Matter of Hull

• Decision Date: 16 April 1982
• Docket Number: Bankruptcy No. FB 79-00277.
• Citation: 19 BR 501
• Parties: In the Matter of Rocky Thomas HULL, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Indiana

19 B.R. 501 (1982)

In the Matter of Rocky Thomas HULL, Debtor.

Bankruptcy No. FB 79-00277.

United States Bankruptcy Court, N.D. Indiana, Fort Wayne Division.

April 16, 1982.

COPYRIGHT MATERIAL OMITTED

Stephen D. Long, Fort Wayne, Ind., for bankrupt.

John J. Wernet, Fort Wayne, Ind., trustee.

R. John Wray, Fort Wayne, Ind., for Environmental Systems, Inc.

Frederick A. Beckman, Fort Wayne, Ind., for Mr. & Mrs. Thomas R. Starn.

ORDER

ROBERT K. RODIBAUGH, Bankruptcy Judge.

This matter is before the Court on the objection of Environmental Systems, Inc., claimant, (hereinafter "Environmental") objecting to the trustee's disallowance of its Claim No. S-2. The matter involves a subcontractor, Environmental, who performed services under a home building contract between the bankrupt, a general contractor, and Mr. and Mrs. Starn, the owners of the realty. In addition to Environmental's claim against the bankruptcy estate for services rendered under the contract, the owners have filed an unsecured claim in this case based on the bankrupt's failure to complete the building contract for amounts they expended to have the home finished. Furthermore, the trustee asserts a contract claim against the owners regarding their failure to pay as provided therein. A hearing was held on January 7, 1981 at which the parties agreed that a stipulation of facts, pleadings, and briefs would constitute the full submission of this matter. Upon receipt of the stipulation and briefs, the matter was taken under advisement on April 16, 1981.

There is no controversy regarding the facts in this case. Environmental worked as a subcontractor on the construction of a residence under a contract between the bankrupt, a general contractor, and Mr. and Mrs. Starn, owners of the property.

The parties have stipulated to the following:

1. The amount of said creditor\'s claim is $3,500.00.

2. On April 16, 1979 creditor Environmental Systems, Inc. gave notice to Mr. and Mrs. Thomas R. Starn pursuant to Indiana Code Section 32-8-3-9 of an intent to hold Mr. and Mrs. Starn personally liable for the above balance due in the amount of $3,500.00; and that said notice complies with the requirements of form of said Indiana Code Section 32-8-3-9.¹

3. On April 16, 1979 there was an amount due and owing by Mr. and Mrs. Thomas R. Starn to Rocky Thomas Hull in excess of $3,500.00; and that there are at the date of preparation of this stipulation still monies owing by the Starns in excess of $3,500.00.

4. The agreement between Rocky Thomas Hull and Mr. and Mrs. Thomas R. Starn was prepared on the Allen County Indiana Bar Association Standard Form entitled "Building, Construction And No-Lien Agreement."

The construction contract includes clauses which among other things provide that:

a) Builder will fully pay, when due, all bills for materials furnished and all wages and compensations due or to become due to each and every employee or laborer.

b) Builder for itself and for all other persons or corporations who may perform labor or furnish materials, supplies, tools or equipment for the construction of the improvements described herein, or for work incidental to such construction, hereby waives and relinquishes all right to claim or file notice of a mechanic\'s lien upon said real estate or any part thereof or upon any buildings or improvements thereon. Builder, for itself, and for all sub-contractors . . . does hereby agree that no lien or notice of lien shall in any event or circumstances whatever, attach to, or be claimed or filed against said building and appurtenances, or any part thereof, or against the real estate on which the same is located, or any part thereof; and in the event Builder shall fail to obtain the release of any liens filed, Builder shall indemnify, save and hold harmless Owner from any expenses incurred in obtaining the release of any such lien, including attorney fees.

The parties to the contract filed and recorded the same and otherwise complied with the statutory requirements of Indiana to make the No Lien Agreement valid against subcontractors. Indiana Code Section 32-8-3-1.²

When Environmental notified the Starns on April 16, 1979 that it intended to hold them personally liable, the owners were liable to the bankrupt in a sum in excess of Environmental's claim.

On May 25, 1979 the contractor filed his voluntary petition in bankruptcy listing Environmental Systems, Inc. as an unsecured creditor. The owners, by their attorney Mr. Frederick Beckman, filed an unsecured claim in the amount of $65,048.00 liquidated plus $1,000.00 for necessary repairs. Environmental filed a claim as a secured creditor in the amount of $3,500.00. The trustee recommended that the claim be disallowed on the grounds that the No-Lien Agreement prohibited creditor from securing a lien and therefore no lien had attached. The creditor then filed its objection to disallowance of the claim.

At the hearing involving Environmental's claim and the claim of the owners, the Court was informed that the trustee and the owners had settled on an amount payable by the owners that would resolve the trustee's contract claim against the owners and their claim against the bankrupt.³ The owners are holding this money (fund) pending resolution of Environmental's claim. In essence the owners are willing to pay a sum to finalize their dealings with the bankrupt but they do not wish to be exposed to a double liability by paying the trustee in settlement of the contract and then being forced to additionally pay the subcontractor who should have been paid under the contract and who has a statutory right of action against the owners for the amount of its labor performed under the contract.

Although this matter was not brought before the Court as an interpleader action, in effect, to do justice and equity and to adequately administer this estate, the Court is presented with circumstances that should be treated as if an interpleader were involved. See 48 C.J.S. Interpleader § 2 and cases cited therein. Therefore, the Court determines that it is necessary and appropriate to carry out the provisions of the Bankruptcy Act under the authority given to the Court by Section 2(a)(6) and (15) of the Bankruptcy Act⁴ to resolve in this proceeding all of these claims (Environmental's, the owners', and the trustee's) which involve the same building contract that is in evidence, the same parties who have claims before this Court regarding the contract, and one fund held by one of the parties.

Environmental contends in its objection to disallowance of its claim that the No-Lien Agreement only prohibits the filing of a "Notice of Intention to Hold a Mechanic's Lien" but does not prohibit Environmental Systems, Inc. from filing notice to hold the owners personally liable under Indiana Code Section 32-8-3-9. Environmental also asserts that compliance with this statute by Environmental gives it all the rights, priorities, and remedies as are provided for those who file a "Notice of Intention to Hold a Mechanic's Lien." Consequently the creditor has a right, prior and superior to that of the trustee, to receive payment of $3,500.00 from money held by the Starns and due to the bankrupt.

Environmental argues that its right to the money is superior to trustee's since only it secured a claim on the money by complying with the requirements of Indiana Code Section 32-8-3-9. Neither the bankrupt nor the trustee gave the notice required by the statute. Therefore the bankrupt and trustee have only a general unsecured contract claim to the money while Environmental has a secured claim by means of a statutory right to the amount due Environmental Systems, Inc.

The trustee says that the statute relied upon by Environmental gives to a subcontractor who complied with its provisions a lien on the money which the owner holds and which is due to the general contractor to the extent of the balance due the subcontractor. However, the trustee contends, the same statute provides that all subcontractors who have performed labor and have given notice to the owner may become parties to an action against the owner, and, if upon final judgment against such owner, the amount recovered and collected shall not be sufficient to pay the claimant in full, the same shall be divided pro rata. Consequently Environmental has a lien on the sums held by the owner, but does not have priority over other subcontractors.

The trustee then asserts that Section 70(c)(3) of the Bankruptcy Act⁵ gives the trustee, by means of the hypothetical lien creditor status, the same rights as any other subcontractor-creditor, including the right to share pro rata with Environmental Systems, Inc. Because of the right to share pro rata, the trustee argues that Environmental Systems, Inc. cannot have a secured claim and therefore its claim must be deemed unsecured.

Findings of Fact

In addition to the stipulated facts, which are hereby incorporated into these findings, the Court also finds that:

1. Environmental Systems, Inc. complied with all requirements of Indiana Code Section 32-8-3-9.

2. Neither the trustee nor the bankrupt took any of the required steps to secure a mechanic\'s lien nor to hold the owner personally liable as set out in the Indiana Code.

3. The contract between the owners and the bankrupt required the full payment of subcontractors when payment was due.

4. The contract contained a prohibition against and waiver of all right by the general contractor and those working under him to claim or file notice of a mechanic\'s lien upon the real estate or any part thereof or upon any buildings or improvements thereon, and provided that no lien shall attach to or be filed against the building and appurtenances or against the real estate.

5. The contract required that the bankrupt, should it fail to obtain the release of any lien, indemnify, save and hold harmless the owner from any expense incurred in obtaining the release of such liens.

Issues

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