In Re Demay International LLC, 09-35759-H4-11.

Decision Date09 June 2010
Docket NumberNo. 09-35759-H4-11.,09-35759-H4-11.
Citation431 B.R. 164
CourtU.S. Bankruptcy Court — Southern District of Texas


Donald L. Wyatt, Stephen Nathaniel Gracey, Wyatt Legal Services, PLLC, The Woodlands, TX, Kenneth A. Keeling, Keeling Law Firm, Houston, TX, for Debtor.


JEFF BOHM, Bankruptcy Judge.

I. Introduction

This Memorandum Opinion addresses thorny issues related to trade fixtures, removables, mechanic's liens, and leases. At stake is $337,279.00 fought over between the debtor's largest secured creditor and another creditor asserting a mechanic's lien.

II. Factual and procedural background

1. On August 4, 2009, Demay International, LLC (the Debtor) filed a petition for relief under Chapter 11 of the United States Bankruptcy Code, commencing case number 09-35759. [Docket No. 1].

2. On November 20, 2009, GSL of Ill, LLC (GSL) filed a proof of claim in the total amount of $14,505,220.46. It holds a security interest in virtually all of the Debtor's assets. It is the Debtor's largest creditor. [GSL's Ex. F].

3. On November 20, 2009, McCaffety Electric Company, Inc. (McCaffety) filed a proof of claim in the amount $337,279.00 (the McCaffety Proof of Claim). [McCaffety's Ex. No. 3]. Pursuant to a contract with the Debtor, McCaffety furnished and installed the following: conduit copper wire, light fixtures, panels, breakers, and connections to: (1) equipment (machines and air conditioning), (2) offices, (3) plugs, (4) switches, as well as incoming primary service and outgoing secondary service to feed low voltage and high voltage panels, and electrical controlling mechanisms (the Electrical Equipment). [Tape Recording, 5/27/10 Hearing at 1:21:43 p.m.]. The Electrical Equipment is replaceable and is replaced within the ordinary course of business. [Tape Recording, 5/27/10 Hearing at 1:33:28 p.m.]. McCaffety installed the Electrical Equipment on property permitted for manufacturing and general industrial use. [GSL's Ex. G, p. 3].

4. The Electrical Equipment sold to the Debtor was valued, at the time of sale, at $748,697.25. [Tape Recording, 5/27/10 Hearing at 1:30:25 p.m.]; [McCaffety's Ex. No. 9]. The resale value of the Electrical Equipment is between $374,348.63 and $561,522.94 ( i.e., between fifty percent and seventy-five percent of the Electrical Equipment's value at the time of sale). [Tape Recording, 5/27/10 Hearing at 1:35:00 p.m.]. Therefore, the Electrical Equipment is valued in excess of McCaffety's claim in this case.

5. The McCaffety Proof of Claim is supported by a mechanic's and materialmen's lien affidavit, signed by Robert McCaffety. [McCaffety's Ex. No. 2]. The debt to McCaffety accrued between August of 2008 and January of 2009. [McCaffety's Ex. No 2]. The affidavit contains the following information: (1) a sworn statement of the amount of the claim; (2) the name and address of the Debtor as the reputed owner and employer; (3) a description of the work done; (4) the name and address of the original contractor ( i.e., McCaffety); (5) a description of the property relating to the mechanic's lien; and (6) McCaffety's physical address. [McCaffety's Ex. No. 2]. On January 29, 2009, McCaffety sent notice of the lien. [McCaffety's Ex. No. 2]. On February 6, 2009, McCaffety notarized the affidavit. [McCaffety's Ex. No. 2].

6. On September 10, 2009, the Debtor filed its schedules. [Docket No. 58]. In the Debtor's Schedule B-Personal Property, the Debtor lists “Tenant Improvements” under the Type of Property category [o]ther personal property of any kind not already listed.” [Docket No. 58-2, p. 8]. The Debtor listed the current value of the Debtor's interest in that property as [u]nknown.” [McCaffety's Ex. No. 8].

7. When the Debtor filed its bankruptcy case, the Debtor was obligated as a tenant under a real property lease agreement with Dumay Real Estate, LLC (the Landlord)-an entity unrelated to the Debtor-at 80 North FM 30823, Conroe, Texas, where the Debtor operated its business (the Lease Agreement). [GSL's Ex. G].

8. Section E, ¶ 1 of the Lease Agreement, titled Alterations (the Alterations Provision), reads as follows:

Any physical additions or improvements to the Premises made by Tenant will become the property of Landlord. Landlord may require that Tenant, at the end of the Term and at Tenant's expense, remove any physical additions and improvements, repair any alterations, and restore the Premises to the condition existing at the Commencement Date, normal wear excepted.
[GSL's Ex. G, p. 6].

9. The termination date of the Lease Agreement is May 31, 2022. [GSL's Ex. G, p. 3]. Upon an event of default by the Debtor,1 the landlord may, among other things, “terminate [the] lease by written notice and sue for damages.” [GSL's Ex. G, p. 8].

10. On December 16, 2009, this Court entered an Order Granting Motion to Extend Time to Accept or Reject Executory Contracts-Real Estate Lease (the Extension Order). [Docket No. 141]. The Extension Order extended the time to accept or reject executory contracts to March 2, 2010. [Docket No. 141]. No party-in-interest objected to the Extension Order.

11. On December 22, 2009, the Debtor filed its Motion for Order Approving Bidding Procedures for the Sale of Substantially all of Debtor's Assets Pursuant to 11 U.S.C. § 363 Free and Clear of Liens, Claims and Encumbrances (the Bid Procedures Motion). [Docket No. 124]. On January 11, 2010, McCaffety filed its Limited Objection to the Bid Procedures Motion. [Docket No. 187].

12. On January 13, 2010, the Debtor filed its Objection to Proof of Claim 67 of McCaffety Electric Company, Inc. (the Objection). [Docket No. 196]. The Objection argued that McCaffety's Proof of Claim should be disallowed as a secured claim-thus becoming an unsecured claim-because the claim was not secured by property of the estate as required by 11 U.S.C. § 506(a).

13. On January 13, 2010, McCaffety filed Motion of McCaffety Electric Co., Inc for Relief From the Stay as to Certain Non-Exempt Property Pursuant to 11 U.S.C. § 362(d)(1) or Alternatively Pursuant to 11 U.S.C. § 362(d)(2). [Docket No. 194].

14. On January 21, 2010, this Court approved McCaffety's compromise of the Objection entitled Creditor, McCaffety Electric Company's Proposed Compromise Language to Resolve Its Limited Objection to Debtor's Motion for Order Approving Bidding Procedures (the First Compromise). [Docket No. 208]. The First Compromise states that [t]he parties agree that the specific assets being transferred under the terms of Schedule A attached to the ‘Stalking Horse’ bid do not include items upon which McCaffety has a lien ... if the successful buyer assumes the lease with Dumay Real Estate, the lease is subject to all of McCaffety's lien rights against the leasehold, removables and/or real property to the extent there are any. In the event ... the lease ... is rejected, the rejection does not terminate any lien rights McCaffety has against the removables and/or real property, if any.” [Docket No. 208]. Counsel for the Debtor and McCaffety agreed to and signed this order. Importantly, however, the First Compromise referenced Schedule A of the Bid Procedures Motion, not the sale order which would be entered by this Court at a later date (more fully discussed in Finding of Fact No. 19).

15. On February 4, 2010, this Court entered an Order Approving Stalking Horse Bid and Bidding Procedures for the Sale of Substantially All of Debtor's Assets Pursuant to 11 U.S.C. § 363 Free and Clear of Liens, Claims and Encumbrances (the Bid Procedures Order). [Docket No. 257]. Included in the Bid Procedures Order is an Addendum to Asset Purchase Agreement, which adds the following terms, among others, to the Asset Purchase Agreement (the Second Compromise):

With respect to the dispute related to the extent, priority and validity of the lien and claim of McCaffety Electric Co. (McCaffety), and as outlined in that certain Order dated January 21, 2010 signed by Judge Bohm related to this issue, the Seller shall escrow the sum of $350,000 from the proceeds of the Purchase Price as a source of payment for McCaffety. These funds shall remain in escrow until the nature, extent and secured status of McCaffety's claims have been finally adjudicated and the court has entered an order for distribution of proceeds. In that regard, some of the Acquired Assets being sold hereunder may include assets upon which McCaffety asserts a lien, such as removables, and such assets are being sold free and clear of any such lien, with McCaffety's lien being transferred to the escrowed funds if it is finally determined that McCaffety holds any such valid lien. McCaffety may not remove any asset from the property or seek to exercise a lien on any of the Acquired Assets.

[Docket No. 257, p. 47] (emphasis added). The above-highlighted language reflects that the Second Compromise, unlike the First Compromise, contemplates that the Purchaser might well buy assets upon which McCaffety claimed to have a lien. The Court approved the proposed form of the Asset Purchase Agreement (the APA) between the Debtor and Drilling Controls, Inc. (the Purchaser). [Docket No. 257].

16. The APA defines “Acquired Assets” as follows: Acquired Assets means all Inventory, Equipment, permits, Records and Warranties, and other assets, including, but not limited to those listed on Schedule A hereto (including any claims and causes of action related exclusively to the post-Closing operation of the Acquired Assets). Acquired Assets does not include the “Excluded Assets.” [Docket No. 257, p. 8]. The Electrical Equipment is not within the definition of “Excluded Assets.” [Docket No. 257, p. 10]. The APA transfers the Acquired Assets from the Debtor to the Purchaser. [Docket No. 257, p. 12 ¶ 1].

17. The APA defines “Equipment” as follows:

Equipment means all of the listed machinery

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2 cases
  • GSL of Ill, LLC v. McCaffety Elec. Co. (In re Demay Int'l LLC), Bankruptcy Case No. 09–35759–H4–11.
    • United States
    • U.S. District Court — Southern District of Texas
    • March 30, 2012
    ...the United States Code in the United States Bankruptcy Court for the Southern District of Texas, Case No. 09–35759–H4–11,In re: Demay International, LLC, Debtor.3 By that time, Demay had paid more than $1,536,592 to McCaffety for the electrical work, but still owed McCaffety $337,279 under ......
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    ...have been incorporated into realty become 'fixtures' that are subject to a statutory mechanic's lien."). 78. In re Demay Intern., LLC, 431 B.R. 164, 176 (Bankr. S.D. Tex. 2010), aff'd sub nom. In re Demay Intern. LLC, 471 B.R. 510 (S.D. Tex. 2012) (quoting Jim Walter Window Components v. Tp......

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