In re Holmes Environmental, Inc.
| Decision Date | 18 July 2002 |
| Docket Number | Bankruptcy No. 02-70034-S.,Adversary No. 02-07029-S. |
| Citation | 287 B.R. 363 |
| Court | U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | In re HOLMES ENVIRONMENTAL, INC., Debtor. Holmes Environmental, Inc., Plaintiff, v. Suntrust Banks, Inc. and Hazmed, Inc., Defendants. |
Richard E. Biemiller, Wolcott, Rivers, Wheary, Basnight & Kelly, Virginia Beach, VA, for Holmes Environmental, Inc. Debera F. Conlon, Office of the U.S. Trustee, Norfolk, VA, for U.S. Trustee.
Andrew J. Dolson, Richmond, VA, for Sun Trust Bank.
John D. McIntyre, Willcox & Savage, P.C., Norfolk, VA, for Hazmed, Inc.
STEPHEN C. ST. JOHN, Bankruptcy Judge.
These matters came on for hearing and trial, respectively, on May 28, 2002 on the Motion to Reject Executory Contract ("Motion") and the Amended Complaint for Turnover of Proceeds pursuant to 11 U.S.C. § 542 ("Amended Complaint"), each filed by the debtor. After the conclusion of the hearing and trial, the Court took both the Motion and the Amended Complaint under advisement. This Memorandum constitutes this Court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.1
Holmes Environmental, Inc. ("Holmes") filed for relief pursuant to Chapter 11 of the United States Bankruptcy Code in this Court on January 2, 2002.2 On February 28, 2002, Holmes filed the Motion, which sought the entry of an order rejecting a certain escrow agreement between Holmes and Hazmed, Inc. ("Hazmed"). The Motion alleged, among other things, that on or about March 23, 2001, Holmes and Hazmed entered into an escrow agreement, which provided for a payment arrangement in connection with work performed by Hazmed under a subcontract agreement between Holmes and Hazmed. Motion, ¶ 5. ("Escrow Agreement"). Holmes also alleged that, incident to the Escrow Agreement, Holmes executed an instrument of assignment ("Instrument of Assignment") which, among other things, assigned proceeds payable by the United States of America Army Corps of Engineers, Louisville District ("Corps") to Suntrust Bank, Inc. ("Suntrust") in connection with a certain contract between Holmes and the Corps, pursuant to which the subcontract agreement with Hazmed was executed ("Subcontract"). Motion, ¶ 6. Asserting that the Subcontract between Holmes and Hazmed expired by its terms on December 21, 2001, Holmes determined it to be in its best interest to reject the Escrow Agreement. Motion, ¶¶ 7, 8. Hazmed responded in opposition to the Motion, contending that the Escrow Agreement and the Instrument of Assignment are not executory agreements. A hearing on the Motion was scheduled for April 11, 2002.
Meanwhile, Holmes filed a Complaint against Hazmed and Suntrust on March 14, 2002. The original Complaint alleged that monies funded into escrow with Suntrust by the Corps pursuant to the Escrow Agreement constitute property of estate to which Hazmed has no title or lien. Holmes prayed that this Court order Suntrust to turnover all of the escrowed funds to Holmes.3 The Amended Complaint was filed by Holmes on April 18, 2002.4 The Amended Complaint, in addition to seeking entry of an order authorizing Suntrust to turnover the monies held by it pursuant to the Escrow Agreement, alleged that the Instrument of Assignment pursuant to the Federal Assignment of Claims Act under which Holmes assigned to Suntrust for deposit into the escrow account the payments due Holmes under the contract with the Corps was not executed until October 8, 2001. Holmes further alleged that payment under the contract with the Corps was not remitted to Suntrust until January 15, 2002, after the date of filing of the petition in bankruptcy by Holmes. Accordingly, Holmes alleges that the execution of the Instrument of Assignment by Holmes was a transfer of the interest of Holmes in property within ninety days of the filing date and therefore is avoidable pursuant to 11 U.S.C. § 547. Alternatively, Holmes alleges the transfer of the funds due under the Corps contract to Suntrust on January 15, 2002 was on account of a pre-petition debt and therefore an avoidable post-petition transfer pursuant to 11 U.S.C. § 549.
Hazmed disputes the allegations of the Amended Complaint. First, Hazmed contends the Instrument of Assignment was executed on March 23, 2001 and not on October 8, 2001 as alleged by Holmes. Hazmed also answers the Amended Complaint by asserting the funds held by Suntrust under the Escrow Agreement are subject to an express trust and are not property of the estate under 11 U.S.C. § 541. Alternatively, Hazmed argues the funds held by Suntrust are subject to a constructive trust and therefore are not estate property. Lastly, should the Court find any of the transfer here to be preferential, Hazmed asserts that it is entitled to a new value defense under 11 U.S.C. § 547(C)(4) to the extent of the value of the services provided to Holmes by Hazmed subsequent to the execution of the Instrument of Assignment.5
Little appears to be factually disputed between Holmes and Hazmed other than the date of execution of the Instrument of Assignment. Holmes is an environmental remediation and training contractor with its principal place of business in Norfolk, Virginia. Amended Complaint, ¶ 1. Ethel Holmes ("Ms. Holmes") is president of Holmes. She was approached by Ms. Jackie Sales, president of Hazmed ("Ms. Sales"), about the possibility of bidding various construction management contracts with the Corps. Holmes and Hazmed executed a teaming agreement dated September 29, 2000, where Holmes and Hazmed agreed to attempt to procure contract work from the Corps. Holmes and Hazmed worked together on a bid proposal through the fall of 2000 and Holmes submitted a bid to the Corps for a certain construction management job. In December 2000, Holmes was awarded a contract by the Corps ("Corps Contract"). Thereafter, Holmes and Hazmed entered into the Subcontract, where Hazmed would perform a portion of the work of the Corps Contract as a subcontractor. Bearing the date of February 8, 2001, the Subcontract was executed at a closing in Richmond, Virginia by Ms. Holmes on behalf of Holmes and Ms. Sales on behalf of Hazmed on March 22, 2001. The Subcontract contemplated an initial period of performance through December 21, 2001. Section 16.3 of the Subcontract provided for creation of an assignment of receivables to an escrow account:
Contractor agrees to execute an assignment of receivables to an escrow account for the invoices processed under the Prime Contract. The bank will be instructed to pay the Subcontractor's invoices per disbursement schedule. A copy of each invoice will also be submitted to the bank along with a copy of the applicable disbursement schedule, indicating the amounts due and payable to each party. All bank service cost or fees associated with escrow account will be divided between the Contractor and Subcontractor according to the division of work.
The Escrow Agreement was executed on March 23, 2001 by Holmes and Hazmed. Ms. Sales insisted on an escrow agreement because her investigation of the finances of Holmes indicated Holmes did not have substantial financial strength. The Escrow Agreement recites the award of the Corps Contract, the making of the Subcontract and that Holmes "has assigned to Escrow Agent, pursuant to the provisions of the Assignment of Claims Act of 1940, as amended, ... certain payments to be made by U.S. Army Corps of Engineers Louisville District under the Prime Contract for the purpose of facilitating the payment to Vendor pursuant to the terms of the Agreement [the Subcontract]." Pl.Ex. 2, Def. Ex. 2, p. 1. The Escrow Agreement appointed Suntrust as escrow agent and provided the following as to its disbursement of monies paid by the Corps on the Corps Contract:
1. Appointment of Escrow Agent. [Holmes] and [Hazmed] hereby appoint Escrow Agent to act as the agent of such parties in accordance with the provisions of the Agreement and this Escrow Agreement, Escrow Agent accepts such appointment.
2. Submission of Invoices. [Hazmed] agrees that upon shipment to [Holmes] and issuance of its invoice to [Holmes], that it will promptly forward to the Escrow Agent a copy of the invoice. [Holmes] agrees that upon issuance of bill of lading or other commercial instrument evidencing delivery to a common carrier of the material purchased from [Hazmed], [Holmes] shall promptly invoice USACE Louisville District and provide a copy to [Hazmed] and the Escrow Agent, together with a letter in the form of Exhibit A (the Payment Instruction).
3. Receipt of Funds. Escrow Agent shall promptly deposit all payments received under the Prime Contract into a non-interest bearing account.
4. Disbursements. Upon receipt of payment under the Prime Contract, Escrow Agent will compare the payment Instructions received from [Holmes] against [Hazmed] invoice. Unless a discrepancy exists between the Payment Instructions received from [Holmes] and [Hazmed's] invoice, or unless Escrow Agent has been notified by either [Hazmed] or [Holmes] of a discrepancy or of a default under the Agreement, Escrow Agent will disburse to [Hazmed], within 2 business days, the amount due [Hazmed]. Any funds remaining in the escrow account after payment to [Hazmed] will be paid to [Holmes] within 2 business days. Escrow Agent will notify [Holmes] and [Hazmed] of any discrepancy between the Payment Instructions and [Hazmed's] invoice or of any disagreement, adverse claim or demand it has received notice of and hold funds in accordance with Section II, paragraph 7 of this Agreement.
Id. ¶¶ I. 1-4. The Escrow Agreement also provided it was made and intended to be constructed under the laws of the Commonwealth of Virginia. Id., ¶ IV, 3.
While there is clarity as to the time and place of the execution of the Subcontract and the...
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