Rieser v. Brownmor Co. et al

UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION AT DAYTON
In re: 	PYPER CONSTRUCTION COMPANY,
Debtor
Case No. 	03-32416
Adv. No. 	05-3146
JOHN P AUL RIESER, CHAPTER 7 T RUSTEE,
Plaintiff
v.
BROWNMOR CO . ET AL.,
Defendants
Judge Waldron
Chapter 7
DECISION GRANTING IN PART,
DENYING IN PART, BILBREY
CONSTRUCTION INC’S AND
BROWNMOR CO.’S MOTIONS FOR
SUMMARY JUDGMENT AND
DENYING THE TRUSTEE’S MOTION
FOR PARTIAL SUMMARY
JUDGMENT
DATED AT DAYTON, OHIO this 15th day of May, 2007:
INTRODUCTION
This 	adversary 	proceeding 	presents 	cross 	motions 	for 	summary 	judgment
involving an adversary proceeding brought by John Paul Rieser, the chapter 7 Trustee
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: May 16, 2007
____________________________________________________________
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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).
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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
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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 A1 ) with Bilbrey Construction, Inc. (the “Contractor”) for the
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
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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).
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
Stipulations to Supplement Exhibit A of Previously Filed Agreed Stipulations of Fact and Documents
(Doc. # 57, 58).
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the construction project (Joint Exhibit A, Article 7, ¶ 7.1.8).2 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.
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). 3
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).
2 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.”
3 The court would note, as explained in this decision, the effect of Deposition Exhibit 11 is not outcome
determinative.
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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).4 The $54,000 was
paid by the Contractor from his general operating account. See Joint Exhibit F.
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
4 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
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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
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.
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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.
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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
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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
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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
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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
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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
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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. 5 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
5 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.
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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.
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.6 As a corollary, the Trustee’s second cause of action to
avoid the mechanic’s lien is DENIED AS MOOT.
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
6 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.
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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. 7 In addition, the Contractor may
still be asserting setoff rights under § 553 8 and applicable Ohio law. The court DENIES
7 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.
8 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,
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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.
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.
SO ORDERED.
c:
John Paul Rieser, Esq., 1520 First National Plaza, 130 West Second Street, Dayton,
Ohio 45402 (Chapter 7 Trustee)
Barry W. Mancz, Esq., 2160 Kettering Tower, Dayton, Ohio 45423 (Atty. for the
Defendant Brownmor Co.)
Robert E. Portune, Esq., 201 East Sixth Street, Dayton, Ohio 45402 (Atty. for the
Defendant Bilbrey Construction, Inc.)
Paul H. Spaeth, Esq., 130 West Second Street, Suite 450, Dayton, Ohio 45402 (Atty. for
the Defendant Bilbrey Construction, Inc.)
###
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.
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