Falcon Steel, Inc. v. J. Russell Flowers, Inc.

Citations: 635 F.3d 369; 2011 A.M.C. 1256; 2011 U.S. App. LEXIS 6393; 2011 WL 1119847Docket: 09-3896

Court: Court of Appeals for the Eighth Circuit; March 29, 2011; Federal Appellate Court

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Falcon Steel, Inc. (Falcon) initiated a lawsuit against US Technology Marine Services, LLC (UST) in state court to enforce a materialman's lien on several barges, claiming $376,659.82 in unpaid steel used in their construction. The case was removed to federal court, where a bench trial affirmed the validity of Falcon's lien under Arkansas law, establishing that it applied jointly and severally to all barges involved.

UST, a Nevada-based corporation, was contracted to build 20 barges for J. Russell Flowers, Inc. (Flowers), engaging Falcon to supply the necessary steel. Testimony revealed that UST's representative, Mike Dismer, informed Falcon about the Flowers contract and provided a material list for the barge designs, leading Falcon to believe the steel was exclusively for Flowers's barges. However, Falcon's management admitted they were unaware of the specifics of UST's contractual obligations with Flowers until after the steel shipments began, later discovering UST was also constructing a barge for Canal Barge Company under a separate agreement.

UST defended itself by presenting testimony from its former industrial engineer, Jeffrey Don Cluck, who stated that UST sourced steel from multiple suppliers and maintained a log tracking the steel used for each barge. Cluck confirmed that only about $65,000 of Falcon steel was used in the first five barges, but he acknowledged that his chart summarizing this information was not a standard business record. The district court ultimately upheld Falcon's lien, affirming its attachment to the barges based on the evidence presented.

Cluck indicated that the data in his chart was primarily an extrapolation based on the steel logbook, which recorded when steel was received and used. He created the chart using purchase order numbers and later incorporated invoice numbers. Cluck confirmed that a specific type of Falcon steel was used in Flowers Barge Number 2, claiming this was necessary for that project, although he acknowledged that his logbooks were intended for tracking price escalations rather than identifying specific steel origins. UST argued that purchase orders sent to Falcon contained designations indicating whether the steel was for Flowers's or Canal's projects, but Cluck later admitted that UST did not fully complete its purchase orders and that Falcon added the designations. Falcon denied any knowledge of this system.

In February 2008, UST submitted a credit application to Falcon, which began shipping steel on a $100,000 line of credit. UST exceeded this line, and Falcon continued shipments based on UST's creditworthiness. Between February 6 and April 9, 2008, UST ordered $1,185,948.28 worth of steel, with shipments continuing until May 12, 2008. After that date, UST stopped payments to Falcon. Disputes arose regarding Falcon's final shipment sent on August 29, 2008, and received on September 5, 2008. There were three points of agreement between Falcon and UST: UST's Ray Williams requested additional steel despite an overdue account, UST had submitted a purchase order on April 4, 2008, which Falcon delayed invoicing until delivery was requested, and UST wired $65,000 to Falcon on August 28, 2008, with Falcon shipping $58,000 worth of steel the next day.

The purpose of the $65,000 payment is contested; Swain and Heinz claim it was applied to UST's existing debt, while Williams asserts it was an upfront payment for the shipment. On September 15, 2008, Falcon notified UST of a materialman's lien for a past-due balance of $476,659.82, and filed a lien account in Arkansas state court on December 10, 2008, followed by a lawsuit on December 23, 2008, to enforce the lien and collect the debt.

UST removed the legal action to the United States District Court for the Western District of Arkansas, where it was established that UST transferred Barge F1 to Flowers, and no lien could attach to it. Falcon and UST agreed that on December 30, 2008, seven days after the lawsuit began, they executed a "Partial Release and Assignment," confirming that Flowers paid $100,000 to release any lien liability concerning Barge F2. Consequently, only the fully-constructed Barges F3, F4, F5, and the partially-constructed Barge F6 remain subject to Falcon's lien claims. 

Following a bench trial on November 3, 2009, the district court issued a memorandum on November 17, outlining five relevant findings: 1) UST did not provide Falcon a copy of its contract with Flowers, though Falcon was informed of its existence; 2) the steel shipped matched the materials list provided by UST; 3) the testimonies of Swain and Heinz regarding the final shipment were deemed more credible than Williams's, establishing that a $65,000 payment was not an advance for that shipment; 4) neither Falcon nor UST accurately tracked the steel allocation among barges during construction; 5) UST sourced steel from Falcon and other suppliers for multiple projects, not exclusively for Flowers' barges.

On appeal, UST argues for reversal of the district court's judgment in favor of Falcon, asserting either that Falcon's lien is invalid due to untimeliness or, alternatively, that even if valid, it cannot attach to Barges F3 through F6 without evidence of the specific steel used in each barge. The appeal’s review of factual findings is for clear error, while legal interpretations are reviewed de novo. Under Arkansas law, material suppliers like Falcon must follow specific perfection procedures to secure a lien, which include filing a true account of the demand and an affidavit of notice with the circuit court within 120 days of providing materials or labor.

The Arkansas Supreme Court recognizes a narrow tolling exception to the statutory limitations period for materialmen supplying builders on an "open" or "running" account. Under this exception, a materialman must file an accounting within 120 days after the last material is delivered, provided there was no specific agreement on the quantity or timing of supplies and a reasonable expectation for further materials existed. In the case at hand, UST contends that Falcon did not timely perfect its materialman's lien, claiming Falcon's last delivery was on May 7, 2008, and thus the filing period should be calculated from that date. UST argues that the September 5, 2008 delivery was a prepaid, one-time shipment rather than part of an ongoing account. However, the district court determined that the September delivery was indeed the final shipment on UST's open account, based on witness testimonies and the lack of a formal contract specifying delivery terms. The court found UST's August 28 prepayment was applied to previous invoices, not as a prepayment for the September delivery, which was listed as "unpaid" in UST's records. The court's conclusion aligns with the definition of an open account, which does not require a specified agreement on the amount or duration of deliveries. A potential counterpoint for UST is the four-month interval between shipments, but it does not override the court's findings. The appellate review of these factual determinations is limited to clear error.

The Arkansas Supreme Court in Kizer established that when assessing an open account, courts should consider whether materials were provided at short intervals. The district court reviewed this criterion and determined that UST had ordered steel on April 4 with the expectation that Falcon would store it for later use, a decision influenced by UST's financial situation. Consequently, the court ruled that Falcon's delivery on September 5 was indeed part of UST's open account, leading to the conclusion that Falcon's account filing on December 10, 2008, was timely per Arkansas law, thereby validating Falcon's materialman's lien.

In a separate issue, UST argued that the entire value of Falcon's lien, amounting to $376,659.82, incorrectly attached to several barges at its shipyard, citing that materialman's liens should only apply to property constructed with the supplied materials. UST claimed evidence showed that some of Falcon's steel was used in other projects, reducing the value of the lien on the remaining barges to $65,803.52. However, the court referenced the precedent set in Central Lumber, which allows for a presumption that materials delivered to a construction site were used if they resemble materials in the completed structure, shifting the burden of proof to the builder to refute this assumption. Furthermore, if materials are provided under a single contract for multiple properties, all affected properties are jointly liable for payment.

Whether Falcon steel was incorporated into the barges is a factual question that the district court resolved without clear error. UST admitted that the barges are made from steel continuously shipped by Falcon in 2008, thus UST must rebut the presumption that the barges contain the unpaid steel valued at approximately $376,000. UST presented Cluck's chart as evidence, claiming it shows that much of the unpaid steel was used in specific barges; however, Cluck acknowledged that the chart was not typically prepared by him and relied on logbooks not meant for tracking individual steel origins or uses. The district court found that this chart was created solely for trial and noted that neither Falcon nor UST closely monitored the steel used in each barge's construction. Consequently, the court concluded that UST did not successfully rebut the presumption that Falcon steel was used.

UST argued for a de novo review, claiming Falcon could not rely on the presumption because the steel was supplied for two separate projects. The Arkansas Supreme Court supports the notion that a lien cannot be asserted on multiple lots when separate accounts are maintained, but whether UST and Falcon treated the projects as separate is disputed. Testimonies indicated that UST specifically referenced the Flowers contract when soliciting Falcon's services, and evidence showed Falcon consistently delivered steel to the shipyard for both projects simultaneously. The only evidence suggesting separate accounts was UST's special numbering of purchase orders, but the court did not determine who imposed this system, and conflicting evidence undermined its significance.

In conclusion, the district court's findings were affirmed. Circuit Judge Bye dissented in part, agreeing that the lien was timely but disagreeing with the determination of the lien amount, asserting that Falcon should not encumber all four barges for UST's total liability given that only a fraction of steel remains unpaid.

Falcon, as a lien claimant, is limited to a lien amount of $65,803.52, which corresponds to the value of the steel it supplied for the four barges in question. The majority opinion incorrectly assumes that the dispute hinges on whether Falcon's steel was used in the barges. UST effectively rebutted any presumption of actual use through Jeffrey Cluck's uncontroverted testimony. The district court did not establish that Falcon's entire steel worth $376,659.82 was utilized in the barges, and Falcon acknowledged that only $65,803.52 was present in them.

UST's argument, supported by the district court, invokes the open-account rule from Kizer Lumber Co. v. Mosely, asserting that it negates the need for tracing Falcon's steel to the barges. However, the law requires lien claimants to demonstrate that the materials were used in the improvement for which the lien is sought. The open-account rule may relieve Falcon from apportioning the $65,803.52 among the barges, but it does not exempt Falcon from proving that the total value of its steel was indeed incorporated into the barges.

The necessity of proving actual use serves multiple purposes: it upholds the priority of materialmen’s liens only to the extent that materials enhance property value, avoids unfairly burdening vessel owners and other creditors, and prevents claims that could negatively impact the rights of other vendors. Consequently, since Falcon has failed to demonstrate actual use of the full amount claimed, the judgment of the district court should be reversed, and the case remanded for further proceedings.