In re Regional Bldg. Systems, Inc.

• Decision Date: 21 February 2003
• Docket Number: No. 01-2319.,01-2319.
• Citation: 320 F.3d 482
• Parties: In re REGIONAL BUILDING SYSTEMS, INCORPORATED, Debtor. Bedford Construction Corporation, Creditor-Appellant, v. The Plan Committee of Regional Building Systems, Incorporated, Debtor-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

320 F.3d 482

In re REGIONAL BUILDING SYSTEMS, INCORPORATED, Debtor.

Bedford Construction Corporation, Creditor-Appellant, v. The Plan Committee of Regional Building Systems, Incorporated, Debtor-Appellee.

No. 01-2319.

United States Court of Appeals, Fourth Circuit.

Argued September 23, 2002.

Decided February 21, 2003.

ARGUED: William Harley Roth, Kelly & Roth, New York, NY, for Appellant. Irving Edward Walker, Saul Ewing, L.L.P., Baltimore, MD, for Appellee.

ON BRIEF: Linda V. Donhauser, E. Hutchinson Robbins, Jr., Matthew G. Summers, Miles & Stockbridge, P.C., Baltimore, MD, for Appellee.

Before MICHAEL and GREGORY, Circuit Judges, and Rebecca Beach SMITH, United States District Judge for the Eastern District of Virginia, sitting by designation.

Affirmed by published opinion. Judge SMITH wrote the opinion, in which Judge MICHAEL and Judge GREGORY joined.

OPINION

REBECCA BEACH SMITH, District Judge.

Plaintiff Bedford Construction Corporation ("Bedford") appeals the district court's affirmance of the bankruptcy court's order denying Bedford delay damages and interest. We agree with the lower courts and, accordingly, affirm.

I.

In December 1991, Regional Building Systems ("RBS"), a manufacturer of modular housing units, entered into a contract with Aspen Knolls Construction Corporation ("Aspen Knolls") to manufacture, deliver, and install 1000 housing units on Aspen Knolls' property in Staten Island, New York. In February 1992, RBS entered into a subcontract agreement with Bedford Construction Corporation ("Bedford"),¹ under which Bedford was responsible for transporting the modular units manufactured by RBS to the Aspen Knolls building site, and then erecting and completing the structures.²

In late 1992, Aspen Knolls experienced financial difficulties and defaulted on a number of payments to RBS. Without these payments, RBS experienced a severe cash flow problem and was unable to meet its contractual obligation to deliver the requisite number of housing units to Bedford. Consequently, RBS suspended its work under the subcontract. As a result, Bedford was forced to bear the expense of supporting idled labor and equipment that would otherwise have been devoted to productive work. In July 1993, Aspen Knolls ceased paying RBS altogether, forcing RBS to terminate the Aspen Knolls contract as well as the subcontract with Bedford.

On November 9, 1993, RBS filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. The bankruptcy court established March 15, 1994, as the last day on which creditors could file proof of unsecured claims in RBS's chapter 11 case. Bedford filed no proof of claim; it was, however, listed in RBS' bankruptcy schedules as holding an unsecured, nonpriority claim in the amount of $614,203.46.

On May 20, 1997, the bankruptcy court entered an order confirming the Amended Chapter 11 Plan of Liquidation (the "Plan"), proposed jointly by RBS and the Plan Committee.³ The Plan recognized a separate class of creditors, designated as Class IV, for those holding valid claims under Article 3A of the New York Lien Law.⁴ Under the Plan, the approximately $5,000,000.00 which RBS recovered from Aspen Knolls was segregated from the other estate assets and held in trust for the lien law beneficiaries. According to the Plan, all Allowed New York Lienholder Claims were to be paid in full prior to any distribution of estate property to general unsecured creditors. The Plan defined an allowed claim as one that is "determined to be valid under Article 3A of the New York Lien Law and allowed pursuant to a Final Order of the Court." All claims were deemed to be automatically disputed, and the bankruptcy court was vested with the responsibility of determining the validity and allowance of such claims. After full payment to the trust beneficiaries, any remaining assets would revert to the general bankruptcy estate and be divided among other creditors.

In July 1997, Bedford filed an Article 3A claim in the amount of $1,448,226.49, plus applicable interest. On October 22, 1997, the Plan Committee filed its first objection to all claims against the estate. The Committee compared the claims to RBS's books and records and sought to reduce those that had insufficient or no documentation from which the Committee could ascertain the validity of the variance. The Committee determined, inter alia, that Bedford's claim for $1,448,226.49 was overstated and sought to reduce it to $614,203.46.

The bankruptcy court began the evidentiary hearing on the Bedford lienholder claim on July 27, 1998. In the midst of the trial, Bedford moved to compel payment of the portion of Bedford's Class IV claim that the Plan Committee agreed was valid. Bedford and the Plan Committee thereafter reached an agreement, under which Bedford was paid the undisputed portion of its claim, in the amount of $718,128.83. The trial proceeded on Bedford's claim for reimbursable expenses, additional damages, delay damages, and for interest. In an extensive opinion, the bankruptcy court determined that Bedford was only entitled to recover an additional $22,067.82 and denied recovery for delay damages and interest. The district court affirmed the bankruptcy court's decision. Bedford first appeals the holding that New York law does not permit a subcontractor to recover delay damages from a general contractor. Second, Bedford argues that it is owed prepetition interest on all unpaid invoices.

II.

Factual findings below are reviewed by this court under the clearly erroneous standard while legal conclusions are reviewed by this court de novo. See In re Stanley, 66 F.3d 664, 667 (4th Cir.1995) ("In essence, we stand in the shoes of the district court, inasmuch as we may not, generally speaking, set aside a finding of the bankruptcy court unless it is clearly erroneous.") (citations omitted). A finding of fact is clearly erroneous only when "the reviewing court on the entire record is left with the definite and firm conviction that a mistake has been made." In re Morris Communications, N.C., Inc., 914 F.2d 458, 467 (4th Cir.1990).

A.

At trial, Bedford sought to recover damages for labor and equipment that were idled when RBS, unable to provide Bedford with the requisite number of manufactured units, suspended its obligations under the subcontract. The bankruptcy court denied Bedford's claim for delay damages, holding that New York law prevents such a recovery when the contractor is not responsible for the delays. Bedford argues, as it did before the district court, that financial difficulty does not excuse performance under a contract and that delay damages are proper.

It is clear that to the extent Bedford seeks to hold RBS liable for delays caused by Aspen Knolls, its claim runs counter to established New York law. In Triangle Sheet Metal Works, Inc. v. James H. Merritt and Co., 79 N.Y.2d 801, 580 N.Y.S.2d 171, 588 N.E.2d 69 (1991), the New York Court of Appeals denied a subcontractor recovery for delay damages, after finding that the delay was not the fault of the general contractor. Triangle, a subcontractor on a construction project for New York City, sought recovery against Merritt, the prime contractor, for performance delays which were contributed to by the City, other contractors, and weather delays. The trial court dismissed the claim and the appeals court affirmed, holding that:

This case falls squarely within the general rule that, absent a contractual commitment to the contrary, a prime contractor is not responsible for delays that its subcontractor may incur unless those delays are caused by some agency or circumstance under the prime contractor's direction or control. Contrary to Triangle's contention, there is no basis for concluding that a prime contractor — which oftentimes lacks control over much of the work to be performed at a particular project — has implicitly agreed to assume responsibility for all delays that a subcontractor might experience — no matter what their cause.

Id. at 802, 580 N.Y.S.2d 171, 588 N.E.2d 69 (citations and quotations omitted) (emphasis added). See also Norcross v. Wills, 198 N.Y. 336, 91 N.E. 803, 805 (1910) (holding that a party to a construction contract will be "answerable for all losses caused by delays, which his control of the work should make him responsible for..."). The Triangle court concluded that a subcontractor unhappy with this rule "should bargain for the inclusion in its subcontract of a provision" to the contrary. Id. at 803, 580 N.Y.S.2d 171, 588 N.E.2d 69. There was no such warranty in the instant case.⁵

Bedford does not dispute the holding of Triangle, but instead disputes its application to the current case. Bedford argues that nonpayment by the owner does not fall within the Triangle holding because Triangle does not alter the general rule that financial difficulty, even bankruptcy or insolvency, will not excuse performance of a contract. Despite Bedford's arguments to the contrary, Triangle is directly on point.⁶ See Port Chester Electrical Construction Corp. v. HBE Corp., 978 F.2d 820, 822 (2nd Cir.1992) (applying Triangle to a dispute between a contractor subcontractor). Thus, we must turn to the question whether the delays suffered by Bedford were attributable, in whole or in part, to Aspen Knolls.

In its opinion, the bankruptcy court made specific and detailed factual findings regarding the cause of the project delays, concluding that Aspen Knolls' breach of its payment obligations to RBS was the cause of RBS's suspension of work. The court found that RBS acted reasonably, suspending deliveries only after Aspen Knolls had defaulted on several payments and resuming them once payments were again made. RBS terminated the contract only after Aspen Knolls had defaulted on two invoices totaling over $3,000,000.00, which the court determined so severely hampered RBS's cash flow that RBS was justified in suspending work. During this time, RBS kept Bedford fully...