Gold v. Myers Controlled Power, LLC (In re Truland Grp., Inc.)

• Decision Date: 23 July 2018
• Docket Number: Adversary Proceeding No. 16-01151-BFK,Case No. 14-12766-BFK
• Citation: 588 B.R. 447
• Court: U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: IN RE: The TRULAND GROUP, INC., Debtor. H. Jason Gold, in his capacity as trustee for the Truland Group, Inc., et al., Plaintiff, v. Myers Controlled Power, LLC, Defendant.

588 B.R. 447

IN RE: The TRULAND GROUP, INC., Debtor.

H. Jason Gold, in his capacity as trustee for the Truland Group, Inc., et al., Plaintiff,

v.Myers Controlled Power, LLC, Defendant.

Case No. 14-12766-BFK

Adversary Proceeding No. 16-01151-BFK

United States Bankruptcy Court, E.D. Virginia, Alexandria Division.

Signed July 23, 2018

Filed July 25, 2018

Dylan G. Trache, Nelson Mullins Riley & Scarborough LLP, Washington, DC, for Plaintiff.

Augustus C. Epps, Jr., Jennifer McLain McLemore, Christian & Barton, L.L.P., Richmond, VA, for Defendant.

MEMORANDUM OPINION

Brian F. Kenney, United States Bankruptcy Judge

This adversary proceeding is brought by the Chapter 7 Trustee of Truland Walker Seal Transportation, Inc. ("TWST") against a supplier of electrical equipment, Myers Controlled Power, LLC ("Myers"), for the avoidance and recovery of an alleged preference under Section 547 of the Bankruptcy Code. 11 U.S.C. § 547(b). The Court heard the evidence on February 1 and March 29, 2018. For the reasons stated below, the Court finds in favor of the Trustee.

Findings of Fact

The Court, having heard the evidence, makes the following findings of fact:

1. TWST was one of a group of affiliated companies doing business under the name "Truland." Truland and its affiliates comprised one of the largest electrical contractors in the United States, with very substantial contracts, including the contract at issue in this case, the Rehabilitation of the Orange/Blue Line – Stadium Armory to National Airport – for the Washington Metropolitan Area Transit Authority (WMATA).

A. The Parties' Contractual Arrangements.

2. Clark Construction Group, LLC ("Clark") was the General Contractor on the Orange and Blue Line renovation contract for WMATA. The project was a $273 million renovation, involving electrical upgrades, architectural upgrades, the installation of 26 kiosks and mechanical upgrades and repairs.

3. In January 2011, TWST, as Subcontractor, entered into a Subcontract Agreement with Clark Construction Group, LLC ("Clark") as the prime contractor on the Orange/Blue Line job. The total sum to be paid under the Subcontract was $45,000,000.00. Def. Ex. A, at 2.

4. In connection with this contract, Truland caused its bonding companies, Fidelity and Deposit Company of Maryland and Zurich American Insurance Company (together, "Zurich"), to issue Performance Bonds and a Payment Bond on the job. Def. Ex. L, at 00014-00019.

5. Partial payments were permitted under the Subcontract for 95% of the approved work and for on-site stored materials. Def. Ex. A, at 2, ¶ 4(b).

6. The Subcontract contained what is generally known as a "flow down" provision, meaning that TWST as a Subcontractor was contractually obligated to pay its subcontractors and suppliers, and to avoid any bond claims against the surety that guaranteed TWST's performance. Id., ¶ 4(c).

7. At first, Truland intended to use Powell Electrical as a second-tier subcontractor to supply the needed electrical equipment and switches. Powell's circuit breakers did not test properly, however, and were rejected by WMATA. Truland ended up replacing Powell with Myers.

8. Myers did not subcontract directly with TWST. Rather, Myers entered into a Supplier Subcontract with a Disadvantaged Business Entity ("DBE"), Nationwide Electrical Services, Inc. ("NES"), for services and equipment. Def. Ex. B. The total amount to be paid under the Myers-NES Supplier Subcontract was $17,041,113.00. Id. at 1, ¶ 4. The Myers-NES Supplier Subcontract contained a flow down provision similar to the one in the Clark-TWST Subcontract. Id. , ¶ 3.¹

9. The initial proposal from Myers was in the amount of $17,211,342.32. Def. Ex. D. This amount included $170,229.32 for payment and performance bonds. Id. In the end, the requirement for Myers to supply payment and performance bonds was dropped, so the price was reduced accordingly. Def. Ex. J.

10. With the exception of one invoice for stored material, Myers sent its invoices to NES. Def. Ex. K.²

11. NES sent invoices to TWST. Def. Ex. G. Most of the invoices state: "Billing for Myers Controlled Power." Id. The parties – TWST and Myers – considered these invoices to be a fee for "managing the Subcontract with Myers." Myers took its directions exclusively from TWST, not from NES.

12. When it came time to pay for the equipment, Clark would issue joint checks to TWST and NES. Def. Exs. E, at 1061, 0164; F.

13. Myers and the Trustee dispute whether there was ever a written subcontract between NES and TWST. The Trustee was unable to locate or produce one. The Court concludes that there was not a signed, written subcontract between NES and TWST.

B. The Joint Check Agreement.

14. In April 2014, the Truland companies engaged Charles Goldstein, a Managing Director with Protiviti, to act as their Chief Restructuring Officer. Mr. Goldstein testified that by the spring of 2014, Truland and its affiliates were "out of trust" with their suppliers, meaning that they were receiving payments from general contractors but were not paying the suppliers and subcontractors in violation of the flow-down provisions of their subcontracts, by approximately $23.7 million. Def. Ex. T.

15. On April 29, 2014, Charles Breeden of Clark stated: "It was brought to my attention this afternoon that MCP (Truland's DC Gear Supplier) has notified Truland that they will not proceed with additional work until old invoices have been paid." Def. Ex. O (Charles Breeden e-mail, Apr. 27, 2014).

16. On May 1, 2014, Charles (Chuck) Tomasco of Truland noted that "MCP [Myers Controlled Power] has currently stopped delivering equipment which will delay the entire project and jeopardize the $28M K-Line change order we're awaiting from WMATA/Clark ... [W]e have also requested that Clark issue them payment via joint check but have not confirmed yet." Pl. Ex. 16 (Chuck Tomasco e-mail, May 1, 2014).

17. Myers refused to release the equipment to TWST. Pl. Ex. 17 (Sanchez e-mail, May 7, 2014) ("[W]e have had to stop testing and shipments of the ABB transformers. Presently six (6) transformers are ready for shipment.")

18. In light of Truland's payment default, Myers requested "one party" checks from Clark, that is, checks payable only to Myers, as well as a payment guarantee directly from Clark. Pl. Ex. 18, at CCG 0014-0015 (Sanchez e-mail to Charles Breeden, May 7, 2014).

19. On May 9, 2014, Clark formally notified Truland of its default owing to Truland's failure to pay its suppliers and subcontractors. Def. Ex. O, at CCG 0005.

20. Clark, as the prime contractor, insisted on a joint check arrangement. Pl. Ex. 20, at 0059 (Charles Breeden e-mail, May 13, 2014) ("Clark will issue Joint Checks to MCP/Truland that will be endorsed by Truland and then sent to MCP by Clark.").

21. A draft of a Joint Check Agreement ("JCA") (along with Joint Check Agreements on other Truland projects) was circulated on June 11, 2014. Def. Ex. M.

22. Clark, Myers and TWST entered into a Joint Check Agreement ("JCA"). Def. Ex. P. Although it is dated June 9, 2014, the JCA was still unexecuted as of June 11^th. See Pl. Ex. 39; Def. Ex. N, at 0049. Rick Sanchez of Myers testified that Myers signed the JCA about a week after June 9^th, thereby putting the effective date of the JCA at about June 16^th.

C. Myers Explores Making a Payment Claim on the Bond.

23. As the negotiations for the Joint Check Agreement proceeded in May 2014, Myers began exploring the process of making a claim against Zurich, Truland's bonding company on the Orange/Blue Line job. Def. Ex. L.

24. Although Mr. Sanchez testified that Myers "commenced" making claims under Truland's performance and payment bonds with Zurich, no bond claim was entered into evidence.

25. The Court, therefore, concludes that Myers never made a formal claim on the bond. Rather, Zurich signed off on the Joint Check Agreement. Def. Ex. P.³

D. The Payment and the Release of the Equipment.

26. On May 27, 2014, Myers, satisfied with Clark's representations that it would enter into a JCA, released equipment with a cost of $1,819,206.31. Def. Ex. R, at 001123. This invoice included $181,920.63 in "Overhead/Profit," for a total of $2,001,126.94. Id.

27. On June 18, 2014, Myers released additional equipment with a cost of $261,667.00. Id. at 001268. The June 18^th Bill of Sale included an additional $26,166.70 for "Overhead/Profit," for a total Invoice of $287,833.70. Id.

28. On July 11, 2014, Clark delivered a check (No. 10101212) to TWST in the amount of $2,107,039.86. Def. Ex. Q. The check was payable jointly to Myers and TWST. Id.

29. TWST endorsed the check and had it delivered back to Clark. Clark then forwarded the check to Myers.

E. Truland and its Affiliates file for Bankruptcy Protection.

30. By mid-July 2014, Truland was planning for a bankruptcy filing. Def. Ex. U. By that point, the Orange and Blue Line contract was approximately 40% complete, with a $2.8 million account receivable in favor of TWST. Id. at 000463.⁴

31. TWST filed a voluntary petition under Chapter 7 with this Court on July 23, 2014. Case No. 14-12774-BFK.

32. The case is being jointly administered (but not substantively consolidated) with the Chapter 7 cases of The Truland Group, Inc., and its subsidiaries, in Case No. 14-12766-BFK. Case No. 14-12766-BFK, Docket No. 150.

33. The Trustee filed this Adversary Proceeding on July 21, 2016. Docket No. 1.

34. The Trustee testified without contradiction that it is "extraordinarily unlikely" that there will be a distribution to the general unsecured creditors in the case. He testified that administrative creditors will be paid in full, and there will be some distribution to priority creditors, but unsecured creditors will not receive a distribution.

Conclusions of Law

The Court has jurisdiction over this matter pursuant to 28 U.S.C. 1334 and the Order of Reference entered by the U.S. District Court for this District on August 15, 1984. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(F) (proceedings to determine, avoid or recover...