In re Fulghum Const. Corp.

• Decision Date: 16 September 1982
• Docket Number: Bankruptcy No. 380-00235,Adv. No. 380-0431.
• Parties: In re FULGHUM CONSTRUCTION CORPORATION, Debtor. Robert H. WALDSCHMIDT, Trustee, Plaintiff, v. COLUMBIA GULF TRANSMISSION COMPANY, Defendant.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Middle District of Tennessee

23 B.R. 147 (1982)

In re FULGHUM CONSTRUCTION CORPORATION, Debtor.

Robert H. WALDSCHMIDT, Trustee, Plaintiff, v. COLUMBIA GULF TRANSMISSION COMPANY, Defendant.

Bankruptcy No. 380-00235, Adv. No. 380-0431.

United States Bankruptcy Court, M.D. Tennessee, Nashville Division.

September 16, 1982.

Robert H. Waldschmidt, Cosner, Waldschmidt & Crocker, Nashville, Tenn., for trustee.

Harlan Dodson, III, Dodson, Harris, Robinson & Aden, Nashville, Tenn., for Columbia Gulf Transmission.

MEMORANDUM¹

KEITH M. LUNDIN, Bankruptcy Judge.

The issue presented is whether Columbia Gulf Transmission Company is entitled to set off amounts paid by it to the debtor's subcontractors and vendors against amounts owed to the debtor pursuant to two contracts with the debtor.² For the reasons stated below, the court holds Columbia is entitled to setoff.

In 1979, Fulghum Construction Corporation ("Fulghum" or "debtor") entered into two contracts to perform work for Columbia Gulf Transmission Company ("Columbia"). Contract C-440 was for pipeline construction in Tennessee and Mississippi; contract C-447 was for work in Louisiana. The contracts allowed Fulghum, with certain restrictions, to contract for labor, supplies and subcontractors at its own expense. All physical work described in the contracts was completed in December, 1979.³ Pursuant to the contracts, Columbia retained money due Fulghum pending performance of the conditions in the contracts.⁴ It was stipulated that the total unpaid retainage under contracts C-440 and C-447 was $223,305.07.

Mr. Ron Upchurch, Columbia's engineer in charge of the two Fulghum projects, testified that he designed the projects, drew up invitations to bid and supervised construction and close-out⁵ of each project. He developed an estimate of project costs including right-of-way acquisition, subcontracts, labor and material requirements.

In December of 1979, Mr. Upchurch began receiving telephone calls from various suppliers, vendors, and subcontractors of Fulghum regarding Fulghum's nonpayment of invoices. Mr. Upchurch verified Fulghum's nonpayment of invoices through telephone conversations with Mr. Gray, Fulghum's secretary/treasurer and accountant. Mr. Gray confirmed in late December, 1979 and early January, 1980 that Fulghum had not paid a significant number of its suppliers and subcontractors on the two projects. By letter to Fulghum dated January 11, 1980, Mr. Upchurch indicated that because of Fulghum's failure to pay invoices, payment would be stopped on a check previously issued to Fulghum in the amount of $2,652.60. Fulghum did not protest. Fulghum has never furnished an affidavit or other evidence that all claims for labor, equipment, materials, and supplies were paid for either contract C-440 or contract C-447.⁶

The telephone calls to Columbia from Fulghum's suppliers and subcontractors continued and in early February, 1980, Columbia sent a letter to various suppliers and subcontractors requesting that they send directly to Columbia copies of unpaid invoices⁷ showing the amounts owed by Fulghum for work done on Columbia's projects. The invoices were sent to Columbia and Mr. Upchurch examined each to determine whether the amounts requested were appropriate for the work done and whether the work, material, and equipment shown on the invoices were used on the Fulghum projects. Based upon examination of the invoices, conversations with Mr. Gray, knowledge of the projects and experience in similar projects, Mr. Upchurch determined money was owed by Fulghum and that the amounts claimed by the subcontractors and vendors were appropriate. Mr. Upchurch also found that liens had been filed by some of Fulghum's subcontractors and vendors against Columbia's property in an effort to collect debts owed by Fulghum⁸.

In February of 1980, Columbia learned that Fulghum had filed bankruptcy in January of 1980.⁹ Columbia reviewed Fulghum's schedules of debts filed with its bankruptcy petition and ascertained that the amounts due unpaid subcontractors and vendors were substantially corroborated by Fulghum's records.¹⁰

It was stipulated that in May, 1980, Columbia made the following payments to Fulghum's subcontractors and vendors:

                  Taylor Machinery Company               $ 43,422.50
                  Alice's Ice Service                       1,158.75
                  Gayle Oil Company                         8,494.57
                  Linscomb Construction Company             3,100.00
                  Sarver Dirt Hauling                       5,147.52
                  Cagnina Lumber Company                    1,808.16
                  Henry's Mower Sales                         549.41
                  Double "L" Hydro-Test, Inc.              42,529.22
                  Burchett Trucking Company, Inc.          42,439.59
                  Porter Walker, Inc.                         582.37
                  Leland Equipment Company                  2,650.00
                  Bayou Pipe Coating Company                2,501.74
                  Commercial Resins                        10,772.00
                  Midcon Pipeline Equipment Company        34,624.09
                  Cross Country of Texas                   16,205.32
                  Acme Truck Line, Inc.                     4,952.08
                  Evans Pipeline Equipment Company         11,365.28
                  Volunteer Welding Supply, Inc.            6,382.01
                  Pipeline Products and Services, Inc.      1,705.60
                  CRC Supply and CRC Pipeline
                   Equipment                               23,457.60
                                                         ___________
                  TOTAL                                  $263,847.81
                

At trial Columbia withdrew any claim to offset the $1,705.60 paid to Pipeline Products and Services, Inc. as Mr. Upchurch's testimony revealed that this payment was not in connection with either of the contracts here at issue. Accordingly, the total paid by Columbia to Fulghum's subcontractors and suppliers pursuant to contract C-440 and contract C-447 was $262,142.21.¹¹ It was also stipulated that no other claims remain unpaid on either contract.

By letter dated May 29, 1980, Columbia's attorney notified Fulghum's trustee that payment to Fulghum's subcontractors and vendors had been made. A list detailing the amounts paid and to whom was attached to the letter. Fulghum again did not protest—Columbia never received any indication from the trustee or from Fulghum that the specific payments were in the wrong amount or to the wrong entities. At trial the trustee for Fulghum presented no proof challenging the propriety of the amounts claimed by or paid to Fulghum's subcontractors and suppliers.

The trustee's complaint herein is styled as an action to recover an account receivable from Columbia under § 542 of the Bankruptcy Code, 11 U.S.C.A. § 542 (West 1979). With exceptions not here pertinent, § 542(a) requires anyone holding property of the estate on the date of the filing of a bankruptcy petition to deliver that property to the trustee. Section 542(b) requires a creditor who owes a debt that is property of the estate, to pay such debt to the trustee "except to the extent that such debt may be offset under § 553 of this title against a claim against the debtor." The burden of proof is on the creditor to prove entitlement to setoff under § 553.¹² Third National Bank v. Carpenter, 14 B.R. 405, 408 (Bkrtcy.M.D.Tenn.1981). The elements necessary to prove setoff under § 553 are:

1. a debt owed by the creditor to the debtor which arose prior to the commencement of the bankruptcy case;

2. a claim of the creditor against the debtor which arose prior to commencement of the bankruptcy case; and

3. the debt and claim must be mutual obligations.

The Bankruptcy Code defines "debt" as "liability on a claim." 11 U.S.C.A. § 101(11) (West 1979). See, e.g., Brendern Enterprises, Inc. v. Micro-Acoustics Corp., 12 B.R. 458, 459 (Bkrtcy.E.D.Pa.1981) (no debt is owed by a creditor holding property of the debtor as bailee or trustee without color of lien). "It has been long the rule that the right of setoff exists if the debt is absolutely owing at the time of the petition even though not due or liquidated." Lawrence v. Commissioner of Internal Revenue Service, 19 B.R. 627, 629 (Bkrtcy.E.D.Ark. 1981) (debtor's unliquidated tax liability for the 1979 tax year was "marginably owing" to the government at the time of the filing of the debtor's petition). As a matter preliminary to trial, the court determined the existence of a debt owed Fulghum by Columbia. The court's holding was based upon the admissions ordered against the defendant, the parties' stipulation that all physical work on the two projects was ultimately completed and the stipulation that Columbia makes no claim for incomplete or improper work.

Section 101(4)(b) defines "claim" as the "right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured." 11 U.S.C.A. § 101(4) (b) (West 1979). Columbia had a claim against Fulghum at the time of Fulghum's petition in bankruptcy.¹³ It is undisputed that the contracts required Fulghum to:

1. prevent the placing of liens or other encumbrances upon Columbia\'s property as a result of the claim against Fulghum;

2. furnish Columbia with evidence that all bills for labor, equipment, materials and all claims against Fulghum have been paid or settled; and

3. quickly and promptly pay all claims against it with regard to these projects.

Fulghum stipulated that it failed to comply with the first and second requirements listed above. It was established by the unrebutted testimony of Mr. Upchurch that during December of 1979, Fulghum was not paying its subcontractors and vendors promptly or satisfactorily. Article XII of both contracts provided that in the event a lien is placed upon Columbia's property as a result of a claim against Fulghum and is not removed, Columbia may pay the claim and remove the lien, and Fulghum will be liable to Columbia for all such expenses, including legal fees. Columbia thus had a pre-petition claim...