UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
TRI-CITY TURF CLUB, INC.
d/b/a Mountain Meadows
f/d/b/a Riverside Downs
DEBTOR CASE NO. 94-10360
PHAEDRA SPRADLIN, Trustee PLAINTIFF
VS. ADV. NO. 94-1011
PHILIP D. JARVIS d/b/a JARVIS
SURETY INSURANCE CO., INC.;
PORTSMOUTH BLOCK, INC. d/b/a
SCIOTO BLOCK; M.L. VAUGHN and
NICCOLETTE VAUGHN; INSULATIONS, INC.;
NCI BUILDING SYSTEMS, L.P.
d/b/a MIDWEST METALLIC; ADDINGTON
HOLDING COMPANY, INC. and ADDWEST
This matter has come before the Court on a Motion for Summary Judgment filed by defendant Philip Jarvis (AJarvis@), and the Response of the plaintiff trustee. Jarvis and NCI Building Systems, L.P. (ANCI@), are the only remaining defendants in this almost five year old proceeding whose interests have not yet been resolved. NCI, however, has filed a Motion to Withdraw the Reference in the United States District Court. A hearing was conducted on the Motion for Summary Judgment and Response on May 6, 1999. At that time the Court reserved ruling, and allowed Jarvis time to tender further documentary evidence in support of his position. No further documents were filed, and this matter was taken under submission by Order entered on June 29, 1999. 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)(F).
As set out in Cox v. Kentucky Department of Transportation, 53 F.3d 146 (6th Cir. 1995),
According to Federal Rule of Civil Procedure 56(c), when a party moves for summary judgment,
At 149. The movant, Jarvis, did not file supporting affidavits with his Motion for Summary Judgment. He appeared to rely mainly on excerpts of depositions of M.L. Vaughan, former principal of the debtor, now deceased.
Jarvis was engaged by the debtor as the general contractor on a racetrack construction project. The Complaint filed in this matter (originally by the Chapter 11 debtor-in-possession and later amended) alleged the following as to Jarvis:
1. That the payment to him by check of the sum of $30,793.00 for the construction of the building at the racetrack was preferential pursuant to 11 U.S.C.
2. That there were defects in the workmanship and materials of the building which require repair, and that the debtor was damaged in the amount of repair costs;
3. That Jarvis began Phase II construction at the racetrack without a written contract, and that there were defects in that construction (erection of the grandstand) requiring repair;
4. That payments were made under Phase II between August 1994 and October 1994 which were preferential pursuant to'547(b); and
5. That Jarvis=s mechanics lien should be declared void.
Jarvis=s Motion for Summary Judgment addresses numbers 1-4, and first contends that the trustee does not have standing to assert claims based on detrimental actions to real property because the debtor did not own the real estate where the racetrack was to be built. The Third Amended Complaint contended that the debtor was the beneficial owner of the property which was titled in the names of M.L. Vaughan and his wife Niccolette, because funds of the debtor were used to purchase the property. (The Vaughans also filed a Chapter 11 bankruptcy, bearing Case No. 94-10441.) Further, the record shows that the debtor amended its schedules to include a beneficial interest in the real estate in question on Schedule A, Real Property.
Jarvis characterizes the trustee as aAlicensee,@ but does not effectively rebut the contention that the debtor had a beneficial interest in the property. He ignores the broad scope of 11 U.S.C. '541 which provides that property of the estate comprises all legal and equitable interests of the debtor in property as of the commencement of the case. Jarvis=s alternative argument is that the subject property was sold by this Court=s order in the Vaughan case, and that any claim to proceeds from it was abandoned by the trustee. With the property gone, he argues that the trustee retains no interest in the property, equitable or otherwise.
Further, contrary to Jarvis=s unsupported statement that the trustee Ahas no legal interest in the real estate and, therefore, has no legal interest in the improvements which are the underlying foundation of the claims against [Jarvis],@ Kentucky courts have recognized that ownership of fixtures and improvements upon real estate does not necessarily reside in the owner of the real estate. In Broadway & Fourth Avenue Realty Co., 197 S.W.2d 238, Ky. (1946), the Court of Appeals stated:
For many years the court held firmly to the concept that anything attached to land was an unalterable part of the land. But this concept has now become somewhat modified and modernized with the changed conditions of a Twentieth Century civilization. The owner of the dirt beneath an embedded fixture, placed there by his tenant, does not necessarily own the fixture itself. See the case of Bank of Shelbyville v. Hartford, 268 Ky. 135, 104 S.W.2d 217.
At 204-205. In Bank of Shelbyville, the court said:
It has been the rule of law almost from time immemorial that whatever was fixed to the soil became in contemplation of the law a part of it and gave the owner of the soil the same rights to it as the soil itself. However, in more modern times the courts have become more liberal, and, as we think, more in line with advancement of the commercial activities of the human race; so the ancient rule has been very much modified. At this time it is a settled rule that an erection made on premises of the owner of real estate for the purposes of trade as well as for some other purposes is removable at the tenant's will at any time before the end of the term.
At 218. It would appear therefore that the trustee=s interest in the improvements or fixtures constructed by Jarvis is not necessarily dependent upon the debtor=s ownership of the real estate. In any event, Jarvis has not overcome the effect of '541's broad definition of property of the estate, and its consequences for the trustee=s interest and standing, and that portion of his Motion for Summary Judgment should be overruled.
Jarvis next contends that the claim for damages to the building (the alleged construction defects) has no merit because the project architect signed off on the work, and that this constitutes a defense to the claim. Jarvis=s support for this contention is limited to references to deposition testimony given by M.L. Vaughan concerning applications for payment he (Jarvis) made during the construction. Jarvis further argues that the trustee=s response that defects were found, made known to Jarvis and not corrected is inadequate, because the response is based on a letter dated November 21, 1994, from Arthur J. Potter Architect and Associates (the project architect) concerning those defects, and the accompanying Apunch lists.@ Jarvis maintains that these documents were never properly authenticated as having been Areceived in the ordinary course of business.@ The existence of these documents, attached as exhibits to the original Complaint in this matter, at the very least raises an issue of fact. Jarvis has not demonstrated that he is entitled to judgment as a matter of law on this issue.
As to any payments that the plaintiff contends were preferential, Jarvis maintains that the payments were not for antecedent debts, but were made in the ordinary course of business or were a contemporaneous exchange for value. Jarvis does not address the $30,793.00 payment set out above, nor does he discuss the requirements for establishing either of the defenses under 11 U.S.C.'547(c)(2) or (4). If Jarvis has documentary evidence which would support his position concerning these defenses, he has not bothered to file it.
He also spends a great deal of time arguing that the various payments to him under Phase II of the contract were written on accounts of M.L. and Niccolette Vaughan, and therefore not property of the debtor. Jarvis does not address the fact that 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
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.") Whether funds paid by the principal of the debtor for the construction of the debtor=s facility constitute an Ainterest of the debtor in property@ is certainly an issue of material fact.
The plaintiff, on the other hand, maintains that she has demonstrated that all the elements for establishing a preferential transfer are present. These elements, as set out in 11 U.S.C.'547(b), 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. All of these elements must be proved in order for a preferential transfer to be established.
The plaintiff points out that Jarvis is a creditor of the debtor, having entered into the Phase I construction contract with the debtor, and having performed under a Phase II contract which was not properly executed; that sums were owed under the contracts before the transfers were made; and that the transfers were made while the debtor was insolvent, based on the testimony of M.L. Vaughan in his deposition on February 27, 1995, that he knew prior to filing that funds did not exist to complete the racetrack. The question of the preference period as concerns the check for $30,793.35, which was not presented for payment until August 1994, requires a determination of when the transfer is considered as having been made.
On the issue of preferential transfer of a check, the law in the 6th Circuit was found in In re Belknap, Inc., 909 F.2d 879 (6th Cir. 1990). There the court held that the transfer of a check occurred upon delivery from debtor to creditor. However, that case was abrogated by the decision in Barnhill v. Johnson, 112 S.Ct. 1386 (1992), in which the Supreme Court held that for purposes of'547(b), transfer occurs when the check is honored. The rule is different for purposes of the '547(c) new value exception. In that instance, the date of delivery prevails. See In re Tennessee Chemical Co., 112 F.3d 234 (6th Cir. 1997). In this instance, the date of transfer would be the August date, putting it well within the preference period.
As concerns the Phase II payments totaling $141,950.00, they were all made between August and October 1994, and so fall within the preference period. As stated above, Jarvis has not established any of the elements of the ordinary course of business or new value exceptions. On the issue of whether Jarvis received more by the payment of the sums under both Phase I and Phase II than he would have as a creditor in a Chapter 7 case in which these transfers had not been made, it seems obvious that this is the case. Jarvis has not demonstrated that he is entitled to judgment as a matter of law on the issue of preferential transfers under either Phase I or Phase II of the contract with the debtor.
In consideration of all of the foregoing, it is the opinion of this Court that Jarvis=s Motion for Summary Judgment should be overruled. An order in conformity with this opinion will be entered separately.
By the Court -
Phaedra Spradlin, Esq., Trustee
John O. Morgan Jr., Esq.
William K. Shaw, Esq.
Robert S. Ryan, Esq.