In re Mastercraft Metals, Inc.
| Decision Date | 03 May 1990 |
| Docket Number | Bankruptcy No. 89-41151-2-11,Adv. No. 89-4245-2-11. |
| Citation | 114 BR 183 |
| Parties | In re MASTERCRAFT METALS, INC., Debtors. Bruce E. STRAUSS, Trustee, Plaintiff, v. MASTERCRAFT METALS, INC., et al., Defendants. |
| Court | U.S. Bankruptcy Court — Western District of Missouri |
Joe Harter, McDowell, Rice & Smith, Kansas City, Mo., for First State Bank.
Scott B. Haines, Gladstone, Mo., for defendants Arrowhead Grating and Metalworks.
Bruce E. Strauss, James L. Baker, Kansas City, Mo.
Michael R. Roser, Kansas City, Mo., for Rich-Con Steel.
Jack R. Grate, Jr., Independence, Mo., for debtor.
Mastercraft Metals, Inc. (Mastercraft), filed for bankruptcy protection under Chapter 11 on May 25, 1989. The case was converted to a Chapter 7 on August 4, 1989. Around August 22, 1989 Modern Builders Industrial Concrete Company (Modern Builders) delivered to the Trustee a check made jointly payable to Mastercraft and Arrowhead Grating and Metalworks, Inc. The check was in the amount of $33,437.00. The next day, Arrowhead filed a proof of claim which included the $33,437.00 allegedly owed to Arrowhead for materials delivered to Modern Builders. Because these funds were potentially subject to competing claims from numerous parties, the Trustee brought the present interpleader action under Bankruptcy Rule 7022, 11 U.S.C. on Oct. 2, 1989.1 At issue is who is entitled to the check issued by Modern Builders.
Evidence at trial, as well as a Stipulation between Arrowhead and First State Bank of Kansas City, Kansas reveal the following facts. On the First of July, Mastercraft, Arrowhead, and Modern Builders entered into a valid Joint Payment and Request Agreement. This agreement was related to a project in Joliet, Illinois on which Mastercraft was a subcontractor to Modern Builders, and Arrowhead was in turn a supplier subcontractor to Mastercraft. Arrowhead, Mastercraft, and Modern Builders entered into this agreement in an effort to ensure that Arrowhead would get paid on the jobs in which it supplied materials to Mastercraft. Late payments by Mastercraft during prior dealings with Arrowhead cast doubt on its ability to pay its bills to Arrowhead in a timely manner.
On May 31, 1989 Arrowhead billed Mastercraft in the amount of $5,488.00 for materials supplied by Arrowhead to Mastercraft in connection with the aforementioned Illinois Project.2 A week or so later, Arrowhead again billed Mastercraft for materials supplied in connection with the Illinois project, this time in the amount of $27,949.00.3 Around August 22, 1989, Modern Builders made a check in the amount of $33,437.00 payable jointly to Mastercraft and Arrowhead pursuant to the Joint Payment Request and Agreement mentioned above.
Soon thereafter, Mastercraft filed bankruptcy and the check was delivered by Modern Builders to the debtor's Chapter 7 Trustee. In bringing the interpleader action to resolve the question of who is entitled to the proceeds of the check, the Trustee noted that the following parties all had potential claims to the Modern Builders check:
Notwithstanding the Trustee's original identification of the above interested parties, First Bank and Arrowhead remain the only two contenders still in the arena and vying for the right to the proceeds. Rich-Con withdrew its claim December 4, 1989 on the condition that First State Bank would not raise failure to assert a claim or collateral estoppel as affirmative defenses against Rich-Con in any subsequent actions related to the withdrawn claim and the present interpleader action. First State claims that it has a prior and duly perfected first lien security interest in the funds — and that it is entitled to recover the funds at this time. Mastercraft Metal, the Trustee and Vaughn Short have not claimed an interest in the check except that the Trustee would not eschew a fee for filing the interpleader action. Those parties, therefore, have apparently relinquished whatever interests they may have in the proceeds. Arrowhead argues that it is entitled to the check and its proceeds as payment for materials it supplied to Modern Builders under the agreement.
A clear path of analysis is somewhat obstructed by the fact that the events and parties in the present case have significant connections to the states of Kansas, Missouri, and Illinois, thus making it unclear which laws to apply in resolving the questions before the court.
The question of which state's laws to apply to the relationship between First Bank and Mastercraft admits of somewhat easy resolution. Pursuant to the security agreement between First Bank and Mastercraft, their secured transaction is governed by the laws of the State of Kansas.4 Insofar as neither party challenged the validity of this clause, and because it seems reasonable that the rights of a Kansas lender should be determined under Kansas law, this Court turns to that state's laws in resolving First Banks' rights under the security agreement. Cf. Marquette National Bank of Minneapolis v. First of Omaha Serv., 439 U.S. 299, 99 S.Ct. 540, 58 L.Ed.2d 534 (1978).
The question of which state's laws should govern the parties rights to the check is somewhat more problematic as already stated, First State Bank is a Kansas resident. Modern Builders is apparently an Illinois corporation. Arrowhead and Mastercraft, the joint payees, are Missouri corporations. The check, which was payment for goods delivered from Missouri to Illinois for use on an Illinois project, was drawn on an Illinois bank.5 The questions of where the parties executed the contract for materials, and where they executed the joint check agreement, were not addressed by the parties. And, of course, there is no one agreement joined in by all the parties. However, since it seems clear that First State Bank's position must rise or fall based on Mastercraft's claim to the funds, the totality of the circumstances surrounding the joint payment agreement and the issuance of the check leads to the conclusion that Illinois law should be applied in resolving the question of whether Arrowhead, Mastercraft, or the Bank, are entitled to the check and its proceeds.
In resolving a choice-of-law question, the choice-of-law rules of the state where suit is brought are applied. In Missouri, the rule of lex loci contractus applies to a choice of law conflict involving a contract. Under this rule, the laws at the time and place where a contract is made governs its execution, interpretation and validity, while matters involving its performance are controlled by the laws at the time and place it is to be performed. Handly v. Lyons, 475 S.W.2d 451 (Mo.App.1971); State ex rel McCubbin, Admr. v. McMillian, 349 S.W.2d 453 (Mo.App.1961); Scudder v. Union National Bank, 91 U.S. 406, 23 L.Ed. 245 (1875). In the case at bar, this Court seeks the answers to several questions involving the interpretation of the joint check agreement, namely what rights were intended to be conferred, or were conferred by operation of law, upon execution of the joint check agreement. Insofar as it appears that the joint payment agreement was executed and performed in Illinois, Illinois law controls the questions of interpretation.
In passing, it should be noted that neither party identified or addressed the choice of law problem. Consequently, neither Arrowhead nor First Bank submitted specific evidence directed to show where the joint check agreement was executed. However, this Court has researched the laws of both Missouri and Illinois and concludes that the laws of the two states are sufficiently similar that a different outcome would not result if Missouri law were applied instead.
First Bank alleges that under the security agreement executed between it and Mastercraft, it is entitled to the check as the "proceeds" of an "account" in which it has a security interest. Kansas law defines an "account" as "any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance." K.S.A. § 84-9-106 (1983). Payment in satisfaction of an account is within the definition of proceeds of under Kansas law. K.S.A. § 84-9-306.6 Bank of Kansas v. Hutchinson, 13 Kan.App.2d 421, 773 P.2d 660 (1989) aff'd 246 Kan. 83, 785 P.2d 1349 (1990). The parties agree that First Bank has a valid, perfected security interest in Mastercraft's accounts and their proceeds. Thus, if debtor Mastercraft in fact has "a right to payment" of the funds represented by the Modern Builders check, First Bank is entitled to the funds pursuant to its security agreement with Mastercraft.
To decide what rights enured to Mastercraft as a result of its dealings with Modern Builders and Arrowhead, we must view the facts of the case under the light of Illinois law. While the Illinois Uniform Commercial Code states that a check made out to joint payees requires the signatures of both payees, the Code does not spell out the rights of joint payees to the proceeds of such a check. Ill.Rev.Stat.1987, ch. 26, ¶ 3-116. Help in resolving that tangled web must come from another source. Arrowhead argues that at best Mastercraft's interest in the check was as a "trustee" holding...
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