Trevdan Bldg. Supply v. Toll Bros., Inc.

Citations: 996 A.2d 520; 2010 Pa. Super. 100; 2010 Pa. Super. LEXIS 412; 2010 WL 2142836Docket: 404 EDA 2009

Court: Superior Court of Pennsylvania; May 28, 2010; Pennsylvania; State Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Trevdan Building Supply (Trevdan) appealed an order from the Superior Court of Pennsylvania that granted Gulf Coast Bank and Trust Company (Gulf Coast) a counter-petition for payment in an interpleader proceeding. The order allocated interpleaded funds of $118,934.00, with Gulf Coast receiving $89,194.00, Toll Brothers, Inc. (Toll Brothers) awarded $15,000.00 for attorneys' fees, and Trevdan receiving $14,740.00. The court reversed this decision and remanded with directions, while also denying Gulf Coast's motion for sanctions.

The case arose after Houston Drywall, Inc. contracted with Toll Brothers for drywall work and subsequently entered an agreement with Trevdan to supply materials. Houston Drywall sold its rights to unpaid invoices to Gulf Coast via a Receivable Purchase Agreement and perfected its security interest by filing a financing statement under the UCC. Gulf Coast informed Toll Brothers to direct payments to them following Houston Drywall's insolvency. Despite this, Toll Brothers did not fulfill Trevdan's demand for payment for materials supplied. Trevdan filed a complaint against Toll Brothers for $128,653.16. After Houston Drywall filed for bankruptcy, it classified the invoices as assets and listed Trevdan as an unsecured creditor. Gulf Coast later sought payment from Toll Brothers for the outstanding invoices related to the Receivable Purchase Agreement.

On January 10, 2006, the trial court granted Toll Brothers's interpleader petition and added Gulf Coast as a plaintiff. Trevdan filed a payment petition on February 28, 2006, followed by Gulf Coast's counter-petition on August 23, 2006. The trial court denied Trevdan's petition on December 18, 2006, and its appeal was quashed. Subsequently, on January 8, 2008, the court ordered Toll Brothers to interplead $118,934.00, discharging Toll Brothers from liability to both Trevdan and Gulf Coast and dismissing it from the case. On January 14, 2009, the court granted Gulf Coast's counter-petition and ordered distribution of the interpleaded funds. Trevdan appealed on January 29, 2009, and complied with the court's order to submit a concise statement of errors. The case involves a legal question concerning the priority of Gulf Coast's security interest over Trevdan's equitable claim to the funds, with a de novo review standard applied. Trevdan raises three key issues: whether it was entitled to direct payment from Toll Brothers as an unpaid materialman, whether it holds priority over Gulf Coast as an unpaid supplier, and whether the court erred in awarding Toll Brothers expenses and fees incurred in bad faith. Trevdan argues that Gulf Coast’s claim is subordinate to its own as it derived from Houston Drywall, asserting that it had not been fully paid for its supplies, thus making Toll Brothers not obligated to pay Houston Drywall or Gulf Coast. Trevdan contends that any rights Houston Drywall had to the funds were contingent on paying unpaid materialmen, which did not occur, preventing the funds from being part of the bankruptcy estate.

Trevdan's claim for an equitable lien against disputed funds was rejected by the trial court, which analyzed the cases of Pearlman and Jacobs. The court noted that both cases involved public contracts where sureties had paid materialmen and were thus entitled to assert claims against the funds retained by the owner. The trial court distinguished Trevdan's situation, indicating that it did not involve a public contract and that Trevdan was not a surety, concluding that the rationale from Pearlman and Jacobs did not apply. Additionally, the court found Trevdan's reliance on Williard, Inc. to be misplaced, as that case involved a contract requiring proof of payment to subcontractors before the contractor could receive payment, allowing the owner to withhold funds if proof was not provided. The subcontractor in Williard was not a party to the contract, and the court determined that only the unpaid subcontractors had a rightful claim to the interpleaded funds.

In contrast, the review indicated that Pearlman and Jacobs should not be viewed as distinguishable based solely on the surety involvement, as the equitable rights of materialmen were central to those cases. The review suggested that the materialmen's rights were inherent and did not depend solely on the surety's status. It concluded that the trial court had erred in determining that the construction agreement between Toll Brothers and Houston Drywall did not provide Trevdan with a right to the disputed funds, asserting that Trevdan's position was supported by relevant common law principles.

Trevdan, as an unpaid materialman, possesses an equitable lien on the contract funds withheld by Toll Brothers during construction, despite the trial court's statement that Trevdan is not Houston Drywall's surety. The case references the U.S. Supreme Court's decision in Pearlman, which affirmed that the Miller Act did not dismantle equitable principles in commercial practices, emphasizing that the obligation to pay unpaid materialmen exists for both public and private projects. The necessity for equitable liens is heightened in private projects where payment bonds are not mandated. The Supreme Court's ruling in Jacobs established that laborers and materialmen have priority over general creditors for disputed contract funds in the absence of a surety bond. The equitable obligation of project owners to pay subcontractors from retained contract funds is applicable to all contracts, not just public ones.

Furthermore, the contract terms reviewed in Williard, Inc. are comparable to the current case, requiring contractors to provide a release of liens and proof of payment to subcontractors before final payment. The construction agreement between Toll Brothers and Houston Drywall similarly mandates that payment is contingent upon Houston Drywall certifying that no mechanics liens exist, and final payment is withheld until a complete release of liens is provided. Additionally, the contract stipulates that if any liens or claims are not resolved within 48 hours of notice, Toll Brothers may pay to satisfy the lien and deduct those costs from amounts owed to Houston Drywall.

Article 6(i) mandates Houston Drywall to promptly pay for all labor, materials, and services related to the work, and to provide satisfactory evidence of such payments when required by Toll. Article 7 stipulates that if Houston Drywall files for bankruptcy, becomes insolvent, or fails to make timely payments, Toll has the right, after notifying Houston Drywall, to either pay for these services and deduct the costs from payments owed or terminate the agreement and take possession of materials and equipment to complete the work. The contract provisions are similar to those in Williard, Inc., establishing that failure to pay subcontractors is a material breach allowing the owner to withhold payments. Houston Drywall's inability to show proof of payment to Trevdan constituted a material breach, justifying Toll Brothers' withholding of payments. 

Consequently, Houston Drywall lacks a claim to the contract balance interpleaded by Toll Brothers, and Gulf Coast, which claims entitlement to the disputed funds based on Houston Drywall's unpaid invoices, also lacks a cognizable interest. Gulf Coast's financing statement and Houston Drywall's bankruptcy do not elevate Trevdan's equitable lien over Gulf Coast's claim. Although Gulf Coast contends that payment was due upon Houston Drywall's completion of work, this disregards the requirement for a complete release of liens before final payment is made. Houston Drywall's failure to meet its payment obligations means Gulf Coast's right to payment has not matured, resulting in Gulf Coast holding a secured interest that is contingent upon Houston Drywall fulfilling its contractual duties. Thus, consistent with the precedent in Williard, Inc., Gulf Coast does not possess a cognizable interest in the interpleaded funds.

Houston Drywall's bankruptcy petition does not enhance Gulf Coast's claim to the interpleaded funds. Trevdan asserts that, as a materialman, it must be paid in full before Houston Drywall or Gulf Coast can claim payment. The Supreme Court's ruling in Pearlman clarified that retained funds by an owner for laborers and materialmen are not part of a bankrupt contractor's estate, emphasizing that a trustee cannot distribute others' property among a bankrupt's creditors. The court examined whether the surety, having paid the materialmen, held an equitable lien on the funds before bankruptcy adjudication. It concluded that if the surety had a legitimate property interest at that time, those funds would not be part of the bankruptcy estate.

The court also referenced In re C.C. Excavating, Inc., where a similar situation occurred, and the bankruptcy court ruled that the contract balance was not part of the bankruptcy estate due to the subcontractor's failure to pay its second-tier subcontractors. The general contractor had the right to withhold funds to satisfy those debts. Ultimately, the court found that Trevdan's equitable lien on the interpleaded funds existed prior to Houston Drywall's bankruptcy, thus excluding the funds from the bankruptcy estate. The court maintained that Pearlman remains authoritative despite its bankruptcy origins, as state law is used to determine property rights before applying the Bankruptcy Code.

The Supreme Court applied Pennsylvania law in a contract dispute involving a construction agreement and determined that the contractor, Houston Drywall, had no legitimate claim to the contract balance due to its default. Consequently, the trial court incorrectly granted Gulf Coast's counter-petition for payment, as Houston Drywall lacked a property right in the interpleaded funds. The court also examined the January 14, 2009 order that awarded Toll Brothers attorneys' fees under 42 Pa.C.S. § 2503(4), which allows for reasonable counsel fees for possessors of property claimed by multiple parties who interplead rival claimants and disclaim interest. Toll Brothers’ inaction regarding Trevdan's equitable claim and its failure to pay Trevdan before Houston Drywall's bankruptcy resulted in $15,000 in attorneys' fees, which the court found unwarranted. The court vacated the attorneys' fees award and reversed the trial court's decision on Gulf Coast’s counter-petition, instructing the trial court to grant Trevdan's payment petition and determine the amount due. Gulf Coast's motion for sanctions against Trevdan was denied, and the case was remanded for further proceedings. A dissenting opinion by Judge Stevens argued that Gulf Coast had a superior interest in the funds, and Toll Brothers was entitled to the attorneys' fees, advocating for the original distribution of interpleaded funds. The relevant facts include Trevdan's provision of materials to Houston Drywall, which ceased operations while Toll Brothers owed money for those materials, leading to the dispute after Houston Drywall’s bankruptcy notification. Gulf Coast claimed ownership of the payments due from Toll Brothers to Houston Drywall.

Toll Brothers withheld payment to avoid multiple liabilities, leading to litigation initiated by Trevdan and Gulf Coast. Trevdan filed a civil complaint on October 11, 2005, followed by Toll Brothers’ interpleader petition on December 6, 2005, and Gulf Coast's complaint on February 17, 2006. Gulf Coast, a factoring business, claimed it purchased unpaid invoices owed by Toll Brothers to Houston Drywall, asserting its status as an "account debtor" under the Uniform Commercial Code (UCC). Gulf Coast had a first lien on these invoices and filed a UCC Financing Statement on October 1, 2004, perfecting its security interest. After Houston Drywall's bankruptcy filing on November 17, 2005, Gulf Coast received court permission to proceed as a secured creditor.

The trial court later ordered the distribution of $118,934.00 interpleaded by Toll Brothers: Gulf Coast received $89,194.00, Toll Brothers $15,000.00, and Trevdan $14,740.00. Trevdan appealed, claiming priority to the funds based on common law rights of unpaid suppliers and contending that Gulf Coast's claim was subordinate because it only stood in the shoes of Houston Drywall, which had breached its duty to Trevdan. Trevdan also argued it was unjustly enriched and asserted several legal theories to claim entitlement to the funds, stating they were held for its benefit and never became part of the bankruptcy estate. Gulf Coast countered that Trevdan was merely an unsecured creditor of Houston Drywall and lacked legal rights to the interpleaded funds, emphasizing its secured interest and relief from the bankruptcy stay that restricted collection efforts by other creditors.

The opinion of the Honorable Arthur R. Tilson sufficiently addresses Trevdan's concerns, referencing legal precedents that differentiate the right to pay under a contract from the enforceable duty to pay, which is applicable to materialmen (Demharter v. First Federal Savings, Loan Association of Pittsburgh). Additionally, it is established that a surety's payment of a subcontractor's suppliers does not grant it superior interest over a bank with a secured claim (United States Fidelity and Guaranty Company v. United Penn Bank). A surety cannot assert subrogation rights against a subcontractor until it pays the materialman's claims, and subcontractors retain priority over unsecured creditors (Himes v. Cameron County Construction Corp.). Furthermore, materialmen can be considered third-party beneficiaries in contracts stipulating fund allocation for them (Kreimer v. Second Federal Savings and Loan Association of Pittsburgh), and funds owed to subcontractors may be part of the bankruptcy estate (In re Buono).

Trevdan's claim of error in the trial court awarding legal fees to Toll Brothers is found to lack merit. Under 42 Pa. C.S.A. 2503(4), Toll Brothers was entitled to recover attorney fees after interpleading rival claims concerning funds owed. Toll Brothers acted properly by depositing the owed amount into court, which absolved it from liability in the dispute. There is no evidence suggesting that Toll Brothers acted unreasonably or in bad faith regarding payment to Trevdan, and Trevdan's claims of priority over Gulf Coast are dismissed. The dissenting opinion concludes that the trial court's order should be affirmed. Additionally, it is noted that Trevdan's motion for reconsideration was not addressed by the trial court, and there is agreement with the Majority's decision to deny Gulf Coast’s motion for sanctions against Trevdan regarding its reproduced record.