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H.g. Prizant & Co. v. Newberg Const. Co.

JUNE 13, 1973.

H.G. PRIZANT AND COMPANY, PLAINTIFF-APPELLANT,

v.

GUST K. NEWBERG CONSTRUCTION CO. ET AL., DEFENDANTS-APPELLEES.



APPEAL from the Circuit Court of Cook County; the Hon. DANIEL A. COVELLI, Judge, presiding.

MR. JUSTICE ADESKO DELIVERED THE OPINION OF THE COURT:

This action was brought by plaintiff, H.G. Prizant and Company, debtor in possession under chapter XI of the Bankruptcy Act (11 U.S.C. § 701-799 (1964)), to recover from defendant, Gust K. Newberg Construction Co., additional expenses incurred in the installation of the ventilation system of the Chicago Civic Center. Various surety companies were also joined as defendants. There was a stipulation of fact including an arbitrator's award to plaintiff of $550,000 for extra expenses incurred. The trial court determined, however, that defendant's payments to plaintiff exceeded the contract price even as increased by the $550,000, which the arbitrator awarded. The court thereupon entered judgment for defendants. Plaintiff appeals from that judgment and raises the following issues for review:

1. Whether a defendant sued by a debtor in possession may setoff against the debtor in possession's claim amounts paid the debtor in possession and its predecessor; and

2. Whether the burden of proof as to what extent payments were made to the debtor in possession and to the debtor lies upon the plaintiff or upon the defendant.

The facts are as follows:

In September, 1963, Gust K. Newberg Construction Co., the general contractor for the building of the Chicago Civic Center, entered into a contract with H.G. Prizant and Company for subcontract work for the ventilation system of the building. On September 9, 1965, long after performance by Prizant had begun and during such performance, Prizant filed a petition for an arrangement with creditors pursuant to chapter XI of the Bankruptcy Act. Newberg, after learning that Prizant had been named as debtor in possession by the district court with authority to continue to operate its business, notified Prizant as debtor in possession that they were:

"* * * to continue to perform the work to be performed by H.G. Prizant and Company under the terms of its contract with us dated September 5, 1963 (subcontract #482-27) and any amendments or additions thereto. To assist you in the performance of said work, we shall advance and pay to you, as required by you, such sums as are necessary for the payment of labor utilized by you in the performance of the aforesaid work; such payments shall include sums required as and for withholding and unemployment taxes as well as F.I.C.A. In addition, we shall advance and pay to you, as required by you, such sums as are necessary to pay for materials delivered to you for use in said job.

Sums advanced by us shall be utilized by you only as and for payment for labor and material, as aforesaid, supplied in connection with the work upon the Chicago Civic Center and shall not be used by you to pay debts incurred in connection with any other job."

Prizant, as debtor in possession, petitioned for authority and was authorized by the Bankruptcy Court to agree to this proposal and in pursuance thereof the work under the subcontract was completed on June 30, 1966. Shortly thereafter this suit was filed by Prizant, debtor in possession, wherein Prizant alleged the existence of the contract and Prizant's performance under it. Prizant, while conceding that Newberg had paid the contract price provided for in its original contract, alleged that in the course of its performance it was required to furnish labor and material in excess of that reasonably indicated on the contract drawings, and that it was entitled to be paid the fair value of such extra work, which it contended was $2,327,782.76.

It became apparent to the court and to the parties that the matters involved in Prizant's complaint required the application of expertise and specialized knowledge in the field of building construction, and with the consent of all the parties, the issues in Prizant's claim referred to McKee-Berger-Monsueto, Inc., construction consultants and engineers, for a determination of the amounts, if any, to which Prizant was entitled with respect to its claims for additional labor and material. McKee-Berger-Monsueto subsequently reported to the court its finding that Prizant was entitled to $550,000 on its claim for additional work and materials, but the report made no apportionment as to work performed prior to the proceeding under the Bankruptcy Act or subsequent thereto and specifically, neither considered nor made any finding with respect to claims by Newberg for setoff or recoupment for payments made to Prizant in excess of the contract price.

A stipulation was subsequently entered into by the parties by which it was agreed that payments to H.G. Prizant and Company, including payments to Prizant as debtor in possession, exceeded the contract price, even when increased by $550,000, which McKee determined should be added to the contract price. The court thereupon entered judgment for defendants, finding that defendants had in fact paid more than the contract price, even as increased. Plaintiff appeals from that judgment.

Plaintiff's initial contention on appeal is that the trial court erred in allowing defendant, Newberg to offset against amounts due to Prizant as the debtor in possession monies paid to Prizant as debtor. Plaintiff maintains that it, as debtor in possession under section 342 of the Bankruptcy Act (11 U.S.C. § 742 (1964)), is a separate legal entity from H.G. Prizant and Company, the debtor, and is in the capacity of a trustee. Plaintiff concludes that payments made to the debtor prior to bankruptcy thus cannot be offset against amounts which become due and owing to the debtor in possession after bankruptcy, as the debtor, and the debtor in possession although both are named H.G. Prizant and Company, are in fact two distinct entities under the law, and the obligations of one would not be the obligations of the other. Plaintiff cites several cases in support of his contention.

In Howard v. Magazine & Book Co., 147 App. Div. 335, 131 N.Y. Supp. 916, upon which plaintiff primarily relies, the Appellate Division of the New York Supreme Court held that one who incurred a debt to a bankrupt and to the trustees of the bankrupt's estate for material and services provided by the bankrupt and by the trustees could not set off amounts owing from the bankrupt itself for advertising space provided to the bankrupt. This 1911 New York case, in which two of the five justices dissented, is distinguishable, however, from the case at bar. The court in Howard held that the trustees are not obliged to continue to perform the contracts of the bankrupt and that damages growing out of such failures are properly claimed against the bankrupt and not against the trustees. The court went on to state the rule that:

"A debt to or from the trustee in bankruptcy and arising after the bankruptcy in the management of the estate cannot be set off against a debt due from or ...


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