Poindexter Excavating, Inc. v. Downey

• Decision Date: 03 July 1996
• Docket Number: No. IP 95-1299-C B/S. Bankruptcy No. 94-2374-FHO-7. Adv. No. 94-206.,IP 95-1299-C B/S. Bankruptcy No. 94-2374-FHO-7. Adv. No. 94-206.
• Citation: 198 BR 292
• Parties: POINDEXTER EXCAVATING, INC., and McGovern Steel Fabricators, Appellants, v. Gary D. DOWNEY and Kathleen L. Downey, Appellees. In re PEARSON CONSTRUCTION CO., INC., Debtor. Gary D. DOWNEY and Kathleen L. Downey, Plaintiffs, v. PEARSON CONSTRUCTION CO., INC., Defendant.
• Court: U.S. District Court — Southern District of Indiana

198 B.R. 292 (1996)

POINDEXTER EXCAVATING, INC., and McGovern Steel Fabricators, Appellants, v. Gary D. DOWNEY and Kathleen L. Downey, Appellees.

In re PEARSON CONSTRUCTION CO., INC., Debtor.

Gary D. DOWNEY and Kathleen L. Downey, Plaintiffs, v. PEARSON CONSTRUCTION CO., INC., Defendant.

No. IP 95-1299-C B/S. Bankruptcy No. 94-2374-FHO-7. Adv. No. 94-206.

United States District Court, S.D. Indiana, Indianapolis Division.

July 3, 1996.

Timothy L. Black, Ancel & Dunlap, Indianapolis, IN, Frank Bohannon, Indianapolis, IN, David L. Byers, Holwager & Holwager, Beech Grove, IN, John R. Carr III, Buschmann Carr & Shanks, Indianapolis, IN, Richard C. Clark, Indianapolis, IN, Frank W. Hogan, Symmes Voyles Zahn Paul & Hogan, Indianapolis, IN, Douglas W. Pool, Foley Pool, Indianapolis, IN, David L. Simmons, Hoffman Drewry Hancock & Simmons, Indianapolis, IN, Charles Young, Brownsburg, IN, for Plaintiffs.

Kenneth C. Meeker, U.S. Trustee, Indianapolis, IN.

Thomas C. Scherer, Bingham Summers Welsh & Spilamn, Indianapolis, IN, for Defendant.

ENTRY

BARKER, Chief Judge.

Appellants Poindexter Excavating, Inc. ("Poindexter") and McGovern Steel Fabricators ("McGovern") appeal the bankruptcy court's entry of summary judgment for appellees Gary and Kathleen Downey ("the Downeys"). For the reasons discussed below, the bankruptcy court's decision is affirmed.

I. BACKGROUND

The Downeys, owners of commercial real estate at 6400 Airway Drive, Indianapolis, Indiana ("the property"), contracted with Pearson, the debtor in bankruptcy, to serve as a general contractor on a commercial construction project on the property. Appellants Poindexter and McGovern were engaged by Pearson to serve as subcontractors and suppliers on the project. Poindexter performed excavating services and McGovern furnished material, labor and equipment.

The contract between Pearson and the Downeys provides that Pearson was obligated to pay all subcontractors and suppliers and warranted all work to be free from defect. (Articles 10.2, 10.4). The Downeys had the right to withhold payment for defective work, for claims filed, or for Pearson's failure to pay subcontractors or suppliers. (Article 16.2). The contract provides that the Downeys would pay monthly sums, but would keep a 10% retainage on the first 50% of the contract price. (Article 4). The contract further provides that final payment shall not be due until the Contractor has delivered to the owner a complete release of all liens, or receipts covering labor, materials and equipment, or a bond indemnifying the owner against a lien. (Article 16.3).

Pearson filed for Chapter 11 bankruptcy on March 30, 1994, at which time the project was substantially complete, and the Downeys had paid all contract sums to Pearson with the exception of a $120,000 retainage, as provided for in the contract. Subcontractors and suppliers had not, however, been paid. Various subcontractors and suppliers recorded mechanics' liens on the property pursuant to I.C. 32-8-3-1 "Mechanic's Lien Statute"¹ in the approximate amount of $127,627, and/or issued notices of personal liability ("PLN"s) to the Downeys pursuant to I.C. 32-8-3-9 "PLN Statute"², in the amount of $176,637.

The Downeys claim that an asphalt drive was defectively paved and must be repaired at a cost of approximately $100,000; that certain "punch list" items remain to be completed; and that the project itself must be completed as contemplated in the contract. On June 17, 1994, the Downeys filed a complaint in the bankruptcy court which sought relief from stay to permit them to exercise their right to setoff any amount due Pearson under the contract against all sums spent to secure release of the mechanics' liens, to perform remedial work, and to complete the project. The complaint also requested a declaration that their setoff rights against the retainage are prior to the interest of the parties issuing PLN notices, and that amounts paid to remove liens, perform remedial work or complete the project are not paid in contravention of the PLN statute. On September 6, 1994, the Downeys filed a Motion for Summary Judgment seeking a declaratory finding that they were entitled to setoff against the retainage, and that such setoff is prior to the interest of the PLN claimants. On December 20, 1994, after notice to all parties and after a hearing, the bankruptcy court approved an agreed entry between the Downeys and Pearson which lifted the automatic stay, reserved for later determination the amount of the Downeys' setoff, and provided for the payment to the Clerk of Court of such funds as may later be found due under the contract. In a post hearing brief filed January 19, 1995, the Downeys stated that the Mechanics' Liens had all been settled and released. On September 13, 1995, the bankruptcy court granted the Downeys' summary judgment motion, ruling as a matter of law that the Downeys' right of setoff reduces the amount a subcontractor or supplier could claim under the PLN statute. The issue of the specific nature and amount of setoffs was reserved for later determination. Notwithstanding this reservation, appellants have filed this interlocutory appeal of the bankruptcy court's summary judgment ruling.

II. ANALYSIS

A. Standard of Review

In reviewing a decision of a bankruptcy court, this court is required to accept the bankruptcy judge's findings on questions of fact as long as they are not clearly erroneous. Matter of Generes, 69 F.3d 821, 824 (7th Cir.1995). The bankruptcy court's conclusions of law are, however, subject to de novo review on appeal. Meyer v. Rigdon, 36 F.3d 1375, 1378 (7th Cir.1994); Matter of Wiredyne, Inc., 3 F.3d 1125, 1126 (7th Cir. 1993). Because appellants challenge only the bankruptcy court's legal findings, we must apply a de novo standard of review.

B. Jurisdictional Issues

In addition to their appeal of the bankruptcy court's declaratory judgment ruling on the merits, appellants raise several challenges to the bankruptcy court's exercise of jurisdiction over the declaratory judgment action. We will address appellants' jurisdictional arguments before moving on to the merits.

1. Existence of Material Issues of Fact

Appellants contend that the Downeys have failed to present facts sufficient to establish the existence of an actual controversy; or, phrased in slightly different terms, because the Downeys did not present proof of the exact nature or extent of the alleged defects and uncompleted punch list items, "there was nothing to set off" and thus nothing for the bankruptcy court to decide.³

Appellants argue that the Downeys must first prove that they possess a valid setoff claim before the bankruptcy court can determine whether the setoff should be allowed priority over PLN claims, and that since there was no proof regarding the nature or amount of the setoff, summary judgment was inappropriate. The Downeys, in their motion for summary judgment, incorporated their prior "Agreed Entry" as their Statement of Material Facts. The Agreed Entry, in relevant part, states that mechanics' liens had been filed in the approximate amount of $121,627.00,⁴ and that:

7. The Downeys assert that the construction and installation of asphalt drive required under the Contract was not performed in a workmanlike manner. They estimate a cost of necessary corrective work on the asphalt drive in the amount of $100,000. In addition, the Downeys claim there are "punchlist" items yet to be completed under the Contract at a cost yet to be determined. . . .

These facts, the Downeys contend, are all the facts necessary for the bankruptcy court to address the legal question of their right of setoff against the retainage. There was and is no factual dispute regarding the fact of the contractor's breach, that the Downeys would incur some damages as a result of the breach, and that the subcontractors were pressing their PLN claims against the Downeys.

"Factual issues will only prevent summary judgment if the disputed issues are material" Parrillo v. Commercial Union Insurance Company, 85 F.3d 1245 (7th Cir. 1996). The issue for the court to decide on summary judgment was the Downeys' legal right to a setoff, which is capable of determination without findings regarding the specific nature of defects or the validity or exact amount of the setoff. The question of the scope and amount of any setoff was not before the bankruptcy court on the Motion for Summary Judgment. (Bankruptcy court Findings of Fact and Conclusions of Law, at 3). The factual issues raised by Appellants are material to the question of the amount of setoff and the extent of any repair work, but are not material to the question of the owners' legal right to setoff against the retainage. In fact, it is interesting to note that the Appellants themselves, in their "Motion of Leave to File a Motion for Leave to Appeal," stated that appeal should be granted

"to avoid unnecessary and costly litigation with regard to the amount and validity of mechanics liens and the amount and validity of the Owners\' cost of completing remedial work and punch list items. If the Bankruptcy Court erred in determining that the owners could offset these costs against the PLN claims, then additional proceedings for this purpose would be unnecessary. The cost effective administration of justice requires that the issue of priority of interests be resolved before proceeding with proof of the amount of each claim."

(Motion for Leave to File, at 5) (emphasis added). Thus, appellants' current position, that it was improper for the bankruptcy court to determine the priority of interests as between the Downeys' setoff rights and the PLN claims without proof of the nature or amount of the setoff, is entirely inconsistent with one of the reasons they cited in urging this court to grant this interlocutory appeal.

We find that any facts in dispute with regard to the validity, nature or specific amount of the Downeys' setoff, or...