Opinion
Case No. 03-32416, Adv. No. 05-3146.
May 16, 2007
INTRODUCTION
This adversary proceeding presents cross motions for summary judgment involving an adversary proceeding brought by John Paul Rieser, the chapter 7 Trustee of the bankruptcy estate of Pyper Construction, Inc., the Debtor. The required determinations are complicated by the presence of underlying construction contracts and specific property of the estate issues, which arise, with great frequency, in the intersection of bankruptcy and construction law and provide a recognized exception to the otherwise applicable general principles governing avoidable transfers in a bankruptcy case. It has been recognized that property of the estate issues are treated differently by the Sixth Circuit in the specific context of construction cases. See generally Crocker v. Braid Elec. Co. (In re Arnold), 908 F.2d 52 (6th Cir. 1990) and XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443, 1451 (6th Cir. 1994) (citing an earlier decision, Selby v. Ford Motor Co., 590 F.2d 642 (1979), and recognizing such cases "are limited in application to the specific exigencies of the construction industry."). See also Pearlman v. Reliance Ins. Co., 371 U.S. 132, 83 S.Ct. 232 (1962) (Surety of government contractor was subrogated to right to pay materialmen and laborers from retained funds).
Although this Court acknowledges that Sixth Circuit law governing construction contracts in a bankruptcy context is not always clear, absent further clarification from the Circuit, this Court determines Arnold furnishes the applicable law and the Trustee's citation of other arguable authority is not persuasive.
PARTIES' SUMMARY JUDGMENT FILINGS
The Trustee filed his complaint (Doc. 1) and the two Defendants, Brownmor Co. and Bilbrey Construction, Inc. filed answers (Docs. 8 and 9). After receiving leave of the court, Bilbrey Construction, Inc. filed an amended answer on October 13, 2005 (Doc. 27).
Pursuant to an Order: Establishing Dates For Filing Motions For Summary Judgment And Ordering Other Matters (Doc. 54), the parties filed the following documents: Agreed Stipulations and Documents (Doc. 57) (the "Stipulations"), Joint Exhibits of Plaintiff and Defendant (Doc. 58), Defendant Bilbrey Construction Inc's Motion For Summary Judgment (Doc. 59), Motion of Plaintiff for Partial Summary Judgment Against Defendants Combined With Notice Hereof (Doc. 60), Agreed Stipulation to Supplement Exhibit A of Previously Filed Agreed Stipulations of Fact and Documents (Doc. #57, #58) (Doc. 61), Exhibit A (Doc. 62), Memorandum of Defendant Brownmor Co. In Opposition To Plaintiff's Motion for Summary Judgment and in Support of Summary Judgment in Defendant Brownmor's Favor (Doc. 63), Amended Exhibit A (Doc. 65), Defendant Bilbrey Constructions Inc's Objection to Plaintiff Trustee's Motion for Partial Summary Judgment (Doc. 66), Response of Plaintiff to Defendant Bilbrey Construction Inc.'s Motion for Summary Judgment (Doc. 67), and Defendant Bilbrey Construction Inc's Reply to Plaintiff Trustee's Response to Defendant Bilbrey Construction Inc's Motion for Summary Judgment (Doc. 68).
JURISDICTION
This court has jurisdiction pursuant to 28 U.S.C. § 1334 and the Standing Order of Reference entered in this District. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (F), (K) and (O).
SUMMARY JUDGMENT STANDARD
This court reviewed the summary judgment standard in a recently reported decision:
The familiar standard to address the parties' filings is contained in Federal Rule of Civil Procedure 56(c) and is applicable to bankruptcy adversary proceedings by incorporation in Bankruptcy Rule 7056. Federal Rule of Civil Procedure 56(c) states, in part, that a court must grant summary judgment to the moving party if:
the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.
In order to prevail, the moving party, if bearing the burden of persuasion at trial, must establish all elements of its claim. Celotex Corp. v. Catrett, 477 U.S. 317, 331, 106 S.Ct. 2548, 2556, 91 L.Ed.2d 265 (1986). If the burden is on the non-moving party at trial, the movant must: 1) submit affirmative evidence that negates an essential element of the nonmoving party's claim; or 2) demonstrate to the court that the nonmoving party's evidence is insufficient to establish an essential element of the nonmoving party's claim. Id. at 331-332, 106 S.Ct. at 2557. Thereafter, the opposing party "must come forward with `specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986) (citations omitted); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-251, 106 S.Ct. 2505, 2510-12, 91 L.Ed.2d 202 (1986). All inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Matsushita, 475 U.S. at 586-588, 106 S.Ct. at 1356-57.
Gemini Servs., Inc. v. Mortgage Elec. Registration Sys., Inc (In re Gemini Servs., Inc.), 350 B.R. 74, 80-81 (Bankr. S.D. Ohio 2006), quoting, Roberds, Inc. v. Broyhill Furniture (In re Roberds, Inc), 313 B.R. 732, 735 (Bankr. S.D. Ohio 2004).
FACTUAL BACKGROUND
The parties' filings and the record in this case establish the following uncontested facts in this adversary.
The Beerman Realty Co. ("Beerman") entered into a contract (the "General Contract"; Amended Exhibit A) with Bilbrey Construction, Inc. (the "Contractor") for the construction of a Steinmart store in Centerville, Ohio. The General Contract did not require the Contractor to post a bond for the construction project (Joint Exhibit A, Article 8, ¶ 8.3.1).
For simplicity, the court will refer to Amended Exhibit A (Doc. 65) as "Joint Exhibit A" for the balance of the decision. Previously filed versions of Joint Exhibit A are incomplete (See Doc. 61 — Agreed Stipulations to Supplement Exhibit A of Previously Filed Agreed Stipulations of Fact and Documents (Doc. # 57, 58).
The Contractor entered into a sub-contract with Pyper Construction, Inc. (the "Debtor/Sub-Contractor") to perform certain site work (the "Sub-Contract"; Joint Exhibit B) for the total amount of $830,015.80 (Stipulations, ¶ 2). Thereafter, the Debtor/Sub-Contractor entered into an agreement with Brownmor Co. dba Hageman Trucking (the "Sub-Sub Contractor") for trucking services and delivery of aggregate to the construction project (Stipulations, ¶ 3). There is no written agreement between the Debtor/Sub-Contractor and the Sub-Sub Contractor; rather, payment was pursuant to invoices presented by the Sub-Sub Contractor to the Debtor/Sub-Contractor.
As part of the Contractor's obligations under the General Contract, and significant for the issues presented in this adversary, ¶ 9.3.3 of the General Conditions of the Contract for Construction contains the following language:
The Contractor warrants that title to all Work covered by an Application for Payment will pass to the Owner no later than the time of payment. The Contractor further warrants that upon submittal of an Application for Payment all Work for which Certificates for Payment have been previously issued and payments received from the Owner shall, to the best of the Contractor's knowledge, information and belief, be free and clear of liens, claims, security interests or encumbrances in favor of the Contractor, Subcontractors, material suppliers, or other persons or entities making a claim by reason of having provided labor, materials and equipment relating to the Work. (emphasis added)
The General Contract also provided that Beerman held, as a retainage, ten percent of interim or progress payments made to the Contractor during various states of the construction project (Joint Exhibit A, Article 7, ¶ 7.1.8). These provisions were also incorporated into the Sub-Contract and required the Contractor to hold a ten percent retainage of all progress payments paid to the Debtor/Sub-Contractor (Joint Exhibit B, p. 2). The Sub-Contract provided for progress payments to be made to the Debtor/Sub-Contractor only upon completion of work on the Steinmart project (Joint Exhibit B, p. 2). Pursuant to this provision, the Debtor/Sub-Contractor received a series of draws, or progress payments, from the General Contractor. These payments are summarized in Stipulation, ¶ 11 and in the referenced Joint Exhibits, I-1 through 1-6.
The contract also provided the possibility of reducing the retainage to five percent after completion of 50 percent of the project (Joint Exhibit A, p. 11). The court also notes that a retainage is consistent with Ohio Revised Code § 4113.61(A)(1)(b), which allows a retainage to resolve disputes concerning "liens" or "claims."
In addition, the Sub-Sub Contractor provided work which it asserts was worth $84,057.70 and the parties agree the Sub-Sub Contractor was initially paid $12,088.43 by the Sub-Contactor. Based on this payment, the Sub-Sub Contractor appeared to have released any mechanic's lien rights against the Steinmart project in December 2002 in return for the payment (Trustee Exhibit 1 (Renner Deposition, Deposition Exhibit 11).
The court would note, as explained in this decision, the effect of Deposition Exhibit 11 is not outcome determinative.
The Debtor/Sub-Contractor filed for chapter 11 on March 26, 2003 and the case was later converted to chapter 7 (Stipulations, ¶ 4).
Despite the prior apparent lien waiver, the Sub-Sub Contractor filed a post-petition mechanic's lien on April 2, 2003 claiming the Debtor/Sub-Contractor owed it $71,969.27 (Joint Exhibit C; Stipulations, ¶ 5).
The Trustee asserts this mechanic's lien is statutorily defective under Ohio law and, additionally, is barred by the December 2002 document captioned "Waiver of Lien." (Trustee Exhibit 1 (Renner Deposition), Deposition Exhibit 11). Without regard to any merit determination of the various parties' positions on this issue, following the Debtor/Sub-Contractor's bankruptcy filing, the Contractor negotiated directly with the Sub-Sub Contractor for resolution of the mechanic's lien issue. The Contractor paid the Sub-Sub Contractor $54,000 and the Sub-Sub Contractor released the mechanic's lien on May 20, 2003. The release was memorialized in a two page document and released Beerman, the Contractor and the Steinmart construction project from both "liens and/or claims" (emphasis added) and any and all causes of action which the Sub-Sub Contractor may have held (the "2003 Release"; Trustee Exhibit 1). The $54,000 was paid by the Contractor from his general operating account. See Joint Exhibit F.
The two page document is an exhibit to the deposition of Robert Renner. It does not appear to be labeled as a specific deposition exhibit, but it is bates stamped "BR0073" and "BR0074." The first page releases any claims or causes of action which can be brought by the Sub-Sub Contractor and the second page is the mechanic's lien release.
Thereafter, during the Chapter 11 portion of the estate case, the Debtor/Sub-Contractor and the Contractor filed a joint motion to reject the Sub-Contract (Joint Exhibit D), which was granted by an order of this court on May 29, 2003 (Joint Exhibit E). The Contractor asserts it paid $123,588.00 to hire replacement contractors to complete the work of the Debtor/Sub-Contractor.
The Trustee filed this adversary proceeding to avoid, pursuant to § 549, the $54,000 payment to the Sub-Sub Contractor; and, the Trustee additionally asserts, pursuant to § 542, that the Debtor/Sub-Contractor is owed funds from the Contractor related to the General Contract. Both the Contractor and the Sub-Sub Contractor have filed proofs of claim in this case and the Contractor asserts § 553 setoff rights. The Trustee has also raised issues of violations of the automatic stay by the Contractor and the Sub-Sub Contractor.
ISSUE PRESENTED
In A Debtor/Sub-Contractor's Bankruptcy, If A Contractor Has A Prepetition, Independent Duty To Pay A Sub-Sub Contractor And Has Available Retainage Funds From Which To Make Such Payment, Do Such Retainage Funds Constitute Property Of The Debtor/Sub-Contractor's Bankruptcy Estate?
ISSUE DETERMINED
In A Debtor/Sub-Contractor's Bankruptcy, If A Contractor Has A Prepetition, Independent Duty To Pay A Sub-Sub Contractor And Has Available Retainage Funds From Which To make Such Payment, Such Retainage Funds Do Not Constitute Property Of The Debtor/Sub-Contractor's Estate.
ANALYSIS
The Trustee asserts that the post-petition transfer of the $54,000 from the Contractor to the Sub-Sub Contractor is avoidable as a § 549 post-petition transfer. The position of the Contractor is that, pursuant to binding precedent in the 6th Circuit, such funds were never property of the estate under § 541 and, thus, this transfer cannot be avoided.
The Trustee argues that the mechanic's lien was defective and, further, ¶ 9.3.3 of the General Contract simply requires that the Contractor keep the construction project free of any mechanic's lien; however, the unambiguous language contained in the parties' contract is not restricted to liens. More specifically, ¶ 9.3.3 of the General Contract requires the Contractor to keep the construction free of liens, security interests, encumbrances and — particularly significant for this adversary proceeding — claims. The broad language in the 2003 Release evidences more than a waiver of mechanic's lien rights under Ohio law and contains language parallel to the General Contract, specifically including the significant term — claims. The General Contract, in ¶ 9.3.3, required, both in unambiguous words and clear intent, that the General Contractor, to its best "knowledge, information and belief," remove any claim. See Graham v. Drydock Coal Co., 667 N.E.2d 949, 952 (Ohio 1996), citing, Kelly v. Med. Life Ins. Co., 509 N.E.2d 411 (Ohio 1987), paragraph one of the syllabus ("The intent of the parties is presumed to reside in the language they chose to use in their agreement.")
Most significantly in terms of controlling authority, the Sixth Circuit issued a decision which considered factual circumstances very similar to the factual circumstances in this adversary. This Court determines that the Sixth Circuit's decision in Crocker v. Braid Elec. Co. (In re Arnold), 908 F.2d 52 (6th Cir. 1990) provides the analysis which controls the outcome in this proceeding.
In Arnold, a general contractor entered into an agreement with the state of Tennessee. Id. at 53. The Contractor hired a Sub-Contractor (Debtor) to perform electrical work. Id. The electrical Sub-Contractor (Debtor), in turn, obtained materials on an open account with a material supplier (Sub-Sub Contractor). Id. The electrical supplier (Debtor) filed for bankruptcy and had not fully paid the material supplier (Sub-Sub contractor). Id. at 54. The amount owed was paid, post-petition, by the general contractor. Id. The Trustee sought to avoid the post-petition transfer under § 549. Id. at 53, 56.
The Sixth Circuit, reversing the bankruptcy court and the district court, which had held for the Trustee, analyzed section 4.4.1 of the contract between the general contractor and the state of Tennessee, which stated:
Unless otherwise provided in the Contract Documents, the Contractor shall provide and pay for all labor, materials, equipment, tools, construction equipment and machinery, water, heat, utilities, transportation, and other facilities and services necessary for the proper execution and completion of the Work, whether temporary or permanent and whether or not incorporated or to be incorporated in the Work.
Id. at 54. The Sixth Circuit rejected the Trustee's argument that the funds transferred constituted property of the debtor's estate and accepted the general contractor's argument that the contract between the general contractor and the state of Tennessee "imposed an obligation on [the general contractor] to pay [the material supplier (Sub-Sub contractor) independent of any relationship [the general contractor] had to [the subcontractor (Debtor)]." Id. at 55.
In Arnold, the retainage funds held by the Contractor were not held in constructive trust for the Debtor, were not escrowed in any manner and the Debtor had not established that the retainage funds were earned as progress payments for actual work completed. Instead, these retainage funds were subject to a competing interest, an independent contractual obligation of the contractor, and were not unconditionally available as part of property of the debtor's estate.
The decision in Arnold may be understood as a narrow exception to the reach of the otherwise broadly construed provision that property of the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). Stated another way, in many construction contracts, including the one is this adversary, whatever legal or equitable interests a sub-contractor debtor may have as of the commencement of a case, such legal or equitable interests do not include, as property of the debtor sub-contractor's estate, any retainage funds paid by a contractor to a sub-sub contractor if the governing contract contains a provision establishing an independent obligation on the part of the contractor to pay a sub-sub contractor.
In this adversary proceeding, the General Contract (Joint Exhibit A), likewise, imposes the same type of independent obligation on Bilbrey, the General Contractor, as did the general contract in Arnold. The General Contract requires the Contractor to avoid "claims", liens and encumbrances. A claim, by its plain and ordinary meaning, is broader than a lien or an encumbrance. See Black's Law Dictionary (6th Ed. abridged) 169 (Defining claim as both "[a] cause of action" and a "demand for money or property as or right."). Regardless of any arguable statutory defects in the mechanic's lien, or any prior waiver by the Sub-Sub Contractor, the Contractor decided, based on its best information and belief, at the time of the $54,000 payment and the corresponding 2003 Release, to pay the Sub-Sub Contractor. This decision is consistent with the unambiguous language of the General Contract and the Contractor's independent contractual obligation to avoid any "claims" on the Steinmart property.
The Court concludes that, in the factual circumstances of this adversary, the Contractor had an independent obligation under the unambiguous language of the governing General Contract to pay the Sub-Sub Contractor, without regard to the validity of the mechanic's lien and/or any prior waiver associated with the mechanic's lien, and the funds paid by the Contractor to the Sub-Sub Contractor were not paid from property of the estate.
Trustee's Arguments to Distinguish Arnold
The Trustee argues that other creditors of the Debtor/Sub-Contractor were not paid and that the only difference is that the Sub-Sub Contractor had obtained a mechanic's lein. The Court will assume the Trustee is correct that other creditors may not have been paid when this Sub-Sub Contractor was; however, it was the assertion of a claim by this Sub-Sub Contractor, not the assertion of a mechanic's lien, valid or not, which formed the basis for the Debtor/Sub-Contractor's payment in this proceeding. The Sixth Circuit has acknowledged, but rejected, the Trustee's concerns in connection with such payments:
Even in the absence of a state builders statute, federal bankruptcy courts in a variety of situations have refused to apply the property, preference and statutory liens sections of the Bankruptcy Act to favor unsecured creditors over the equitable claims of subcontractors and materialmen to the proceeds of a construction project in the hands of a bankrupt contractor.
Arnold, 908 F.2d at 55, quoting, Selby, 590 F.2d at 648.
Also, in his response brief (Doc. 67), the Trustee raises the issue that if an "independent obligation" existed under the General Contract, the Sub-Sub Contractor would have been entitled to full payment on its claim. An apparent answer may be that the Contractor reached a negotiated settlement with the Sub-Sub Contractor of the amount due. This compromise was consistent with its obligations under the General Contract, to cause the Steinmart project to complete free of both liens and claims. Regardless of any waivers or defects in the Sub-Sub Contractor's mechanic's lien, the Contractor appears to have concluded that a settlement was more effective than even rudimentary litigation to challenge the filed lien and asserted claim against the Steinmart project.
More importantly, the question of the Contractor's subjective purpose or intent is less relevant than the objective result of Contractor's actions, authorized by the unambiguous language of the General Contract, — eliminating a claim (and a filed lien, defective or not) against the Steinmart construction project. The Contractor's decision to pay the Sub-Sub Contractor $54,000, regardless of how other claimants may or may not have been treated, is consistent with that independent obligation.
The court has no cause to consider extrinsic evidence, such as suggested by the Trustee, because the language of the contract is not unclear or ambiguous, nor does the court have any evidence in this record that the term claim has "special meaning" in construction law contracts. See Graham, 76 Ohio St.3d at 313-14 ("Extrinsic evidence is admissible to ascertain the intent of the parties when the contract is unclear or ambiguous, or when circumstances surrounding the agreement give the plain language special meaning.").
The court will assume, without deciding, that the Trustee is correct that the mechanic's lien was not valid. The Trustee then argues, under such circumstances, the independent obligation doctrine of Arnold cannot apply. The Trustee cites Indiana Lumbermen's Mut. Ins. Co. v. Constr. Alternatives, Inc., 161 B.R. 949 (Bankr. S.D. Ohio 1992), aff'd, 2 F.3d 670 (6th Cir. 1993). The Trustee's position is that Indiana Lumbermen's stands for the proposition that, under Ohio law, there is no "independent obligation" under Arnold to pay a Debtor/Sub-Contractor where a proper mechanic's lien was not filed. Indiana Lubermen's, however, addressed circumstances where a debtor was owed funds as a specific progress payment under a construction contract. The Trustee, at least for purposes of this motion, has not established that the Debtor was due any future funds, as a progress payment, as a result of work completed. Instead, he simply asserts the $54,000 paid to the Sub-Sub Contractor, from the General Contractor's general account, is per se property of the estate without regard to whether the Debtor/Sub-Contractor completed any work for which it had not been paid. The position asserted by the Trustee, that retainage itself is always property of the estate, is contrary to established Sixth Circuit authority. Arnold explicitly holds that retainage payments in construction contracts can be paid by a contractor to a sub-sub contractor where an independent contractual obligation exists and such payments are not funds from property of the Debtor/Sub-Contractor estate. See also Mendelsohn v. The Dormitory Auth. of the State of New York (In re QC Pipings Installations, Inc.), 225 B.R. 553, 570 (Bankr. E.D.N.Y. 1998) (The court finding that retainage in construction contracts is not property of the estate).
The Trustee also appears to argue that the independent obligation doctrine of Arnold should be limited to circumstances in which a bond was required under the contract. Under this theory, the Sub-Sub Contractor could pursue the surety, who would in turn seek reimbursement for the Contractor. Arnold, however, neither in its facts or its holding, contains any such limitation. Arnold is based on an independent obligation established by contract and this court will follow Arnold.
The Trustee also cites Mason v. Zorn Indus., Inc., (In re Underground Storage Tech. Svcs. Group, Inc.) 212 B.R. 564 (Bankr. E.D. Mich. 1997). The Trustee is correct that in In re Underground Storage Tech. Svcs. Group, Inc., the Michigan court does discuss a payment bond as a basis for the independent obligation; however, it is also significant that whatever may have been contained in provisions of the contract governing the parties, the contract was not made a part of the record in that proceeding. Id. at 568. As a result, the Michigan court was unable to consider the issue of an independent obligation based on the parties' contract. It must also be recognized that despite the Michigan court's concern about Sixth Circuit law governing construction contracts in a bankruptcy context, the Michigan court, concluded, based on Arnold, that contractor payments to a sub-sub contractor were not property of the estate and the payments could not be avoided, nor could the funds be subject to a constructive trust in favor of the debtor/subcontractor. Id. at 573.
This court's decision in this adversary is not based on any constructive trust for the benefit of either the Debtor/Sub-Contractor or the Sub-Sub Contractor. Arnold does not require the determination of a constructive trust, nor is a constructive trust the basis for the holding in Arnold. The court is aware of a series of Sixth Circuit decisions creating, limiting and defining constructive trust/property of the estate issues. See, e.g., XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443 (6th Cir. 1994). In the specific context of applying the "independent obligation" doctrine of Arnold, these decisions are not binding, since they neither directly contradict the holding in Arnold, nor impact its reasoning. Of course, there is no decision overruling Arnold and the "independent obligation" doctrine remains the law of the Sixth Circuit.
The Trustee cites Alban Tractor Co. v. Gold (In re Gray Elec. Co.), 142 F.3d 433, 1998 WL 109989 (6th Cir. 1998) (unpublished). Gray Electric merely reaffirms the holding of Arnold, a published decision, and suggests it is possible, under certain circumstances, for a constructive trust to exist in favor of the Debtor where it was created by contract or other escrow agreement. Id. at *2. Those facts did not exist in Gray Electric and, more importantly, the constructive trust argument is not the basis of this court's decision. The Trustee also cites to Ohio Farmers Ins. Co. v. Hughes-Bechtol, Inc. (In re Hughes Bechtol, Inc.), 225 F.3d 659, 2000 WL 1091509 (6th Cir. 2000), another unpublished decision. Hughes-Bechtol addressed a constructive trust argument in the interpretation of a cash collateral order. It does not concern, and never addresses, the "independent obligation" doctrine of Arnold.
To the extent the Trustee is arguing the funds were held in a constructive trust for the Debtor, the $54,000 retainage funds were paid from the general operating account of the Contractor and there is no basis to impose a constructive trust.
In a cause of action under § 549, a necessary pre-requisite to the Trustee's establishment of a prima facie case is that the transfer sought to be avoided and the funds sought to be recovered involve property of the estate. Although it would generally appear to be in a creditor's best interest to obtain a court determination that the involved funds are not property of a debtor's estate, prior to any transfer, the $54,000 paid by the Contractor to the Sub-Sub Contractor involved in this adversary are determined not to be property of the Debtor's estate and cannot be avoided as a post-petition transfer pursuant to § 549.
The Sub-Sub Contractor and the Contractor are GRANTED summary judgment as to the $54,000 transfer payment because the Trustee has no legally recognized basis to avoid the transfer. As a corollary, the Trustee's second cause of action to avoid the mechanic's lien is DENIED AS MOOT.
This decision resolves the Trustee's third causes of action in that the Trustee has not asserted any other improper post-petition transfers. The court is also not aware of any pre-petition preferential transfers (§ 547) that the Trustee is asserting in his fourth cause of action.
Stay Violation Issues
The court has concluded the $54,000 payment was not from property of the Debtor's estate. Accordingly, the Trustee's first cause of action against the Contractor for violation of the automatic stay for the $54,000 payment is DENIED. Any issue in the Trustee's first cause of action concerning whether the post-petition mechanic's lien was a stay violation is DENIED AS MOOT.
Proof of Claim/Setoff/Turnover Issues
The resolution of the $54,000 payment does not conclude this adversary. The Trustee still has a separate turnover (§ 542) cause of action against the Contractor for $169,582.09. The court is unable to ascertain how this exact figure was reached, but it apparently represents what the Trustee asserts to be the unpaid account receivable due the Debtor/Sub-Contractor under the General Contract. The Contractor's position is that the Debtor/Sub-Contractor never completed the work and is not entitled to any further payment. The Contractor has filed an unsecured proof of claim for $27,427.58, which it asserts is the net costs to complete the construction work after the Sub-Contract was rejected in this bankruptcy (Joint Exhibit G). The Sub-Sub Contractor has filed an unsecured proof of claim for pre-petition services for $93,354.82 (Joint Exhibit H). These issues will require a separate determination. In addition, the Contractor may still be asserting setoff rights under § 553 and applicable Ohio law. The court DENIES summary judgment in regard to all of these remaining issues and reserves them for further determination. The record is simply inadequate to rule on these remaining issues as a matter of law.
The Trustee objects to these proofs of claim in his sixth cause of action on the basis of § 502. Any merit arguments can be resolved in the context of this adversary proceeding by an evidentiary hearing without a separate contested matter. It does appear that the proofs of claim filed may need to be amended in light of this decision and the remaining causes of action clarified. The court will address all of these issues in a pretrial conference set by separate order.
The Trustee asserts that the Contractor waived any setoff rights by filing an unsecured, rather than secured proof of claim. This proof of claim was filed on August 28, 2003 (Claim 29). While the court is aware of this legal theory and the underlying case law, the Trustee cites no specific legal authority for this proposition. For this reason alone, the court could decline to grant summary judgment. Moreover, the setoff defense was specifically raised in the amended answer of the Contractor over eighteen months ago as an affirmative defense. See Amended Answer of Defendant Bilbrey Construction (Doc. 2, p. 6). The setoff issue was also mentioned in a Pre-Trial Statement from August 29, 2005 (Doc. 22). The Trustee has suffered no discernable prejudice and all rights of the Contractor to setoff, to the extent otherwise valid under § 553 and applicable nonbankruptcy law, are preserved. Had the Trustee wished to raise this argument, it could have been addressed back in 2005. See Doc. 24 — Pretrial Scheduling Order — ¶ 2, addressing amendments to the pleadings). With other issues still outstanding, it is not clear to the court if the resolution of the $54,000 moots any setoff arguments that the Contractor may have.
Conclusion
The court GRANTS IN PART, AND DENIES IN PART, Defendant Bilbrey Construction Inc.'s Motion for Summary Judgment (Doc. 59) and Brownmor's Motion for Summary Judgment (Doc. 63). The Trustee's Motion of Plaintiff for Partial Summary Judgment Against Defendants Combined with Notice Hereof (Doc. 60) is DENIED. An Order in accordance with this decision and a separate order scheduling a pretrial conference will be simultaneously entered.