IN RE: CABIN CREEK ENTERPRISES, INC. CASE NO. 95-50037

 

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

IN RE:

CABIN CREEK ENTERPRISES, INC. CASE NO. 95-50037

DEBTOR

J. JAMES ROGAN,

Trustee for the bankruptcy estate

of Cabin Creek Enterprises, Inc. PLAINTIFF

V. ADV. NO. 95-5040

JAMES W. CLAY, et al. DEFENDANTS

 

MEMORANDUM OPINION

This matter is submitted on the summary judgment motion of the chapter 7 trustee of the estate of the debtor, Cabin Creek Enterprises, Inc.

The facts are set out in Stipulations of Fact and Amended Stipulations of Fact signed by the parties.

CONCLUSIONS OF LAW:

The trustee claims the mechanics' or materialmen's liens of the defendants 31-W Insulation Co., Inc.; 84 Lumber Company; Clay-Ingels Co., Inc.; and Red Hatton d/b/a R & H Electric are avoidable as preferences under the Kentucky preference statute KRS 376.010 et seq., as made applicable by title 11 U.S.C. 544(b). The latter statute permits the trustee to step into the shoes of an unsecured creditor of the debtor and to avoid as preferential a transfer of property of the debtor that is avoidable by such creditor under applicable state law. The Kentucky statute requires the action to avoid the transfer be commenced within six months of the date of the transfer. If this six-month period has not expired on the date of bankruptcy the trustee is afforded additional time within which to commence the action. 11 U.S.C. 546(a).

An involuntary petition for relief under chapter 7 of the Bankruptcy Code was filed against Cabin Creek Enterprises, Inc. on January 11, 1995 by the trustee of the bankruptcy estate of John David Hall, the principal stock holder of Cabin Creek Enterprises, Inc. Mr. Hall had filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code on June 29, 1994.

Mr. Hall, a building contractor, was engaged in constructing homes on subdivision lots owned by Cabin Creek Enterprises, Inc., the name under which he did business.

Mr. Hall's individual bankruptcy precipitated the filing of mechanics' or materialmen's liens against lots owned by Cabin Creek Enterprises, Inc. The liens were filed by suppliers or workmen who had provided materials or labor for the improvements on the lots. The liens of the defendants were filed on or after July 11, 1994, within six months of the filing of the January 11, 1995 involuntary petition against Cabin Creek Enterprises, Inc. Thus, the plaintiff trustee postulates the liens are avoidable under the Kentucky preference statute.

The problem with the trustee's position is that the Kentucky mechanics' and materialmen's lien statute, KRS 376.010(1), provides that once notice of such a lien is properly filed the lien relates back to the date the lienhholder first delivered materials or performed work on the property. In this case the defendants first delivered materials to or performed work on the lots in question prior to the six-month preference period. Because of this relation back feature of the Kentucky mechanics' and materialmen's lien statute, the liens of the defendants antedate the reach-back period of the Kentucky preference statute. The relevant case law recognizes that such liens relate back and preempt a subsequent judicial lien such as that of the trustee under title 11 U.S.C. 544(a) so long as notice of the mechanics' or materialmen's lien is timely filed, even though the notice is filed after the judicial lien has attached to the property. Hodges, et al. v. Quire, 295 Ky. 78, 174 S.W.2d 9 (Ky.Ct. of Appeals 1943); Egyptian Supply Co. v. Boyd, et al., 117 F.2d 608 (6th Cir. 1941). See also In re WWG Industries, Inc., WWG Industries, Inc. v. United Textiles, Inc., 772 F2d 810 (11th Cir. 1985); In re The Lionel Corporation, Klein v. Civale & Trovato, Inc., 29 F.3d 88 (2nd Cir. 1994).

Insofar as the avoidance of these statutory liens is concerned the trustee's reliance on title 11 U.S.C. 545(1) and 547(b) is also misplaced. The statutory lien provided for by the Kentucky mechanics' and materialmen's statute is not a lien that first becomes effective when the debtor becomes insolvent or when the debtor's financial condition fails to meet a specified standard. Consequently, the lien is not avoidable by the trustee under section 545(1) which in turn means the lien is not avoidable by the trustee under section 547(b). 11 U.S.C. 547(c)(6). In re Burton Church Bldg. Co., Inc., 53 B.R. 704 (Bankr. N.D.Ala. 1985). The Bankruptcy Code permits the perfection and relation back of such liens even after bankruptcy. 11 U.S.C. 362(b)(3) and 546(b)(1). Consequently, the liens in question likewise are not avoidable under 11 U.S.C. 545(2). Notices of the liens of three of the defendants were filed before the intervention of bankruptcy. Obviously, those liens would have been valid against a bona fide purchaser on the date of bankruptcy. With respect to the remaining defendants' notice of lien filed after bankruptcy the relation back feature of the Kentucky mechanics' and materialmen's lien stature protects that lien from avoidance under section 545(2) as well. In re Cantrup, 38 B.R. 148 (Bankr. D.Colo. 1984).

To the extent the judgments obtained by the defendants within 90 days of bankruptcy are for materials delivered to or work performed on the lots on which the liens were filed, and are limited to the amount each defendant's lien claim against each lot, such judgments are not avoidable by the trustee under title 11 U.S.C. 547(b). These are merely judgments enforcing liens which the court has determined to be nonavoidable by the trustee under applicable state law, KRS 376.010, et seq. A judgment enforcing a secured claim to the extent the claim is secured does not detract from the secured nature of the claim, and in this instance does not deprive the lienholder of such lienholder's pro rata share of the proceeds of sale of any lot on which the lienholder holds a valid enforceable mechanics' or materialmen's lien.

The decision in In re Rexplore Drilling, Inc., 971 F.2d 1219 (6th Cir. 1992), is not to the contrary. In that case the agreed judgment provided for release of Petro Supply Company's mechanics' and materialmen's liens with the result the judgment was on a wholly unsecured claim. Moreover, the released liens were valueless because they were preempted by a prior consensual lien which exceeded the value of the mineral leases on which the liens were filed. Thus, the Petro Supply judgment on which the garnishment was based was not secured to any extent. Whereas, in this instance the judgments on the mechanics' and materialmen's liens are partially and perhaps in some instance fully secured.

Of course, the position of the defendants cannot be improved by garnishments within the 90-day period proceeding bankruptcy on proceeds remaining from the sale of any lot after satisfaction of mechanics' and materialmen's liens for labor or materials that contributed to the improvements on and resultant value of a lot. The garnishments obtained by the defendants Clay-Ingels Co., Inc.; 84 Lumber Company, and 31-W Insulation Co. within 90 days of bankruptcy on the monies held by the Master Commissioner representing the proceeds of sale of all four lots clearly accomplished preferential transfers of property of the debtor and are avoidable by the trustee under title 11 U.S.C. 547(b). These defendants must look to satisfaction of their lien claims only from the proceeds of sale of lots on which they hold valid mechanics' or materialmen's lien claims.

The court doesn't perceive any notice problem in this case because the lienholders had contracted directly with Cabin Creek Enterprises, Inc., the owner of the property against which the liens were filed. The statute requires notice only in instances where the lienholder has not provided materials or work under contract with the owner of the property.

The trustee's motion for summary judgment avoiding the defendants' mechanics' and materialmen's lien claims as preferential under KRS 376.010 et seq., as made applicable by title 11 U.S.C. 544(b), is overruled.

The trustee's motion for summary judgment avoiding the mechanics' and materialmen's lien claims of the defendants as preferential under title 11 U.S.C. 545 and 547 is overruled.

The trustee's motion for summary judgment avoiding the garnishments of the defendants Clay-Ingels Co., Inc.; 84 Lumber Company; and 31-W Insulation Company as preferential under title 11 U.S.C. 547(b) is sustained.

There remains a dispute between the trustee and 84 Lumber Company as to the amount of the lien claims of 84 Lumber Company against the lots sold by the Master Commissioner. Because there is a material dispute of fact with respect to this issue, a further hearing may be necessary to resolve the dispute. Consequently, this issue cannot be resolved at this time by summary judgment.

Dated:

By the court

______________________

JOE LEE

U. S. Bankruptcy Judge

Copies to:

Ann E. Samani, counsel for the plaintiff

C. William Swinford, Jr., counsel for the defendant 31-W Insulation Company, Inc.

J. Michael Dalton, counsel for the defendant 84 Lumber Company

Thomas H. Burnett, counsel for the defendant Clay-Ingels Co., Inc.

Dodd D. Dixon, counsel for the defendant Red Hatton d/b/a R & H Electric