In re R. Bastyr and Associates, Inc.
| Decision Date | 14 January 1988 |
| Docket Number | Bankruptcy No. 4-86-1144. |
| Citation | 81 BR 978 |
| Parties | In re R. BASTYR AND ASSOCIATES, INC., Debtor. |
| Court | U.S. Bankruptcy Court — District of Minnesota |
Robert R. Roos, Bradley R. Janzen, Minneapolis, Minn., for creditor.
James H. Levy, Minneapolis, Minn., for debtor.
MEMORANDUM ORDER DETERMINING CLAIM NUMBER 38
This case came on for hearing on the debtor's objection to claim number 38 filed by Centurion Company. James H. Levy appeared for the debtor. Robert R. Roos and Bradley R. Janzen appeared for Centurion Company. This court has jurisdiction pursuant to 28 U.S.C. §§ 157 and 1334, and Local Rule 103(b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(B). Based on the evidence, memoranda of counsel, and the file of this case, I make the following:
R. Bastyr and Associates, Inc. is the debtor in a chapter 11 case filed on April 16, 1986. Centurion Company is a creditor in the case, and has filed a proof of claim for $327,563.85. The debtor filed an objection to the claim disputing the amount of the debt and alleging a setoff based on a theory of unjust enrichment.
This is the second of two related claim objections.1 The first objection concerned Cheyenne Land Company's claim for $25,305.00. The claim related to repairs and warranty work on homes that the debtor built in the Aspenwood development, one of several construction projects between the parties. On November 6, 1987, I entered an order disallowing Cheyenne's claim concluding that the course of conduct between the parties established that Cheyenne, not the debtor, was responsible for the repairs. In re R. Bastyr and Associates, Inc., Bktcy. No. 4-86-1144, slip op. at 5-6 (Bktcy.D.Minn. Nov. 6, 1987).
This objection involves the claim of Centurion Company. It consists of several categories of expenses:
Category Description Amount
A Invoices of the debtor paid $214,093.83
by Centurion
B Advances to the debtor in $47,157.38
excess of costs on completed
homes
C Advances to the debtor in $42,905.85
excess of costs on
uncompleted lots
D Repairs made by Centurion $13,000.00
to Cherry Hill homes
(foundation work)
E Repairs made by Centurion $3,565.26
to home at 18719 Red
Cherry Circle
F Repairs made by Centurion $6,841.53
to home at 18600 Clearview.
___________
Total $327,563.85
On September 25, 1987, the parties stipulated that category A should be allowed in the amount of $139,338.99, category B in the amount of $47,157.38, and category C in the amount of $42,905.85. On November 25, 1987, I allowed Centurion to amend its claim by $11,150.00 — the amount of a mechanic's lien judgment arising out of the Cherry Hill development. On December 11, 1987, the debtor stipulated to the amount of the amended claim as $11,150.00 and agreed to increase the previously stipulated amounts in categories A, B, and C.2 Therefore, the total amount of the agreed claim is $240,552.22 ($139,338.99 + $47,157.38 + $42,905.85 + $11,150.00). The balance of Centurion's claim, consisting of categories D, E, and F for a total of $23,406.79 ($13,000.00 + $3,565.26 + $6,841.53), remains in dispute.
In addition to its objection to the amount of Centurion's claim, the debtor asserts a right of setoff for specific payments the debtor made for construction costs, and for unjust enrichment. If proven, the setoffs would reduce Centurion's claim. 11 U.S.C. § 502(b)(1). Centurion agreed to the construction cost setoff for $27,500.00 pursuant to a December 11, 1987, stipulation. The setoff for unjust enrichment relating primarily to work performed by the debtor on the Cherry Hill development has not been settled. The total claimed setoff that the debtor seeks to establish is $194,500.00.
In summary, the parties have agreed that categories A, B, and C of Centurion's claim totalling $240,552.22 is allowable, and that the debtor has a valid setoff of $27,500.00 against that claim. There remains in dispute categories D, E, and F totalling $23,406.79, and the debtor's alleged right of setoff for unjust enrichment totalling $194,500.00.
R. Bastyr and Associates, Inc. is a Minnesota corporation in the business of land planning and home construction. Up until the summer of 1985, the corporation operated as two separate entities. R. Bastyr and Associates, Inc. did the land planning work, and Copperfield Homes, Inc. supervised the construction of new homes. Both corporations were owned and operated by Ronald L. Bastyr and his wife, Adrian J. Bastyr. On July 23, 1985, the two companies merged to become R. Bastyr and Associates, Inc., the debtor in this Chapter 11 case.3
The business relationship between Ronald Bastyr and Richard Neslund began back in 1983. Bastyr's corporations worked on several of Neslund's housing projects. Although the claim that is the subject of this dispute relates primarily to the Cherry Hill project, some discussion of the Aspenwood project is necessary to fully understand the parties' relationship.
The Aspenwood project involved the development of eight residential lots. Cheyenne Land Company, which is operated by Neslund,4 purchased the real estate at a tax foreclosure sale. R. Bastyr and Associates did the land planning for the project, and Copperfield Homes constructed the seven rental units which comprised Aspenwood.
The precise details of the agreement between the parties is not clear since there was never a written contract. However, it is clear that Ronald Bastyr, through his corporations, was responsible for the land planning services and construction of the homes. His duties included: designing the house floor plans, hiring contractors to complete the construction, and various other tasks. For their services, Copperfield Homes received $3,000.00 per unit for construction, and R. Bastyr and Associates received $1,000.00 per lot for land planning.5 Cheyenne Land Company was responsible for all the costs of construction and engineering, including the cost of warranty work.6
The Cherry Hill project was much larger. Centurion Company acquired the Cherry Hill property at a tax foreclosure sale on June 17, 1983, for approximately $515,000.00. Initially, Centurion planned to resell the property to a third party shortly after purchasing it. Bastyr had located a buyer and arranged a tentative sale. However, the resale was never consummated, and after subsequent attempts to sell the property also failed, Centurion decided to develop the land.
As with the Aspenwood project, Neslund contacted Bastyr to assist in the development. Acting this time on behalf of Centurion Company, Neslund orally contracted with R. Bastyr and Associates to perform preconstruction services. Those services included: (1) surveying and plotting the lots, (2) lowering the floodplain to increase the amount of usable land, (3) negotiating with the city to change the zoning restrictions, and (4) supervising other professionals in developing the land.7 Throughout the preconstruction phase, Centurion paid all of R. Bastyr and Associates costs, except the wages of its employees.
After the land planning work was completed, Centurion contracted with Copperfield Homes to build multi-family and single-family units. The August 1, 1984, agreement provided that Copperfield Homes would supervise the design, layout, and construction of the units. Although Copperfield Homes did much of the design work itself, other subcontractors did the actual construction.8
As compensation for its services, the debtor received $4,000.00 per unit constructed. Of that amount, $3,000.00 went to Copperfield Homes for services rendered in supervising the actual construction of the units, collecting all the bills from subcontractors, attending the closings, and other services necessary to facilitating the construction and sale of the units. The remaining $1,000.00 went to R. Bastyr and Associates for preconstruction services. R. Bastyr and Associates also received a $52,000.00 lump sum payment at the outset of the project.9
All the costs incurred by Copperfield Homes in designing and constructing the units was paid by Centurion. Money was advanced to Copperfield Homes on a regular basis to fund the construction and pay for materials.
In late February 1986, a problem arose with the payment of subcontractors. Over $350,000.00 in funds advanced to Copperfield Homes to cover construction costs was never paid, and several builders and suppliers filed mechanic's lien claims against Cherry Hill homes. After investigating the situation, Centurion learned that Ronald Bastyr had diverted the money for his own personal use, and therefore, Copperfield Homes could not pay the construction bills as they came due. In order to satisfy the liens on the property, Centurion advanced additional funds to pay the subcontractors.
On April 16, 1986, the debtor filed this chapter 11 case. At the time of filing, it had completed 56 of the 176 units in the Cherry Hill development. On May 5, 1986, the debtor, with court approval, assigned the remaining interest in the August 1, 1984, construction contract back to Centurion as part of a comprehensive settlement between the parties.
On August 29, 1986, Centurion Company filed a proof of claim for $327,563.85. The debtor objected to the claim on October 8, 1987.
The debtor raises two issues with respect to Centurion's claim. The first issue is a claim objection relating to the costs of warranty work on the Cherry Hill project as set forth in categories D, E, and F of Centurion's claim. The debtor argues that it is not liable for the costs of the warranty work, and therefore, Centurion is not entitled to reimbursement for those expenses.
The second issue the...
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