In re Inc.

• Decision Date: 21 September 2011
• Docket Number: Adversary No. 02–10118.,Bankruptcy No. 00–01771.
• Citation: 458 B.R. 782
• Court: United States Bankruptcy Courts – District of Columbia Circuit
• Parties: In re NETTEL CORPORATION, INC., NETtel Communications, Inc., Debtors.Wendell Webster, Trustee, Plaintiff,v.Scott & Reid General Contractors, Inc., Defendant.

458 B.R. 782

In re NETTEL CORPORATION, INC., NETtel Communications, Inc., Debtors.Wendell Webster, Trustee, Plaintiff,

v.Scott & Reid General Contractors, Inc., Defendant.

Bankruptcy No. 00–01771.

Adversary No. 02–10118.

United States Bankruptcy Court, District of Columbia.

Sept. 21, 2011.

Linda M. Correia, Webster, Fredrickson, Correia & Puth, P.L.L.C., Washington, DC, for Plaintiff.Wendell W. Webster, Webster, Fredrickson, Correia & Puth, Washington, DC, pro se.Philip T. Evans, Holland & Knight, Washington, DC, for Defendant.

MEMORANDUM DECISION AND ORDER ADDRESSING RENEWED MOTIONS FOR SUMMARY JUDGMENT

S. MARTIN TEEL, JR., Bankruptcy Judge.

In a previous order dealing with cross-motions for summary judgment, I granted the trustee's motion for summary judgment on his preference action as to all issues except as to Scott & Reid's 11 U.S.C. § 547(c)(1) defense that the payment it received pre-petition was a contemporaneous exchange for new value. Webster v. Scott & Reid Gen. Contractors, Inc. (In re NETel Corp., Inc.), 2008 WL 5071733 (Bankr.D.D.C. Oct. 10, 2008). That remaining issue is addressed here.

I

Invoking 11 U.S.C. §§ 547(b) and 550(a), the complaint in this proceeding against Scott & Reid General Contractors, Inc. (“Scott & Reid”) seeks to recover a pre-petition payment of $129,508.36 made by the debtor, NETtel Corporation, Inc. (“NETtel”), to Scott & Reid.¹ The plaintiff, Wendell W. Webster, is the trustee of NETtel's estate under Chapter 7 of the Bankruptcy Code.

The payment, made within the ninety days preceding NETtel's bankruptcy filing, was for construction work Scott & Reid had performed on real property located on Addison Road in Addison, Texas in which NETtel held a leasehold interest. Article XVI, § 37 of the Texas Constitution provided Scott & Reid with an automatic lien on that leasehold interest for the value of Scott & Reid's labor and materials. Scott & Reid contends that the payment it received on August 31, 2000, effected a release of its constitutional lien, citing Wood v. Barnes, 420 S.W.2d 425 (Tex.Civ.App.1967), and thus the payment was made in exchange for its release of the constitutional lien. Accordingly, it argues, the payment cannot be avoided as it constitutes a contemporaneous exchange for new value under § 547(c)(1). For reasons that follow, the trustee has shown that Scott & Reid cannot carry its burden of proof under 11 U.S.C. § 547(g) to show that § 547(c)(1) applies, and summary judgment in his favor is thus appropriate.

II

Summary judgment is appropriate if, assuming all reasonable inferences favorable to the nonmoving party, there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322–23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The court will not grant summary judgment “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Doe v. U.S. Postal Serv., 317 F.3d 339, 342 (D.C.Cir.2003). Although a finder of fact at trial is permitted to draw inferences from the evidence, those inferences “must be reasonably probable, and based on more than speculation.” Rogers Corp. v. EPA, 275 F.3d 1096, 1103 (D.C.Cir.2002) (internal quotations and citations omitted). When the evidence allows for contradictory inferences, summary judgment is inappropriate. Id. (citing Londrigan v. FBI, 670 F.2d 1164, 1171 n. 37 (D.C.Cir.1981)).

The moving party bears the burden to show that the material facts are undisputed. See Celotex, 477 U.S. at 322, 106 S.Ct. 2548. The nonmoving party, however, may not rest on mere allegations or denials, but must instead demonstrate the existence of specific facts that create a genuine issue for trial. See Liberty Lobby, 477 U.S. at 256, 106 S.Ct. 2505.

III

Section 547(c)(1) sets forth a “contemporaneous exchange for new value” exception to a trustee's avoidance power under § 547(b) and provides that:

The trustee may not avoid under this section a transfer—

(1) to the extent such transfer was—

(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and

(B) in fact a substantially contemporaneous exchange.

Thus, to prevail on a contemporaneous exchange for new value defense, Scott & Reid must satisfy a three-part test, showing (1) that it extended new value to the debtor; (2) that both parties intended the alleged new value and reciprocal transfer by the debtor to be contemporaneous; and (3) the exchange was in fact contemporaneous. 5 Collier on Bankruptcy ¶ 547.04[1] (15th ed. as revised April 2010).

Two primary issues arise: first, whether the release of the constitutional lien was not “new value” because the lien was void or voidable by the trustee under applicable law, and, second, whether the payment was intended by both parties as an exchange for “new value.” I conclude that the trustee is entitled to an award of summary judgment in his favor as to each of these issues.²

IV

To invoke § 547(c)(1), Scott & Reid must first demonstrate that release of the leased premises from the constitutional lien qualified as “new value.” Section 547(a)(2), as applicable here, defines “new value” as including “money's worth in ... release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by ... the trustee under any applicable law....”

A

The trustee has the power to avoid any transfer of property of the debtor that is voidable by a hypothetical bona fide purchaser who obtains the status of bona fide purchaser at the time of the commencement of the case. 11 U.S.C. § 544(a)(3). It is thus necessary to turn to Texas law to determine whether Scott & Reid's constitutional lien would have been defeated by a bona fide purchaser.

Under Texas Property Code § 53.052(a), the holder of a constitutional lien must file a lien affidavit by the fifteenth day of the fourth calendar month after the day on which the debt accrues to make the constitutional lien enforceable, via constructive notice, against a subsequent bona fide purchaser without actual notice. Texas Wood Mill Cabinets, Inc. v. Butter, 117 S.W.3d 98, 105 (Tex.App.2003). Constructive notice is imputed during the approximately four-month period under Texas Property Code § 53.052(a) during which a contractor can file an affidavit to record his lien. Id. at 105–06; Keating Implement & Mach. Co. v. Marshall Elec. Light & Power Co., 74 Tex. 605, 12 S.W. 489 (1889). “When a lien affidavit is filed after the property is sold by the owner who contracted for the improvements, the purchaser is deemed to have constructive notice of a contractor's right to assert a lien for the statutory period, even where the filing period commenced prior to the purchase.” Butter, 117 S.W.3d at 105, citing Valdez v. Diamond Shamrock Ref. & Mktg. Co., 842 S.W.2d 273, 276 (Tex.1992). Constructive notice of the constitutional lien via the recordation statute continues after the statutory recordation period has expired only if the contractor timely filed such an affidavit. Two issues thus arise: when did the statutory period expire, and if it expired prior to August 31, 2000, would a subsequent bona fide purchaser have been on inquiry notice such as to be deemed to be on actual notice.

B

The evidence reasonably supports a finding only in the trustee's favor that the work on the project was completed in April 2000, such that the period under Texas Property Code § 53.052(a) for filing a lien affidavit expired on August 15, 2000. Accordingly, the lien would have been avoidable by a hypothetical bona fide purchaser of NETtel's leasehold interest, without notice, as of when NETtel made the payment to Scott & Reid on August 31, 2000, and as of the commencement of the bankruptcy case on September 28, 2000.³

Sometime prior to March 27, 2000, Scott & Reid submitted a bid to perform construction work on NETtel's Addison Road property. On March 27, 2000, Jimmy Ellis of NETtel sent a letter to Scott & Reid informing it that a purchase order was being approved within NETtel, and would be forwarded to Scott & Reid upon approval, and asking that Scott & Reid “recognize this as our ‘letter of intent’ to proceed with securing the building permit and start construction in order to keep the project on schedule for a complete date of April 15, 2000.” NETtel later issued a purchase order to Scott & Reid dated April 3, 2000, for the purchase of Scott & Reid's construction services (the “Purchase Order”). The Purchase Order provided that Scott & Reid would construct certain improvements at NETtel's leased premises on Addison Road, in return for which NETtel agreed to pay Scott & Reid all amounts due once the work was complete and 30 days after invoice.

Scott & Reid performed the work called for under the purchase order (the “NETtel Project”), and the work was accepted by NETtel. A “final clean” was performed on April 20, 2000.

Scott & Reid argues that some remaining work could have been undertaken during the early days of May 2000, before or slightly after the invoice was submitted to NETtel on May 3, 2000. If that were the case, the filing period would not have expired until September 15, 2000, which would mean that as of the time NETtel rendered payment, even a bona fide purchaser without actual notice would have been subject to the constitutional lien. In support of its contention, Scott & Reid cites to the deposition of Nick Goettsch. Mr. Goettsch testified that, although the final cleaning performed on the job was completed on April 20, 2000, sometimes problems are discovered after that period—such as an electrical outlet that does not work or a drawer that does not slide correctly—and it is thus possible that this type of work occurred after the April...