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In re Universal Medical Services Inc.

decided: May 30, 1972.


Seitz, Chief Judge, Hunter, Circuit Judge, and McCune, District Judge.

Author: Hunter


JAMES HUNTER, III, Circuit Judge.

On May 7, 1970, the debtor (now bankrupt) Universal Medical Services, Inc. ("Universal") and appellee Liskey Aluminum, Inc., ("Liskey") entered into a contract for the "supplying and installing" of a raised steel floor at Universal's premises in King of Prussia, Pennsylvania. Thereafter Liskey delivered materials for the floor to the job site, and installation began. On August 5, 1970, after Liskey had installed approximately three-quarters of the floor, Universal filed a petition for arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq. Subsequently Universal failed to file a plan for arrangement under Chapter XI and was adjudicated a bankrupt. See Bankruptcy Act § 376, 11 U.S.C. § 776. Appellant Irving H. Kutcher, the Chapter XI receiver, was appointed trustee.

On August 7, 1970, two of Liskey's employees demanded that Universal allow removal of the materials on the job site. That demand was refused. On September 8, 1970, Liskey filed a petition to compel the receiver to adopt or reject the contract, and to reclaim the materials*fn1 if the contract were not adopted.

The Referee held (1) that since only 25 percent of the installation remained to be completed, only that portion of the contract was executory; (2) that the trustee had rejected the still-executory 25 percent of the contract; and (3) that reclamation would not be allowed.

On petition for review to the District Court, the Referee was reversed, and reclamation was allowed. In re Universal Medical Services, Inc., 325 F. Supp. 890 (E.D.Pa.1971). The trustee appeals.

The parties no longer dispute that the contract was executory on August 5, 1970, and that the trustee effectively rejected the contract, as is his right under Section 70(b) of the Bankruptcy Act, 11 U.S.C. § 110(b). See 4A Collier on Bankruptcy para. 70.43 (14th ed. rev. 1967). The fact that the contract has been rejected, however, does not automatically give Liskey the right to reclaim the materials.

Under Section 70(a) of the Bankruptcy Act, 11 U.S.C. § 110(a), the trustee in bankruptcy is "vested by operation of law with the title of the bankrupt" to various kinds of property. Bank of Marin v. England, 385 U.S. 99, 101, 87 S. Ct. 274, 17 L. Ed. 2d 197 (1966). But the Bankruptcy Act, insofar as it is relevant here,*fn2 does not vest the trustee with greater title than that which the bankrupt possessed. Bank of Marin v. England, supra. Where proper proof is presented that property in the possession of the trustee actually belongs to a third person, that property should be restored to the third person. Pearlman v. Reliance Insurance Co., 371 U.S. 132, 83 S. Ct. 232, 9 L. Ed. 2d 190 (1962); In re Metropolitan Offset Printers, Inc., 391 F.2d 770 (3d Cir. 1968); In re American Boiler Works, Inc., 220 F.2d 319 (3d Cir. 1955); see 4A Collier on Bankruptcy para. 70.39 (14th ed. rev. 1967). State law rather than federal law determines to whom the property belongs. Bryant v. Swofford Bros. Dry Goods Co., 214 U.S. 279, 291, 29 S. Ct. 614, 53 L. Ed. 997 (1909); In re Kravitz, 278 F.2d 820 (3d Cir. 1960); In re Forgee Metal Products, Inc., 229 F.2d 799 (3d Cir. 1956); In re Lipschutz, 228 F.2d 290 (3d Cir. 1955); Susquehanna Chemical Corp. v. Producers Bank & Trust Co., 174 F.2d 783 (3d Cir. 1949). In the present case the applicable state law is that of Pennsylvania.*fn3

The District Court held, and we agree, that this contract was a construction contract, and not a severable contract to deliver certain materials and then to install those materials. The law in Pennsylvania is quite clear that:

"unless provided otherwise by contract, materials furnished by the builder generally remain his property until affixed to the owner's land or delivered to and accepted by him as his property. . . . "

8 P.L.E. Contracts § 363, at 410 (1971). See Weintrob's Estate, 295 Pa. 374, 145 A. 425 (1929); Commonwealth ex rel. Schnader v. Nelson-Pedley Construction Co., 303 Pa. 174, 181-182, 154 A. 383, 385 (1931); 17A C.J.S. Contracts § 516 (1963).

Here the contract was silent regarding passage of title. It is conceded that Universal did not accept the material as its property when it was delivered to the job site. Nor is it argued that there was piecemeal delivery and acceptance as the material was installed by Liskey. The trustee argues, however, that the 75 percent of the material that was installed was "affixed" and thereby title to that portion of the material passed to Universal and to the trustee from Universal.*fn4 The outcome of this case thus depends upon whether the material was "affixed" within the meaning of the Pennsylvania rule of law quoted above.

The particular steel floor involved here consisted of some 17,440 square feet of steel tiles, set into a grid system sixteen inches above an existing floor. The grid system was attached to the existing floor, but the steel tiles were merely placed into the grid system and could be easily picked up and removed, with no damage whatever to the realty. Apparently the tiles that had been placed into the grid system were not permanently ...

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