In Re Raymond Professional Group
April 12th, 2008Judge Jack B. Schmetterer of the U.S. Bankruptcy Court for the Northern District of Illinois has released an opinion in the Raymond Professional Group, Inc. bankruptcy matter. Reviewing the intersection of mechanics liens and bankruptcy seems appropriate in this economic downturn.
The basic structure of bankruptcy is this: Upon declaration of bankruptcy, the debtor, under supervision of the court, performs a strict accounting of all assets and all liabilities. Each asset and liability is categorized, and then the entire bankruptcy “estate” (the assets and liabilities) are then processed, each according to the categorization it receives. There are many ways to categorize parts of the estate, but at the bottom is “unsecured, nonpriority claims,” over which the Court has tremendous discretion to reduce or even completely eliminate the debt. An unpaid bill to a subcontractor or supplier would commonly be categorized as an unsecured, nonpriority claim, unless the sub or supplier could show that the debt should be accorded some higher-status treatment. To state the obvious, those with higher status get paid more, sooner.
One way to get higher-status treatment is to show that the thing in question isn’t part of the bankruptcy estate at all. The easiest example would be, if you loan your car to a friend so that he can drive down to file bankruptcy, his possession of the car doesn’t mean that it becomes an asset of the bankruptcy. Just because he happens to be holding your car doesn’t mean that he owns it. The example seems trivial, but it is at the core of understanding the trustee provisions of the Illinois Mechanics Lien Act.
Section 21.02 of the Act, in pertinent part, reads:
Money held in trust; trustees. Any owner, contractor, subcontractor, or supplier of any tier who requests or requires the execution and delivery of a waiver of mechanics lien by any person who furnishes labor, services, material, fixtures, apparatus or machinery, forms or form work for the improvement of a lot or a tract of land in exchange for payment or the promise of payment, shall hold in trust the sums received by such person as the result of the waiver of mechanics lien, as trustee for the person who furnished the labor, services, material, fixtures, apparatus or machinery, forms or form work or the person otherwise entitled to payment in exchange for such waiver.
The intended effect of this provision is to lay out the ownership of the money. “Trusteeship” is the legal term that explains that, just because a person is holding the money doesn’t mean they own it. Trustee relationships exist in all sorts of common situations - banks are trustees who hold your money, as are investment houses. Just as the guy you loaned your car to has the right to drive it, banks and investment houses have the right to do certain things with your money, and even obtain some benefit from holding it. But their possession of the money doesn’t amount to ownership, any more than loaning your car out means you made a gift or a sale.
This provision of the Act does exactly that for monies extracted through the use of a lien waiver. Just because a GC receives money from the owner or title company doesn’t mean they own it. If the GC got a sub to issue a lien waiver, and used that waiver to induce payment, the GC does not own that money and cannot use it to pay the GC’s general debts. The only use of that money the GC may make is to pay the subcontractor who issued the lien waiver. The common practice of “job-kiting,” using money intended for a particular subcontractor to pay older debts is a crime, for the same reason the bank has to return your money when you decide to withdraw, or your buddy has to return your car. It’s not theirs.
The Raymond Professional Group opinion is a case in which a sub, the William A. Pope Company attempted exactly that - to withdraw “their” money from the Raymond bankruptcy estate. Raymond claimed that the money was Raymond’s general asset, not held in trust for Pope. The legal procedure Raymond used was a Federal Rule 12(c) motion, applicable to bankruptcy under Bankruptcy Rule 7012(b), requesting a judgment on the pleadings. For purposes of a motion for judgment on the pleadings, all well-pleaded allegations contained in the non-moving party’s pleadings are to be taken as true. So the court has to assume that everything Pope claimed in their pleading is true, and see if that adds up to a win for Raymond.
Unfortuntately for all involved, we’ll never know if that is true, though there are a couple of lessons available in the remainder of the opinion. Lesson One is, “Don’t offend the judge.” Judge Schmetterer deals a nasty blow to both sides:
As a threshold matter, counsel for both parties would be well advised to consult the Standards for Professional Conduct Within the Seventh Federal Judicial Circuit: Lawyers’ Duties to Other Counsel, which states in part: “(4) We will not, absent good cause, attribute bad motives or improper conduct to other counsel or bring the profession into disrepute by unfounded accusations of impropriety.” Available at http://www.ca7.uscourts.gov/Rules/rules. htm#standards (last visited Apr. 2, 2008). The parties’ briefs on the pending Motion, and other filings in the bankruptcy proceeding and related Adversaries, are replete with accusations by both parties of alleged efforts by their adversary to mislead the court by misconstruing the facts and law. Such arguments ill serve their clients and adversely affect counsels’ credibility.
This could seem like a mild rebuke, compared to what one might hear on the street, but coming from a federal judge, it’s a severe rebuke, reflecting a serious frustration with the behavior of the attorneys.
The second lesson is to make sure you have all your facts in a row before you put time and effort into arguing the law. The Court goes on to explain that the allegations in Pope’s pleadings are not sufficient to carry the day, and finally rebukes Raymond’s counsel for failing to include the lien waiver, which the Court said contains essential facts required to issue a decision granting the money to one side or the other.
Clients who push their lawyers to be more aggressive and insult the other side should understand that doing so could result in this decision - a lot of time and money lost, and nobody wins. Lawyers, of course, should keep this opinion in mind as the reason not to give in to that temptation, since it ultimately benefits no one, and leaves a stain on the lawyer, which shouldn’t be a necessary evil needed to represent any client.
