In re Wm. Cargile Contractor, Inc.
| Decision Date | 03 March 1993 |
| Docket Number | Bankruptcy No. 1-92-04791. |
| Parties | In re WM. CARGILE CONTRACTOR, INC. ID# XX-XXXXXXX, Debtor. |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio |
Richard D. Nelson, Cincinnati, OH, for debtor.
Kim Martin Lewis, Cincinnati, OH, for Unsecured Creditors' Committee.
Robert G. Sanker, Michael L. Scheir, Cincinnati, OH, for the Unsecured Creditors' Committee.
Thomas Coffey, Cincinnati, OH, for National American Ins. Co. Grady L. Pettigrew, Columbus, OH, for U.S. Fidelity & Guarantee Co.
Neal J. Weill, Office of the U.S. Trustee, Cincinnati, OH.
DECISION ON MOTION OF NATIONAL AMERICAN FOR DIRECT PAYMENT
This contested matter is before the court pursuant to a dispute between a surety, National American Insurance Company ("National"), and the Unsecured Creditors' Committee ("UCC") over the disposition of money held by Messer Construction Company ("Messer"), construction manager for a public construction project at the University of Cincinnati which is owned by the state of Ohio for work at the University of Cincinnati. The debtor, William Cargile Contractor, Inc. ("debtor"), is a subcontractor with respect to the project, and itself in turn employed subcontractors (hereafter "debtor's subs"). Before debtor filed its Chapter 11 petition, National issued performance bonds for certain construction work to be completed by debtor. These bonds guaranteed payment by debtor to debtor's subs and materialmen (referred to hereafter collectively as "debtor's subs"), including Carlisle Construction, TYS Construction and Baker Construction. Much of the work on the project has been completed. Debtor's subs, however, are owed approximately $60,000.00 for their work under subcontracts with debtor that were guaranteed by the bonds.
National seeks an order from this court authorizing Messer to pay debtor's subs directly, which right National asserts is based on provisions contained in the construction contract between Cargile and the University. National states that allowing the debtor's subs to receive the funds directly would allow debtor's subs to pay their labor expenses without having to expend the cost and effort of making claims against National. According to National, a direct payment of the funds would also reduce the ultimate claim against debtor by the amount equal to the payment. National bases its motion on two arguments. First, National asserts that debtor's subs are secured creditors based on properly filed mechanic's liens, which, although filed postpetition, nevertheless relate back to the first day work was performed. National states that since debtor's subs are fully secured, allowing them to be paid directly would not prejudice the rights of unsecured creditors, since those creditors have no right to the monies. Additionally, National asserts that the monies are not property of the estate pursuant to § 541 because of a trust agreement between itself and debtor arising out of the performance bonds, on the one hand, and out of the contract between debtor and the State, on the other.
This court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this District. This is a core proceeding arising under 28 U.S.C. §§ 157(b)(2)(A).
We will first address the issue of whether debtor's subs are secured creditors. We note that debtor filed its Chapter 11 petition in September, 1992, and notices of debtor's subs' liens pursuant to Ohio Revised Code ("ORC") § 1311.26 were filed in December, 1992. National contends that although debtor's subs filed their liens postpetition, those liens nevertheless relate back to the first day each debtor's sub performed work on the job pursuant to ORC § 1311.13 and 11 U.S.C. § 546(b) of the Code.1 In support of its relation back argument, National cites three cases: In re Bain, 64 B.R. 581, 583 (W.D.Va.1986); In re Yobe Electric, Inc., 30 B.R. 114 (Bankr. W.D.Pa.1983), aff'd, 728 F.2d 207 (3d Cir. 1984); and In re Fiorillo & Co., 19 B.R. 21, 24 (Bankr.S.D.N.Y.1982). The courts in those cases found that 11 U.S.C. § 362(b)(3) and § 546(b) work together to create an exception to the automatic stay. Those sections provide that the postpetition perfection of a lien does not violate the automatic stay if applicable local law allows the lien to relate back prepetition and therefore defeat the rights of a hypothetical lien creditor pursuant to 11 U.S.C. § 544. See also 4 Collier on Bankruptcy § 546.032, at 546-14 (15th ed. 1992).
Whether the liens of debtor's subs performing work on public works projects, then, relate back to the first day work was performed, depends on whether Ohio law so provides. The UCC asserts that ORC §§ 1311.26-.32 provides the exclusive statutory framework under which subcontractors may file liens for work done on public projects. See State, ex. rel. General Electric Supply Co. v. Jordano Electric Co., 53 Ohio St.3d 66, 558 N.E.2d 1173, 1175 (Ohio 1990). The UCC states further that since there is no relation back provision within ORC §§ 1311.26-.32, and that ORC § 1311.13 specifically excludes public projects from the relation back provision, the legislature did not intend for such a provision to apply to public construction projects. The UCC contends that since the liens do not relate back to the first day of performed work, § 546(b) is inoperative, for the relation-back provision of that section depends on "generally applicable law that permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of such perfection." The UCC concludes that since the liens are effective only upon filing, their postpetition filing violated the automatic stay under § 362(a)(4), and thereby rendered them void and without effect.
National's response to the UCC's statutory argument is that the sections of the Ohio Revised Code relating to mechanic's liens must be interpreted holistically, and that such an interpretation compels the conclusion that the relation back provision applies to both private and public construction projects. Rather than interpreting ORC §§ 1311.01-.24 and .26-.32 as distinctly applying to private and public projects respectively, as the UCC suggests, National argues that § 1311.26 is not a substantive statute, and thus, liens are not "created" pursuant to it; it is an enforcement statute which, together with ORC § 1311.28 merely create "stop notices," which grant an assignment of monies remaining due from the owner to the prime contractor. See Turzillo Contracting Co. v. Cincinnati Metropolitan Housing Authority, 10 Ohio St.2d 5, 225 N.E.2d 255, 259 (1967).2 According to National, subcontractors' liens are created only pursuant to ORC § 1311.02, and since ORC § 1311.02 generally applies throughout the Ohio mechanic's lien statute, so does the relation back rule of ORC § 1311.13. National argues that accepting the UCC's statutory argument would effectively read out of the mechanic's lien statute several sections applying to mechanic's liens generally, including ORC §§ 1311.13, 1311.16, 1311.22, 1311.23, and 1311.24. National thus asserts that the debtor's subs' liens relate back to the first day work was performed, and that the debtor's subs are secured creditors with respect to the fund held by the state. National concludes that its position as surety entitles it to the same status through its derivative rights as subrogee.
In determining whether the subcontractors' liens relate back to the first day work was performed, we first note that the cases cited by National on this point are inapposite herein, since those cases interpret the mechanic's lien statutes of other states, and, more important, those cases involve privately-owned construction projects. Under Ohio law, the statutory provisions governing public and private construction projects are interpreted separately. The following passage from Ohio Jurisprudence 3d so indicates:
The lien statutes which govern liens for private construction and improvements ORC §§ 1311.01-.23 and those governing mechanics\' liens for public works construction ORC §§ 1311.26-.32 operate in distinct domains. The former set of statutory provisions are general in their operation, and under the rule that the state is not bound by the terms of a general statue unless it is expressly so enacted, such statutes are not binding with regard to public improvements made by the state. The general mechanic\'s lien statutes do not apply to public improvements owned or being constructed by public authority out of public funds where such statutes do not expressly so provide. Absent such express provision, the general language of mechanic\'s lien statutes give no remedy against the public.
68 O.Jur.3d, Mechanic's Liens § 227, at 305-06 (1986) (citations omitted). See also Marti & Goldstein, Ohio Mechanics' and Materialmen's Liens § 10-2 at 186 (2d ed. 1992) (hereafter "Marti & Goldstein") ("the statutory provisions for the protection of subcontractors, materialmen, and laborers contributing to projects funded by the state or political subdivisions of the state are found in sections 1311.25 through 1311.32 of the Ohio Revised Code.").
An important aspect of Ohio mechanic's lien law is that unlike liens upon privately owned property, mechanic's liens with respect to work done on Ohio public projects attach not to the property, but to a public fund set aside for the payment of subcontracts. Poenisch v. Kingsley-Dunbar, Inc., 64 Ohio App.3d 699, 582 N.E.2d 1071, 1073 (1990). See also Talco Capital Corp. v. State Underground Parking Comm'n, 41 Ohio App.2d 171, 324 N.E.2d 762, 766 (1974) ().3 A discussion of the statutory framework enacted by the Ohio legislature regarding this fund begins with ORC § 1311.26, which provides that a subcontractor or materialman...
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