The Strauss Co. v. Jarrett Builders, Inc. (In re Strauss Co.), 1:18-bk-12972-SDR
| Decision Date | 27 September 2021 |
| Docket Number | Adv. 1:20-ap-01033-SDR,1:18-bk-12972-SDR |
| Parties | In re: The Strauss Company, Inc., Debtor. v. Jarrett Builders, Inc., Defendant. The Strauss Company, Inc., Plaintiff, |
| Court | U.S. Bankruptcy Court — Eastern District of Tennessee |
SHELLEY D. RUCKER CHIEF UNITED STATES BANKRUPTCY JUDGE.
Plaintiff The Strauss Company, Inc. ("Strauss")-a contractor and also the debtor in Main Case No: 1:18-bk-12972-SDR-issued a check to defendant Jarrett Builders, Inc. ("Jarrett Builders") on April 9, 2018 to pay for subcontracting work on a certain construction project. Fewer than 90 days later, on July 6, 2018, three creditors commenced the Main Case by filing an involuntary Chapter 7 petition against Strauss. Strauss now seeks the return of the money that it paid Jarrett Builders as a voidable preference under 11 U.S.C. § 547. When Strauss filed the original adversary complaint, it did not name Jarrett Builders; instead, it named Jarrett Fire Protection, LLC ("Jarrett Fire Protection"), a different company that also performed work on the same construction project and that happens to be owned by the same person who owns Jarrett Builders. By the time Strauss acknowledged the error and tried to start over with an amended complaint against Jarrett Builders, more than two years had passed after the entry of the order for relief in the Main Case.
Strauss's error prompted Jarrett Builders to file a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure made applicable by Rule 7012 of the Federal Rules of Bankruptcy Procedure. (Doc. No. 35.) Jarrett Builders argues that the amended complaint is untimely, having been filed more than two years after the order for relief, and that it cannot relate back to the original complaint because Strauss had all the information that it needed from the beginning to sue the correct defendant. Jarrett Builders asks the Court to infer that, with all the necessary information available, Strauss must have chosen to sue a different company that had nothing to do with the April 9, 2018 payment. Jarrett Builders argues further that any money that Strauss received to pay it would have constituted construction trust funds as a matter of state law, meaning that the money paid through the April 9, 2018 check was not the property of the debtor.
Strauss counters that the amended complaint does relate back to the original complaint because all of its efforts consistently have aimed at avoiding the April 9, 2018 payment. In that context, according to Strauss, serving the right person at the right address but confusing companies was only a mistake. Strauss responds to the issue of construction trust funds by noting that it has only one bank account that it uses for all expenses. The existence of a single bank account is significant to Strauss because it raises the likelihood of commingling funds, which would require Jarrett Builders to proceed through discovery to trace its payment.
The Court held oral argument on June 3, 2021. For the reasons below, the Court denies the motion in its entirety, though the part of the motion concerning construction trust funds is denied without prejudice to renew after discovery.
This voidable-preference case traces back to a 2017 construction project called Fairfax Flats in Nashville, Tennessee. Strauss was the general contractor for the Fairfax Flats project. Among any other subcontracts that it might have entered, Strauss entered two subcontracts with two companies owned by Jason Jarrett. Jarrett Fire Protection-which was listed as "Jarrett Fire Protection" in the subcontract and not by its full name, Jarrett Fire Protection, LLC-signed a subcontract on February 24, 2017 to complete fire-protection work including installation of automatic fire sprinkler systems. (Doc. No. 13-1 at 6.) Jarrett Builders-which was listed as "Jarrett Builders" in that subcontract and not by its full name, Jarrett Builders, Inc.-signed a subcontract on February 22, 2017 to complete all site utilities work. (Id. at 21.) Mr. Jarrett signed both subcontracts as president of each respective company. The Court takes judicial notice-and the parties have not disputed in their motion papers or at oral argument-that state business records list both subcontractors as active corporate entities. According to state records, Jarrett Fire Protection has a principal office and mailing address at 1106 Lebanon Pike in Nashville, and Mr. Jarrett is the registered agent at the same address. Jarrett Builders has the same principal office and mailing address and includes Mr. Jarrett's name in those addresses. Lindi Holmes Jarrett is the registered agent for Jarrett Builders, also at the Lebanon Pike address.
In accordance with the subcontracts, Strauss paid Jarrett Fire Protection and Jarrett Builders for their work on the Fairfax Flats project. Copies of some of the checks that Strauss issued appear in the record. (Doc. No. 13-1 at 17-20.) Central to this adversary proceeding, and the pending motion, is one check in particular:
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(Id. at 19.) Through this check, Strauss paid Jarrett Builders $76, 465.40 on April 9, 2018. The check issued fewer than 90 days before the Main Case began with the involuntary Chapter 7 petition filed against Strauss on July 6, 2018. Strauss asserts that it was significantly insolvent when it issued the check, and its solvency has not been made an issue for purposes of the pending motion. At the time, Strauss's financial position was "substantially similar" to a financial profile consisting of over $2 million in assets and nearly $11 million in liabilities. (Doc. No. 31 at 2.)
As the Court mentioned above, Strauss's bankruptcy proceedings began with the filing of an involuntary Chapter 7 petition on July 6, 2018. (Main Case, Doc. No. 1.) The petitioning creditors opposed Strauss's motion to convert to Chapter 11 because the business ceased operations and intended only to liquidate its assets. (Doc. No. 21.) Following a hearing, the Court issued an order of conversion and an order for relief on August 14, 2018. (Doc. Nos. 26, 27.) This adversary proceeding began with the filing of the original complaint on June 23, 2020. (Doc. No. 1.) Strauss sought to recover the April 9, 2018 payment as a voidable preference under 11 U.S.C. § 547. Rather than name Jarrett Builders, however, Strauss named Jarrett Fire Protection as the sole defendant. The certificate of service for the original complaint shows that Strauss served both Jarrett Fire Protection and Mr. Jarrett, as the registered agent for the misspelled "Jerrett Fire Protection," by first-class mail at the Lebanon Pike address. (Doc. No. 4 at 2.) Although the Lebanon Pike address is the only address of record for both of Mr. Jarrett's companies, and although plaintiff suggested at oral argument that the address might be a residential address, Mr. Jarrett has denied receiving service of process of the original complaint. (Decl. of Jason Jarrett, Doc. No. 13-1 at 5, incorporated by reference to the pending motion by Doc. No. 35 at 2.) Mr. Jarrett further has denied knowing anything about this adversary proceeding until he received a copy of the default judgment that resulted when Jarrett Fire Protection never appeared. (Id.) The Court entered the default judgment on October 13, 2020. (Doc. No. 9.) Following cross-motions either to correct a misnomer in the default judgment or to set it aside entirely, based on the naming of the wrong defendant, the parties reached an agreement to set aside the default judgment and to permit an amended complaint. (Doc. No. 25.) The Court endorsed the agreement by order on February 17, 2021. (Doc. No. 26.)
Strauss filed an amended complaint on March 5, 2021; it is identical to the original complaint in all substantive respects but named Jarrett Builders as the sole defendant. (Doc. No. 31.) Service of the amended complaint occurred by first-class mail on registered agent "Jason Lindi Holmes Jarrett" at the Lebanon Pike address. (Doc. No. 34.)
Jarrett Builders filed the pending motion to dismiss on March 28 2021. Jarrett Builders argues that the amended complaint is untimely because, citing 11 U.S.C. § 546(a)(1), Strauss filed it more than two years after the entry of the order for relief. The amended complaint cannot relate back to the original complaint, in Jarrett Builders's view, for multiple reasons: The original and amended complaints, on their faces, targeted two legally distinct companies; Mr. Jarrett's denial of receipt of service of the original complaint means that the original complaint was not served within 90 days as required by Federal Civil Rule 4(m); and Strauss did not make a mistake in the original complaint when identifying a defendant. To this last point, Jarrett Builders argues that Strauss must have had a copy of the April 9, 2018 check in its possession and that a review of the check, plus due diligence, would have identified Jarrett Builders as the payee and proper defendant. If, in the face of available information, Strauss sued Jarrett Fire Protection anyway then that decision must have been intentional. Jarrett Builders concludes that Strauss cannot argue that it was unable to uncover the identity of the proper defendant. Jarrett Builders makes the additional argument that "[b]ecause Strauss as the prime contractor held the funds in a statutory trust for the benefit of its subcontractor Jarrett Builders, Inc. pursuant to Tenn. Code Ann. § 66-34-304, the funds were never the property of Strauss and the transfer of those trust funds to Jarrett Builders, Inc. cannot be avoided in this...
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