District Court in South Carolina Holds Subcontractor for Underground Utility Work Not Entitled to Statutory Lien Applicable to Erection, Alteration or Repairs of Buildings; IRS Takes Priority

Bell South Communications, Inc. dba Southern Bell Telephone and Telegraph Co. v. Dekalb Concrete Pro
1995 U.S. Dist. LEXIS 11443 (D.S.C. July 27, 1995)

BellSouth Telecommunications, Inc. (“Southern Bell”) initiated interpleader proceedings to determine which one of three Defendants held priority in the debt owed by Southern Bell to the fourth Defendant, Kelly Green, Inc. (“Kelly Green”). Each of the three Defendants were creditors to Kelly Green. In June of 1993, Southern Bell contracted Kelly Green to perform miscellaneous work connected with burying underground telephone cable. Kelly Green, in turn, subcontracted a portion of the work to Defendant Dekalb Concrete Products, Inc. (“Dekalb”). Shortly thereafter, Kelly Green failed to pay Dekalb, Defendant, Internal Revenue Service (“IRS”) for employment related taxes and Defendant King & Vernon, P.A. (“King & Vernon) for legal services rendered.

In April, 1994, Dekalb notified Southern Bell that it had not been fully paid under its contract with Kelly Green, which prompted Southern Bell to withhold $8,871.70 from its contract with Kelly Green. After receiving conflicting demands from the three creditors, Southern Bell initiated an interpleader action pursuant to the Federal Interpleader Statute, 28 U.S.C. 1335. Southern Bell paid the disputed amount into the court’s registry and was discharged from any obligation to the three claimants.

The IRS assessed the tax liability claim against Kelly Green on April 5, 1993. Pursuant to 26 U.S.C. 6321 and 6322, a federal tax lien arose on the assessment date and attached to all Kelly Green property. For priority purposes, the federal tax was perfcreated by the assignment was filed with the Secretary of State on May 12, 1994 and August 1, 1994.

As the relevant dates were not in dispute, the question before the court was to determine which claim was entitled to priority so as to recover all the funds impleaded into the court.

The court initially disposed of King & Vernon’s claim because it did not file its security interest until, at the earliest, May of 1994, whereas the federal tax lien was filed on June 22, 1993. Dekalb, conceding that its judgment was junior to the federal tax lien a year prior, relied upon the South Carolina’s statutory subcontractor’s lien, S.C. Code Ann. 29-7-10, which provides:

Any contractor in the erection, alteration or repairing of buildings in this state shall pay all . . . subcontractors and material men for their lawful services out of the money received for the erection, alteration, or repairs of buildings . . . and persons who shall furnish material for any such building shall have a first lien on the money received by such contractor for the erection, alteration or repair of such building in proportion to the amount of their respective claims[.]

In contrast to a traditional mechanics lien, to be accorded priority against adverse claimants, Dekalb was not required to file or serve a notice of its lien. Thus, Dekalb argued that it was entitled to the $4,704.25, the amount furnished to Kelly Green prior to the IRS’s filing the tax lien.

The court rejected Dekalb’s for two reasons. First, the statutory lien created by Section 29-7-10 does not come into existence until the contractor has received the money. In the case before the Court, Kelly Green never obtained possession of the disputed funds.
Second, in strictly construing the provisions of the statute at issue, the court held that the statutory lien had no application to the work performed by Dekalb. Section 29-7-10 provides a lien on money received by a contractor “for the erection, alteration or repair of a building.” Dekalb, rather than erect, alter or repair a building, buried underground telecommunications wires, with occasional manholes. Citing South Carolina law, the court was constrained to read the term “building” literally, and thus the statutory lien provided no protection to Dekalb’s furnishing of materials related to underground telecommunications equipment.

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