In re Glover Const. Co., Inc.

• Decision Date: 15 June 1983
• Docket Number: Adv. No. 4820095,4820096.,48200457,Bankruptcy No. 48200456
• Citation: 30 BR 873
• Parties: In re GLOVER CONSTRUCTION CO., INC. Glover Contracting Co., Inc., Debtor. AMERICAN STATES INSURANCE CO., Plaintiff, v. GLOVER CONSTRUCTION CO., INC. United States of America, Defendants. and AMERICAN STATES INSURANCE CO., Plaintiff, v. GLOVER CONTRACTING CO., INC. City of New Castle, Indiana, Defendants.
• Court: U.S. Bankruptcy Court — Western District of Kentucky

30 B.R. 873 (1983)

In re GLOVER CONSTRUCTION CO., INC. Glover Contracting Co., Inc., Debtor.

AMERICAN STATES INSURANCE CO., Plaintiff, v. GLOVER CONSTRUCTION CO., INC. United States of America, Defendants. and AMERICAN STATES INSURANCE CO., Plaintiff, v. GLOVER CONTRACTING CO., INC. City of New Castle, Indiana, Defendants.

Bankruptcy Nos. 48200456, 48200457, Adv. Nos. 4820095, 4820096.

United States Bankruptcy Court, W.D. Kentucky.

May 18, 1983.

On Motion to Modify Judgment June 15, 1983.

William D. Grubbs and Thomas A. Hoy, Louisville, Ky., for plaintiff.

David T. Gray, Asst. U.S. Atty., Lexington, Ky., and to David L. Copenhaver, New Castle, Ind., counsel for the City of New Castle, Ind.

MEMORANDUM AND ORDER

MERRITT S. DEITZ, Jr., Bankruptcy Judge.

This matter is before the Court on motion of the plaintiff, American States Insurance Co. (American States), for partial summary judgment in two related adversary proceedings involving Glover Contracting Co., Inc. and Glover Construction Co., Inc. (Glover).¹ American States seeks a declaratory judgment regarding "rights in and disposition of proceeds and progress payments earned and to be earned under the contract by and between the Owner and the Debtor for the construction of centralized tank wash facilities and a lagoon and pump station."²

Preliminarily we note that we have jurisdiction to provide the relief sought. Section 213 of the Bankruptcy Code amended 28 U.S.C. § 451 to include bankruptcy courts within the term "court of the United States;" therefore, we may "declare the rights and other legal relations of any interested party seeking such declaration . . ." under authorization of 28 U.S.C. § 2201. The declaratory judgment action properly lies here. Indeed, under our District Court Emergency Rule of December 22, 1982, broadly delegating its authority in all bankruptcy proceedings, we cannot escape it.

The nature of American States' claim must be briefly highlighted at the outset. The claimant asserts ownership of the progress payments based upon an equitable subrogation theory. That is, as surety for the construction projects, it alleges an equitable right to payments due the contractor under the contract, to the extent of net costs.³ Functioning as a court of equity, we must decide the validity of a demand which is not contractual in nature, but rather is purely equitable. In the course of our deliberations we may not, of course, disregard the legal and equitable rights of others to the funds in dispute.

The ultimate issue is whether Glover, as general contractor, has any legal or equitable interest in the progress payments under the construction contract so that they become property of the bankrupt estate under § 541. This determination generates several related inquiries: (1) Is there a significant difference between progress payments and retainage fees so that these funds should be treated differently? (2) Which parties have a property interest in the progress payments and to what extent? (3) Are the progress payments simply a trust fund being held for materialmen and subcontractors? Before we embark on an exploration of those questions, an overview of the factual setting is necessary.

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In August, 1981, Glover was awarded two major construction contracts: one with the City of New Castle, Indiana, to build a new lagoon and pump station for sewage treatment (Contracting); and, one with the United States Government to build a tank wash rack facility at Ft. Knox, Kentucky (Construction). The contract prices on these two projects were $2,989,250.00 and $6,279,250.00 respectively. The performance and payment bonds required for each undertaking were executed with American States.

These two construction projects, like all others, may be viewed in terms of a time line, with the beginning and ending points arbitrarily determined by the contract, and performance plotted along that line. In the construction trades, progress along the time line is expressed in terms of "percentage of completion," with periodic payments or "construction draws" received by the general contractor, so that funding and physical improvements run apace. In that rarest and best of all possible worlds, the job is paid out exactly upon completion. When this Court initially encountered this contractor-debtor, it was at mid-point on the Kentucky job, and just beyond the three-quarter mark in Indiana.⁴ With its election to file for reorganization relief, Glover assumed the status of debtor in possession and took on the responsibility of continuing work on both projects. Work at the job sites has been uninterrupted, but is predictably slower because numerous subcontractors and suppliers remain unpaid and are unwilling to contribute further effort. Now, both disputants, American States and Glover, are seeking the same goal, efficient and effective movement toward the September, 1983, completion deadlines.

Disposition of the progress payments on both contracts quickly became a contested issue when Glover applied for authority to borrow funds to meet its current obligations and petitioned this Court to direct the City of New Castle to release payments due and payable to the contractor. Realistically, these progress payments are the only available means for Glover to maintain satisfactory progress and finish on time. Not surprisingly, American States, facing surety liability on both projects, objected to Glover's motions and instituted the present proceedings, all on the same grounds.

Specifically, this surety seeks a declaration that it is the owner of, and entitled to control disbursement of, the funds. American States contends that the general contractor has no property interest in these payments, or alternatively, that it, American States, has a prior and superior property right to such interest as Glover may have.

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Exactly what are these sought after progress payments? Knowing the nature and function of these monies will assist us in determining who has what right vis-a-vis this property. Progress payments are those funds which the owner contracts to pay periodically based upon satisfactory performance.⁵ This compensation enables the contractor to embark on costly and lengthy projects without himself financing the enterprise. Pragmatically, the construction industry and the world of finance have devised a system in which obstacles notwithstanding, the contractor keeps working and the owner keeps paying. Disbursal of progress payments is frequently made despite knowledge of a contractor's financial difficulties. The Supreme Court in Fireman's Fund Insurance Co. v. United States, 362 F.Supp. 842, 846 (1973), recognized this widespread practice: "It is common knowledge that contractors rely upon contract proceeds administered through progress payments to properly finance the contract."

The specifics of the Glover-New Castle agreement provide for monthly installments equal to 90% of the value of the work completed and materials stored on site. At Ft. Knox, the United States issues funds to Glover after its demand is evaluated in terms of the percent of work finished. In both cases there is, in the background, a governmental entity contractually bound to pay Glover⁶ and vitally interested in a continuation of the work and its timely completion. We deal with this case in that unique context, and realize that any amounts which Glover may draw in the future are extremely uncertain because they are dependent on actual performance as measured by rigid governmental requirements. Because work is still in progress, overhead and operating costs are mounting, and potential subcontractor claims are being generated, presently incalculable as to ultimate amount and claimant identity.

American States recognizes this element of uncertainty in its claim, but nevertheless insists that it is the true owner of the contract proceeds. In our estimation, American States understates its vulnerability with the observation that "other claims will arise in the future during the completion of the Contract." (Plaintiff's Complaints, p. 5). The contractor's expenses and the secondary parties to be reimbursed remain unknown variables, even as we are asked to decide the practicalities of satisfying these costs. But for the meantime the surety jealously stakes out the proceeds, without knowing the full scope of its exposure or to whose demands it may have to answer.

Necessarily, then, the chronological context of this litigation is most salient. We are asked to elucidate the property rights of these parties at approximately the median point along the time line of the Glover jobs, mindful that our resolution will determine the fate of these ongoing projects. Likewise, we are aware that the future of these Chapter 11 debtor-contractors, and the solvency of numerous smaller subcontractors, hang in the balance.

For the reasons we will express herein, we declare that the Glover companies have an undeniable legal and equitable interest in the progress payments, and that those payments are therefore property of the Chapter 11 estate.

In order to reach that result we are required to distinguish away the leading Supreme Court case upon which American States relies, Pearlman v. Reliance Insurance Co., 371 U.S. 132, 83 S.Ct. 232, 9 L.Ed.2d 190 (1962). The Pearlman case involved "a dispute between the trustee in bankruptcy of a government contractor and the contractor's payment and bond surety over which has superior right and title to a fund withheld by the Government (the Owner) out of earnings due the contractor."⁷ That is not our case. A contract retainage fund is gradually built up through the owner's retention of a percentage of the periodic progress payments. These funds may be, and are always, retained by the owner until the completion and acceptance of the contract. They function as an incentive to completion and as an indemnity resource for unpaid subcontractor's claims or...