In re AJ Lane & Co., Inc.
| Decision Date | 18 February 1994 |
| Docket Number | Bankruptcy No. 89-40268-JFQ to 89-40270-JFQ and 89-40387-JFQ. Adv. No. 92-4081. |
| Parties | In re A.J. LANE & CO., INC., Lane Homes, Inc., Lane Management, Inc., Indian Hill Associates, Inc., Debtors. Stanley MILLER, Trustee, Plaintiff, v. PERINI CORPORATION, Defendant. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
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David Madoff, Cohn, Roitman & Kelakos, Boston, MA, for Stanley Miller, Trustee.
James C. Gross, Klieman, Lyons, Schindler, Gross & Pabian, Boston, MA, for Perini Corp.
This is a preference action. The principal issue raised is whether a pattern of late payments following dunning calls places the payments "in the ordinary course of business . . . of the debtor and the transferee," within the meaning of section 547(c)(2)(B) of the Bankruptcy Code. Stanley Miller (the "Trustee"), as trustee of the bankruptcy estate of A.J. Lane & Co., Inc. ("Lane, Inc."), brings the action against Perini Corporation ("Perini"). Except for the issue of insolvency, the parties agree the dispositive issues are questions of law rather than fact. Without the formality of motions for partial summary judgment, but intending the same consequences, they request the court to adjudicate the issues on the basis of an agreed statement of facts and certain documents filed by Perini in a state court action against the bank that financed the parties' construction project.
Lane, Inc. and its principal, Andrew J. Lane ("Lane"), are real estate developers and owners of rental properties used for commercial and residential purposes. Perini is a construction contractor with operations throughout the country.
On July 2, 1986, Perini and Lane, Inc. entered into a contract pursuant to which Perini agreed to construct for Lane, Inc. a four-story office building on land in Framingham, Massachusetts owned by Lane individually. The agreement provided for Perini to submit a requisition to Lane, Inc. each month setting forth the amounts owed to Perini for the preceding thirty days. Add, Inc. was the architect for Lane, Inc. Upon review and approval of each requisition by Add, Inc., Lane, Inc. was to pay Perini the amount set forth in the requisition. Add, Inc. was obligated to take "appropriate action" on a requisition within seven days of its receipt. Lane, Inc. was, in turn, obligated to make payments to Perini within fifteen days after it had received Add, Inc.'s recommendation. The agreement further granted Lane, Inc. the right to retain specified percentages of sums included in requisitions, exclusive of certain items.
Construction commenced in June of 1986 without Lane, Inc. having obtained outside funding of any sort. Lane, Inc. immediately fell behind in its payments to Perini. On July 1, 1986, Perini submitted Requisition No. 1 to Add, Inc. for its review and approval. Perini received payment for Requisition No. 1 on August 1, 1986, thirty-one days after its submission. Payment for Requisition No. 2 was received twenty-nine days after its submission; payments for Requisitions No. 3 and No. 4 were received fifty-two and fifty-three days after submission, respectively.
On September 24, 1986, less than three months after commencement of work on the project, the Massachusetts Department of Environmental Quality and Engineering ("DEQE") ordered the immediate cessation of all work because of certain unauthorized changes made by Lane, Inc. in the project's design. Over the course of the ensuing twenty months, during which work on the project was suspended, the average length of time which elapsed between requisition and payment increased. The requisitions submitted by Perini during this period represented Perini's monthly administrative fees and the cost of work performed and materials purchased by Perini's subcontractors prior to the project's shutdown.
On October 15, 1986, Perini informed Lane, Inc. by certified mail of its concern regarding "the continuing problems we are experiencing in getting payments on this project." Requisition No. 5, submitted on October 31, 1986, was not paid until January 8, 1987, sixty-nine days after its submission. Requisition No. 6, submitted on February 20, 1987 for expenses incurred during November and December of 1986, was not paid until May 11, 1987, eighty days after its submission. Payments of Requisitions No. 7 through No. 15 were made, on average, some 180 days after their submission. No requisitions were submitted between February 8, 1988, and July 29, 1988.
On January 6, 1988, Lane, as the individual owner of the property, entered into a construction loan agreement with First American Bank for Savings (the "Bank"), pursuant to which the Bank agreed to lend Lane up to $7,000,000.00 to complete construction of the project. Lane executed and delivered to the Bank a promissory note in the principal amount of $7,000,000.00 and, as security therefor, a mortgage deed and security agreement granting the Bank a first mortgage on the property. Lane, Inc., the party to the contract with Perini, was not a party to the loan agreement. The loan agreement provided for the Bank to advance to Lane from time to time sums necessary to enable Lane, Inc. to pay Perini for its work. Section 1.6 of the loan agreement allowed the Bank, in its sole election, to make payments directly to Perini, or to Perini's subcontractors or suppliers, "from time to time and at any time with notice to Borrower and without prejudice to Borrower's right to contest the statement or requisition payment."
In June of 1988, Lane, Inc. resolved its dispute with DEQE. On June 14, 1988, it entered into a new agreement with Perini for completion of the project. The new agreement was written in the form of a change order to the prior agreement. It incorporated most of the prior terms, including the terms of payment. It also added a few provisions, and it made changes to the total price.
Work on the project continued through January of 1989. Lane, Inc. once again fell immediately behind in its payments. The first post-shutdown requisition — No. 17 — was submitted on July 29, 1988 but not paid until September 19, 1988, fifty-two days later. On September 2, 1988, Perini wrote to Lane, Inc. that it was "quite concerned about the length of time it has taken for the first billing to be paid." Requisition No. 18 was paid thirty-two days after invoice; Requisition No. 19 forty-seven days after invoice; and Requisition No. 20 fifty-seven days after invoice. Requisition No. 21, in the amount of $532,670.00, was submitted on November 30, 1988 but never paid. It constitutes part of Perini's proof of claim against Lane, Inc.'s estate.
On January 27, 1989, Lane, Inc. made the first of two payments which the Trustee alleges to be preferential. This payment, in the sum of $293,734, paid Requisition No. 22 in full, thirty-two days after the requisition's submission.
On February 8, 1989, Perini asked that the Bank, in accordance with the loan agreement, to pay Perini directly all amounts due and owing for its work. The Bank made no immediate response to Perini's request. As a result, on February 27, 1989 Perini ceased work on the project. On March 2, 1989, representatives of Perini, Add, Inc., Lane, Inc. and the Bank met to discuss resumption of work by Perini. At that meeting, the Bank represented and assured Perini that it would pay Perini for any and all costs Perini would incur in connection with the project's completion, provided only that such costs were approved in accordance with the terms of the construction agreement. The parties' understanding was memorialized in a letter dated March 2, 1989. In that letter agreement, Perini promised to resume work when the Bank paid it the amounts owed on all requisitions to date and all retainages. Lane, Inc. agreed to pay Perini $53,399, which represented amounts earned, including retainages, under certain change orders. The parties also agreed that no further retainages would be withheld and that the Bank would pay Perini directly on all future requisitions. Lane, furthermore, was to grant Perini a second mortgage on the property under construction and other property.
On March 10, 1989, the Bank made payments totalling $737,984.00 on Requisitions No. 23 and No. 24R, which had been submitted by Perini in connection with work performed and materials supplied in January and February, 1989. One the same date, Lane, Inc. paid Perini $13,839.00, which represented a partial payment of the $53,399.00 which Lane, Inc. had agreed to pay under the letter agreement. This $13,839.00 payment is the second of the two transfers which the Trustee seeks to avoid.
On March 13, 1989, Perini resumed work on the project and continued to work until March 24, 1989, when Lane and Lane, Inc. both filed petitions in this court requesting orders for relief under chapter 11. On March 29, 1989, pursuant to the letter agreement, Perini submitted for Add, Inc.'s approval and the Bank's eventual payment Requisition No. 25 in the amount of $207,494. This was for work performed and materials provided during the period March 13 through March 24, 1989. Despite the Bank's promise that it would compensate Perini for its work, Perini never received payment for Requisition No. 25. Perini thereafter sued the Bank in state court for recovery of the $207,494. That suit is still pending.
Perini asserts that the January 27th payment of $293,734 and the March 10th payment of $13,839 are both protected as payments in the ordinary course of business under section 547(c)(2). That subsection states:
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