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April 9, 1993

PENNEX ALUMINUM COMPANY, a division of Metal Exchange Corporation, Plaintiff
INTERNATIONAL FIDELITY INSURANCE COMPANY, Defendant/ Third Party Plaintiff v. AIR MASTER, INC., Third Party Defendant

The opinion of the court was delivered by: SYLVIA H. RAMBO

 Before the court is Plaintiff's motion for summary judgment. Briefs have been filed and the motion is ripe for disposition.


 This is an action to recover on two payment bonds. The bonds were issued by defendant International Fidelity Insurance Company ("IFIC") to benefit suppliers furnishing materials to third party defendant Air Master, Inc. ("Air Master") for improvements on two New York City Housing Authority ("NYCHA") public housing projects.

 Plaintiff Pennex Aluminum Company ("Pennex") is in the business of manufacturing aluminum extrusions. (Complaint at P 1; Defendant's brief in opposition at 2.) Air Master, now insolvent, at one time was in the business of manufacturing and installing windows. (Brief in opposition at 2.)

 Defendant IFIC is a New Jersey corporation which is in the business of writing and issuing bonds to construction companies in connection with construction projects. (Brief in opposition at 2.) In July 1990, IFIC issued two payment bonds to cover window replacement work being done by third party defendant Air Master at Lattimer Gardens, Leavitt Street Houses and Twin Parks West housing projects in New York City (collectively, the "Housing Projects"). (Frank Tanzola Aff. at P 3, Def. App. at 7; Copy of bonds attached to Plaintiff's motion, Ex. A & B.) *fn1" Such bonds are required of all contractors working on NYCHA projects. N.Y. State Fin. Law § 137.1 (Consol. 1993).

 In August 1990, Air Master began purchasing aluminum extrusions from Pennex. *fn2" (Deposition of Bettina Kapp ("B. Kapp Dep.") at 14-15, Def. App. at 54-55; Deposition of Harold Kapp ("H. Kapp Dep.") at 43, 57-58, Def. App. at 27, 30-31.) These extrusions were shipped by Pennex to Air Master's plant in Bensalem, Pennsylvania where they were incorporated into the windows manufactured by Air Master. (Dep. of Joseph Golec ("Golec Dep.") at 58, Def. App. at 77; H. Kapp Dep. at 26, Def. App. at 19.) Since August 1990, Air Master has purchased a substantial quantity of material from Pennex. Sometime after September 1991, Air Master became insolvent and was taken over by secured creditors. (Letter from E. Harris Baum, counsel for Air Master, to court, dated Dec. 21, 1992.) As of the filing of the instant suit, Air Master owed approximately $ 160,000 to Pennex for the purchased extrusions. (Complaint at P 8; Brief in opposition at 10.)

 Pennex received a judgment against Air Master in the amount of approximately $ 176,000 in the Court of Common Pleas of York County, Pennsylvania. *fn3" (Complaint at P 9.) This judgment has been docketed in the Supreme Court for the State of New York, County of Erie. (Motion at 2, P 3.) Pennex also asserted a mechanic's lien against funds retained by NYCHA that were owing to Air Master. (Def. App. at 78-81; Golec Pep. at 65-68.) Recently, Pennex advised the court that it has received $ 68,669.51 from NYCHA in satisfaction of that lien. (Letter from Chas. Friedman, counsel for Pennex, to court, dated Jan. 20, 1993.) Thus, any recovery Pennex obtains in this court will be reduced by that amount.

 In a further effort to recover the funds owed it, Pennex demanded payment under the payment bonds. When IFIC refused to pay, Pennex filed the instant suit, seeking recovery under the payment bonds and under New York State Finance Law § 137. Defendants filed a third party complaint against Air Master.

 Pennex has moved for summary judgment, alleging that it is entitled to recover on the construction payment bonds. IFIC denies liability, asserting that the materials for which payment is sought were not incorporated into the covered projects. Air Master also opposes Pennex's motion, and has adopted IFIC's brief in opposition.


 The standards for the award of summary judgment under Federal Rule of Civil Procedure 56 are well known. As the Third Circuit Court of Appeals recently capsulized:

Summary judgment may be entered if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). An issue is "genuine" only if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S. Ct. 2505, 2510, 91 L. Ed. 2d 202 (1986); Equimark Comm. Finance Co. v. C.I.T. Financial Serv. Corp., 812 F.2d 141, 144 (3d Cir. 1987). If evidence is "merely colorable" or "not significantly probative" summary judgment may be granted. Anderson, 106 S. Ct. at 2511 ; Equimark, 812 F.2d at 144. Where the record, taken as a whole, could not "lead a rational trier of fact to find for the nonmoving party, summary judgment is proper." Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 106 S. Ct. 1348, 1356, 89 L. Ed. 2d 538 (1986).

 Hankins v. Temple Univ., 829 F.2d 437, 440 (3d Cir. 1987). Once the moving party has shown that there is an absence of evidence to support the claims of the nonmoving party, the nonmoving party may not simply sit back and rest on the allegations in his complaint, but instead must "go beyond the pleadings and by [its] own affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate specific facts showing that there is a genuine issue for trial." Celotex Corp. v. Catrett, 477 U.S. 317, 324, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986) (quotations omitted). The court will consider Plaintiff's motion under these standards.

 I. The Parties' Respective Claims

 Pennex asserts that its claim falls squarely within the provisions of the subject bonds issued by IFIC. It claims that there is no genuine issue of material fact that (1) it furnished material for prosecution of the Housing Projects and (2) that those materials were incorporated into the project, or, in the alternative, if they were not incorporated into the project, the materials were diverted from the project without the knowledge or authorization of Pennex. In the event that the materials were thus diverted, Pennex claims that it is entitled to recover under the diversion doctrine as articulated in Giant Portland Cement Company v. State, 232 N.Y. 395, 134 N.E. 322 (N.Y. 1922), and its progeny. Pennex also claims it is entitled to statutory interest at 9% and attorney fees pursuant to N.Y. State Fin. Law § 137.4(c) and C.P.L.R. § 5004.

 IFIC disputes that Pennex is entitled to recover under the bonds, disagreeing with Pennex on both factual and legal grounds. First, IFIC asserts that there are at least three genuine issues of material fact that preclude the entry of summary judgment in this case:

(1) whether the material ordered by Air Master from Pennex was ordered specifically for use on the Housing Projects, (2) whether the extrusions Pennex sold to Air Master were used in the prosecution of the work on the Housing Projects, at or in the vicinity of the Housing Projects, and (3) against which bond is Pennex asserting its claim, and to what extent.

 (Brief in opposition at 27.) Second, IFIC disputes a number of legal contentions made by Pennex: (1) the applicability of the Giant "diversion" exception to the instant case; (2) the immateriality of whether or not the subject material actually was used in the project; and (3) the placement of the burden of proof regarding why materials were incorporated in the Housing Projects on IFIC. Finally, IFIC denies that it is liable for attorney fees even if it were found liable on the underlying claim.

 II. Recovery Under the Payment Bonds

 To recover under a payment bond, normally a supplier must prove (1) that it sold materials to the principal; (2) that the materials it sold were used in the prosecution of the project covered by the bonds; and (3) that the supplier was not paid all sums rightfully due for materials supplied for the covered project. See, e.g., American Surety Co. v. Wells Water Dist., 253 A.D. 19, 1 N.Y.S.2d 614, 254 A.D. 717 (App. Div. 1938), aff'd, 280 N.Y. 528, 19 N.E.2d 926 (N.Y. 1939) (surety liable to all claimants furnishing labor or materials in connection with construction and whose claims are provable and unpaid).

 In this case, the parties do not dispute that the first and third prongs are met. It is conceded that Air Master supplied Pennex with a significant quantity of aluminum extrusions and that Air Master owes Pennex approximately $ 160,000. (Brief in opposition at 5-7, 10.)

 The difficult issue is the second prong. With respect to the bulk of the material, the parties and all individuals with knowledge of the relevant sequence of events concede that no one knows how much, if any, of the Pennex extrusions actually were used in the covered Housing Projects. (Memorandum in support, at 8-9; Brief in opposition at 9; H. Kapp Dep. at 54-55, Def. App. at 28-29; Hillig Dep. at 42, 43, Def. App. at 45-46; B. Kapp Dep. at 23-25, 27, Def. App. at 58-60, 62.)

 However, there appears to be a significant distinction between two types of parts supplied by Pennex. Pennex supplied Air Master with both standard extrusions of a type manufactured by many suppliers, including Air Master's other suppliers, and specially fabricated extrusions that were specific to the New York City Housing Projects. The evidence regarding actual use of the material in the Housing Projects differs significantly for the two types of material.

 A. Specially Fabricated Parts

 Pennex specifically designed and fabricated a number of extrusions for the Housing Projects. (H. Kapp Dep. at 28-29, Motion, Ex. J.) The parties did not brief the exact quantities and value of these specially fabricated pieces. However, the facts establish that these parts were used in the Housing Projects.

 At his deposition, Harold Kapp, Chairman of the Air Master Board, testified as to the normal handling of specially fabricated materials:

"If it came to something we had ordered special, like something for a job, which was not the usual situation, well, that would sit in the yard until, you know, it was needed for that job."

 (H. Kapp Dep. at 32, Def. App. at 23.) In contrast to standard materials, which might be interchanged from one job to the next, *fn4" the specialized materials, because of their job-specific nature, were used only for the particular project for which they were ordered. "We couldn't take [a piece of specially manufactured extrusion] and put it into our line and use this for another job." ( Id. at 37, Motion, Ex. J.)

 The materials were specially ordered for the New York City Housing Projects because Air Master had never had a contract to supply such parts before.

We never used those [specially fabricated] parts before. . . . Let's put it this way: New York City Housing basically uses the same parts. We had not-- we had provided windows for contractors for New York City Housing. They got those parts from somebody else. This was a job where we had bid the job directly, so we were supplying them for the first time.

 (H. Kapp Dep. at 28-29, Motion, Ex. J.) Air Master became insolvent shortly after completing its work for NYCHA. ( Id. at 45.) Thus, because Air Master's work on the Housing Projects was completed and there is essentially no stock left at the Air Master plant, ( id. at 46), there is no logical explanation for the use of the specially fabricated materials other than that they were used in the projects covered by the bonds in this suit.

 Defendant presents no evidence to rebut this conclusion. Instead, IFIC merely asserts that "Pennex has not demonstrated that even those [specially manufactured] parts were used in the prosecution of the work on the Projects." (Brief in opposition at 24 n.15.) This assertion directly follows IFIC's concession that Air Master's purchasing manager, James Hillig "testified that some of the extrusions were ordered specifically for the Housing Projects." (Id.) This mere denial is insufficient. Once the moving party has shown that there is an absence of evidence to support the claims of the nonmoving party, the nonmoving party "must designate specific facts showing that there is a genuine issue for trial." Celotex, 477 U.S. at 324.

 Therefore, with respect to the specially fabricated parts, there is no genuine issue of material fact that they were incorporated into the Housing Projects. *fn5"

 B. Standard Extrusions

 Pennex also provided Air Master with standard extrusions of the type used on many projects and made by many manufacturers. Apparently, the standard extrusions were the bulk of the material that Pennex supplied to Air Master. (H. Kapp Dep. at 39-40, Def. App. at 25-26; Hillig Dep. at 36-37, 43, Def. App. at 43-44, 46.) There is a substantial question as to whether these pieces actually were incorporated into the subject Housing Projects.

 The Pennex materials supplied to Air Master were delivered to Air Master's Bensalem, Pennsylvania plant. (Golec Dep. at 58, Def. App. at 77.) None were shipped directly to the Housing Projects. (Id.) At the plant, the materials were stored outside the factory in a storage yard. In the yard, the Pennex materials were tagged with the appropriate Air Master part number and segregated according to that part number. (Hillig Dep. at 33; Def. App. at 40.) Similar parts manufactured by various suppliers received the same Air Master part number. (Id.) Parts manufactured by Pennex were commingled with the extrusions supplied by other extrusion manufacturers. (Id.) After delivery, Pennex materials were nearly indistinguishable from those manufactured by Air Master's other suppliers. (Hillig Dep. at 33-34.)

 Further, when using standard extrusions in the manufacturing process, Air Master employees generally did not distinguish materials according to their manufacturer. When employees needed a particular type of extrusion for a project, they would fill out a requisition form specifying the necessary part number and use whatever was brought to them from the yard. (Id.) No one kept track of which manufacturer's standard extrusions were used on a particular project. (Id.)

 Finally, once the extrusions are incorporated into windows and installed in the Housing Projects, it is nearly impossible to determine who manufactured them without bearing the window out. Peter Weeks, Pennex's president, walked through the projects and was unable to determine if the windows he examined ...

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