Capitol Indemnity Corp. v. Heidkamp (In re Steve A. Clapper & Associates of Florida)

Citations: 265 B.R. 460; 14 Fla. L. Weekly Fed. B 349; 2001 Bankr. LEXIS 964Docket: Bankruptcy No. 99-13102-9P7; Adversary No. 00-438

Court: United States Bankruptcy Court, M.D. Florida; June 19, 2001; Us Bankruptcy; United States Bankruptcy Court

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A Motion for Rehearing or Reconsideration filed by Capitol Indemnity Corporation in a Chapter 11 bankruptcy case concerns an Order that allowed a secured claim and determined the distribution rights of Claim No. 78. On April 5, 2001, the court vacated the previous Order regarding the secured claim and deferred issues related to the distribution pending an adversary proceeding. Capitol's Complaint, filed on July 17, 2000, seeks to compel the Trustee to turn over funds totaling $95,702.04 from the Force Main Project and $80,324.00 from the Harbor Boulevard Project, asserting these funds are not property of the estate and thus should be returned to Capitol. The court's Order specifically addresses Counts I and II of the Complaint, while Count III, which seeks declaratory relief regarding funds in a separate adversary proceeding, is not addressed. The Trustee has denied Capitol's claims, asserting the funds are property of the estate under Section 541 of the Bankruptcy Code, as they represent contract payments earned during the reorganization. Both Capitol and the Trustee filed Motions for Summary Judgment, claiming no genuine issues of material fact exist. However, on February 20, 2001, the court denied both motions and scheduled a pretrial conference. The Motion for Reconsideration indirectly challenged the denial of the Motions for Summary Judgment and was granted on April 5, 2001. The court is now reconsidering the Order denying these motions.

Steve A. Clapper Associates of Florida, Inc. (Debtor) was involved in underground utility construction, primarily for public projects, with Capitol acting as the bonding company and surety for several of its projects, including the Manatee County Force Main Project and the Charlotte County Harbor Boulevard project. On August 25, 1998, the Debtor signed a General Indemnity Agreement (GIA) which established all contract funds as trust funds for the benefit of labor and materials suppliers and the Surety. The Debtor entered into a contract with Manatee County on January 5, 1999, for water main rehabilitation at a total price of $982,640.80, which was later reduced by change orders. Manatee County paid the Debtor $523,029.32, leaving a balance of $424,070.57. The Debtor filed for Chapter 11 relief on August 11, 1999, and was authorized to continue operations. However, the Force Main project was incomplete, and on September 30, 1999, the Debtor-in-Possession submitted a payment application for $95,702.04 for work completed, which Manatee County accepted. Subsequently, on October 21, 1999, Manatee County declared a default and terminated the Debtor’s rights to the project. The Chapter 11 case was converted to Chapter 7 on November 17, 1999, with Thomas S. Heidkamp appointed as Trustee. On March 31, 2000, Manatee County paid the Trustee the $95,702.04 for the work performed before the conversion. This amount is currently held in escrow pending resolution in this adversary proceeding. Additionally, Capitol has paid $595,799.59 to various subcontractors under its bond obligations.

The Affidavit of Andy Anderson, supporting Capitol’s Motion for Summary Judgment, includes schedules and correspondence demonstrating Capitol's claim to specific funds. The parties have stipulated that claims by subcontractors and suppliers are valid and outstanding, including an undisputed contract balance of $328,368.58 owed for the Force Main project in Manatee County. The Harbor Boulevard project in Charlotte County, mentioned in Count II of the Complaint, is also under dispute. 

Key details of the Harbor Boulevard project include a contract dated January 25, 1999, initially priced at $376,898.50, later increased to $395,236.50 due to change orders. Prior to filing for Bankruptcy on August 11, 1999, the Debtor received $230,031.51. The Debtor-in-Possession (DIP) submitted a payment requisition for $78,990.53 for work completed, which was certified by Charlotte County. However, after declaring a default on October 8, 1999, due to the DIP's inability to operate, Charlotte County hired a replacement contractor who was paid $38,920.00 from the remaining contract funds. 

Charlotte County later paid the Trustee $80,324.00 related to the previous requisition, which is held in escrow. Capitol has disbursed $137,459.08 to various subcontractors and suppliers under the performance bond for the Harbor Boulevard project. The authenticity of the documentation attached to Capitol's motion, including proofs of claim, has been agreed upon by the parties. Capitol claims a superior right to the disputed funds amounting to $95,702.04 from Manatee County, arguing that it has paid nearly one million dollars in bond claims as Clapper’s surety and cites Paragraph 11 of the GIA, which designates all project funds as trust funds for the surety and claimants under the bonds. Thus, Capitol seeks summary judgment on Counts I and II based on these grounds.

Capitol seeks summary judgment for $80,324 in disputed funds related to the Charlotte County project, asserting equitable subrogation rights. The Trustee counters, claiming the funds belong to the bankruptcy estate under section 541 of the Bankruptcy Code, which encompasses all interests of the debtor at the case's commencement. The Trustee cites United States v. Whiting Pools, Inc. and asserts that funds owed to the debtor, even if unpaid, constitute property of the estate. 

Capitol relies on its General Indemnity Agreement and the doctrine of equitable subrogation, referencing Pearlman v. Reliance Insurance Co., where the Supreme Court ruled that a surety who pays debts owed to laborers has a right to the contract funds, as these funds are not considered property of the estate. Capitol also cites MCA Ins. Co. v. Genson, affirming that a surety completing a contract after the contractor's default is entitled to recover unpaid contract proceeds.

While the Trustee acknowledges the validity of the equitable subrogation doctrine and its support from case law like Pearlman, they argue that the specific facts of this case warrant a different outcome.

At the time the Debtor requested payments, neither contract was in default, and they were not terminated until after the payment requests were made. Thus, these payments are considered earned and are property of the estate, subject to turnover under Section 542 of the Code. The courts have emphasized the owner’s obligation to pay for work performed, noting that non-payment could disrupt contract performance and lead to construction disputes. Case law supports that absent bad faith or abuse of discretion, payments to a financially troubled contractor are enforceable against surety challenges. A distinction is made between payments made during contract performance and final payments, with the latter being subject to greater owner discretion.

In the case of Newkirk Constr. Corp. v. Gulf County, it was determined that progress payments for work already done belong entirely to the contractor until the surety fulfills its obligations following the contractor's breach. However, evidence suggests that the Trustee's payments for the Manatee County project may not have been fully earned due to fraudulent certification by the Debtor regarding payments for work or materials. Similar allegations were made concerning the Charlotte County project, but the record lacks supporting evidence.

The court concluded that the funds received by the Trustee for both projects were earned prior to the contracts being declared in default, thus entitling the Trustee to retain these funds. The court also addressed the doctrine of equitable subrogation, stating that it does not apply here since the right to subrogation would only arise after contractor default and surety payment. Ultimately, the motions for summary judgment by Capitol Indemnity Corporation were denied, while the Trustee's motions were granted. A final judgment was entered in favor of the Trustee for $176,026.04, confirming the funds as property of the estate, free from Capitol's liens, and allowing Capitol to file an unsecured claim for any payments made to the Debtor's creditors related to these projects.