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decided: January 30, 1970.


Appeal from order of Court of Common Pleas of Philadelphia County, April T., 1968, No. 216, in case of J. Paul Martin, trustee, v. National Surety Corporation et al.


Melvin Lashner, with him Adelman & Lavine, for appellant.

Paul J. Donnelly, for appellee.

Edward A. Hosey, Assistant Attorney General, with him John R. Rezzolla, Deputy Attorney General, and William C. Sennett, Attorney General, for Commonwealth, appellee.

Bell, C. J., Jones, Cohen, Eagen, O'Brien, Roberts and Pomeroy, JJ. Opinion by Mr. Justice Cohen. Dissenting Opinion by Mr. Justice Roberts. Mr. Justice Eagen joins in this dissent.

Author: Cohen

[ 437 Pa. Page 161]

Appellant is the trustee in bankruptcy for James J. O'Brien and Daniel L. Redmond, Jr., trading as O'Brien and Redmond, who, prior to their financial embarrassment, were primarily engaged in the construction of highways for the Commonwealth of Pennsylvania. During the period that bankrupts' financial difficulties were developing they had nine active contracts with the Commonwealth, the total value of which was $114,616.65. National Surety Corporation, one of the appellees here, was surety on six of the contracts. When bankrupts became unable to fulfill their contractual obligations the sureties were required to step into the breach and complete the contracts. Construction was completed and most laborers, materialmen and subcontractors were paid; some claims, however, remained outstanding.

[ 437 Pa. Page 162]

Some time after the contracts were completed the Commonwealth paid the entire $114,616.65 due on the nine jobs to National. National in return signed and gave to the Commonwealth an indemnification bond holding the Commonwealth harmless from any claims that might be made against it for releasing that sum to National.

Appellant first brought suit against National in the United States District Court for the Eastern District of Pennsylvania, alleging jurisdiction under Section 23 of the Bankruptcy Act, 11 U.S.C. § 46. That court decided that it did not have jurisdiction and dismissed the complaint. Appellant then filed this action in assumpsit against National and the Commonwealth. Preliminary objections were filed by both defendants; the Commonwealth claimed that the Common Pleas Court of Philadelphia County lacked jurisdiction, and National claimed that the complaint failed to state a cause of action. Both preliminary objections were sustained and this appeal followed.

The lower court correctly concluded that it was without jurisdiction over the Commonwealth. It also properly concluded that appellant was not a third party beneficiary of the indemnity agreement between National and the Commonwealth. The unavailability of that theory, however, does not preclude the existence of other theories upon which appellant may proceed.

A trustee in bankruptcy takes title to the property of the bankrupt under § 70a of the Bankruptcy Act, 11 U.S.C. § 110a. Relevant to this case is § 70a(6) which vests in the trustee, as of the date of the filing of the petition, title to "rights of action arising upon contracts . . . or the unlawful taking or detention of . . . his property." Because this appeal is from the granting of appellee's preliminary objections, the court must accept as true all allegations of fact in appellant's complaint, plus all reasonable inferences therefrom. In

[ 437 Pa. Page 163]

    paragraph 8, appellant alleges that at the time of the filing of the petition there were funds due and owing by the Commonwealth for work performed on the nine projects. Appellant also alleges that these funds are now in the hands of appellee. Thus, as of the day the petition was filed, we must assume the trustee acquired title to a valid contract right of action and a fund of money that that action represented.

Absent the sovereign immunity doctrine, appellant could proceed against the Commonwealth on the right of action which arose out of a contract. That is impossible, and as a practical matter, appellant will not be able to take his claim to the Board of Arbitration of Claims because the short six months statute of limitations has expired. Therefore, if he is to have any remedy at all, it must be against this appellee. The bankrupts apparently did not have a right of action against National Surety arising upon a contract, and so the trustee can proceed only if the appellee has unlawfully appropriated the bankrupts' property. Since we must assume the Commonwealth actually owed this money, the trustee can trace that property to its present possessor if the appellee has unlawfully taken or detained it.

The leading case in this area is Pearlman v. Reliance Insurance Company, 371 U.S. 132 (1962), which involved a dispute between a trustee in bankruptcy and a surety over $87,000 in a federal government withheld fund. The bankrupt had not carried out its obligation to pay laborers and materialmen, and the surety had to pay debts totaling $350,000. The trustee asserted title to the money under § 70 and claimed the surety had only the status of a general creditor. The surety claimed the entire amount free and clear of any claims by the trustee. The ...

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