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Ram Construction Co. v. American States Insurance Co.

December 6, 1984

RAM CONSTRUCTION COMPANY, INC., DEBTOR
v.
AMERICAN STATES INSURANCE COMPANY; AMERICAN STATES INSURANCE COMPANY V. RAM CONSTRUCTION COMPANY, INC. AND EQUIBANK AMERICAN STATES INSURANCE COMPANY, APPELLANT



APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA

Author: Weis

Before: ALDISERT, Chief Judge, HUNTER and WEIS, Circuit Judges

Opinion OF THE COURT

WEIS, Circuit Judge.

In this appeal we determine that the bankruptcy judge's ruling -- that two separate agreements existed between a contractor and owner -- was a matter of contract construction subject to plenary review. Although the district court used the clearly erroneous test, the error is not reversible because under either standard the result here is the same. We also conclude that the bankruptcy judge did not err in ruling that a surety's right of equitable subrogation does not include the right to use profits from a post-bankruptcy contract to offset losses on pre-bankruptcy jobs. Accordingly, we will affirm.

In two consolidated adversary proceedings, the bankruptcy judge determined that liens of a surety should be avoided and denied it priority. The district court on appeal affirmed the orders of the bankruptcy judge.

Ram Construction Company filed for reorganization under Chapter 11 of the Bankruptcy Code on January 21, 1983. At that time, among other construction jobs, Ram was engaged in the removal of a landslide on Saw Mill Run Boulevard in Pittsburgh, Pennsylvania (Slide I), pursuant to a contract with the City dated December 8, 1982. As it had for other projects Ram was performing for the City, American States furnished a performance bond, as well as a labor and material bond, for the Slide I contract.

On February 16, 1983, about three weeks after the filing of the petition, a large rock slide occurred at the project site on the Boulevard (Slide II). There were two fatalities, and the road was closed, causing severe traffic congestion. The City was anxious to remove all debris from the roadway, to stabilize the hillside, and to reopen the Boulevard promptly. The Director of Public Works requested a proposal from Ram to undertake the work.

On February 21, 1983, Ram responded to the City by a letter agreeing to clear the road, but at substantially increased unit prices on all categories of earth and rock removal. Part of the increase was the result of the City's insistence that the work proceed 24 hours a day, seven days per week until completion. To facilitate the work the road would remain closed for the duration of the project, a change from the Slide I contract under which traffic had to be maintained.

The Director of Public Works then asked City Council for "Authorization and Approval for Extra Work on the Saw Mill Run Boulevard rock slide." After receiving that approval, the Department of Public Works issued an "Authorization for Additional Work," contract. A new written contract between the City and Ram was not prepared nor were new surety bonds executed.

Under the provisions of the Slide I contract, the City could have required Ram to perform "additional" work at the same unit prices, unless the amount of added work exceeded twenty-five percent of the original contract. The parties agree that that proviso has no application to the situation presented here because of the substantial increase in work required by the second slide.

American States presented evidence that it had suffered losses on other contracts that Ram had performed for the City, e.g, the "sewer job," and that a profit was expected on Slide II. With these facts established, the surety contended that it was entitled to offset its earlier losses against the profits earned on Slide II.

The bankruptcy judge found that provise inapplicable to the situation presented here because of the substantial increase in work required by the second slide. That the City, for its convenience and for purposes of internal administration, labeled the project as "additional work" was not dispositive of whether there were two contracts or one. Consequently, the subrogation interest of American States, created by payments made in connection with pre-bankruptcy contracts, did not carry through to the Slide II project begun after the filing of the petition.

The district court affirmed the bankruptcy judge's finding that two separate contracts had been executed and stated, "the factual finding of the bankruptcy court was not clearly erroneous; the court correctly construed the intent of the ...


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