Constructors & Associates, Inc. v. First National Bank of Cameron

• Court: Court of Appeals of Texas
• Decided: July 14, 2011
• Docket: 03-10-00357-CV
• Status: Published

Opinion

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-10-00357-CV

Constructors & Associates, Inc., Appellant

v.

First National Bank of Cameron, Appellee

FROM THE DISTRICT COURT OF MILAM COUNTY, 20TH JUDICIAL DISTRICT NO. CV30,426, HONORABLE ED MAGRE, JUDGE PRESIDING

MEMORANDUM OPINION

This dispute involves competing claims on a series of construction subcontracts.

After Tedco Electric, Inc. (“Tedco”) filed bankruptcy, First National Bank of Cameron (the “Bank”),

a lender with a secured interest in Tedco’s accounts receivable, initiated suit against Constructors

& Associates, Inc. (“Constructors”) for payment of the outstanding balances on ten construction

subcontracts between Constructors and Tedco. In response to the parties’ competing motions for

summary judgment, the district court granted summary judgment in favor of the Bank and denied

Constructors’ motion. We reverse the trial court’s grant of summary judgment, affirm its denial of

Constructors’ summary-judgment motion, and remand the case to the trial court for further

proceedings consistent with this opinion. BACKGROUND

Constructors is a general contractor engaged in commercial construction throughout

Texas. Between November 2001 and August 2004, Constructors entered into a series of

subcontracts with Tedco where Tedco agreed to provide electrical work for ten of Constructors’

projects. At least three of these subcontracts contained identical language providing that,

If Subcontractor [Tedco] defaults or fails to carry out the Work in accordance with the Subcontract and fails within twenty-four (24) hours after receipt of written notice from Constructors to commence and continue correction of such default or failure to perform with diligence and promptness, Constructors may, without prejudice to any other remedies otherwise available to Constructors, make good such deficiencies through its own efforts and deduct the cost thereof from payments then or thereafter due Subcontractor.

In order to complete the subcontracts, Tedco further contracted with three sub-subcontractors (the

“suppliers”) to purchase goods, materials, and services for the Constructors projects.

In February 2004, Tedco executed two promissory notes payable to the Bank. One

note was secured by Tedco’s equipment. The other note, in the amount of $2,144,654, was secured

by Tedco’s “accounts and other rights to payment . . . whether or not earned by performance” and

perfected by a financing statement.

On August 24, 2004, Constructors sent notice to Tedco that Tedco was in default “on

numerous Austin and San Antonio Projects” and should, within 24 hours, provide proof of financial

security and a plan to pay all vendors. When Tedco did not respond by August 26, Constructors

notified Tedco that it was “hereby terminated on any and all projects with Constructors.”

2 On August 31, Tedco filed for Chapter 7 bankruptcy. As of the petition date,

Constructors still owed Tedco $883,291.90 on the subcontracts.1 Shortly after Tedco filed for

bankruptcy, the bankruptcy court granted the Bank leave from the automatic stay to collect the assets

named as collateral in the Bank’s promissory notes. After other relevant collateral was collected,

Tedco still owed the Bank $1,650,634.03.2 The Bank sent notice to Constructors that its perfected

security interest in Tedco’s accounts receivable required that Constructors pay the Bank

$883,291.90, the remaining balance on the subcontracts between Constructors and Tedco.

Constructors responded that because Tedco defaulted on the subcontracts, the subcontracts’ curative-

measures provision allowed Constructors to withhold payment to Tedco and use the unpaid contract

balance to complete the projects that Tedco failed to complete. Constructors claimed that it spent

the entire $883,291.90 subcontract balance along with an additional $859,113.52—for a total of

$1,742,405.42—to complete Tedco’s unfinished work. The expenses necessary to complete Tedco’s

projects included $948,374.22 in payments made to the suppliers (materialmen hired by Tedco as

sub-subcontractors on the projects) to fulfill Tedco’s contractual obligations under the sub-

subcontracts. Because Constructors’ cost to complete Tedco’s unfinished work exceeded the

remaining balance on the subcontracts between Constructors and Tedco, Constructors claimed that

it did not owe Tedco any money, and therefore the Bank had no claim.

1 The record does not indicate whether this balance represented work yet to be done or whether it also included money earned but not yet paid. 2 The record does not indicate which portion of this balance originated from the promissory note secured by Tedco’s accounts receivable, as opposed to the other promissory note secured by Tedco’s equipment.

3 After Constructors failed to pay the Bank, the Bank filed suit in district court for

breach of contract, conversion, declaratory judgment, and attorney’s fees. The parties filed cross-

motions for summary judgment and, after a hearing on the motions, the district court granted the

Bank’s motion for summary judgment and denied Constructors’ motion. The trial court further

ordered that Constructors pay the Bank $883,291.90 plus interest.3 Constructors now appeals the

granting of the Bank’s summary-judgment motion and the denial of its own.

STANDARD OF REVIEW

We review the district court’s summary judgment rulings de novo. Valence

Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005). A movant is entitled to traditional

summary judgment if (1) there are no genuine issues of material fact, and (2) it is entitled to

judgment as a matter of law. Tex. R. Civ. P. 166a(c). A movant is entitled to no-evidence summary

judgment if an adverse party presents no evidence of one or more essential elements of its claim or

defense. Id. R. 166a(i). When reviewing a summary judgment, we take as true all evidence

favorable to the nonmovant, and we indulge every reasonable inference and resolve any doubts in

the nonmovant’s favor. Valence, 164 S.W.3d at 661. When both parties move for summary

judgment on the same issues and the trial court grants one motion and denies the other, we consider

the summary-judgment evidence presented by both sides and determine all questions presented. Id.

3 While this order stated that it was not a final order for the purposes of appeal because the Bank’s request for attorney’s fees remained pending, the Bank later nonsuited its attorney’s-fees claim and the trial court entered a final judgment in favor of the Bank on October 20, 2010.

4 DISCUSSION

Constructors bases its appellate arguments on the assumption that the trial court

granted the Bank’s summary-judgment motion on the ground that the Bank prevailed on its

conversion claim as a matter of law. Though the trial court stated during the hearing, “I’m going to

grant the Plaintiff’s motion for summary judgment, finding that . . . this did constitute a conversion

of funds that were due to the bank,” the Bank’s motion for summary judgment did not clearly

identify the claim on which it requested summary judgment nor does the written order granting

summary judgment specify on what grounds the order was granted.4 The arguments made and relief

requested in the Bank’s motion, however, are inconsistent with either its breach of contract or

declaratory judgment claims.5 Therefore, we conclude that the Bank presented grounds for summary

judgment based solely on its conversion claim. The Bank did not appear to pursue its remaining

claims for breach of contract or declaratory judgment following the trial court’s grant of summary

judgment on its conversion claim, and in its final judgment, the trial court declared that “all relief

not expressly granted in this cause is hereby denied.” We will affirm the Bank’s summary judgment

if we find that the Bank proved conversion as a matter of law. See Tex. R. Civ. P. 166a(c);

Provident Life & Accident Ins. Co. v. Knott, 128 S.W.3d 211, 216 (Tex. 2003) (holding that when

4 A trial court’s comments during a hearing do not constitute written findings and conclusions and do not limit the grounds upon which an order may be upheld on appeal. See Larry F. Smith, Inc. v. Weber Co., 110 S.W.3d 611, 615 (Tex. App.—Dallas 2003, pet. denied). 5 The relief requested in the Bank’s motion, an award of $883,291.90, is not consistent with that of a declaratory judgment claim. See Tex. Civ. Prac. & Rem. Code Ann. § 37.004 (West 2008) (identifying judicial declaration as proper relief in declaratory judgment action). Further, the motion never alleges that Constructors breached any contract either to the Bank or to Tedco. Though the Bank’s motion did claim that Constructors owed Tedco money and that the Bank had a priority claim on that money, it never alleged that this debt resulted in a breach of any contract.

5 order does not state specific grounds for summary judgment, appellate court will uphold summary

judgment on any ground presented in motion). Constructors sought both no-evidence and traditional

summary judgment on the Bank’s declaratory judgment, breach of contract, and conversion claims.

While the parties generally agree on the relevant facts, they join issue as to which

party’s claim to the subcontracts’ $883,291.90 outstanding balance takes priority under the

circumstances presented. Because this question of law impacts our discussion of both the Bank’s

and Constructors’ motions for summary judgment, we will begin by addressing which party’s claim

takes priority.

According to Constructors, the Bank’s claim to the balance of the subcontracts was

superseded by two distinct priorities: first, the funds owed to Tedco’s suppliers are trust funds under

the Texas Property Code and therefore the suppliers’ right to payment, as beneficiaries of the trust

funds, took priority over the Bank’s secured claim; second, the subcontracts’ terms allowed

Constructors to offset any costs to remedy Tedco’s default against the remainder of the contract

balance.

Texas Construction Trust Fund Act

The Texas Construction Trust Fund Act, located in chapter 162 of the property code,

provides that any funds to a contractor, subcontractor, or supplier made in payment of labor and

materials are held in trust for all parties in the construction chain. Tex. Prop. Code Ann. §§ 162.001-

.033 (West 2007 & Supp. 2010); Vulcan Materials Co. v. Jack Raus, Inc., 157 B.R. 592, 597 (Bankr.

W.D. Tex. 1993) (finding that “once the owner makes a payment to either the general contractor or

to a subcontractor, that payment gives rise to a trust for all parties in the subcontract chain”). The

6 statute was enacted to protect materialmen, laborers, contractors, and subcontractors and should be

given a broad construction to effectuate its protective purposes. Vulcan Materials, 157 B.R. at 597.

In accordance with the act, all funds owed by Constructors to Tedco under the subcontracts were

trust funds as a matter of law held for the benefit of the suppliers. See Tex. Prop. Code Ann.

§§ 162.001-.002. Trust funds may only be distributed for purposes unrelated to the construction

project after all current or past due obligations to the supplier beneficiaries have been paid. See id.

§ 162.031. There are no procedural requirements for a subcontractor or supplier to qualify for

protection under the Texas Construction Trust Fund Act. See In re Waterpoint Int’l, LLC, 330 F.3d

339, 345 (5th Cir. 2003).

When two competing claims exist, one under the construction trust fund act and

the other as an assignee money lender, the trust fund claim takes priority. See Stone Fort Nat’l Bank

v. Elliott Elec. Supply, Inc., 548 S.W.2d 441, 446 (Tex. Civ. App.—Tyler 1977, writ ref’d n.r.e.)

(“[U]nder the statute and the authorities, [the materialman] was entitled to the trust funds in

preference to the [secured lender].”); Panhandle Bank & Trust Co. v. Graybar Elec. Co., Inc.,

492 S.W.2d 76, 81 (Tex. Civ. App.—Amarillo 1973, writ ref’d n.r.e.) (stating that case law

established “the preferred position of materialmen and laborers over assignee money lenders in

ascertaining priorities as to the distribution of retained funds under construction contracts”). This

priority does not disappear in bankruptcy, as trust funds are not part of the bankruptcy estate. See

Begier v. I.R.S., 496 U.S. 53, 59 (1990) (stating that money held in trust for another is not property

of debtor for purposes of bankruptcy code preferences); In re N.A. Flash Found. Inc., 298 Fed. Appx.

355, 360 (5th Cir. 2008) (concluding that in hypothetical bankruptcy, trust funds under Texas

Construction Trust Fund Act gave subcontractor priority claim to funds).

7 Therefore, the suppliers had a priority claim to any funds held in trust, i.e., each

subcontract’s entire balance, to fulfill any sub-subcontract debts against Tedco related to that project.

Because the suppliers’ claims for payment took priority over the Bank’s, any part of the $883,291.90

outstanding balance used to pay a supplier’s claim on that project was properly paid. The Bank’s

conversion claim fails as a matter of law as to those amounts.

The summary-judgment record presented here, however, does not provide the

information necessary to ascertain what portion of the subcontracts’ outstanding balances were paid

to the suppliers for their sub-subcontract debts. The record contains an expense schedule created by

Constructors that lists both the amount still owed on the subcontracts between Constructors and

Tedco and the amount paid by Constructors to the suppliers on their sub-subcontracts with Tedco,

segregated by individual subcontract. However, both parties agree that the subcontract balances

reflected in this schedule are incorrect. The schedule indicates that Tedco and Constructors’ total

outstanding balance for all subcontracts is $1,084,393.73, but the parties agree that additional

payments were made to Tedco in its last days that reduced the total balance due to $883,291.90.

These payments were unaccounted for in Constructors’ schedule and the evidence does not indicate

how the additional payments were allocated among the individual projects’ balances.

The suppliers’ trust-fund claims to the subcontracts’ balances are specific to each

individual subcontract,6 and require calculation on a project-by-project basis. However, the record

before us does not reflect the correct subcontract balance for each individual project. It is unclear

how much of each project’s balance would remain after giving priority to the suppliers’ claims.

6 This is due to the chain-of-construction nature of the construction trust fund act’s protection.

8 Though as a matter of law Constructors was entitled to pay at least some portion of the subcontracts’

balances to the suppliers who held debts on each project, under the record presented here we cannot

calculate the exact portion of the Bank’s claim that would be preempted by these priority payments.

Taking as true all evidence favorable to Constructors and indulging every reasonable

inference in Constructors’ favor, we hold that the Bank failed to meet its summary-judgment burden

because, as a matter of law, Constructors’ suppliers had a priority claim under the Texas

Construction Trust Fund Act to some portion of the remaining subcontracts’ balances.7 We therefore

reverse the trial court’s summary judgment.

Contractual Setoff

We next address Constructors’ claim that the subcontracts with Tedco contained

language contractually permitting Constructors to use the outstanding contract balance to pay for

damages resulting from Tedco’s default. Though Constructors provided summary-judgment

evidence that Tedco defaulted on “numerous Austin and San Antonio projects,” it never produced

any evidence regarding which specific subcontracts Tedco breached.8 Because the contractual setoff

language cited by Constructors is dependent on Tedco’s default, any claim of a contractual right to

setoff fails on summary judgment if, as here, no evidence exists of Tedco’s default on any specific

contract. Further, the summary-judgment evidence contains only three of the ten relevant contracts.

7 Alternatively, the Bank failed to meet its summary-judgment burden because it provided no evidence showing what portion of Tedco’s $1,650,634.03 outstanding debt originated from the note secured by Tedco’s accounts receivable. Therefore, the Bank did not prove what portion of the $883,291.90 balance it would be entitled to if its claim were successful. 8 Though Constructors’ termination of all subcontracts with Tedco created an inference that Tedco breached all of the subcontracts, no affirmative statement to that effect was made.

9 It is not clear from the record how many of the ten contracts even contain language regarding a right

to setoff. Without knowing on which contracts Tedco defaulted, we cannot analyze Constructors’

defense of contractual setoff.

For the reasons discussed above, Constructors failed to meet either its no-evidence

or traditional summary-judgment burdens. Constructors’ no-evidence motion for summary judgment

fails as to the declaratory judgment and conversion claims because the Bank provided some evidence

that it has a claim to the balance of the subcontracts. Its no-evidence motion fails as to the breach

of contract claim because the Bank produced some evidence that a contract existed between Tedco

and Constructors and that the terms of the contract were not fulfilled. In its traditional motion for

summary judgment, Constructors failed to conclusively negate any element of the Bank’s claims for

breach of contract, declaratory judgment, or conversion.9 Constructors also presented a number of

affirmative defenses in response to the Bank’s three claims. On appeal, Constructors argues that it

conclusively established its affirmative defenses of conditions precedent, offset, payment, waiver

and estoppel, and fiduciary duty. All of these affirmative defenses relate to either Constructors’

rights under the construction trust fund act or its right to a setoff under the contract. Because fact

issues remain on these two issues, Constructors failed to prove the affirmative defenses as a matter

of law. The trial court properly denied Constructors’ motion for summary judgment.

9 In addition to its contention that it conclusively negated the element of conversion regarding the Bank’s right to the subcontracts’ balances, Constructors also claims that the Bank failed to prove that the subcontracts’ balances constituted chattel that may be converted. A claim lies for conversion of money when the identification of the money is possible and there is an obligation to deliver the specific money in question. See AIG Life Ins. Co. v. Federated Mut. Ins. Co., 200 S.W.3d 280, 285 (Tex. App.—Dallas 2006, pet. denied). The subcontracts’ balances meet this characterization and are therefore chattel capable of being converted.

10 CONCLUSION

We reverse the trial court’s summary judgment in favor of the Bank and affirm its

denial of Constructors’ motion for summary judgment. We remand this case to the trial court for

further proceedings consistent with this opinion.

__________________________________________

Diane M. Henson, Justice

Before Justices Puryear, Henson and Goodwin

Affirmed in part; Reversed and Remanded in part

Filed: July 14, 2011