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March 13, 1963

Harry POLISH, Trustee in Bankruptcy of Edward F. Dougherty, trading as Penn Plumbing & Heating Co., Bankrupt

The opinion of the court was delivered by: DUSEN

This case, brought by the Trustee in Bankruptcy of a plumbing and heating contractor against a subcontractor who had contracted with such plumbing and heating contractor to install temperature controls in a high school building, was tried to the court on February 26, 27 and 28, 1963. The Trustee claims that such subcontractor received an overpayment, to part of which the Trustee is entitled, in securing from the owner the full amount owed to such subcontractor by the bankrupt at the time of the adjudication in bankruptcy.

 'Owner accepts an alternate proposal suggested by Contractor whereby Johnson Service Pneumatic controls are used instead of Minneapolis Electric controls at a deduction in cost of $ 5,500.00.'

 Certain parts of the work to be done under the above contract of December 5, 1955 (P-8) were subcontracted by the bankrupt, including the installation of a temperature regulation system. The contract for this system was entered into with Johnson Service Company (a Wisconsin corporation), defendant, with the understanding that the 'valves, dampers, pan and grid humidifiers furnished * * * shall be installed by others free of expense to' the defendant (D-3). This temperature regulation system, together with necessary electrical wiring, was to be installed for a price of $ 6,000.

 On or about August 9, 1957, the bankrupt, being in a precarious financial condition, stopped work on the job site in Upper Darby. A few days subsequent to that date, defendant wrote a letter dated August 9, 1957, to the Archdiocese, with copies to the attorneys for the Archdiocese, the bankrupt, the architect, the surety company on the performance bond of the bankrupt, and others. This letter (P-2) enclosed a statement showing that, although bills for progress payments had been submitted by the defendant to the bankrupt in the total amount of $ 5,292. on or before August 6, 1957, only $ 1638. (representing the first bill submitted in May of 1956) had been paid, leaving a balance due of $ 3,654. The letter contained this wording, among others:

 'We wish to advise you as indicated upon our statement these items run back as far as June 1956 and our terms of payment are 30 days net. We also wish to advise you that under our company policy we cannot complete this job until payment is received or guarantee of payment made by your organization. 'We would appreciate your cooperation in this matter by forwarding necessary remittance or remittance from Penn Plumbing & Heating Company or guarantee of payment from the Archdiocese of Philadelphia for the stipulated amount. 'We wish to reiterate that our company policy prohibits finishing contract work on which payments are not received.'

 The Archdiocese answered the above letter from defendant dated August 9, 1957, by a letter of August 16, 1957 (P-3), stating '* * * we could not make payment to you * * * without an assignment from' the bankrupt. 'Our performance bond guarantees completion only. Under the circumstances, we cannot comply with your request.' On August 21, 1957, the defendant wrote the bankrupt (P-4), saying:

 '* * * we are therefore looking directly to your company for payment of this amount due or as stated above we do not wish to inconvenience anyone concerned, but request that necessary arrangements be made for payment upon this contract.'

 On August 30, 1957, the bankrupt filed a voluntary petition in bankruptcy in this court (Cause No. 25148) and was adjudicated a bankrupt on the same day.

 A conference called by the Archdiocese was held on September 13, 1957, at which representatives of the architects, Sabin and Company, defendant, and of the Archdiocese (including the attorney for the Archdiocese), among others, were present. At this meeting, the representatives of the defendant again emphasized that the policy of their company prevented them from doing any further work on the high school building unless the balance due under the contract by the bankrupt and the defendant was guaranteed by the Archdiocese or paid. At this conference, the urgency of completion of the temperature control system in the high school was discussed by those present. *fn2" It was clear to those present, including the representatives of the defendant, that the Archdiocese would have to have the work completed almost immediately due to the possibility of cold weather in late September or early October. It was also made clear at this meeting that even if an alternative thermostatic control and pipe head for such alternative control were installed, there was a possibility that other parts of the heating system already installed under defendant's supervision might not work. Defendant gave a one-year free service contract on all jobs completed, but it would not give such free service if the pipe head and thermostat of a competitor were installed. There was no assurance that any competitor would give a guarantee or service contract if its pipe head and thermostat control were installed in the system designed for defendant's product, even though it was quite possible that the system would work with an alternative pipe head and thermostat.

 On October 7, 1957, there was another meeting at the offices of the Archdiocese, at which the representatives of Sabin and Company reported that they could not do any further work on the heating system until the thermostats were installed. The architect recommended that these thermostats be procured from the defendant. Under these circumstances, the attorneys for the Archdiocese were authorized to prepare a writing, to be executed by the defendant, which would recite the circumstances under which the Archdiocese should guarantee payment of the amount owed to the defendant by the bankrupt under the contract marked D-3. This writing was forwarded to the defendant with a letter of October 8, 1957, from the attorney for the Archdiocese, which letter contained this language (P-5):

 'The work which you have not yet completed makes it impossible for the Archdiocese to use the heating system in parts of Msgr. Bonner High School and, for that reason, it becomes necessary for the Archdiocese of Philadelphia to guarantee payment of your balance (?) of $ 5,292.00 composed as above, in order to protect the health and safety of the students at Msgr. Bonner High School. I am authorized to state that payment of the amount of $ 4,362.00 will be made to you upon completion of the work which you agreed to do for Penn Plumbing & Heating Co. at Msgr. Bonner High School and upon the issuance of an architect's certificate authorizing payment. It will be appreciated if you will sign the enclosed statement to the Archdiocese of Philadelphia so that the nature of this undertaking may be reduced to writing.'

 The writing or statement enclosed with the letter of October 8 was signed by the authorized representatives of defendant on October 10, 1957, ...

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