Construction Law Insights

In re Lansdowne Constr., LLC, 2020 Bankr. LEXIS 461, 2020 WL 930107 (Bankr. E.D. Va. Fed. 21, 2020)

In June 2016, 3 Boys, LLC (“3 Boys”) and Lansdowne Construction, LLC (“Lansdowne”) entered into a contract (the “Contract”) for Lansdowne to serve as a general contractor on the Rosner Stafford Toyota project in Stafford, Virginia. The Contract required Lansdowne to warrant with the submittal of an Application for Payment (“Pay App”) that all Work for which Certificates for Payment were previously issued and payments received from the Owner was free and clear of liens and claims in favor of subcontractors or material suppliers by reasons of having provided labor or materials relating to the Work. The Contract also gave the Architect the right to withhold payment if a lien was filed or likely would be filed and gave the Owner the right to issue joint checks to Lansdowne and any subcontractor or material supplier whom Lansdowne failed to pay.

In August 2016, Lansdowne entered into a subcontract with T&B Electric, LLC (“T&B”) for electrical work on the project. In October 2016, 3 Boys assigned the Contract to Sheehy Stafford Property, LLC (“Sheehy”) when Sheehy purchased the property. Between November 2017 and March 2018, T&B submitted several invoices to Lansdowne, which Lansdowne in turn submitted to Sheehy. On April 19, 2018, T&B filed a Memorandum of Mechanic’s Lien on Sheehy’s property in the amount of $82,489.00. On April 26, 2018, Lansdowne emailed T&B that Sheehy was issuing joint checks to subcontractors and that the joint checks were available for pickup from Sheehy’s office. Sheehy Auto Stores, Inc. (“Sheehy Auto Stores”) issued a joint check payable to Lansdowne and T&B in the amount of $82,489.00, which Lansdowne endorsed. When T&B picked up the joint check, T&B executed and delivered a Certificate of Release of its Memorandum of Mechanic’s Lien and a Final Lien Waiver. On May 15, 2018, Lansdowne filed a Chapter 7 bankruptcy.

On September 7, 2018, Sheehy filed a Consent Motion for Modification of the Automatic Stay, which represented that: (i) Sheehy owed Lansdowne $534,139.48, subject to certain offsets for costs to complete the project ($24,000.00) and amounts that it had paid to subcontractors to obtain releases of mechanic’s liens ($276,464.87); and (ii) an additional $334,347.30 was owed to subcontractors, so there was no remaining balance due on its Contract with Lansdowne. On October 3, 2018, the Court entered a Consent Order Modifying the Automatic stay so that Sheehy could accomplish its setoff and pay the remaining subcontractor claims. Sheehy filed a Proof of Claim in the amount of $634,812.17, claiming that it had a right of setoff in the Contract proceeds of $534,139.48.

The Court granted the Trustee’s motion for summary judgment on Count I (Preferential Transfer) and Count III (Recovery of Avoided Transfer) of the Trustee’s Complaint in the amount of $82,489.00 and denied T&B’s motion for summary judgment, including T&B’s four affirmative defenses. There was no dispute that T&B was a creditor of Lansdowne at the time of the joint check transfer. The debts were antecedent debts. Lansdowne is presumed statutorily to be insolvent within 90 days preceding the case and T&B did not raise a solvency defense. The joint check transfer was made within 90 days of the bankruptcy filing. The Trustee submitted an Affidavit, attesting to the fact that the payment enabled T&B to receive more than it would have received in liquidation. Therefore, the Court found that the Trustee met its burden of proof on the elements of a preference under 11 U.S.C. § 547(b).

The Court denied T&B’s motion for summary judgment, including T&B’s four affirmative defenses. The Court rejected T&B’s first argument that Lansdowne suffered no damages because the joint check came from Sheehy Auto Stores. Lansdowne had a contractual right to payment from Sheehy, subject to any offset and rights as payee on the joint check. T&B could not deposit the joint check if Lansdowne did not endorse the joint check. Further, T&B’s argument would mean that Lansdowne could sue Sheehy for breach of contract, which would then mean that Sheehy Auto Stores could sue T&B for unjust enrichment. The Court rejected T&B’s second argument that the payment cannot be considered a preference because it was a joint check. Even if the parties contemporaneously agreed to a joint check arrangement with the issuance of the April 26, 2018 joint check, that joint check arrangement occurred within the 90-day preference period and was itself a preference that could be avoided under 11 U.S.C. § 547(b). The Court rejected T&B’s third argument that funds provided by Sheehy Auto Stores were earmarked for payment to Lansdowne. The earmark defense only applies where the debtor borrows money from one creditor and the terms of the arrangement require the debtor to use the loan proceeds to extinguish specific, designated, existing debt. T&B produced no evidence that Sheehy Auto Stores made a loan to Lansdowne for the specific purpose of paying T&B. Finally, the Court rejected T&B’s fourth argument that the release of its Memorandum of Mechanic’s Lien on Sheehy’s property was a contemporaneous exchange for new value under 11 U.S.C. § 547(c)(1). The key question is whether the alleged preferential transfer diminished the debtor’s estate, i.e. whether the debtor acquired new asset that offset the loss in value to the estate when the debtor transferred existing assets to acquire the new asset at issue. The new value defense only applies to the extent that the transfer was intended to be a substantially contemporaneous exchange and was in fact a substantially contemporaneous exchange for new value. T&B could not show that its release of its Memorandum of Mechanic’s Lien created any new value for Lansdowne.

PLDR Law Scott Kowalski 1 PLDR Law Mark Burgin 1

Thomas Wolf 002 Kenneth Stout 002 Jason Goldsmith 002 

Office Hours

Mon - Fri 8:30 am - 5 pm
Sat Closed
Sun Closed

Contact Us

925 Main St., Suite 300 
Lynchburg, VA 24504 

This email address is being protected from spambots. You need JavaScript enabled to view it.
pldr law firm facebook icon