Wisconsin Dairies Co-op. v. Citizens Bank & Trust
| Decision Date | 03 April 1991 |
| Docket Number | No. 89-1771,89-1771 |
| Citation | 467 N.W.2d 124,160 Wis.2d 758 |
| Parties | WISCONSIN DAIRIES COOPERATIVE, Plaintiff, v. CITIZENS BANK & TRUST, a Wisconsin banking corporation, Michael E. Boncher, President, Defendant-Appellant, Marathon Masonry, Inc., Ronald Wadzinski, Commercial Roofing, Inc., Wayne Herzog, Wausau Tile, Inc., Edward Creske, County Concrete, Corp., Merlin Sonnentag, Hanz Contractors, Inc., Lawrence Hanz, Jr., Wausau Buildings, Robert Schedler, and Holster Construction, Inc., Robert Holster, Defendants-Respondents. |
| Court | Wisconsin Supreme Court |
Thomas F. Mallery and Mallery & Zimmerman, Wausau, on briefs (in Court of Appeals), for defendant-appellant.
Kevin P. Crooks and Crooks, Low & Connell, S.C., Wausau, on brief (in Court of Appeals), for defendants-respondents Marathon Masonry, Inc. and Wausa Tile, Inc.
John E. Knight, James E. Bartzen and Boardman, Suhr, Curry & Field, Madison, on brief, amicus curiae for Wis. Bankers Ass'n.
This case is before the court on certification from the court of appeals. Citizens Bank & Trust (Bank) appeals the circuit court's grant of summary judgment in favor of the respondents, the subcontractors. The subcontractors and the Bank, as creditors of the insolvent prime contractor Holster Construction, Inc. (Holster), each claim money that Wisconsin Dairies Cooperative (Wisconsin Dairies) owed to Holster and deposited with the Marathon County Clerk of Court. The circuit court found that the funds constitute a trust fund under the trust fund statute, sec. 779.02(5), Stats., to which the subcontractors are entitled. The Bank argues that there is no trust for the benefit of the subcontractors because the owner, Wisconsin Dairies, did not make direct payment to the prime contractor Holster, and because the subcontractors failed to preserve their lien rights. We hold that the trust fund statute does not require direct payment from an owner to a contractor. We also hold that the failure of subcontractors to preserve their lien rights does not affect their eligibility as trust beneficiaries. Accordingly, we agree with the circuit court that the subcontractors are entitled to the money held by the clerk of court.
The facts are not in dispute. In July, 1988, Wisconsin Dairies contracted with Holster to supervise the construction of a 500 square foot addition to their building in Rothschild, Wisconsin. As prime contractor, Holster hired the subcontractors for the project, the defendants-respondents in this case: Marathon Masonry, Inc.; Commercial Roofing, Inc.; Wausau Tile, Inc.; County Concrete, Corp.; Hanz Contractors, Inc., and Wausau Buildings. The project was completed in January, 1989.
Wisconsin Dairies still owed Holster $16,516.06 under the construction contract when the project was completed. By this time, however, Holster was insolvent and in receivership. To ensure that the money they owed would be distributed to the proper parties, Wisconsin Dairies deposited the $16,516.06 with the Marathon County Clerk of Court and sought a declaratory judgment on how the funds should be distributed.
Two separate entities claimed the money. The subcontractors claimed the money because they were still owed over $12,000 by Holster for their work on the Wisconsin Dairies Project. The Bank, a secured creditor of Holster, also made a claim because Holster owed them sums well in excess of the $16,516.06.
On July 10, 1989, the Bank moved for summary judgment asserting that the payment of $16,516.06 from Wisconsin Dairies to the Clerk of Court constituted an account receivable that was subject to the Bank's perfected security interest. All parties agreed that the issues raised by this case are questions of law amenable to summary judgment.
The subcontractors argued that the money constituted a trust under the trust fund statute, sec. 779.02(5), Stats., to which they were entitled. Section 779.02(5) states:
Theft by contractors. The proceeds of any mortgage on land paid to any prime contractor or any subcontractor for improvements upon the mortgaged premises, and all moneys paid to any prime contractor or subcontractor by any owner for improvements, constitute a trust fund only in the hands of the prime contractor or subcontractor to the amount of all claims due or to become due or owing from the prime contractor or subcontractor for labor and materials used for the improvements, until all the claims have been paid, and shall not be a trust fund in the hands of any other person.... Until all claims are paid in full, have matured by notice and filing or have expired, such proceeds and moneys shall not be subject to garnishment, execution, levy or attachment.
The Bank argued that the statute did not give the subcontractors priority to the money because they had failed to perfect their lien rights against the owner. The Bank also argued that there was no trust fund because the funds were not in Holster's "own hands." The circuit court found that the failure of the subcontractors to preserve their lien rights did not affect their rights to the funds under sec. 779.02(5). The circuit court found in favor of the subcontractors.
The Bank appealed the circuit court's decision and again argued that the subcontractors did not have a right to the funds under sec. 779.02(5), Stats., because they had failed to perfect their lien rights. Although the Bank barely addressed the issue, the court of appeals recognized in its certification that the threshold issue presented is whether a trust was even established under the language of sec. 779.02(5) and this court's holding in Visser v. Koenders, 6 Wis.2d 535, 95 N.W.2d 363 (1959). 1 After we granted certification in this case, the Wisconsin Bankers Association (WBA) filed an amicus curiae brief in favor of the Bank's position. The WBA argued that the money deposited with the clerk of court was not a trust fund under sec. 779.02(5) because it had not been paid directly to Holster.
This case presents two issues, both of which require construction of sec. 779.02(5), Stats. The construction of a statute is a question of law which this court reviews ab initio. Sacotte v. Ideal-Werk Krug & Priester, 121 Wis.2d 401, 405, 359 N.W.2d 393 (1984). The first issue is whether an owner must directly pay a contractor in order for a trust fund to be created for the benefit of subcontractors under sec. 779.02(5). If there is a trust fund under sec. 779.02(5), then the second issue is whether subcontractors must perfect their lien rights in order to claim those trust funds.
We hold that sec. 779.02(5), Stats. does not require direct payment from the owner to the contractor or subcontractor and that a trust fund is created when an owner constructively pays an insolvent contractor by delivering money to the clerk of court to seek a declaratory judgment as to how the funds should be distributed. We also hold that the failure of subcontractors to preserve their lien rights does not affect their eligibility as trust beneficiaries under sec. 779.02(5).
The first issue, whether direct payment is a prerequisite for the establishment of a trust under sec. 779.02(5), Stats., requires us to reconsider our decision in Visser, 6 Wis.2d 535, 95 N.W.2d 363. In Visser, the prime contractor had been adjudicated bankrupt and a bankruptcy trustee appointed. Id. at 536, 95 N.W.2d 363. Visser and other subcontractors sought a declaratory judgment that the bankruptcy trustee had no interest or claim upon money still owed by the owner to the contractor. Id. at 535, 95 N.W.2d 363. The subcontractors argued that under the trust fund statute 2 money owed by the owner to the contractor was impressed with an equitable trust, even while it remained in the hands of the owner. Id. at 537, 95 N.W.2d 363. The court disagreed, finding that no trust was created under the statute because "[t]he principal condition is, first of all, that the money shall have been paid to the contractor by the owner." Id. at 537, 95 N.W.2d 363. The Visser court emphasized that equitable relief was particularly inappropriate because the subcontractors had not taken advantage of their lien rights against the owner which would have provided them with an alternative form of relief. Id. at 538, 95 N.W.2d 363.
Although the determinative factor in Visser was that there was no payment of any kind made by the owner, the decision has been consistently interpreted in bankruptcy proceedings as requiring a direct payment by the owner to the contractor in order for a trust to be created. See In re Mercury Heating Co., 322 F.Supp. 1161, 1162 (E.D.Wis.1971); Matter of Don's Electric, Inc., 65 B.R. 399, 402 (Bankr.W.D.Wis.1986); Matter of Pacocha, 9 B.R. 531, 533 (Bankr.W.D.Wis.1980). Money in the hands of a bankruptcy trustee has not been considered to be money held by the contractor under the trust fund statute. See Don's Elect., Inc., 65 B.R. at 402, n. 6. The WBA urges us to follow this narrow construction of the trust fund statute.
Visser has been criticized as being contrary to the purposes of the trust fund statute. The legislative drafting notes to chapter 231, Laws of Wisconsin 1973, under the heading "Purpose of Proposal," state "[t]he purpose of this law is (a) to protect the owner from having to pay twice and (b) to secure payments to subcontractors and workers." See also Kraemer Bros. v. Pulaski State Bank, 138 Wis.2d 395, 402-03, 406 N.W.2d 379 (1987) () Visser, however, as interpreted by the bankruptcy courts, limits the ability of subcontractors to get paid and encourages subcontractors to file liens against owners, thereby potentially subjecting owners to double payment. Professor Raushenbusch harshly criticized the Visser decision as poor public policy:
If the subcontractors had given...
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