- Case Type:
- Case Status:
- Reversed and Remanded
- 17-1436 (1st Circuit, Oct 05,2018) Published
- The Pearlman doctrine (Pearlman v. Reliance Ins. Co., 371 U.S. 132, 141-42 (1962)), does not apply to the relationship at issue between the debtor-subcontractor and the contractor due to the complex factual background underlying the parties' dispute. Instead, the debtor-subcontractor's rights to the funds must be determined under local law and equitable principles. The lower court's reliance on the Pearlman doctrine thus requires that the judgment be vacated and the case be remanded.
- Procedural context:
- The debtor/subcontractor had sued the contractor for wrongfully withholding payments that allegedly were property of the bankruptcy estate. The bankruptcy court granted the contractor summary judgment on the legal principle that a subcontractor has no right to unpaid funds used by the contractor to pay cover and cure costs under Pearlman v. Reliance Ins. Co., 371 U.S. 132, 141-42 (1962).
- The Department of Veteran Affairs awarded defendant Walsh Construction Company ("Walsh") a contract to build an addition to a VA facility in San Juan, Puerto Rico. Walsh subcontracted with Insite Corporation ("Insite"), which later became a debtor in a chapter 11 debtor. Insite, in turn, subcontracted with various subcontractors and suppliers (collectively, "suppliers") and began work. Insite applied for and received progress payments until late 2011/early 2012, when Walsh rejected three payment applications. In addition, Walsh hand-delivered Insite a termination notice, alleging that Insite had issued a check to a supplier that had been rejected for insufficient funds and had accounts with suppliers that were 60 to 120 days overdue. That same evening Insite filed a chapter 11 petition. Walsh notified Insite's surety, United Surety & Indemnity Company ("USIC"). and demanded payment. USIC refused, arguing that it had no obligation to Walsh until Walsh formally terminated the contract with Insite, and that Walsh could not do that because Insite had filed bankruptcy. On February 29, 2012, Insite, USIC and one of Insite's creditors filed a stipulation to allow Insite to assume the subcontract with Walsh and its contracts with the suppliers, The bankruptcy court approved the stipulation on March 1, and formally granted the underlying motions to assume on March 29. Insite subsequently demanded that Walsh pay Insite so that Insite could perform. Walsh refused, and Insite never performed any additional work on the job, Walsh then notified Insite of Walsh's intent to supply the suppliers and continue withholding payment. Insite filed an adversary proceeding against Walsh, alleging among other things that the unpaid funds were property of Insite's bankruptcy estate. The bankruptcy court subsequently granted Walsh summary judgment, observing that Insite's claims were based on the proposition that the funds were property of Insite's bankruptcy estate. The bankruptcy court relied on the Pearlman doctrine and rejected Insite's proposition.
- Torruella, Lipez, and Barron
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