UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
March 11, 1985
WILLIAM PENN SAVINGS & LOAN ASSOCIATION, APPELLANT
CHIPIN CLIVEDEN ASSOCIATES, INC.; CW PROPERTIES, INC.; ANSALDO ASSOC., INC., AS CO-PARTNERS, T/A CLIVEDEN DEVELOPMENT ASSOCIATES AND THE FIDELITY BANK; SILVI CONCRETE PRODUCTS, INC.; GLENN NORET; JACK CARDONICK; SIDNEY FEINSTEIN; REDI CONCRETE COMPANY, INC.; CHARLES ANASTASI; JOSEPH ANASTASI; HERBERT FOGEL; WATERMAN ELECTRONIC TUBE CO., AS CO-PARTNERS T/A COMMERCIAL INVESTOR ASSOCIATES
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA, D.C. Civil No. 84-1108, District Judge: Honorable Clifford Scott Green
Before: ADAMS and WEIS, Circuit Judges, and HARRIS*fn* , District Judge
MEMORANDUM OPINION OF THE COURT
WEIS, Circuit Judge.
The issue in this bankruptcy case is the priority of liens against real estate owned by the debtor. Pertinent facts were stipulated and are discussed in detail in the bankruptcy judge's opinion and that of the district court. The circumstances need only be summarized here.
William Penn Savings & Loan Association held the first mortgage on the property. Included in the terms was a provision that William Penn would release any individual lot from the lien of the mortgage upon payment of $60,800.
At a later date, when additional financing was required, Fidelity Bank agreed to advance $600,000 on certain conditions. As part of the arrangements, Penn became party to an amendment agreement stating, inter alia, that the owner and Penn would not "extend or modify" their original agreement as it "concern[s] the amount required for releases, without the written consent of Fidelity . . . ." Fidelity later assigned its rights to another.
After the debtor defaulted and filed a petition under Chapter 11, three lots were sold and the liens were transferred to the funds realized. Penn contended that Fidelity's assignee was not entitled to the benefit of the release clause because of a provision in the original agreement between the owner and Penn. That section stated that "the parties do not intend the benefits of this Agreement to inure to any third party . . . ."
The bankruptcy court determined that under the terms of the Amendment Agreement, the parties intended Fidelity to have the power to enforce the release provision. Moreover, the fact that the debtor had defaulted before the lots were sold did not deprive Fidelity of its rights. In support of his conclusions, the bankruptcy judge cited both the Superior Court and the Pennsylvania Supreme Court opinions in Reilly v. City Deposit Bank & Trust Co., 118 Pa. Super. 222, 179 A. 886 (1935), rev'd 322 Pa. 577, 185 A. 620 (1936).
Having reached that determination, the bankruptcy judge directed the following distributions:
1. Out of the proceeds of each lot sold, the first $60,800 is to be paid to Penn.
2. The balance is to be paid to Glenn Noret, the holder of a mechanics' lien.
3. Any balance remaining is to be paid to Fidelity's assignee until its claims are satisfied.
4. Any further balance is to go to Penn until its claim is satisfied.
5. The remainder is to be remitted to the bankruptcy estate.
The district court affirmed, and Penn has appealed to this court.
After a careful review of the record, we have concluded that the bankruptcy judge did not err in determining that Fidelity's assignee was entitled to the benefit of the release clause. We agree that Reilly is persuasive authority for his rulings. However, the bankruptcy judge should have limited Penn's secured interest in each lot to $60,800, the amount set out in the mortgage agreement. The effect of a release clause is to clear the property of the encumbrance upon payment of the stated amount. After receipt of that sum, Penn becomes an unsecured general creditor with respect to any additional proceeds from the sale of any lots. See Neale v. Dempster, 179 Pa. 569, 36 A. 338 (1897).
Because Penn no longer has a secured interest after receipt of $60,800 for any lot, it follows that Noret, the mechanics' lien holder, properly became the party next entitled to satisfaction of his claim. Noret's waiver of any rights superior to those of Penn in regard to the proceeds refers only to Penn's secured rights. Once that interest has been satisfied, Noret's lien becomes effective.
Accordingly, we will affirm the ruling of the district court, except with respect to that part of the bankruptcy judge's order which provides that after the claim of Fidelity's assignee has been satisfied, Penn is entitled to the balance. The case will be remanded to the district court to strike provision 4 of the bankruptcy judge's order of January 23, 1984. In all other respects the order of the bankruptcy judge shall remain as entered.