Myers Controlled Power, LLC v. Gold (In re Truland Grp., Inc.)
Decision Date | 24 May 2019 |
Docket Number | Bankr. No. 16-1151 (BFK),1:18-cv-979 (LMB/IDD) |
Court | U.S. District Court — Eastern District of Virginia |
Parties | IN RE The TRULAND GROUP, INC., et al., Debtors. Myers Controlled Power, LLC, Appellant, v. H. Jason Gold, in his capacity as trustee for The Truland Group, Inc., et al., Appellee. |
Jennifer McLain McLemore, Williams Mullen, Richmond, VA, for Appellant.
Dylan Gillespie Trache, Nelson Mullins Riley & Scarborough LLP, Washington, DC, for Appellee.
Before the Court is Myers Controlled Power, LLC's ("Myers" or "appellant") appeal from an order of the bankruptcy court in this adversary proceeding granting judgment in favor of H. Jason Gold, the trustee ("trustee" or "appellee") for the avoidance and recovery of a preference in the amount of $2,107,039.86, along with prejudgment interest at the federal rate. The appeal has been fully briefed,1 and the Court finds that oral argument would not aid the decisional process. For the reasons stated below, the judgment of the bankruptcy court will be affirmed.
This dispute arises out of a large-scale construction project related to the Washington Metropolitan Area Transit Authority's ("WMATA") Orange and Blue Lines. Mem. Op. 1-2. WMATA engaged Clark Construction Group, LLC ("Clark") to serve as the prime contractor for the $273 million renovation. Id. at 2. Clark then subcontracted with Truland Walker Seal Transportation, Inc. ("TWST"), one of several affiliated companies performing electrical contracting work under the name "Truland." Id. at 1-2. Among other terms, the subcontract between Clark and TWST included a "flow-down" provision requiring TWST to pay all subcontractors and suppliers to prevent those parties from making any claims against the surety that guaranteed TWST's performance. Id. at 2. TWST ultimately decided to use Myers, the appellant, as a second-tier subcontractor to provide necessary electrical equipment and switches. Id. at 2-3. Myers did not contract with TWST directly; rather, it signed a supplier subcontract with Nationwide Electrical Services, Inc. ("NES"), a disadvantaged business enterprise.2 Myers sent all but one of its invoices to NES.3 Id. at 3. Even so, "Myers took its directions exclusively from TWST, not from NES." Id.
The Truland companies ran into serious financial difficulties in the spring of 2014 and became unable to make the required flow-down payments to their suppliers and subcontractors. Mem. Op. 4. As unpaid invoices began to accumulate, Myers notified TWST and Clark that it would cease delivering equipment until payments resumed. Id. Because TWST's financial difficulties were threatening the schedule of the overall project, the parties began searching for alternative arrangements. Myers initially sought direct payment and a guarantee from Clark. Clark refused, insisting instead on an arrangement in which checks made jointly payable to Myers and TWST would be sent to TWST for endorsement and then delivered to Myers. Id. at 5. Based on Clark's representations about this arrangement, Myers released equipment worth approximately $1.8 million on May 27, 2014. Id. at 6. The parties executed the Joint Check Agreement ("JCA") on June 16, 2014, and two days later, Myers released additional equipment worth over $250,000. Id. On July 11, 2014, Clark delivered a check made jointly payable to TWST and Myers in a total amount of $2,107,039.86; TWST endorsed the check, returned it to Clark, and Clark forwarded it to Myers. Id.
TWST filed a Chapter 7 bankruptcy petition on July 23, 2014. TWST's petition was jointly administered with those of The Truland Group, Inc. and the rest of its subsidiaries (collectively, "debtors"). The trustee instituted this adversary proceeding in July 2016, seeking to recover the $2,107,039.86 paid to Myers under the JCA as an avoidable transfer under 11 U.S.C. § 547(b). Myers opposed the trustee's efforts on several grounds, including that Myers was not a creditor of TWST or any of the other debtors at the time of the alleged transfer; that the joint check was not TWST's "property," at least for purposes of bankruptcy law, at the time of the transfer; and that the transfer was not avoidable because it was a substantially contemporaneous exchange for new value under 11 U.S.C. § 547(c).
The bankruptcy court held a trial on the merits in February and March of 2018. Based on the parties' written submissions and the evidence adduced at trial, the bankruptcy court found that Myers was TWST's creditor at the time of the transfer in July 2014; that the joint check was properly part of the bankruptcy's estate as of that date; that the JCA and resulting payment constituted an avoidable transfer from TWST to Myers; and that although the parties had intended to effect an exchange for new value through the JCA, that exchange was not "substantially contemporaneous" and thus was not covered by § 547(c)'s defense to avoidance. The bankruptcy court concluded that the trustee was entitled to recovery of the $2,107,039.86 transfer along with prejudgment interest at the federal rate, as calculated from the date of filing of the adversary proceeding. Myers timely filed this appeal.
The bankruptcy court had jurisdiction over this dispute under 28 U.S.C. § 1334 and the Order of Reference entered on August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(F), and the Court has jurisdiction over Myers's appeal under 28 U.S.C. § 158(a). On appeal, the bankruptcy court's legal determinations are reviewed de novo, and its factual findings are reviewed for clear error. Fairchild Dornier GMBH v. Official Comm. of Unsecured Creditors (In re Dornier Aviation (N. Am.), Inc. ), 453 F.3d 225, 231 (4th Cir. 2006) ; see First Owners' Ass'n of Forty Six Hundred Condo., Inc. v. Gordon Props., LLC (In re Gordon Props., LLC ), 516 B.R. 323, 327 (E.D. Va. 2014) ( .
11 U.S.C. § 547(b). The bankruptcy court found that the $2,107,039.86 payment to Myers was an avoidable transfer under § 547(b). Myers challenges that finding on two grounds, arguing first that "the funds transferred to Myers by means of the Joint Check were [not] ‘an interest of the debtor in property,’ " Appellant's Br. 11, and second that Myers was not a "creditor" of TWST at the time of the transfer. Neither argument is persuasive.
Myers' argument that the funds TWST conveyed to it under the JCA were not "an interest of [TWST] in property" under § 547(b) rests on Mid-Atlantic Supply, Inc. of Virginia v. Three Rivers Aluminum Co., 790 F.2d 1121 (4th Cir. 1986). That case involved a similar fact pattern: A primary contractor entered into a joint check agreement with the subcontractor debtor and the supplier appellee in which a check drawn by the primary contractor would be delivered to the debtor "in trust for the benefit of" the appellee, which under the agreement "was entitled to receive and retain the Check." Id. at 1122. Construing Virginia law, the Mid-Atlantic court ruled that the subcontractor debtor had held the joint check in constructive trust in favor of the supplier appellee and thus lacked equitable title over the check's proceeds. Id. at 1126-27. The court accordingly held that the proceeds of the check did not qualify as "an interest of the debtor in property" under § 547(b). Id. at 1127-28 ; see also In re Williams, 338 B.R. 678, 683 (Bankr. E.D. Va. 2004) ( ).
The bankruptcy court recognized Mid-Atlantic as controlling authority but held that the JCA itself was a preference that, because it was effected within 90 days of the filing of the petition, could be subject to avoidance under § 547(b). Mem. Op. 14-15 . The bankruptcy court observed that the parties agreed to the JCA only "after TWST was in material default, after TWST was deeply out of trust with its suppliers, after Myers refused to release the equipment, and within the 90-day preference period." Id. at 15. Concluding that one "preference (the JCA) can[not] save a[nother] preference (the payment)," the bankruptcy court found that the joint check and its proceeds were properly considered to be property of the...
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