Precision Testing Laboratories v. Kenyon Corp.

• Decision Date: 26 August 1986
• Docket Number: No. 84 Civ. 5424 (IBC).,84 Civ. 5424 (IBC).
• Citation: 644 F. Supp. 1327
• Parties: PRECISION TESTING LABORATORIES, LTD., a New York corporation, Asher Hiesiger, d/b/a Precision Testing Laboratories, Asher Hiesiger, and Arthur Ellis, Plaintiffs, v. KENYON CORPORATION OF AMERICA, a Colorado corporation, and Lawrence B. Kenyon, Defendants.
• Court: U.S. District Court — Southern District of New York

644 F. Supp. 1327

PRECISION TESTING LABORATORIES, LTD., a New York corporation, Asher Hiesiger, d/b/a Precision Testing Laboratories, Asher Hiesiger, and Arthur Ellis, Plaintiffs, v. KENYON CORPORATION OF AMERICA, a Colorado corporation, and Lawrence B. Kenyon, Defendants.

No. 84 Civ. 5424 (IBC).

United States District Court, S.D. New York.

August 26, 1986.

Scheffler, Karlinsky & Stein, New York City, for plaintiffs; Martin E. Karlinsky, of counsel.

O'Donnell, Fox, Gartner & Sobolewski, New York City, for defendants; Stuart F. Gartner, Kenneth A. Bloom, of counsel.

IRVING BEN COOPER, District Judge.

Plaintiffs, two individuals and a corporation engaged in the business of developing emissions systems for foreign automobiles, bring this action pursuant to 28 U.S.C. § 1332 for damages based on breach of an alleged joint venture agreement. They name as defendants an individual and a corporation wholly owned by him engaged in the same business. The case was tried to the Court on February 10 to February 14 and was bifurcated (the issue of liability to be determined first, damages reserved pending our decision thereon). At the conclusion of the trial decision was reserved. Post trial memoranda were filed on April 8, 1986.

FACTS

Plaintiffs Hiesiger and Ellis and defendant Kenyon are all involved in the "gray market" automobile business. Through the "gray market" luxury imported automobiles may be purchased by consumers at prices substantially below retail prices offered by dealers of the manufacturers.

Standards for vehicle pollution emissions are less stringent in Europe than they are here; (Tr. 27-38)¹ safety standards with respect to bumpers, door beams, headlights and door locks are different. (Tr. 36-37) Consequently, European manufacturers who export automobiles to the United States modify the cars in Europe with U.S. regulations. These modified automobiles are much more expensive than their European counterparts.

An alternative means of selling luxury foreign automobiles is to import the vehicles before they have been conformed to U.S. standards and then have them converted in the U.S. to satisfy Department of Transportation ("DOT") and Environmental Protection Agency ("EPA") regulations. It was discovered that through this latter method, the automobiles could be manufactured at much lower prices than automobiles that are converted in Europe and sold by dealers in this country. The process of importing these European vehicles, converting them in the U.S., and selling them here is what is known as the "gray market." (Tr. 13-14)

There are two procedures for bringing a foreign automobile into compliance with U.S. standards. The first involves modification of one particular vehicle. The process works as follows: The nonconforming vehicle is purchased in Europe and transported to the U.S. At the U.S. Customs Port of Entry, the importer of record declares that the vehicle will be brought into compliance with safety and emissions regulations within 120 days and fills out various forms. The vehicle is then released to the importer of record who brings it to a compliance center where safety and emissions modifications are performed. The next stop of the automobile is the emissions test laboratory; the results of the tests determine whether the vehicle returns to the compliance center for more work, or whether it can be made available for use or sale. The automobiles must pass a 50,000 mile standard. (Tr. 56)

At the same time as the automobile is following that path, massive paperwork is being processed by both the DOT and the EPA. Both of these organizations must review all the forms submitted to them, and the EPA further reviews the results obtained by the emissions test laboratory. The DOT and EPA then each reject the automobile for failing to meet their requirements or approve it; in the case of the latter, a release letter is sent to Customs which issues a notice of duty liquidation and admits the vehicle into commerce in the U.S. (Ex. 3; Tr. 25-35, 38-58) The average time period from when the vehicle is first purchased in Europe until it is admitted into commerce is six months. (Tr. 48-49)

The second method for bringing European automobiles into compliance with U.S. standards is called the Small Volume Manufacturers Certification Program. (Tr. 55) It was designed to benefit smaller European manufacturers who export less than 10,000 cars per year to the U.S. by lessening the onerous requirements for testing. Pursuant to the program, a manufacturer who imports less than 10,000 vehicles of one type per year for sale in this country and who agrees to abide by federal regulations and to pay certain taxes (Tr. 131) could have a prototype automobile tested by a 4,000 mile standard instead of a 50,000 mile standard. The emissions laboratory projects the emission levels of the car at 50,000 miles based on the emission levels at 4,000 miles. (Tr. 56-57) If the manufacturer has been designated a member of the Small Volume Manufacturers Program and if the prototype vehicle passes the 4,000 mile test, the manufacturer is empowered to modify nonconforming vehicles without the necessity of any further emissions tests; each individual vehicle need not be separately tested for emission levels. (Tr. 59) If the vehicle passes, the small volume manufacturer is granted a license to place his system on all similar nonconforming cars. (Tr. 133) In short, this method of conforming automobiles is much more efficient and economical.

Plaintiff Hiesiger is a New York attorney who has been working as a real estate investor since the 1950's. (Tr. 10-11) In 1982, he turned some of his efforts toward the business of importing foreign automobiles through the gray market. (Tr. 12) Early that year he invested $50,000 in purchasing five Porsche automobiles which were each individually modified and sold. (Tr. 15) In late 1982 and early 1983 he considered getting involved in a project to import the Volkswagen Beetle from Mexico. In connection with those plans, a prototype vehicle was brought to New York and arrangements were made for Hiesiger to meet the person in charge of the certification program, defendant Kenyon. (Tr. 67-68)

Kenyon, once a motor vehicle mechanic, formed defendant Kenyon Corporation of America ("KCA") sometime in 1981-82 (exact date unspecified) in order to conduct engineering and compliance work on European vehicles imported into the U.S. (Tr. 749) Beginning in 1982, Kenyon worked with an engineer named Claus Liphardt on developing an emissions control system that would replicate the work done by European manufacturers who import cars to this country. (Tr. 750-51) Although by March 1983 Kenyon had certified five vehicles through the one time pass procedure, KCA had not certified a vehicle pursuant to the Small Volume Manufacturers Program (Tr. 755); however, the company's application to be a member of that program had been granted in the spring of 1983. (Tr. 760)

The relationship between Kenyon and Liphardt is noteworthy. According to the deposition testimony of Liphardt, when he first met Kenyon the defendant was unsuccessfully using a very basic, undeveloped system in attempting to pass a certificate car. (Ex. 131 at 19-20) After reviewing Kenyon's problems, Liphardt designed a new and meritorious system which he shared with Kenyon. (Ex. 131 at 21-22) It is clear that Liphardt, not Kenyon, was solely responsible for that system and its engineering. (Ex. 131 at 23-24)

The first meeting between Hiesiger and Kenyon took place in March, April or May of 1983. (Tr. 70, 754) At that time Kenyon was performing engineering work for one Albert Mardikian pursuant to a Small Volume Manufacturers Certificate program. (Tr. 70-72, 757) Kenyon represented to Hiesiger that he and his engineer Liphardt had the capability to perform all work required for certification. (Tr. 72) Soon thereafter, Hiesiger ceased his involvement in the Volkswagen Beetle project. (Tr. 76)

The next meeting between Hiesiger and Kenyon, which occurred one to two months after the first, took place at Hiesiger's apartment at 31 West 11th Street in Manhattan. At trial, each party recalled different aspects of their conversation at that time. Kenyon remembered that Hiesiger stated he did not want to purchase KCA, though at an earlier time he had expressed such an interest, because the asking price of $30,000 was too high. (Tr. 759-60) He also recollected a general discussion pertaining to the "Bosch-Lambda" components (Tr. 761), an emissions technology which gives the engine in a car a great amount of power, low amount of emissions, and high mileage. (Tr. 116-17)

Hiesiger's memory of the meeting focused on the suggestion by Kenyon of a partnership between Hiesiger, Kenyon, Liphardt and Jerry Ellison, the chief laboratory technician of the Mardikian organization. (Tr. 85) Hiesiger had responded that he "would be very glad to see such an organization and would make every effort to bring Ellison on board if Kenyon would make an effort to bring Claus Liphardt on board." (Tr. 86)

Liphardt was not interested in getting involved in the suggested arrangement (Tr. 98), so, according to Hiesiger, Kenyon then suggested that he, Hiesiger and Ellison proceed to modify systems for three Porsche automobiles. Heisiger offered to pay for the vehicles, hire out work space in Amagansett, Long Island, pay for necessary parts, provide a testing facility in Pennsylvania, and pay for a $7,500 bond needed to import the vehicles (Tr. 99-100) All in all, in June or July 1983 (Tr. 106), Hiesiger paid $100,000 in purchasing the three Porsches in Kenyon's name. (Tr. 103-04) Of that money, $4,000 was paid directly to Kenyon to reimburse him for a deposit he had made on one of the automobiles. (Tr. 102) An additional $40,000-50,000 was expended between July and September 1983 (Tr. 106) to pay for technicians and for insurance and testing costs. (Tr. 106) Hiesiger testified that...