Maersk Line, Limited et al v. Ocean Technical Services Corp. et al

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IN THE UNITED STATES DISTRICT COURT FOR
THE DISTRICT OF MARYLAND, NORTHERN DIVISION
In re: 	*
BALTIMORE MARINE INDUSTRIES, 	* 	CASE NO. 03-80215-JS
INC.
*
Debtor 	(Chapter 11)
*
* 	* 	* 	* 	* 	* 	* 	* 	* 	* 	* 	* 	*
ALAN M. GROCHAL, LIQUIDATING 	*
AGENT
*
Appellant,
* 	ADVERSARY NO: 03-8154-JS
v.
* 	CIVIL NO.: WDQ-05-1441
OCEAN TECHNICAL SERVICES
CORPORATION, et al. 	*
Appellees 	*
* 	* 	* 	* 	* 	* 	* 	* 	* 	* 	* 	* 	*
MEMORANDUM OPINION
Alan Grochal, the liquidating agent for Baltimore Marine
Industries (“BMI”), appealed the final orders entered by the
United States Bankruptcy Court for the District of Maryland (the
“Bankruptcy Court”) on April 21, 2005 and June 30, 2005, denying
the liquidating agent’s motion for summary judgment and granting
summary judgment in favor of Ocean Technical Services (“OTS”) and
McCallister Towing of Baltimore (“McCallister”) (collectively the
“Subcontractors”). 	For the following reasons the Bankruptcy
Court’s decision will be affirmed.
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I. 	Background
Before entering bankruptcy, BMI owned and operated a full-
service shipyard primarily used for ship repair and
reconditioning. 	Appellant’s Brief, p. 9. 	A sluggish economy and
a downturn in the ship repair industry led to BMI’s filing for
Chapter 11 protection on June 11, 2003. 	Id at 10.
Before the petition date, BMI was contracted by Maersk Line,
Limited (“Maersk”), the Military Sealift Command (“MSC”) and the
Crowley Liner Service (“Crowley”) to repair government owned or
chartered ships of the Maritime Prepositioning Force. 	Id at 10-
12. 	BMI contracted OTS and McCallister to work on the project.
After work was completed, Maersk, MSC and Crowley filed
interpleader complaints and turned over funds owed BMI to the
court. 	The Subcontractors, who had not been paid for their work
on the project, moved for summary judgment, seeking a priority
interest in the interpleaded funds. 	The Liquidating Agent sought
summary judgment that the interpleaded funds were property of the
debtor’s estate.
On April 21, 2005 and June 30, 2005 the Bankruptcy Court
denied the Liquidating Agent’s motion and granted summary
judgment to the Subcontractors. 	The Liquidating Agent
subsequently appealed the Bankruptcy Court’s order to this Court.
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II. 	Standard of Review
A district court reviews a bankruptcy court’s findings of
fact for clear error and conclusions of law de novo. 	Nesse v.
IRS of the United States, 305 B.R. 645, 647 (D. Md. 2004) (citing
Canal Corp. v. Finnman, 960 F.2d 396, 399 (4th Cir. 1992);
Traveler’s Ins. Co. v. Bryson Prop., XVIII, 961 F.2d 496, 499
(4th Cir. 1992)). 	Accordingly, the Court will review the
Bankruptcy Court’s decision de novo.
III. Analysis
The Liquidating Agent appeals the Bankruptcy Court’s ruling
that the Subcontractors had a priority interest in the funds,
arguing that the interpleaded funds are property of the estate
under 11 U.S.C. § 541(a)(1). 	OTS argues in response that the
Bankruptcy Court correctly held, as a matter of law, that an
unpaid subcontractor who has performed work on a government
contract has a priority interest, superior to that of a debtor-
contractor, in funds paid to the contractor.
Under § 541(a), the commencement of a bankruptcy action
creates an estate that is comprised of, inter alia, all legal or
equitable interests of the debtor in property wherever located
and by whomever held. 	11 U.S.C § 541(a). 	As the estate
necessarily includes the debtor’s contract rights and accounts
receivable, the Liquidating Agent argues that the interpleaded
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funds are property of the estate.
Under § 541(d), however, property in which the debtor holds
legal title but not an equitable interest becomes property of the
estate “only to the extent of the debtor’s legal title to such
property, but not to the extent of any equitable interest in such
property that the debtor does not hold.” 	11 U.S.C § 541(d).
When another party has an equitable interest or prior right to
property, the property does not become part of the bankruptcy
estate and cannot be administered, liquidated or distributed to
creditors of the bankrupt. 	Pearlman v. Reliance Insurance
Company, 371 U.S. 132, 136 (1962).
Unpaid laborers and materialmen working on a federal
contract have an equitable interest in funds paid, or that would
be paid, to the contractor. 	Pearlman, 371 U.S. at 141; Universal
Bonding Insurance Co. v. Gittens and Sprinkle Enterprises, Inc.,
960 F.2d 366 (3 rd Cir. 1992); E.R. Fegert, Inc. v. Seaboard
Surety Company, 887 F.2d 955 (9 th Cir. 1989); Active Fire
Sprinklers Corp. v. United States Postal Service, 811 F.2d 747
(2 nd Cir. 1987); Western Casualty and Surety Company v. Brooks,
362 F.2d 486 (4 th Cir. 1966); In re Abatement Environmental
Resources, Inc., 307 B.R. 91,(Bankr.D.Md. 2004); Brock v. Career
Consultants, Inc., 84 B.R. 419 (Bankr. E.D.Va. 1988). 	When the
contractor has been paid, the debtor-contractor holds an
equitable trust for the benefit of the unpaid subcontractors.
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Universal Bonding Insurance Co., 960 F.2d at 372, 376. 	Even
where the debtor-contractor has been paid, payments due the
subcontractors do not become part of the bankruptcy estate and
cannot be liquidated or distributed to the debtor’s creditors.
Pearlman, 371 U.S. at 136; Universal Bonding Insurance Co., 960
F.2d at 372. 	“[Bankruptcy law] simply does not authorize a
trustee to distribute other people’s property among a bankrupt’s
creditors.” 	Pearlman, 371 U.S. at 135-136.
It is undisputed that: 1) BMI was under contract to the
United States government; 2) OTS and McCallister were
subcontractors and materialmen for BMI; and 3) OTS and
McCallister were not paid for their work; accordingly, the
subcontractors have an equitable interest in the interpleaded
funds. 	Thus, the funds are not property of the bankruptcy
estate, and the Bankruptcy Court appropriately granted summary
judgment to the subcontractors. 	Accordingly, the decision of the
Bankruptcy Court will be affirmed.
January 6, 2006 	/s/
Date 	William D. Quarles, Jr.
United States District Judge
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