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IN RE LEWIS JONES

November 30, 1973

In re LEWIS JONES, INC., et al., Bankrupts

Broderick, District Judge.


The opinion of the court was delivered by: BRODERICK

BRODERICK, District Judge.

This matter comes before the Court on the motion of Ric-Wil, Inc. ("Ric-Wil") for an injunction pending appeal. Ric-Wil seeks to enjoin the Commonwealth of Pennsylvania ("Commonwealth"), the Trustees in Bankruptcy, the First Pennsylvania Banking and Trust Company ("Bank"), and Modular Energy Systems, Inc. ("purchaser"), as well as the purchaser's officers, agents and nominees from releasing or withdrawing or permitting withdrawal of certain funds which it contends are trust funds for the benefit of certain creditors of the bankrupt Wilkes Barre Steam Heat Company. The Bank is the depository of the fund. The approval of the Secretary of Commerce of the Commonwealth was required to make expenditures from the fund by the orders of the Bankruptcy Court of November 27, 1972 and January 8, 1973. The Commonwealth was the original source of the alleged trust fund. The purchaser acquired all of the assets of Wilkes Barre Steam Heat Company at the Trustees' sale and included in the purchase price of $2,740,000 was "all of the right, title, and interest of the bankrupt and the Trustees in" the said fund ("escrow fund").

 In June 1972 the steam heat system of Wilkes Barre Steam Heat Company suffered extensive damage as a result of the devastating floods which inundated portions of the Commonwealth. On August 18, 1972, the Commonwealth loaned $2,500,000 to the City of Wilkes Barre Industrial Development Authority ("Authority") which executed a note in that amount, dated August 18, 1972, payable to the Commonwealth. In the note the Authority agreed that it would cause the loan proceeds to be loaned, concurrently, to Wilkes Barre Steam Heat Company, Public Utilities Investment Corporation ("PUIC") and International Service Industries, Inc. ("ISI"), and it would require these corporations "to use the loan proceeds to refurbish and/or replace the flood-damaged boilers and distribution system" of Wilkes Barre Steam Heat Company.

 On August 18, 1972, the Authority loaned the $2,500,000 to Wilkes Barre Steam Heat Company, PUIC, and ISI, which corporations executed a note in that amount payable to the Authority. In the note, PUIC, ISI and Wilkes Barre Steam Heat Company agreed to "use the loan proceeds to refurbish and/or replace the flood-damaged boilers and distribution system" of Wilkes Barre Steam Heat Company. On the same day, the Authority assigned to the Commonwealth, without recourse, the note executed by Wilkes Barre Steam Heat Company, ISI and PUIC. Also, the same day, PUIC and the Bank entered into an agreement labeled "Escrow Agreement," whereby PUIC agreed to deposit the proceeds of the $2,500,000 loan with the Bank in an "Escrow Deposit," which funds would be disbursed by the Bank to a designated payee only upon receipt of a voucher from PUIC incorporating a certification that the requested disbursement was to be used for the purposes contained in the note from the Authority to the Commonwealth and signed by the President of PUIC (Arthur C. Crimmins), the Secretary of Commerce of the Commonwealth (Walter G. Arader), or their designated representatives. The "Escrow Agreement" was signed by PUIC and the Bank and consented to in writing by Wilkes Barre Steam Heat Company and ISI. The account set up by the Bank pursuant to agreement was, and still is, "Public Utilities Investment Corporation -- Wilkes Barre Steam Heat Co. Escrow Account."

 Ric-Wil alleges that subsequent to August 18, 1972 it was informed of the $2,500,000 loan and the procedures for disbursement to be used to refurbish the steam distribution system of Wilkes Barre Steam Heat Company, and in reliance thereon, delivered pipe to the Wilkes Barre Steam Heat Company for which pipe it has not been paid. Ric-Wil claims that the escrow fund is a trust fund set up to pay to suppliers of materials to Wilkes Barre Steam Heat Company.

 On November 8, 1972 Wilkes Barre Steam Heat Company, PUIC and four other related corporations filed for an arrangement under Chapter XI of the Bankruptcy Act in the United States District Court for the Eastern District of Pennsylvania. On December 5, 1972 ISI and three other affiliated companies also filed Chapter XI petitions, and the proceedings were consolidated for administrative purposes under Cause No. 72-714.

 On November 27, 1972, upon notice to the Commonwealth, the Bankruptcy Court entered an order authorizing the Receivers to expend the sum of $172,550.00 from "retained funds" claimed to be a part of the alleged trust fund for certain essential repairs to avoid a shutdown of three of the debtor corporations.

 On December 14, 1972, Ric-Wil filed with the Bankruptcy Court its petition for temporary and permanent injunctive relief and for an order declaring the escrow fund and the sums traceable to it to be impressed with a trust in favor of it and other creditors who had provided labor and materials to Wilkes Barre Steam Heat Company. On the same day, the Bankruptcy Judge entered an Order denying the application of Ric-Wil for temporary relief, and fixed January 16, 1973 as the date for a hearing, which date was later advanced to January 8, 1973. On December 15, 1972 Ric-Wil filed a petition with this Court for a temporary restraining order pending said hearing in the Bankruptcy Court, which petition was denied on the same day. An appeal was taken, and on December 26, 1972 the Court of Appeals likewise denied Ric-Wil's petition for such a temporary restraining order.

 On December 21, 1972 the Bankruptcy Judge entered an order which authorized the Receivers to borrow $325,000 from the "retained funds" claimed to be a part of the alleged trust fund for the purpose of continuing the operation of Lewis Jones, Inc., Overbrook Steam Heat Company, Longacre Park Heating Company, Wilkes Barre Steam Heat Company and Scranton Steam Heat Company.

 On January 8, 1973 the Bankruptcy Judge held a hearing on Ric-Wil's petition to declare the escrow fund a trust fund. On January 26, 1973 the Bankruptcy Judge entered an Order which dismissed Ric-Wil's petition to declare the escrow fund a trust fund, and held that the balance in the escrow fund and the sums traceable to it were not trust funds for Ric-Wil or other creditors of the Wilkes Barre Steam Heat Company.

 Petitions for review of the aforesaid orders of the Bankruptcy Court were filed, but Ric-Wil did not seek any stay of the Bankruptcy Court proceedings.

 On June 18, 1973 Wilkes Barre Steam Heat Company was adjudicated bankrupt.

 On August 17, 1973 this Court, after hearing, affirmed the aforesaid Orders of the Bankruptcy Judge which came before the Court on certificates of review, and held that the balance in the escrow fund and the proceeds traceable to it were not trust funds for ...


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