This summary was computer-generated without any editorial revision. It is not official, has not been checked for accuracy, and is NOT citable.
Facts
A dispute arose from a public construction project in New Mexico involving a fund claimed by a materialman (Gosney & Sons, Inc.) and a secured finance company (KBK Financial, Inc.) that had loaned money to a subcontractor (Hilfiker Systems, Inc.). Hilfiker supplied materials to the project but failed to pay Gosney, its supplier, after filing for bankruptcy. KBK, as Hilfiker's assignee, sought payment from the fund, while Gosney claimed priority as a materialman (paras 1, 4-12).
Procedural History
- District Court of Bernalillo County: Granted summary judgment in favor of the materialman, Gosney & Sons, Inc., determining that it should be paid from the interpleaded fund before KBK Financial, Inc..
Parties' Submissions
- Appellant (KBK Financial, Inc.): Argued that it held a perfected security interest in Hilfiker's accounts receivable under the Uniform Commercial Code (UCC) and was entitled to the funds free of any claims by Gosney. KBK contended that the contract between Hasse and Hilfiker did not require payment to materialmen as a condition for payment to Hilfiker (paras 13-14, 23).
- Appellees (Hasse Contracting Company, Inc. and Gosney & Sons, Inc.): Asserted that KBK's claim was subordinate to Gosney's as a materialman under public policy and statutory provisions. They argued that Hilfiker's failure to pay Gosney breached its contractual obligations, and Hasse was entitled to withhold payment to avoid double liability (paras 15, 22, 28).
Legal Issues
- Was KBK Financial, Inc. entitled to priority over Gosney & Sons, Inc. in the interpleaded fund under the UCC?
- Did Hilfiker Systems, Inc.'s failure to pay its materialman (Gosney) constitute a valid defense for Hasse Contracting Company, Inc. to withhold payment?
- Should public policy and statutory provisions favor materialmen over secured creditors in disputes over retained funds?
Disposition
- The Court of Appeals of New Mexico affirmed the summary judgment in favor of Gosney & Sons, Inc., holding that the materialman had priority over KBK Financial, Inc. in the interpleaded fund (paras 1, 35-36).
Reasons
Per Bustamante J. (Pickard and Wechsler JJ. concurring):
KBK's Security Interest: The court acknowledged that KBK held a valid and perfected security interest in Hilfiker's accounts receivable under the UCC. However, KBK could not acquire greater rights than Hilfiker possessed, and Hilfiker's claim to payment was subject to its obligation to pay its materialmen (paras 16-20, 35).
Public Policy and Materialmen's Priority: The court emphasized the public policy underlying New Mexico's Little Miller Act and materialmen's lien statutes, which aim to protect suppliers and ensure proper payment down the construction chain. The court implied an obligation in construction contracts to pay materialmen, even in the absence of explicit contractual terms (paras 28-29, 34).
Defenses Against Hilfiker's Claim: Hasse was entitled to assert Hilfiker's failure to pay Gosney as a defense under UCC § 9-318(1). Allowing KBK to recover the funds would have exposed Hasse to double liability, as it would still be responsible for paying Gosney under the Little Miller Act bond (paras 21-22, 28).
Precedent and Industry Expectations: The court cited case law from other jurisdictions supporting the priority of materialmen over secured creditors in disputes over retained funds. It also noted that the construction industry's economic viability depends on ensuring that payments flow properly to all parties involved in a project (paras 30-34).
In conclusion, the court affirmed the lower court's decision, prioritizing Gosney's claim to the fund over KBK's secured interest to protect the materialman's rights and uphold public policy (paras 35-36).