712 F.2d 962 (5th Cir. 1983), 82-3582, Georgia Pacific Corp. v. Sigma Service Corp.

Docket Nº:82-3582.
Citation:712 F.2d 962
Party Name:GEORGIA PACIFIC CORPORATION, et al., Plaintiffs-Appellees, v. SIGMA SERVICE CORPORATION, Defendant-Appellant.
Case Date:August 22, 1983
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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712 F.2d 962 (5th Cir. 1983)

GEORGIA PACIFIC CORPORATION, et al., Plaintiffs-Appellees,



No. 82-3582.

United States Court of Appeals, Fifth Circuit

August 22, 1983

Rehearing Denied Oct. 17, 1983.

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Gary & Field, Leon Gary, Jr., Michael T. Perry, Baton Rouge, La., for defendant-appellant.

Sanders, Downing, Kean & Cazedessus, R. Gordon Kean, Jr., Gary A. Bezet, Baton Rouge, La., for Georgia Pacific.

Gold, Little, Simon, Weems & Bruser, Dee D. Drell, Alexandria, La., for Dura-Wood Treating Co.

Stone, Pigman, Walther, Wittmann & Hutchinson, John M. Landis, New Orleans, La., for L.B. Foster Co.

Appeal from the United States District Court for the Middle District of Louisiana.

Before WISDOM, TATE and GARWOOD, Circuit Judges.

TATE, Circuit Judge:

Sigma Service Corporation ("Sigma"), debtor in possession of a bankrupt general contracting firm, appeals from a judgment of the district court, 22 B.R. 984, that held that money due to it from Georgia-Pacific Corporation ("Georgia-Pacific") and Mississippi Chemical Corporation ("Mississippi Chemical") (two companies for which Sigma had contracted to perform contracting services)

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did not in fact form a part of its bankruptcy estate. These funds represent amounts admittedly due, under contract, to Sigma from the two companies, but a competing claim to the money has been raised by two parties, L.B. Foster Company, ("Foster") and the Dura-Wood Treating Company Division of Roy O. Martin Lumber Company, Inc. ("Dura-Wood"), who claim that the money is subject, under state law recognizable in bankruptcy, to a "constructive trust" in their favor. Therefore, Foster and Dura-Wood argue, the money belongs to them as owners of the beneficial interest in the constructive trust.

The bankruptcy court rejected the claims of Dura-Wood and Foster and ordered that the amounts due to Sigma by Georgia-Pacific and Mississippi Chemical be turned over to Sigma's estate. Mississippi Chemical did not appeal the order of the bankruptcy judge and turned over to the debtor in possession the sums due by it to Sigma. However, Dura-Wood, Foster, and Georgia-Pacific (the appellees now before us) did appeal to the district court, which reversed the bankruptcy court, accepting the constructive trust theory and concluding, therefore, that the money subject to the trust had never become "property of the estate and was therefore not subject to being turned over to the estate."

We reverse the district court and remand. First, even if the debt due by Georgia-Pacific to Sigma included funds subject to a constructive trust or other equitable claim of Dura-Wood and Foster, nevertheless Sigma had legal title to the account so due and it therefore was part of the debtor's estate, 11 U.S.C. § 541(a), (d), that was required to be turned over to the administrator of the debtor's estate, 11 U.S.C. § 542(a), (b), subject to recognition in the bankruptcy court of the equitable interest of the claimants, 11 U.S.C. § 541(d), 4 Collier on Bankruptcy, p 541.13 (15th ed., 1983). Second, we find that neither Dura-Wood or Foster had a constructive trust or a protected equitable interest in the accounts arising out of their joint-check arrangement or state lien law.

The Factual Background

The undisputed facts indicate that prior to the commencement of the bankruptcy proceedings in this case, Sigma undertook to perform general contracting duties for two companies in two separate construction projects, one in Arkansas for Georgia-Pacific and the other in Mississippi for Mississippi Chemical. Dura-Wood and Foster, as material suppliers, provided materials needed for the Arkansas project, and Dura-Wood provided materials needed for the Mississippi project.

With regard to the Arkansas project:

The record indicates that prior to the contract performance, Sigma sent a letter to Georgia-Pacific requesting that payments to materialmen on the project be accomplished by sending checks to Sigma drawn to the order of both Sigma and to the materialmen. The letter does not specify any affirmative duties of Sigma with regard to the materialmen, but it is apparent, in light of the statement in the letter to the effect that this procedure would ensure the prompt payment of suppliers, that Sigma planned to endorse the checks over to the named materialmen in payment for supplies previously delivered by them to Sigma. In apparent acceptance of the plan proposed by this letter, Georgia-Pacific thereafter sent two checks to Sigma, one made jointly payable to Sigma and Dura-Wood (for the amount of $11,058.19) in partial payment for material supplied by Dura-Wood to Sigma, and one made jointly payable to Sigma and Foster ($13,756.61) in partial payment for material supplied by Foster to Sigma.

Sigma, however, did not endorse the checks over to the respective materialmen, but instead (after its request for re-issuance of the checks to it as sole payee was refused by Georgia-Pacific), retained the checks, filed a petition as debtor in possession for reorganization relief under Chapter 11 of the Bankruptcy Code of 1978, 11 U.S.C. §§ 101 et seq., and filed this complaint in bankruptcy court to require Georgia-Pacific to turn over sums due to Sigma, but still retained by Georgia-Pacific. The total

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amount now claimed from Georgia-Pacific is $63,187.30, representing the amounts paid by joint-payee checks plus additional amounts due to Sigma for materials supplied by Dura-Wood and Foster.

With regard to the Mississippi construction project:

The record does not reflect that any joint-check arrangement was made with regard to the amounts here at issue. Dura-Wood, however, provided materials to Sigma for this project and billed Sigma for $2,563.20, for which no payment has been made. Prior to the filing of the bankruptcy petition in this case, a statutory "stop-notice" was served on Mississippi Chemical by another of Sigma's unpaid material suppliers (not a party to this appeal). Under the state lien statute, this stop-notice had the effect of binding in Mississippi Chemical's hands at least all amounts then due to that materialman. Subsequent to the filing for bankruptcy, Dura-Wood also transmitted a stop-notice to Mississippi Chemical.

Sigma, debtor in possession, instituted this claim demanding the turnover of the amounts due to its estate. 11 U.S.C. § 542.

The bankruptcy court concluded that all disputed amounts formed a part of Sigma's bankruptcy estate, and it ordered that Georgia-Pacific and Mississippi Chemical pay such amounts into the estate. Mississippi Chemical acquiesced in the order and did not appeal. On appeal by Georgia-Pacific, Dura-Wood, and Foster to the district court, the bankruptcy court's order was reversed. With regard to Georgia-Pacific, the district court concluded, under Arkansas lien law, and also relying on the joint-payee nature of the checks and on decisions from other jurisdictions decided under the former Bankruptcy Act, that a constructive trust in favor of Dura-Wood and Foster would be impressed on the amounts due to Sigma from Georgia-Pacific. In addition, relying on the strong wording of the Mississippi lien statute, the district court concluded that a constructive trust would be imposed in favor of Dura-Wood on the amounts due Sigma from Mississippi Chemical. Under this constructive trust theory, the amounts due to Sigma never became "property of the estate" and could not be collected by Sigma in these bankruptcy proceedings. Sigma appeals from this judgment against it.

In concrete terms, the appeal concerns the district court's reversal of the bankruptcy court insofar as: (a) Georgia-Pacific was ordered to turn over to the debtor in possession $55,690.21 (see note 3 infra ) that it owed to Sigma, subject to a credit for prior payments that apparently included the $11,058.19 paid by joint check to Sigma and the appellee Dura-Wood and the $13,756.60 paid by joint check to Sigma and the appellee Foster, suppliers to Sigma for work performed by it for Georgia-Pacific; (b) it rejected the claims of Dura-Wood and Foster to equitable ownership by virtue of a constructive trust to the funds so paid or to be paid to Sigma by joint checks; and (c) it rejected the claim of Dura-Wood of a constructive trust claim under state lien law to $2,563.20 of the total amount due Sigma by Mississippi Chemical for Sigma's work on that contract (which amount as noted, was without appeal turned over to the debtor Sigma in accordance with the bankruptcy judge's order, perhaps (the record is unclear) less the amount owed by Sigma to Dura-Wood). The amounts claimed by Dura-Wood and Foster are for materials delivered to Sigma's contract sites in July and August, 1980. Sigma filed its petition for relief as a debtor in possession on October 14, 1980.

The Statutory Scheme

The issues before us arise under the Bankruptcy Code of 1978, 11 U.S.C. §§ 101 et seq. The application of §§ 541 and 542 are particularly at issue, and we have set them forth in full in an appendix to this opinion.

Under § 541(a)(1), upon the filing of a petition for bankruptcy, an estate is created of "all legal or equitable interests of the debtor in property as of the commencement of the case." Under § 542(b), if this property is in the form of a debt due and payable to the estate, it shall be turned over

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to the trustee--or to the debtor in possession 1--by any entity owing such debt. In order to satisfy the language of § 542(b), however the debt owed must be "property of the estate." 2

Under § 541(d), property that the bankrupt debtor holds subject to the interest of another entity, becomes the property of the estate subject to that interest. This section provides that,


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