Kayhoe Const. Corp. v. United Virginia Bank, 770951

• Decision Date: 30 August 1979
• Docket Number: No. 770951,770951
• Citation: 220 Va. 285,257 S.E.2d 837
• Parties: KAYHOE CONSTRUCTION CORPORATION v. UNITED VIRGINIA BANK. Record
• Court: Virginia Supreme Court

Page 837

257 S.E.2d 837

220 Va. 285

KAYHOE CONSTRUCTION CORPORATION v. UNITED VIRGINIA BANK.

Record No. 770951.

Supreme Court of Virginia.

Aug. 30, 1979.

Archibald Wallace, III, Albert M. Orgain, IV, Richmond (Sands, Anderson, Marks & Miller, Richmond, on briefs), for plaintiff in error.

James E. Farnham, Richmond (Gordon F. Rainey, Jr., Hunton & Williams, Richmond, on brief), for defendant in error.

Before I'ANSON, C. J., and CARRICO, HARRISON, COCHRAN, HARMAN, POFF and COMPTON, JJ.

Opinion By HARMAN, Justice.

This controversy arose over payments made by a subcontractor, C & T Mechanical Corporation (C & T or subcontractor), to a bank, United Virginia Bank (Bank), from funds received as partial payments from the general contractor, Kayhoe Construction Corporation (Kayhoe or general contractor), under two construction subcontracts. Kayhoe, in its own behalf, and on behalf of C & T's unpaid suppliers and subcontractors ¹, sought to recoup and recover partial payments made by Kayhoe to the subcontractor. C & T, in turn, paid these funds over to Bank, which held a perfected security interest in and to certain contract rights, accounts receivable and the proceeds therefrom of C & T. The trial court after hearing the case on stipulations of fact, entered judgment for Bank and the general contractor appealed.

Kayhoe was the general contractor on two construction projects involving commercial property in Henrico County. In August, 1975, Kayhoe and C & T entered into two written agreements, one for each project, whereby C & T undertook, for an agreed consideration in each instance, to provide all labor, material, equipment, tools and services necessary to install all plumbing, heating, air conditioning, ventilation and electrical equipment required by the plans and specifications for each project. C & T, because of financial difficulties, ceased doing business on January 12, 1976. It filed a voluntary petition in bankruptcy on February 26, 1976.

When it abandoned its contracts with Kayhoe on January 12, 1976, C & T was indebted to thirteen suppliers and subcontractors for materials furnished or services performed on the Kayhoe projects. These unpaid suppliers and subcontractors notified Kayhoe and the property owners of their respective claims. At the time this action was instituted, they were in the process of perfecting their mechanic's liens on the real estate. This action was originally instituted by Kayhoe against C & T and Bank, but a nonsuit was subsequently entered on the claim against C & T.

For a number of years prior to August, 1975, and thereafter until the following December, Bank had been lending money to C & T. These loans were secured by a security interest in C & T's accounts receivable, contract rights and the proceeds therefrom, with exceptions not relevant here, pursuant to an "Accounts Receivable and Contract Rights Security Agreement" dated February 26, 1966. It was stipulated that the security interest under this agreement was duly perfected and continued by the requisite filings under the effective provisions of the Uniform Commercial Code.

Upon receipt of money subject to the security interest, C & T deposited such receipts in a special account designated "collateral account" at the bank. The funds so deposited were applied by Bank to repayment of its loans to C & T.

C & T's total contract price for the two projects was $51,657. Progress payments on the projects totaling $43,574.26 were made by Kayhoe to C & T and deposited by it in the collateral account. Between August 11, 1975, and January 2, 1976, loans totaling $524,000 were extended to C & T by Bank.

At the time the progress payments on the two projects were deposited in the collateral account and applied by Bank to reduce C & T's loans, Bank was not aware that C & T had failed to meet its obligations to suppliers and subcontractors on the two projects. The Bank, of course, was aware that C & T was obligated by its agreement with Bank to deposit payments received from almost all of its accounts receivable and contract rights in the collateral account.

Here, as before the trial court, the general contractor argues two legal theories under which it says it was entitled to recover the payments received by the Bank from the progress payments made by Kayhoe to C & T.

The primary theory advanced by Kayhoe is that the progress payments made to C & T were "impressed with a trust for the benefit of those having potential mechanic's lien claims." Such a trust, Kayhoe says, is created by the provisions of Code §§ 43-13, ² -19 ³.

In support of its argument, Kayhoe cites cases from three of our sister states, Michigan ⁴, Texas ⁵, and Wisconsin ⁶. We find these cases inapposite because in each of those jurisdictions the mechanics' lien statute expressly created a trust in the funds paid over to a contractor or subcontractor for the benefit of his materialmen and laborers.

No such provision is contained in our statute. In Overstreet v. Commonwealth, 193 Va. 104, 67 S.E.2d 875 (1951), we had occasion to consider a constitutional challenge to Code § 43-13. There we pointed out that the statute created "a moral obligation closely akin to a legal trust relation extending to both the owner and to those whose material or labor has entered into a structure, that the compensation paid therefor by the owner should not be misapplied." 193 Va. at 111, 67 S.E.2d at 879.

While this criminal statute creates a moral obligation, it contains no language creating a legal trust for the benefit of materialmen and laborers. Nor does the statute purport to affect or extend the rights and remedies otherwise available in a civil proceeding to materialmen and workmen under the mechanics' lien statutes. We therefore reject Kayhoe's trust fund argument.

Kayhoe's other argument, closely akin to its trust fund argument, is that Bank's security interest in C & T's receivables is subordinate to the liens of C & T's unpaid materialmen or subcontractors. This argument is grounded in Code § 43-19, and particularly the last sentence of the statute, which provides: "No such assignment or transfer shall in any way affect the validity or the priority of satisfaction of liens given by (the mechanics' lien laws)." Kayhoe also argues that the provisions of Code § 8.9-310 ⁷ clearly demonstrate the intent of the Uniform Commercial Code that a perfected security interest will not be given priority over liens securing claims arising from work intended to enhance or preserve the value of the collateral.

Again we find no merit in Kayhoe's position. A mechanic's lien is purely a creature of statute. Wallace v. Brumback, 177 Va. 36, 39, 12 S.E.2d 801, 802 (1941). It has no existence in the common law, and, independently of statute, is unknown in equity. Burks Pleading and Practice § 455 (4th ed. 1952). Such a lien is a liability In rem. Fairbanks, Morse & Co. v. Cape Charles, 144 Va. 56, 61, 131 S.E....