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In re Gebco Investment Corp.

decided: February 18, 1981.

IN THE MATTER OF: GEBCO INVESTMENT CORPORATION, CREATIVE DEVELOPMENT CORPORATION, PLAZA DEVELOPMENT CORPORATION, FIDELITY LOAN AND INVESTMENT CORPORATION AND MEADOWLANDS INN, DEBTORS MONROEVILLE ELECTRONICS CO., APPELLANT


APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 80-0188 sur Bankruptcy No. 77-0090)

Before Gibbons and Weis, Circuit Judges and Whipple*fn*, District Judge.

Author: Weis

Opinion OF THE COURT

A subcontractor on an apartment building project and the trustee in bankruptcy for the owner each claim the right to undisbursed construction mortgage funds in the hands of a bank. Discerning no contract between the subcontractor and the bank or the owner, the district court entered judgment for the trustee. We conclude that, under Pennsylvania law, the subcontractor is entitled to recover on third party beneficiary, equitable assignment, or unjust enrichment theories and accordingly reverse.

I

Gebco Investment Corporation entered into an agreement with its wholly owned subsidiary, Lion Development and Construction Corporation, to build an apartment house near Pittsburgh, Pennsylvania. Financing for the project was provided by Equibank, which loaned $85,000 secured by a mortgage executed in February 1974. To satisfy one condition of the loan, Gebco and Lion agreed that no liens would be filed by any subcontractors. Pursuant to Pennsylvania law, this no-lien contract was duly recorded in the Prothonotary's Office of Allegheny County, Pennsylvania.

As part of the transaction with Equibank, Gebco signed a construction loan agreement providing that the bank would advance monies in stages as the building progressed. According to the payment schedule incorporated in the agreement, Gebco and Lion would certify monthly the work completed and costs incurred. The bank would then advance 90% of the requested amount, reserving the right to hold the remainder in escrow to satisfy any outstanding indebtedness associated with the construction. The agreement contained a provision reciting, "Lender will ... lend ... the sum of $85,000.00 to be used only for the payment of labor and material costs in the construction of the Improvements...." The following paragraph of the agreement states, "All monies borrowed or advanced ... will be applied entirely and exclusively for the payment of the labor and materials used in the construction...." The contract documents also required that before disbursement of the final installment, Gebco was to produce "(properly) executed Release of Liens evidencing payment for all labor done and materials delivered in connection with the proposed Improvements." The bank was given the option of advancing the sums directly to subcontractors.

Construction began on the following month and in April 1975 the appellant, Monroeville Electric Co., Inc.,*fn1 began performance of its subcontract to install the electrical equipment in the building. During the autumn of that year, various subcontractors, including Monroeville Electric, encountered delays in payment and were referred by Gebco to the bank. Although bank officials did not guarantee payment of the subcontractors' bills, they stated that sums adequate to compensate the subcontractors were being held and would be disbursed when the project was completed. Even though no independent agreements were undertaken by the bank, the subcontractors returned and completed their work.

Apparently in November 1975, after Equibank had advanced a total of $59,580, the bank held Gebco in default.*fn2 Nevertheless, it was after that date that some of the subcontractors continued to work on the apartment building. Invoking the terms of the construction loan agreement, the bank refused to advance further funds to Gebco, and retained $25,420.

In February 1977 Gebco filed a Chapter X petition for reorganization, and in September of that year, pursuant to an order of the bankruptcy court, the trustee sold the completed apartment building for $120,000. The mortgage was paid in full, and in the following month the trustee brought suit against the bank to recover the $25,420 of undisbursed funds. The bank disclaimed any interest in the money and invoked Bankruptcy Rule 719*fn3 to join a number of subcontractors, including Monroeville Electric, as parties to the litigation.

The bankruptcy judge held that under § 70(a) of the Bankruptcy Act, 11 U.S.C. § 110 (1976), the trustee succeeded to Gebco's right under the construction loan agreement to collect sums due from the escrow fund held by the bank. The judge concluded that the subcontractors' claims failed because Equibank had no legal obligation under the terms of the loan agreement to pay the money to the subcontractors. Although the agreement gave Equibank the right to protect the security position of its mortgage by paying subcontractors directly, the bank had not exercised its prerogative. Nor did Equibank enter into separate agreements with the subcontractors or induce them to complete their work. The bank, therefore, was directed to turn over the money to the trustee.

The subcontractors appealed the decision to the district court, which affirmed without opinion. Only one subcontractor, Monroeville Electric, has appealed to this court.

II

It is important at the outset to clarify the positions of the parties to this litigation. Equibank concedes that it is not entitled to the money but is merely a stakeholder. The dispute, then, is between the trustee, standing in the shoes of the owner Gebco, and the subcontractor. When asserting a right of action against another in circumstances such as those present in this case, the trustee has no greater rights than the bankrupt had. Mutual Life Trust Insurance Co. v. Wemyss, 309 F. Supp. 1221, 1231 (D.Me.1970); 4A Collier on Bankruptcy P 70.28, at 385 (14th ed. 1978). Furthermore, "any defense, legal ...


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