Au Bon Pain Corp. v. Artect, Inc., 1228

• Citation: 653 F.2d 61
• Decision Date: 22 June 1981
• Docket Number: No. 1228,Docket No. 81-7066,1228
• Parties: AU BON PAIN CORPORATION, Plaintiff-Appellant, v. ARTECT, INC., Douglas Kahn and Max Gordon, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 61

653 F.2d 61

AU BON PAIN CORPORATION, Plaintiff-Appellant, v. ARTECT, INC., Douglas Kahn and Max Gordon, Defendants-Appellees.

No. 1228 Docket No. 81-7066.

United States Court of Appeals Second Circuit.

Argued April 22, 1981.

Decided June 22, 1981.

Michael E. Schoeman, New York City (Schoeman, Marsh, Updike & Welt, New York City, Beth L. Kaufman, New York City, of counsel), for plaintiff-appellant.

Michael D. Brookman, New York City (Brookman & Brookman, New York City, of counsel), for defendants-appellees.

Before LUMBARD, OAKES and KEARSE, Circuit Judges.

LUMBARD, Circuit Judge:

Plaintiff Au Bon Pain Corporation (ABP) appeals from an order of judgment entered after trial, in the Southern District of New York, Brieant, J., dismissing its complaint against defendants Artect, Inc., Douglas Kahn and Max Gordon. In an earlier order the district court had severed the claims against Artect, thus leaving ABP to proceed against the individual defendants, both officers of Artect. The district court held at trial that ABP had failed to prove its case against either individual and dismissed ABP's complaint in its entirety. We now reverse.

I.

According to the allegations in its complaint and the proof offered at trial, ABP, a Delaware corporation with its principal place of business in Boston, Massachusetts, operates a chain of retail bake shops. It hired Gordon Kahn Associate Architects to design three bake shops, two in Michigan one at the Lakeside Mall in Sterling Heights and one at the Fairlane Town Center in Dearborn and one in Boston. Douglas Kahn and Max Gordon were the partners of Gordon Kahn Associate Architects. Artect, Inc. of which Kahn was the president and Gordon was the vice-president was the general contractor on all three projects.

Pursuant to the standard contracts for each project, progress payments were to be made to Artect by ABP based upon standard Applications and Certificates for Payment submitted by Artect. These documents contain a summary of the work completed to date by each subcontractor, the goods and materials stored at the site, and the payments then due to each subcontractor. They also contain a certification that states:

The undersigned Contractor certifies that the Work covered by this Application for Payment has been completed in accordance with the contract Documents, that all amounts have been paid by him for Work for which previous Certificates for Payment were issued and payments received from the Owner, and that the current payment shown herein is now due. (Emphasis added).

Thus, the certification makes clear that the Contractor certifies that prior advances have been disbursed to subcontractors as provided in the summaries set out in prior Applications and Certificates for Payment.

According to ABP, however, despite advances to Artect totaling at least $171,114 based upon such Applications, ABP was notified by various subcontractors, materialmen, suppliers and laborers that they had not been paid by Artect. ABP terminated all three projects in the winter of 1979-80. It was compelled to make additional payments to the various workers, over and above the funds advanced to Artect.

ABP then brought this diversity suit in the Southern District against Artect, Kahn, and Gordon. The complaint had five counts. The first three claimed a breach of contract by Artect as to each of the three projects and sought resulting losses. The fourth count charged all three defendants with fraud in connection with the Lakeside project and sought damages based upon money advanced by ABP, in reliance upon defendants' misrepresentations, which was never received by the various subcontractors, laborers, suppliers and middlemen, plus punitive damages. Finally, in the fifth count, ABP demanded an accounting by all defendants of the money advanced on all three projects and damages in the amount of the advanced funds which were not properly disbursed.

On June 25, 1980, the district court ordered that, because of an arbitration clause in the standard construction contract, the claims against Artect had to be submitted to arbitration. The court also held, however, that if the individual defendants committed a fraud or other tort while acting for the corporation, they could be sued individually. Therefore, the court ordered the arbitration claims stayed and severed from the claims against the individual defendants. Those latter claims were to go to trial.

Defendant Kahn failed to appear at a court-ordered deposition on July 30, 1980. He called the Magistrate responsible for pre-trial discovery and claimed he had discharged his lawyer (the firm which until then had represented all defendants) by letter dated July 29, and was having difficulty securing new counsel. At pre-trial conference on September 5, Kahn, now appearing pro se, informed the district judge that he could be reached regarding the litigation through his brother whose address and phone number he gave to the judge. In a letter dated September 18, Kahn responded to ABP's interrogatories in an evasive and unresponsive manner. In a second attached letter, dated September 19, Kahn informed the district judge that he would not be able to attend the trial then scheduled for November 15 because he was looking for work; he stated that his absence "should not be mistaken for default," and that "Mr. Gordon's defense should more than adequately present my case." Trial was rescheduled for December 15, and a subpoena so informing Kahn was left at his brother's address; ABP also sent a telegram giving the date of trial.

On December 15, Kahn did not appear for trial. His brother was present and stated that he had not heard from Kahn who was "traveling through the country, photographing." In the meantime, ABP and Gordon had reached a settlement, according to which Gordon would pay ABP $8,500, ABP would drop its charges against Gordon filed with the New York State Department of Education (the state body which licenses architects), and any judgment rendered to ABP in the suit would be joint and several against Gordon and Kahn for $8,500 and only against Kahn for any larger amounts awarded.

At the trial, after noting Kahn's failure to appear, and after striking a portion of the settlement respecting entry of a confession of judgment in state court, the district court asked ABP how it wished to proceed. ABP replied that it would like to take an inquest to obtain a judgment against Kahn. The court allowed ABP to proceed with its inquest; the court also dismissed the claims against Artect, Inc. without prejudice to arbitration, although ABP stated its belief that Artect was not solvent.

ABP then attempted to prove its inquest as to Kahn. Its theory of the case was that, under Michigan law, which it believed governed the obligations of the defendants with respect to the Lakeside and Fairlane project, funds paid to a contractor are considered a trust fund for the benefit of the builder, subcontractors, laborers and materialmen. Mich.Comp.Laws § 570.151 (1970). The contractor is considered the trustee of the fund. Id. Therefore, ABP alleged that Artect, by falsely certifying payment of ABP's money to the various subcontractors and others, while actually keeping the funds, breached its fiduciary duties. Moreover, as officers of the corporation who participated in the breach, Kahn and Gordon were also liable for the breach...