Admiral Drywall, Inc. vs. Cullen, 56 F.3d 4 (1st Cir. 1995)

06/08/1995 Posted By: Corwin & Corwin LLP
Court: U.S. FEDERAL CIRCUIT COURT OF APPEALS
Citation: 56 F.3d 4 (1 st Cir. 1995)
Parties: ADMIRAL DRYWALL, INC. vs. CULLEN
Docket No. 95-1036
Decision Date: June 8, 1995
Judges: BOUDIN, ALDRICH AND BOWNES, SENIOR CIRCUIT JUDGES

Peter J. Gagne with whom Corwin & Corwin was on brief for
appellants.

Robert Owen Resnick with whom Posternak, Blankstein & Lund was on
brief for appellee.

AULDRICH, J. John F. Cullen is the trustee in bankruptcy of Vappi &
Co., Inc., a general contractor who defaulted after substantially
completing its contract to build a condominium complex. Plaintiffs,
Admiral Drywall and others, are unpaid subcontractors who furnished labor
and materials, and seek to impose an equitable lien on undisbursed
contract funds ahead of the trustee and all other creditors. They did not
file statutory liens, nor was there a surety bond or any other contract
for their protection. The district court affirmed the bankruptcy court's
summary judgment in favor of the trustee. We affirm.

We look to Massachusetts law for determination of interests in
assets of the bankruptcy estate. Butner v. United States, 440 U.S. 48, 54
(1979). In Ehrlich v. Johnson Service Co., 272 Mass. 385, 172 N.E. 508
(1930), a general contractor, within four months of bankruptcy paid some
of its subcontractors, and its trustee in bankruptcy sued to recover.
Defendants claimed they had equitable liens. The court held that, in the
absence of any special contract, they had none, and hence the payments to
them were voidable preferences. Plaintiffs here, who likewise have no
protection of a surety, and no special contract otherwise, can escape
foreclosure of their equitable claim only by persuading us that Ehrlich
is no longer law.

Plaintiffs would reach that result by pointing out that in Canter v.
Schlager, 358 Mass. 789, 267 N.E.2d 492 (1971), the court recognized
subrogation rights. There it held that a surety on a performance bond
that paid subcontractors has a priority "right of subrogation over the
rights of a construction contractor's trustee in bankruptcy." 358 Mass.
at 792, 267 N.E.2d at 494. Strictly this meant priority for the surety
who was "subrogated . . . to the rights of the subcontractors it paid."
Id. at 791, 267 N.E.2d at 494. This differed from Ehrlich where
subcontractors were held to have no special rights because here there was
a contract. The subcontractors had rights because "they are entitled to
rely on a payment bond providing expressly that they may sue thereon."
Id. at 795, 267 N.E.2d at 496. The court noted, further, that, unlike
Ehrlich, the surety was not claiming, timewise, in violation of the
Bankruptcy Act. "[T]he surety's right dates back to the date of the
bond." Id. at 795-96, 267 N.E.2d at 496. For present plaintiffs, who lack
a bond, and such timeliness, these are fatal distinctions.

Since we are concerned with state law choices in the treatment of
creditors, and not federal law, it is pointless for plaintiffs to argue
that Canter's reasoning and its treatment of subcontractors' rights as
depending upon the presence of a surety bond was inconsistent with
Ehrlich, and therefore must be taken as overruling Ehrlich -- although it
said it distinguished it. Our sole duty is to take state law as we find
it, not build on it. Nor would we be tempted to build. There is sound
public policy in recognizing a difference when there is a surety in the
picture. "Traditionally sureties compelled to pay debts for their
principal have been deemed entitled to reimbursement." See Pearlman v.
Reliance Insurance Co., 371 U.S. 132, 136 (1962). If they were not, there
would be few sureties. Individual subcontractors can seek mechanics
liens. Mass. Gen. L. c. 254.

Affirmed.

End Of Decision.