Emond Plumbing & Heating, Inc. v. BankNewport

• Decision Date: 28 November 2014
• Docket Number: No. 2013–212–Appeal.,2013–212–Appeal.
• Citation: 105 A.3d 85
• Court: Rhode Island Supreme Court
• Parties: EMOND PLUMBING & HEATING, INC., et al. v. BANKNEWPORT.

105 A.3d 85

EMOND PLUMBING & HEATING, INC., et al.

v.BANKNEWPORT.

No. 2013–212–Appeal.

Supreme Court of Rhode Island.

Nov. 28, 2014.

Christopher H. Little, Esq., for Plaintiffs.

Neil P. Galvin, Esq., Newport, for Defendant.

Present: SUTTELL, C.J., GOLDBERG, FLAHERTY, ROBINSON, and INDEGLIA, JJ.

OPINION

Justice FLAHERTY, for the Court.

Emond Plumbing & Heating, Inc. (Emond) and Tecta America New England, LLC (Tecta) (collectively the plaintiffs) appeal from a judgment of the Superior Court granting BankNewport's (defendant) motion for summary judgment and denying the plaintiffs' cross-motion for summary judgment. On appeal before this Court, the plaintiffs argue that the Superior Court erred when it analyzed their claims under the Uniform Commercial Code (UCC) and the equitable subordination framework applicable to priority disputes between secured and unsecured creditors. Instead, the plaintiffs contend that their claims should have been analyzed under the theory of unjust enrichment. In that regard, the plaintiffs aver that each of them has sufficiently demonstrated that it conferred a benefit upon the defendant, that the defendant appreciated the benefit, and that the defendant's acceptance of the benefit, without payment, would be inequitable and unjust. Conversely, the defendant argues that it was not unjustly enriched because it neither received, nor did it appreciate, any benefit conferred by the plaintiffs. Further, the defendant argues that it is not inequitable for a secured creditor to retain the benefit that it recovered arising from its contractual rights. Finally, the defendant contends that a judgment in favor of the plaintiffs would do great damage to our jurisprudence because it would effectively render a secured creditor's priority status meaningless. For the reasons set forth in this opinion, we affirm the judgment of the Superior Court.

IFacts and Travel

In May 2010, AIDG Properties, LLC (AIDG), a real-estate holding company managed by Anjan Dutta–Gupta (Dutta–Gupta), purchased premises located at 184 John Clarke Road, Middletown (the property). The property consisted of 5.15 acres of real estate and a 57,372–square–foot industrial office building. AIDG purchased the property in order to lease the majority of the office building to Advanced Solutions For Tomorrow, Inc. (ASFT), a related defense contracting firm. Dutta–Gupta was the principal of ASFT and the relationship between AIDG and ASFT has been described as that between a real-estate holding company and an operating company.

To finance the purchase of the property, and to obtain capital to perform certain necessary improvements to the building located thereon, AIDG obtained two loans from defendant. The first loan was in the amount of $2,516,000; it was intended to finance the acquisition of the property. That loan was secured by a first mortgage on the property, naming defendant as mortgagee. Further, AIDG obtained a second loan in the amount of $1,984,000, referred to as a bridge or construction loan, to help, in part, with financing the purchase of the property as well as funding the necessary improvements. The second loan was secured by a second mortgage on the property in favor of defendant. Both loans were personally guaranteed by ASFT, Dutta–Gupta, and his wife, Indrani Dutta–Gupta.

Necessary improvements included the replacement of the mechanical, or HVAC, systems, which was estimated to cost $400,000, as well as a total roof replacement, which was estimated to cost $357,000. It soon became evident that an increase to the construction budget was required. As a result, on October 6, 2010, a loan modification was executed, increasing the construction budget and bringing the combined total amount of the first and second loans to $4,727,520.

On August 2, 2010, AIDG engaged ABC Building Corp. (ABC) to serve as the general contractor for the HVAC and roofing renovations. AIDG and ABC engaged in a competitive bidding process to solicit interested subcontractors to bid on the projects. After reviewing the bids that were submitted, ABC selected Emond to serve as the HVAC subcontractor based upon the company's bid and experience. As a result, on August 31, 2010, ABC and Emond entered into a subcontract agreement. The agreement provided that Emond was to remove the existing HVAC system as well as design, construct, and install a new system. The original subcontract price for the HVAC work was $400,000.¹

Similarly, following a competitive bidding process, ABC selected Tecta to serve as the subcontractor for the new roof. On September 10, 2010, ABC and Tecta entered into an agreement that provided that Tecta was responsible for removing the existing roof and installing the new roof. The original subcontract price for the roofing work was $206,570.²

Emond and Tecta commenced the improvements, respectively, in September and October of 2010. Pursuant to the subcontract agreements, plaintiffs submitted monthly payment applications to ABC, describing in detail the work that had been completed during the preceding month. ABC then compiled the subcontractors' payment applications into a single, consolidated monthly payment application and forwarded it to AIDG. The consolidated payment application reflected all the work that had been performed by plaintiffs during the previous month.

Upon receipt of ABC's consolidated monthly payment application, AIDG transmitted the application to defendant for its review. The defendant engaged an inspector to review the completed work and to confirm that the work described in each payment application had, in fact, been satisfactorily completed. When defendant's inspector found the completed work to be in order, the requested distribution of the construction loan proceeds was approved and processed. Thereafter, the loan proceeds were disbursed to AIDG, which, in turn, paid the subcontractors for the previous month's work. Generally, this process took thirty days.

In accordance with the above-described procedure, plaintiffs submitted monthly payment applications to ABC. Emond submitted monthly payment applications from September 2010 to February 2011, requesting a total payment amount of $413,428.21.³ The record discloses that Emond was paid only $94,668.02. Likewise, Tecta submitted monthly payment applications from October 2010 to February 2011, excluding the month of January, seeking a total payment amount of $186,507.⁴ It is undisputed that Tecta received a total amount of $11,191.50. For some reason, plaintiffs' November payment applications were not timely transmitted; as a result, they were submitted along with the December payment application. At that time, Emond was owed $191,046.27; while Tecta was owed $174,883.50 for their November and December payment applications. The plaintiffs substantially completed the remaining renovations in January 2011.

The defendant's inspector reviewed the work described in the November and December payment applications and confirmed that the work had been satisfactorily completed. On February 3, 2011, defendant approved the requested distribution of the construction loan proceeds to AIDG. The following day, defendant deposited the loan proceeds in the total requested amount of $497,327.66 into AIDG's account.

Several days later, and before any further funds had been disbursed to plaintiffs, defendant learned that Dutta–Gupta had been arrested based on allegations that he bribed a government official in connection with defense contracts that had been procured by ASFT. Almost immediately, ASFT laid off all its employees and ceased operations. The defendant then declared Dutta–Gupta's arrest to be an event of default because it constituted a material adverse change in the circumstances of AIDG and its guarantors. Therefore, under the terms of the loan documents, defendant accelerated the loans, making the full amount immediately due and payable.

Then, on February 8, 2011, defendant set off the February 4, 2011, deposit of $497,327.66 that had been made into AIDG's account by “reversing” it. Similarly, pursuant to the terms of the personal guaranties, defendant set off the bank accounts of ASFT and Dutta–Gupta.

As a result of defendant's setoff and reversal of the February 4, 2011, deposit, AIDG was unable to pay plaintiffs for the work they had performed. Indeed, plaintiffs have received no compensation since the October payment applications. As a result, there is no dispute that Emond is owed a total amount of $318,760.19 and Tecta $196,038.50 for materials and labor.

On February 15, 2011, defendant filed a complaint in Newport County Superior Court, asserting that it would be irreparably harmed if the property were to remain unsecured and unprotected. The defendant also filed a motion for injunctive relief, seeking to enjoin all parties from entering the property. A justice of the Superior Court issued an order granting defendant possession of the property and denying all others access to it. At one point, Emond requested that defendant allow its employees to enter the property and retrieve the HVAC equipment that it had installed, but for which it had not been paid. However, defendant denied Emond's request, stating that it was unable to grant access without approval from the Superior Court.

On February 16, 2011, defendant commenced foreclosure proceedings against AIDG. Shortly thereafter, AIDG filed for bankruptcy protection in the Northern District of Georgia.⁵ As a result, defendant discontinued its foreclosure proceedings.

In an effort to be remunerated, plaintiffs and ABC initiated mechanic's lien proceedings against AIDG in the Superior Court. The defendant responded in each of the mechanic's lien proceedings by filing an account and claim. Thereafter, on July 18, 2011, defendant obtained permission from the United States Bankruptcy Court to foreclose on the property. The following day, defendant filed petitions for permission to foreclose in each of the pending mechanic's lien...