In re Hobbs & Co.

DAYTON, District Judge (after stating the facts as above). At the threshold of a consideration of this very voluminous record and the many intricate and perplexing questions involved, it becomes absolutely necessary to keep in view constantly the extent of this court’s jurisdiction in the premises. As a court of bankruptcy, inasmuch as the firm of Hobbs & Co. and its members as individuals have been properly adjudged bankrupts, it is its plain duty (a) to secure control of all the assets of said firm or its individual members, and (b) disburse such assets to the respective creditors of each — firm assets to firm debts, individual assets to individual debts. Inasmuch as no assets have been found of the individual members, and no debts proven against them as such, they as individuals need not be further considered. In the distribution of the firm assets all its creditors, -after the payment of the costs of suit and administration, are entitled to share pari passu, unless liens exist as provided by sections 64, 65, 66, and 67 of the bankrupt act (Act July 1, 1898, c. 541, 30 Stat. 563-565 [U. S. Comp. St. 1901, pp. 3447-3450]), in which case such liens are to be expressly preserved in priority. It is no concern, ordinarily, of this court what collateral controversies may arise between outside parties because of an individual’s, firm’s or corporation’s bankruptcy. Its sole purpose must be, as I have said, to collect the assets and apply the same to the bankrupt’s debts. Con — 215 — sent of parties to determine outside and collateral issues between other parties cannot give jurisdiction to this court. Byers v. McAuley, 149 U. S. 608, 13 Sup. Ct. 906, 37 L. Ed. 867; Olds Wagon Works v. Benedict, 67 Fed. 1, 14 C. C. A. 285. It would therefore at first blush appear that this court could have nothing to do with the determination of the controversies existing between the materialmen, tlie mechanics, and the laborers on the one side, and the owners on the other side; the first claiming and the latter denying the existence of liens upon tlie properties of the latter, and that all this court should do would be to collect from the owners the sums due under contract from them to Hobbs & Co. and disburse the amounts thereof among- the creditors of this bankrupt firm. In any event, I think it can be assumed at once lhat no obligation rests upon this court by its process to enforce any such liens against the properties of such owners. But, on the other hand, it is to be remembered that these courts do have jurisdiction to “bring in and substitute additional persons or parties in proceedings in bankruptcy when necessary for the complete determination of a matter in controversy.” The touchstone'of jurisdiction in such cases is whether it is necessary, in order to fully secure and disburse the bankrupt’s assets, to pass upon the rights of other parties. Does such necessity necessarily exist in this case? After earnest thought and consideration of the situation I am driven to the conclusion that it does. Here was a contracting firm, doing a very large business, hopelessly involved, thrown into bankruptcy, with every dollar of its assets locked up and dependent upon the fulfillment of its uncompleted contracts. In each case it had, for a fixed price, contracted with the owner to build, and in each case the owner had right to withhold the contract price or a part of it to secure the building’s completion. In each case the debts due these mechanics, materialmen, and laborers were primarily debts contracted by the bankrupt firm and not by the owners. These owners cannot in any event be held personally liable for these debts to these men, while the firm and its individual members were so liable. Only by an express statute of the state can tlie owners be affected at all by these debts, and that under express conditions and limitations fixed by the statute, by having liens therefor attach to the building upon which work was done or material provided for which was tlie consideration of the debt. If such lieu has attached to the owners’ property, he has the right to demand that this contracting firm secure its release by payment, and, if he does not, to withhold from the amount due from him to the contractor sufficient to pay it. Thus it is that this court could not require the owner to pay over to its receivers or trustee the sum due, unless it did so with the obligation upon it to devote the fund as far as it would go to the release of such liens, without violating the sanctity of tlie contract between the owner and the contracting firm. Under such circumstances, the valid liens attaching to the owners’ property become in equity liens upon the funds collected on behalf of the bankrupt contractor from the owner, and such funds must first be applied to the payment of such liens before any general creditors can have any lot or share therein. The conclusion therefore is — 216 — inevitable that, in order to make proper distribution of the funds arising under each contract, this court must determine the validity of these claims of liens thereunder. It is to be always remembered that these liens are created solely by the state statute and are against common-law right, therefore full and substantial compliance with the statutory limitations is required to maintain them. It is further to be borne in mind that this court, in construing this statute, will follow the constructions given it by the court of last resort in the state. The West Virginia statute authorizing these liens is contained in sections 2 to 13 inclusive of chapter 75 of the Code of 1899 of that state, except that section 3 has been very materially amended by chapter 42, p. 132, of the Acts of the Legislature of 1903. The provisions of this statute are, at least, obscure — perplexing, if not to an extent contradictory of each other. Section 2 provides that every mechanic, builder, artisan, workman, laborer, or materialman shall have a lien upon the structure and the lot of ground upon which it stands, constructed, etc., under contract with the owner or his agent; the aggregate of such liens not to exceed the contract price, and no priority to exist between them. Section 3 originally, as found in the Code, provides that materialmen, laborers, etc., performing labor or furnishing material under a contract with a principal contractor or his subcontractor for the construction, etc., of a structure provided for in a contract between its owner and such principal contractor, shall have a lien for such labor performed or material furnished (not exceeding the price for the same stipulated in the contract between such principal contractor or his subcontractor and such materialman, laborer, of mechanic) on the structure and the lot of ground upon which it stands. That such liens shall have priority over other liens created subsequent to the performance of such labor or the furnishing of such material; that the laborer and mechanic shall have the first lien, and the liens of laborers, mechanics, or persons furnishing material or machinery to a contractor, shall take precedence over the lien taken, or to be taken, by the contractor indebted to them, and all assignments and transfers of such head contractor of his contract with the owner, or by a subcontractor of his contract with the head contractor, and all proceedings in attachment or otherwise against the head contractor or subcontractor to subject or incumber his interest in such contract are made subject to the liens of'the laborers, mechanics, and materialmen who have labored upon or furnished material for the constructing, altering, repairing, or removing of such structure under contract with the contractor or subcontractor. The language making these provisions ■ in the original act, found in the Code and in the amended act as found in chapter 4.2, p. 132, of the Acts of 1903, are identical. The original act then proceeds as follows: “It shall be the duty of such laborer, mechanic or person furnishing material to file with the owner or his authorized agent an itemized account of the labor done or material or machinery furnished verified by affidavit, within thirty-five days after the same is performed or furnished, and his neglect or failure so to do shall release the owner from all responsibility and his property from all lien for any item therein done or furnished prior to the — 217 — said thirty-five days, and the owner may at any time by notice in writing require such laborer, mechanic or person furnishing the material or machinery to file with him such itemized account, and the neglect or failure to do so, within ten days after receiving such notice, shall release the owner from all responsibility and his property from all lien for all labor done or material or machinery furnished by the person so neglecting or failing prior to the giving of such notice.” The language in italics is supplied from the note as having been by accident omitted in the engrossed act. It is absolutely necessary to complete the sense. In the amended act of 1903 this clause reads as follows: “It shall be the duty of such laborer, mechanic or person furnishing material, to file with the owner or his authorized agent an itemized account for the labor done or the material or machinery furnished, verified by affidavit, within thirty-live days after the same is performed or furnished, which said thiry-five days shall be construed to mean that the laborer, mechanic or person furnishing material shall have thirty-five days after he shall hare ceased to have performed labor, or furnished machinery or material to file such notice, and that if the notice is given within thirty-five days, as aforesaid, it shall include all items for labor performed or machinery furnished. within a period not exceeding nine months from the date of said notice, to the owner of the property on which the lien is to bo charged; and his neglect or failure so to notify tile party to bo charged ’within thirty-five days, after ho shall have ceased to furnish labor, machinery or material, shall release the owner from all responsibility, and his properly from all lien for any item therein done or furnished prior to the said notice; and the owner may at any lime by notice in writing require such laborer, mechanic or person furnishing the labor, material or machinery, to file with him such itemized account, and the neglect or failure so to do within ten days, .after receiving such notice, shall release the owner from all responsibility, and his property from all lien, for all labor done or material or machinery furnished by the person so neglecting dr failing prior to the said giving of such notice.” The section, both in the original and amended act, then sets forth a proviso that any laborer or other person employed to do work or furnish material or machinery for, or to, a contractor may, before doing work or furnishing material or machinery, give notice in writing to the owner, that he will hold him responsible if not paid by the contractor, and, if such notice is given, then the itemized account referred to need not be given unless expressly required by the owner, and the lien will not in any way be impaired by failure to furnish certain itemized accounts. In the amended act forms are given for the itemized account and the notice. Section 4 of the act provides that any lien under sections 2 and 3 shall be discharged unless the party claiming it, within 60 days after ceasing labor or furnishing material or machinery, file with the clerk of the county court a verified account of the amount due after allowing all credits with a description of the property sufficiently accurate to identify it with the name of the owner. Section 5 provides the duty of a clerk to record this account and description, and then says: “No payment by the owner or Ills agent to a eontraetor, shall affect or impair the lien of a laborer, or materialman, provided for in section 3 of this chapter. l!ut such owner may limit his liabilities so that the amounts to be paid by him shall not exceed in Hie aggregate the price stipulated in the said contract between himself and the contractor, by having the said contract, or so much thereof as shows the contract price, and the times of its — 218 — payment, recorded in the office of the clerk of the county court of the county, where such house or other structure is situated, prior to the performance of the labor and the furnishing of the material, or the machinery for the same. But if such owner fails to have said contract so recorded, the contractor shall be held to be his agent and the house or other structure, and the lot on which it is situated, then be held liable for the true value of all labor done and the material and machinery furnished therefor, prior to said recording, although the same may exceed in the aggregate the price stipulated in the contract between the owner and the contractor.” It is next to impossible to attempt to construe and apply this legislation without calling attention to its vicious character, and especially to that portion of it contained in the amended act of 1903. In almost every case, class legislation is to be condemned, and results, practically, in injuring rather than benefiting those for whom it is enacted. I am fully persuaded this legislation, so manifestly intended for the benefit of laborers and mechanics, instead of aiding in the long run will only injure them. In effect, instead of leading them to think and act for themselves, protect themselves when working for a contractor, collect their wages promptly from him as they should do, and cease to labor for him when he fallá behind in payment, it lulls them into a carelessness in so caring for their interests, into a fancied security based upon the idea that, no matter how improvident or even dishonest their contractor may be, their labor must and will be paid for by the owner with whom they have no contractual relations and who they may not know, under and by virtue of this law. They pay little attention in consequence, how far the payments of their wage becomes in arrear until the almost inevitable litigation comes, and the expense and loss of time in conducting it usually sacrifices the amount due them. On the other hand, under such law as this, for any one to undertake to build by contract becomes a most serious matter. The state subjects the private citizen to all of its iniquities, but, of course, excepts itself from its effects, for it has been held that no public building can be subject to the provisions of this act. Hall v. Scites, 38 W. Va. 691, 18 S. E. 895. “Public policy and public necessity” create the ground for such exceptions. The Legislatures enacting such laws as these would seem to regard that little or no conception of the equal rights of citizens as to each other, or the sanctity of their contracts one with the other, is required to be exercised by them in the administration of true public policy and necessity. When a man enters into a contract with another to build him a house, mutual obligations arise under the contract, the one to build, the other to pay, and if the contractor expends his money and labors in erecting the building, as by the contract he has bound himself to do, and which if he fails to do he can by the contract be compelled by law to do, or else to answer in damages for such failure, it is well that he should be secured in the payment by the owner with a lien on the building and the ground upon which it stands, to the extent of the contract price, but, when such contractor, after having so bound himself with the owner is then permitted to hire whom he pleases, good workmen, bad workmen, lazy workmen, or worthless workmen, without interference from the owner and whom — 219 — die owner may not know, make reasonable or unreasonable contracts with them for their wages, buy in like manner and with like noninterference from the owner, his material from all parts of the country, his sash and doors from Chicago, his nails from Wheeling, his plaster from Pittsburg, his lumber from North Carolina and Michigan, and all from men the owner never did and cannot know and at prices over which he cannot have control; for this to be done with no other or further agreement on the owner’s part than to pay a specified sum or sums for the building completed or partially so, as the case may be, and at a specified time or times to the contractor and to him only and then have this law step in and announce that his solemn contract did and could do no more than constitute this contractor 1ns agent, and that, if such contractor has failed to pay the money paid over to him by such owner/ as required by the terms of the contract, to these laborers, mechanics, and materialmen, with whom such owner has no privity by contract or otherwise, and whose whereabouts he may not know of, that in that event his building and ground is to be subject to pay all these debts of the defaulting contractor, no matter how much their sum total may exceed his contract agreement, is nothing short of the grossest outrage, to say the least of it. This outrage has been accentuated by the act of 1903, which was apparently enacted for the express purpose of permitting this species of “plucking” and despoiling the owner to continue for a period of nine months, and it would almost seem in order that he may be punished good and hard for his temerity in undertaking to build at all. Section 5 of this statute, however, after providing that payment by the owner to a contractor shall not effect or impair these labor and material liens, does say that the owner may limit his liability in amount to the contract price, provided he record the contract, or so much of it as shows the contract price and the terms'’ of payment, in the office of the clerk of the county court of the county, prior to the performance of such labor or the furnishing of such material, but it further provides, if this recordation is not made, the contractor is to be held as agent for the owner, and the lot and house of such owner is to be liable for the labor and material demands, no matter how much exceeding the contract price. If it were an original proposition presented for the first time to me, or even if it was absolutely necessary for me, in order to settle the questions here, to pass upon this section directly, I do not think I would hesitate a moment in holding the latter clause of this section to be in direct violation of constitutional inhibitions against invalidating contracts. A wayfaring man, though a fool, well knows that no man, in contracting with another to build his house, intends to constitute that other his agent with power to create against his property debts to an unlimited degree, and without his knowledge, and it seems to me no Legislature, no matter how consuming its desire to truckle to classes, ought to be permitted to declare such contract to be so. In this case the Davis & Elkins College Corporation did record its contract before labor performed or material furnished, but it is earnestly contended that this contrapt had not been acknowledged by — 220 — the parties before recordation, and is subject to all the requirements of the recordation acts relating to deeds and other conveyances of title in this respect, and therefore is in fact an “unrecorded” paper. There is nothing in this contention. Fortunately all papers do not have to be acknowledged before recordation in the county clerk’s office, and the very language of this section requiring only the clauses giving the contract price and the times of payment to be recorded clearly shows that these building contracts are of this class. Wagon Co. v. Hutton, 53 W. Va. 154, 44 S. E. 135. Certain it is that in the interest of common justice the effect of the provision limiting the owners liability by his recordation should be given the widest and fullest scope, and I have no hesitancy in saying that these labor and materialmen’s liens should not by any court be enforced against the building of this corporation beyond the balance of the contract price still in its hands or in the hands of the special receivers of this court who may have collected such balance from such corporation. This balance, however, whatever it may amount to, after making it contribute its proportionate share of the costs incurred in this proceeding, should be applied to these liens — first to the labor ones, and the balance pro rata to those for material. That it may be so applied, I must ascertain what ones of these liens conform to the requirements of this statute, and I now do ascertain, from the master’s report and the evidence filed with it, them to be as follows: First, the labor liens: Floyd Triplett, $47.50; Alfred Phares, $22.50; J. C. McDonald, $33.25; E. Sturm, $47.50; Wm. Plerron, $37.50; W. H. Head, $32.50; C. A. Poling, $46.25; Ward Eewis, $36.75; J. M. Knapp, $45; J. O. Johnson, $45; J. A. Moore, $36.25; W. A. Allensworth, $55; Theodore Mayer, $37.50; Fred Hoffman, $29.75; J. A. Kelley, $47.50; Thomas Haines, $76. Second, the liens for material: Kane & Keyser Hardware Company, $2,084.36; Collins Company, $2,690.07; Kelley & Jones Company, $2,779.40; Fairmont Wall Plaster Company, $32.10; Elkins Planing Mill Company, $283.80; James E. Hanley, $1,378.70; L. C. Wolf, $1,374.46; and the D. M. Anderson, Mariner, Son & Co., $1,593.75. The objection made to the first seven above-named material liens are technical in character, going to the question of these people being subcontractors, their accounts not being properly itemized, and their notices improperly served. I think all these objections should be overruled. I have sustained the exception taken by the D. M. Anderson, Mariner, Son Company, and allowed this lien, following the very recent cases of Grant v. Cumberland Valley Cement Co., 52 S. E. 36, decided October 31, 1905, by the Supreme Court of Appeals of West Virginia, and Rainey v. Freeport Smokeless Coal & Coking Co., 52 S. E. 473, decided by said court on November 28, 1905. These cases were not out when Special Master Shirley made his report. They seem to be directly antagonistic to the former holdings of this court as set forth by such cases as Mertens v. Tile Company, 53 W. Va. 192, 44 S. E. 241, and Niswander v. Black, 50 W. Va. 188, 40 S. E. 431, which manifestly the special master followed, but they are the latest rulings of this court, although in my judgment not the soundest, upon this subject, and for that reason — 221 — will be followed by me. I agree with the master that the lien asserted by K. G. Lyon cannot under any of these cases be sustained, and .1 have disallowed it. The Cobb contract was not recorded, and it is not necessary, as I have said, to finally pass upon the question whether the laborers and materialmen, by complying with the terms of this statute, can hold Cobb’s property liable for any siim beyond the contract price. To settle that question would be to exceed this court’s jurisdiction in the premises. It is beyond peradventure that Hobbs & Co. could not collect from Cobb a sum greater than the contract price. Therefore the trustee in this bankruptcy case can collect no sum in excess of the unpaid balance of such contract price. This balance represents the sum total of the bankruptcy firm’s assets due from and in the hands of Cobb, and, as Cobb could not be required to pay over this balance without being indemnified to the extent thereof to the release of proper liens • against his property growing out o f the building contract, it is my duty to pass upon and decide what are proper liens and apply this balance to them. As a credit upon these liens, the gross sum of this balance is applicable, but it is to be reduced as to such lienors to the extent of its proportionate part of the costs of this and the bankruptcy proceeding. This applies to the balance due from the Elkins College Corporation and the other balances due under the Cook Hospital and Watson contracts hereinafter to be considered. In other words, these balances, as assets of Hobbs & Co., are due these lienors as creditors of Hobbs & Co. The costs of these proceedings must be taken and paid from such assets to the loss pro tanto of the creditors, but not to the loss to any extent of the owners who are to be considered only as holders of the funds for their own protection and indemnity. In this instance there are no labor liens to be paid in full as first in priority. The materialmen and mechanics who have filed liens, in my judgment conforming to this statute, against the Cobb building, are as follows: Kane & Keyser Hardware Company, $2,711.11; Katie & Keyser Hardware Company, $46.84; the Elkins Planing Mill Company, $412.98: the Randolph Company, $299.24 ; and L. Creed Wolf, $458.53. I think the objections made upon technical grounds to these liens should be overruled, and I agree with the special master that the D. M. Anderson, Mariner, Son Company claim for $184.87 cannot be upheld as such a lien. Touching the trust lien for $10,000 dtte to A. B. Serpell I do not regard it necessary to pass upon it in any way. It is a lien upon this property, but wholly independent of this building contract and amply secured. It ought not to participate in this distribution of this balance due from Cobb to Hobbs & Co., under the building contract, because it is not Hobbs & Co.’s debt but Cobb’s, and Cobb is not in bankruptcy nor subject, in the settlement of his affairs, to that court’s jurisdiction. The validity of this trust lien is to be therefore regarded as in no way affected or impaired by this proceeding. The contract of Jno. R. Cook and the Cook Hospital & Training School Company with Hobbs & Co. was not recorded. The contract price was paid in full, but a claim was advanced by Hobbs & Co. for — 222 — extra labor. The extra labor was conceded, but the price demanded first was resisted as excessive. The special master has investigated this matter fully, and I agree with his conclusion that $3,200 is a fair value, for this extra labor; $1,200 of this had been paid, leaving a balance of $2,000 due from this hospital company. There are no labor liens demanding payment in full as first in priority under the terms of the statute. I ascertain and decide that the following materialmen and mechanics have complied substantially with the requirements of this statute and are entitled to share pro rata in the distribution of this $2,000 balance after the payment from it of its proportionate share of the costs, as hereinbefore set forth: The Electric Supply & Construction Company, $1,088.47; A. M. Knight, $50.28; Reed Plumbing Company, $3,197.29; Charles D. Hough, $118.89; S. H. Calkins Company, $1,117.58; and Dickerson Building Supply Company, $66.40. I have carefully considered the objections made to these claims on technical grounds and agree with Special Master Shirley that they must be overruled, under the state decisions I have heretofore cited. Plobbs & Co. entered into two separate and distinct contracts with C. W. Watson; one to remodel a residence property at the price of $22,398, increased by extras to $24,908.33, the other for the erection of a stable or barn at the price of $19,636, increased by extras to $19,886. The ground upon which these buildings stand belongs to said Watson’s sisters, Ida M. and Lucy L. Watson. C. W. Watson made these contracts in his own name, neither was recorded. Being a man of large means, it may have been his purpose to erect these buildings on the old homestead for his sisters at his own expense. In fact his statement in his answer that he acted independently of his sisters in this matter seems to me conclusive from the high character and probity of the man. However, the evidence discloses that he has always conducted the business affairs of these sisters of his, that no objections were at any time made by them to the erection of these buildings upon their ground, and that they had full knowledge of the character and plans of the buildings and of the building operations. These sisters and C. W. Watson live together. Under these circumstances I think the special master was right in concluding that, so far as these mechanic liens were concerned, the law from the circumstances would assume C. W. Watson to have acted in legal effect, as agent for these owners in the making of these contracts. Under the contract for the residence property a small balance of $751.-24 remains. This sum, after deducting its share of costs in the manner heretofore directed in respect to the other funds, should be disbursed pro rata upon the mechanic and material liens complying with the requirements of this statute. These I ascertain to be the Collins Company, $1,805.05; D. M. Anderson, Mariner,. Son Company, $1,-736.73; John E. Phillips, $593.57; Charles D. Hough, $743.29; Kelley Brothers, $152.20; Reed Plumbing Company, $459.98; and Hamilton & Hoffman, $452.41. I think the special master right in rejecting the claims of the Dickerson Building Supply Company for $192.30 and of Allen & Son for $92.07, on the ground that these claimants undertook — 223 — to take their lien on property not involved in the contract, under the luling in Mertens v. Tile Company, 53 W. Va. 192, 44 S. E. 241. I have disagreed with the special master who rejected the claims of the Collins Company, the D. M. Anderson, Mariner, Son Company, and parts of the claims of John E. Phillips and Kelley Bros. His action was based upon the ruling in Niswander v. Black, 50 W. Va. 188, 40 S. E. 431. I base my action upon the later cases of Grant v. Cement Co., and Rainey v. Coal Company hereinbefore cited, in which the Supreme Court of Appeals of the state seems to have almost abandoned their former rule of strict construction. I am not in sympathy with them, but follow them. Touching the contract for the Watson stable it is sufficient to say 'that not a dollar balance remains of the contract price. All has been expended, and besides near $3,000 additional was required to be paid by Watson to complete the structure according to the requirements of the contract. It is wholly unnecessary for this court therefore to further consider this contract or attempt to pass upon the validity of the liens claimed. If these are to be enforced at all, it must be in another court, and under the iniquitous last clause of section 5 of this statute, which I could not and will not sustain until directed by a higher court having power to control my action. The matter touching the dealings between Hobbs & Co. and Showalter injected into this proceeding does not belong here. The demand is a disputed one not involving special liens which the referee in the bankruptcy proceeding proper should ascertain and settle. A decree should be entered in this cause referring it to the referee in bankruptcy to be heard by him in connection with the original proceeding, and directing him to have the trustees in bankruptcy collect the balances of the funds from the parties as set forth in the special master’s report herein, and cause such funds to be disbursed in the manner and to the parties as set forth herein, and to proceed in all respects as in this opinion directed. As said referee and the special master are the same person, and it will be embarrassing for him as referee to ascertain and fix his own compensation as special master, I think such decree should fix such compensation. The labor in this case done by the special master has been enormous. It was before him for sixteen months, during which time lie worked almost constantly upon the matters involved. He has taken a very large amount of testimony. He has been heretofore allowed by order of this court a part payment of $500, and I have determined to allow him $500 additional compensation, and the sum of $215 actually expended by him in expenses. The other costs and the compensation of the receivers, the referee, being in no way interested in, can very properly ascertain and fix, subject of course to revision, if it should, when fixed by him, he asked by parties in interest.