Matter of J. Robert Pierson, Inc.

• Decision Date: 27 November 1984
• Docket Number: Civ. A. No. 84-1486,Adv. No. 83-1703.,Bankruptcy No. 82-00292 G
• Citation: 44 BR 556
• Parties: In the Matter of J. ROBERT PIERSON, INC., Debtor. LONDON GROVE CONTRACTORS, INC., Appellant/Plaintiff, v. J. ROBERT PIERSON, INC., et al, Appellee/Debtor-Defendant.
• Court: U.S. District Court — Eastern District of Pennsylvania

44 B.R. 556 (1984)

In the Matter of J. ROBERT PIERSON, INC., Debtor LONDON GROVE CONTRACTORS, INC., Appellant/Plaintiff, v. J. ROBERT PIERSON, INC., et al, Appellee/Debtor-Defendant.

Civ. A. No. 84-1486, Bankruptcy No. 82-00292 G, Adv. No. 83-1703.

United States District Court, E.D. Pennsylvania.

November 27, 1984.

Randall C. Schauer, West Chester, Pa., for appellant/plaintiff.

Janet M. Sonnenfeld, Philadelphia, Pa., for appellee/debtor-defendant.

OPINION

LUONGO, Chief Judge.

This bankruptcy appeal was filed by London Grove Contractors, Inc. (London Grove), a judgment creditor of the debtor, J. Robert Pierson, Inc. (Pierson). London Grove seeks to overturn a bankruptcy judge's order denying its complaint for relief from the automatic stay provision of the Bankruptcy Code with respect to a settlement fund which was created in favor of Pierson after Pierson filed a petition for relief under Chapter 7.¹ The bankruptcy judge, in an opinion accompanying his order, ruled that London Grove had not obtained a valid lien in the settlement fund before the debtor filed for relief. The bankruptcy judge also ruled that London Grove's lien could not be enforced against the settlement fund after the debtor declared bankruptcy because of the automatic stay imposed by the Code. For the reasons discussed below, I will affirm.

I.

The facts of this case were set forth in London Grove Contractors, Inc. v. J. Robert Pierson, Inc., 36 B.R. 853, 854 (Bankr. E.D.Pa.1984):

Marker & Marker, Inc. ("Marker"), was the builder of homes in a development in Concord Township, Pennsylvania. To aid in the completion of the project Marker contracted for the services of the debtor who in turn subcontracted much of the work to London Grove Contractors, Inc. ("London Grove"). Marker subsequently defaulted on the contract and failed to pay the debtor for work previously completed, which caused the debtor to default on its payments to London Grove. In state court, the debtor filed a complaint against Marker to which the latter filed an answer and counterclaim. In the same court London Grove instituted suit against the debtor upon which a default judgment of $49,416.50 was entered on June 21, 1981. In July of 1981 London Grove caused the issuance of a writ of execution against Marker, as garnishee, and the debtor. The said garnishment action was predicated on the debt owed by Marker to the debtor which was the subject of the above described action between these two parties. The debtor filed a petition for relief under chapter 7 of the Bankruptcy Code on January 25, 1982, although it has since been converted to a chapter 11 proceeding. In November of 1982 the debtor settled the action against Marker whereby the latter deposited a settlement fund of $50,000 in the state court pending the confirmation of the debtor\'s plan of reorganization.

II.

On these facts the bankruptcy judge rejected London Grove's complaint seeking relief from the automatic stay. The judge ruled that London Grove did not obtain a valid lien on the settlement fund before Pierson declared bankruptcy, reasoning that Pennsylvania law does not permit garnishment of an unliquidated claim for breach of contract. The bankruptcy judge also concluded that the creation of a settlement fund after the debtor's petition for relief inured to the benefit of the trustee because of the trustee's status as lien creditor, and that the fund could not be attached by London Grove pursuant to its pre-bankruptcy garnishment because of the automatic stay.

III.

In order for London Grove to succeed in this appeal, it must establish (1) that it possessed a lien not subject to avoidance by the trustee by virtue of the trustee's power under the "strong arm clause" of the Code, and (2) that any act or occurrence needed to perfect its lien after the filing of Pierson's petition was not forbidden by the automatic stay. London Grove advances two theories to support its assertion of a lien in the settlement fund. Primarily London Grove argues, as it argued to the bankruptcy judge, that the garnishee had property of the debtor in its possession when the garnishment writ was served in July, 1981. From this premise, London Grove contends that its lien was impressed upon the property so held by Marker & Marker before Pierson's petition for relief, and, indeed, before the preference period antecedent to the onset of bankruptcy.

In its submissions to this court, London Grove advances a second line of argument: Relying on Pennsylvania Rule of Civil Procedure 3111(b),² London Grove contends that its garnishment attached property in the hands of Marker & Marker which became owing to Pierson after Pierson's Chapter 7 petition was filed—this notwithstanding the possibility that Marker & Marker may have held no property of the debtor at the time garnishment was effected.

In response, Pierson argues that Pennsylvania law does not permit attachment of a lien against an unliquidated claim for breach of contract; that London Grove obtained no greater rights against Marker & Marker than Pierson had when the attachment was served; and that London Grove's rights were "frozen" when Pierson petitioned for relief because of the automatic stay.

IV.

Section 544(a) of the Bankruptcy Code,³ aptly termed the "strong arm clause," gives to the trustee, as of the commencement of a case, "the status and powers of a judicial lien creditor, a creditor holding an execution returned unsatisfied, and a bona fide purchaser of real property from the debtor. . . ." 4 Collier on Bankruptcy ¶ 544.02 at 544-6—544-7 (15th ed. 1984). Because section 544(a) does not define the roles of a judicial lien creditor, unsatisfied execution creditor, or bona fide purchaser of real property, the content of the trustee's powers under the strong arm clause is derived from applicable nonbankruptcy law—here the law of Pennsylvania. Id. at 544-5. The question presented in this case, therefore, is whether London Grove's lien on the settlement fund would be superior, under Pennsylvania law, to the claim of a subsequent lien creditor.

London Grove first argues that a subsequent lien creditor could not overcome its interest in the settlement fund because London Grove had validly attached the debtor's property in the hands of Marker & Marker. In support of this contention, London Grove relies on Pennsylvania Rule of Civil Procedure 3111(b), which provides in part:

Service of the writ of execution upon the garnishee shall attach all property of the defendant which may be attached under these rules which is in the possession of the garnishee.

As London Grove further points out, a garnishee is deemed to be in possession of the debtor's property if the garnishee "owes a debt to the defendant," or "has property of the defendant in his custody, possession, or control." Pa.R.Civ.P. 3101(b). That Marker & Marker owed a debt to the defendant, London Grove contends, is established by Pierson's complaint against the developer in Pierson's state court lawsuit. That Marker & Marker possessed property of the debtor is shown in two ways according to the appellant: At the time of service of London Grove's garnishment, Marker & Marker possessed a voucher in the amount of $39,785.00 which, under Marker & Marker's escrow agreement with Continental Bank, required the bank to disburse for payment the amount of the voucher upon approval by officials of Concord Township and the developer. The voucher was approved by Concord Township, but Marker & Marker refused to approve payment to Pierson. Secondly, London Grove argues that Pierson's claim against Marker & Marker was itself a basis for attachment because the suit for work performed was not so unliquidated or uncertain as to render it exempt from execution.

After careful consideration of London Grove's arguments, I conclude that Marker & Marker did not hold property of the debtor within the meaning of Rule 3111(b) at the time the garnishment writ was served. Whether phrased in terms of a "debt" owed by Marker & Marker to Pierson (Rule 3101(b)(1)), or as "property" of Pierson in Marker & Marker's custody, possession or control (Rule 3101(b)(2)), the substance of Pierson's property sought to be attached by London Grove was an unliquidated claim for breach of contract. On the facts of the case before me, I concur with the bankruptcy judge's conclusion that such a claim may not be attached as if it were the debtor's property in the garnishee's hands.

Under long-established precedent of both the Pennsylvania Supreme Court and the Court of Appeals for the Third Circuit, "the general rule . . . is that unliquidated claims for tort or breach of contract are not the subject of garnishment." Eaton v. Pittsburgh Terminal Coal Corporation, 84 F.2d 364, 365 (3d Cir.1936); Selheimer v. Elder, 98 Pa. 154, 158-59 (1881). This rule is in accord with the principle that an attaching creditor obtains no greater right than was vested in the debtor; where the claim of the debtor against the garnishee is undetermined, neither the debtor nor the garnishing creditor can compel payment. See Folmar v. Shaffer, 232 Pa.Super.Ct. 22, 25, 332 A.2d 821, 823 (1974); Meyer v. Pianti, 109 Pa.Super.Ct. 313, 167 A. 374 (1933).

I recognize, of course, that the rule against garnishment of unliquidated claims is not absolute. In Girard Fire and Marine Insurance Company v. Field, Merritt & Co., 45 Pa. 129 (1863) the Pennsylvania Supreme Court permitted garnishment of an unliquidated claim arising under an insurance policy, stating: "We cannot come to the conclusion that every unliquidated claim is without the reach of the attachment process." 45 Pa. at 133. The Court, nevertheless, restricted its holding to cases in which the amount of recovery could be ascertained by reference to the contract and the market value of the property lost. Cf. Dunn v. Printing Corporation of America, 245 F.Supp. 875 (E.D.Pa.1965) (attachment of profits computed at contractual rate of...