Questions are frequently asked by alarm dealers when a customer or a subscriber files for bankruptcy. Can the alarm company collect the past due account? Secondly, during the bankruptcy, can the alarm company remove its equipment and discontinue service if the receiver fails to pay?

Although it didn’t involve a security-related company or directly answer the questions, a recent New York case did indirectly address the issue. The plaintiff contracted with the defendants to purchase materials and plans for a log cabin home. The plaintiffs made payment in full, but before delivering all the materials, Lincoln Logs filed for bankruptcy. The plaintiff moved in bankruptcy court for turnover of the undelivered materials, or, as an alternative, for a refund for the undelivered materials. The bankruptcy judge held that by operation of New York law, the respondents’ payment to Lincoln Logs was subject to a statutory trust and not part of the bankruptcy estate and should be repaid to the plaintiff.

On appeal, the United States District Court for the Northern District of New York contended that the purchase agreement between the parties was a contract for the sale of goods and not a home improvement contract.

The court referred to Section 770, which defined “home improvement” as goods and services that are bought in connection with home improvement. Such home improvement goods and services include burglar alarm systems, and any other goods which, at the time of sale or subsequently, are to be so affixed to real property by the home improvement contractor as to become a part of real property whether or not severable from it. Additionally, “home improvement contract” was defined as an agreement for the performance of home improvement between a home improvement contractor and an owner and where the aggregate contract price specified in one or more home improvement contracts including all labor, services and materials to be furnished by the home improvement contractor exceeded $500.

The question before the court was whether the purchase agreement between the parties was a “home improvement contract.” The court pointed out that the purchase agreement was for a “basic home package.” The parties signed a construction liability disclaimer that stated in part, that the purchaser understood that the purchase agreement entered into between the purchaser and Lincoln Logs Limited related solely to the sale of the home, solarium package and/or building materials from Lincoln Logs Limited and not in any manner to its construction. The contract further provided that when the purchaser hired a contractor to perform any construction-related services with the log home package, that any and all work by that contractor was performed independently of Lincoln Log Limited and its dealer.

Therefore, the court found that the respondents purchased from Lincoln Logs a building plan and materials for a home to be constructed by a contractor who was to be hired by the respondents and who had no connection to Lincoln Logs and was therefore not a home improvement contract within the meaning of Section 770. Therefore, the court found that the money paid by the respondents to Lincoln Logs for undelivered materials was not subject to a statutory trust. Therefore the order was reversed and remanded to bankruptcy court for any appropriate further action.

The bottom line is, unless there is a specific agreement setting up some type of statutory trust, there is no preference or priority for the creditor. However, by that court’s interpretation of the law, it is important to note that home improvements include burglar alarm systems.

Readers Ask

Q: I own an alarm company. We are presently drafting our contracts and I would like to include a provision that would limit the period of time in which the subscriber can bring an action against the company, notwithstanding what the statute of limitations may be in our state. Can I include such a limitation?

A: I am not sure what the law may be in every state, but in many states you can limit the period of time in which an action can be brought against your company. In a recent case in Ohio, the alarm company did in fact limit the period of time in which a claim could be made against the alarm company to one year after the cause of action occurred. There was a loss and the insurance company filed an action against the alarm company in excess of one year after the loss occurred. The plaintiff argued that the contract had expired and that the limitation period was no longer in effect.

The court in that case indicated that under Ohio law, parties to a contract may agree to a limitations period shorter than authorized by law, so long as the period was reasonable. The court held that the plaintiff failed to bring its claims within the one year period, and therefore the claims were barred.