In re Waterpoint Intern. LLC

• Court: U.S. Court of Appeals — Fifth Circuit
• Writing for the Court: King
• Citation: In re Waterpoint Intern. LLC, 330 F.3d 339 (5th Cir. 2003)
• Decision Date: 01 May 2003
• Docket Number: No. 02-20755.,02-20755.
• Parties: In The Matter Of: WATERPOINT INTERNATIONAL LLC, Debtor. Exchanger Contractors Inc., Appellant, v. Comerica Bank-Texas; Waterpoint International LLC; Robbye Waldron, Chapter 7 Trustee, Appellees.

330 F.3d 339

In The Matter Of: WATERPOINT INTERNATIONAL LLC, Debtor.

Exchanger Contractors Inc., Appellant, v. Comerica Bank-Texas; Waterpoint International LLC; Robbye Waldron, Chapter 7 Trustee, Appellees.

No. 02-20755.

United States Court of Appeals, Fifth Circuit.

May 1, 2003.

Edward Louis Rothberg (argued), Weycer, Kaplan, Pulaski & Zuber, Houston, TX, for Appellant.

Phillip Lewis Lamberson (argued), Eli Omar Columbus, Winstead, Sechrest & Minick, Dallas, TX, for Comerica Bank Texas.

Appeal from the United States District Court for the Southern District of Texas.

Before KING, Chief Judge, DAVIS, Circuit Judge, and VANCE, District Judge.^*

KING, Chief Judge:

Exchanger Contractors Inc., a subcontractor, was not paid by its contractor, Waterpoint International LLC, for labor performed by the subcontractor. In response, Exchanger Contractors sought a declaration regarding its rights (pursuant to trust fund provisions of the Texas Property Code) to a portion of the receivable owing to the contractor by the property owner. The contractor's lender, who holds a security interest in the contractor's receivable from the owner, countered. Because the trust fund provisions under which Exchanger Contractors claims relief explicitly exempt banks and other lenders from their reach, we affirm the district court's final order upholding the bankruptcy court's summary judgment in favor of the lender.

I. FACTUAL AND PROCEDURAL HISTORY

In 1997, the debtor, Waterpoint International LLC ("Waterpoint"), a construction contractor, executed a promissory note payable to its lender, Comerica Bank-Texas ("Comerica"). Pursuant to this note and the contemporaneously-signed security agreement, Comerica acquired a valid security interest in Waterpoint's accounts receivable. Comerica duly perfected its security interest in these accounts receivable.

Sometime before February 2000, Waterpoint contracted with Exxon Mobil Corporation ("Exxon") to construct certain improvements to specific real property owned by Exxon. Waterpoint subcontracted some of the labor necessary to complete the Exxon project to Exchanger Contractors Inc. ("Exchanger"). Invoices document labor performed by Exchanger for the benefit of Waterpoint totaling $71,878.45. However, Exchanger made no effort to comply with the notice and filing provisions for perfecting a mechanic's lien under the Texas Property Code (the "Code").

On July 5, 2000, before paying Exchanger for the labor performed on the Exxon project, Waterpoint filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. At this time, Exxon still had, in its hands, money due Waterpoint for the improvements to its real property.

On January 9, 2001, after seeking relief from the automatic stay provisions of the Bankruptcy Code, Exchanger filed a declaratory action in state court, seeking an adjudication of its right to a portion of the funds owed Waterpoint by Exxon. Claiming it was a core proceeding related to the administration of Waterpoint's estate, Comerica removed the action to federal bankruptcy court pursuant to 28 U.S.C. § 1452 and Rule 9027 of the Federal Rules of Bankruptcy Procedure. The bankruptcy court thereafter preserved Exchanger's claim for $71,878.45 of the Waterpoint receivable, but authorized all of Waterpoint's accounts receivable to be paid to Comerica so that Exxon could be dismissed from the action. The bankruptcy court then granted summary judgment in favor of Comerica. This final order was affirmed by the district court. Exchanger timely appeals the district court's order.

II. STANDARD OF REVIEW

On appeal in a bankruptcy case, we review de novo the bankruptcy court's decision to grant summary judgment in favor of Comerica. See Mercer v. Mercer (In re Mercer), 246 F.3d 391, 402 (5th Cir.2001) (en banc).

III. COMPETING CLAIMS TO THE WATERPOINT RECEIVABLE

Exchanger's declaratory judgment complaint requested that the bankruptcy court "adjudicate its rights to receivables owing by Exxon ... to Waterpoint International, LLC upon which Comerica Bank-Texas claims a security interest and to which [Exchanger] claims a prior right by reason of Section 162 of the Property Code." Comerica countered that Exchanger has no valid claim to a portion of the receivable because banks and other lenders are specifically exempted (under § 162.004 of the Code) from the Chapter 162 trust fund provisions under which Exchanger claims relief. In support of this argument, Comerica proffered to the bankruptcy court the plain language of § 162.004 of the Code and a Texas Supreme Court case interpreting § 162.004 clearly to except banks and other lenders from the trust fund provisions of the Code. See Republicbank Dallas, N.A. v. Interkal, Inc., 691 S.W.2d 605 (Tex.1985). In response, Exchanger argued that in 1989, the Texas Legislature amended § 53.151 of the Code specifically to overrule Interkal in favor of increased protection for subcontractors regarding funds held in trust for their benefit.

To address the competing claims to a portion of the Waterpoint receivable, we start with an overview of the relevant sections of the Code as they relate to construction contracts.

A. Enforcing Rights under the Texas Property Code

Exchanger roots its claim to a portion of the funds owed to Waterpoint (in which Comerica claims a security interest) to the trust fund provisions of the Code found in Chapter 162. See TEX. PROP.CODE §§ 162.001-033 (Vernon 1995 & Supp. 2003). However, it relies on a provision in the chapter on mechanic's and materialman's liens, Chapter 53, to support this claim. See id. § 53.151. A basic understanding of the underlying framework and purpose behind both chapters is thus helpful.

(1) Chapter 53 of the Texas Property Code

The mechanic's lien appeared in Texas in 1839 when the Congress of the Republic enacted "[a]n Act for the Relief of Master Builders and Mechanics of Texas." Eldon L. Youngblood, Mechanics' and Materialmen's Liens in Texas, 26 Sw. L.J. 665, 665 (1972). The purpose of the mechanic's lien is to secure payment for those who furnish labor or materials in connection with the construction of improvements to real property to the extent of the increased value of those improvements to the owner's property. Jeffrey A. Leonard & Darren G. Woody, Texas Mechanic's and Materialman's Liens and the Scope of the Preferential Lien on Removables, 15 TEX. TECH L.REV. 673, 674 (1984). In 1869, the right to a mechanic's lien, even for derivative claimants (e.g., subcontractors, mechanics or materialmen who have not contracted directly with the owner of the property to be improved), also became a constitutional right in Texas. W. MICHAEL BAGGETT & BRIAN THOMPSON MORRIS, TEXAS PRACTICE GUIDE, Ch. 10:118 (2003). Article 16, Section 37, of the Texas Constitution now provides that "mechanics, artisans and materialmen of every class, shall have a lien upon the buildings and articles made or repaired by them for the value of their labor done thereon, or material furnished therefor...." TEX. CONST. art. XVI, § 37.

However, as interpreted by the Texas Supreme Court, while the constitutional right to a mechanic's or materialman's lien is broad, the Texas Constitution creates a "self-executing" lien in favor of only original or general contractors (those who contract directly with the property owner or its agent), not derivative claimants. See, e.g., First Nat'l Bank v. Lyon-Gray Lumber Co., 110 Tex. 162, 217 S.W. 133, 135-36 (1919). Persons not contracting directly with the owner do not have a "self-executing" lien. See Cabintree, Inc. v. Schneider, 728 S.W.2d 395, 396 (Tex. App.-Houston [1st Dist.] 1986, writ ref'd). Instead, they must comply with the statutory lien perfection requirements to be able to enforce their rights to payment or, if necessary, foreclosure against the owner and his property. See Thermo Tech, Inc. v. Goodyear Tire & Rubber Co., 643 F.2d 1173, 1178 (5th Cir. Unit A 1981); First Nat'l Bank v. Sledge, 653 S.W.2d 283, 285 (Tex.1983) ("Because a subcontractor is a derivative claimant and, unlike a contractor, has no constitutional, common law, or contractual lien on the property of the owner, a subcontractor's lien rights are totally dependent on compliance with statutes authorizing the lien."); Hayek v. W. Steel Co., 478 S.W.2d 786, 790 (Tex.1972).

Chapter 53 of the Texas Property Code, entitled "Mechanic's, Contractor's, or Materialman's Lien" and formerly known as the Hardeman Act, controls the procedures for perfecting liens and the relative priority of these liens once perfected. The Chapter is divided into ten subchapters ranging from general lien provisions and provisions relating to persons entitled to liens (subchapters A and B) to procedures for perfecting liens (subchapter C), schemes for funds being retained or withheld by owners for the benefit of claimants (subchapters D and E), procedures for determining priorities and preferences (subchapter F), procedures related to the release of liens and foreclosure of mechanics' liens (subchapter G), and procedures related to bonds and liens in the public works context (subchapters H, I and J). In general, the chapter deals with relationships between a general contractor, the owner of the real property and derivative claimants. See, e.g., Scarborough v. Victoria Bank & Trust Co., 250 S.W.2d 918, 922-23 (Tex. App.-San Antonio 1952, writ ref'd). It sets out procedures for connecting a derivative claimant to the owner in order to give the owner notice of the derivative claimant's claim to money still in the owner's hands. See id.; see also Youngblood, supra, at 676 ("In Texas, unlike many states, only an original contractor enjoys a direct lien on the property; the subcontractor must rely on his statutory rights to collect funds due from the owner to his contractor. Consequently, once the owner has paid the full price to his original contractor, if he has complied with the statutes for doing so, no...