In re Hamilton Associates, Inc.

Citations: 66 B.R. 674; 1986 Bankr. LEXIS 5007Docket: No. BK-S-84-448

Court: United States Bankruptcy Court, D. Nevada; November 5, 1986; Us Bankruptcy; United States Bankruptcy Court

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Hamilton Associates, Inc., operating as a framing subcontractor, had a contract with West Coast Holdings for the Newport Cove project from 1982 to 1984. Four claimants assert rights to funds owed to Hamilton by West Coast: Pioneer Citizens Bank of Nevada, Sand-lin Lumber Company, the IRS, and Hamilton's bankruptcy trustee. In October 1982, Hamilton entered a loan agreement with Pioneer, granting them a security interest in Hamilton's inventory and accounts receivable, including a general assignment of funds owed by West Coast. Hamilton executed several promissory notes to Pioneer, with a total outstanding balance of $32,145.42, excluding interest.

Sandlin's claim stems from lumber supplied to Hamilton for the Newport Cove project between March and July 1983, which was incorporated into the project. Hamilton invoiced West Coast for completed work and materials, requiring lien releases for payment. Sandlin recorded a lien for $127,508.33 on May 25, 1983, which was partially released after a payment agreement that left a remaining balance of $119,350.00 owed directly from West Coast's lender. Sandlin received partial payments but did not receive the final payment of approximately $63,000.00. They attempted to re-lien the project on September 30, 1983, but this lien was later deemed invalid. On the same day, Sandlin was informed of Pioneer’s claim to the funds, and the IRS also asserted a claim based on a tax assessment against Hamilton, with a federal tax lien filed on October 10, 1983, and no IRS demand made until November 28, 1983.

The IRS acknowledges that its claim is subordinate to Pioneer’s but claims superiority over all other claims. The Trustee contends that the funds owed to Hamilton by West Coast are part of the estate's property, not subject to other claims, and should be distributed after covering the Trustee's expenses. Pioneer asserts its rights to the disputed funds based on its security interest in Hamilton’s accounts receivable and the assignment of moneys owed by West Coast. The security agreement defines 'account receivable' as any right to payment for goods or services, which applies to Hamilton's obligations from West Coast. Pioneer has a valid, perfected security interest since it met the requirements of attaching the interest to collateral and filing a financing statement. Additionally, Pioneer’s rights are reinforced by Hamilton’s assignment of all moneys due from West Coast, which was communicated to West Coast, establishing Pioneer as the assignee before Sandlin or the IRS’s claims arose. Sandlin argues for superiority based on a materialman’s lien, claiming entitlement to funds after releasing the lien, but the Court disagrees, citing that property owners may withhold payments only if a lien is recorded and an action commenced, as per Nevada law.

A property owner has a limited right to withhold payments due to a contractor when a materialman’s lien is recorded and an action on the lien is initiated. The court cannot grant Sandlin's request to allow the property owner to redirect payments to the lien holder when (1) no action to enforce the lien has begun, (2) the funds were previously assigned and subject to a security interest, and (3) the assignee/security interest holder was not notified of the redirection. Section 108.235(2) delineates specific rights for property owners in this context, and no broader rights exist allowing redirection without the contractor's consent. Contractors and their assignees have the right to contest the mechanic’s lien, and a debtor cannot consent to redirected payments without their assignee's agreement. Pioneer, as a secured creditor, is entitled to interest on its claim and reasonable fees under the agreement, as outlined in 11 U.S.C. 506(b). The security agreement allows Pioneer to recover attorney’s fees and expenses incurred in enforcing its rights. Interest rates on the loans, ranging from 16% to 18%, will apply to the outstanding balances for calculating Pioneer’s claim. 

Regarding federal tax liens, Section 6321 of the Internal Revenue Code establishes that a lien arises when a tax is owed and after demand for payment. The IRS lien against Hamilton's property became effective on April 11, 1983, despite the notice being filed later. State law governs the taxpayer’s property interest, while federal law determines lien priority. The funds owed to Hamilton are considered an account under state law and are subject to the federal tax lien. Priority is determined by the principle of "first in time, first in right," with Section 6323 requiring the IRS lien to be filed to be valid against certain parties. Pioneer’s security interest takes precedence over the federal tax lien due to its prior creation and perfection, while Sandlin’s claim regarding priority remains ambiguous.

A 'mechanic’s lienor' is defined under the IRC as an individual or entity possessing a lien on real property for services, labor, or materials related to property construction or improvement. A lien becomes valid under local law when it can enforce against subsequent purchasers without actual notice, provided services, labor, or materials have begun. Sandlin held a valid materialman’s lien on the Newport Cove property effective May 26, 1983, which took precedence over an IRS lien recorded on October 10, 1983. However, after Sandlin released its lien, the IRS contended that Sandlin had no lien of record when the IRS recorded its notice, thus claiming superiority over Sandlin’s rights.

The IRS referenced Nomellini Constr. Co. v. United States, where a creditor was deemed not a 'purchaser' due to failure in state law steps to perfect property transfer, thus lacking priority over the IRS. Unlike that case, Sandlin's valid lien initially granted it priority under section 6323, and the central issue was whether Sandlin lost that status by releasing its lien as per a June 6 agreement to receive payments. The Court concluded that Sandlin retained its priority since the IRS lien was not recorded by that date, and Sandlin had no actual knowledge of it. The agreement effectively replaced the lien with a payment arrangement, allowing Sandlin to maintain priority.

The Court also disagreed with the Trustee's claim that the funds were estate property free from claims by Pioneer, Sandlin, and the IRS. However, it agreed that the Trustee was entitled to compensation for necessary services and expenses. The Court ordered the Trustee to submit a claim for interim compensation within 30 days, while Pioneer was to apply for a determination of its secured claim amount. The discussion noted that a separate assignment involving funds owed to Hamilton by West Coast related only to Newport Cove VIII, not the current matter concerning Phases 11A and B. Pioneer had a perfected security interest with actual notice to obligors, contrasting with the IRS, which failed to notify third parties of its claim, making it unfair to disregard Pioneer’s interest.