filed: May 9, 1980.
FREDERIC M. GEE, SHERWIN-WILLIAMS CO., FINGERLAKES GLASS CORPORATION, PESKIN SIGN COMPANY, TEMPLE & PEFFER, UNLOADING CORPORATION, J. SCREED, INC., LEVA BROS. TILE & MARBLE CO., INC., MANCINI & KLIMCHUCK CO., INC., ENJEM'S, INC., APPELLANTS,
EDWARD R. EBERLE, CHARLES ELIN, ROBERT G. GUEMPEL, WILLIAM W. HAGERTY, GEORGE M. JOHNSON, JAMES C. KELLOGG, III, JOHN S. ROBERTS, SEFTON STALLARD, AND W. PAUL STILLMAN, TRUSTEES OF HAMILTON INVESTMENT TRUST, AND DAN HANDLER, STANFORD FREEMAN, MERCURY CONSTRUCTION CORPORATION AND MERCURY PROPERTIES OF PENNSYLVANIA, INC.; FREDERIC M. GEE, SHERWIN WILLIAMS CO., FINGERLAKES GLASS CORPORATION, PESKIN SIGN COMPANY, TEMPLE & PEFFER, UNLOADING CORPORATION, J. SCREED, INC., LEVA BROS. TILE & MARBLE CO., INC., MANCINI & KLIMCHUCK CO., INC., ENJEM'S, INC., EXCEL LIGHTING PRODUCTS, R.S.E., INC., D/B/A WELLSBORO ASPHALT COMPANY, CONTRACTORS EQUIPMENT RENTAL, INC., ROSENTHAL CHADWICK, INC., CHAPEL LUMBER CO., RUPERT HEICHEL, V. EDWARD R. EBERLE, CHARLES ELIN, ROBERT G. GUEMPEL, WILLIAM W. HAGERTY, GEORGE M. JOHNSON, JAMES C. KELLOGG, III, JOHN S. ROBERTS, SEFTON STALLARD, AND W. PAUL STILLMAN, TRUSTEES OF HAMILTON INVESTMENT TRUST, AND DAN HANDLER, SANFORD FREEMAN, MERCURY CONSTRUCTION CORPORATION AND MERCURY PROPERTIES OF PENNSYLVANIA, INC. APPEAL OF R.S.E., INC., D/B/A WELLSBORO ASPHALT COMPANY
No. 2786 October Term 1978, No. 2807 October Term 1978 Appeals from the Orders of the Court of Common Pleas, Tioga County, Civil Action Equity, at No. 8 Civil Division 1976.
Thomas A. Beckley, Harrisburg, for appellants.
William A. Hebe, Wellsboro, for appellees.
Spaeth, Stranahan and Sugerman, JJ.*fn*
[ 279 Pa. Super. Page 104]
This is an appeal from an order denying any recovery by unpaid subcontractors against an owner. The subcontractors claim that they are entitled to recovery because the owner, by accepting their work, has been unjustly enriched.
On May 16, 1974, appellees Sanford Freeman and Daniel Handler executed a mortgage in favor of Hamilton Investment
[ 279 Pa. Super. Page 105]
Trust, the trustees of which are also appellees, as security for a loan of $1,350,000 for the construction of a shopping plaza in Wellsboro, Pennsylvania. The mortgage had a provision that allowed the parties to "increase or decrease from time to time [the total amount of the indebtedness], but the total unpaid balance secured at any one time by this Mortgage shall not exceed a maximum principal amount of twice the principal amount stated in the promissory note." Para. 16, Mortgage Agreement at 6. The mortgage incorporated by reference an unrecorded construction loan agreement, which included the following provisions. Of the total amount of the loan, $75,000 was for the acquisition of the premises, and $1,275,000 was for the construction of the improvements. Para. 1, Section 4, Construction Loan Agreement. Advances were to be made periodically, not more often than monthly, Para. 8, Section 4, Construction Loan Agreement, and were to represent 90% of various calculations of the value of the work done at a particular stage of the project. Para. 1, Section 4, Construction Loan Agreement. Any money withheld by the lender during construction would be paid upon satisfaction of the conditions necessary for final payment, which included certification by the lender's architect that the work had been done satisfactorily and the necessary certificates had been obtained from various government agencies. Para. 6, Section 4, Construction Agreement. In order for the borrower to receive a particular advance, it would have to apply to the lender, stating the amount and nature of the costs and giving satisfactory evidence that they were incurred. Para. 3, Section 4, Construction Loan Agreement. Moreover, the lender's architect would have to certify that the work on account of which the advance was sought had been done in a "good and workmanlike manner." Para. 5, Section 4, Construction Loan Agreement. The lender was not obliged to make any advance unless it believed that "all work usually done at the state of construction when the advance is requested has been done in a good and workmanlike manner and all material and fixtures usually furnished and installed at that time had been furnished and installed." Para. 2,
[ 279 Pa. Super. Page 106]
Section 4, Construction Loan Agreement. The lender had the option to disburse the funds to a title insurance company as disbursing agent or directly to the contractors, suppliers, or laborers, instead of to the borrower. Para. 9, Section 4, Construction Loan Agreement.
Hamilton made its first advance on the construction loan on May 29, 1974, and continued to make advances during the remainder of 1974, and in 1975. In June of 1975, one of the buildings in the shopping plaza was substantially completed, and the structural steel work for another of the buildings was half completed. Deposition of Joseph Carl Walsh, April 28, 1977 at 21. On June 6, Freeman and Handler and Hamilton entered into a new construction loan agreement, which, like the original construction loan agreement, was unrecorded. The new agreement reduced the amount of the loan to $1,100,000 because one of the major tenants had pulled out and a new tenant did not want as much space. Deposition of Joseph Carl Walsh, April 28, 1977 at 9. The agreement also stipulated that Hamilton would not have to advance any money beyond $1,050,000 until Freeman and Handler had found a tenant for some of the space that had been left vacant by the major tenant's departure. The agreement left open the possibility that the financing might go as high as $1,200,000 if Freeman and Handler obtained a written commitment for long-term financing from an institutional lender.
At the time of the June 6 agreement, Hamilton had advanced $648,000. On June 10, Hamilton advanced $162,005.56, of which $87,005.56 went to a title company that had been engaged to clear up existing liens on the property. In July, August, and September, respectively, Hamilton advanced $70,000, $110,000, and $105,000 to Freeman and Handler. Deposition of Joseph Carl Walsh, April 28, 1977 at 17. As of the last advance, on September 22, Hamilton had advanced a total of $1,049,342.69 towards the project.*fn1 On
[ 279 Pa. Super. Page 107]
January 26, 1976, Hamilton instituted mortgage foreclosure proceedings against Freeman and Handler because they had failed to make interest payments on August 1, 1975, September 1, 1975, October 1, 1975, November 1, 1975, December 1, 1975, and January 1, 1976. Sometime after instituting the foreclosure proceedings, Hamilton completed the project. A sheriff's sale was held on June 23, 1976, at which time Hamilton purchased the property for $500,000. Hamilton expended a total of $1,202,138.60 on the property, both before and after it acquired it.
Appellants are 11 subcontractors out of a group of 16 who performed work on the project in 1974 and 1975 and were never paid by Freeman and Handler. Exhibit B of the Stipulated Facts contains the following record of their work:
Name of Plaintiff Work Commenced Work Completed
Frederic M. Gee September , 1975 October 4, 1975
Sherwin Williams Co. August 31, 1975 October 29, 1975
Fingerlakes Glass Corporation September 1, 1975 October 17, 1975
Peskin Sign Company September 2, 1975 October 16, 1975
Temple & Peffer September , 1974 October 12, 1975
Unloading Corporation September 3, 1975 October 16, 1975
J. Screed, Inc. June , 1974 October 27, 1975
Leva Bros. Tile & Marble Co.,
Inc. December 20, 1974 October , 1975
Mancini & Klimchuck Co., Inc. September 24, 1975 October 21, 1975
Enjem's, Inc. July 14, 1975 October 31, 1975
R.S.E., Inc., d/b/a Wellsboro
Asphalt Co. July 10, 1975 October 25, 1975
The record makes it clear that of the subcontractors on the project, only one, Rosenthal Chadwick, Inc., which was granted relief by the court below and is not a party to this appeal, had more than an extremely limited knowledge of the financing between Freeman and Handler and Hamilton. Irving Rosenthal of Rosenthal Chadwick testified that when
[ 279 Pa. Super. Page 108]
payments on his contract did not come through during the summer of 1975, he spoke to an official of Hamilton, who assured him that the project was adequately financed. N.T. at 7, 7/12/77. Rosenthal also testified that he mentioned his discussion with Hamilton to "many" of the other subcontractors on the project, but that "the only portion that I may have related to them is I found out there appeared to be sufficient money to complete the job. I didn't get into the specifics of this." N.T. at 7, 7/12/77. Most of the subcontractors who testified suggested that they had performed their work in response to assurances by Freeman and Handler as owners that there was adequate financing. None of them, however, verified with Hamilton that there was adequate financing.*fn2 Several of the subcontractors received a letter from Freeman and Handler in November 1975, stating there was adequate financing, but most of the subcontractors had by then stopped work. N.T. 18, 24, 26, 34, 7/12/77.
When there was no further communication from Freeman and Handler, appellants filed the following mechanics' liens against the property:
Number and Date of Amount
Mechanic's Lien Holders Term Filing Claimed
Frederic M. Gee 1371 C.D. 1975 12/ 5/75 $6,617.93
Sherwin Williams Co. 1436 C.D. 1975 12/18/75 873.15
Fingerlakes Glass Corporation 1443 C.D. 1975 12/19/75 12,554.00
Peskin Sign Co. 1452 C.D. 1975 12/22/75 6,678.00
Temple & Peffer 1456 C.D. 1975 12/24/75 5,256.82
Unloading Corporation 1472 C.D. 1975 12/31/75 3,785.00
J. Screed, Inc. 12 C.D. 1976 1/ 6/76 17,500.00
Leva Brothers Tile & Marble
Co., Inc. 124 C.D. 1976 2/ 3/76 4,090.56
Mancini & Klimchuck Co., Inc. 155 C.D. 1976 2/ 9/76 18,994.06
Enjem's, Inc. 248 C.D. 1976 2/27/76 27,387.53
R.S.E., Inc., d/b/a Wellsboro
Asphalt Company 223 C.D. 1976 2/24/76 34,578.47
[ 279 Pa. Super. Page 109]
The liens were in effect until the property was sold at the sheriff's sale on June 23, 1976. Just prior to the sheriff's sale, appellants as lien holders obtained a temporary order from the lower court enjoining Hamilton, Freeman and Handler from transferring the property free and clear of the liens. A hearing on the rule to show cause why the order should not be made permanent was to be held, but instead the proceeding was continued indefinitely and the prothonotary marked the judgment docket lis pendens against Hamilton. Eventually, by the parties' arguments, pleadings and stipulation of fact, the proceeding was converted from one seeking a permanent injunction to "that of imposing a constructive trust upon the theory of unjust enrichment." Slip op. of lower court at 5.
By amended order entered November 2, 1978, the lower court ordered "that a constructive trust in the amount of eleven thousand forty dollars ($11,040.00) with interest from November 5, 1975, is hereby imposed against the real estate sold at the sheriff's sale held on June 23, 1976, purchased by the Mortgagee, Hamilton Investment Trust as described in [the recorded] mortgage . . . . The Prothonotary shall index the case as a verdict entered in the amount of eleven thousand forty dollars ($11,040.00) with interest from November 17, 1975 in favor of Rosenthal Chadwick, Inc., Plaintiff." Record at 34a. The court granted Rosenthal Chadwick this adequate recovery because it had relied on Hamilton's assurances of financing. The court refused to grant the other subcontractors any recovery because they were unable to show that they had relied on any assurances from Hamilton. As already indicated above, Hamilton has not appealed from the order in favor of Rosenthal Chadwick. The subcontractors denied recovery have appealed.
As appellants, the subcontractors argue that their unsatisfied claims against Freeman and Handler should be satisfied out of Hamilton's unexpended loan funds on the project, namely, the difference between the $1,016,508.49*fn3 that Hamilton advanced to Freeman and Handler and the $1,350,000 that was originally agreed upon in the mortgage
[ 279 Pa. Super. Page 110]
and the accompanying loan agreement. Appellants maintain either that Hamilton should be declared a constructive trustee of this unexpended fund, or that they should be held to have an equitable lien upon the fund; the "label" chosen, they say, is unimportant. Appellant's Brief at 12.*fn4
[ 279 Pa. Super. Page 112]
The Supreme Court has said that a constructive trust "is not really a trust at all but rather an equitable remedy." Buchanan v. Brentwood Federal Savings & Loan Ass'n, 457 Pa. 135, 151, 320 A.2d 117, 126 (1974); See also Kimball v. Barr Township, 249 Pa. Super. 420, 378 A.2d 366 (1977). As such, it "is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee." Buchanan v. Brentwood Federal Savings & Loan Ass'n, supra, 457 Pa. at 152, 320 A.2d at 127. A constructive trust may arise "even though the acquisition of property was not wrongful and the defendant's intention was not malign. Our courts focus not on intention, but on the result of unjust enrichment." Kimball v. Barr Township, supra 249 Pa. Super. at 425, 378 A.2d at 368. See also Roman Mosaic and Tile Co., Inc. v. Vollrath, 226 Pa. Super. 215, 218, 313 A.2d 305, 307 (1973); see generally Restatement of Restitution, §§ 160, 194 (1937).
This court recently had before it a case in which appellants' theory was tested on a slightly different set of facts. In Myers-Macomber Engineers v. M.L.W. Construction Corp. and HNC Mortgage and Realty Investors, 271 Pa. Super. 484, 414 A.2d 357 (1979), a developer had given a mortgage of $5,850,000 as security for a construction loan. After the lender had advanced $2,900,000, the developer defaulted. The lender foreclosed and subsequently purchased the development at a sheriff's sale. One of the unpaid subcontractors sought to recover from the lender $11,298.98 for site-preparation work on the theory that the lender had been unjustly enriched. In denying recovery, this court noted that prior to the developer's default, the lender had already advanced the money budgeted for site preparation. Given that advance, the court concluded that it could not be said that by receiving the benefit of the site preparation work, the lender had been unjustly enriched; it
[ 279 Pa. Super. Page 113]
had been enriched, but since it had paid for the work, not unjustly.
Appellants rely on Morgan-Oswood and Associates, Inc., of Fla. v. Continental Mortgage Investors, 323 So.2d 684 (Fla.1975). There, a contractor finished a hotel but the lender refused to make a final advance on the project because meanwhile the owner had defaulted. The court found that the lender had been unjustly enriched because it had received the security of a completed hotel*fn5 without making all the advances required under the construction loan agreement. Accord Trans Bay Engineers and Builders, Inc. v. Hills, 551 F.2d 370 (D.C.Cir.1976) (contractor may recover retained mortgage payments from mortgagee assignee where contractor finished construction project); Bennett Construction Co. v. Allen Gardens, Inc., 433 F.Supp. 825 (W.D.Missouri 1977) (semble); F. W. Eversley and Co., Inc. v. East N.Y. Non-Profit HDRC, Inc. et al., 409 F.Supp. 791 (S.D.N.Y.1976) (semble); Miller v. Mountain View Savings & Loan Assn., 238 Cal.App.2d 644, 48 Cal.Rptr. 278 (1966) (a trust may be imposed on undisbursed mortgage funds in favor of claimants who complete project because through their efforts lender has received the security it bargained
[ 279 Pa. Super. Page 114]
for); Sutro v. Paramount Plastering, Inc., 216 Cal.App.2d 433, 31 Cal.Rptr. 174 (1963) (semble); Whiting Mead Co. v. West Coast Bond and Mortgage Co., 66 Cal.App.2d 460, 152 P.2d 629 (1944) (semble).
It will be observed that Myers-Macomber and Morgan-Oswood may be regarded as supplementing each other. Where Morgan-Oswood explicitly held that recovery will be allowed on proof of unjust enrichment, Myers-Macomber may be read as implicitly holding that such recovery will be allowed, denying it not as a matter of legal principle but rather because on the facts, there was no unjust enrichment. However, Myers-Macomber may be read more narrowly, as going no further than assuming arguendo, without holding, that recovery will be allowed on proof of unjust enrichment, thus leaving undecided the issue of legal principle. Given this uncertainty, we must consider and decide de novo, so to speak, whether under Pennsylvania law an unpaid subcontractor should be permitted to recover against a lender upon proof that as a result of the subcontractor's work, the lender has been unjustly enriched.*fn6
It is important to start this consideration by noting that we are not concerned with a situation where an unpaid subcontractor asserts a right to recover on some theory other than unjust enrichment. Recently, we had occasion to consider the subject of an unpaid subcontractor's rights, in Bornstein v. Macy et al., 278 Pa. Super. 156, 420 A.2d 477 (1980). There, unpaid subcontractors sought recovery against an owner on the basis of what they characterized as an "equitable" right. This asserted right, however, did not
[ 279 Pa. Super. Page 115]
involve the right to recover for unjust enrichment, for on the facts, no unjust enrichment was, nor could it be, pleaded; the owner had paid all that was due; the money had been deposited with the court, and the dispute was whether the unpaid subcontractors or certain creditors of the owner were entitled to it. We held that
[u]nder established principles, subcontractors may proceed against an owner in either of two situations: if there is a direct, or express, or "actionable," promise by the owner to pay the subcontractors [citations omitted]; or if the contract between the owner and the general contractor contains a promise "for the benefit of all the subcontractors who [have] not been paid" [citations omitted]. 278 Pa. Super. at 115, 420 A.2d at 486.
Since neither of those situations prevailed, we denied recovery. In doing so, we expressly noted that whether a subcontractor may recover on proof of unjust enrichment was not an issue pertinent to our decision.
As already noted, this issue has been decided in other jurisdictions. See Morgan-Oswood and Associates, Inc., of Fla. v. Continental Mortgage Investors, supra, and the other cases in accord, cited supra. Before deciding whether to follow these cases, however, it should be noted that there is another line of cases at least implicitly if not explicitly contra. As has been stated, Morgan-Oswood involved a claim by an unpaid subcontractor against a lender, on the theory that the lender had been unjustly enriched because the value of its security had been enhanced as a result of the subcontractor's work. Suppose, however, that the unpaid subcontractor claims that the owner, rather than the lender, has been unjustly enriched. Will the action lie? In many jurisdictions, the answer is that it will not. It would seem to follow that in those jurisdictions, cases such as Morgan-Oswood would not be followed, on the basis that no distinction should be made between the liability of an owner and of a lender, so far as an unpaid subcontractor is concerned. Furthermore, cases denying recovery against an owner are especially pertinent to the present case, for Hamilton may
[ 279 Pa. Super. Page 116]
be regarded, so far as its possible liability on a claim of unjust enrichment is concerned, either as a lender or as an owner. It will be recalled that Hamilton started out as a lender, but when Freeman and Handler defaulted, it bought the property at sheriff's sale and as owner, completed the project.
[ 279 Pa. Super. Page 117]
Cases involving the liability of an owner on a claim of unjust enrichment include the following: Constanzo v. Stewart, 9 Ariz.App. 430, 453 P.2d 526 (1969) (subcontractor recovered from owner on unjust enrichment theory where owner received benefit of subcontractor's services, did not pay contractor for them, knew that subcontractor was concerned about payment, and had assured subcontractor that escrow arrangements for payment had been made); G and B Contractors, Inc. v. Coronet Developers, 134 Ga.App. 916, 216 S.E.2d 705 (1975) (subcontractor may not recover from owner where no privity of contract between them); Bishop v. Flood, 133 Ga.App. 804, 212 S.E.2d 443 (1975) (subcontractor may not recover from owner where subcontractor failed to pursue lien or garnishment remedies); Dale's Service Co. v. Jones, 96 Idaho 662, 534 P.2d 1102 (1975) (subcontractor may not recover from owner where owner did not agree to pay subcontractor for work); Indianapolis Raceway Park v. Curtiss, Ind.App., 386 N.E.2d 724 (1979) (subcontractor may not recover from owner where no showing that owner acted wrongfully or in misleading manner); Guldberg v. Greenfield, 259 Iowa 873, 146 N.W.2d 298 (1966) (subcontractor may not recover from owner where owner paid contractor for work and subcontractor had not taken advantage of mechanics' lien law); Pay-N-Taket, Inc. v. Crooks, 259 Iowa 719, 145 N.W.2d 621 (1966) (subcontractor may not recover from owner where subcontractor did not file mechanic's lien); Pendleton v. Sard, Me., 297 A.2d 889 (1972) (subcontractor may not recover from owner where subcontractor did not first sue contractor); Custer Builders, Inc. v. Quaker Heritage, Inc., 41 App.Div.2d 448, 344 N.Y.S.2d 606 (1973) (subcontractor may not recover from owner where owner made no promise to subcontractor); George M. Morris Page 117} Constr. Co. v. Four Season's Motor Inn, Inc., 90 N.M. 654, 567 P.2d 965 (1977) (subcontractor may not recover from owner because of existence of lien remedy); McLaughlin Elec. Supply v. Am. Empire Ins., S.D., 269 N.W.2d 766 (1978) (subcontractor ordinarily has no remedy against owner other than mechanic's lien); Pascall's, Inc. v. Dozier, 219 Tenn. 45, 407 S.W.2d 150 (1966) (supplier of materials has cause of action against owner even though no contractual relationship if owner had not paid an party for materials and supplier had exhausted remedies against party it had contracted with); Crockett v. Brady, Tex.Civ.App., 455 S.W.2d 807 (1970) (subcontractor may not recover against owner where subcontractor has no reason to believe that anyone other than contractor will pay him); Crockett v. Sampson, Tex.Civ.App., 439 S.W.2d 355 (1969) (semble); Schneider v. Delwood Center, Inc., Tex.Civ.App., 394 S.W.2d 671 (1965); (employee of tenant may not recover against landlord for work done benefiting landlord).
These cases, it will be observed, may be divided into three categories: those that require proof that the owner has engaged in some wrongdoing or misrepresentation; those that require proof that the subcontractor has exhausted statutory or contractual remedies; and those that require some sort of direct contractual relationship between the subcontractor and owner. It is not apparent to us, however, why a subcontractor should have to satisfy any of these additional requirements to make out a case of unjust enrichment.
As regards the requirement of proof of wrongdoing or misrepresentation: We have specifically held that on a claim of unjust enrichment, a showing of wrongdoing or wrongful intent on the part of the benefited party is not necessary. Thus, in Kimball v. Barr Township, 249 Pa. Super. 420, 425, 378 A.2d 366, 368 (1977), in discussing the imposition of a constructive trust because of unjust enrichment, we stated that a constructive trust may be imposed "even though the acquisition of the property was not wrongful and the defendant's intention was not malign. Our
[ 279 Pa. Super. Page 118]
courts focus not on intention, but on the result of unjust enrichment." Even more specifically, in Roman Mosaic and Tile Co., Inc. v. Vollrath, 226 Pa. Super. at 218, 313 A.2d at 307, supra, we stated that to recover on a claim of unjust enrichment, "appellant must show that [Mrs. Vollrath] wrongfully secured or passively received a benefit that it would be unconscionable for her to retain." (Emphasis added.)*fn7 Finally, in Scott v. Purcell and The Oaklander Associates, 264 Pa. Super. 354, 399 A.2d 1088 (1979), we held, citing Roman Mosaic and Tile, that the appellant was entitled to recover on a claim of unjust enrichment against a corporation that had purchased property from one who was supposed to buy it for the appellant, notwithstanding the failure to show any wrongdoing by the corporation.
As regards the requirement of exhaustion of remedies: No doubt in most cases, the preferable remedy from the unpaid subcontractor's point of view will be to file a mechanic's lien. This will be so because the remedy is so expeditious and drastic; the lien may be easily filed, and once filed, may preclude the owner from selling the property until the lien has been satisfied. However, we see no reason why a subcontractor who for some reason does not file a lien should be penalized by being unable to recover on a claim of unjust enrichment. By not filing a lien, the subcontractor will have lost the considerable procedural advantages given him by the mechanics' lien law. That is penalty enough. To go further, and deny the subcontractor any recovery at all, even when the subcontractor can show that the owner, or lender, has been unjustly enriched, seems to us to serve no useful purpose, and to be inconsistent with the principle of such cases as Kimball v. Barr Township, that "[o]ur courts focus . . . on the result of unjust enrichment." A similar
[ 279 Pa. Super. Page 119]
observation may be made regarding the requirement that a contractual remedy must be exhausted. Assuming that an owner has been unjustly enriched as the result of an unpaid subcontractor's work, we see no reason why the owner should be entitled to retain that enrichment simply because the subcontractor has for some reason failed to sue the general contractor.
Finally, as regards the requirement of some sort of direct relationship between the subcontractor and the owner: The cases imposing this requirement seem to us to ignore the fact that the essence of the doctrine of unjust enrichment is that there is no direct relationship between the parties. Sometimes, of course, there will be a direct relationship, in the form of a promise either to the subcontractor or for the benefit of the subcontractor. In such a case, the subcontractor has a right to recover on the promise. See Bornstein v. Macy, supra. The existence of that right, however, precludes a claim of unjust enrichment. Thus in Roman Mosaic and Tile Co., Inc. v. Vollrath, supra, we stated:
The doctrine of unjust enrichment is clearly "inapplicable when the relationship between the parties is founded on a written agreement or express contract. Third National Bank & Trust Co. of Scranton v. Lehigh Valley Coal Company, 353 Pa. 185, 193, 44 A.2d 571 (1945)." Schott v. Westinghouse Elec. Corp., 436 Pa. 279, 290, 259 A.2d 443, 448 (1969).
226 Pa. Super. at 218, 313 A.2d at 307.
Here, the unpaid subcontractors do not assert any contractual right to recover against Hamilton, whether Hamilton be regarded as lender or owner, nor does it appear that they could assert any such right. Given this fact, we see no reason to hold that they may not assert a claim of unjust enrichment.
There is at least one decision that is opposed to the cases requiring an unpaid subcontractor to prove wrongful conduct by the owner, or exhaustion of remedies, or some sort
[ 279 Pa. Super. Page 120]
of direct relationship with the owner. In S. and M. Rotogravure Service, Inc. v. Baer, 77 Wis.2d 454, 252 N.W.2d 913 (1977), the Wisconsin Supreme Court held, simply, that a contractor who had done work for a tenant of a building could recover from the landlord on a claim of unjust enrichment where the contractor's work enhanced the value of the building and the landlord had not paid anyone for the work. We acknowledge that this appears to be a minority view. We nevertheless think it sound, and consistent with our decisions on the nature of a claim of unjust enrichment.
With this conclusion reached, the question arises, which, if any, of the unpaid subcontractors in the present case are entitled to recover on a claim of unjust enrichment? The answer to this question is that we do not know. On the one hand, several of the subcontractors, Frederic Gee, Sherwin Williams Co., Fingerlakes Glass Corporation, Peskin Sign Company, Unloading Corporation, and Mancini and Klimchuk Co., Inc., began their work at a time when it is unlikely that Hamilton could have made advances on their behalf. This is so because advances were made on the basis of the prior month's work and these subcontractors began their work on the last day of August or in September, when the last advance to Freeman and Handler was made. On the other hand, the other subcontractors, Temple & Peffer, J. Screed, Inc., Leva Bros. Tile & Marble Co., Inc., Enjem's Inc., and R.S.E., Inc. d/b/a Wellsboro Asphalt Company, began their work considerably before the last advance was made. It is therefore possible that Hamilton made advances*fn8 to pay for their work in which event Hamilton may not be said to be unjustly enriched, even if the subcontractors did not receive the advances from Freeman and Handler. See Myers-Macomber Engineers v. M.L.W. Construction Corp. and HNC Mortgage and Realty Investors, supra.
[ 279 Pa. Super. Page 121]
In order to determine what rights, if any, the subcontractors may have against funds in Hamilton's possession,*fn9
[ 279 Pa. Super. Page 122]
we shall remand this case to the lower court. See Bedillion v. Wilson Stave Company, Inc., et al., 271 Pa. Super. 292, 413 A.2d 411 (1979); Frowen v. Blank, 242 Pa. Super. 276, 363 A.2d 1267 (1976). The court, after further testimony, if that is necessary, should review each subcontractor's claim and determine whether the claim was covered in any of the advances made, and if not, whether Hamilton was unjustly enriched as a result of the work being done. Having completed its determination, the court should make findings of fact and conclusions of law, which can be reviewed on any further appeal.
Since the case must be remanded, it is in order to discuss two additional arguments made by appellants. If not resolved now, the lower court and the parties will be uncertain about how to proceed on remand.
Appellants argue that Hamilton was necessarily unjustly enriched by appellants' work because after it purchased the property at the sheriff's sale, it resold the property to a third party for $1,400,000, reaping a "profit" of just under $385,000, since it had made only $1,016,508.49 in advances to Freeman and Handler. We are not persuaded by this argument.
Appellants neither pleaded the resale in their complaint nor amended the complaint to do so. The fact of the resale is therefore not of record. As an appellate court we may not consider facts or materials referred to in a party's brief but not of record. Acker v. Palena, 260 Pa. Super. 214, 218, 393 A.2d 1230, 1231 n.2 (1978); In the Interest of Carroll, 260 Pa. Super. 23, 393 A.2d 993, 995 n.4 (1978).
Assuming that on remand the lower court decides that evidence of the resale is admissible-and we do not mean to intimate what the court's decision on this point should be-we note that the evidence would not necessarily be determinative. In Miller v. Mountain View Savings and Loan Assn., supra, a developer had defaulted on a completed
[ 279 Pa. Super. Page 123]
project, the lender refused to advance funds owing a subcontractor, bought the project at a sheriff's sale for the amount it had expended on the project, and then sold the property to a third party for an additional $10,000. The issue was whether the lender could credit back the unexpended portion of the loan against the balance of the loan without satisfying the subcontractor's claim. The court found that the subcontractor could recover out of the unexpended loan fund, but did not find the evidence of the resale relevant. The court stated:
It is therefore unnecessary to determine what effect the subsequent resale by [the lender] had upon the respective rights and obligations of it, as lender, and respondent as claimant. It has been conceded in this case that the sale by [the lender] cut off any right [the subcontractor] had under his recorded claim or lien. It may be assumed that he had no other right in the property itself or in the proceeds from the subsequent sale. It was therefore error to receive the evidence concerning that sale.
238 Cal.App.2d at 665, 48 Cal.Rptr. at 292.
This appears to hold that once the lender purchases the property at the sheriff's sale, the subcontractor has no right to participate in any subsequent profit. We agree in part with this proposition. If the lender has in fact made advances to pay for the work of a subcontractor, it has satisfied its obligation-so far as it is concerned, it has paid for the work-and the subcontractor may not claim part of the proceeds of the profit on an unjust enrichment theory. If, however, the lender has not made advances to pay for the work of the subcontractor, the subcontractor may be entitled to recover from the lender on a claim of unjust enrichment. On that claim, evidence of resale may be relevant as tending to show the value to the lender of the subcontractor's work.
Appellants also argue that an equitable lien should be imposed on Hamilton's unexpended loan funds on the basis of appellants' reliance on the existence of the funds and on certain assurances that Freeman and Handler gave them with respect to the funds. In support of this argument,
[ 279 Pa. Super. Page 124]
appellants have cited several California cases. See Doud Lumber Co. v. Guaranty Savings & Loan Assn., 254 Cal.App.2d 585, 60 Cal.Rptr. 94 (1967); McBain v. Santa Clara Savings & Loan Association, 241 Cal.App. 829, 51 Cal.Rptr. 78 (1966); Hayward Lumber and Investment Co. v. Const. Federal Savings & Loan Assn., 47 Cal.App.2d 211, 117 P.2d 682 (1941); Smith v. Anglo California Trust Co., 205 Cal. 496, 271 P. 898 (1928). However, we do not choose to follow these cases, which in any event no longer seem to be the law in California.*fn10
The California cases do not deal with the issue of whether subcontractors may rely on a loan fund where the fund may originally have been sufficient to meet their claims, but over the course of the project was reduced by the parties to the loan. That is what occurred here. Appellants argue that Hamilton should be held to its original obligation to supply $1,350,000, but to accept that argument would mean that
[ 279 Pa. Super. Page 125]
parties to a loan would lose their freedom to alter its terms. Furthermore, to give effect to third party reliance on the existence of a loan fund might have unfortunate consequences for the construction industry. The lender would be subjected to "unbargained for risk," which might well lead to higher interest rates, more restrictive loan policies, and the inevitable squeezing out of smaller developers. See Gutierrez, California Civil Code Section 3264 and The Ghost of the Equitable Lien, 30 Hastings L.J. 493, 521 (1979). As an illustration of such a risk: an unscrupulous owner or developer might misrepresent to the subcontractors the extent of the financing. To protect itself the lender would have to disclose to each participant in a project at the outset the exact terms of the financing agreements. The lender would also have to inform participants of any changes in the agreements. This obligation might discourage a lender from engaging in a project. Finally, contrary to the assertions of subcontractors generally, it is not clear that lenders are better predictors of developer default than they are. See Lefcoe and Schaffer, Construction Lending and the Equitable Lien, 40 So.Cal.L.Rev. 439, 447 (1967). To impose liability on lenders on the theory that they are better predictors, and therefore better risk averters, than subcontractors, would in our opinion be to act on the basis of inadequate information.
We therefore conclude that a contractor or subcontractor must show that it relied on assurances of adequate financing from the lender itself, in order to recover from the lender on a reliance theory. In Pioneer Plumbing Supply Co. v. Southwest Savings & Loan Assoc., 102 Ariz. 258, 428 P.2d 115 (1967), an Arizona court suggested just such a rule. Cf. Demharter v. First Federal S. and L. Assn. of Pittsburgh, 412 Pa. 142, 194 A.2d 214 (1963).*fn11 Here, only one of the
[ 279 Pa. Super. Page 126]
subcontractors was able to make this showing. As has been indicated, Rosenthal of Rosenthal Chadwick testified that he had called Hamilton and spoken to an official administering the project, who assured him that the owners were "strong" and that "everything seems okay." N.T. at 7, 7/12/77 Hearing. Based on this conversation, Rosenthal Chadwick continued to work on the project.
*fn* President Judge JOHN Q. STRANAHAN of the Court of Common Pleas, of Mercer County, Pennsylvania, and Judge LEONARD SUGERMAN of the Court of Common Pleas of Chester County, Pennsylvania are sitting by designation.