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Courts are divided on preferential payments in mechanics lien cases.

No creditor enjoys receiving a letter in the mail stating that a substantial amount of money must be returned to a bankruptcy estate under the preferential payment provisions of the bankruptcy code. The letter is even more distasteful in the construction industry when the creditor waives lien rights or bond rights in exchange for payment by check.

In light of an article appearing in the November/December 1991 issue of Business Credit, which discussed this issue with respect to Aerotech Mechanical Contractors. Gibbons-Grable (debtor), the following comments may be of interest to creditors similar situations.

First, this matter is not a new one. For years, numerous attempts have been made under the preferential payment section of the code to upset the rights of a mechanics lien holder who may have had a perfected lien or waived those rights in lieu of payment. Owens-Corning Fiberglas experienced this problem in 1983, for example.

Briefly stated, Owens-Corning had perfected a mechanics lien on an automobile plant in Michigan several weeks prior to the preferential period. The contractor paid Owens-Corning during the preferential period. Upon payment, the lien was released.

While it seems absurd to have to defend this set circumstances, the attor-ney representing Owens-Corning Fiberglas presented the trustee with approximately six cases, heard in various bankruptcy courts, which made it clear to the trustee that he had no case. After 30-minute discussion, the trustee dropped the claim.

The facts involved in any case vary, but many bankruptcy judges have protected payments to creditors--not only to a perfected lien holder, as Owens-Corning's case-but also to those who waived their lien rights within the preferential period.

In a case heard in New York, Ricotta vs. Burns Coal and Building Supply (264 Feb. 20 749), for example, the judge stated:

It would be absurd to treat differently payments for the same debts obtained (with or) without filing liens, and the law does not do so. Constituent with common sense, the court have upheld payments where, at the time the payments were made, the creditor could have equally protected himself by filing a non-preferential lien... Accordingly, the ruling below (lower court) that the payments in question were in their entirely preferential is incorrect.

The above case also makes it clear that the creditor must have maintained its ability to file a lien. For example, if a preliminary notice to claim a lien is required in a particular state, and the creditor failed to give notice, the creditor voided its lien rights. The creditor cannot argue that lien rights were waived contemporaneously with subsequent payment.

Recent decisions in Ohio have been quite disturbing and provide another example of how bankruptcy judges differ in their interpretations. In Bownic Insulation Contractors, Inc. vs. L&G Powers, Inc.(134 BR 261), for example, Powers lost its fight against a preferential payment claim despite the fact that the company had waived its rights to file a payment bond claim and a lien against public construction funds.

Based upon the foregoing, this court concludes that Powers failed to establish that its forbearance from including the funds it received as a preference in its lien and bond claims constitutes new "value".

There are other factors which may come into play depending on a particular state's lien statutes. Some states treat the flow of funds on a construction project as "trust funds". Some states may subject an owner of a construction project to pay twice for the project, while other states limit the owner's liability to the unpaid portion of the owner's contract.

These factors may enhance or diminish the "real" value of one's lien and perhaps impact the preferential issue. Direct payments and joint paychecks from third parties have been helpful in defending an attack by a trustee.

Seeing the differing interpretations among district bankruptcy courts leaves one in a confused state of affairs. Efforts by the American Subcontractors Association and NACM to promote a more favorable and uniform interpretation of the section of the code would be worthwhile.

A few cases are listed below which may be helpful to those who wish to investigate further. Bailey vs. N. O. Nelson (17 BR 50:1981) Johnson vs. Evans Lumber Co. Inc. (25 BR 889:1782) In the matter of: Hatfield Electric Co. (91 BR 785) Show Industries, Inc. vs. Gil (37 BR 957) Lang vs. Heieck Supply (71 BR 19) Michael W. Wright is a senior customer financial services administrator for the Roofing Products Division of Owens-Corning Fiberglas, Toledo, Ohio.
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Title Annotation:Construction Corner
Author:Wright, Michael W.
Publication:Business Credit
Article Type:Column
Date:Jun 1, 1992
Words:746
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