In re McGee

• Decision Date: 12 January 2001
• Docket Number: No. 98-6-5599-JS.,98-6-5599-JS.
• Parties: In re Robert W. McGEE and Janis S. McGee, Debtors.
• Court: U.S. Bankruptcy Court — District of Maryland

258 B.R. 139 (2001)

In re Robert W. McGEE and Janis S. McGee, Debtors.

No. 98-6-5599-JS.

United States Bankruptcy Court, D. Maryland.

January 12, 2001.

COPYRIGHT MATERIAL OMITTED

Anthony J. DiPaula, DiPaula and Sullivan, LLC, Bel Air, Maryland, Mark S. Devan, Covahey and Boozer, P.A., Towson, Maryland, for the claimants.

Lawrence J. Yumkas, Douglas B. Riley, Rosenberg, Proutt, Funk & Greenberg, LLP, Baltimore, Maryland, for the debtors.

Ellen W. Cosby, Baltimore, Maryland, Chapter 13 Trustee.

MEMORANDUM OPINION ALLOWING CLAIMS OF BENFIELD ELECTRIC CO., INC., AND RIDGE HEATING, AIR CONDITIONING & PLUMBING, INC., BASED UPON THE MARYLAND CONSTRUCTION TRUST STATUTE AS TO DEBTOR ROBERT W. McGEE AND DISALLOWING SAID CLAIMS AS TO JANIS S. McGEE

JAMES F. SCHNEIDER, Bankruptcy Judge.

The debtors, Robert W. McGee and Janis S. McGee, filed the instant Chapter 13 bankruptcy petition on November 4, 1998. On April 1, 1999, the debtors filed objections to the claims of Benfield Electric Co., Inc. ("Benfield") and Ridge Heating. Air Conditioning & Plumbing, Inc. ("Ridge"). For the following reasons, the objection of Janis S. McGee will be sustained, the objection of Robert W. McGee will be overruled and the said claims will be allowed, but only as to Mr. McGee.

FINDINGS OF FACT

On February 16, 1999, Benfield and Ridge filed proofs of claim in the instant Chapter 13 case in the respective amounts of $90,877.65, and $357,816.41¹, based upon judgments obtained by the claimants against Keystone Homes, Inc., in the Circuit Court for Harford County Carr, J., entered on February 9, 1999. Each proof of claim contained the following attachment:

BASIS FOR CLAIM

1. The Debtors, Robert William McGee and Janis Smith McGee, jointly owned one hundred percent (100%) of the stock in the following corporations, being development projects at which labor and materials were supplied by the Claimant herein, creating the debt which is the subject of this claim. Those corporate ownership entities are listed on Schedule B of the Debtor\'s Petition as follows: Keystone Homes at Hickory Overlook, Inc.; Keystone Homes at Spenceola Farms, Inc.; Keystone Homes at Waterford Commons, Inc.; Keystone Homes at the Reserve, Inc.

2. The Debtors were ninety percent (90%) joint owners of a corporation known as Keystone Homes, Inc., the remaining ten percent (10%) being owned five percent (5%) each by two other members of the McGee family. Keystone Homes, Inc. was, on information and belief, the building entity on behalf of the other Keystone Homes entities which were developing the various projects. All of the entities share common ownership, officers, offices, and management.²

3. That each of the development projects was funded by substantial construction loans, the lenders on which disbursed substantial funds during the course of construction to pay the costs of the labor and materials supplied by construction trades such as the Claimant herein who supplied heating and air conditioning labor and materials, as well as plumbing labor and materials.

4. That the funds from the construction loans, it is believed and averred, were either disbursed directly to Keystone Homes, Inc., the entity owned and controlled by the Debtors, or disbursed to the other Keystone Homes entities that actually owned the development projects, who then in turn disbursed those funds to Keystone Home, Inc., all of which entities were controlled, operated and managed by the Debtors.

5. That the construction loans disbursed and managed by the Debtors were not held in trust as required by Title 9, Subtitle 2 of the Maryland Real Property Code Annotated, to pay the suppliers of materials or labor such as the Claimant herein, but were instead retained or utilized for purposes other than to pay those for whom the money was intended such as the Claimant, thereby subjecting the Debtors to personal liability in accordance with Section 9-202 of the Maryland Real Property Code.

Id.

The claimants asserted that the debtors' individual liability for the claims against the corporation arose under the Maryland Construction Trust Statute, Sections 9-201 through 9-204 of the Real Property Article of the Maryland Annotated Code.

In their objections, the debtors denied liability to the claimants under the Maryland Construction Trust Statute, denied that they had violated the statute and denied that they or the corporation had retained draws earmarked for the claimants. Mr. McGee was president and the principal corporate officer of Keystone Homes, Inc., but there has been no showing that Mrs. McGee was an "officer, director, or managing agent" of any of the corporations alleged to have defaulted on payments to the claimants.

CONCLUSIONS OF LAW

THE MARYLAND CONSTRUCTION TRUST STATUTE

The Maryland Construction Trust Statute creates a statutory trust relationship between a contractor who has been paid by an owner and a subcontractor for whose work an owner has paid the contractor. Upon receiving payment from the owner, the contractor holds the funds in trust for the benefit of the subcontractor who performed work or the suppliers who provided materials for the project. The statute provides:

§ 9-201 Moneys to be held in trust; commingling.

(a) Moneys to be held in trust. — Any moneys paid under a contract by an owner to a contractor, or by the owner or contractor to a subcontractor for work done or materials furnished, or both, for or about a building by any subcontractor, shall be held in trust by the contractor or subcontractor, as trustee, for those subcontractors who did work or furnished materials, or both, for or about the building, for purposes of paying those subcontractors.

(b) Commingling. — (1) Nothing contained in this subtitle shall be construed as requiring moneys held in trust by a contractor or subcontractor under subsection (a) of this section to be placed in a separate account.

(2) If a contractor or subcontractor commingles money held in trust under this section with other moneys, the mere commingling of the moneys does not constitute a violation of this subtitle.

§ 9-202 Liability for retention or use of moneys held in trust under S 9- 201 of this subtitle.

Any officer, director, or managing agent of any contractor or subcontractor, who knowingly retains or uses the moneys held in trust under § 9-201 of this subtitle, or any part thereof, for any purpose other than to pay those subcontractors for whom the moneys are held in trust, shall be personally liable to any person damaged by the action.

§ 9-203. Misuse of funds prima facie evidence of intent to defraud.

Repealed by Acts 1995, ch. 436, effective October 1, 1995.

§ 9-204 Applicability of subtitle; definitions.

(a) In general. — This subtitle applies to contracts subject to Title 17, Subtitle 1 of the State Finance and Procurement Article, known as the "Maryland Little Miller Act", as well as property subject to § 9-102 of this title.

(b) Exceptions contracts. — This subtitle does not apply to:

(1) A contract for the construction and sale of a single family residential dwelling; or

(2) A home improvement contract by a contractor licensed under the Maryland Home Improvement Law.

(c) Definitions. — In this subtitle, "owner", "contractor", and "subcontractor" have the same meanings as in § 9-101 of this title.

Md.Code Ann., Real Prop. §§ 9-201 to 9-204. Section 9-101 is the definitional section of the Maryland Mechanic's Lien Law, which provides as follows:

§ 9-101 Definitions.

(a) In general. — In this subtitle the following words have the meanings indicated.

(b) Building. — "Building" includes any unit of a nonresidential building that is leased or separately sold as a unit.

(c) Contract. — "Contract" means an agreement of any kind or nature, express or implied, for doing work or furnishing material, or both, for or about a building as may give rise to a lien under this subtitle.

(d) Contractor. — "Contractor" means a person who has a contract with an owner.

(e) Land. — "Land" means the land to which a lien extends under this subtitle or the land within the boundaries established by proceedings in accordance with the Maryland Rules. "Land" includes the improvements to the land.

(f) Owner. — "Owner" means the owner of the land except that, when the contractor executes the contract with a tenant for life or for years, "owner" means the tenant.

(g) Subcontractor. — "Subcontractor" means a person who has a contract with anyone except the owner or his agent.

Md.Code Ann., Real Prop. § 9-101.

The statute is applicable to the instant case because it applies to buildings that are subject to the Maryland mechanics' lien statute, Md.Code Ann., Real Prop. § 9-101, et. seq., as were the buildings in this case, and the debtors' corporation, through its Subchapter S subsidiaries, was the owner of the properties as well as the contractor engaged in the construction of the buildings. Md.Code Ann., Real Prop. § 9-204(a).

Mr. McGee set up Subchapter S corporations for the various projects to purchase and own the land that Keystone developed. Then Keystone borrowed money to purchase the land in the name of the Subchapter S corporations and to develop the land. The loans were paid directly to Keystone, not to the individual Subchapter S owners. The statute creates a trust when the money is paid to the contractor by the owner for payment to subcontractors and materialmen. The debtors argued that the statute is not applicable because the debtors' corporations were both owners and contractors, and that by reason of their identity, Ridge and Benfield may not invoke the statute.

This contention was rejected by the Maryland Court of Special Appeals in a similar context, one involving the fixing of a mechanic's lien, in the case of Skinner Logsdon Constr. and Equip., Inc. v. First United Church, 88 Md.App. 434, 594 A.2d 1245 (1991). There, the court held that

In light of the history of the mechanic\'s lien statute, its purpose and liberal

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