City of Vallejo v. Hutson et al

1 printed pages contain little extracted OCR body text; searchable legal-body completeness has not been established for those pages.

OCR transcription for search; preserved printed pages are authoritative

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

295

26

INFORMATION

Entered on Docket
October 27, 2005

GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA

Signed: October 24, 2005

at -

wh, fi NALS
LESLIE TCHAIKOVSKY
U.S. Bankruptcy J udge

UN TED STATES BANKRUPTCY COURT
NORTHERN DISTRI Cr OF CALI FORN A

In re No. 04-41779 TG
Chapter 13
HAROLD WAYNE HUTSON etc.,
Debt or.
ee /
CITY OF VALLE] O, A.P. No. 05-4253 AT
Plaintiff,
VS.
HAROLD WAYNE HUTSON etc.,
et al.,
Def endant.
/

MEMORANDUM OF DECISION RE CITY OF VALLEJO S FEE APPLICATION
The City of Vallejo (the “City”) filed an application for
attorneys’ fees and costs in connection wth the above- capti oned
adversary proceeding. Defendants Insurance Company of the Wst
and Explorer Insurance Company (the “Sureties”) filed an
opposition to the Application. For the reasons stated below, the

application is denied.

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
1Additional stop notices (the “Additional Stop Notices”)
were served on the City by other subcontractors in March 2004.
On January 10, 2005, the City was provided with release bonds
with respect to the Additional Stop Notices.
2
SUMMARY OF FACTS AND CONTENTIONS
Prior to the commencement of this bankruptcy case, the City
contracted with the Debtor to perform a work of improvement and
required the Debtor to provide the City with one or more payment
and/or performance bonds (the “Bonds”). The Sureties are the
issuers of the Bonds.
In October 2003, before the work of improvement was completed,
one of the Debtor’s subcontractors, Thomas & Pratt Highway
Specialty Services, Inc. (“Thomas & Pratt”), served a stop notice
on the City in the amount of $22,060 (the “First Stop Notice”).
Later that month, Thomas & Pratt served a second stop notice on
the City in the amount of $42,950.27 (the “Second Stop Notice”).
After the Second Stop Notice was served, the Sureties provided the
City with a release bond (the “Release Bond”) in the amount of
$64,425.40, and the funds then due were released to the Debtor.1
The Debtor completed the project, and the City accepted the
work on March 30, 2004. On April 1, 2004, the Debtor filed a
chapter 13 petition. At that time, the City still owed the Debtor
$20,548.12 in retention funds (the “Retention Funds”). After the
bankruptcy filing, on April 13, 2004, Thomas & Pratt wrote a
letter to the City, complaining that it had not yet been paid. On
April 14, 2004, a representative of one of the Sureties wrote to
Case: 05-04253 Doc# 45 Filed: 10/24/05 Entered: 10/27/05 07:38:20 Page 2 of 7

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
3
the City, demanding that the City place a freeze on the Retention
Funds.
On August 23, 2004, Thomas & Pratt wrote the City again,
demanding payment of the amount due from the Debtor and
threatening to sue the City if payment was not received. On
August 30, 2004, an attorney representing the City spoke by
telephone with the representative of one of the Sureties. The
representative of the Sureties demanded that the City release the
Retention Funds to them. On January 10, 2005, in the letter
enclosing a release bond for the Additional Stop Notices, the
representative continued to assert the Sureties’ right to the
Retention Funds.
On April 16, 2005, the City filed an action in state court,
seeking to interplead the Retention Funds and naming the Trustee,
the Sureties, and Thomas & Pratt as defendants. On April 20,
2005, the Trustee’s attorney wrote to the City, making a formal
demand for turnover of the Retention Funds to the Trustee pursuant
to 11 U.S.C. §§ 541 and 542. The attorney advised the City that
it had violated the automatic stay of 11 U.S.C. § 362 by filing
the state court interpleader action. He also advised the City
that it had improperly sued the Trustee without first seeking
permission of the court that appointed the Trustee: i.e., the
bankruptcy court. He cited authority for this principle. See In
re Kashani, 190 B.R. 875, 885 (Bankr. 9th Cir. 1995) and Leonard v.
Vrooman, 383 F.2d 556, 560 (9th Cir. 1967. Finally, he asserted
that any action against the Trustee should have been filed in the
Case: 05-04253 Doc# 45 Filed: 10/24/05 Entered: 10/27/05 07:38:20 Page 3 of 7

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
2Ultimately, the City did turn over the Retention Funds to
the Trustee and the Sureties’ claim to the funds has apparently
been resolved without judicial intervention.
4
bankruptcy court. He asked the City to dismiss the state court
interpleader action immediately.
The City failed to turn over the Retention Funds to the
Trustee at that time.2 It did dismiss the state court interpleader
action. However, it then filed the Interpleader Action without
first seeking the Court’s permission. The City then filed an
application, seeking payment of its attorneys’ fees and costs for
filing the Interpleader Action. The Sureties opposed the
application on the ground that it was unnecessary for either of
interpleader actions to be filed.
DECISION
When a bankruptcy case is filed, an estate is created. With
limited exceptions, not applicable here, the estate consists of
all of the debtor’s property on the petition date. See 11 U.S.C.
§ 541. Property of the estate includes property encumbered by
liens or against which the claims of third parties may be
asserted. Absent an order of the bankruptcy court to the
contrary, the trustee is entitled to possession of property of
the estate. For that reason, 11 U.S.C. § 542 requires any party
in possession of property of the estate when a bankruptcy petition
is filed, other than a custodian, to deliver the property to the
trustee. The City does not qualify as a custodian.
Case: 05-04253 Doc# 45 Filed: 10/24/05 Entered: 10/27/05 07:38:20 Page 4 of 7

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
5
Delivery of property subject to liens or against which claims
may be asserted does not deprive the secured creditors or
unsecured claimants of their rights. Those rights must simply be
asserted in the bankruptcy case. The City acted improperly by
failing to deliver the Retention Funds to the Trustee promptly
once it learned of the bankruptcy case and, in any event, after
turnover was demanded by the Trustee’s attorney.
The City contended that it filed the interpleader actions
based on threats of litigation made by Thomas & Pratt in April and
August 2004. This contention is not credible. The state court
interpleader was not filed until April 2005. What is credible is
that the City viewed the Sureties and the Trustee’s demands for
turnover of the Retention Funds as conflicting claims, justifying
the filing of an interpleader action. This was a misconception.
As noted above, federal bankruptcy law gives the Trustee the right
to possession of the funds. That right does not conflict with the
Sureties’ right to assert a claim to the funds in the bankruptcy
court. In fact, both Thomas & Pratt’s and the Sureties’ attempts
to persuade the City to turn over the Retention Funds to them
constituted a violation of the automatic stay. See 11 U.S.C. §
362(a)(1) & (3). They did not justify the filing of an
interpleader action.
Since the City acted improperly by filing the Interpleader
Action, its fee application will be denied. Counsel for the
Sureties is directed to submit a proposed form of order in
accordance with this decision.
Case: 05-04253 Doc# 45 Filed: 10/24/05 Entered: 10/27/05 07:38:20 Page 5 of 7

10
11
12
13
14
15
16
17
18
19
20

21

23
24.
295

26

C

END OF DOCUMENT

Ase: 05-04253 Doc# 45 Filed: 10/24/05 Entered: 10/27/05 07:38:20 Page 6 of 7

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
7
COURT SERVICE LIST
Matthew P. Shelton
Law Offices of J. Michael Pisias, Jr.
177 Post St., Ste. 700
San Francisco, CA 94108
Claudia M. Quintana
Deputy City Attorney
City of Vallejo
555 Santa Clara St.
P.O. Box 3068
Vallejo, CA 94590
Roger L. Efremsky
Efremsky & Nagel
5776 Stoneridge Mall Rd., Ste. 360
Pleasanton, CA 94588
Martha G. Bronitsky
Chapter 13 Trustee
P.O. Box 5004
Hayward, CA 94540-5004
Case: 05-04253 Doc# 45 Filed: 10/24/05 Entered: 10/27/05 07:38:20 Page 7 of 7