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Docket Number

Bankruptcy No. 80-01254-W, Adv. No. 81-1128-W.

Attorney(S)

Mark McGowan, Detroit, Mich., for Const. Pipe Co. Peter A. Nathan, Detroit, Mich., for Mahon Indus. Corp. Arnold G. Shulman, Dearborn, Mich., for Ford Motor Co.

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Smart Summary

Summary of Memorandum Opinion and Order — In the Matter of Mahon Industrial Corporation

Factual and Procedural Background

Ford Motor Company hired Mahon Industrial Corporation as general contractor for construction of a body phosphate machine at the Ford Assembly Plant in Claycoma, Missouri (the "Kansas City Job"). Pursuant to a November 22, 1976 written purchase order, Mahon subcontracted certain labor and materials to Construction Pipe Company. Construction Pipe performed the contracted services and was fully paid for those items; subsequently it performed additional extra work (mechanical piping for installation on the second floor) for which it claims it has not been paid $40,335.00.

Construction Pipe filed suit against Mahon in Saginaw County Circuit Court on March 7, 1978 seeking the unpaid amount. On June 13, 1978 Ford issued an invoice reflecting a $20,000.00 offer credited to Mahon as a purported settlement amount; Mahon apparently did not accept this credit. Mahon filed a third-party complaint against Ford on March 27, 1979 listing, among other amounts, the $40,335.00 claimed by Construction Pipe. On January 29, 1980 Ford and Mahon executed a settlement agreement for $3,870,486.00 containing broad release language settling "any and all claims of whatsoever kind or nature" as of that date. A stipulation and order dismissing Mahon's third-party complaint was signed on February 26, 1980.

An involuntary Chapter 7 bankruptcy petition was filed against Mahon on February 13, 1980; the case was converted to Chapter 11 on March 14, 1980 and reconverted to Chapter 7 on August 4, 1981. This Court released most of the settlement fund, leaving approximately $318,000.00; Construction Pipe's claim remained unresolved. At a prior pre-trial the Court applied the Michigan Builders Trust Fund Act, awarded Construction Pipe the $20,000.00 held by Ford pursuant to the June 13, 1978 invoice, and left open the possibility of additional recovery from the settlement fund pending further proceedings. The present opinion resolves the remaining dispute.

Legal Issues Presented

Whether Construction Pipe Company has sufficiently traced its claimed Kansas City Job funds into the Ford–Mahon settlement fund so as to assert an entitlement under the Michigan Builders Trust Fund Act.
Whether the Construction Pipe claim was included within the scope of the Ford–Mahon settlement agreement (i.e., whether the settlement covered the plaintiff's claim and thus provided the source from which Construction Pipe may be paid).

Arguments of the Parties

Mahon Industrial Corporation's Arguments

Mahon argued that the Michigan Builders Trust Fund Act was inapplicable as against the debtor (Mahon).
Mahon conceded it holds the settlement funds in trust under the Act but contended that Construction Pipe could not make a claim against those funds because Construction Pipe could not trace the settlement funds to the Kansas City Job; Mahon asserted the Kansas City Job was not included in the settlement agreement with Ford.

Construction Pipe Company, Inc.'s Arguments

Construction Pipe maintained it had traced its Kansas City Job claim into the settlement fund: the claim was presented in letter form to Mahon and remained unsettled as of January 29, 1980.
Construction Pipe argued further that its claim was specifically mentioned in Mahon's third-party complaint against Ford, which was dismissed in connection with the settlement—indicating the claim was within the meaning and scope of the settlement agreement.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Schuyler v. Littlefield, 232 U.S. 707, 34 S.Ct. 466, 58 L.Ed. 806 (1914)	Supports the principle that a claimant must prove title to funds by establishing the original trust relationship, identifying the trust fund, and tracing the fund where commingled.	The Court cited this case to state the tracing burden and then found the trust relationship conceded and the trust fund identified, leaving only the tracing question to be resolved.
American Service Company v. Henderson, 120 F.2d 525 (4th Cir. 1941)	Used to support the general tracing requirement for claimants asserting rights in trust or commingled funds.	The Court relied on this authority as part of the body of precedent establishing the claimant's burden to trace into commingled funds.
Sonnenschein v. Reliance Insurance Company, 353 F.2d 935 (2d Cir. 1965)	Holds that the plaintiff is required to specifically identify, either in original or substituted form, the funds from which it claims it is owed.	The Court cited Sonnenschein to emphasize the need for Construction Pipe to specifically identify the settlement funds it claimed; the Court concluded the plaintiff met this requirement.
Johnson v. Morris, 175 F.2d 65 (10th Cir. 1949)	States that where funds are commingled, tracing is satisfied if the claimant can clearly show that his property went into the common mass of property which came into the hands of the trustee.	The Court applied this principle to find that Construction Pipe had sufficiently shown its property (claim) went into the common settlement fund and thus satisfied the tracing requirement.

Court's Reasoning and Analysis

The Court began by applying the established burden for a claimant seeking funds held in trust: the claimant must prove title by establishing (1) the original trust relationship, (2) identification of the trust fund, and (3) where the fund has been commingled, sufficient tracing into the fund. The Court observed that the trust relationship under the Michigan Builders Trust Fund Act was conceded by Mahon and that the settlement fund had been identified as the trust fund at issue.

With the first two elements satisfied, the Court focused on the single remaining issue—tracing. The Court examined testimonial evidence: (a) testimony that Construction Pipe's claim was outstanding at the time of the January 29, 1980 settlement and was specifically listed in Mahon's third-party complaint against Ford; (b) testimony from Mahon's president (Frimberger) that Mahon intended the settlement proceeds to be used to satisfy outstanding claims, including the plaintiff's; and (c) testimony from Ford's representative (Irvine) that the settlement was meant to provide funds to pay off claims generally and that no specific allocation of funds to particular claims occurred, although Irvine stated he personally knew nothing of Construction Pipe's claim as of January 29, 1980.

The Court interpreted the settlement agreement's broad language—reciting that Ford would pay the settlement "in full and complete satisfaction of any and all claims of whatsoever kind or nature which Mahon has or may have against Ford as of the date thereof"—as covering known and unknown claims. The Court rejected Mahon's attempt to exclude Construction Pipe's claim on the basis that Ford's representative did not know of the claim, reasoning that the agreement's broad terms and the inclusion of the claim in Mahon's third-party complaint demonstrated the claim was encompassed by the settlement.

Applying the cited tracing authorities (including Sonnenschein and Johnson v. Morris), the Court concluded that Construction Pipe had sufficiently traced its claim from the Kansas City Job into the settlement fund: the claim was outstanding at the time of settlement, was listed in Mahon's pleadings that were dismissed in connection with the settlement, and there was no specific allocation excluding the claim from the settlement fund. Therefore the tracing requirement was satisfied and Construction Pipe was entitled to recover from the settlement fund.

Holding and Implications

Holding: The Court awarded Construction Pipe Company, Inc. the sum of $40,335.00, less $20,000.00 already received, to be paid from the settlement fund held pursuant to the Michigan Builders Trust Fund Act. No interest was awarded.

Implications: The direct effect of the decision is that Construction Pipe is entitled to an additional payment of $20,335.00 from the Ford–Mahon settlement fund. The opinion resolves the tracing question in favor of the subcontractor by finding that the subcontractor's claim was encompassed by the broad settlement language and was sufficiently traced into the commingled settlement fund. The opinion does not purport to announce or discuss any broader new precedent beyond applying existing tracing principles to the facts at hand.

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In the Matter of MAHON INDUSTRIAL CORPORATION, a Michigan corporation, Debtor. CONSTRUCTION PIPE COMPANY, INC., a Michigan corporation, Plaintiff, v. MAHON INDUSTRIAL CORPORATION, a Michigan corporation, and Ford Motor Company, a Delaware corporation, Defendants.

MEMORANDUM OPINION AND ORDER

GEORGE E. WOODS, Bankruptcy Judge.

Ford Motor Company (Ford) hired Mahon Industrial Corporation (Mahon) to be the general contractor with regard to the construction of a body phosphate machine at the Ford Assembly Plant in Claycoma, Missouri (Kansas City Job). Pursuant to a written purchase order, dated November 22, 1976, Mahon hired Construction Pipe Company as a subcontractor to provide certain labor and materials with respect to the job. In this regard, there is no question that Construction Pipe properly provided the services and materials for which it was retained and that it was fully paid by Mahon. Subsequent to November 22, 1976, Mahon requested Construction Pipe to provide certain labor and materials over and above those specified in the November 22 purchase order. This work was in connection with the installation of the body phosphate machine on the second floor rather than on the ground floor of the plant and concerned the installation of mechanical piping. Mahon apparently agreed to pay Construction Pipe additional compensation for this extra work. Construction Pipe claims it has not been paid $40,335.00 for performing the above mentioned work.

On March 7, 1978, Construction Pipe filed a complaint against Mahon in the Saginaw County Circuit Court which sought, among other things, to recover the $40,335.00. An invoice, dated June 13, 1978, purported to reflect an offer of settlement by Ford to Mahon in the amount of $20,000.00 which would have been considered full settlement of the Mahon claims. Mahon apparently rejected this offer. On March 27, 1979, Mahon filed a third party complaint against Ford claiming $298,077.00. This complaint specifically listed the $40,335.00 claimed by Construction Pipe. On January 29, 1980, a settlement in the amount of $3,870,486.00 was entered into between Ford and Mahon. The settlement agreement recited that Mahon had performed certain multiple jobs for Ford at Ford plants and that Mahon had claimed money in excess of purchase order amounts for a variety of reasons. The first paragraph of the agreement reads:

"Ford shall pay to Mahon the sum of $3,870,486.00 (settlement fund) in full and complete satisfaction of any and all claims of whatsoever kind or nature which Mahon has or may have against Ford as of the date thereof."

Paragraph 2 of the agreement states:

"Mahon hereby releases Ford from all claims, of whatsoever kind or nature, it has against Ford as of the date hereof, except payment of $3,870,486.00 in accordance with paragraph 1 above, and agrees to dismiss with prejudice all pending litigation by Ford, wherever pending."

In connection with this agreement, Ford prepared a stipulation and order for dismissal of the third party complaint. The order was signed February 26, 1980. In addition to the settlement, Ford agreed to allow Mahon to try and collect the $20,000.00 previously credited to Mahon by way of the June 13, 1978 purchase order, since that amount had already been invoiced by Ford.

On February 13, 1980, an involuntary bankruptcy petition was filed against Mahon under Chapter 7 of the Bankruptcy Code. The case was converted to Chapter 11 on March 14, 1980 and was reconverted to Chapter 7 on August 4, 1981.

This Court has issued a number of orders for the release of all but approximately $318,000.00 of the fund created by the settlement agreement. A large number of claims against Mahon were thereby settled. The Construction Pipe claim was not included.

At the pre-trial hearing on this matter, counsel for Mahon argued that the Michigan Builders Trust Fund Act was inapplicable as against the debtor. On November 24, 1981, the Court ruled that the Act was applicable and that Construction Pipe be awarded the $20,000.00 held by Ford pursuant to Ford's June 13, 1978 invoice. The Court further provided for the possibility of additional payments to Construction Pipe under the Builders Trust Fund theory pending future findings of this Court. The total amount of the Construction Pipe claim is less than that currently remaining in the settlement fund.

At trial, John D. Frimberger, president of Mahon, testified that Mahon demanded payment from Ford for certain extras. This demand was in the form of a letter dated August 10, 1977. The letter lists $211,613.00 claimed by Mahon against Ford. This figure represents the amount Mahon owed to its piping contractor which Frimberger indicated as being Construction Pipe.

As to the $20,000.00 invoiced by Ford as a purported settlement, Frimberger testified that Mahon did not respond to this offer and believed it to be rejected.

Frimberger further testified that the complaint filed by Mahon against Ford specifically included the plaintiff's claim against Mahon; that Mahon sued Ford on a number of other claims for jobs throughout the country for extras such as those involved herein; and that the claims of Construction Pipe were outstanding prior to the settlement. Frimberger believed that all the money received by Mahon through the settlement was to be used to satisfy all claims including the plaintiff's.

James Irvine, called as a witness, had represented Ford in the negotiations regarding the extras. He explained that the purpose of the settlement agreement was to allow Mahon to pay off the claims and have a little extra left over to stay in business. The agreement required $870,000.00 to be held back in regard to various jobs. The balance of the fund was to be used as an "umbrella" for settling all "known and unknown claims." There was therefore no specific allocation of the money to any of the claims which were outstanding. Irvine simply stated that Ford was to pay for all the jobs done for Ford by Mahon. Further testimony revealed that he knew nothing of the claim by Construction Pipe as of January 29, 1980.

The settlement fund is held in trust by Mahon pursuant to the Michigan Builders Trust Fund Act, M.C.L.A. § 570.151, which reads:

"In the building construction industry, the building contract fund paid by any person to a contractor, or by such person or contractor to a subcontractor, shall be considered by this act to be a trust fund, for the benefit of the person making the payment, contractors, laborers, subcontractors or materialmen, and the contractor or subcontractor shall be considered the trustee of all funds so paid to him for building construction purposes."

Mahon concedes it holds the settlement funds in trust under the Act but alleges that in order for Construction Pipe to make a claim against the funds, it must be able to trace the funds to the Kansas City Job. Mahon contends that the plaintiff cannot trace the funds since the Kansas City Job was not included in the settlement agreement with Ford.

Construction Pipe maintains it has traced its claim from the Kansas City Job to the settlement fund. The fact that it presented its claim in letter form to Mahon and that said claim was not settled as of January 29, 1980, reflects that it was a claim within the meaning of the settlement agreement and therefore was intended to be included therein. Construction Pipe contends it has further satisfied the tracing requirement because its Kansas City claim is specifically mentioned in the third party complaint by Mahon against Ford, which complaint was dismissed in lieu of the settlement agreement.

The plaintiff has the burden of proving its title to the funds. It must establish the original trust relationship, identify the trust fund and, where the fund has been commingled with the general property of the debtor, sufficiently trace the trust fund. See Schuyler v. Littlefield, 232 U.S. 707, 34 S.Ct. 466, 58 L.Ed. 806 (1914); American Service Company v. Henderson, 120 F.2d 525 (4th Cir. 1941). The plaintiff is required to specifically identify, either in original or substituted form, the settlement funds from which it claims it is owed. See Sonnenschein v. Reliance Insurance Company, 353 F.2d 935 (2d Cir. 1965). Further, where the funds were commingled it has been held that the tracing requirement is satisfied if the claimant can clearly show that his property went into the common mass of property which came into the hands of the trustee. Johnson v. Morris, 175 F.2d 65 (10th Cir. 1949).

In the instant case, the trust relationship is conceded and the trust fund has been identified. The only question remaining, therefore, is whether the plaintiff has sufficiently traced its property. This question can be answered by determining whether the claim by the plaintiff for its Kansas City work was included in the settlement agreement executed by Ford and Mahon.

The testimony presented before this Court shows that the Construction Pipe claim was outstanding at the time of the settlement agreement and that said claim was included in the third party complaint by Mahon against Ford which was settled pursuant to the agreement.

The settlement agreement purported to settle all claims of "whatsoever kind or nature", whether known or unknown. Mahon attempted to show through Mr. Irvine that the Construction Pipe claim was not known by Irvine at the time of the settlement and therefore could not have been included. In light of the testimony that all claims known and unknown were to be settled, this Court would be hard pressed to find that the agreement settled all the claims listed by Mahon in the third party complaint except those of Construction Pipe. Additionally, testimony by Frimberger revealed that he believed the purpose of the agreement was to settle all claims including that of the plaintiff.

The broad language of the settlement agreement and the testimony before this Court clearly indicate the fact that the Construction Pipe claim was included in the settlement agreement and that it was to be settled thereby.

This Court agrees that the plaintiff has sufficiently traced its claim from the Kansas City Job to the settlement fund and hence plaintiff is entitled to be paid out of those funds.

An award is hereby made of $40,335.00, less $20,000.00 received, to the plaintiff Construction Pipe Company, Inc. No interest is awarded.

So ordered.

MATTER OF MAHON INDUS. CORP., (Bankr.E.D.Mich. 1982)