Jonathan L. Flaxer, Not Individually But Solely in His Capacity for Lehr Constr. Corp. v. Peter Gifford, Paul Mcquillan, Lisa Fahey, Kevin Mcnicholas, & Sandor Frankel P.C. (In re Lehr Constr. Corp.)
| Decision Date | 03 April 2015 |
| Docket Number | Case No. 11-10723 (SHL),Adv. No. 13-01261 (SHL). |
| Parties | In re Lehr Construction Corp., Debtor. Jonathan L. Flaxer, not individually but solely in his capacity as Chapter 11 trustee for Lehr Construction Corp., Plaintiff, v. Peter Gifford, Paul McQuillan, Lisa Fahey, Kevin McNicholas, and Sandor Frankel P.C. f/k/a/ Frankel & Abrams, Defendants. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
In re Lehr Construction Corp., Debtor.
Jonathan L. Flaxer, not individually but solely in his capacity as Chapter 11 trustee for Lehr Construction Corp., Plaintiff,
v.
Peter Gifford, Paul McQuillan, Lisa Fahey, Kevin McNicholas, and Sandor Frankel P.C. f/k/a/ Frankel & Abrams, Defendants.
Case No. 11-10723 (SHL)
Adv. No. 13-01261 (SHL).
United States Bankruptcy Court, S.D. New York.
Signed April 3, 2015
[528 B.R. 601]
Golenbock Eiseman Assor Bell & Peskoe LLP, 437 Madison Avenue, New York, NY 10022, By: Douglas L. Furth, Esq., Dallas L. Albaugh, Esq., Michael S. Weinstein, Esq., Michael S. Devorkin, Esq., Jonathan L. Flaxer, Esq., Daniel N. Zinman, Esq., Counsel for Jonathan L. Flaxer, Chapter 11 Trustee for Lehr Construction Corp.
Aronauer, Re & Yudell, LLP, 60 East 42nd Street, Suite 1420, New York, NY 10165, By: Joseph Aronauer, Esq., Counsel for Peter Gifford.
SEAN H. LANE, UNITED STATES BANKRUPTCY JUDGE
Before the Court is Defendant Peter Gifford's motion seeking to dismiss the Plaintiff Trustee's complaint against him, which consists of a single claim under New York's faithless servant doctrine (the “Complaint”). Suing in the shoes of the Debtor Lehr Construction Corporation, the Trustee alleges that Gifford, a Lehr employee, participated in a scheme to overbill Lehr's customers and must return compensation paid to him by Lehr. Gifford argues that Lehr instructed him to carry out the acts in question, and that the Trustee's claims are barred by the in pari delicto doctrine because Lehr was at least equally culpable for the overbilling scheme. For the reasons set forth below, the Court concludes that the in pari delicto doctrine bars the Trustee's claim.
As is required in a motion to dismiss, the Court assumes all the facts alleged in the Complaint to be true. Lehr planned, designed, and oversaw interior construction projects in and around New York City. Compl. ¶¶ 14, 28. Generally, Lehr's work consisted of expanding or renovating a customer's existing space. Compl. ¶ 14. Lehr competed for construction jobs by submitting bids on construction project contracts to potential customers. Compl. ¶ 15. If selected, Lehr became responsible for the completion of the construction project, even though subcontractors would be used by Lehr for parts of the project. Compl. ¶ 16. Thus, Lehr worked closely with specialized subcontractors, who often executed most of the construction work. Compl. ¶ 16.
[528 B.R. 602]
Gifford worked in the purchasing department at Lehr, which negotiated with construction subcontractors. Compl. ¶ 38. The purchasing department “was responsible for ‘buying out’ a project, i.e., entering into the purchase orders with subcontractors to work on the project.” Compl. ¶ 20. Mark Martino headed the purchasing department; Gifford and two others were purchasing agents in that department. Compl. ¶ 38.
Lehr generally grouped its services into two categories: fixed price and cost-plus projects. Compl. ¶ 17. Under these two different types of construction projects, Lehr owed different duties to its customers and had different likelihoods to recover certain expenses from them. Compl. ¶¶ 18, 26, 28, 30, 33, 34. Under a fixed price project, the customer provided Lehr—and its competitors—with finalized drawings depicting the customer's desired construction outcome. Compl. ¶ 18. To estimate the cost of meeting the customer's expectations (i.e., constructing what was depicted in the finalized drawing), Lehr's estimating department inspected the space that the customer sought to renovate or build out and evaluated subcontractor bids for the necessary construction work. Compl. ¶¶ 18–19. Lehr also added oversight costs and a profit factor before submitting a fixed price project bid to the potential customer. Compl. ¶ 19. If the customer selected Lehr to complete the fixed price project, Lehr's bid became the “fixed” price that the customer paid for the project, and the purchasing department entered into purchase orders with subcontractors to execute the construction work. Compl. ¶ 20.
Some fixed price projects required additional work that had not been priced into the fixed price documented in the initial purchase order. Compl. ¶ 24. This additional work was generally required for one of two reasons. Compl. ¶¶ 24–26. First, customers requested to change their designs even after finalized drawings were submitted and the initial purchase order was agreed upon. Compl. ¶ 25. If the customer wanted to modify a design after the initial purchase order was agreed upon for a fixed price project, the customer had to change its order and pay Lehr for the new work. Compl. ¶¶ 24–25. Second, Lehr could have overlooked or failed to price in certain sub-jobs required to complete the project. Compl. ¶ 26. If Lehr reasonably overlooked the additional work, the customer could still be asked to pay for it. Compl. ¶ 26. However, if Lehr failed to account for work reasonably anticipated from the construction drawings, then Lehr had to provide a “contract extra,” and pay the subcontractors to complete the project out of Lehr's potential profits. Compl. ¶¶ 24–26. Lehr's cost control department, headed by Dwayne Mitchell, determined when the customer had to change its order and when Lehr had to provide a contract extra. Compl. ¶ 24.
In fixed price projects, Lehr continued to negotiate with subcontractors after a customer had accepted Lehr's fixed price project bid. Compl. ¶ 21. If Lehr could convince the subcontractors to accept less than had been budgeted for their work under the fixed price project, Lehr could keep the difference without any obligation to pass the difference along to the customer because Lehr was not working as the customer's agent. Compl. ¶¶ 21, 25. Thus, Lehr made efforts to convince subcontractors to reduce their prices after the customer accepted the fixed price project bid. Compl. ¶¶ 22, 30. For example, Lehr bundled multiple fixed price projects to obtain post-acceptance discounts from subcontractors, who in turn benefitted from securing jobs on multiple projects. Compl. ¶ 22.
[528 B.R. 603]
The second type of project was a cost-plus project in which Lehr acted as the agent for the customer. Compl. ¶ 28. If Lehr negotiated with subcontractors to reduce their prices after the customer accepted bids from Lehr and the subcontractors for cost-plus projects, Lehr was obligated as the customer's agent to pass the excess along to the customer. Compl. ¶ 30. Thus, Lehr had no incentive to convince the subcontractors to reduce their prices post-acceptance in cost-plus projects. Compl. ¶ 30.
There were other differences between the fixed price and cost-plus projects. Compl. ¶¶ 28, 32. Unlike in fixed cost projects, “where Lehr was generally provided with the construction drawings that it was tasked to build, in cost [-]plus projects Lehr generally worked with the customer and its agents in the planning and design of the construction project.” Compl. ¶ 28. Lehr then solicited bids from construction subcontractors and, as with fixed price projects, the estimating department considered the bids. Compl. ¶ 29. In cost-plus projects, customers expected that the initial purchase orders between Lehr and the subcontractors included all construction costs because of Lehr's involvement in creating the finalized drawings; sometimes additional work was nevertheless required to complete a cost-plus project. Compl. ¶ 32. Because project completion was Lehr's responsibility, it paid subcontractors to perform the additional work. Compl. ¶ 32. Lehr's profits decreased if customers refused to reimburse Lehr for that work. Compl. ¶ 32. As a result, Lehr created a bid package (the “Bid Package”), which required subcontractors to submit bids for work required by the construction drawings, but also for additional work that Lehr believed could be required based on Lehr's prior experience. Compl. ¶ 33. The Bid Package left Lehr a financial cushion to pay for additional work, sidestepping its past problems with customer reimbursement. Compl. ¶ 34.
However, the Bid Packages' expansive descriptions of the subcontractors' work meant that the subcontractors would not always perform all of the work priced into the Bid Package. Compl. ¶ 34. Thus, while the customer paid for all of the construction work priced into the Bid Package, not all of the work priced into the Bid Package would be provided. Compl. ¶ 34. Acting as the customer's agent under a cost-plus project, Lehr was obligated to return the excess paid for work that was not provided. Compl. ¶ 34.
II. The Criminal Scheme and its ParticipantsAt some point between January 2000 and August 2004, Lehr began to purposely invoice customers with over-expansive descriptions of work, which included unperformed work in cost-plus project Bid Packages. Compl. ¶¶ 33, 35. The money allocated for that unperformed work was never returned to the customers. Compl. ¶ 35. Instead, Jeffrey Lazar, a senior officer at Lehr, oversaw a criminal scheme in which Lehr and its subcontractors...
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