In re A & M Operating Co., Inc.

• Decision Date: 29 March 1995
• Docket Number: No. 6:93cv627 to 6:93cv629.,6:93cv627 to 6:93cv629.
• Citation: 182 BR 997
• Parties: In re A & M OPERATING COMPANY, INC., d/b/a Custom Vessel Company, Debtor. The RALPH M. PARSONS COMPANY, Appellant, v. SOUTH COAST SUPPLY COMPANY, INC., Appellee.
• Court: U.S. District Court — Eastern District of Texas

182 B.R. 997 (1995)

In re A & M OPERATING COMPANY, INC., d/b/a Custom Vessel Company, Debtor.

The RALPH M. PARSONS COMPANY, Appellant, v. SOUTH COAST SUPPLY COMPANY, INC., Appellee.

Nos. 6:93cv627 to 6:93cv629.

United States District Court, E.D. Texas, Tyler Division.

March 29, 1995.

COPYRIGHT MATERIAL OMITTED

Jason Riley Searcy, Longview, TX, Glenn W. Merrick and Sara A. Moon, Davis Graham & Stubbs, Denver, CO, for appellant.

William Sheehy, Wilson Miller Spivey Sheehy & Knowles, Tyler, TX, Frank Edward Billings, Billings & Solomon, and Wayne Kitchens, Houston, TX, for appellees.

MEMORANDUM OPINION AND ORDER

STEGER, District Judge.

On this day came on to be considered the appeal of a bankruptcy court order granting a constitutional mechanic's lien in favor of the South Coast Supply Company, Inc. ("South Coast") for $309,464.32 and a general unsecured claim of $24,544.72. After careful consideration, the Court is of the opinion that the decision of the lower court should be affirmed in part and reversed and rendered in part.

This appeal is brought by the Ralph M. Parsons Company ("Parsons"). The appellee is South Coast Supply Company ("South Coast"). The debtor is A & M Operating Company, which does business as Custom Vessel Company ("CVC"). The facts are concisely stated in the bankruptcy court's opinion and will not be repeated.

I. STANDARD OF REVIEW

"Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." Bankr.R. 8013.

In contrast to the clearly erroneous standard of review for findings of fact, conclusions of law reached by the bankruptcy court are reviewed de novo by the district court. T.B. Westex Foods, Inc. v. FDIC, 950 F.2d 1187, 1190 (5th Cir.1992).

II. THE CONSTITUTIONAL LIEN

The principal issue is whether South Coast is entitled to a constitutional materialman's lien. Because the law surrounding the constitutional materialman's lien is indeterminate and inconsistent, it is worthwhile to review the lien's history.

There are two types of materialman's liens. The more commonly used is the statutory lien established by the state legislature. Tex.Prop.Code Ann. ch. 53 (Vernon's 1995) (formerly Tex.Rev.Civ.Stat.Ann. art. 5452 et seq.). The statutory lien is not at issue here; all concede that South Coast did not avail itself of the statutory lien.

The second, less frequently litigated lien is the constitutional lien. In 1876, Texas extended broad protection of certain manufacturers with the following constitutional provision:

Mechanics, artisans and material men, of every class, shall have a lien upon the buildings and articles made or repaired by them for the value of their labor done thereon, or material furnished therefor; and the Legislature shall provide by law for the speedy and efficient enforcement of said liens.

Tex. Const. art. XVI, § 37.

This safeguard is nearly identical to its 1869 ancestor, which in turn paralleled statutory mechanic's liens passed by the Congress of the Texas Republic in 1839. Tex. Const. art. XVI, § 37 interp. commentary (Vernon 1993); see also University Sav. & Loan Ass'n v. Security Lumber Co., 423 S.W.2d 287, 293 (Tex.1967).

Early cases confused the statutory and constitutional provisions, reading them as creating only one lien. See, e.g., Shields v. Morrow, 51 Tex. 393 (1879); Horan v. Frank, 51 Tex. 401 (1879); see R.D. McPherson, The Constitutional Mechanic's Lien in Texas, 11 So.Tex.L.J. 101, 105 (1969). In 1896, a cornerstone opinion by the Texas Supreme Court eliminated this confusion. Strang v. Pray, 89 Tex. 525, 35 S.W. 1054 (1896). The court held that the constitutional provision is self-executing. The constitutional lien exists independently and apart from any legislative act. Id.; see also First Nat'l Bank in Dallas v. Whirlpool Corp., 517 S.W.2d 262, 267 (Tex.1974); Wood v. Barnes, 420 S.W.2d 425, 429 (Tex.Civ.App. — Dallas 1967, writ ref'd n.r.e.) (list of citations). The self-executing aspect of the constitutional lien is vital because it translates into the chief advantage over statutory liens: the lien-holder does not need to give notice or record his lien; his protection is automatic. Apparently the constitutions of only seven other states make reference to mechanic's liens, and only Texas' has been declared self-executing, making our constitutional lien unique among the fifty states. M.K. Woodward, The Constitutional Lien on Chattels in Texas, 28 Tex.L.Rev. 305, 308-09 (1950).

The same year as Strang, the Texas Supreme Court decreed that "this constitutional provision, in so far as it gives a lien, is as broad as language can make it." Bassett v. Mills, 89 Tex. 162, 34 S.W. 93, 95 (1896). This expansive directive is misleading. Bassett has been conspicuously ignored by later courts which depreciated Bassett's generosity and limited access to the lien.

The most important of these restrictions sharply limits the number of potential defendants: the lien may only be asserted by one in privity with the owner of property in question. First Nat'l Bank of Paris v. Lyon-Gray Lumber Co., 194 S.W. 1146 (Tex. Civ.App. — Texarkana 1917), aff'd, 110 Tex. 162, 217 S.W. 133 (1919); see also Woodward, supra, at 316-17; Eldon L. Youngblood, Mechanics' and Materialmen's Liens in Texas, 26 Sw.L.J. 665, 688 (1972); accord First Baptist Church of Tyler v. Carlton Lumber Co., 173 S.W. 1179 (Tex.Civ.App. — Texarkana 1915, writ ref'd). The Texarkana Court of Appeals' decision in Lyon-Gray was the most significant in this respect. Lyon-Gray swept aside courts of appeals decisions to the contrary, downplayed the generous interpretation in Bassett, and limited "the liens to those who own and control the material when it passes directly to the owner of the incumbered property or by incorporation into his building." Lyon-Gray Lumber Co., 194 S.W. at 1151. The Texas Supreme Court affirmed, apparently viewing a privity requirement as essential to balance the vital need of small businesses to be paid, with the necessity of guarding unsuspecting property owners from hidden liens acquired by someone with whom the owner has not conducted business. First Nat'l Bank v. Lyon-Gray Lumber Co., 110 Tex. 162, 217 S.W. 133, 134 (1919) (disapproving three lower court decisions allowing unrecorded subcontractor liens against owners); accord Lyon-Gray Lumber Co., 194 S.W. at 1151 ("If one who sells material to a contractor may acquire such a paramount right, then the owner would in every instance be at the mercy of those who extend credit to the contractor."); see generally McPherson, supra, at 106-07 (overview of this area).

The contracting party in privity with the owner is called an "original contractor." McPherson, supra, at 106-07. An original contractor is "a person contracting with an owner either directly or through the owner's agent," or "one who deals directly with the owner, with no middleman or contractor intervening." Tex.Prop.Code Ann. § 53.001(7) (Vernon's 1995); Matthews v. Waggenhaeuser Brewing Ass'n, 83 Tex. 604, 19 S.W. 150, 151 (1892); McPherson, supra, at 107.

A corollary of the privity rule is that the constitutional lien is never available to a subcontractor. Da-Col Paint Mfg. Co. v. American Indemnity Co., 517 S.W.2d 270, 273 (Tex.1974). This rule was firmly established by the Texas Supreme Court in 1879 in Horan v. Frank, only three years after enactment of the constitutional provision. 51 Tex. 401, 405 (1879). Among the curious turns in constitutional lien case law is that seventeen years after Horan, the supreme court announced in Bassett that a subcontractor is entitled to the lien. More remarkable is Bassett's conclusion that the lien not only protected subcontractors but also the materialmen who supplied them. Bassett, 34 S.W. at 95. Bassett, as mentioned however, seems to be an aberration disowned by all later courts. See Lyon-Gray Lumber Co., 194 S.W. at 1148-49 (mentioning Bassett's obscurity). All subsequent cases followed Horan. See, e.g., Robert Burns Concrete Contractors v. Norman, 561 S.W.2d 614, 617 (Tex.Civ.App. — Tyler 1978, writ ref'd n.r.e.); Wiseman Hardware Co. v. R.L. King Construction Co., 387 S.W.2d 79, 81 (Tex.Civ. App. — Dallas 1965, no writ); Huddleston v. Nislar, 72 S.W.2d 959 (Tex.Civ.App. — Amarillo 1934, writ ref'd); Lyon-Gray Lumber Co., 194 S.W. at 1149; First Baptist Church of Tyler, 173 S.W. at 1181.

Similarly, the lien is ineffective against a subsequent bona fide good faith purchaser for value without notice. See Wood v. Barnes, 420 S.W.2d 425, 429 (Tex. Civ.App. — Dallas 1967, writ ref'd n.r.e.); Youngblood, supra, at 688. The reason of course is that surprising later purchasers with unrecorded constitutional liens places too heavy of burden on real estate transactions, and again reveals the wisdom of the privity requirement.

Another corollary of the privity rule is that the constitutional lien can only be applied against a debtor who owns the article or building. McPherson, supra, at 107-17 (complete discussion). For example, an original contractor cannot obtain a lien against an owner based on the contractor's privity with a third party who has an executory purchase contract with the owner. See, e.g., Galveston Exhibition Ass'n v. Perkins, 80 Tex. 62, 15 S.W. 633 (1891); Faber v. Muir, 27 Tex.Civ.App. 27, 64 S.W. 938 (1901, writ ref'd).

Another limitation, this one imposed by the wording of the provision itself, is that the constitutional lien only extends to work performed on an "article" or "building." Youngblood, supra, at 688-69; see, e.g., Ball v. Davis, 118 Tex. 534, 18 S.W.2d 1063, 1067 (1929) (well casing is neither article nor building).

The final restriction imposed by Texas courts on the constitutional lien concerns those to whom the lien is extended. Article XVI, section 37 grants lien protection to "mechanics, artisans...