without question or inquiry; and no consent of bondholders is ever required.
In Berlanti v. Borough of Manheim Authority, 93 F. Supp. 437 [E.D. Pa. 1950], a Federal District Court sitting in Pennsylvania was dealing with a similar Pennsylvania municipal authority. The plaintiff was a contractor who had recovered judgment for a balance due under his construction contract. He attached the defendant's funds in possession of a Trustee bank and had the bank brought in as garnishee. The Court held that all moneys derived from the sale of bonds, regardless of the fund to which they were subsequently transferred for the payment or protection of bondholders were nevertheless subject to the claims of construction contractors because the bondholders had purchased their bonds with the knowledge that such moneys were to be used for the payment of construction costs and that the bondholders' lien was subject to the prior application of such moneys for construction. The Court held in that case that money from rental income was not subject to attachment because the Indenture provided that such income was to be used only for payment of interest and principal on bonds. The situation is different in the present case because the present Indenture does not restrict the Authority on the use of surplus rental income after the requirements of the Revenue Fund, the Debt Service Fund, and the Maintenance Reserve Fund have been met.
Defendants and Intervenors argue that the Bondholders are secured by a recorded Financing Statement filed under Sec. 9-201 et seq. of the Pennsylvania Uniform Commercial Code, which pledged to the Trustee all the proceeds of the sale of the bonds as well as all receipts and revenues of the Authority. But we do not believe that the rights of the Trustee under the Uniform Commercial Code can rise any higher than the Trust Indenture provides. To the extent that the Authority is free to call upon the Trustee to disburse funds of the Bond Redemption and Improvement Fund, then the collateral secured by the Financing Statement is subject to attachment, levy, garnishment and execution. See Sec. 9-311 Pennsylvania Uniform Commercial Code (12A P.S. § 9-311) and Comment 1 thereunder. Also, as noted in Comment 2, "* * * in all security interests the debtor's interest in the collateral remains subject to claims of creditors who take appropriate action * * *".
Thus we find no obstacle created by the Pennsylvania Uniform Commercial Code to execution upon any funds which, under the Trust Indenture, are not required to pay current interest and retire matured bonds, and provide the necessary reserves. The Bond Redemption and Improvement Fund is not required for this purpose, and is subject to disbursement by the Authority until such time as any event, such as default, makes them available to bondholders.
Furthermore, the provisions of the Secured Transactions Article of the Pennsylvania Uniform Commercial Code specifically excludes a lease of real estate or the rents thereunder from its provisions, Sec. 9-104(j) (12A P.S. § 9-104(j)), and the recorded Financing Statement creates no rights in the Trustee with respect thereto other than those created by the Indenture. A substantial portion of the funds now held in the Bond Redemption and Improvement Fund may have originated from the annual rental payments made by the Township to the Authority under the provisions of the "Contract and Lease" whereby the entire system of the Authority is leased to the Township for operation.
Thus, to the extent that any lien of the bondholders to moneys in the Bond Redemption Fund is subject to revocation by act of the debtor, the rights of the Trustee for the bondholders are inferior to the rights of an attaching creditor. See 1 Restatement, Contracts § 172.
Intervenors also argue a general trust fund theory to place the entire funds of the Authority in the hands of the Trustee beyond the reach of creditors. We do not find the holding of Merritt-Chapman & Scott Corp. v. Public Utility District No. 2, 237 F. Supp. 985 [S.D., N.Y. 1965] controlling. There an attempt was made to bring foreign attachment against the trust fund prior to any determination of plaintiff's right to recover. In our case plaintiff has obtained judgment against the debtor. Secondly, the debtor was found to have no right or interest in the fund which it could assign, release or alienate, either present or reversionary. In our case the moneys in the Bond Redemption and Improvement Fund are subject to withdrawal by the judgment debtor for construction purposes. Merritt-Chapman & Scott Corp., supra, applied New York law. In Pennsylvania it has been held that funds of a municipal authority were subject to attachment. Central Contracting Company v. C.E. Youngdahl & Co., 418 Pa. 122, 209 A. 2d 810 .
The only remaining argument raised is that to allow execution to be carried out will imperil the Authority in the event it secures a reversal of the present judgment. This is a risk that every litigant faces, but in this case the sums which Plaintiff is attempting to secure on execution are those mostly admittedly due under the contract. Defendant Authority's only desire is to retain these funds as a credit under its Counterclaim against the Authority, which was denied by the jury's verdict. In the event Authority should finally prevail on its Counterclaim it is well secured by the solvent corporate surety company which it has joined under its Counterclaim.
Also, counsel for intervening bondholders have argued the possible adverse effect on municipal borrowing rates of any invasion of the trust funds. This is not impressive when we examine the evidence produced in aid of execution. It reveals that the Authority has exercised a rather free hand in disposing of almost all of the monies in the Construction Fund, more than $100,000 during a period when no construction was underway, and has also paid out substantial sums from the Bond Improvement and Redemption Fund to various parties other than bondholders, and also when no construction was underway. It appears that the bondholders clearly contemplated under the Indenture that their security rested in the provisions for a Revenue Fund, a Debt Service Fund, a Debt Service Reserve Fund, and a Maintenance Reserve Fund. After the requirements of these funds had been filled, excess revenues were allowed to spill over into the Bond Redemption and Improvement, which was subject to a rather wide power of alienation or disposition by the Authority, which the Authority has widely used, without objection from the Trustee or the bondholders.
As has been frankly admitted by one Intervenor, Provident National Bank, a bondholder:
"However, in the case of the bond redemption and improvement fund, unlike other funds, the Authority is permitted to use the fund to pay construction costs. Consequently, Provident concedes that plaintiff can reach this fund to the extent (and only to the extent) that plaintiff's judgment represents unpaid construction costs. There is no warrant for using this fund to pay damages on lost profits."
The verdict against the Authority alone, based on the Construction Contract itself, was in the amount of $254,367.04. The evidence showed that this was composed of the following items of claim:
$184,986.26 -- representing the 10% retainage under the contract,
liability for which it is undisputed;
21,838.83 -- representing approved Estimate No. 19 -- liability
for which is undisputed;
47,541.96 -- claimed for crushed stone used under the
contract, part of which the Authority admitted to be due.
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