d/b/a Mountain Meadows

f/d/b/a Riverside Downs

DEBTOR CASE NO. 94-10360





VS. ADV. NO. 94-1011















This matter is before the Court on the debtor's Motion for Partial Summary Judgment against defendant NCI Building Systems, L.P. ("NCI") filed herein on October 13, 1995, and NCI's Response and Motion for Partial Summary Judgment filed on October 20, 1995. This Court has jurisdiction of this matter pursuant to 28 U.S.C. 1334(b). The debtor has alleged that it is a core proceeding pursuant to 28 U.S.C. 157(b)(2). The debtor was the plaintiff in this matter until its Chapter 11 case converted to Chapter 7, and the trustee was substituted as the party in interest.

The debtor initiated this matter by the filing of its Complaint on December 13, 1994. In regard to NCI (originally designated "American Building Company") the Complaint sought the return of structural steel for the construction of a grandstand at the racecourse the debtor proposed to build. On March 9, 1995, the debtor moved to file an Amended Complaint, and on March 15, 1995, moved to dismiss American Building Company. An order sustaining these motions and adding NCI, inter alia, as a party was entered on April 18, 1995.

The Amended Complaint was filed on April 19, 1995, and NCI filed its Answer to the Amended Complaint on May 11, 1995. The debtor filed a Second Amended Complaint on July 18, 1995. NCI filed a Motion to Dismiss Case on October 4, 1995. The debtor filed its Motion for Partial Summary Judgment, and NCI filed its Response and Motion, as set out above. The debtor voluntarily converted its Chapter 11 case to Chapter 7 on November 17, 1995. By Order of this Court entered on November 17, 1995, the Motions for Summary Judgment were abated pending the appointment of a Chapter 7 trustee and the realignment of the trustee as party plaintiff.

This Court entered an Order on December 18, 1995, giving the trustee sixty days to move the Court to be realigned as the party plaintiff herein. The trustee filed her Motion for Substitution as Party Plaintiff on January 26, 1996, and an Order in that regard was entered on February 9, 1996. The trustee advised the Court that she had nothing further to add to the debtor's Motion for Partial Summary Judgment, and an Order was entered on September 11, 1996, submitting the matter for decision.

In its Motion for Partial Summary Judgment the debtor contends that NCI should return $357,000.00 which the debtor paid for structural steel intended for the construction of a grandstand. This sum represented half of the total amount due for the steel under a contract ("the steel contract") between defendant Philip D. Jarvis d/b/a Jarvis Construction ("Jarvis") and NCI. According to the debtor, after this payment was made Jarvis informed NCI that no further payments would be made and that NCI should pick up the partial shipment of steel it had delivered. The debtor states that when it learned of the repossession it demanded the return of the $357,000.00.

The debtor maintains that it is entitled to the return of the $357,000.00 pursuant to KRS 355.2-711 which provides:

Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes acceptance then with respect to any goods involved, and with respect to the whole if the breach goes to the whole contract (KRS 355.2-612), the buyer may cancel and whether or not he has done so may in addition to recovering so much of the purchase price as has been paid

(a) "cover" and have damages under KRS 355.2-712 as to all the goods affected whether or not they have been identified to the contract; or

(b) recover damages for nondelivery as provided in this article (KRS 355.2-713).

The debtor further contends that NCI's repossession of the steel is a voidable preference pursuant to 11 U.S.C. 547(b) in that it was based on an antecedent debt and occurred within ninety days immediately preceding the involuntary petition filed against the debtor on October 24, 1994.

NCI's response to the debtor's first contention is that the debtor consistently sought the return of the steel, rather than its price, and that it should not be allowed to "change horses in mid-stream" without any further amendment to its pleadings. NCI also argues that the debtor and NCI were not in privity of contract with each other and therefore could not have the seller-buyer relationship contemplated by KRS 355.2-711. As to the debtor's second contention, NCI replies that it is not and was not a creditor of the debtor, and that 11 U.S.C. 547(b) is therefore inapplicable in this instance.

Federal Rule of Civil Procedure 54(c), made applicable herein by Federal Rule of Bankruptcy Procedure 7054(a), provides in pertinent part that "every final judgment shall grant the relief to which the party in whose favor it is rendered is entitled, even if the party has not demanded such relief in the party's pleadings." NCI argues that an exception to this provision exists when failure to demand the relief substantially prejudices the opposing party. It cites several cases in support of this position.

This issue was considered in In re Meyertech Corp., 831 F.2d 410 (3rd Cir. 1987), where the court stated:

In our review, we found a technical assertion of a counterclaim for recovery notably absent from Meyertech's pleadings. We conclude, however, that Fed.R.Civ.P. 15(b), adopted by Bankr.Rule 7015, remedies this and, in conjunction with the application of Fed.R.Civ.P. 54(c) ... , supports the entry of the judgment in favor of Meyertech.

Rule 15(b) reads as follows:

* * * * * *

(b) Amendments to Conform to the Evidence. When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings....

* * * * * *

In determining the applicability of this provision here we examine the contents of the pleadings actually filed and the record of the proceeding below for reference to the [issue].

At page 421. It appears to this Court that the amount paid for the steel at issue herein, as well as the source of the payment, would necessarily be considered in determining whether the debtor had a right to the return of the steel. Therefore, the technical lack of a specific reference to the payment in a pleading would not defeat the debtor's recovery of that payment according to the reasoning in Meyertech, supra.

As concerns the issue of whether the debtor has a claim directly against NCI for either the steel or the payment of the $357,000.00, the debtor argues that it paid $357.000.00 for the partial shipment of steel, and now it has neither the steel nor the money. It contends that since it now has no use for the steel, it should have the money back. NCI argues that since the debtor was not a party to its contract with Jarvis, the debtor has no contract-based claim against NCI. Neither the debtor nor NCI support its contentions with reference to case law.

NCI's argument ignores the fact that Kentucky law provides that a contract between two parties may be for the benefit of a third party. In Simpson v. JOC Coal, Inc., Ky., 677 S.W.2d 305 (1984), the Kentucky Supreme Court repeated the rule stated in Long v. Reiss, 290 Ky. 198, 160 S.W.2d 668 (1942) and Ball v. Cecil, 285 Ky. 438, 148 S.W.2d 273 (1941):

'It is settled in this State, as well as most jurisdictions in America, that a third party for whose benefit a contract is made may maintain an action thereon; however, he must have been a party to the consideration or the contract must have been made for his benefit, and the mere fact that he will be incidentally benefited by the performance of the contract is not sufficient to entitle him to enforce it.' 148 S.W.2d @ 274; 160 S.W.2d @ 673.

At page 307. The Simpson court goes on to conclude: "In short, all that is necessary is that there be consideration for the agreement flowing to the promisor and that the promisee intends to extract a promise directly benefiting the third party." Id., at page 307.

In the within matter, the consideration for the agreement, the money that was paid for the steel that was delivered, flowed to the promisor, NCI, for providing the steel to build the racetrack grandstand, a direct benefit to the debtor. In addition, the steel contract, a copy of which was filed herein as an exhibit to Jarvis's Answer, identifies the "End User" of the steel as the debtor's racetrack. It therefore appears to the Court that the debtor fits the definition of a third-party beneficiary, and that it may maintain an action on the contract between NCI and Jarvis.

The debtor has not established, however, that it could recover as the "buyer" under KRS 355.2-711. KRS 355.2-103 defines "buyer" as "a person who buys or contracts to buy goods." The steel contract specifically identifies Jarvis as the "buyer," the party who contracted to buy the steel in this instance. This Court believes that the provisions of KRS 355.2-711 apply to him and not to the debtor.

NCI further argues concerning the equities of its being allowed to retain both the steel it picked up and the money that was paid for it. In support of its contention that it should be able to retain both, NCI has filed the Supplemental Affidavit of Robert J. Medlock, vice-president and CFO of NCI. Mr. Medlock states that "NCI subcontracted out a substantial portion of the steel fabrication, requiring NCI to expend substantial monies therefor." He further states that "[d]ue to the highly specialized nature of the fabricated steel, its value as scrap is minimal in relation to the Steel Contract price."

NCI maintains that it would be inequitable to require either the return of the steel or the payment of any money to the debtor. NCI has expended "effort, money and manpower," it argues, and "the fabricated steel [is] worth no more than scrap value." Unfortunately, NCI does not provide the Court with any specific figures concerning either its expenditures or the scrap value of the steel. The Court therefore is unable to determine how much of the purchase price, if any, might reasonably be retained by NCI.

As concerns the debtor's contention that NCI's taking of the steel is a voidable preference pursuant to 11 U.S.C. 547(b), NCI argues that the debtor acquired no interest in the steel and so cannot maintain a preference action. In order for 547 to be applicable, some property interest of the debtor must be transferred. As set out in Begier v. I.R.S., 110 S.Ct. 2258 (1990):

The Bankruptcy Code does not define 'property of the debtor.' Because the purpose of the avoidance provision is to preserve the property includable within the bankruptcy estate--the property available for distribution to creditors--'property of the debtor' subject to the preferential transfer provision is best understood as that property that would have been part of the estate had it not been transferred before the commencement of the bankruptcy proceedings. For guidance, then, we must turn to 541, which delineates the scope of 'property of the estate' and serves as the postpetition analog to 547(b)'s 'property of the debtor.'

Section 541(a)(1) provides that the 'property of the estate' includes 'all legal or equitable interests of the debtor in property as of the commencement of the case.'

At page 2263. (In a footnote to this text, the court points out that the 1984 amendments to 547(b) substituted "an interest of the debtor in property" for "property of the debtor.") Consistent with this reasoning, the debtor herein had an "interest" in the property in question.

However, in order to establish a preference the debtor (now the trustee) must show that each element of 547(b) is satisfied. These include that the transfer was made to or for the benefit of a creditor, for or on account of an antecedent debt owed by the debtor before the transfer was made, while the debtor was insolvent, and within the appropriate preference period. The section also requires that the transfer enable the creditor to receive more than it would have in a Chapter 7 case in which the transfer had not been made and the creditor received payment of the debt to the extent provided in such a case.

The only preferential transfer element that the debtor even alleged in its Motion for Partial Summary Judgment is that the transfer took place within ninety days of the filing of the involuntary petition in October 1994. It neither alleges nor argues the other elements. NCI raises the issue of whether or not it is a creditor of the debtor. It states that it is not listed as a creditor on any of the debtor's schedules, and that it would have had no cause of action against the debtor if the money for the steel had not been paid. Therefore, while it seems clear that the debtor had a property interest in the steel, it is not so clear that the debtor and NCI had a debtor-creditor relationship with each other so as to satisfy the requirements of 547(b).

Based on all of the foregoing, it is the opinion of this Court that neither movant has carried forward its burden of establishing that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Both the plaintiff's Motion for Partial Summary Judgment and NCI's Motion for Summary Judgment should therefore be overruled, and an order to that effect will be entered separately.


By the Court -



Copies to:


Phaedra Spradlin, Esq., Trustee

John O. Morgan Jr., Esq.

Robert S. Ryan, Esq.