UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

CORBIN DIVISION

 

 

IN RE:

MANLON, INC.

DEBTOR CASE NO. 93-60281

CHAPTER 11

 

 

MANLON, INC. PLAINTIFF

 

VS. ADV. NO. 93-6028

 

DISTRICT NO. 1

OF CAMPBELL AND KENTON COUNTIES;

ASSOCIATED PIPELINE CONTRACTORS, INC.;

ACCELERATED NATIONAL INLSURANCE COMPANY;

BELLEVIEW SAND & GRAVEL, INC. DEFENDANTS

 

FINDINGS OF FACT AND CONCLUSIONS OF LAW

 

This matter having come before the Court on September 8, 1993, for hearing on the plaintiff's Motion for Preliminary Injunction, and the Court having heard testimony, reviewed the pertinent documentary evidence and considered the memoranda of counsel, now makes the following Findings of Fact and Conclusions of Law.

I. Findings of Fact

The plaintiff/debtor in possession herein filed a Chapter 11 petition in this Court on July 23, 1993. The plaintiff had entered into a contract to perform services necessary to the completion of the Part III, Project I-515B Elijah Creek Gravity Sewer with defendant Sanitation District No. 1 of Campbell and Kenton Counties ("Sanitation District") on August 20, 1992. The plaintiff earned progress payments in the amount of $31,414.47 as of July 12, 1993, and $24,134.04 from July 13, 1993, through August 6, 1993, and has submitted an estimate for work completed since August 6, 1993, in the amount of $69,453.54. None of these amounts have been paid. Checks jointly payable to the plaintiff and various contractors were issued by the Sanitation District before the filing of the bankruptcy and returned by counsel for the plaintiff after the filing.

Liens have been filed against the contract funds by defendant Associated Pipeline Contractors, Inc. ("Associated") in the amount of $83,936.16 and defendant Belleview Sand & Gravel, Inc. ("Belleview") in the amount of $36,080.84. The lien of Associated was filed on June 7, 1993. The Sanitation District received a signed copy of a letter addressed to the plaintiff without a post office receipt showing that an attested copy of the lien statement had been sent by the lien claimant to the contractor by certified mail, return receipt requested, or by registered mail. Belleview filed its lien on July 14, 1993.

Defendant Acceleration National Insurance Company ("Acceleration") entered into a surety agreement with the plaintiff on October 5, 1989. Acceleration issued a payment bond and a performance bond covering the contract. In August 1992, the plaintiff entered into a contract with Acceleration to provide a payment bond for payment of all charges for labor, materials, supplies, repairs and equipment related to the contract. After the filing of the Chapter 11 petition, Acceleration's agent sent a letter to the Sanitation District demanding that no funds be paid to the plaintiff without Acceleration's approval. No claims have been paid by Acceleration on any claims made against the payment bond.

II. Conclusions of Law

This Court has jurisdiction of this matter pursuant to 28 U.S.C. 1334(b); it is a core proceeding pursuant to 28 U.S.C. 157(b)(2). The issue of the creation and perfection of liens for labor and materials on a public improvement project is governed by KRS Chapter 376, specifically KRS 376.210, 376.230 and 376.240. KRS 376.210(2) provides that a person furnishing labor, materials or supplies for a public improvement project shall have a lien on funds due the contractor from the owner of the property. The lien is for the full contract price and is superior to all other liens created thereafter. The lien is dissolved, however, unless the lien claimant files a lien statement in the appropriate county clerk's office within 30 days of the last day of the month that labor, materials or supplies were furnished.

The perfection of such a lien is governed by KRS 376.240. That section provides:

Upon the filing of the statement of lien provided for in subsection (2) of KRS 376.230 in the county clerk's office and the delivery of an attested copy thereof to the public authority making the contract ..., and the filing with the public authority of a signed copy of a letter addressed to the contractor or subcontractor at his address given in the contract, with a post office receipt showing that an attested copy of the lien statement has been sent by the lien claimant to the contractor or subcontractor by certified mail, return receipt requested or by registered mail, the claimant shall have a lien superior to any lien subsequently perfected on any unpaid balance due the contractor under the contract of improvement.

The record in this case shows that Associated complied with the requirements of the statute, except for the attachment of a copy of the receipt for certified mailing of the copy of the letter to the plaintiff. There is no dispute that the letter was sent by certified mail. The Court concludes that Associated properly perfected its lien prior to the filing of the bankruptcy petition. To conclude otherwise would be to deny Associated the perfection of its lien on the basis of a hyper-technicality.

As concerns the lien of Belleview, that creditor contends that the filing of its lien two days after the filing of the bankruptcy petition does not defeat perfection because the lien arose pursuant to KRS 376.210 prior to the filing of the petition and 11 U.S.C. 546(b) allows the perfection of a lien after the filing of the petition. Belleview goes on to argue that even if its lien should fail, it has rights in the funds being held by the Sanitation District that are superior to the debtor's rights. Belleview in fact contends that these funds do not become property of the estate.

The trustee may avoid the fixing of a statutory lien on property of the debtor pursuant to 11 U.S.C. 545(2) to the extent that such a lien "is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case, whether or not such purchaser exists." Therefore, as pointed out by the court in Allgeier v. Dyer, Inc., 18 B.R. 82 (Bkrtcy.W.D.Ky. 1982), "...the enforceability of the statutory lien depends upon its state of perfection as of the date the petition is filed." At page 86.

The "saving provision", 546(b), allows statutory liens to survive the filing of the bankruptcy petition as long as the statutory requirements have been strictly complied with. "So long as, under applicable law, later perfection will relate back to the bankruptcy filing, such subsequent perfection will be good against the trustee and the lien will not be avoided." Allgeier, at p. 87. In order to prevail on this issue, therefore, Belleview would have to demonstrate that it had strictly complied with all the requirements set out in KRS Chapter 376 for the perfection of such a lien.

The Allgeier court discusses this process, stating that a lien may be acquired by the method set out in KRS 376.210(2) or by filing the statement called for in KRS 376.230. This statement must be filed within 30 days of the last day of the month in which any labor, materials or supplies were furnished. The court states that "[c]ase law regarding this section would tend to support the idea that the filing of this statement is where the inchoate materialman's lien may arise." The court goes on to state that once the lien arises it must be perfected pursuant to the requirements of KRS 376.240. Id, at p. 87.

A lien claimant who had totally complied with all these provisions would then have a claim superior to that of the trustee if all the requirements had been met by the date of filing of the petition, in this case June 12, 1993. The court goes on to state:

The limitation of 546(b) would apply where the state statutory law provides a grace period for perfection which would necessarily relate back to a time before the bankruptcy. The only 'relation back' provision is that found in KRS 376.210(2) when a statement is filed by one expecting to furnish materials, labor or supplies. This provision bears no relationship to perfection or the priority of the lien but appears to have relevance only to when the lien is to take effect.

Id, at p. 88. Since Belleview did not comply with all the required statutory provisions by the date of filing of the petition, and no "grace period" is provided for, this Court concludes that the trustee could avoid Belleview's lien.

Belleview has argued that the debtor has no property interest in progress payments to the extent that they represent sums owed to materialmen. That contention is based to a certain extent on the contention that KRS 376.070 establishes a trust for the benefit of unpaid materialmen. That issue has been resolved by the Sixth Circuit in Com. of Ky., United Pac. Ins. Co. v. Laurel County, 805 F.2d 628, 632 (1986). Therein the court declined to uphold the district court's reliance on several cases, including one cited by Belleview, In re D & B Electric, Inc., 4 B.R. 263 (Bkrtcy.W.D.Ky. 1980), for the proposition that KRS 376.070 creates a trust by implication.

In coming to this conclusion, the court pointed out that the D & B Electric court had relied on two Sixth Circuit cases which interpreted a Michigan statute that expressly created such a trust fund. The United Pac. Ins. Co. court held that the contractor had property interests in the progress payments at issue therein. Id, at p. 634. This Court agrees and concludes that KRS 376.070 does not create a trust for the benefit of unpaid materialmen.

Acceleration has also argued that progress payments do not become property of the debtor's estate. That contention was refuted by the court's decision in United Pac. Ins. Co., supra, as well as that in In re Glover Const. Co., Inc., 30 B.R. 873 (Bkrtcy.W.D.Ky. 1983). The Glover court was concerned with a dispute among the owner, the contractor and the surety. The court distinguished Pearlman v. Reliance Insurance Co., 371 U.S. 132, 83 S.Ct.232, 9 L.Ed.2d 190 (1962) since it dealt with a contract retainage fund and not progress payments:

[T]he issues and interests pertinent to funds retained for disbursement after acceptance of a completed project, and the successive payments made to the contractor to facilitate performance, appear radically dissimilar. ... Focusing only on progress payments, then, we perceive them as latent assets of the bankruptcy estate under 541(a) ...

At pp. 878-879.

The Glover court went on to discuss the interests of various parties to the funds and came to the following conclusion:

Acknowledging interests in others, while warranted, does not alter our basic 541 determination. Although we note their existence, we need not now dissect and quantify these correlative interests. Section 541 does not demand exclusivity of interest in the debtor; for example, if he has a shared interest as a life tenant, joint tenant, tenant in common, or lessee, still the property becomes part of the bankruptcy estate. According to the mandate of the statute, whenever the debtor has a legal or equitable interest in property it is to be available to afford a meaningful opportunity for a fresh start.

This rationale is particularly persuasive in the present context. Progress payments provide the working capital for the ocnstruction industry. As noted at the outset, these funds are the only available means of continuing work on the sites, and attaining the completion deadlines. To hold that a bonded contractor's bankrupt estate does not include his operating capital would be to close the Chapter 11 courtroom door to a broad class of claimants for relief.

At page 881.

Two cases cited by Acceleration in support of its position, D & B Electric, supra and Reliance Insurance, supra have been demonstrated to be inapplicable herein. A third case, In re Pacific Marine Dredging and Construction, 79 B.R. 924 (Bkrtcy.D.Or. 1987) is inapplicable as well. As the debtor has pointed out in its Supplemental Memorandum at page 3, Pacific Marine Dredging is a case decided by a "bankruptcy consultant" strictly on the basis of Oregon law. It directly contradicts the Sixth Circuit decision in United Pac. Ins. Co., supra. This Court therefore concludes that Acceleration was not justified in its attempt to exercise control over the disbursement of funds to the debtor, and it may not avoid its responsibility to comply with the terms of the payment bond.

This Court finally concludes that the debtor's Motion for Preliminary Injunction should be sustained as regards the progress payments, subject to the properly perfected lien of Associated. The Court further concludes that Acceleration should be enjoined from attempting to control payment of funds owed the debtor, or in any way exercising control of the funds of the bankruptcy estate, and from refusing to comply with the terms of the payment bond.

The attorneys shall submit an order in conformity with these findings of fact and conclusions of law.

Dated:

By the Court -

 

 

_____________________________

Judge

 

Copies to:

Debtor

Robert J. Brown, Esq.

Carl E. Grayson, Esq.

James W. Smirz, Esq.

Dixie R. Satterfield, Esq.

Michael L. Baker, Esq.

U.S. Trustee