WT JONES AND COMPANY v. Foodco Realty, Inc.
| Decision Date | 15 June 1962 |
| Docket Number | Civ. A. No. 531. |
| Citation | 206 F. Supp. 878 |
| Parties | W. T. JONES AND COMPANY, Inc., v. FOODCO REALTY, INC., et al. |
| Court | U.S. District Court — Western District of Virginia |
COPYRIGHT MATERIAL OMITTED
Arthur B. Davies, III, Hickson & Davies, Lynchburg, Va., for W. T. Jones & Co.
Roy E. Cabell, Jr., Richmond, Va., for Foodco Realty, Inc.
Lawrence C. Musgrove, Asst. U. S. Atty., Roanoke, Va., for the United States.
W. H. Overbey, Rustburg, Va., for Campbell Co. Bank and W. H. Overbey, trustee.
Howard W. Rhodes, Jr., Lynchburg, Va., for Mid-State Electric Supply Co.
Royston Jester, Jr., Lynchburg, Va., for Falwell Well Corp.
Jos. L. Lyle, Jr., Hickson & Davies, Lynchburg, Va., for Noland Co., Inc., Lynchburg Ready Mix Concrete Co. and Marvin Mosely.
This suit was originally brought by the plaintiff, W. T. Jones and Company, Incorporated (hereinafter called the Plaintiff), in the Circuit Court of Campbell County, Virginia, to enforce a mechanic's lien on certain property in that county owned by the defendant Foodco Realty, Inc. (hereinafter called Foodco). Foodco, its then tenant and sole stockholder, Famous Virginia Foods Corporation (hereinafter called the Parent Company), Campbell County Bank (hereinafter called the Bank), the holder of a note secured by a deed of trust on the property in question, the trustees named in the deed of trust and five other mechanics and materialmen who had filed mechanic's liens against the property, were made parties.
The United States was not originally made a party to the suit. But, though not disclosed by the deed of trust, the Small Business Administration had participated with the Bank in the loan to Foodco to the extent of 90 per cent thereof. Consequently the United States, on its motion, was allowed to intervene in the suit and the suit was then removed to the United States District Court for the Western District of Virginia. The court referred the suit to a Special Master with instructions to report on various matters, the only ones now in controversy involving the priority of the various liens or claimed liens on the property. In due course the Master filed his report and the United States filed objections to the report. The matter is now before me on these objections.
The facts, so far as pertinent, are as follows.
Foodco was organized by the Parent Company for the purpose of taking title to certain real estate and to construct a building thereon which would be leased to the Parent Company. Shortly after its organization it purchased the land for $10,000.00 and erected a warehouse and other improvements on it at a cost of approximately $41,000.00. It seems to be agreed that at the time of the hearing before the Special Master the land and these original improvements had a value of only $25,500.00.
Subsequently Foodco approached the Bank for a substantial loan in order to make additional improvements. The Bank did not care to make such a loan by itself but it brought in the Small Business Administration, an agency of the United States organized under the Small Business Act, 15 U.S.C.A. §§ 631-647. A loan of $85,000.00 was made by the Bank and the United States to Foodco, the Bank participating to the extent of only 10 per cent and the S. B. A. for the remaining 90 per cent. The note appears to have been made payable to the Bank alone and was secured by a deed of trust upon the real estate which, generally speaking, was in a form usual in Virginia and which expressly provided that the provisions of §§ 55-59 and 55-60 of the Code of Virginia () would apply. It also contained certain words, the meanings of which are more or less unintelligible when the words are considered by themselves, but which are given meaning by those Code sections. And the deed of trust contained a covenant of Foodco "not to create or permit to accrue any debt, lien or charge which would be prior to or on a parity with the lien" of the deed of trust.
The deed of trust was recorded on August 13 1959 and the work on the construction for which the $85,000.00 had been borrowed commenced on August 21 1959. On January 25 1960 the Parent Company took possession of the newly constructed factory under a ten-year lease providing for a rental of $2,000.00 per month. However the plaintiff did not complete its work on the premises until April 9 1960. Within the next few months thereafter the Plaintiff and Noland Company, Marvin Mosely and Falwell Corporation filed proper mechanic's liens for work or supplies furnished to the property, Midstate Electrical Supply Company filed such a lien, the timeliness of the filing of which was contested but which was allowed by the Master, and Ready-Mix Cement Co. filed a document claiming such a lien but the claim was disallowed by the Master because it was filed too late. There are also various subsequent judgments, the first of which was rendered November 29 1960 in the Circuit Court of Campbell County. None of these have been satisfied but they are clearly subordinate to the note secured by the deed of trust and to the properly perfected mechanic's liens. There are also unpaid Campbell County real estate taxes of 1960 and 1961 and 1962 taxes are a lien though not yet payable.
On March 3 1961 the Parent Company was declared bankrupt and shortly thereafter terminated its lease of Foodco's property. Foodco was then left with property which had cost $156,229.52 but for which, apparently, it could find no ready tenant and which was valued at the hearing before the Master at from $78,000.00 to $80,000.00. No question has been raised as to the substantial accuracy of this appraisal and it seems to be generally conceded that Foodco is insolvent in the sense that its assets are worth less than the total of its debts. Whether it is also insolvent in the sense in which the word is used in the Federal priority statute, 31 U.S.C.A. § 191, will be later discussed.
At some time, apparently subsequent to the commencement of this proceeding, the Bank assigned to the United States all of its interest in the note secured by the deed of trust in consideration of an agreement on the part of the United States to turn over to the Bank 10 per cent of any recovery received by the United States upon the note.
The question involved is whether under these circumstances the debt secured by the deed of trust or those of the mechanic's liens which were properly filed within the time required by Va. Code, § 43-4 are entitled to priority. Minor questions are whether the mechanic's lien of Midstate Electrical Supply Company was so filed and the priority of the real estate taxes.
On this state of facts the Special Master held that the debt secured by the deed of trust was entitled to priority to the extent of the value of the land and the improvements that had been placed on the property at the time the deed of trust was recorded and, as stated above, that value, as of the time of the hearing, seems to have been agreed to be $25,500.00. But the Master further held that the mechanic's lienors and materialmen who had duly perfected their liens were entitled to priority over the holder of the note secured by the deed of trust as to any additional sum which might be realized upon a sale of the property.
The United States contends that this latter conclusion of the Master was erroneous for three reasons:
First, it contends that in matters affecting the priority of claims of the Federal government general "Federal" commercial law rather than state law prevails, even where the Federal priority statute is not applicable; that the rule of the Federal law is "the first in time is the first in right"; and that therefore the claim of the United States, having originated first in point of time, is entitled to priority over the mechanic's liens even though the latter might be entitled to priority under Virginia law; second, that, in any event, even if Virginia law should be applied, the mechanic's liens would not be entitled under that law to priority over the loan since the proceeds of the loan were used for the improvement of the property just as much as the labor and material that gave rise to the mechanic's liens; and third, that in any event the Federal priority statute, 31 U.S.C.A. § 191, is applicable since Foodco is "insolvent" within the meaning of the word as there used and that under that statute the United States is entitled to priority even over otherwise prior mechanic's liens.
The Virginia Law.
It will simplify matters to dispose first of the contention that even under Virginia law the lien of the United States would prevail since the proceeds of the loan, like the work and supplies furnished by the mechanics and materialmen, were used for the improvement of the property.
There is an old Virginia case that so held: Iaege v. Bossieux (1859), 15 Grat. (56 Va.) 83. However that case was decided long before what is now § 43-21 of the Code of Virginia took its present form. That section, so far as material, now provides:
The quoted language would seem quite clearly to set this question at rest....
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