IN RE v. Pangori & Sons, Inc.
| Decision Date | 01 October 1985 |
| Docket Number | Bankruptcy No. 78-60231. |
| Citation | 53 BR 711 |
| Parties | In re V. PANGORI & SONS, INC. Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
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Jeffrey A. Chimovitz, Flint, Mich., for Creditor Michigan Nat. Bank-Mid Michigan.
Paul A. Callam, Southfield, Mich., for Continental Cas. Co.
Raymond C. June, Flint, Mich., for David Cuvrell, Trustee.
The events giving rise to this matter are undisputed. On March 21, 1977, the bankrupt, V. Pangori & Sons, Inc., contracted with the City of Sterling Heights, Michigan, for the construction of a sanitary sewer. At the same time, Pangori obtained performance and payment bonds from Continental Casualty Co. as required for all public contracts in Michigan by the Michigan Public Contractors Bond Act, Mich. Comp.Laws § 129.201, et. seq. Prior to the establishment of these bonds, the bankrupt had executed a general agreement of indemnity with Continental, under which Pangori agreed to indemnify and hold Continental harmless from all claims or payments which the surety might make pursuant to bonds established on Pangori's behalf. Construction of the project did not go as planned. Pangori encountered significant and unanticipated costs and delays in performing the excavation and installation of the new sewer system. As a result of these and other difficulties, Pangori was unable to pay various suppliers and subcontractors. Progress on the project slowed to a halt, and on June 7, 1978, the city notified Pangori that its contract was terminated. At the time the project was terminated, most of the work had been done, save for clean-up, restoration and grading of the property disrupted by the project. When the debtor filed bankruptcy relief, there were material invoices, in excess of $30,000, which were more than 30 days past due. At no time prior to Pangori's filing in bankruptcy did any supplier or subcontractor make demand on the surety for payment.
On June 9, 1978 (two days after the termination of the contract) Pangori filed a voluntary petition under Chapter XI of the Bankruptcy Act and an operating receiver was appointed on June 11, 1978. In an attempt to obtain working capital which would enable it to complete various projects, including clean-up on the Sterling Heights project, the Chapter XI receiver sought a loan from Michigan National Bank. The bank agreed to loan $35,000 if it received first priority status. Pursuant to an ex parte motion by the receiver, the Court on September 12, 1978 approved a certificate granting the bank a first priority claim and security interest in all unencumbered assets of the bankrupt as permitted by § 344 of the Act. The loans were made in four installments, the first being made on September 13, 1978, and the last on December 8, 1978. Continental made its first actual disbursements on the payment bond on November 10, 1978, in an aggregate amount exceeding $30,000. The surety eventually paid over $75,000 to laborers and materialmen on the bond.
Despite the influx of new capital, the bankrupt's troubles continued. When the time for repayment of the loan arrived, Pangori was unable to pay the balance due. In an attempt to stave off the bank's demands for payment, the receiver agreed to assign to the bank all proceeds due from the Sterling Heights project; at that time the bankrupt was involved in two lawsuits with the city regarding the project. On January 9, 1980, the Court approved this assignment pursuant to another ex parte motion by the receiver.
On September 19, 1980 — nine months after the order assigning proceeds was entered — the surety moved to vacate this order. Consideration of this motion was held in abeyance pending the outcome of the state court litigation between the bankrupt and the city, since if the bankrupt was unsuccessful, the controversy might be mooted. While this particular matter was dormant, on April 2, 1982, the case was converted to a straight bankruptcy; on April 5, 1982 the operating receiver was appointed as trustee. The trustee and the city finally reached a settlement whereby the latter agreed to pay Pangori $30,000 in satisfaction of all claims arising out of the sewer project. On June 26, 1984, the Court ordered Sterling Heights to pay this sum to the trustee, who was directed to keep the money separate from all other funds until the Court determined the respective rights and priorities of the parties to the proceeds. There the money sits awaiting distribution.
Continental claims that by virtue of its liabilities incurred on the payment bond, its rights in the proceeds of the sewer project are superior to both the trustee and the bank. The surety asserts that it became subrogated to the rights of the materialmen and laborers, the bankrupt and the city; it further claims that because the right of subrogation relates back to the date of execution of the bonds (March 21, 1977), its interest in the retained funds attached well before the petition in bankruptcy was filed, and is therefore superior to the rights of the trustee and his assignee. Additionally, Continental claims that the proceeds were assigned to it pursuant to the contract of indemnity and that this assignment was not governed by the filing requirements of the Uniform Commercial Code. In essence, Continental takes the position that the proceeds never became part of the bankruptcy estate, or, if they did, they came into the estate subject to the surety's valid prior lien. In either case the trustee would have been without authority to assign the receipts from the sewer project to the bank. Michigan National Bank, of course, contests the surety's several claims and states that Continental has no enforceable property interest in the funds, it being at best an unsecured creditor, inferior in priority to the trustee. The Bank's rights are entirely derivative of the trustee's.
The bank reminds us that the Court entered two orders, the first authorizing the receiver to pledge the bankrupt's accounts receivable as security for the bank's $35,000 loan, and the second directing the disbursement of the contract proceeds to the bank upon their receipt. It claims that:
What the bank "relied" on were ex parte orders entered on the basis of, at best, ex parte petitions or, at worst no petition at all. Careful review of the records of this case reveal that no petition for the issuance of a receiver's certificate was ever filed with the Court; although the order of September 12, 1978 refers to an "attached petition", it appears neither there nor anywhere else in the file. No notices of either the requests for orders or of the entry of the orders were served on Continental, even though the bank and the receiver must have known that there were outstanding payment and performance bonds on the project, as the bankrupt was engaged in a Michigan public works project. Whether or not notice to the list of creditors was necessary, due process of law required that one seeking to subordinate another's lien serve the other with the request for such relief. Memphis Light, Gas & Water Div. v. Craft, 436 U.S. 1, 98 S.Ct. 1554, 56 L.Ed.2d 30 (1978); Halvorsen v. Grain Dealers Mut. Ins. Co., 210 F.Supp. 73 (W.D.Mich.1962). This Court abhors the practice of obtaining court authorizations and orders without the decency of providing the parties necessarily interested in the result with notice of the request and an opportunity to be heard thereon. Such are the rudiments of due process. Such conduct invites disrespect for the judicial system, promotes the appearance of cronyism, and, since in the final analysis the result of such practice will likely be overturned anyway, creates gross inefficiencies in the administration of justice. The bank relied on something that was written in invisible ink and should have known it.
Moreover, the order resulting from the receiver's phantom petition for authority to issue receiver's certificates, upon which Michigan National Bank "relies", does not in fact authorize the receiver to issue certificates which would prime an otherwise prior lien. While the order does give the holders of certificates priority of payment over other creditors, the certificate "shall constitute a first lien on all unencumbered assets of the estate and a subordinate lien and encumbrance on any and all encumbered assets of the estate." (Emphasis added). In other words, the order gives the receiver no authority to upset pre-existing liens on the bankrupt's property. The order ultimately neither heightens nor diminishes the bank's rights to the funds; as the following discussion indicates, the controlling question is not whether the ex parte orders gave the bank a priority claim, but is instead whether Continental had an enforceable lien on the date the bankrupt filed its petition for an arrangement. For these reasons, the Court will place no weight at all on the existence of its prior orders, despite the bank's alleged "reliance" on them.
Generally speaking, the surety's rights of "subrogation" in fact encompass several distinct rights, which are more precisely referred to as the rights of indemnity and reimbursement as well as subrogation. The right of indemnification may arise from the express contractual relation between the parties, implied contract, or by operation of law, Green Constr. Co. v. Williams Form Engineering, 506 F.Supp. 173, 178 (W.D.Mich.1980); it involves the promise of the indemnitor (here, Pangori) to compensate the...
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