IN THE SUPREME COURT OF THE STATE OF MISSISSIPPI KGC PROPERTIES, INC. v. TRIANGLE MAINTENANCE SERVICES, LLC APPELLANT T CAUSE NO. 2011-TS-000717 APPELLEE CERTIFICATE OF INTERESTED PERSONS The undersigned counsel of record certifies that the following listed persons have an interest in the outcome of this case. These representations are made in order that the justices of the Supreme Court and/or the judges of the Court of Appeals may evaluate possible disqualification or recusal. KGC Properties, Inc., Appellant; Kenny G. Coleman, shareholder ofkgc Properties, Inc.; Triangle Maintenance Services, LLC, Appellee; Oxford Dozer Company; Claude Neal, Owner Oxford Dozer Company; J. Hale Freeland, counsel for Appellant; William Sloan and Robert Whitwell, former counsel for Appellant; William T. Cooper, counsel for Appellee. Attorney of Record for Appellants 2
TABLE OF CONTENTS CERTIFICATE OF INTERESTED PERSONS... 2 TABLE OF CONTENTS... 3 TABLE OF CASES AND OTHER AUTHORITIES... 4 STATEMENT ON ORAL ARGUMENT... 5 STATEMENT OF ISSUES... 6 STATEMENT OF THE CASE... 7 SUMMARY OF THE ARGUMENT... 9 STANDARD OF REVIEW... 10 ARGUMENT... 11 I. Under Miss. Code Ann. 85-7-181, an owner who engages a contractor is not required to pay the contractor's unpaid subcontractors if the subcontractors served stop notices after the contractor had abandoned the project when the owner is not indebted to the contractor at the time the notices are received and absent any privity of contract between the owner and the unpaid subcontractor... 11 II. An owner who chooses to independently, voluntarily, or gratuitously pay some subcontractors, which the contractor failed to pay, does not have a legal obligation to pay other subcontractors who remain unpaid yet file stop notices after the owner has made full payment to the contractor... 16 CONCLUSION... 17 CERTIFICATE OF SERVICE... 19 3
TABLE OF CASES AND OTHER AUTHORITIES Federal Circuit Court Case Genesis Ins. Co. v. Wausau Ins. Co., 343 FJd 733 (5th Cir. 2003)... 16 Federal District Court Case Monroe Banking & Trust Co. v. Allen, 286 F. Supp. 201 (N.D. Miss. 1968)... 17 Mississippi Statute Miss. Code Ann. 85-7-181..."""... 9, 15, 17 Mississippi Supreme Court Cases Browder v. Williams, 765 So.2d 1281 (Miss. 2000)... 11 City of Jackson v. Presley, 40 So. 3d 520 (Miss. 2003)... 11 Hamilton v. Hopkins, 834 So. 2d 695 (Miss. 2003)... 10-11 King v. Hankins, 209 So. 2d 190 (Miss. 1968)..""""""'"..."""""'"''''''... 10 Lake v. Brannin, 44 So. 65 (Miss. 1907)... 16-17 Newsom v. Newsom, 557 So. 2d 511 (Miss. 1990)... 10 Tucker v. Prisock, 791 So.2d 190 (Miss. 2001)... 10-11 Williams v. Taylor, 62 So. 2d 883 (Miss. 1953)... 17 Mississippi Court of Appeals Cases Chancellor v. Melvin, 52 So. 2d 360 (Miss. 1951)... 17 Chic Creations of Bonita Lakes Mall v. Doleac Elec. Co., Inc., 791 So. 2d 254 (Miss. Ct. App. 2000)..."""""''''''''''''''''''''''''''''''''''''''... 12, 14-15 Engle Acoustic & Tile, Inc. v. Grenfell, 223 So. 2d 613 (Miss. 1969)... 17 Industrial & Mech. Contractors of Memphis, Inc. v. Tim Mote Plumbing, LLC, 962 So. 2d 632 (Miss. Ct. App. 2007)... 11 Service Elec. Supply Co., Inc. v. Hazlehurst Lumber Co., Inc., 932 So. 2d 863 (Miss. Ct. App. 2006)...""'"''..."""... 12-14 Summerall Electric Co., Inc. v. Church of God at Southaven, 25 So. 3d 1090 (Miss. Ct. App. 2010)..."''''''''...""''''''''''''... 13 Timms v. Pearson, 876 So. 2d 1083 (Miss. Ct. App. 2004)... 12-13 4
STATEMENT ON ORAL ARGUMENT Oral argument is unnecessary because this appeal simply asks the Court to apply Mississippi Code Ann 85-7-181 and the prerequisites the statute imposes before an owner is obligated to pay a subcontractor whom the contractor failed to pay after the contractor received its final payment and abandoned the project. This appeal simply asks this Court to apply the statute as written and explained by the precedent, and reverse the holding which imposed a legal obligation upon the appellant owner in the absence of any contractual or statutory obligation to the subcontractor. 5
STATEMENT OF ISSUES I. Whether the owner who engages a contractor may be required to pay the contractor's unpaid subcontractors if the subcontractors served stop notices after the contractor had abandoned the project, although the owner was not indebted to the contractor at the time the notice was received, and absent any privity of contract between the owner and the unpaid subcontractor. II. If the owner chooses to gratuitously pay some of the local subcontractors which the contractor failed to pay, does the owner have a legal obligation to pay any other subcontractor the contractor failed to pay as well? 6
STATEMENT OF THE CASE Appellant KGC Properties, Inc. (hereinafter "KGC" or "Owner") entered a contract with Oxford Dozer Company to construct a development near Oxford, Mississippi. Subsequently, Claude Neal, the owner of Oxford Dozer signed a subcontract with Appellee Triangle Maintenance to perform curb and gutter work for the development. Triangle Maintenance had no contractual relationship with KGC. (Exhibit 3 and Tr. 8-9, 12, 18, 38-40). Triangle Maintenance sent Oxford Dozer an invoice for work performed in the amount of $35,601.93 on September 18, 2008. (Exhibit 2, Record Excerpts p. 8; and Tr. 10, 39). In October 2008, Claude Neal submitted a pay request to KGC for payment of $43,382.70 which included $35,904.00 for curb and gutter work. (Exhibit 4, p. 13 and Tr. 23-25, 31-32, 42-45, 47, 98-99, 100-101). The project engineer certified the work had been done, and KGC paid Oxford Dozer $43,382.70. Claude Neal signed an affidavit stating the subcontractors had been paid. (Exhibit 5, Record Excerpts p. 14; and Tr. 25, 40-42, 46, 56, 98-100). After that October 22, 2008 payment, Oxford Dozer abandoned the project, and KGC did not owe Oxford Dozer for any additional work. (Exhibit 10 and Tr. 95). After the contractor had abandoned the project, KGC dealt directly with the asphalt company with which it had entered into a separate contractual arrangement. (Exhibit 13 and Tr. 101-102). The asphalt company invoiced KGC for the work it performed thereafter, and KGC consequently paid the asphalt company directly. (Exhibit 13 and Tr. 101-102). KGC subsequently received its first stop payment notice under Miss. Code Ann. 85-7- 181 from Total Lawn Care on October 29, 2008. KGC received two additional stop payment notices in November 2008, one from Williams Equipment & Supply and the other from CMC Ready Mix. (Exhibit 3; Exhibit 5, Record Excerpts p. 14; and Tr. 23, 29-31, 99). The project had been behind schedule and should have been completed in September 2008. It was still 7
incomplete in October 2008, and as a result, KGC requested Oxford Dozer to complete the job. KGC wrote Oxford Dozer and asked that Oxford Dozer complete the project. KGC advised Oxford Dozer that it had received three stop notices, and that under the contract with Oxford Dozer, KGC would pay Oxford Dozer $32,000 to complete the contract as agreed. If Oxford Dozer did not complete the contract, KGC would have to hire someone else to complete the project. Claude Neal of Oxford Dozer told Kenny Coleman of KGC that he could not afford to finish the job, and he offered to complete the job using a "straw man," which KGC would pay and thereby circumvent the claims of the subcontractors KGC had received. Rather than participate in that scheme, KGC paid another contractor $52,190.1 0 to complete the job that Oxford Dozer had abandoned. (Exhibit 6; Exhibit 11, Record Excerpts p. 15; Exhibit 16, Record Excerpts p. 18; and Tr. 96-98, 105-108). Oxford Dozer filed a materialman/construction lien against the KGC development, which the trial court set aside. There is no dispute but that Oxford Dozer was not owed anything under its contract with KGC. (Exhibit 9, 14, 15 Tr. 84,103-105, Clerk's record 153). On January 30, 2009, a fourth stop payment notice was filed by Sparks Auto Parts for $13,385.85, and Triangle Maintenance filed a stop payment notice on February 2, 2009, in the amount of $35,601.93. (Exhibit 2, 3 and Tr. 30). On March 12, 2009, KGC then gratuitously paid Total Lawn Care, Williams Equipment & Supply, and CMC Ready Mix even though KGC did not owe them anything. (Tr. 88-92). Triangle Maintenance brought suit against KGC seeking payment as a subcontractor under Mississippi's stop notice statute. The trial court ruled in favor of Triangle Maintenance, requiring KGC to pay Triangle Maintenance, absent any contract between the two parties, and based on the false premise that the contract was incomplete and funds had to be paid by KGC to 8
complete the project so some of those funds should have been paid to Triangle Maintenance. The trial court stated, "there is no question in the Court's mind that at least $32,000.00 was owed on the contract." (Tr. 121, Record Excerpts p. 31). The Trial Court's ruling required the owner to pay more than it was required under contract since it had to pay more than Oxford Dozer agreed to complete the job and pay Oxford Dozer's subcontractor, Triangle Maintenance, whom Oxford Dozer represented it had paid. Oxford Dozer was owed nothing at the time KGC received the stop notice from Triangle Maintenance in February 2,2009. SUMMARY OF THE ARGUMENT Section 85-7-181 of the Mississippi Code permits a subcontractor to recover directly from the owner of property by way of a "stop notice" to the owner when a general contractor fails to pay the subcontractor. Courts have required as a prerequisite to payment that the owner owe money to the general contractor. KGC received stop notices from five subcontractors and paid three of them. However, KGC owed no money to its general contractor, Oxford Dozer, and Oxford Dozer refused to complete the contract. Should Oxford Dozer have completed the contract, it would have received an additional $35,939.60 which remained to be paid to complete its performance of the contract with KGC. Subsequent to Oxford Dozer's breach, KGC was forced to hire another general contractor to complete construction, and Oxford Dozer was not owed any additional sums due to its failure to complete performance. Thus, KGC made its final payment to the contractor on October 22, 2008, in reliance upon the owner's affidavit that it had paid the subcontractors and without having received any stop notice from any subcontractor. After Oxford Dozer abandoned the contract, KGC received five stop notices, including the stop notice from the Appellee Triangle Maintenance. The Chancellor recognized that in 9
order for KGC to be legally obligated to pay a subcontractor Oxford Dozer had not paid, KGC must have owed Oxford Dozer funds for performance of the contract at the time KGC received the stop notice. (Tr. 121, Record Excerpts p. 31). However, it was undisputed that Oxford Dozer had been fully paid for its performance, that Oxford Dozer was in breach of abandoning the project, and that it cost KGC thousands more to pay a third party to complete the work that Oxford Dozer abandoned. Notwithstanding, the Chancellor leapt to the conclusion that since more had to be paid to complete the contract, Triangle Maintenance was entitled to some of the additional funds which KGC paid. Triangle Maintenance was not entitled to anything simply because KGC owed nothing to Oxford Dozer when KGC received Triangle Maintenance's stop notice. Nothing in the record supported the chancellor's conclusion, i.e., there was no substantial evidence in the record justifying his findings. Thus, the trial court erred in failing to follow the prerequisites set out in Miss. Code Ann. 85-7-181, and the trial court erred in finding that KGC was obligated to pay Triangle Maintenance. Consequently, the Court of Appeals should reverse. STANDARD OF REVIEW In reviewing the judgment of a chancery court, an appellate court "will not disturb the findings of a chancellor when supported by substantial evidence unless the chancellor abused his discretion, applied an erroneous legal standard, was manifestly wrong, or was clearly erroneous." Hamilton v. Hopkins, 834 So.2d 695, 699 (~ 12) (Miss. 2003) (citations omitted). Additionally, where the chancellor has made no specific findings, appellate courts will proceed on the assumption that he resolved all such fact issues in favor of the appellee. Newsom v. Newsom, 557 So.2d 511, 514 (Miss. 1990). A chancellor's interpretation and application of the law, however, is reviewed de novo. ruckerv. Prisock, 791 So.2d 190, 192 (~ 10)(Miss. 2001). 10
Where there is a disputed issue of fact, the appellate court gives deference to the chancellor's resolution of factual disputes. Hamilton, 834 So.2d 695, 699 (~ 12) (Miss.2003). However, "[w]here a 'chancellor's award... is not supported by substantial evidence but rather on the chancellor's mistaken view of the evidence,' the chancellor's judgment must be reversed." Industrial & Mech. Contractors of Memphis, Inc. v. Tim Mote Plumbing, LLC, 962 So. 2d 632, 637 (Miss. Ct. App. 2007) (quoting Browder v. Williams, 765 So.2d 1281, 1287-88 (~~ 32, 36) (Miss. 2000». A trial court's interpretation and application of law is reviewed de novo by the appellate court. City of Jackson v. Presley, 40 So. 3d 520, 522 (Miss. 2003); Tucker v. Prisock, 791 So. 2d 190, 192 (~10) (Miss. 2001). ARGUMENT I. Under Miss. Code Ann. 85-7-181, an owner who engages a contractor is not required to pay the contractor's unpaid subcontractors if the subcontractors served stop notices after the contractor had abandoned the project when the owner is not indebted to the contractor at the time the notices are received and absent any privity of contract between the owner and the unpaid subcontractor. The trial court reached the conclusion that the contractor was owed funds under the original contract, and thus, the owner should have paid some of those funds to the subcontractor, Triangle Maintenance. The conclusion was not supported by the record because there was no dispute that the contractor was not owed additional funds, and the Appellee Triangle Maintenance sent its stop notice months after the final payment was made to the original contractor. The Chancellor assumed that because additional work was to be performed under the contract which the owner KGC had to pay another contractor to perform, then some of those 11
payments should have gone to Triangle Maintenance. However, Triangle Maintenance's rights, if any, arose out of the owner's obligations to pay Oxford Dozer, the original contractor on the job. KGC owed nothing to the contractor Oxford Dozer, and therefore, Triangle Maintenance's stop payment lien could not attach to a payment obligation owed to Oxford Dozer. See Service Elec. Supply Co., Inc. v. Hazlehurst Lumber Co., Inc., 932 So. 2d 863, 869 (Miss. Ct. App. 2006) (stop payment notice is a statutory lien which attaches to funds due and owing to the contractor from the owner). The trial court ignored essential statutory requirements, which are narrowly construed and required to be met before an owner can be compelled to pay a subcontractor, absent privity of contract between the owner and the subcontractor. First, the owner must owe a payment to the contractor upon which a stop notice lien can attach; and second, the stop notice must have been received before the payment is made to the contractor. See Chic Creations of Bonita Lakes Mall v. Doleac Elec. Co., Inc., 791 So. 2d 254, 258 (Miss. Ct. App. 2000). Neither of these conditions had been met. Consequently, the trial court misinterpreted and misapplied the stop payment notice statute, which has been consistently applied by our appellate courts, based upon a conclusion not supported by the record. As a result, the trial court's ruling is not entitled to deference by this Court. Instead, this Court should review the decision de novo and reverse and render the decision. The Court of Appeals reversed a chancellor who held that an owner was required to pay the subcontractors which the contractor had failed to pay after the contractor abandoned the job. As in the case at bar, the trial court in Timms v. Pearson, 876 So. 2d 1083, 1085A (Miss. Ct. App. 2004), ordered the owner to pay the subcontractors even though the contractor was not owed anything for the project and the owner received stop notices when the owner was not indebted to the contractor. The chancellor's finding was based solely on the fact that the 12
subcontractors' bills remained unpaid. The Court of Appeals noted, "if a subcontractor serves a stop notice after the owner has paid the contractor the full amount due under the contract, the owner is not liable to the subcontractor." Id. at 1086 (citations omitted). Because there was no privity of contract between the subcontractors and the owners, and the subcontractors had not, timely served stop notices upon the owner, the chancellor's order requiring the owner to pay the subcontractors was reversed and rendered. Id. at 1087. Also on point is Summerall Electric Co., Inc. v. Church a/god at Southaven, 25 So. 3d 1090 (Miss. Ct. App. 20 I 0), another case in which a contractor abandoned the project leaving his subcontractors unpaid and requiring the owner to find and pay another contractor to complete the project. The chancellor found that since the contractor was not owed any funds for its performance of the contact, its unpaid subcontractors were barred from recovery from the owner. Id. at 1092. The trial court found "that the subcontractors could not recover from the Church because they had failed to give stop payment notices before the Church made its final payment to NCS, the general contractor." Id. at 1092. KGC's payment in full extinguished its liability to Oxford Dozer's subcontractors. See Service Elec. Supply Co., Inc. v. Hazlehurst Lumber Co., Inc., 932 So. 2d 863 (Miss. Ct. App. 2006) ("the owner's payment in full of all amounts due to the prime contractor prior to the service of a stop notice extinguishes the owner's liability"). In Service Electric Supply Co., the owner agreed to issue joint checks to the subcontractor and the contractor. Subsequently, the contractor abandoned the project, and the owner was required to hire another contractor to complete the contract. The owner stopped paying the original contractor on the job after which the owner received a stop notice from the unpaid subcontractors. The trial court granted 13
summary judgment because tbe subcontractors had no right to recover pursuant to any derivative contract right or statute. Id. at 868. After Oxford Dozer abandoned the project, KGC hired another contractor whom it had to pay $52,190.10 to complete the project which was more than the remaining $32,688.50 that Oxford Dozer would have received had it completed the work under the contract. However, since Oxford Dozer abandoned the project and did not complete the work, nothing was due and owing to the original contractor Oxford Dozer when KGC received tbe stop notices. Even still, KGC paid some of the subcontractors which Oxford Dozer had failed to pay and made out the checks to both the subcontractors that it chose to pay and to Oxford Dozer as well. Triangle Maintenance brought this suit claiming that if KGC paid anyone subcontractor, it should have paid all of the subcontractors that Oxford Dozer had failed to pay. The fact tbat KGC chose to pay some of the subcontractors did not create a new legal right to payment from the owner, nor did KGC guarantee the contractor's performance to any third party by anything it said or did. Simply put, Triangle Maintenance believes it should have been paid if KGC voluntarily chose to pay some of the subcontractors Oxford Dozer failed to pay. Absent a contract, Triangle Maintenance's rights arise from statute and the contractor's contractual right to payment from the owner KGC. See Chic Creations of Bonita Lakes Mall v. Doleac Elec. Co., Inc., 791 So. 2d 254 (Miss. Ct. App. 2000). In Chic Creations, the lessee ofa mall space, Chic Creations, agreed to lease a mall space and the mall owner agreed to contribute $25,000.00 toward the construction project in the leased mall space. Chic Creations hired a contractor which it paid. After Chic Creations paid the general contractor, a subcontractor sent a stop notice to the owner and claimed a right to the funds tbe mall owner had agreed with Chic Creations that it would pay toward the construction project. Like Triangle Maintenance in the 14
instant case, the subcontractors argued that "the Mississippi stop notice statute gives them a claim against the funds." Ed. The Court of appeals noted: The statute permits subcontractors or materialmen who have not been paid by the contractor to file a notice that requires the owner to retain any funds it still holds that otherwise would be paid to the contractor: When any contractor or master workman shall not pay any person who may have furnished materials used in the erection, construction, alteration of any house, building, structure... the amount due by him to any subcontractor therein... any such person, subcontractor,... may give notice in writing to the owner thereof of the amount due him and claim the benefit of this section; and, thereupon the amount that may be due upon the date of the service of such notice by such owner to the contractor..., shall be bound in the hands of the owner for the payment in full, or if insufficient then pro rat [a]. Miss. Code Ann. 85-7-181 (Rev. 1999). Ed. at 257-58 (alteration in original). The Court of Appeals reversed the chancellor for ordering the funds the mall owner was to contribute to the project to be paid to the subcontractors. Id.at 256. The Court of Appeals held that the subcontractors were not third party beneficiaries of those funds, and since the $25,000 the mall owner had agreed to contribute to the project were not funds due and owing to the contractor, it reversed the chancellor's ruling that the unpaid subcontractors were entitled to a pro rata share of those funds. Id. at 258. Similarly, neither the funds KGC ultimately paid to have someone else complete the job, nor those funds that were used to gratuitously pay subcontractors were due and owing to the contractor Oxford Dozer. Like the chancellor in Chic Creations, the chancellor in the trial court erred in holding that KGC had to pay an unpaid subcontractor even though KGC owed the original contractor nothing. 15
II. An owner who chooses to independently, voluntarily, or gratuitously pay some subcontractors, which the contractor failed to pay, does not have a legal obligation to pay other subcontractors who remain unpaid yet file stop notices after the owner has made full payment to the contractor. A voluntary payment is one that cannot be taken back, made without compulsion or mistake of fact. See Genesis Ins. Co. v. Wausau Ins. Co., 343 F.3d 733 (5th Cir. 2003). An independent undertaking to pay some subcontractors does not obligate an owner to pay other subcontractors. Lake v. Brannin, 44 So. 65 (Miss. 1907). In Lake v. Brannin, the owner of a building independently agreed to pay some subcontractors for materials furnished by them prior to receiving notice from other subcontractors that they had not been paid by the general contractor. Like the contractor in the instant case, the contractor in Lake abandoned the project without having paid the parties who supplied materials. Though nothing was owed to the contractor, the unpaid materialmen brought suit arguing that they too should be paid by the owner, just as the other materialmen had been paid pursuant to the owner's independent agreement with them. Id. Since the owner did not owe the general contractor any amount at the time the owner received notice from the unpaid subcontractors, and the owner and the unpaid materialmen had not independently entered into an agreement for direct payment by the owner, the owner was not liable. Id. KGC gratuitously paid Total Lawn Care, Williams Equipment & Supply, and CMC Ready Mix after receiving stop notices from all five subcontractors. Triangle Maintenance was not privy to this independent undertaking by KGC. Lake stands for the proposition that an independent undertaking by the owner to pay some subcontractors imposes no obligation on him to pay unpaid subcontractors such as Triangle Maintenance. Id. Since KGC voluntarily paid 16
three of the subcontractors after receiving all five stop payment notices when nothing was due the contractor, KGC was not legally obligated to pay Triangle Maintenance. Again, Mississippi law is replete with cases holding that in order for a subcontractor to recover under the stop payment notice statute, there must be something due by the owner to the general contractor at the time of service of the notice. Monroe Banking & Trust Co. v. Allen, 286 F. Supp. 201 (N.D. Miss. 1968); Engle Acoustic & Tile, Inc. v. Grenfell, 223 So. 2d 613 (Miss. 1969); Williams v. Taylor, 62 So. 2d 883 (Miss. 1953); Chancellor v. Melvin, 52 So. 2d 360 (Miss. 1951). Furthermore, In King v. Hankins, 209 So. 2d 190 (Miss. 1968) (reviewing a materialman's lien), the Court held that where a contractor did not complete work on a residence as required by his contract with the owner, he was not entitled to any payment from the owner and accordingly the contractor's materialman had no lien on the owner's property nor any valid claim against the owner. Since KGC owed nothing to Oxford Dozer at the time of the filing of the subcontractors' stop payment notices, and in fact, had to hire another contractor to complete the work, and because KGC did not engage in an independent undertaking to pay Triangle Maintenance, KGC is not liable to Triangle Maintenance under the stop notice statute. CONCLUSION Mississippi's stop payment notice statute, 'as set forth in Miss. Code Ann. 85-7-181, provides a limited remedy which attaches a lien upon funds due and owing to a general contractor upon the owner's timely receipt of the stop notice. If the owner is not indebted to the contractor at the time the stop notice is received, the stop notice has no funds upon which the stop notice lien can attach. Mississippi appellate courts do not impose an equitable lien and have held that subcontractors are not third party beneficiaries to funds paid to parties other than the 17
CERTIFICATE OF SERVICE I, the undersigned counsel of record for the Appellants, do hereby certify that I have this day served a true and correct copy of the forgoing Brief of Appellant upon the following persons via United States Mail, postage prepaid, at the following addresses: William T. Cooper Nichols Crowell Gillis Cooper & Amos Post Office Box 1827 Columbus, Mississippi 39703 Chancellor Glenn Alderson Post Office Drawer 70 Oxford, Mississippi 38655 f/i This, the ~y of December, 2011. 19