The matter before the Court is the "First Amended Complaint for Turnover of Assets and to Determine Priority of Liens" (the "Complaint") filed by the Chapter 7 Trustee of the estate of Bay State York Company, Inc. ("BSY") and Jager, Smith, Stetler & Arata, P.C. ("JSSA").1 The original complaint was filed on December 31, 1991. The amended complaint was filed on May 5, 1992. Following protracted discovery and a number of continuances granted at the request of the parties, this matter was tried on August 12, 1993. The Court now makes the following findings of fact and conclusions of law in accordance with Fed.R.Bankr.P. 7052.
This adversary proceeding arises out of a construction project known as "Harbor Point" (the "Project"). Harbor Point Apartments Company Limited Partnership was the Owner, Massachusetts Housing Finance Agency ("MHFA") was the lender, Vernon Construction Company ("Vernon"), a joint venture of CMJ Peninsula Construction, Inc. and Peabody Peninsula Construction Company, Inc., was the general contractor, and BSY was the heating, ventilation and air-conditioning ("HVAC") subcontractor for the Project pursuant to a Subcontract, dated September 29, 1986, and pursuant to certain change orders. The Subcontract, the value of which exceeded $11 million, specifically incorporated certain documents, including the "contract between the General Contractor and the Owner and any attachments, schedules, addenda, modifications and conditions thereto" and the Project Specifications. Upon executing the SubContract, BSY agreed to
perform and complete this work in a thorough, workmanlike manner under the direction and to the satisfaction of the Contractor and to do all the work herein sublet in conformity with said Plans, Drawings and Specifications, including all labor and materials incidental thereto and to provide, at his own expense, all ladders, scaffolding, implements, apparatus, molds, models, hoisting, cartage, and any other machinery, equipment and tools necessary for the performance of the work or works herein sublet.
Subcontract, Article 1. BSY agreed that the Contractor could
withhold monies for a period of thirty (30) days after the Subcontractor has fully completed the work and after the Contractor receives final payment from the Owner. Said withholding may be applied by the Contractor toward any reasonable costs resulting from delay in performance or any deficiency or defect in the work of the Subcontractor or any failure of the Subcontractor to perform his obligations herein. The Subcontractor agrees that the Contractor may withhold from amounts due the Subcontractor the amounts of any lien claims or claims against the Contractor\'s bonds resulting from the Subcontractor\'s nonpayment of bills. . . . The retainage will be reduced in an equal percentage as the retainage is reduced to the contractor.
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No payment by the Contractor to the Subcontractor shall relieve the Subcontractor of responsibility for any work or materials not in accordance with this contract; and the Subcontractor shall remedy any defects in his work and pay for any damage to other work resulting therefrom.
Subcontract Article 4 (emphasis supplied). With respect to final payment, the Subcontract provided the following:
The final payment after all adjustments provided for herein shall be made sixty-five (65) days after completion of the work covered by this Contract and acceptance thereof by the Contractor, the Architect in charge of said work for the Owner, and the Owner, provided:
(a) close out requirements of the Specifications and the particular trade section covered by this Contract, General Conditions, the terms and conditions of this Contract and the requirements of any applicable affirmative action program have been met, and
(b) the Subcontractor has given to the Contractor satisfactory evidence that the premises are free from all liens or other claims chargeable to the premises or the said Subcontractor, and. . . .
(e) satisfaction by the Subcontractor and/or Contractor of any and all requirements of the Owner and Lender as conditions to the final payment of the Contractor for the work contemplated by this Contract. . . .
Subcontract Article 5. With respect to warranty work, BSY also agreed
(g) to provide and promptly pay for all materials, labor, tools, equipment, transportation and other facilities necessary for the execution and completion of the work as herein set forth. . . . and
(g) to warranty and represent that all materials and equipment furnished under this Contract will be new unless otherwise specified, and that all work will be of good quality, free from faults and defects and in conformance with the Contract and any contract documents in connection with the contract between the Owner and the Contractor, including but not limited to the Drawings, Plans and Specifications. All work not conforming with these requirements be considered defective sic. If within one year after the date of substantial completion of the work or within such longer period of time as may be prescribed by law or by the terms of any applicable general or special warranty required by the contract documents between the Owner and Contractor, the Subcontractor shall correct such defect promptly upon written notice from the Contractor.
Subcontract Article 7(g)-(h) (emphasis supplied). In Article 12 of the Subcontract, BSY agreed that
If the Contractor deems it inexpedient to correct work of the Subcontractor not performed in accordance with this contract, the Contractor may deduct the cost of performing the work from the contract price.
Subcontract Article 12. Alternatively, BSY agreed that it would
. . . within three (3) business days after receiving written notice from the Contractor, proceed to remedy and correct or, if ordered, to take down all portions of the work and remove from the premises all material, whether corrected or uncorrected, which the Contractor shall deem to be unsound or improper, or which has in any way failed to conform to the Drawings, Plans and Specifications. The Subcontractor at his own cost and expense shall make good any defects or omissions and all work damages or destroyed thereby redoing or replacing any such work in a manner and with materials satisfactory to the Contractor.
If the Subcontractor, being so ordered, does not proceed to correct or remove said defective work within twenty-four (24) hours, or fails to prosecute diligently said work of correction or removal, then the Contractor may correct the aforesaid defects or remove the defective work and store the material, all at the expense of the Subcontractor, and the Contractor may charge the cost of such correction or removal to the Subcontractor by deducting the same together with all loss, expense and damage arising therefrom from any amounts then and thereafter due to the Subcontractor, and if said amounts prove insufficient, may collect the deficiency from the Subcontractor.
Subcontract Article 13. Finally, the Subcontract contained provisions for termination in the event BSY failed to supply proper materials, failed to promptly pay bills incurred in connection with the work or failed to correct defective work or materials as or when ordered as follows:
. . . the Contractor may, after three (3) business days written notice to the Subcontractor, provide any labor, equipment and materials required and charge the same to the account of the Subcontractor together with all damages cost or expense occasioned to the Contractor or, at the option of the Contractor, may terminate forthwith the employment of the Subcontractor by mailing a written notice of termination and complete or sublet the work or any part thereof.
Subcontract, Article 9.
The Contract between Vernon and the Owner, provided that "the Contractor shall correct any defects due to faulty materials or workmanship which appear within one year from the date of substantial completion. . . ."
On December 10, 1986, Hartford Casualty Insurance Company ("Hartford") issued a performance and a payment bond under which Hartford was the surety, BSY was the principal and Vernon was the obligee.
Between March 30, 1990 and May 29, 1990, over three years from the date the Subcontract was executed, representatives of C.A. Crowley Engineering, Inc., Vernon, MHFA, BSY, and the Project Architect, Russell & Scott, prepared and reviewed work on final punch list items for HVAC work. In June and July of 1990, Vernon submitted Applications and Certificates for Payment to MHFA (AIA Document G702), in which Vernon indicated that all mechanical work on the Harbor Point project was complete and no additional sums were needed to finish the work.
On November 13, 1990, over three months after Vernon submitted its final application for payment, Hartford received written notice from BSY that it was "unable to complete the work and/or pay its obligations to suppliers of labor and materials on contracts or subcontracts bonded by Hartford." BSY authorized Hartford to take action it deemed appropriate "to cause the bonded projects to be completed and to pay outstanding amounts to suppliers of labor and materials." However, Vernon never sent any form of written notice to BSY either demanding that...
