Admiral Drywall v. Cullen ( 1995 )

USCA1 Opinion

                            UNITED STATES COURT OF APPEALS
UNITED STATES COURT OF APPEALS

                                FOR THE FIRST CIRCUIT
FOR THE FIRST CIRCUIT



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        No. 95-1036



                            ADMIRAL DRYWALL, INC., ET AL.,



                               Plaintiffs, Appellants,



                                          v.



                                   JOHN F. CULLEN,

                          TRUSTEE OF VAPPI & COMPANY, INC.,



                                 Defendant, Appellee.





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                     APPEAL FROM THE UNITED STATES DISTRICT COURT



                          FOR THE DISTRICT OF MASSACHUSETTS



                     [Hon. William G. Young, U.S. District Judge]
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                                        Before



                                Boudin, Circuit Judge,
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                      Aldrich and Bownes, Senior Circuit Judges.
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            Peter  J.  Gagne  with whom  Corwin  &  Corwin was  on  brief  for
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        appellants.

            Robert Owen Resnick with whom Posternak,  Blankstein & Lund was on
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        brief for appellee.



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                                     June 8, 1995

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                      ALDRICH, Senior Circuit  Judge.  Defendant John  F.
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            Cullen is the trustee in  bankruptcy of Vappi & Co.,  Inc., a



            general   contractor   who   defaulted  after   substantially



            completing its  contract  to  build  a  condominium  complex.



            Plaintiffs,   Admiral   Drywall   and   others,   are  unpaid



            subcontractors who furnished labor and materials, and seek to



            impose an equitable lien  on undisbursed contract funds ahead



            of the trustee and  all other creditors.   They did not  file



            statutory liens, nor  was there  a surety bond  or any  other



            contract for  their protection.  The  district court affirmed



            the  bankruptcy  court's summary  judgment  in  favor of  the



            trustee.  We affirm.



                      We look  to Massachusetts law for  determination of



            interests  in assets  of the  bankruptcy estate.   Butner  v.
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            United States, 440 U.S. 48, 54 (1979).  In Ehrlich v. Johnson
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            Service  Co., 272 Mass. 385,  172 N.E. 508  (1930), a general
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            contractor, within four months of bankruptcy paid some of its



            subcontractors,   and  its  trustee  in  bankruptcy  sued  to



            recover.  Defendants claimed  they had equitable liens.   The



            court held that, in the absence of any special contract, they



            had  none,  and hence  the  payments  to them  were  voidable



            preferences.    Plaintiffs   here,  who   likewise  have   no



            protection of  a surety,  and no special  contract otherwise,



            can  escape  foreclosure of  their  equitable  claim only  by



            persuading us that Ehrlich is no longer law.
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                      Plaintiffs would reach that result  by pointing out



            that in Canter  v. Schlager,  358 Mass. 789,  267 N.E.2d  492
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            (1971), the  court recognized  subrogation rights.   There it



            held  that   a  surety  on  a  performance   bond  that  paid



            subcontractors has a priority  "right of subrogation over the



            rights of a construction contractor's trustee in bankruptcy."



            358  Mass. at 792,  267 N.E.2d at  494.  Strictly  this meant



            priority for  the  surety who  was "subrogated  . . . to  the



            rights  of  the subcontractors  it paid."    Id. at  791, 267
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            N.E.2d   at  494.      This  differed   from  Ehrlich   where
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            subcontractors were  held to  have no special  rights because



            here there  was a  contract.   The subcontractors  had rights



            because  "they  are  entitled  to  rely  on  a  payment  bond



            providing  expressly that they may sue thereon."  Id. at 795,
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            267  N.E.2d at 496.   The court noted,  further, that, unlike



            Ehrlich, the surety was  not claiming, timewise, in violation
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            of the Bankruptcy Act.   "[T]he surety's right dates  back to



            the date  of the bond."   Id. at  795-96, 267 N.E.2d  at 496.
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            For present plaintiffs, who lack a bond, and such timeliness,



            these are fatal distinctions.



                      Since we  are concerned  with state law  choices in



            the  treatment of  creditors,  and  not  federal law,  it  is



            pointless for plaintiffs to argue that Canter's reasoning and
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            its treatment of subcontractors' rights as depending upon the



            presence of a  surety bond was inconsistent with Ehrlich, and
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            therefore must be taken as overruling  Ehrlich -- although it
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            said it distinguished it.  Our sole duty is to take state law



            as we find it, not build on  it.  Nor would we be tempted  to



            build.    There  is  sound  public  policy  in  recognizing a



            difference   when  there   is  a   surety  in   the  picture.



            "Traditionally  sureties compelled  to  pay  debts for  their



            principal have  been deemed entitled to  reimbursement."  See
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            Pearlman v. Reliance Insurance Co., 371 U.S. 132, 136 (1962).
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            If  they were not, there  would be few  sureties.  Individual



            subcontractors can seek  mechanics liens.   Mass. Gen. L.  c.



            254.



                      Affirmed.
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