In re Pyramid Industries, Inc., Bankruptcy No. 89 B 15373. Adv. No. 93 A 1025.

Decision Date22 July 1994
Docket NumberBankruptcy No. 89 B 15373. Adv. No. 93 A 1025.
Citation170 BR 974
PartiesIn re PYRAMID INDUSTRIES, INC., Debtor. UNITED STATES of America, Plaintiff, v. Andrew MAXWELL, not individually, but as Trustee of the Estate of Pyramid Industries, Inc.; Affiliated Bank; All American Corporation; Art Drapery Studios Corporation; Butler Street Foundry & Iron; Chicago Builders & Erectors, Inc.; Columbia Pipe & Supply Company; Construction Specialties, Inc.; Contractors Acoustical Supply; Diversified Insulation; Douglass & Company; Gerson Electric Construction Co.; Gilead-Angelo Construction; Harold A. Schweig Company, Inc.; The Lazzaro Companies, Inc.; Martin Cement Company; Municipal Funding, Inc.; Southwest Financial Bank; Vesta Distributors, Inc.; WLW & Associates; and Nonrecord Claimants, Defendants.
CourtU.S. Bankruptcy Court — Northern District of Illinois


Joel Nathan, Asst. U.S. Atty., Chicago, IL, for U.S.

Robert Samko, Chicago, IL, for All American Corp.

Peter Swan, Highland Park, IL, for Gerson Elec. Const. Co.

Kurt Muller, Chicago, IL, for The Lazzaro Companies, Inc.


DAVID H. COAR, Bankruptcy Judge.

This matter comes before the Court on the motion of the United States, on behalf of the Small Business Administration ("SBA"), for summary judgment on its Complaint to Determine the Extent, Validity and Priority of Liens and Interest in Property of the Estate. The Court has core jurisdiction pursuant to 28 U.S.C. §§ 157(b)(2)(K) and 1334. Upon consideration of the pleadings, memorandum and other supporting documents submitted by the parties, the Court now issues Findings of Fact and Conclusions of Law.


The interests at issue in this proceeding arise out of a contract between the Debtor, Pyramid Industries, Inc. ("Pyramid"), and the United States Navy entered into on September 17, 1987, contract # N62472-84-C-0517 ("Prime Contract"). Pyramid was to perform work as the general contractor at the Glenview Naval Air Station in Glenview, Illinois. Upon completion of the project, a dispute arose between Pyramid and the Navy regarding the final balance due. Although Pyramid maintained that it was owed $55,000.00, its claim was eventually settled for $51,050.00. The Court approved this compromise in a February 27, 1990 order which stated that "all liens, claim sic and encumbrances asserted against the Prime Contract shall be transferred to and attach to the proceeds of the Prime Contract collected by Trustee, subject to further order of court."

The Prime Contract required Pyramid to provide payment and performance surety bonds, which could be posted by individual sureties. Pyramid submitted A.G. Merklinger ("Merklinger") and William Reeves ("Reeves") as individual sureties. Merklinger and Reeves provided affidavits indicating their financial positions, but they did not post the requisite bonds. Merklinger filed for bankruptcy on June 1, 1990 claiming that he had no assets. The assets appearing on Reeves' affidavit were subsequently found to be non-existent at the time of execution and at all times thereafter.

Pyramid filed a voluntary petition for relief pursuant to chapter 11 of the Bankruptcy Code on September 14, 1989. The case was converted to chapter 7 on October 30, 1989. Andrew Maxwell ("Maxwell") is the duly appointed chapter 7 trustee. The sum of $51,050.00 in proceeds from the Prime Contract ("Proceeds") is among the assets of Pyramid's estate.

The SBA holds a lien claim against Pyramid for $590,574.88 arising out of loans extended to Pyramid to perform the Prime Contract. SBA's interest is evidenced by three notes made by Pyramid (or one of its predecessors) in the amounts of $309,140.25, $47,171.33 and $240,316.30. The notes were made on July 2, 1984, August 22, 1988 and July 3, 1989, respectively. Each note is secured in part by a perfected security interest in Pyramid's accounts, instruments, chattel paper, general intangibles, and proceeds therefrom.

All American Corporation ("All American") was the drywall, painting and decorating subcontractor for the Prime Contract pursuant to two separate agreements with Pyramid: a July 19, 1988 contract for $19,600.00 and an October 26, 1988 contract for $25,000.00. After necessary additional work was performed, the balance due was $54,814.71. All American has received no payments for its work. Thus All American holds an unsecured claim for $54,817.71 as one of Pyramid's subcontractors under the Prime Contract.

The Lazzaro Companies, Inc. ("Lazzaro") similarly asserts an unsecured claim as a subcontractor in the amount of $27,956.00. The claim is evidenced by an unsatisfied judgment in that amount entered against Pyramid, Merklinger and Reeves by the Circuit Court of Cook County, Illinois on April 20, 1990. Lazzaro has received no payments for its work, and therefore holds an unsecured claim against Pyramid for $27,956.00.

On November 13, 1987, Gerson Electric Construction Company ("Gerson") entered into a contract with Pyramid to provide electrical construction labor and materials at the Naval Station for a base contract price of $181,200.00. Gerson has fully performed its work under the subcontract, and it has received $85,991.50 in payments from Pyramid. Gerson has not yet received the $95,208.50 balance. When Pyramid filed for bankruptcy, Gerson made an unsuccessful claim against the sureties for payment. Gerson asserts a secured claim against Pyramid for $95,208.56 as a subcontractor under the Prime Contract.1

On or around August 13, 1993, the United States (on behalf of the SBA) filed a complaint to determine the extent, validity and priority of liens and interests in Pyramid's estate. The following parties were named as defendants: Maxwell, as trustee of the Debtor's estate; Affiliated Bank; All American; Art Drapery Studios Corp.; Butler Street Foundry & Iron; Chicago Builders & Erectors, Inc.; Columbia Pipe & Supply Co.; Construction Specialties, Inc.; Contractors Acoustical Supply; Diversified Insulation; Douglass & Co.; Gerson; Gilead-Angelo Construction; Harold A. Schweig Co., Inc.; Lazzaro; Martin Cement Co.; Municipal Funding, Inc.; Southwest Financial Bank; Vesta Distributors, Inc.; WLW & Assocs.; and nonrecord claimants. The complaint alleged that the interests of these defendants are junior, inferior and subordinate to those of the SBA. Therefore, the SBA sought declaratory judgment that its interest in the Proceeds is superior to those of the defendants. Maxwell, All American, Gerson and Lazzaro filed answers to the complaint.2 All American, Gerson and Lazzaro (collectively, the "Defendants") deny that their equitable interest in the Proceeds are junior, inferior or subordinate to those of the federal government and the SBA. Maxwell admits the amounts due under the Prime Contract for each of the defendants named in the complaint, admits that each of the defendants has some interest in the Proceeds, and denies that his interest is subordinate to that of the SBA.

The United States on behalf of the SBA now moves for summary judgment on its declaratory judgment complaint with respect to the Defendants.3


Summary judgment is appropriate when the pleadings, depositions, answers to interrogatories, admissions and affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Fed. R.Civ.P. 56, incorporated by reference by Fed.R.Bankr.P. 7056; Wainwright Bank & Trust Co. v. Railroadmens Fed. Sav. & Loan Ass'n of Indianapolis, 806 F.2d 146, 149 (7th Cir.1986). The movant has the burden of establishing that there is no genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). The primary inquiry is whether the evidence presents a sufficient disagreement to require a trial, or whether it is so one-sided that one party must prevail as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 2509-10, 91 L.Ed.2d 202 (1986). If the moving party meets this burden, the non-moving party must then respond by setting forth specific facts which demonstrate the existence of a genuine issue for trial. Fed. R.Civ.P. 56(e); Posey v. Skyline Corp., 702 F.2d 102, 105 (7th Cir.1983).


The SBA maintains, and the Defendants do not contest, that it has a perfected security interest in the Proceeds. The SBA also argues that the Defendants do not have a perfected interest in the Proceeds; rather, they are general unsecured creditors of Pyramid. Therefore, the SBA reasons that if the Defendants have an equitable interest in the Proceeds, those interests are subordinate to those of the SBA. Finally, the SBA claims that it may step into the shoes of the Navy because they are both government entities and that it has the right to setoff against the proceeds pursuant to § 553 of the Bankruptcy Code.

All American and Gerson filed separate answers to the motion for summary judgment as well as memoranda in support of their positions. All American's brief expressly adopted the arguments set forth in Gerson's memorandum and presented additional arguments. Although Lazzaro did not file a separate memorandum in response to the SBA's summary judgment motion, the Court will assume that it adopts the arguments articulated in All American's and Gerson's memoranda.4 The Defendants essentially assert that their interests in the Proceeds are superior to those of the SBA pursuant to the Miller Act, third party beneficiary principles, and equitable liens.

A. Priority of Claimants to Contract Proceeds

In order to determine the relative priorities of the SBA and the Defendants to the Proceeds, the Court must attempt to navigate a thicket of public construction cases dating back almost a century. The exercise begins with Prairie State Nat'l Bank of Chicago v. United States, 164 U.S. 227, 17...

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