In re Huber Contracting, Ltd.

• Decision Date: 25 July 2006
• Docket Number: No. 04-57159-C.,04-57159-C.
• Citation: 347 B.R. 205
• Parties: In re HUBER CONTRACTING, LTD, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Texas

Page 205

347 B.R. 205

In re HUBER CONTRACTING, LTD, Debtor.

No. 04-57159-C.

United States Bankruptcy Court, W.D. Texas, San Antonio Division.

July 25, 2006.

Michael G. Colvard, San Antonio, TX, for Debtor.

DECISION DETERMINING LIEN PRIORITY

LEIF M. CLARK, Bankruptcy Judge.

This is a Motion to Determine Lien Priority.The debtor in this case was a general contractor.It filed for bankruptcy on December 7, 2004.Prior to filing, a creditor attempted to garnish the debtor's bank account at Wachovia Bank, N.A., trapping some $98,750.After the filing, the trustee successfully avoided the garnishment lien as a preference.A dispute arose between the bank (which was also a creditor of Huber Contracting), and certain mechanics' lien claimants who were owed money by Huber Contracting.Both groups asserted competing claims to the $98,750.The money was, of course, property of the bankruptcy estate, so the trustee had a claim to the fund as well.The trustee and the bank entered into a compromise whereby, if the bank could successfully defend its claim to the money, it would share the fund with the trustee, 25% to the estate and 75% to the bank.The bank then filed a motion to determine lien priority with respect to the money, naming all other potential claimants to the fund.Both the owner of a property for which Huber had been the general contractor and various lien claimants whose liens arose from work done on the owner's property filed responses to the bank's motion.The matter was submitted to the court on agreed facts.For the reasons detailed below, the court holds that the bank has the superior claim to the $98,750 on deposit with Wachovia Bank NA.

I.BACKGROUND FACTS

Huber Contracting, Ltd., the debtor, was a general contractor.Huber was hired by Mardi Gras Parade Café, LLC to construct a hotel.Among others, the debtor hired Argosy Floor Covering, Opening Specialties & Supply, Samuels Glass Company, and R.W. Jones(the "Lien Claimants") as sub-contractors on the project.The Lien Claimants were not paid for their work by Huber, and ultimately perfected mechanic's liens on the owner's property in accordance with the provisions of Chapter 53 of the Texas Property Code.

Well prior to these events, Huber had signed a promissory note and security agreement in favor of Wachovia Bank, N.A., formerly known as SouthTrust Bank, to obtain a $500,000 working capital loan, extending and renewing prior notes, all of which had been (and still were) secured by all of the debtor's assets.The bank perfected its lien, properly amending its UCC-1 financing statements after each loan renewal..

On November 4, 2004(after the most recent renewal of its note and security agreement with the bank), the debtor submitted a draw request for $399,010.42 to Mardi Gras.The request was approved by Mardi Gras and, on November 11th or 12th, the debtor drew out the funds from the construction loan, and deposited the funds into its account at the Bank.Days later, on November 15, 2004, the Bank was served with a writ of garnishment by one of the debtor's creditors.The bank then froze debtor's deposit account, honoring the writ.

Huber filed for bankruptcy relief, the trustee set aside the garnishment lien, the bank and the trustee made their settlement, and the bank and the lien claimants submitted their competing claims to this court for disposition.

II.ISSUE

The essential issue to resolve here is a simple one to state: as between the bank and the lien claimants, whose rights are paramount with regard to the $98,750?The resolution of that issue is not at all simple, however, requiring the court to reconcile two different legislative schemes, one set out in the Texas Property Code and the other in the Texas version of the Uniform Commercial Code.The bank claims that its Article 9 perfected security interest in the debtor's deposit accounts trumps any competing claim by the Lien Claimants.The Lien Claimants retort that they have a priority over all other creditors, including the Bank (regardless of its security interest), by virtue of provisions in Chapter 53 of the Texas Property Code.

The bank starts its argument with Revised Article 9 of the Uniform Commercial Code as enacted in Texas in 2001 which permits a secured party to obtain a security interest in deposit accounts.Section 9.327 lays out a priority scheme with respect to security interests in deposit accounts.The bank says that this statute is the sole source of law for resolving competing priority claims in deposit accounts and that, under that section, the bank comes first.SeeTEX.BUS. & COMM. CODE ANN., § 9.327(West pamphl.ed.2005).

The lien claimants counter that section 53.121 of the Texas Property Code entitles them to priority in the very same account, notwithstanding the bank's lien and notwithstanding section 9.327 of the Uniform Commercial Code.SeeTEX. PROP. CODE, § 53.121(West pamphl.ed.2005).They rely in part on the Fifth Circuit's ruling in Matter of Waterpoint Intern., L.L.C.,330 F.3d 339, 342-45(5th Cir.2003), which noted in dicta that lien claimants enjoy a preference over all other creditors of the original contractor, provided the lien claimants have properly perfected their mechanics' and materialmen's liens in accord with chapter 53.The lien claimants in Waterpoint had failed to do so (which is why they lost).The Lien Claimants in this case, however, did properly perfect their liens.They note that the lien claimants in Waterpoint would have prevailed if only they had been properly perfected, and the Lien Claimants should therefore prevail in this case.

To resolve the issue presented, the court must reconcile these two statutes.In a nutshell, does section 9.327 of Revised Article 9, enacted by the Texas Legislature in 2001, trump the ancient and extraordinary protection accorded mechanics' and materialmen's lien claimants by the Texas Legislature as far back as 1869 and now codified in Chapter 53 of the Texas Property Code?

III.ANALYSIS

An Overview

Section 9.327 of the Uniform Commercial Code ostensibly governs priorities of security interests in deposit accounts.It states, in relevant part, as follows:

The following rules govern priority among conflicting security interests in the same deposit account:

. . .

(3) Except as otherwise provided in Subdivision (4), a security interest held by the bank with which the deposit account is maintained has priority over a conflicting security interest held by another secured party;

(4) A security interest perfected by control under Section 9.104(a)(3) has priority over a security interest held by the bank with which the deposit account is maintained.

TEX. BUS. & COMM. CODE, § 9.327(West pamphl.ed.2005)(emphasis added)!The bank in this case is "the bank with which the deposit account is maintained" and so, according to this statutory provision, has priority "over a conflicting security interest held by another secured party."Seeid.(emphasis supplied).The bank says this is enough to assure it absolute priority over the lien claimants.

Meanwhile, section 53.121 of the Texas Property Code gives holders of perfected mechanic's liens "preference over other creditors of the principal contractor or builder."The precise language of the statute reads:

All subcontractors, laborers, and materialmen who have a mechanic's lien have preference over other creditors of the original contractor.

TEX. PROP. CODE, § 53.121(West pamphl.ed.2005)(emphasis added).¹The lien claimants state that this language gives them a priority (or "preference") over Huber's creditors, including the bank.The mechanic's lien is asserted in the owner's property, but, if properly perfected, affords its holder a preference over creditors of the contractor.SeeIn re Waterpoint Intern'l, L.L.C., supra.

1.Background of Mechanic's Liens in Texas

The Fifth Circuit in Waterpoint set out in some detail the nearly 200 year history of the Texas mechanic's lien statute, as well as the purpose and policy behind it.Explained the court:

The mechanic's lien appeared in Texas in 1839 when the Congress of the Republic enacted lain Act for the Relief of Master Builders and Mechanics of Texas."The purpose of the mechanic's lien is to secure payment for those who furnish labor or materials in connection with the construction of improvements to real property to the extent of the increased value of those improvements to the owner's property.In 1869, the right to a mechanic's lien, even for derivative claimants(e.g., subcontractors, mechanics or materialmen who have not contracted directly with the owner of the property to be improved), also became a constitutional right in Texas.Article 16, Section 37, of the Texas Constitution now provides that "mechanics, artisans and materialmen of every class, shall have a lien upon the buildings and articles made or repaired by them for the value of their labor done thereon, or material furnished therefor ...."

However, as interpreted by the Texas Supreme Court, while the constitutional right to a mechanic's or materialman's lien is broad, the Texas Constitution creates a "self-executing" lien in favor of only original or general contractors (those who contract directly with the property or its agent) not derivative claimants....Instead, they must comply with the statutory lien perfection requirements to be able to enforce their rights to payment or, if necessary, foreclosure against the owner and his property.

Chapter 53 of the Texas Property Code, entitled "Mechanic's, Contractor's, or Materialman's Lien" and formerly known as the Hardeman Act, controls the procedures for perfecting liens and the relative priority of these liens once perfected....In general, the chapter deals with relationships between a general contractor, the owner of the real property and derivative claimants.It sets out procedures for connecting a derivative claimant to the owner in order to give the...