Insite Corporation Inc. v. Walsh Construction Company Puerto Rico
Filing
10
OPINION AND ORDER. The bankruptcy court's decision granting summary judgment, Case No. 11-11209, Docket No. 123, is AFFIRMED. Furthermore, the bankruptcy court's opinion and order denying Insite's motion to reconsider the summary jud gment decision, Case No. 11-11209, Docket No. 146, and judgment dismissing the adversary proceeding, Case No. 11-11209, Docket No. 147, are also AFFIRMED. Judgment shall be entered accordingly. Signed by Judge Francisco A. Besosa on 03/21/2017. (brc)
IN THE UNITED STATES ISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
INSITE CORPORATION,
Plaintiff,
v.
Civil No. 16-2010 (FAB)
WALSH
CONSTRUCTION
PUERTO RICO,
COMPANY,
Defendant.
OPINION AND ORDER
BESOSA, District Judge.
Before the Court is appellant Insite Corporation (“Insite”)’s
appeal from the United States Bankruptcy Court for the District of
Puerto
Rico
bankruptcy
(“bankruptcy
court’s
court”).
Opinion
and
Insite
Order
is
granting
appealing
appellee
the
Walsh
Construction Company (“Walsh”)’s summary judgment motion, Case
No. 11-11209,
Insite’s
Docket
motion
for
No.
123,
the
reconsideration
Opinion
of
the
and
Order
summary
denying
judgment
decision, Case No. 11-11209, Docket No. 146, and the judgment
dismissing the adversary proceedings between Insite and Walsh,
Case No. 11-11209, Docket No. 147.
For the reasons set forth
below, the Court AFFIRMS the bankruptcy court’s decisions in toto.
Civil No. 16-2010 (FAB)
I.
2
Background
This case arises from a dispute between Walsh, a building
contractor, and Insite, a subcontractor. 1
On September 30, 2010,
the Department of Veterans Affairs awarded Walsh a construction
contract titled “Seismic Correction Phase II, Outpatient Addition”
(“Veteran Affairs project”).
at
p.
2.)
Subsequently,
(“executory
contract”)
construction
services
(Case No. 11-11209, Docket No. 123
Walsh
with
in
entered
Insite
into
to
furtherance
of
a
subcontract
complete
the
Veteran
certain
Affairs
project. Id. The executory contract required Insite to commission
and compensate its own subcontractors and suppliers. (Case No. 1111209, Docket No. 146 at p. 2.)
Insite fulfilled its contractual obligations without incident
until the end of 2011.
paid
Insite
in
full
December 30, 2011.
As Insite’s own records reflect, Walsh
for
all
final
pay
applications
as
of
(Case No. 11-11209, Docket No. 123 at p. 3.)
Insite, however, failed to pay its subcontractors and suppliers in
violation of the executory contract.
failure
to
compensate
Id.
subcontractors
and
Because of Insite’s
suppliers,
Walsh
delivered a notice of default to Insite at approximately 9:00 a.m.
1
The facts set forth herein are based on the undisputed material
facts contained in the Summary Judgment Opinion and Order and
Opinion, and Order denying Insite’s motion for reconsideration.
(Case No. 11-11209, Docket Nos. 123 & 146.)
Civil No. 16-2010 (FAB)
on December 30, 2011.
3
Id.
That very same day, at approximately
5:49 p.m., Insite filed for Chapter 11 bankruptcy protection in
the bankruptcy court.
Id.
Two months after filing for bankruptcy, Insite moved to assume
the executory contract. 2
Id. at p. 3.
In the motion, Insite
conceded that it was in default, but proposed to cure arrears upon
assumption of the executory contract.
Id.
Before the bankruptcy
court ruled on the motion to assume the executory contract, Insite
demanded payment from Walsh.
at p. 2.)
(Case No. 11-11209, Docket No. 146
Walsh responded that Insite’s failure to pay its
subcontractors
and
suppliers
further payments from Walsh.
constituted
Id.
a
breach,
precluding
The bankruptcy court granted
the motion to assume the contract on March 29, 2012.
11209, Docket No. 123 at p. 3.)
(Case No. 11-
Insite remained in default,
however, and completed no additional work in furtherance of the
executory contract.
Id.
Insite initiated an adversary proceeding against Walsh on
May 29, 2012 based on alleged violations of the automatic stay set
forth in 11 U.S.C. Section 362.
2
Id.
According to Insite, Walsh
Insite, along with its creditor Banco Cooperativo de Puerto Rico
and surety company United Surety and Indemnity Company, requested
that the bankruptcy court permit: (1) assumption of the executory
contract, and (2) the use of funds to satisfy operating expenses
at the Veteran Affairs project. (Case No. 11-11209, Docket No. 44
at pp. 1-2.)
Civil No. 16-2010 (FAB)
withheld
payments,
4
subcontracted
personnel
to
complete
assigned to Insite, and confiscated property owned by Insite.
Complaint, Case No. 11-11209, Docket No. 1.
work
See
Insite claims that
Walsh withheld payments in the amount of $586,800, seized tools
belonging to Insite at the Veteran Affairs project site, and
demanded damages in the amount of $394,000 plus legal expenses and
attorney fees.
to
payment
Id.
from
In essence, Insite argues that it is entitled
Walsh
because
outstanding
executory
contract
balances fall within the bankruptcy estate. 3
On March 29, 2015, the bankruptcy court granted Walsh’s motion
for summary judgment, concluding that Walsh had not violated the
automatic
stay.
In
so
doing,
the
bankruptcy
court
rejected
Insite’s argument that executory contract balances were property
of the bankruptcy estate and protected by the automatic stay.
(Case No. 11-11209, Docket No. 123 at p. 4.)
denied
Insite’s
motion
for
reconsideration
The bankruptcy court
and
dismissed
the
adversary proceeding between Insite and Walsh on March 28, 2016.
(Case No. 11-11209, Docket Nos. 146 & 147.)
3
The bankruptcy estate is created upon the filing of a bankruptcy
petition and is subject to the jurisdiction of the bankruptcy
court.
11 U.S.C. § 541. Property of the bankruptcy estate is
protected by the automatic stay, which includes a stay on
litigation and lien enforcement. 11 U.S.C. § 362(a).
Civil No. 16-2010 (FAB)
II.
5
Standard of Review
The Court has jurisdiction over this appeal pursuant to 28
U.S.C. § 158(a).
On appeal, the Court may affirm, modify, or
reverse a bankruptcy court’s judgment, or remand with instructions
for further proceedings.
Fed.R.Bkrtcy.P. 8013.
“The scope of
this task, however, varies depending on whether the appeal revolves
around findings of facts or conclusions of law.”
Segarra-Miranda
v. Perez-Padro, 482 B.R. 59, 67 (D.P.R. 2012). The Court considers
a bankruptcy court’s conclusions of law de novo.
Umpierrez, 121 F.3d 781, 785 (1st Cir. 1997).
Palmacci v.
The Court must,
therefore, analyze and resolve issues from the same perspective of
the bankruptcy court as if the issues were decided for the first
time.
Segarra-Miranda,
482
B.R.
at
67
(citing
Water
Keeper
Alliance v. U.S. Dept. of Defense, 271 F.3d 21, 31 (1st Cir.
2001)).
Accordingly, the Court will review the bankruptcy court’s
opinion and order granting summary judgment de novo.
III. Discussion
Insite appeals three decisions from the bankruptcy court:
(1) the grant of summary judgment to Walsh, Case No. 11-11209,
Docket No. 123; (2) the denial of Insite’s motion to reconsider
summary judgment, Case No. 11-11209, Docket No. 146; (3) and
dismissal of the adversary proceeding, Case No. 11-11209, Docket
No. 47.
The
Court
will
address
only
the
bankruptcy
court’s
Civil No. 16-2010 (FAB)
6
decision granting summary judgment to Walsh because there is no
reason to disturb the bankruptcy court’s denial of Insite’s motion
for reconsideration or dismissal of the adversary proceeding if
the summary judgment decision withstands de novo review.
Insite
contends
has
that
raised
the
nine
issues
bankruptcy
on
court
appeal.
erred
Insite
in
first
“completely
disregarding evidence” that Walsh owed Insite $179,897 for work
performed in December 2011.
p. 3.)
(Case No. 11-11209, Docket No. 3 at
This argument lacks merit.
In its statement of undisputed
material facts, Walsh averred:
[A]s of December 30, 2011, according to
Insite’s own Payment Application, Insite had
been fully paid for all final Payment
Applications which Insite had submitted to
Walsh.
(Case No. 11-11209, Docket No. 119 at p. 2.)
Insite admitted that
this statement was true, conceding that Walsh had paid Insite in
full as of December 30, 2011, the date in which Insite filed for
bankruptcy.
Id.
Accordingly, the Court rejects Insite’s argument
that the bankruptcy court disregarded “evidence” that Walsh owed
Insite any money as of December 30, 2011.
The second, fifth, seventh, and eighth issues raised on appeal
are
premised
on
Insite’s
argument
that
the
bankruptcy
court
disregarded evidence that Walsh owed Insite $591,953 for work
Civil No. 16-2010 (FAB)
7
performed from December 2011 through March 2012.
Id. at pp. 3-4. 4
This argument is unpersuasive.
After the bankruptcy court granted Insite’s motion to assume
the executory contract, essentially providing Insite a second
opportunity to fulfill the contract with Walsh, Insite again failed
to pay its subcontractors and suppliers.
Docket No. 123 at p. 4.)
held
that
“contract
(Case No. 11-11209,
The First Circuit Court of Appeals has
retainages
do
not
become
property
of
a
contractor until contractual obligations such as payment of the
laborers and materialmen are met.”
Caribbean Resort Constr. &
Maint., Inc. v. Coco Beach Util. Co., 318 B.R. 241, 247 (Bankr.
D.P.R.
2003)
(citing
Segovia
Development
Corporation
v.
Constructora Maza, Inc., 628 F.2d 724, 728 (1st Cir. 1980)).
Because “Insite never cured arrears by paying laborers, suppliers
and materialmen,” it never became entitled to contract balances
after defaulting on payments to its subcontractors and suppliers.
(Case No. 11-11209, Docket No. 147 at p. 7.)
4
That is, Walsh did
The second, fifth, seventh, and eight issues on appeal assert,
respectively, that: (1) the bankruptcy court disregarded evidence
that Walsh owed Insite $591,953, (2) the bankruptcy court erred in
finding that Insite owed contractors more than $591,953, (3) the
bankruptcy court erred in concluding that Walsh did not owe Insite
$591,953 without receiving and paying claims from subcontractors
and suppliers and, (4) the bankruptcy court erred in disregarding
evidence that Walsh defaulted on $591,953 before the Court granted
Insite’s motion to assume its contract with Walsh. (Docket No. 3
pp. 3-4.)
Civil No. 16-2010 (FAB)
8
not “owe” Insite $591,953 because Insite breached the executory
contract.
As the bankruptcy court held, “these monies are not
property of the estate and consequently, Walsh did not violate the
automatic stay by withholding payment from Insite.” 5 Id.
The
third
bankruptcy
and
court
fourth
erred
by
issues
not
on
voiding
appeal
claim
Walsh’s
that
the
post-petition
assertion of contractual set-off rights without obtaining relief
5
In its reply brief, Insite contends that the bankruptcy court
misapplied Caribbean Beach, 318 B.R. 241 (Bank. P.R. 2003). Docket
No. 9 at p. 4.
According to Insite, Caribbean Beach is
distinguishable because the laborers and suppliers in that case
“asserted direct claims” to the owner of the project, bypassing
the subcontractor. (Case No. 11-11209, Docket No. 9 at p. 5.) As
Insite notes, subcontractors and suppliers submitted claims to
Insite, not to Walsh. Id. The court in Caribbean Beach, however,
did not anchor its analysis on the distinction between direct and
indirect claims. 318 B.R. 241 (Bankr. P.R. 2003). In Caribbean
Beach, as in this case, the subcontractor neglected to pay laborers
and suppliers in violation of its contract with the project owner.
Id. The project owner consigned with the Clerk of the Court funds
to pay laborers and suppliers to avoid additional litigation
pursuant to Puerto Rico law allowing laborers and suppliers to sue
owners directly. Id. at p. 14. This distinction between direct
and indirect claims is tangential to the court’s central ruling
that “the retainage held by Coco Beach Utility under the Second
Contract is not property of the estate under section 541(a)(1) of
the Bankruptcy Code until the laborers and suppliers are paid in
full according to the terms and conditions set forth in the Second
Contract.” Id. at p. 25. This Court, therefore, rejects Insite’s
contention that the bankruptcy court erred in its understanding
and application of First Circuit Court of Appeals precedent.
Civil No. 16-2010 (FAB)
9
from the automatic stay. 6
pp. 14 & 26.)
(Case No. 11-11209, Docket No. 3 at
Once more, this argument is based on the assumption
that Walsh withheld contract balances from Insite.
As the Court
previously discussed, these contract balances were not part of the
bankruptcy
estate
because
subcontractors and suppliers.
Insite
defaulted
on
payments
to
(Case No. 11-11209, Docket No. 123
at p. 6.) (“Walsh did not violate the automatic stay by withholding
payment to [Insite].”)
What is more, pursuant to the executory
contract, failure to “make prompt payment for [Insite’s] workers,
6
Article 3.12 of the executory contract provides that:
“Contractor [Walsh] may withhold amounts otherwise due under this
agreement or any other agreement between the parties to cover
Contractor’s [Walsh’s] reasonable estimate of any costs or
liability Contractor [Walsh] has incurred or may incur for which
Subcontractor [Insite] may be responsible.”
(Docket No. 9 at
p. 7.)
Article 8.1 of the executory contract states that: “If the
Subcontractor [Insite] refuses or fails to [. . .] make prompt
payment for its workers, subcontractors, and suppliers [. . .] and
fails within seventy-two hours after receipt of written notice to
commence correction of such default the contractor shall have the
right to any of the following remedies: I) supply such number of
workers and quantity of materials, equipment, and other facilities
as the contractor [Walsh] deems necessary for the completion of
the Subcontractor’s work [. . .] and charge the cost to the
subcontractor who shall be liable to the payment of the same,
including reasonable overhead, profit and attorney fees; contract
with additional contractors to perform such part of the
Subcontractor’s work as the Contractor shall determine [. . .] and
charge the cost to the Subcontractor; and/or II) withhold payments
of any money due the Subcontractor pending corrective action to
the extent required by and to the satisfaction of the Contractor.”
(Docket No. 9 at p. 15.) (emphasis added)
Civil No. 16-2010 (FAB)
subcontractors,
and
10
suppliers”
permitted
Walsh
to
“withhold
payments of any money due [Insite] pending corrective action.”
(Docket No. 6 at p. 17.)
Accordingly, the Court rejects the notion
that the automatic stay prevented Walsh from withholding contract
balances as a basis to reverse the bankruptcy court’s decisions.
With regard to the sixth issue on appeal, Insite argues that
the bankruptcy court concluded erroneously that Walsh received
funds from the federal government despite failing to “pay amounts
owed to Debtor and others due to labor and materials furnished in
the Project.”
(Docket No. 3 at p. 4.)
Insite infers that Walsh
should not receive funds from the federal government because Walsh
withheld payments to Insite.
Id.
Insite’s argument assumes that
payment to Walsh from the federal government was contingent on
Walsh paying Insite.
There is nothing in the record to support
this allegation and Insite has presented no authority in support
of this argument.
Furthermore, the Court is at a loss as to what
specific remedy Insite seeks in advancing this argument.
The ninth and final issue on appeal is Insite’s claim that
the
bankruptcy
assumption
court
order
incorrectly
[Insite]
became
held
that
obligated
“pursuant
to
to
comply
the
with
obligations under the Subcontract after Walsh had defaulted on its
payment obligations under the same.”
argument
assumes
incorrectly
that
(Docket No. 3 at p. 4.)
Walsh
defaulted
on
The
payment
Civil No. 16-2010 (FAB)
11
obligations to Insite. For the reasons previously discussed, Walsh
was under no obligation to make any payments to Insite after the
latter defaulted on its obligations to its subcontractors. 7
In
sum, no issue raised in Insite’s appeal warrants this Court to
disturb the bankruptcy court’s final decisions.
IV.
Conclusion
For the reasons set forth above, the bankruptcy court’s
decision granting summary judgment, Case No. 11-11209, Docket
No. 123, is AFFIRMED.
and
7
order
denying
Furthermore, the bankruptcy court’s opinion
Insite’s
motion
to
reconsider
the
summary
Moreover, the Court rejects Insite’s calculations as flawed
because they belie previous representations to the bankruptcy
court. To arrive at the amount of $591,953, Insite cites to three
outstanding pay applications submitted to Walsh. (Docket No. 3 at
pp. 8-9.)
The first pay application is based upon work and
materials furnished by Insite before December 30, 2011.
Id.
Insite’s reliance on this first pay application is disingenuous.
This Court reiterates that Insite admitted that as of December 30,
2011, Walsh had paid Insite for all final pay applications. (Case
No. 11-11209, Docket No. 147 at p. 5.)
Insite cannot claim
simultaneously that Walsh paid and failed to pay Insite for work
and materials furnished before December 30, 2011. Id. This Court
will not disturb the bankruptcy court’s decision granting summary
judgment on contradictory and inconsistent grounds. The remaining
two pay applications that Insite relies upon to arrive at the
$591,953 amount stem from alleged work and materials provided by
Insite after failing to pay subcontracts and suppliers. (Docket
No. 3 at p. 9.) Because Insite’s failure to pay its subcontractors
and supplies constituted a breach of the executory contract, as
the bankruptcy court ruled, Insite “never became entitled to
receive any further payment from Walsh.”
(Case No. 11-11209,
Docket No. 147 at p. 7.) Thus, the Court rejects Insite’s second,
fifth, seventh, and eighth issues on appeal because they are
premised on inaccurate assumptions.
Civil No. 16-2010 (FAB)
12
judgment decision, Case No. 11-11209, Docket No. 146, and judgment
dismissing the adversary proceeding, Case No. 11-11209, Docket
No. 147, are also AFFIRMED.
Judgment shall be entered accordingly.
IT IS SO ORDERED.
San Juan, Puerto Rico, March 21, 2017.
s/ Francisco A. Besosa
FRANCISCO A. BESOSA
UNITED STATES DISTRICT JUDGE
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