U.S. East Telecommunications, Inc. v. US West Communications Services, Inc.

Decision Date02 November 1994
Docket NumberD,Nos. 1763,1769,s. 1763
Citation38 F.3d 1289
PartiesU.S. EAST TELECOMMUNICATIONS, INC., Plaintiff-Appellee-Cross-Appellant, v. US WEST COMMUNICATIONS SERVICES, INC., formerly known as US West Information Systems, Inc., Defendant-Appellant-Cross-Appellee. ockets 93-9140, 93-9198.
CourtU.S. Court of Appeals — Second Circuit

Joel M. Miller, New York City (James P. Rosenzweig, Miller & Wrubel, P.C., of counsel), for defendant-appellant-cross-appellee.

Ralph Pernick, Great Neck, NY (Clifford J. Chu, Hayt, Hayt & Landau, of counsel), for plaintiff-appellee-cross-appellant.

Before: NEWMAN, Chief Judge, OAKES and PRATT, Circuit Judges.

OAKES, Senior Circuit Judge:

This appeal requires us to examine under what circumstances a general contractor may become liable in quasi-contract to a "second-tier" subcontractor with whom it has not contracted. Appellant US West Communications Services, Inc. (formerly known as US West Information Systems, Inc., hereinafter "West"), the general contractor in this case, conducts large-scale telephone installation and maintenance operations. In 1986, the United States General Services Administration ("GSA") awarded West a contract to upgrade telephone systems in federal offices across the country, including the United States Courthouse in New York City (the "GSA Project"). West subcontracted with Telefacs, Inc., a small telecommunications company headquartered in Houston, Texas, to perform some of the work on the GSA Project in New York. Telefacs in turn hired the appellee, U.S. East Telecommunications, Inc. ("East") (the "second-tier subcontractor"). This litigation ensued after the second-tier subcontract between Telefacs and East began to break down and East sought payment directly from West.

The erosion of relations between Telefacs and East occurred in January of 1987, approximately two months before the conclusion of the New York project, when Telefacs announced to East that, due to tax problems, the IRS was about to shut down its business. In response, East attempted to bypass Telefacs and enter into a contract directly with West. Although it did not manage to obtain a written contract with West, East continued to work on the GSA Project, relying, at least in part, on West's assurances that East would somehow "get paid." The project was completed in late February 1987, and, a month later, Telefacs filed for bankruptcy. When East sought payment from West for work done during January and February 1987, West refused, stating that its only contract was with Telefacs. East's contract was likewise with Telefacs, West reasoned, and accordingly any recovery by East must be solely against Telefacs, in the bankruptcy court. East responded by suing West in the Southern District of New York for breach of contract, fraud, and unjust enrichment.

The district court, Kevin T. Duffy, Judge, dismissed East's fraud claim. East cross-appeals the dismissal, and we affirm, as set out below. The parties then stipulated to a trial by jury before Magistrate Judge Theodore H. Katz, and the jury awarded East damages of $439,953.25 plus interest on the alternative grounds of breach of contract and unjust enrichment. On West's motion to set aside the verdict or for a new trial, Magistrate Judge Katz reversed the breach-of-contract verdict, holding that no reasonable jury could have concluded that East and West reached a "meeting of the minds" on the terms of the proposed contract. Furthermore, the court concluded, East's second-tier subcontract with Telefacs was never extinguished, and so any work performed by East was done pursuant to East's contractual obligations to Telefacs, and did not constitute consideration for a separate contract with West.

The court, however, allowed the jury's unjust-enrichment verdict to stand, and it is from this judgment that West now appeals. West contends that it could not have been "enriched" at East's expense since East's second-tier subcontract with Telefacs was never extinguished and thus East's work was performed for the benefit of Telefacs rather than West. We disagree. While, under most circumstances, a second-tier subcontractor cannot recover from a primary contractor for work performed pursuant to the second-tier subcontract, recovery is not precluded under New York law where, as here, the primary contractor has represented to the second-tier subcontractor that it will be paid. Accordingly, we affirm the orders of the district court and magistrate judge and affirm the judgment.

I. Background
A. Facts

West is a wholly owned subsidiary of US West, Inc., one of the telephone operating companies formed from the breakup of AT & T. US West, Inc. is incorporated under Colorado law and based outside Denver. East is incorporated under New York law and has its principal place of business in Mount Vernon, New York. Thus, the district court had diversity jurisdiction under 28 U.S.C. 1332 (1988).

The deadline for completion of the New York City area portion of the GSA Project, on which West was a primary contractor, was February 28, 1987. In August 1986, West subcontracted with Telefacs to perform some of the work on the New York portion of the project. West's subcontract with Telefacs prohibited Telefacs from "second-tier subcontracting," that is, hiring another business to perform its obligations. Despite that provision, on November 10, 1986, Telefacs hired East to perform Telefacs' obligations on the New York project.

The manner in which work was billed proved to be an important issue at trial. West's agreement with Telefacs provided for "task" billing, that is, payment of preset amounts for particular jobs. Notwithstanding this agreement, East billed Telefacs on a time-and-materials basis, and Telefacs used East's billing invoices as the bases for its own billing invoices to West, adding a mark-up to the rates charged by East. Thus, Telefacs submitted its bills to West on a time-and-materials basis, and West, despite continuing wrangling over the proper billing procedure, paid Telefacs' bills. After taking its markup, Telefacs would pay East.

In early December 1986, a check from Telefacs to East bounced. Telefacs quickly covered this bounced check with a new check. Again, in early January 1987, another check from Telefacs to East bounced. Again, Telefacs quickly covered this bounced check--this time with a wire transfer.

Fearing that Telefacs was experiencing financial difficulty and would not be able to perform its obligations under its contract with East, Carmine "Monte" Montemarano, 1 the Treasurer of East, called Charlie Castillo, the Vice-President of Telefacs, to seek assurances that Telefacs would perform its obligations to East. Monte testified that "[w]hat he basically told me was I have a problem here with the IRS in my office and they are closing me down and I don't know whether I'm going to be in business next week or not." Transcript of 10/14/92 at 121. Mike McCarthy, the Vice-President of East, who listened to the conversation on speakerphone, testified that "Mr. Castillo informed us he was upset, he informed us the IRS had shut his doors and he was out of business, and we said--well Carmine said, 'what should we do now', and he said 'go set up your deal with U.S. West. I'm out of business, I can't pay you guys.' " Transcript of 10/20/92 at 11.

Monte testified that he then spoke with George Kotlarchik, West's installation supervisor for the GSA Project in New York, and asked Kotlarchik how East could arrange "getting direct payment" from West. Kotlarchik referred Monte to Mike Marsh, West's New York Operations Manager. Monte testified that he called Marsh and threatened to pull East's workers off the GSA Project in New York if East did not get paid. Marsh responded, according to Monte's testimony, "[W]e will get you paid. We know you are doing work, let me straighten this out." Transcript of 10/14/92 at 124. In addition, Monte testified that he had similar conversations with Mitch Sherman, West's Operations Manager for the Northeast Region, and Bill Stone, a member of West's Subcontractor Resources Group. Both Sherman and Stone assured him, Monte testified, that West would "get [East] paid." Id. at 124-26.

According to West's own internal procedures, it could not pay East directly unless East became an approved subcontractor. Therefore, Monte was advised that East must complete the subcontractor application package before it could be approved. Monte responded that he would fill it out but that he preferred to hand-deliver the application to West's headquarters in Denver. On January 27, 1987, Monte and Salvani met with West representatives at West's Denver headquarters and discussed the different ways in which East might get paid for its remaining work on the New York job. Monte testified that he made it clear to West that he would have to pull his men off the job if East was not paid directly on its outstanding invoices and all remaining work. Witnesses at trial had conflicting recollections of West's responses. For instance, Mike McCarthy, East's Vice-President, testified that a West representative, Jan Kabachus, told him, "You're working for us now." Transcript of 10/19/92 at 153. Kabachus, on the other hand, denied making such a statement, and West's Stone testified that he told Monte, "Our relationship [is] with Telefacs, ... and if you have a problem getting paid, then you need to deal with [Telefacs]." Transcript of 10/21/92 at 61.

While witnesses disagreed at trial as to exactly what was said, there was agreement that West representatives suggested several alternative ways in which East might get paid. Three options were raised: (1) West could "get East paid" indirectly, by pressuring Telefacs to pay East's invoices; (2) West could pay East directly by issuing "split checks" to East and Telefacs--one paying East directly for its time and materials, and the other paying Telefacs its mark-up of...

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