In Re HL Gentry Construction Company

• Decision Date: 05 December 1961
• Docket Number: No. 43771.,43771.
• Citation: 200 F. Supp. 546
• Parties: In the Matter of H. L. GENTRY CONSTRUCTION COMPANY, a Michigan Corporation, Debtor.
• Court: U.S. District Court — Western District of Michigan

200 F. Supp. 546

In the Matter of H. L. GENTRY CONSTRUCTION COMPANY, a Michigan Corporation, Debtor.

No. 43771.

United States District Court E. D. Michigan, S. D.

December 5, 1961.

Henderson & Henderson, Lassiter, Moore & Van Allen, Charlotte, N. C., Johnson, Biggs & Britt, Lumberton, N. C., Allen & Hipp, Raleigh, N. C., for appellant Creditors.

Katcher & Feldman, Detroit, Mich., Rosenburg, Painter, Stanton & Bullen, Jackson, Mich., for debtor.

McCoy, Weaver & Wiggins, Fayetteville, N. C., for North Carolina Natural Gas Corp.

FREEMAN, District Judge.

This is a proceeding to review an Order of the Referee in Bankruptcy entered in proceedings for an arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq., based on cross-petitions for review filed by the debtor and certain creditors.

The debtor, H. L. Gentry Construction Company, is a construction company incorporated under the laws of Michigan. On December 22, 1958, the debtor entered into two contracts with the North Carolina Natural Gas Corporation (hereinafter referred to as the "Gas Company") for certain construction work including the installation of 233 miles of pipeline for a natural gas transmission system in North Carolina.

Bonds were procured by the debtor from Seaboard Surety Company of New York (hereinafter sometimes referred to as the "Bonding Company") and deposited with the Gas Company as required by the contracts.

Despite unanticipated construction problems and consequential financial difficulties, the debtor completed performance under these contracts on October 12, 1959, at which time approximately 50 of its creditors (sometimes hereinafter referred to as the "North Carolina creditors") who allegedly furnished labor and materials for such work had notified the Gas Company that the debtor was indebted to them in the amount of $174,507.81. The Gas Company then owed the debtor, Gentry, a balance of $141,146.30 under the contracts, which it withheld pursuant to a retaining provision to insure payment of material, labor and subcontractors' claims.

On September 16, 1959, one of such creditors instituted suit against the debtor, the Gas Company, and the Bonding Company in the State Court of North Carolina. On November 11, 1959, the Gas Company filed a declaratory judgment action against the Bonding Company in the State Court, which was removed to the U. S. District Court for the Eastern District of North Carolina, to have the bonds construed as instruments guaranteeing the payment of Gentry's contractors on this construction job, in which action the plaintiff prevailed, and on appeal, North Carolina Natural Gas Corporation v. Seaboard Surety Corp., 4 Cir., 284 F.2d 164, the court upheld the decision of the District Court that the bonds were payment bonds. On November 27, 1959, Gentry, pursued by creditors and unable to pay its debts, filed an original petition for arrangement under Chapter XI of the Bankruptcy Act in this Court.

The controversy in this case involves the retainage fund of $141,146.30 held by the Gas Company. The debtor seeks to invoke the summary jurisdiction of the Bankruptcy Court to order the Gas Company to turn over the retainage fund to the Bankruptcy Court and to hear and determine the validity, extent and priority of the various claims asserted against the fund, regardless of whether it takes possession of such fund. The Gas Company and debtor's North Carolina creditors questioned the Bankruptcy Court's jurisdiction and the Gas Company additionally alleged that it was an adverse claimant to the fund. The Referee concluded that the retainage fund was not subject to the summary jurisdiction of the Bankruptcy Court and declined jurisdiction to determine the validity, extent and priority of the respective claims asserted against such fund by the North Carolina creditors and the Bonding Company, and also the liability of the Bonding Company to the creditors or the Gas Company.

The Referee also ruled that the North Carolina creditors were entitled to receive from the plan of arrangement only the percentage payable under the plan to a general creditor, less the amount received from the retainage fund.

The North Carolina creditors filed a petition for review of that portion of the Order of the Referee fixing the amount which such creditors are entitled to receive under the arrangement plan; and the debtor filed a cross-petition for review of that portion of the Referee's Order denying summary jurisdiction in the Bankruptcy Court.

These petitions for review present the following issues:

I.

Does the Bankruptcy Court have summary jurisdiction to require the Gas Company to turn over the retainage fund to the Bankruptcy Court?

The debtor contends that the Referee erred in concluding that there was "some fair doubt and reasonable room for controversy" as to the claim of the Gas Company that it was an adverse claimant of the fund within the meaning of Harrison v. Chamberlin, 271 U.S. 191, 46 S.Ct. 467, 70 L.Ed. 897, because (1) the Gas Company did not claim the fund for itself but only held it for the benefit of the North Carolina lien creditors; and also because (2) the Bankruptcy Court had constructive possession of the fund.

The appealing creditors contend that (1) the fund is not the property of the debtor and, in any event, (2) the Gas Company was an adverse claimant of the fund as held by the Referee.

The Gas Company contends that the retainage fund is held by it as a trust fund for the sole benefit of the lien claimants and it therefore had a claim to the fund adverse to the Receiver in Bankruptcy.

Section 311 of the Bankruptcy Act, 11 U.S.C.A. § 711, provides:

"Where not inconsistent with the provisions of this chapter, the court in which the petition is filed shall, for the purposes of this chapter, have exclusive jurisdiction of the debtor and his property, wherever located."

We must look to the state law of North Carolina to determine what interest, if any, the debtor, Gentry, had in the retainage fund. Aquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277, 4 L.Ed.2d 1365.

Sections 44-6 to 44-12, Gen.Stat. North Carolina, provide for liens on improved real estate in favor of laborers, materialmen and subcontractors, and also provide that it becomes the duty of the owner, upon receiving the prescribed form of notice from any such person entitled to claim a lien, to retain from the money then due the contractor a sum not exceeding the price contracted for and to distribute such amount pro-rata among the claimants.

These statutes have been construed by the North Carolina courts as giving a lien claimant who serves proper notice an independent cause of action against the owner to compel payment at any time during the period of general limitations, even though such lien claimant has not commenced an action to enforce his lien within the six months' period required by the lien statute. Hildebrand v. Vanderbilt, 147 N.C. 639, 61 S.E. 620; Charlotte Pipe and Foundry Co. v. Southern Aluminum Co., 172 N.C. 704, 90 S.E. 923; Guilford Lumber Manufacturing Co. v. Holladay, 178 N.C. 417, 100 S.E. 597; Campbell v. Hall, 187 N.C. 464, 121 S.E. 761; Schnepp v. Richardson, 222 N.C. 228, 22 S.E.2d 555; United States v. Durham Lumber Co., Inc. (CA 4, 1958), 257 F.2d 570.

In the Durham Lumber Co. case, the court, at p. 573, said:

"In any settlement with the general contractor, the owner may take credit for payments made by him to subcontractors, and he is required by statute to withhold sufficient funds to pay all of the claims of subcontractors of which he has notice. The obligation of the owner to the subcontractor is, thus, primary; his obligation to the general contractor, secondary." (Emphasis supplied)

The U. S. Supreme Court, affirming the decision of the Fourth Circuit in the Durham Lumber case, 363 U.S. 522, at p. 525, 80 S.Ct. 1282, at p. 1284, 4 L.Ed.2d 1371, said:

"* * * the Court of Appeals held that, under North Carolina law, the general contractor did not have a property interest in the face amount, as such, of the general construction contract. Specifically, the court said that `except to the extent the claim of the general contractor exceeds the aggregate of the claims of the subcontractors, the general contractor has no right which is subject to seizure under the tax lien.'"

In the Charlotte Pipe and Foundry case, the court held that once the owner receives notice from the creditor of a contractor, the statutes impose on the owner "the duties of a trustee with respect to the amount due the contractor, and requires him `to distribute the amount pro rata among the several claimants, as shown by the itemized statement furnished the owner.'" 172 N.C. 704, 90 S. E. 924 or of which notice has been given the owner by the claimant.

In Schnepp, supra, the court states:

"The claim of the subcontractor or material man supplants that of the contractor and the duty of the owner to pay is an independent and primary obligation created by statute." (Emphasis supplied) 222 N.C. 228, 22 S.E.2d 557

From the above decisions, this Court concludes that under the law of North Carolina, the Gas Company is a custodian in the nature of a trustee of the retainage fund for the primary benefit of Gentry's creditors who have given proper notice and that the contractor, Gentry, has no property interest in the fund except to the extent the balance owing on its contracts exceeds the aggregate of the claims of such creditors.

The controversy over whether or not the North Carolina creditors have lost their liens by failure to enforce same within the six months' period required by the statute is of no consequence. The failure of a creditor to timely enforce his lien, after giving proper notice, has no effect upon the retainage fund. In the Charlotte Pipe and Foundry case, the court held that one who enforces his lien pursuant to the statute has no greater right to the retainage fund than one who does not. Proper...