Gold v. Alban Tractor Co., Inc.
| Decision Date | 30 October 1996 |
| Docket Number | Bankruptcy No. 93-46788 SWR,Adversary No. 95-4547.,Civil Action No. 96-70985 |
| Citation | 202 BR 424 |
| Parties | Stuart A. GOLD, Trustee of Gray Electric Company, Plaintiff/Appellee, v. ALBAN TRACTOR CO., INC., and Alban Engine Power, a Division of Alban Tractor Co., Inc., Jointly and Severally, Defendants/Appellants. |
| Court | U.S. District Court — Western District of Michigan |
Robert A. Weisberg, Carson Fischer, PLC, Birmingham, MI, for Plaintiff/Appellee.
Roy C. Sgroi, Muller, Muller, Richmond, Harms, Myers & Sgroi, P.C., Birmingham, MI, Stephen M. Goldberg, Weinberg & Green LLC, Baltimore, MD, for Defendant/Appellant.
This is an appeal from a Bankruptcy Court judgment. DeMaria Building Company ("DeMaria") had three construction contracts with the Federal Aviation Administration ("FAA"). Gray Electric Company ("Gray") was a subcontractor for DeMaria on all three projects. In one project, the Detroit Metropolitan Air Traffic Control Tower Project ("Tower Project"), Gray purchased materials from Alban Tractor Company and Alban Engine Power (collectively, "Alban"). In June 1992, Alban sued Gray, DeMaria, and DeMaria's surety, Hartford Fire Insurance Co., to recover money owing to Alban under its contract with Gray. A consent judgment for $411,653.81 was entered against Gray and DeMaria in favor of Alban on February 2, 1993.
At that time, the parties entered into a stipulated agreement whereby DeMaria would pay the full amount to Alban and offset payment against Gray's remaining balance on its contract. Under this agreement, DeMaria issued three checks totalling $250,000 payable jointly to Gray and Alban, which Gray endorsed before DeMaria forwarded the checks to Alban. However, after Gray filed for bankruptcy under Chapter 11 on June 17, 1993, DeMaria was unwilling to pay the remaining balance. Pursuant to the settlement agreement, an order reinstating Alban's cause of action and entering a judgment by default against DeMaria was issued on October 27, 1993. DeMaria subsequently sent Alban a check for the balance due, $61,653.81, made payable solely to Alban, fully satisfying the judgment.
The instant action arose when the Trustee for Gray, Stuart Gold, on June 16, 1995 filed an adversary proceeding in Bankruptcy Court to recover as a preference all sums paid to Alban by DeMaria, both before and after Gray's petition for bankruptcy. On November 25, 1995 Alban filed a motion for summary judgment and subsequently Trustee Gold filed a counter-motion for summary judgment. On February 21, 1996 Bankruptcy Judge Steven W. Rhodes denied Alban's motion for summary judgment and granted the counter-motion of the Trustee. Judge Rhodes concluded that the funds used by DeMaria to pay Alban "came from funds that had been withheld from the debtor for failing to pay Alban" and were thus an avoidable transfer. In re Gray Electric Company v. Alban Tractor Co., Inc., 192 B.R. 706, 708 (Bankr.E.D.Mich.1996).
Alban timely filed this appeal. On August 6, 1996 I granted leave to DeMaria and the Associated General Contractors of America to file briefs as Amicus Curiae, which they have done on behalf of Alban. Because I find that under controlling Michigan law the money DeMaria paid to Alban was not the property of the now-bankrupt Gray, I hereby reverse the judgment of the Bankruptcy Court and grant summary judgment in favor of Alban.
Federal Rule of Civil Procedure 56, governing summary judgment, is applied to bankruptcy proceedings by the Federal Rule of Bankruptcy Procedure 7056. A motion for summary judgment shall be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law" Fed.R.Civ.P. 56(c).
An appeal of a bankruptcy court judgment to a district court is "taken in the same manner as appeals in civil proceedings generally are taken to the courts of appeals from the district courts. . . ." 28 U.S.C. § 158(c)(2). Thus my review of the Bankruptcy Court's grant of summary judgment is de novo as to findings of law.
At issue here is whether DeMaria paid Alban out of funds owing to or belonging to Gray. Section 547(b) of the Bankruptcy Code permits a bankruptcy trustee to:
11 U.S.C.A. § 547(b). As the Bankruptcy Court noted, the only issue in dispute here is whether Gray, the debtor, had an interest in the funds that DeMaria paid to Alban, Gray's creditor. If Gray had such an interest, the payments would constitute an avoidable preference under Section 547(b). The Bankruptcy Court ruled that DeMaria had indeed paid Alban out of money due to Gray, thereby depleting Gray's estate to the possible detriment of other creditors. Thus the court held that both the pre- and post-petition payments were avoidable preferences.
The first consideration is whether DeMaria had an independent obligation to pay Alban. As the Bankruptcy Court noted, payments made by a contractor to a supplier who was a creditor of a debtor subcontractor are generally not considered part of the debtor's bankruptcy estate if the contractor has an independent obligation to pay the supplier. In re Flooring Concepts, Inc., 37 B.R. 957, 961 (9th Cir. BAP 1984); Keenan Pipe & Supply Co. v. Shields, 241 F.2d 486, 489-90 (9th Cir.1956). Here, the Bankruptcy Court found that DeMaria did have such an independent obligation to Alban, under the Miller Act. 40 U.S.C. § 270 et seq. Because these were "public building or work" contracts, the Miller Act required DeMaria and its surety, Hartford Fire Insurance Co., to execute a payment bond for "the protection of all persons supplying labor and material in the prosecution of the work performed," which they did execute in the amount of $5,165.00. DeMaria's payments to Alban were made under a stipulated settlement agreement recognizing that obligation.
Nevertheless, the Bankruptcy Court held that because DeMaria satisfied its independent obligation to Alban with funds owed to the debtor which had been withheld from the debtor, DeMaria's payments to Alban constituted an avoidable preference. The Court based its decision primarily on its reading of In re Arnold, 908 F.2d 52 (6th Cir.1990). The facts of that case were similar to the instant controversy. A contractor on a public construction project, J. Harold Shankle Construction Company paid money to a supplier, Braid Electric Company, which was owed to the supplier by a subcontractor, Arnold Electric Company. Shankle paid Braid mostly out of money that Shankle owed to Arnold. When Arnold filed for bankruptcy relief, its trustee sought to avoid Shankle's payments to Braid.
Arnold held that because the payments in question fulfilled an independent obligation from the contractor to the supplier, they were not a preference that could be recovered by the debtor's trustee. The Bankruptcy Court in this case found that Arnold did not apply because, in its view, DeMaria used funds that were owed to the debtor in order to satisfy its independent obligation to Alban.
I do not agree with the Bankruptcy Court that Arnold's holding is limited to situations where the funds in question were not "owing" to the bankruptcy estate. Rather, I interpret that case as standing for the broader proposition that even when a contractor owes money to a debtor, the contractor's payment to a creditor of the debtor is not an avoidable preference so long as it arises from an independent obligation held by the contractor.
Arnold states, "In light of contractor's Shankle's payments to supplier Braid, arising out of an obligation independent of any obligations owed to debtor Arnold, there is no basis upon which to conclude that the funds paid by Shankle are the property of Arnold's estate." Id. at 56. This statement clearly implies that because the payments were made under an independent obligation they could not be property of the debtor, even though the same amount was owed to the debtor.
Immediately following the above-quoted sentence, the Arnold decision rejects an argument that because the payments were equal to amounts owed to the debtor they were property of the debtor. "The funds paid to Braid came from Shankle's general accounts, and not from segregated funds earmarked for Arnold." Id. Yet nowhere is there any indication that this finding is necessary to the decision. That such a finding was not necessary is made clear by the decision's overwhelming emphasis on the contractor's independent obligation to the supplier.
Even if Arnold did depend on the debtor's lack of...
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