In re Payless Cashways, Inc.

• Decision Date: 10 February 1999
• Docket Number: 98-6075WM.,BAP No. 98-6044WM
• Citation: 230 BR 120
• Parties: In re PAYLESS CASHWAYS, INC., d/b/a Payless Cashways, d/b/a Furrow, d/b/a Lumberjack, d/b/a Hugh M. Woods, d/b/a Somerville Lumber, d/b/a Knox Lumber, Debtor. Amtech Lighting Services Company, Creditor-Appellant, v. Payless Cashways, Debtor-Appellee. International Association of Lighting Management Companies, Amicus on Behalf of Appellant.
• Court: U.S. Bankruptcy Appellate Panel, Eighth Circuit

230 B.R. 120 (1999)

In re PAYLESS CASHWAYS, INC., d/b/a Payless Cashways, d/b/a Furrow, d/b/a Lumberjack, d/b/a Hugh M. Woods, d/b/a Somerville Lumber, d/b/a Knox Lumber, Debtor Amtech Lighting Services Company, Creditor-Appellant, v. Payless Cashways, Debtor-Appellee International Association of Lighting Management Companies, Amicus on Behalf of Appellant.

BAP Nos. 98-6044WM, 98-6075WM.

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted December 10, 1998.

Decided February 10, 1999.

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Paul M. Hoffmann, Kansas City, MO, for appellant.

Mark H. Ralston, Dallas, TX, Karin B. Torgerson, Dallas, TX, on the brief, for amicus curiae.

Benjamin F. Mann, Kansas City, MO, Michelle M. Boehm, Kathryn B. Bussing, Kansas City, MO, on the briefs, for appellee.

Before: HILL, WILLIAM A., DREHER and EDMONDS,¹ Bankruptcy Judges.

DREHER, Bankruptcy Judge.

These appeals are from two orders of the bankruptcy court.² The first order, dated May 7, 1998, sustained an objection by Debtor, Payless Cashways, Inc. (Payless), to Claim Number 5116 filed by Amtech Lighting Services Company (Amtech). The second, dated July 17, 1998, denied Amtech's motion for reconsideration. The effect of the bankruptcy court's orders was to allow Amtech an unsecured claim in the sum of $1,733,449.84, but to deny Amtech secured status on that claim. We affirm.

FACTS AND PROCEDURAL HISTORY

A. THE AGREEMENT

Payless was engaged in the retail sales business. Before it filed for bankruptcy it was doing business in at least twenty states. Amtech designs, builds, and maintains internal and external lighting systems for businesses.

This dispute arises out of an Agreement dated April 1, 1995, between Payless and Amtech (the Agreement). Under the Agreement, entitled "Lighting Retrofit and Maintenance Agreement," Amtech agreed to retrofit or relamp ceiling-mounted lighting fixtures at 164 Payless locations in twenty states. These services were identified as "Initial Services." Amtech was also to provide continuing maintenance services, which included inspecting all locations for burned out bulbs and replacing inoperative lights, ballasts, lamp holders, and wiring on a regular and on an emergency basis. These services were identified as "Continuing Services."

Payless did not pay cash for the initial installation, and it did not borrow money from others to do so. Instead, the parties agreed to a credit arrangement whereby the cost of the retrofitting and relamping would be amortized over a forty-eight month period. These costs were spread out to each of the 164 Payless locations. In addition, for each location, Payless would pay a monthly charge for the continuing maintenance services, as well as extra charges for replacement lightbulbs, lamps, and supplies. Under Paragraph 6 of the Agreement, Payless had the right to terminate the contract without cause as to any or all stores on sixty days' notice. Under Paragraph 7, either party could terminate the Agreement for cause on thirty days' notice. Paragraph 8 allowed each party to terminate the contract in the case of bankruptcy, insolvency, or similar financial event of the other. Paragraph 5 provided:

5. If Customer Payless terminates the Agreement pursuant to Paragraphs 6, 7, or 8 then Customer Payless shall pay to the Contractor Amtech an amount equal to 100% of unaccrued Initial Services for the number of months remaining on the Agreement for each Store that has received an Initial lighting retrofit and that is being serviced under the Agreement at the effective date of the notice. This is not a penalty, but represents initial costs, overheads, and profits for work completed by Contractor in providing labor and materials for Initial lighting retrofit. If Customer terminates the continuing service portion of this agreement pursuant to the provisions of PARAGRAPH 7 ONLY (Breach of agreement or default by Amtech Lighting Services), it is agreed that the unaccrued initial services may still, at the customer\'s option, be amortized over the term of the agreement under the established terms and conditions.

There was conflicting evidence regarding whether the Initial Services and the Continuing Services portions of the contract were segregable. A Payless witness testified that Payless's obligation to pay for the original installation and its obligation to pay for the continuing maintenance services were segregable, and Payless could cancel the continuing maintenance portion at any time. Amtech's witness testified that he viewed the continuing maintenance services as an integral part of the overall contract. He pointed, particularly, to his view that the energy savings the Agreement was designed to generate could be diminished if the wrong replacement light bulbs were installed after the original installation. He opined that he doubted Payless would have canceled because of the practical difficulties of bringing in a new maintenance contractor.

Amtech completed all initial installation work at all locations over a period of approximately twelve months. The bankruptcy court found, and the parties agree, that Amtech completed the initial installations in Minnesota on August 29, 1995; Nevada on December 20, 1995; Oklahoma on February 9, 1996; and, Texas on April 8, 1996. Amtech also provided routine maintenance and repair services at all 164 locations. For a while, things went smoothly. Amtech finished the initial installation work at all locations, and Payless paid both the monthly amortized per-location installation charge and the monthly service charge for the continuing maintenance services at each such location. In addition, while not specifically covered by the Agreement, from time to time Payless would request and Amtech would perform additional upgrade work, such as installing an additional outdoor parking light or replacing a lighting pole knocked down accidentally.

The monthly charges for the continuing maintenance and for any additional installation work ordered after completion of the original installation were billed and paid for promptly; they are not part of these appeals. It is the amount still due and owing for the Initial Services at the time of the bankruptcy filing that is in contention. At the date Payless filed for bankruptcy relief, Amtech had taken no steps to perfect a mechanics' lien in any of the several states. By failing to do so it exposed itself to the argument that Payless makes in these appeals, i.e., that Amtech is not entitled to mechanics' liens for the unpaid amount for the initial installation work because it failed to timely perfect.

B. THE PAYLESS BANKRUPTCY

On July 21, 1997. Payless filed for relief under Chapter 11 of the Bankruptcy Code. On September 27, 1997. Payless advised Amtech that, pursuant to 11 U.S.C. § 365, it would reject the contract effective October 1, 1997. On October 13, 1997, Amtech filed Claim Number 5116 for $1.733.449.84, which represents the remaining amount due for the initial installation work done at locations in four of the twenty states covered by the Agreement: Minnesota ($214.883.39). Oklahoma ($197,914.24), Nevada ($158,450.00), and Texas ($1,162,201.45). Amtech's claim asserted that it was secured, and in subsequent briefing it asserted that it was entitled to statutory mechanics' liens in those four states covering the unpaid amounts. While Payless still owed Amtech for a portion of the initial installation in sixteen other states, Amtech did not claim mechanics' liens in any of those sixteen states. Amtech also filed an unsecured claim for all amounts due for the initial installation in all twenty states, noting that Claim Number 5116 was not to be considered duplicative, but was designed to preserve Amtech's claim to a mechanics' lien in at least these four states.

On November 19, 1997, the bankruptcy court confirmed a Plan of Reorganization, which is expected to pay unsecured creditors pennies on the dollar. Between November 24, 1997, and December 18, 1997. Amtech took steps to perfect mechanics' liens for sixty-one stores located in Minnesota, Oklahoma, Nevada, and Texas. While Payless agrees that Amtech has an allowable unsecured claim for all amounts still owed for the initial installation work for all stores in all states, it has objected to the secured status of such a claim.

C. THE BANKRUPTCY COURT DECISION AND THE FIRST APPEAL

Following an evidentiary hearing, the bankruptcy court rejected Amtech's claim to mechanics' lien rights. The court held that, on its face, the contract was divisible into two parts, one consisting of initial design and installation work (Initial Services) and one consisting of ordinary maintenance and repair services (Continuing Services). It noted that the initial installation work by far represented the greater percentage of each monthly bill for each location.³ The court held, in essence, that the Agreement had two components: 1) installation of a new lighting system, the charges for which were payable over forty-eight months, unless, under Paragraph 5, they became immediately due and payable by reason of termination of the Agreement, and 2) ordinary maintenance and repair, the charges for which were billed on a monthly basis.

The bankruptcy court separately analyzed the law in Minnesota, Oklahoma, Nevada, and Texas. Because it was undisputed that all initial installation was completed in late 1995 and early 1996, the bankruptcy court held that, in all four states, the time to perfect had long since passed. The bankruptcy court also rejected Amtech's argument that, because Payless was promptly paying each month, Amtech would have risked a suit for slander of title if it had attempted to perfect a mechanics' lien earlier. The court noted that parties cannot extend by contract the statutory time limit to perfect a mechanics' lien and that Amtech could have protected...