In re Laurel Hill Paper Co.

• Citation: 393 B.R. 372
• Decision Date: 22 July 2008
• Docket Number: Bankruptcy No. 07-10187C-11G.,Adversary No. 07-2040.
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Middle District of North Carolina
• Parties: In re LAUREL HILL PAPER COMPANY, Debtor. All Points Capital Corp., Plaintiff, v. Laurel Hill Paper Company, et al., Defendants.

393 B.R. 372

In re LAUREL HILL PAPER COMPANY, Debtor.

All Points Capital Corp., Plaintiff, v. Laurel Hill Paper Company, et al., Defendants.

Bankruptcy No. 07-10187C-11G.

Adversary No. 07-2040.

United States Bankruptcy Court, M.D. North Carolina, Greensboro Division.

July 22, 2008.

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Daniel C. Bruton, Elizabeth M. Repetti, Winston-Salem, NC, for Plaintiff.

Charles M. Ivey, III, Dirk W. Siegmund, James K. Talcott, Ivey, McClellan, Gatton, & Talcott, LLP, Jason A. Knight, Knight & Free, PLLC, Greensboro, NC, William

P. Janvier, Chad Joseph Cochran, Vann & Sheridan, LLP, Chad A. Sharkey, N. Hunter Wyche, Jr., Byron L. Saintsing, Raleigh, NC, Holmes P. Harden, Thomas E. Coughlin, Jaffe, Raitt, Heuer, & Weiss, P.C., Southfield, MI, John E. Zummo, Vedder Price, Chicago, IL, Richard Steele Wright, James R. Langdon, Moore & Van Allen, PLLC, Charlotte, NC, David M. Warren, Rocky Mount, NC, Gene B. Tarr, Winston-Salem, NC, Stephan Ray Futrell, Kitchin, Neal, Webb, Webb, & Futrell, PA, Rockingham, NC, for Defendants.

Claude F. Smith, Jr., Rockingham, NC, pro se.

Maximus Leasing Company, pro se.

Richmond County Body Politic, pro se.

John Doe, pro se.

XYZ Corporation, pro se.

MEMORANDUM OPINION

WILLIAM L. STOCKS, Bankruptcy Judge.

This adversary proceeding came before the court on March 31, 2008, for the trial of the issues related to whether the claimants in this proceeding who are asserting statutory liens pursuant to Chapter 44A of the General Statutes of North Carolina have a perfected lien against any of the proceeds realized from the assets sold by the Debtor, Laurel Hill Paper Company, in May of 2007. Having considered the evidence offered during the week-long trial, the arguments of counsel and the post-trial briefs submitted by the parties, the court makes the following findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure and Rule 52 of the Federal Rules of Civil Procedure.

JURISDICTION

The court has jurisdiction over the subject matter of this proceeding pursuant to 28 U.S.C. §§ 151, 157, and 1334, and the General Order of Reference entered by the United States District Court for the Middle District of North Carolina on August 15, 1984. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(K) which this court may hear and determine.

BACKGROUND

On February 13, 2007, Laurel Hill Paper Company ("Debtor") filed a petition in this court seeking relief under chapter 11 of the Bankruptcy Code. The assets of the Debtor included a manufacturing facility located in Cordova, North Carolina. On May 17, 2007, an order was entered granting the Debtor's motion for approval of the sale of the Cordova facility at a price of $22,700,000. On May 29, 2007, the sale of the Cordova facility closed and the Debtor received net proceeds of $21,965,868.27.

The assets that were sold pursuant to the May 17, 2007 order consisted of the Cordova real estate and buildings, the machinery and equipment at the Cordova facility, the inventory, spare parts and supplies located at the Cordova facility and various vehicles and trailers owned by the Debtor. At the time of the sale, the assets that were sold were subject to various alleged liens and encumbrances, which were transferred to the sale proceeds by the order authorizing the sale. There were some fifteen entities that held or claimed liens or security interests with respect to one or more of the assets that were sold. The parties to this proceeding include the various entities who claim they are entitled to a portion of the sale proceeds based upon their lien or security interest having been transferred to the sale proceeds. The relief sought in this proceeding is a determination of the priority extent and value of the liens and encumbrances that were transferred to the sale proceeds.

The Claimants who are asserting statutory liens are American Stainless & Supply, LLC ("American Stainless"), Mechanical Supply Company ("Mechanical Supply") and Superior Cranes, Inc. ("Superior") (the "44A Claimants"). The 44A Claimants contend that they performed labor or furnished materials for improvements at the Cordova facility for which they have not been paid and that each has a lien that secures their unpaid balances pursuant to Chapter 44A of the General Statutes of North Carolina. In addition to claiming a lien against the proceeds from the Cordova real estate, the 44A Claimants contend that their liens also extended to a portion of the machinery and equipment at the Cordova facility and that they are entitled to the proceeds from such machinery and equipment, as well.

There are other parties to this proceeding who also claim to have a lien or security interest in the same items of machinery and equipment based upon having perfected a security interest pursuant to Article 9 of the Uniform Commercial Code as adopted in North Carolina. Based upon their Article 9 security interests, these claimants maintain that they, not the 44A Claimants, are entitled to the proceeds realized from the items of machinery and equipment in question.¹

FACTS

The Debtor purchased the Cordova real estate in 1982. The site had been a textile mill and contained no paper making equipment when acquired. Over the next two years, the Debtor purchased and installed the equipment required in order to manufacture tissue paper and napkins at the facility.

The raw material used by the Debtor consisted of used paper products such as newspaper rather than virgin wood fiber. The manufacturing process employed by the Debtor involved converting the paper products into a watery mush referred to as pulp, cleaning the pulp and then feeding the pulp into the paper making machine which converted the pulp into tissue-type paper.

Nearly all of the equipment that the Debtor installed at the facility was used equipment. The used equipment installed by the Debtor included a very large Beloit machine that made the tissue paper manufactured at the Cordova facility and various items of equipment for making and cleaning the pulp. At a later time, the Debtor installed converting equipment at the Cordova facility which enabled the Debtor to convert the large parent rolls of paper that came off the paper making machine into smaller rolls of paper.

In approximately 2002, the Debtor began planning for a possible expansion at the Cordova facility in order to increase the manufacturing capacity of the facility. In late 2004 or early 2005, the Debtor decided to proceed with the expansion. At that time, the Debtor still had only one paper-making machine, the Beloit machine. The expansion involved purchasing and installing another paper making machine and certain ancillary equipment.

Even before selecting the additional paper making machine, the Debtor had begun purchasing and accumulating various used parts and components that would be required in order to install an additional paper machine and continued to do so after the selection was made. Although the Debtor had investigated and considered the purchase of a used paper making machine, the decision was made to purchase a new machine from Metso Paper USA, Inc. known as a Metso DCT 100 ("the Metso").

Prior to undertaking the installation of the new paper machine, the Debtor made extensive improvements to its real estate in Cordova. The Debtor determined that the new machine could not be installed in the existing plant and that a new building would have to be constructed for the machine. However, the Cordova site did not have enough vacant land for the erection of a new building. It therefore was necessary to convert a marshy area on the property into solid ground. This work consisted of moving and compacting a significant amount of fill dirt onto the marsh. Once the site work was completed, the Debtor then had a new building constructed on the site that had been prepared. None of the 44A Claimants had any role or contemplated having any role in this work and it was only after this work was completed that the 44A Claimants had any involvement.

The Metso was ordered in April of 2005 at a cost of $7,745,000. The Metso was manufactured in Sweden and had to be shipped by sea to the United States. Because of the large size of the machine, it could not be shipped in one piece. Instead, various parts of the machine were packed in containers and transported by ship to the United States. After arriving at the port in Charleston, South Carolina, the containers were delivered to the Cordova facility by trailers that were left at the Cordova facility with the containers in place on the trailers.

At the point at which the 44A Claimants became involved, the site preparation and building construction were complete and the project envisioned and contemplated at that time was the installation of the new paper machine and some upgrading of ancillary machinery. Because of the size and weight of the Metso, cranes and rigging equipment were required in order to remove the shipping containers from the trailers, remove the machine components from the containers and move the machine components into the new building so that the machine could be assembled. Once the Metso was assembled, various connections were required in order for the machine to operate and manufacture paper, such as connections to electricity, steam and the equipment that prepared the pulp. Superior was involved in the moving, assembly and installation of the Metso and, later, performed work related to other machinery and equipment at the Cordova facility. American Stainless supplied a portion of the stainless steel piping required for connecting the various equipment and sources of steam, while Mechanical Supply supplied some of the valves utilized in the piping installed at the facility.

ANALYSIS

In asserting that they hold perfected liens, the 44A Claimants rely...