In re Scherer Hardware & Supply, Inc.
| Decision Date | 12 February 1981 |
| Docket Number | Bankruptcy No. 78 B 10069. |
| Citation | 9 BR 125 |
| Parties | In re SCHERER HARDWARE AND SUPPLY, INC., an Illinois corporation, Debtor. SCHERER HARDWARE AND SUPPLY, INC., Plaintiff, v. CHARLES H. EICHELKRAUT & SON, INC., Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
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Gerald F. Munitz, Nachman, Munitz & Sweig, Chicago, Ill., for Scherer Hardware and Supply, Inc.
Warren, Hayner & Baxter, Ottawa, Ill., for Charles H. Eichelkraut & Sons, Inc.
This cause came on to be heard on the objection of the debtor, Scherer Hardware and Supply, Inc. (hereinafter "Scherer"), to the claim of Charles H. Eichelkraut and Son, Inc. (hereinafter "Eichelkraut"), and on Scherer's counterclaim against Eichelkraut. The parties have presented a number of questions, both legal and factual, which will be discussed separately.
The major part of Eichelkraut's claim is for a payment for mailboxes that it made to one of Scherer's creditors. Eichelkraut claims this as a setoff against its debt to Scherer. The Court first must determine whether Eichelkraut's claim is allowable as a claim. Next the Court must determine into which class of claims it belongs, if it is allowable. If it is entitled to be treated as a setoff, Scherer's counterclaim must be determined to permit the establishment of the arithmetic amounts of the competing claims so that the portion of Eichelkraut's claim which can be set off may be calculated. The largest of Scherer's counterclaims is for "extras" incurred by Scherer while refitting bifold doors at the Streator Elderly Development at Streator, Illinois. Scherer also claims it is owed money for extra work on the "Foster Grant", "St. Bede's Abbey", "Illinois Trust", "Philadelphia Quartz", and "Frank Rowland" jobs. Finally, Scherer claims that it is entitled to interest on any amounts owed it by Eichelkraut.
On October 15, 1976 La Salle National Bank as Trustee under Trust No. 51382, as owner, entered into a Master Construction Contract with Eichelkraut, as general contractor, for the construction of a project to be known as the Streator Elderly Development in Streator, Illinois. On November 2, 1976 Eichelkraut and Scherer entered into a Subcontract Agreement whereunder Scherer was to furnish and install 315 bi-fold doors at the Streator project. This agreement is the basis for Scherer's counterclaim and will be discussed later.
On November 3, 1976 Eichelkraut and Scherer entered into another subcontract whereunder Scherer was to furnish and install mailboxes at the Streator project. It is Eichelkraut's contention that it can set off the amount due to it for the mailboxes against the amount which it owes on the doors. In November 1976, Scherer placed its order for the mailboxes with Cutler-Federal, Inc. (hereinafter "Cutler"). On November 28, 1977, approximately one year later, Cutler drop-shipped the mailboxes to the Streator project. On November 29, 1977 Cutler billed Scherer for the cost of the mailboxes $1,801. Although Scherer did not pay Cutler, Cutler did not retain a security interest in the mailboxes, and Cutler thus became a general unsecured creditor of Scherer. Cutler did not cause a written notice of its claim to be served on Eichelkraut1 or on the owner of the Streator project. In addition, Cutler has never filed a claim for lien with the Recorder of Deeds in La Salle County, Illinois (the site of the Streator project) or with the Registrar of Titles in La Salle County, Illinois.
On January 18, 1978 and May 1, 1978 Scherer obtained payment from Eichelkraut on the mailbox contract by submitting the required lien waivers, which incorrectly stated that the mailboxes were paid for, and omitted Cutler's name as an unpaid supplier. Walter Scherer, the president of Scherer, testified it was his general practice in his dealings with Eichelkraut to submit lien waivers showing payment for labor and materials as having been made, even though that was not the case. The Court will take judicial notice that it is a common practice of subcontractors to follow this procedure. Despite Eichelkraut's payment to it, Scherer did not pay Cutler at that time.
On December 28, 1978 Scherer filed its Petition for an Arrangement under Chapter XI of the Bankruptcy Act, beginning this case. About two months later, in February, 1979, Cutler finally notified Eichelkraut of its unpaid claim for the mailboxes. Eichelkraut then paid Cutler $1,801 and obtained a lien waiver and an assignment of the Cutler claim against Scherer.
Scherer objects to permitting Eichelkraut's claim for $1,801 to be treated as a setoff, which has considerable merit and will be discussed in detail below. Scherer also objects to the allowance of the $1,801 as a general unsecured claim, but without any legal analysis.
It is considered by all parties that Scherer received the mailboxes from Cutler, and that Scherer did not pay for the boxes. On the other hand Scherer was paid $2,888 by Eichelkraut, which was the contract price for providing and installing the boxes. On February 22, 1979, Eichelkraut paid to Cutler the $1,801 selling price. Thus at the moment Cutler has sold the boxes and has received the full selling price. Scherer has received the price of the boxes, but has not paid for them. Eichelkraut has paid for the mailboxes twice; by partial payments on January 18, 1978, May 1, 1978, and June 2, 1978, Eichelkraut paid the total contract price to Scherer; on February 22, 1978, Eichelkraut paid the materials portion of the contract to Cutler directly.
By first addressing the issue of whether the $1,801 claimed by Eichelkraut could be set off against a larger amount owed by Eichelkraut to Scherer, the parties in their briefs became so involved in the intricacies of mechanics lien law that they overlooked simple contract law. Looking now at the issue as a matter of bankruptcy law, the issue is whether the $1,801 which is owed by Scherer to Eichelkraut shall be paid in 100¢ dollars (that is, treated as a setoff), or paid in 30¢ dollars (that is, treated as a general unsecured claim entitled to the same proportionate distribution as all other general unsecured claims under the confirmed reorganization plan).
Scherer objects to the proposed setoff of the $1,801 Eichelkraut paid Scherer because section 68(b) of the Bankruptcy Act prohibits a setoff in favor of any debtor of the bankrupt that "(2) was purchased by or transferred to him after the filing of the petition, or within four months before such filing, with a view to such use and with knowledge or notice that such bankrupt was insolvent or had committed an act of bankruptcy."
Eichelkraut contends that while its payment was made after the filing of Scherer's petition, and with knowledge of Scherer's insolvency, the payment should not be disallowed as a setoff because it does not fall within the limitations of section 68(b). Eichelkraut relies on two cases2 as authority that not every purchase of a claim against a person known to be insolvent can be charged with having been purchased "with a view to" using the claim as a setoff against the bankrupt. Specifically, the cited cases hold that where a debtor of the bankrupt paid a claim of one of the bankrupt's creditors, a setoff should be allowed if the claim had been acquired as the result of a direct or independent legal obligation.
The corollary is that the setoff should not be allowed if the payment had been made voluntarily and without compulsion. This doctrine is similar in concept to the more widely recognized principle that a non-governmental entity will be subrogated to the tax priority of § 64(a)(4) of the Bankruptcy Act only if it shall have made payment of the bankrupt's taxes under a legal obligation to make payment or under some other form of duress which would expose it to legal liability in the absence of payment of the tax by somebody. See Collier on Bankruptcy, ¶¶ 64.405, 64.408 (14th ed. 1978).
The principle, which might be called the "Doctrine of Priority through Payment under Compulsion", is followed generally in determining whether payments by a bankrupt shall be treated as a preference under § 60(a)(1), or whether payments by a third party of the debts of a bankrupt shall be entitled to setoff under § 68(a), both of which frequently are geared to mechanics liens. With respect to mechanics liens, the doctrine normally is interpreted to provide that payments to a supplier of labor or materials to eliminate or to prevent a mechanics lien:
As a consequence, in cases of this nature the core issues usually are whether a mechanics lien had been or could be perfected and whether at the time of the payment the payer had an obligation to remove an existing mechanics lien or to prevent the creation of one.
The Doctrine of Priority through Payment under Compulsion is better understood in the tax circumstances of § 64(a)(4) because that entails a straight subrogation. If the creditor had an obligation to pay the taxes, under a surety bond, for example, the creditor is allowed to stand in the shoes of the tax authority. That direct derivative benefit of § 64(a)(4) does not pertain under § 60(a) and § 68(a), where the correlative benefit is indirect. If the payee had a mechanics lien, or was in the position to impose a mechanics lien which the payer was obligated to remove or to prevent, the payment to the payee would not be considered a preference nor a purchase. Under § 60(a)(1) it would be irrelevant that the payer was insolvent, that the payment was made within four months of bankruptcy and that the payee received a larger share of the estate than other creditors. Under § 68(b)(2) it would be irrelevant...
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