quantum meruit is an equitable doctrine); Gravely v. Pfizer, Inc., 427 N.W.2d 613, 616 (Mich.Ct.App. 1993) (same); Sullivan v. PPC Oil Gas Co., 383 N.W.2d 641, 643-44 (Mich.Ct.App. 1986) (same); see also Republic Bank v. Modular One L.L.C, 591 N.W.2d 335 (Mich.Ct.App. 1998) (applying equitable principle "to obtain equity you must do equity" to case involving competing equitable claims to clear title and for quantum meruit). Nevertheless, for the reasons stated below, the Court does not believe that there has been sufficient proof that SCS will be bankrupt or will disburse its assets if the settlement assets are not frozen.
As to the first exception listed above, Plaintiff argues that it has a title interest in the settlement proceeds because of provisions of the subcontract and the settlement agreement and because its relationship with BWL generally. On the whole, although the state case law itself is less than clear, the Court believes that SCS has the better of the argument in that it does not appear that the subcontract, settlement agreement or subcontractor relationship involved here created a prejudgment secured interest on PAS' behalf in the settlement monies.
Even assuming that under Michigan law such a secured interest was created prior to a judicial finding of the interest, it is likely that the secured interest was waived by PAS by its signature to the subcontract, which contained at Paragraph 18 an explicit disclaimer of any lien interest in the Project. The Court realizes that PAS interprets this waiver language more narrowly than does SCS. PAS' interpretation is that the disclaimer is only effective upon final payment from SCS. This interpretation is based upon the final sentence of Paragraph 18, which states that "[p]rior to receipt of final payment, SUBCONTRACTOR shall execute and deliver to CONTRACTOR a general release of liens in a form to be provided by CONTRACTOR." The first thing to say about this interpretation is that it does not even fit the contract language. If PAS' interpretation were intended, then the subcontract would have provided for release of liens after final payment and not before final payment. In the Court's judgment, the release of liens is effective from the date of the subcontract and the language relating to the filing of releases is only intended to later document a release of liens which occurred earlier by virtue of the subcontract language. The Court also believes that this language was intended to prevent the subcontractor from asserting a secured interest in the Project and Project payments. While this interpretation runs somewhat contrary to Michigan's usual expectations of construction and mechanic's liens, there are no such concerns in this case because the Project was bonded and the bond company remains liable in the event that it is later determined that there has been a failure to pay money owed PAS. Indeed, the settlement agreement has reaffirmed the bond company's commitment to insuring the proper payment of PAS for its construction work.
Furthermore, precisely because of Fidelity's bond obligations, there is no significant risk of irreparable harm in the event that SCS fleets off to South America leaving unpaid its obligations to PAS. The bond company will not fleet off to South America. The bond company will remain solvent. Notwithstanding PAS' worries that Fidelity may assert defenses to its claims for bond payment, should PAS prevail on its claims against SCS, it is equally likely that it will prevail as to its claims for bond payment. Indeed, when Fidelity was given opportunity to comment on its defenses at hearing, it failed to describe those defenses with particularity and failed to provide any reason to believe that the defenses would succeed. Both SCS and PAS were of the belief that Fidelity's defenses were without merit, which opinion the Court shares at this moment.
Furthermore, there was simply no proof that SCS would transfer substantial assets offshore. SCS has not given proof of any certain dollar figure of transfers offshore in the past. It has also not made any definitive claims about SCS' financial status in general which would contract the testimony of Jerome Williams. Thus, the Court regards these allegations as mere speculation. Accordingly, the Court determines that there is no irreparable harm that is likely to result in this case and that PAS does not have a secured interest in the settlement proceeds.
This Court also finds that PAS is not entitled to a constructive trust over the settlement proceeds under Michigan law. Michigan law as correctly cited by SCS limits the use of a constructive trust to severe cases, such as when there is proof of actual fraud, duress or similar inequitable conduct warranting a conclusion that the holder's possession of the property is unconscionable. See Kammer Asphalt Paving Co. v. East China Tp. Schools, 504 N.W.2d 635, 641 (Mich. 1993); Potter v. Lindsay, 60 N.W.2d 133 (Mich. 1953). In this case, there is nothing unconscionable about SCS keeping proceeds of a settlement that was designed to determine SCS' rights versus BWL and which was not designed to determine PAS' rights. This is especially true since the settlement reiterated Fidelity's duty to make good on obligations owed to PAS in connection with the construction. Accordingly, the Court also determines that there is no basis for entry of a constructive trust.
3. Harm to SCS
SCS argues that the remedy proposed, freezing the assets, would deprive it of the benefit of its bargain in that the settlement agreement contemplated that it would have the immediate use of the $1.8 million. Frankly, there can be little dispute here that the settlement agreement contemplated exactly SCS' use of that money. Furthermore, SCS is not so large of a company that depriving it of $1.8 million dollars is unlikely to have negative effects upon the company-though exactly what those effects are is unclear from the evidence (i.e., possibly including payment of interest on loans to continue company operations, curtailed construction projects, loss of jobs). Assuming that SCS had to take out a loan to operate in the absence of the $1.8 million dollars and assuming an interest rate of 9 percent, the yearly interest cost by itself would be $162,000.00. Accordingly, the Court determines that this factor strongly weighs against the granting of relief.
4. Public Interest
Finally, the Court must consider the public's interest in this dispute. This is not particularly a telling factor since the great majority of the public could care less about the competing plights of two construction companies engaged in a litigation war in federal court. Nevertheless, to the extent that the public interest is impacted, the Court believes that the public interest is most favored in this case by encouragement of the settlement process in which SCS participated and by respecting the limitations on Rule 65 outlined by the Supreme Court in the Grupo decision. As such, the Court determines that this factor too favors not granting the relief.
The balance of all factors disfavors granting the preliminary injunction requested.
CONCLUSION
In conclusion, the Court determines that PAS' request for a preliminary injunction and constructive trust will be denied. An Order shall enter denying PAS' Motion.