Opinion ID: 2978163
Heading Depth: 3
Heading Rank: 1

Heading: Wells Fargo’s Motion for Summary Judgment

Text: SCS moved to deny or continue Wells Fargo’s motion for summary judgment pursuant to Federal Rule of Civil Procedure 56(f)4 asserting that, in spite of its best efforts, SCS had been unable to obtain adequate discovery. While discovery is not required before a court grants a motion for summary judgment, such a grant “is improper if the non-movant is not afforded a sufficient opportunity for discovery.” Vance v. United States, 90 F.3d 1145, 1148 (6th Cir. 1996) (citing White’s Landing Fisheries, Inc. v. Buchholzer, 29 F.3d 229, 231-32 (6th Cir. 1994)). Therefore, Rule 56(f) provides that the court may defer summary judgment pending discovery if the nonmoving party submits affidavits stating that “the party cannot for reasons stated present by affidavit facts essential to justify the party’s opposition.” Fed. R. Civ. Proc. 56(f); Plott v. Gen. Motors Corp., Packard Elec. Div., 71 F.3d 1190, 1196 (6th Cir. 1995). The bankruptcy court denied SCS’s motion. The Sixth Circuit Court of Appeals has identified a number of different factors which are applicable when a party seeks additional time for discovery under Rule 56(f) including: (1) when the appellant learned of the issue that is the subject of the desired discovery; (2) whether the discovery would have changed the ruling below; (3) how long the discovery period lasted; (4) whether the appellant was dilatory in its discovery efforts; and (5) whether the appellee was responsive to discovery requests. Plott, 71 F.3d at 1196-97. Applying these factors, the bankruptcy court did not abuse its discretion in denying SCS’s motion. SCS did not propound any discovery until nine months after the adversary proceeding was initiated. See McGraw v. Betz (In re Bell & Beckwith), 112 B.R. 863, 868 (Bankr. N.D. Ohio 1990) (“A request for relief under Rule 56(f) is extremely unlikely to succeed when the party seeking the delay has failed to take advantage of discovery.”). Additionally, SCS’s affidavit failed to demonstrate how the information it sought was material to Wells Fargo’s motion for summary judgment or how it would change the outcome of the 4 Federal Rule of Civil Procedure 56(f) is made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7056. 8 ruling below. Finally, while the affidavit details that SCS has been unable to obtain the Jackson property lease, and implies that it is because the Jackson property landlord did not make an appearance in the adversary proceeding, it does not explain what effect discovery of the lease will have nor why it did not seek discovery of that lease from the Debtor who initiated the adversary proceeding. Because SCS had a total of ten months to seek discovery, but was dilatory in its efforts, and failed to show how the information it sought would affect the outcome of Wells Fargo’s summary judgment motion, the bankruptcy court did not abuse its discretion in denying the Rule 56(f) motion. Having determined that the bankruptcy court did not err in denying the Rule 56(f) motion, we turn to the substance of Wells Fargo’s motion for summary judgment. The only issue between Wells Fargo and SCS is whether SCS has prepetition liens against the Debtor’s leasehold interests or the Landlords’ fee interests which would trump Wells Fargo’s interest in the funds being held in escrow. Like most states, the Mississippi legislature has adopted a statutory scheme to provide those who perform construction and repair services with liens against property on which they work. See Miss. Code Ann. § 85-7-131 et seq. (“Mechanic’s Lien Laws”).5 Mississippi Code Annotated § 85- 7-131 provides generally that those performing construction and repair services shall have a lien on the property on which the structure is located.6 Such a lien is limited, however, by Miss. Code Ann. § 85-7-135 which provides that the lien shall only arise when the work is contracted for by the owner 5 Because the properties at issue here are located in Mississippi, the parties agreed that Mississippi law applies. 6 Miss. Code Ann. § 85-7-131 provides in relevant part: Every house, building, water well or structure of any kind . . . erected, constructed, altered or repaired . . . shall be liable for the debt contracted and owing, for labor done or materials furnished, or architectural engineers’ and surveyors’ or contractors’ service rendered about the erection, construction, alteration or repairs thereof; and debt for such services or construction shall be a lien thereon. The architects, engineers, surveyors, laborers, and materialmen and/or contractors who rendered services and constructed the improvements shall have a lien therefor. . . . If such house, building, structure, or fixture be in a city, town or village, the lien shall extend to and cover the entire lot of land on which it stands and the entire curtilage thereto belonging. . . . Such lien shall take effect as to purchasers or encumbrancers for a valuable consideration without notice thereof, only from the time of commencing suit to enforce the lien, or from the time of filing the contract under which the lien arose, or notice thereof, in the office of the clerk of the chancery court. . . . 9 or by a person authorized, either expressly or impliedly, by the owner.7 The statutory mechanic’s lien is further limited by § 85-7-137 which requires that the owner of property give written consent for the services performed in order for the lien to extend to the fee interest.8 Despite this statutorily provided remedy, SCS has never asserted it was entitled to a statutory mechanic’s or materialman’s lien nor has it ever attempted to obtain such a lien. Rather, because it provided construction and repair services from which the Debtor and Landlords have benefitted, SCS asserts that it is entitled to an equitable lien against both the fee interests of the Landlords in the three properties at issue, and the leasehold interests of the Debtor.9 Mississippi courts recognize the existence of equitable liens in limited circumstances. See Pincus v. Collins, 22 So. 2d 361 (Miss. 1945) (holding that explicit contractual language which granted the contractor a lien was sufficient to create an equitable lien); Lindsey v. Lindsey, 612 So. 2d 376 (Miss. 1992) (holding that a court may impress an equitable lien to prevent unjust enrichment). Nevertheless, despite acknowledging the existence of equitable liens, the Mississippi Supreme Court has held that generally, the rights of materialmen to assert a lien are governed by statute. Riley Bldg. Supplies, Inc. v. First Citizens Nat’l Bank, 510 So. 2d 506, 508 (Miss. 1987). The Mississippi Supreme Court stated: There is no natural law of materialman’s liens. The law governing the subject is the product of enactments of the Mississippi Legislature. See Miss. Code Ann. § 85-7- 131 (Supp. 1986). Parties such as [the materialman] hold a lien against property only to the extent that they have brought themselves within the terms of the statute. 7 Miss. Code Ann. § 85-7-135 provides: The lien declared in section 85-7-131 shall exist only in favor of the person employed, or with whom the contract is made to perform such labor or furnish such materials or render such architectural service, and his assigns, and when the contract or employment is made by the owner, or by his agent, representative, guardian or tenant authorized, either expressly or impliedly, by the owner. 8 Miss. Code Ann. § 85-7-137 provides: If such house, building, structure, or fixture be erected, constructed, altered, or repaired at the instance of a tenant, guardian, or other person not the owner of the land, only the house, building, structure, or fixture, and the estate of the tenant or such other person, in the land, shall be subject to such lien, unless the same be done by the written consent of the owner. 9 The parties agreed that the escrowed funds represented either the leasehold interests or the Landlords’ fee interests. In other words, if the bankruptcy court found that SCS had an equitable lien in either interest, its lien would be satisfied by the escrowed funds. Therefore, when the bankruptcy court found that SCS had no equitable lien in either interest, the claims of SCS against all parties, including the Landlords, were dismissed. 10 Id.; accord Chic Creations of Bonita Lakes Mall v. Doleac Elec. Co., Inc., 791 So. 2d 254, 259 (Miss. Ct. App. 2000) (finding no basis for creation of an equitable lien and noting, “the chancellor cannot by labeling it an equitable lien, provide subcontractors a lien to which they are not statutorily entitled;” in the absence of a statute, “materialman and laborers would be mere general creditors of the contractor”); Countrywide Home Loans, Inc. v. Parker, 975 So. 2d 233 (Miss. 2008) (denying mortgagee an equitable lien where the requirements for a statutory lien were not met). “Mechanics’ and materialmen’s liens are not recognized at common law or in equity. They are creatures of and dependent upon statute.” Jones Supply Co. v. Ishee, 163 So. 2d 470, 472 (Miss. 1964). This Panel holds that under Mississippi law, when a materialman or mechanic, such as SCS, fails to take steps available to perfect a lien, his claims are subordinate to those who take for valuable consideration without notice. Riley, 510 So. 2d at 509. The Mississippi Supreme Court has explained that “[t]he lien statutes of Mississippi afford an abundance of protection for mechanics and materialmen. But in all cases such persons must take action as a condition precedent to receiving the benefits thereof, and upon their failure so to do their remedies are those of common creditors.” Jones Supply Co., 163 So. 2d at 475. There are no facts in the record to support SCS’s claim that it has enforceable liens against either the Debtor’s leasehold interests or against the Landlords’ fee interests. As noted above, an equitable lien may arise by explicit contractual language granting a lien, Pincus v. Collins, 22 So. 2d 361 (Miss. 1945), or an equitable lien may be impressed by a court of equity to prevent unjust enrichment by the party against whom the lien is asserted. Lindsey v. Lindsey, 612 So. 2d 376 (Miss. 1992). This Panel will first discuss the insufficiency of SCS’s claim that it has equitable liens against the Debtor’s leasehold interests. Without question, the liens did not arise by virtue of explicit contractual language granting SCS liens in the leasehold interests. The only written agreement between SCS and the Debtor did not contain any language regarding what would happen in the event of a default, much less language granting SCS a lien. Furthermore, to the extent that SCS alleges 11 that the Debtor was unjustly enriched by SCS’s work, SCS’s argument fails under both Mississippi law and bankruptcy law. Under Mississippi law, the right to enforce an equitable lien arises by operation of law at the time of an alleged wrong or unjust enrichment. First Nat’l Bank of Jackson v. Huff, 441 So. 2d 1317 (Miss. 1983). Thus, to the extent that SCS had equitable liens against the Debtor’s leasehold interests on an unjust enrichment theory, the liens arose and could be enforced against the Debtor’s interests at the time SCS was not paid for the work it performed on the properties. Once the Debtor filed for bankruptcy, the Bankruptcy Code governed creditors’ rights. 11 U.S.C. § 544 provides that upon the filing of a bankruptcy petition, the trustee (and by extension, the debtor in possession under 11 U.S.C. § 1107) acquires the status of a bona fide purchaser for value.10 Rogan v. Bank One (In re Cook), 457 F.3d 561, 566 (6th Cir. 2006); Hill v. Akamai Tech., Inc. (In re MS55, Inc.), 477 F.3d 1131, 1134-35 (10th Cir. 2007). As a bona fide purchaser, the trustee or debtor in possession may avoid liens not perfected or enforced prior to the filing of the bankruptcy. By operation of § 544 and § 1107 of the Bankruptcy Code, the debtor in possession stands in the shoes of a hypothetical bona fide purchaser at the time of the commencement of the case, and may avoid any liens which could by avoided by a subsequent bona fide purchaser for value under Mississippi law. Mississippi law provides that an equitable lien cannot be enforced against property that has been transferred to a bona fide purchaser without notice. First Nat’l Bank of Jackson v. Huff, 441 So. 2d at 1321; Collier v. Shell Oil Co., 534 So. 2d 1015, 1018 (Miss. 1988) (“every 10 11 U.S.C. § 544 states in part: (a) The trustee shall have . . . the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by - .... (3) a bona fide purchaser of real property . . . from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists. 11 U.S.C. § 1107 provides in pertinent part: (a) Subject to any limitations on a trustee serving in a case under this chapter, and to such limitations or conditions as the court prescribes, a debtor in possession shall have all the rights, other than the right to compensation under section 330 of this title, and powers, and shall perform all the functions and duties, except the duties specified in sections 1106(a)(2), (3), and (4) of this title, of a trustee serving in a case under this chapter. 12 reasonable intendment should be made to support the titles of bona fide purchasers of real property. . . .”). SCS may have been entitled to have equitable liens enforced against the Debtor’s leasehold interests, but SCS did not perfect or enforce the liens at any time prior to the filing of bankruptcy. To the extent that SCS held unperfected and unenforced equitable liens against the Debtor’s interests, SCS’s interests were cut off by the filing of the bankruptcy petition. Since SCS has neither a contractual lien or an unjust enrichment claim which was perfected or reduced to judgment, its argument that it has equitable liens against Debtor’s leasehold interests, which elevate its claim over the interests of the Debtor and the perfected security interest of Wells Fargo, fails. SCS also argued that it had equitable liens against the fee interests held by the Landlords. Mississippi law requires that a landowner give written consent for work to be performed before an equitable lien will be enforced against a fee interest. Miss. Code Ann. § 85-7-137; Brown v. Gravlee Lumber Co., 341 So. 2d 907 (Miss. 1977). In order for the Landlords’ leases to constitute adequate written consent, the leases must identify the specific construction or repairs to be performed. Graham v. Pugh, 417 So. 2d 536, 540 (Miss. 1982) (finding written consent of owner where the “lease specifically and in writing provided that the lessee was to see that the work was done on that particular building”); Brown, 341 So. 2d at 910 (holding written consent for certain repairs required to impose equitable lien on entire lot); Burwell v. Planters Lumber Co., 70 So. 2d 71 (Miss. 1954) (permitting lien on entire lot where lease detailed certain repairs and construction). Because the leases at issue here do not speak to any specific construction or repairs, but rather contain only standard maintenance and repair language, they do not constitute the necessary written consent of the Landlords for the work of SCS sufficient to impress an equitable lien on the fee interests. SCS also argues that the Sixth Circuit recognizes the concept of an equitable lien. In XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443, 1451 (6th Cir. 1994), the Sixth Circuit reversed the bankruptcy court’s imposition of a constructive trust and held that, because a constructive trust is a remedy that does not come into existence until it is judicially declared, a creditor’s claim of entitlement to a constructive trust cannot be enforced in bankruptcy unless the party seeking the trust can show that another court has already imposed such a trust on the assets. 13 Id. at 1449. Consequently, as a general rule, a bankruptcy court may not impose a constructive trust. Id. at 1453. The Sixth Circuit later clarified its decision in Omegas Group by providing that a bankruptcy court may impose a constructive trust if “property in bankruptcy was not subject to distribution to creditors and so did not implicate the rationale of ratable distribution.” Poss v. Morris (In re Morris), 260 F.3d 654, 666 (6th Cir. 2001) (citing McCafferty v. McCafferty (In re McCafferty), 96 F.3d 192, 196-97 (6th Cir. 1996)). Additionally, Omegas Group does not preclude a bankruptcy court from enforcing a constructive trust if creditors initiated appropriate state court proceedings prior to the filing of bankruptcy. In re Morris, 260 F.3d 654; Kitchen v. Boyd (In re Newpower), 233 F.3d 922, 936 (6th Cir. 2000). In short, Omegas Group bars a bankruptcy court from impressing a constructive trust in those situations, like SCS’s, where a “creditor with a claim arising in the ordinary course appeals to the bankruptcy court for preferential treatment.” In re Morris, 260 F.3d at 666 (citing In re Newpower, 233 F.3d 922, 936 (6th Cir. 2000)). The Sixth Circuit’s decision in Omegas Group is of no assistance to SCS for two reasons. The issue in Omegas Group involved the imposition of a constructive trust for the purpose of removing the trust property from the property of the estate pursuant to 11 U.S.C. § 541(d). To the extent the creditor could assert a trust, those assets subject to the trust would not be available to other creditors. SCS has not argued on appeal that the proceeds in escrow are not property of the estate, or that there was some prepetition asset which could have been impressed with a constructive trust. Second, even if SCS had some equitable claim to funds prepetition, the Omegas Group decision makes it quite clear that SCS’s claim would have had to have been reduced to judgment prior to the filing of the bankruptcy. SCS fails to establish that it has an equitable or statutory lien against either the Debtor’s leasehold interests or the Landlords’ fee interests. In the absence of a lien interest, SCS has no claim against the funds held in escrow. Wells Fargo was granted a lien by virtue of the DIP Financing Order. Wells Fargo’s prepetition and postpetition liens give it a right to the funds in escrow. The bankruptcy court’s order granting summary judgment to Wells Fargo is affirmed. 14