Parker v. Klochko Equipment Rental Co., Inc.

• Decision Date: 11 January 1979
• Docket Number: Nos. 76-2395,s. 76-2395
• Citation: 590 F.2d 649
• Parties: Bankr. L. Rep. P 67,084 Robert E. PARKER, Trustee for Olympia Construction Co., Bankrupt, Plaintiff-Appellee, v. KLOCHKO EQUIPMENT RENTAL CO., INC., Defendant-Appellant, Mario Trucking Company, Defendant-Appellant, Price Brothers Company, Defendant-Appellant, Doug Schroeder, Inc., Defendant-Appellant. to 76-2398.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 649

590 F.2d 649

Bankr. L. Rep. P 67,084

Robert E. PARKER, Trustee for Olympia Construction Co., Bankrupt, Plaintiff-Appellee, v. KLOCHKO EQUIPMENT RENTAL CO., INC., Defendant-Appellant, Mario Trucking Company, Defendant-Appellant, Price Brothers Company, Defendant-Appellant, Doug Schroeder, Inc., Defendant-Appellant.

Nos. 76-2395 to 76-2398.

United States Court of Appeals, Sixth Circuit.

Argued April 18, 1978.

Decided Jan. 11, 1979.

Richard J. Langs, Langs, Schatzberg, Patterson & Langs, Detroit, Mich., for defendant-appellant in No. 76-2395.

Stephen G. Danko, D'Avanzo & Danko, Southgate, Mich., for defendant-appellant in No. 76-2396.

Robert R. Nix, II, Kerr, Wattles & Russell, Detroit, Mich., for defendant-appellant in No. 76-2397.

Marlynn Marcks, Harris, Ben & Marcks, P. C., Detroit, Mich., for defendant-appellant in No. 76-2398.

Andrew A. Paterson, Cross, Wrock, Miller & Vieson, Detroit, Mich., for plaintiff-appellee.

Before WEICK, LIVELY and MERRITT, Circuit Judges.

MERRITT, Circuit Judge.

The trustee in bankruptcy of a subcontractor seeks to set aside as preferences payments made to four materialmen within four months of the subcontractor's bankruptcy. ¹ The district court for the Eastern District of Michigan held that the payments were preferences and granted judgment to the trustee. The materialmen appealed. We reverse on the grounds that the payments were made from funds subject to the Michigan Builders Trust Fund Act ² which were not the "property" of the bankrupt under § 70 of the Bankruptcy Act, 11 U.S.C. § 110 (1976). ³

I. FACTS

The subcontractor, Olympia Construction Co., filed its petition in bankruptcy on December 21, 1973. During the course of 1973 the four materialmen, Klochko Equipment Rental Co., Mario Trucking Co., Price Brothers Co. and Doug Schroeder, Inc., provided materials and supplies to Olympia, which was a subcontractor to Markward & Karafiles (M & K) on Public construction projects in the vicinity of Detroit. During the same period Doug Schroeder, Inc. was also a materialman to Olympia in connection with work on a Private project in which Plymouth Construction Co. was the general contractor.

During the summer of 1973 Olympia's indebtedness grew to the extent that the materialmen became apprehensive. M & K, the general contractor on the public jobs, intervened. On September 11, 1973 M & K issued two checks, one for $25,000 payable jointly to Olympia and Mario, the other for $6,883.56 payable jointly to Olympia and Price. M & K issued a similar joint check to Schroeder and Olympia on October 1. M & K also issued a joint check for $20,000 to Olympia and Klochko in settlement of a garnishment proceeding brought by Klochko. Olympia indorsed all four checks over to the materialmen.

On the private construction project, the pattern of events was similar, and on November 1, 1973 the general contractor issued a joint check for $3,117.32 which Olympia indorsed to Schroeder.

II. THE PRIVATE CONSTRUCTION PROJECT

The issue presented by the payment to Schroeder for materials supplied to the Private construction project is identical to that in Selby v. Ford Motor Co., 590 F.2d 642 (6th Cir. 1978). Accordingly, we hold that by virtue of the Michigan Builders Trust Fund Act, Mich.Comp.Laws Ann. § 570.151 (1967), ⁴ the funds paid to Schroeder were never Olympia's property. Therefore, Olympia's trustee in bankruptcy cannot set aside the payment under § 60 of the Bankruptcy Act, 11 U.S.C. § 96.

III. THE PUBLIC CONSTRUCTION PROJECTS

In Selby v. Ford Motor Co., supra, we analyzed the property rights which are created by the Michigan Builders Trust Fund Act and held that these rights should be recognized under the Bankruptcy Act. We found that trust funds due or in the hands of a contractor as trustee are not his "property" under § 70 of the Bankruptcy Act and, therefore, payments of such trust fund may not be set aside as preferential transfers under § 60.

The instant case and Selby differ in only one respect. Selby involved a private construction project while this case involves public projects. Thus, the only new question raised on this appeal is whether the state statutory trust, and our holding in Selby, apply to Public as well as Private construction projects.

The Michigan act, by its express terms, applies to "the building contract fund paid by Any person to a contractor or . . . a subcontractor," and we would have no hesitancy or difficulty in applying the act to public construction projects, except for language that appears in our opinion in General Insurance Co. of America v. Lamar Corp., 482 F.2d 856 (6th Cir. 1973). We have determined, however, that this language was not necessary to the opinion, narrowly read, and we decline to follow it.

In the General Insurance case, a general contractor on a public construction project owed money for prior unrelated work to a materialman. The general contractor paid the materialman money received from the owner on the public construction project. The materialman applied part of the payment from the contractor to the pre-existing indebtedness and used the funds for general business purposes. When the general contractor defaulted, his surety on the performance bond took over the work. The surety brought suit against the materialman for that portion of the payment applied to the pre-existing indebtedness. Judge McCree, writing for this Court, reversed a judgment in favor of the surety on two grounds. His opinion said (1) the Michigan statutory trust applies only to private construction projects, not public projects and thus does not affect the rights of the parties; and (2) "under Michigan law," the materialman "was under no duty to apply the funds to the . . . (public project rather than the prior indebtedness) in the absence of fraud or an express direction by the (contractor) . . . ." 482 F.2d at 861.

We believe the second ground for the Court's decision quoted above is correct and was dispositive of the case, whether or not the Michigan statutory trust governed the rights of the parties. Even if the Court had applied the statutory trust, the materialman in that case would have been the beneficiary of the trust fund, not the trustee. After the funds were paid to him and were used for general business purposes, tracing would have been impossible. Neither the common law of Michigan nor the statutory trust imposes a duty on the materialmen as beneficiaries to apply the payment by the contractor to current work rather than prior indebtedness in the absence of any direction to do so. It would have been the responsibility of the contractor both as trustee under the statutory trust and as a contracting party under Michigan common law to direct the application of the funds.

We believe, therefore, that the language in the General Insurance opinion stating that the builders trust statute is inapplicable to public projects was unnecessary, and we decline to follow it. ⁵ This language was based on dicta from a prior Michigan case, Club Holding Co. v. Flint Citizens Loan and Investment Co., 272 Mich. 66, 261 N.W. 133 (1935), which held that Michigan Builders Trust Fund Act does not create a private, civil right of action. The Club Holding case was overruled in B. F. Farnell Co. v. Monahan, 377 Mich. 552, 141 N.W.2d 58 (1966), which established that the statute does give rise to a private right of action. We do not believe the Club Holding case is viable authority in Michigan now, and Michigan courts have not been called upon to rule upon the question of the applicability of the statute in the context of a public construction project. ⁶

The only reason given in the General Insurance case for not applying the statutory trust to public projects is not convincing. The opinion states that the statutory requirement that contractors on public projects provide a payment bond protects subcontractors and materialmen and makes the statutory trust unnecessary for their protection on public projects. 482 F.2d at 860. But in order for subcontractors and materialmen on public projects to establish their rights to payment from the surety under the statutory payment bond, they must perfect their claims and file notice as if they were perfecting a mechanic's lien. ⁷ The main purpose of the Michigan statutory trust, as our opinions in General Insurance and Selby recognized, was to provide a better remedy than those provided by the mechanics lien and similar state laws. We were in error in stating in General Insurance that, under Michigan law, subcontractors and materialmen are better protected under the statutory payment bond applicable to public construction projects than under the mechanics lien laws applicable to private jobs.

The facts of the instant case undermine the assumption on which the General Insurance dicta were based, the assumption that aggrieved materialmen on public jobs do not need the trust fund remedy because they can rely on the payment bond statute. Here, the materialmen have foregone their right to recover on the payment bond. Confident in their belief that the funds received from M & K were theirs to keep, the materialmen had no apparent need to file the appropriate notices which are conditions precedent to recovery from the bond. Indeed, Klochko voluntarily dismissed a garnishment proceeding against M & K when the direct payment plan was consummated.

Furthermore, it is clear the Club Holding's dicta that the Michigan Trust Fund Act does not apply to public projects were based on an assumption that any civil remedy provided by the statute would be in the nature of a mechanic's lien. 272 Mich. at 72, 261 N.W. at 135. Since it was, and is, "well-understood and established" that it is contrary to public policy to allow private liens on public property, the Club Holding court declined to recognize the civil remedy in a public project. Id. Since Club Holding, however, it has become apparent that the interest created by the Michigan...