          United States Court of Appeals
                      For the First Circuit


No. 17-1436

                 IN RE: INSITE CORPORATION, INC.,

                              Debtor.



                     INSITE CORPORATION, INC.

                            Appellant,

                                v.

              WALSH CONSTRUCTION COMPANY PUERTO RICO,

                             Appellee.


          APPEAL FROM THE UNITED STATES DISTRICT COURT
                 FOR THE DISTRICT OF PUERTO RICO

         [Hon. Francisco A. Besosa, U.S. District Judge]
       [Hon. Mildred Cabán-Flores, U.S. Bankruptcy Judge]


                              Before

                   Torruella, Lipez, and Barron,
                          Circuit Judges.


     David Carrión-Baralt for appellant.
     Paul T. DeVlieger, with whom DeVlieger Hilser P.C. was on
brief, for appellee.

                          October 5, 2018
            LIPEZ, Circuit Judge.           The appellant in this case is a

bankrupt    subcontractor,        Insite,    which   claims   that    a   general

contractor, Walsh, improperly withheld payments belonging to its

bankruptcy estate.          Insite sought to recover the payments by

initiating an adversary proceeding against Walsh in bankruptcy

court in Puerto Rico. The bankruptcy court found that the withheld

payments were not property of Insite's estate, the district court

affirmed, and Insite now appeals to us.

            Applying the Supreme Court's decision in Pearlman v.

Reliance Insurance Co., 371 U.S. 132, 141-42 (1962), we have held

that, under Puerto Rico law, funds withheld by a general contractor

to cure a subcontractor's default and to complete a subcontractor's

work do not become property of the subcontractor, and hence are

not part of the subcontractor's bankruptcy estate.                   See Segovia

Dev. Corp. v. Constructora Maza, Inc., 628 F.2d 724, 729-30 (1st

Cir. 1980).     The bankruptcy court found that this well-established

principle, known as the Pearlman doctrine, prevented Insite from

gaining a property interest in the funds withheld by Walsh, and it

accordingly granted summary judgment to Walsh.

            Because we conclude that Insite had no right under the

subcontract with Walsh to any of the funds it claims were withheld,

we   do   not   rely   on   the    Pearlman    doctrine.      In   the    unusual

circumstances of this case, neither that doctrine nor the parties'

contract answers the question that determines Insite's right to


                                      - 2 -
payment: whether a defaulting subcontractor who has no contractual

right to compensation is nonetheless entitled to an equitable

recovery   if   the     general     contractor    has   benefited    at   the

subcontractor's expense.          In that scenario, the subcontractor's

right to recovery, if any, must be determined by other principles

of local law.     Thus, although we agree with the bankruptcy and

district courts that Insite is not due funds under its contract

with Walsh, the courts still must consider whether Walsh was

benefited by Insite's post-default performance in such a way that

Insite has an equitable claim under Puerto Rico law.           We therefore

vacate the judgment and remand to allow the bankruptcy court to

address that issue in the first instance.

                                       I.

A. Factual & Procedural Background

           In September 2010, the Department of Veterans Affairs

awarded appellee Walsh Construction Company Puerto Rico ("Walsh")

a contract to build an addition to a VA facility in San Juan,

Puerto Rico.    Two months later, Walsh subcontracted with appellant

Insite   Corporation,    Inc.     ("Insite")   for   certain   concrete   and

masonry work.     Insite in turn contracted with a number of sub-

subcontractors and suppliers (collectively, its "suppliers") and

began its work on the job site.             The terms of the Walsh-Insite

contract   entitled     the   latter   to    periodic   progress    payments,

subject to certain conditions.         Insite regularly applied for, and


                                     - 3 -
Walsh regularly satisfied, such payments through the month of

November 2011.

            More precisely, the last progress payment issued by

Walsh corresponded to work performed by Insite through November

21, 2011.        Insite would later apply for three other progress

payments    totaling    $591,953:      $179,897    for    work    performed   from

November 22 to December 26, 2011; $70,750 for work performed from

December 27, 2011 through January 22, 2012; and $341,306 for work

performed from January 23 through March 7, 2012.                   Walsh did not

approve these payment applications for reasons that we shall

explain.

            On    the   morning   of    December    30,    2011,    Walsh     hand-

delivered Insite a letter titled "Notice of Default," accusing

Insite of materially breaching the parties' subcontract by failing

to pay its suppliers.        Specifically, Walsh asserted that a check

issued by Insite to pay a supplier for work performed in October

2011 was rejected for insufficient funds, and that Insite had

balances overdue by 60 to 120 days with two other suppliers.

Consistent with the terms of the parties' contract, the letter

provided Insite 72 hours to remedy its default, and demanded

assurance that Insite intended and was able to perform the balance

of its contracted work.

            That evening, at 5:49 p.m., Insite filed for Chapter 11

bankruptcy.         Insite   subsequently         notified       Walsh   of    this


                                       - 4 -
development and assured Walsh that the protection afforded by

federal bankruptcy law would allow it to continue executing the

subcontract. Walsh responded with a letter contesting the adequacy

of Insite's assurance and accusing Insite of failing to timely pay

two more suppliers.

          Meanwhile, Walsh notified Insite's surety, United Surety

& Indemnity Company ("USIC"), that Insite was in default of the

subcontract.     USIC, however, refused to perform on its bond,

asserting that it had no obligation to perform until Walsh formally

terminated its subcontract with Insite.   Though Walsh had accused

Insite of defaulting on the subcontract, it was unable to terminate

the agreement before Insite entered bankruptcy.   And, once Insite

filed for bankruptcy, Walsh could not terminate the contract

without the bankruptcy court's approval.      See, e.g., Computer

Commc'ns Inc. v. Codex Corp. (In re Computer Commc'ns), 824 F.2d

725, 728 (9th Cir. 1987) (holding that defendant was required to

obtain bankruptcy court's permission before terminating contract

with debtor).1

          With Walsh unable to terminate Insite, and USIC refusing

to perform on its bond, Insite continued to execute at least some

work on the job site after it filed for bankruptcy.   The value of



     1 Walsh eventually moved to terminate the contract in both
June and September 2012, but the court denied the motions in
December 2012.


                              - 5 -
the work performed by Insite during this time, and in the month

preceding its bankruptcy filing, is unclear.   Taken at face value,

the progress payment applications submitted by Insite for its work

from November 22, 2011 to March 7, 2012 suggest that Insite

performed $591,953 worth of work for which it was not paid.

However, Walsh was not satisfied with Insite's performance during

this time.   Walsh sent a number of letters to Insite accusing it

of repeatedly defaulting on the contract and of failing to timely

prosecute its work.     Furthermore, to keep Insite's suppliers

working on the project, Walsh issued $63,927.15 in jointly payable

checks to Insite and its suppliers.    Walsh contends that these

checks were intended to be deposited by the suppliers, but that

Insite appropriated the checks for its own purposes.

          On February 29, 2012, Insite, USIC, and one of Insite's

creditors sought the bankruptcy court's approval of a stipulation

allowing Insite to "assume" its contracts with Walsh and Insite's

suppliers.2 The bankruptcy court approved the stipulation on March


     2 In a Chapter 11 proceeding, the debtor (or its trustee) may
"assume or reject an executory contract . . . at any time before
the confirmation of a [reorganization] plan," subject to the
bankruptcy court's approval. 11 U.S.C. § 365(d)(2); id. § 365(a).
"This latitude allows the debtor in possession an opportunity to
determine which of the prepetition executory contracts are
beneficial to the estate and which should be assumed or rejected."
Mason v. FBI Distrib. Corp. (In re FBI Distrib. Corp.), 330 F.3d
36, 42 (1st Cir. 2003). An executory contract remains in effect
while the debtor is deciding whether to assume or reject it, as it
cannot be terminated without the bankruptcy court's consent. See
In re Computer Commc'ns, 824 F.2d at 728-31. If the bankruptcy


                              - 6 -
1, and then formally granted the underlying motions to assume the

contracts on March 29.3   Following the court's March 1 approval of

the stipulation, Insite notified Walsh that its cash flow situation

was "critical," and declared it "imperative that Insite gets

payment for the work performed during the months of December 2011

and January 2012."   Insite's letter closed by informing Walsh that

Insite would "be forced to suspend work until proper funding is

available" if it did not receive payment from Walsh by March 9.

          Walsh responded with a letter on March 9, refusing to

make any payments to Insite.   According to a spreadsheet attached

to the letter, Walsh issued direct payments to some of Insite's

suppliers, Insite continued to carry past-due balances with other

suppliers, and Walsh incurred certain other expenses related to

Insite's defaults.    As a result, Walsh's "preliminary analysis"




court approves an assumption, the debtor "accepts both the burdens
and the benefits of the bargain."     Eagle Ins. Co. v. BankVest
Capital Corp. (In re BankVest Capital Corp.), 360 F.3d 291, 296
(1st Cir. 2004).
     3 The record reflects some confusion between the parties as
to the date on which Insite legally assumed the parties' contract.
There are three possible dates of assumption: (a) when the
bankruptcy court approved the stipulation on March 1, 2012; (b)
when the bankruptcy court approved the underlying motion to assume
on March 29; or (c) when the bankruptcy court's March 29 order
"became final and firm" on April 12.         The precise date of
assumption makes no difference to our decision, and we see no need
to decide the issue. However, in the interest of simplicity, we
will refer to the date of assumption as March 29. We also note
that neither party challenges the bankruptcy court's decision to
allow Insite to assume the contract.


                               - 7 -
showed that "Insite's liabilities on the project exceed the amount

otherwise due Insite on the project by over $180,000."     However,

this "preliminary" analysis did not include Insite's $341,306

payment application for work performed from January 23 through

March 7, which Insite did not submit until March 19.4

          Insite did not perform any work after it received Walsh's

March 9 letter.     Accordingly, on March 14, Walsh notified Insite

of its intent to:

          supply such numbers of workers and quantity of
          materials, equipment and other facilities as
          Walsh deems necessary for the completion of
          Insite's Subcontract work; contract with one
          or more additional contractors to perform such
          part of Insite's Subcontract work . . . and/or
          withhold payment of any moneys due Insite
          pending corrective action to the extent
          required by and to the satisfaction of Walsh
          and the Architect/Engineer.

          Believing that Walsh owed it $591,953 in unpaid progress

payments, Insite filed an adversary complaint in bankruptcy court

on May 29, 2012.5     The complaint asserted, inter alia, that the

unpaid progress payments were property of the bankruptcy estate;

that Walsh violated the Bankruptcy Code's automatic stay, 11 U.S.C.


     4 In the proceedings below, the parties also disputed whether
Walsh's preliminary analysis accurately reflected the balance
between the parties at the time of the calculation. As that issue
has not been briefed on appeal, we express no opinion on the
matter.
     5 Insite actually requested $586,600 in its complaint, but
its subsequent filings in this case have stated that Walsh owes it
$591,953. This discrepancy is immaterial to our decision.


                                - 8 -
§ 362, by withholding the payments; and that Walsh breached the

subcontract.      Insite subsequently filed a motion for summary

judgment in September 2013. The court denied the motion in January

2015, finding genuine issues of material fact about: (a) the amount

of monies withheld by Walsh; (b) the amount of work performed by

Insite; and (c) whether Insite's suppliers were paid, and if so,

by whom.

             Walsh then filed a motion for summary judgment which the

bankruptcy court granted in October 2015.           The court explained

that Insite's claims were all premised on the threshold proposition

that the unpaid progress payments were property of the estate.

However, applying the Pearlman doctrine, the court found it "well

settled . . . that contract funds in a construction project do not

become property of the estate until the debtor completes the

project and fully complies with the payment obligations to the

suppliers and laborers."       Since it was undisputed that Insite

"never cured [its] arrears, even upon assumption of the contract

with Walsh," Insite "never became entitled to receive any funds."

The court found that Insite's failure to cure deprived it of any

property interest whatsoever in the funds at issue, and Walsh thus

"did not violate the automatic stay by withholding payment to

[Insite]."      The   bankruptcy   court   denied   Insite's   motion   for

reconsideration, reiterating that "Insite never became entitled to

any payment under the subcontract."        The district court affirmed


                                   - 9 -
the bankruptcy court on substantially the same reasoning, and this

appeal followed.

                                     II.

A. Legal Principles

           The filing of a bankruptcy petition creates an estate

comprised of "all legal or equitable interests of the debtor in

property as of the commencement of the case," with some exceptions

not applicable here.     11 U.S.C. § 541(a)(1).         The Bankruptcy Code

then protects the property of the estate by imposing an "automatic

stay" that prevents creditors from taking certain actions adverse

to the estate's property interests.          Id. § 362; see also Jamo v.

Katahdin Fed. Credit Union (In re Jamo), 283 F.3d 392, 398 (1st

Cir. 2002).

           When a debtor believes that particular property belongs

to its estate, or that a person is violating the automatic stay,

it may file an adversary complaint asking the bankruptcy court to

resolve the matter.       See Fed. R. Bankr. P. 7001; McMullen v.

Sevigny (In re McMullen), 386 F.3d 320, 324 (1st Cir. 2004); City

of Springfield v. Ostrander (In re LAN Tamers, Inc.), 329 F.3d

204, 208-09 (1st Cir. 2003).        The bankruptcy court's judgment can

be   appealed   to   either   the   district   court    or   the   bankruptcy

appellate panel, at the parties' discretion.           See 28 U.S.C. § 158;6


      6Section 158 requires the circuit courts to "establish a
bankruptcy appellate panel service composed of bankruptcy judges


                                    - 10 -
Vázquez Laboy v. Doral Mortg. Corp. (In re Vazquez Laboy), 647

F.3d 367, 373 (1st Cir. 2011).          Any subsequent appeal comes to

this court.     We "concentrate on the bankruptcy court's decision,

reviewing its findings of fact for clear error and its conclusions

of   law   de   novo,"   and   ceding   "no   special   deference   to   the

intermediate decision."        Stornawaye Fin. Corp. v. Hill (In re

Hill), 562 F.3d 29, 32 (1st Cir. 2009).

            In assessing whether property belongs to a bankruptcy

estate, "we first must determine the scope of the debtor's property

rights under state law."       Keach v. Wheeling & Lake Erie Ry. (In re

Montreal, Me. & Atl. Ry.), 888 F.3d 1, 7 (1st Cir. 2018).           If the

debtor has a property interest under state law, we "then look to

federal law, which 'dictates to what extent that interest is

property of the estate.'"        Id. (quoting Rent–A–Ctr. E., Inc. v.




of the districts in the circuit" unless a circuit's judicial
council finds that "there are insufficient judicial resources
available in the circuit" or that "establishment of such service
would result in undue delay or increased cost to parties."     28
U.S.C. § 158(b)(1). Five circuits, including the First Circuit,
have established bankruptcy appellate panels. See 8 Hon. William
L. Norton Jr., Norton Bankruptcy Law and Practice § 170:6 (3d ed.
July 2018 update).    Section 158 makes the panels the default
destinations for bankruptcy appeals, unless "(A) the appellant
elects at the time of filing the appeal; or (B) any other party
elects, not later than 30 days after service of notice of the
appeal; to have such appeal heard by the district court."      28
U.S.C. § 158(c)(1).     In this case, Insite appealed to the
bankruptcy appellate panel and Walsh elected to have the appeal
heard by the district court.


                                   - 11 -
Leonard (In re WEB2B Payment Sols., Inc.), 815 F.3d 400, 405 (8th

Cir. 2016)).

B. The Contract

          As an initial matter, we can easily discard Insite's

contention that Walsh, rather than Insite, materially breached the

parties' agreement.    In its bankruptcy court filings, Insite

admitted that it "had failed to make the contractually mandated

payments to its subcontractors and suppliers," and "was, in fact,

in default of its payment obligations."       Furthermore, Insite

conceded that "as of December 30, 2011" -- the date on which Walsh

delivered to Insite its original notice of default and on which

Insite filed for bankruptcy -- "Insite had been fully paid for all

final Payment Applications which Insite submitted to Walsh."7

Nonetheless, Insite argues on appeal that its failure to pay

suppliers was not a material breach of the contract.    And, since

its breach was not material, Insite believes that Puerto Rico law

required Walsh to continue issuing progress payments.




     7 In light of this admission, the district court found that
Insite's insistence that Walsh was liable for the $179,897 progress
payment application it submitted for work performed from November
22 through December 26 was "disingenuous." However, the record
suggests that as of December 30, the $179,897 progress payment
application was not yet due and payable. It thus appears, subject
to further evaluation by the bankruptcy court, that Insite's
admission is not inconsistent with its reliance on the progress
payment application.


                              - 12 -
           Insite's argument is squarely foreclosed by Section 8.1

of   the   subcontract,     which    categorizes     the   failure     to    pay

subcontractors and suppliers as a material breach.             Specifically,

that section provides that if Insite "refuses or fails to supply

enough properly skilled workers, proper materials, or maintain the

Schedule of Work, or it fails to make prompt payment for its

workers, subcontractors or suppliers, disregards Laws . . . or

otherwise materially breaches a provision of this Agreement,"

Walsh shall have certain rights to recourse.               (Emphases added.)

The use of the phrase "otherwise materially breaches" in this

provision is conclusive, showing that the parties intended the

list of refusals or failures preceding it to be material breaches.

Cf. P.R. Laws Ann. tit. 31 § 3471 ("If the terms of a contract are

clear and leave no doubt as to the intentions of the contracting

parties,   the    literal    sense    of     its   stipulations      shall    be

observed.").     Hence, Insite's admitted failure to timely pay its

suppliers was a material breach pursuant to Section 8.1 of the

subcontract.8

           Once Insite defaulted on its obligations, at least three

provisions of the subcontract allowed Walsh to immediately begin

withholding progress payments from Insite.           Section 3.6 expressly


     8 Since we conclude that Insite's breach was material, we do
not need to decide whether Puerto Rico law would have required
Walsh to continue issuing progress payments in the face of a non-
material breach.


                                    - 13 -
conditioned   Insite's   entitlement   to   progress   payments   on   its

compliance with the subcontract.

          Time of Payment.     If Subcontractor is in
          compliance with this Subcontract and if, and
          only if, Owner [first] pays Contractor . . .
          Progress   Payments    shall   be    due   to
          Subcontractor no later than ten (10) days
          after receipt of payment from Owner by
          Contractor provided Subcontractor remains in
          compliance with the terms of this Agreement.

(Emphases added.)   Section 3.11 of the subcontract allowed Walsh

to intervene if it had reason to suspect that Insite was not

satisfying its labor and supplier obligations:

          Subcontractor Payment Failure. In the event
          Contractor has reason to believe that labor,
          material or other obligations incurred in the
          performance of the Subcontractor's Work are
          not being paid, the Contractor may take any
          steps Contractor deems necessary to insure
          that such obligations are paid including, but
          not limited to, issuance of checks jointly to
          Subcontractor   and   the  person    to  whom
          Subcontractor owes an obligation, and direct
          payment of labor . . . and Subcontractor's
          subcontractors and suppliers . . . .

(Emphasis added.)    And, Section 3.12 gave Walsh the right to

"withhold amounts otherwise due under this Agreement . . . to cover

[Walsh's] reasonable estimate of any costs or liability [it] has

incurred or may incur for which [Insite] may be responsible."

          Once Insite failed to timely cure its defaults, Walsh

became entitled to take a number of additional remedial actions at

Insite's expense.   Section 8.1 of the subcontract provided Insite




                                - 14 -
with 72 hours to "commence and continue satisfactory correction of

[its] default[s]."9    After 72 hours, Section 8.1 allowed Walsh to

          (i) supply . . . workers and . . . materials,
          equipment   and    other   facilities as  the
          Contractor deems necessary for the completion
          of Subcontractor's Work . . . and charge the
          cost thereof to the Subcontractor . . . (ii)
          contract with . . . additional contractors to
          perform . . . the Subcontractor's Work . . .
          and   charge    the   cost    thereof to  the
          Subcontractor; and/or (iii) withhold payment
          of any moneys due the Subcontractor pending
          corrective action . . . .

          As a result of these provisions, when Walsh accused

Insite of defaulting on the contract on December 30, 2011, Walsh

was entitled to immediately begin withholding progress payments

from Insite.     It could use the withheld funds to pay Insite's

suppliers and laborers directly, and could apply the funds to cover

costs and liabilities reasonably related to Insite's defaults.

Once Insite failed to timely cure its defaults, Walsh could

additionally invoke the remedies found at Section 8.1 of the

subcontract.     Thus, the subcontract gave Walsh the right to use

the progress payments to cure Insite's defaults and complete

Insite's work.




     9 Walsh believes, and Insite does not disagree, that Insite's
filing of its bankruptcy petition paused this 72-hour window until
Insite assumed the subcontract on March 29, 2012.            Walsh
accordingly calculates the 72 hours as extending until April 1,
2012. It is undisputed that at that time Insite had not performed
any work for over three weeks, and had not cured its defaults.


                               - 15 -
C.   The Pearlman Doctrine

            As a general matter, it has been widely held that a

defaulting subcontractor does not have a property interest in funds

withheld by a general contractor to cover cure and completion

costs.    This principle derives from the Supreme Court's opinion in

Pearlman v. Reliance Insurance Co., a case involving the competing

claims of a surety and a contractor's bankruptcy trustee to funds

withheld by a project owner.    371 U.S. 132 (1962).     The owner in

Pearlman had accumulated $87,737 in retainages by the time its

contractor defaulted.    Id. at 134.     A surety stepped in and spent

over $350,000 to discharge the contractor's debts for labor and

materials. Id. The surety and the contractor's bankruptcy trustee

both claimed ownership of the $87,737 in withheld funds.

            The Pearlman Court held that the surety owned the funds.

Importantly for our purposes, the Court's holding was based on its

conclusion that the project owner had a right to use the retainages

to satisfy the defaulting contractor's debts to its laborers.      Id.

at 141.     Once the surety stepped into the owner's shoes and

fulfilled its obligation to cover the subcontractor's debts, the

surety became subrogated to the owner's right to the funds "to the

extent necessary to reimburse it" for its costs.       Id.   Since the

surety had "paid out more than the amount of the [withheld] fund,

it ha[d] a right to all of it," and the fund thus did not become




                                - 16 -
property of the defaulting contractor's bankruptcy estate.              Id. at

141-42.

            In a trio of cases building on Pearlman, we have made

clear that the Pearlman doctrine applies regardless of whether the

defaulting      party   is   a   general     contractor    or   (as   here)     a

subcontractor, and regardless of whether the withheld funds are

retainages or (as here) unpaid progress payments.               See Framingham

Trust Co. v. Gould-Nat'l Batteries, Inc., 427 F.2d 856 (1st Cir.

1970); Nat'l Shawmut Bank of Bos. v. New Amsterdam Cas. Co., 411

F.2d 843, 844 (1st Cir. 1969); Am. Fire & Cas. Co. v. First Nat'l

City Bank of N.Y., 411 F.2d 755, 757 (1st Cir. 1969).                          We

subsequently     established     that   Puerto   Rico     law   governing     the

ownership of withheld funds aligns with the Pearlman doctrine.

See Segovia Dev. Corp. v. Constructora Maza, Inc., 628 F.2d 724,

725 (1st Cir. 1980).         In Segovia Development, the contractor had

defaulted and filed for bankruptcy, and a surety stepped in and

"expended funds greatly in excess" of the $423,630 withheld by the

project owner.      Id. at 726.     We explained that under the law of

Puerto Rico, the surety was "subrogated to any rights which the

owner . . . has against [the contractor]," including the owner's

rights to apply the withheld funds to its cure and completion

costs.    Id.   The funds thus belonged to the surety rather than to

the defaulting contractor's bankruptcy estate.             Id. at 725, 730.




                                    - 17 -
             The bankruptcy court granted summary judgment to Walsh

because it found that, under the Pearlman doctrine, Insite had no

property interest in the funds at issue.10                  The court made this

finding despite Insite's contention that the funds withheld by

Walsh exceeded Walsh's cure and completion costs and that it was

entitled to the excess amount.               As we shall explain, the court

properly rejected Insite's entitlement to the funds at issue

insofar as its claim was premised on the parties' contract.

However, the court neither determined as a factual matter whether

Walsh benefited from Insite's post-default performance nor whether

Puerto Rico law would provide Insite a non-contractual property

interest   in   any    such    funds.        Absent   one     or   both    of   those

determinations,       the    grant   of    summary    judgment     for    Walsh   was

premature.

                                          III.

             Insite    has    consistently       maintained    that      substantial

withheld funds remain after cure and completion expenses are

deducted, and it claims entitlement to the difference between the

total withheld -- i.e., the payments that would have been due

Insite for its work under the contract if Insite had not defaulted

-- and the amount attributable to the cost of remedying the

default.      Otherwise, Insite complains, Walsh would receive a


     10 The district court's opinion followed the same line of
reasoning.


                                      - 18 -
windfall.     Walsh insists that there is no "excess" and that, in

any event, Insite's bankruptcy estate has no claim to any such

funds.

             The bankruptcy court understandably bypassed both the

factual and legal questions pertinent to Insite's entitlement to

any excess funds.          Although Insite broadly claims a right to

payment for the work it performed, its briefing has not clearly

distinguished between its contractual rights and any equitable or

other bases for its claim.       Moreover, this case involves a complex

set of facts that are not easily untangled.                With the bankruptcy

filing preventing Walsh from terminating the contract, Insite

continued to work on the project for more than two months despite

Walsh's     evident   dissatisfaction       with    its    performance.     The

"excess" that Insite claims appears largely attributable to that

seemingly unusual period of ongoing work.

             Thus, while Insite could have more clearly articulated

the basis for its claim, we are reluctant to affirm summary

judgment for Walsh without careful review of its entitlement to

funds attributable to the work that Insite performed following its

bankruptcy filing and that, if not belonging to Walsh, might be

available to Insite's creditors.           On remand, the bankruptcy court

will have the opportunity to answer the questions that remain.

First,    however,    we   explain   why   the     court   correctly   rejected

Insite's reliance on the contract.


                                     - 19 -
A.   Insite's Rights under the Contract

             In December 2011, when Walsh notified Insite that it was

in default of its contractual obligations, Insite was carrying

past-due balances with three of its suppliers totaling $45,832.66.

As Insite continued to work on the job site during the next two

months,     it   also   continued    to     accumulate   liabilities   to    its

suppliers.       As the bankruptcy court observed, it is undisputed

that    Insite   "never   cured     [its]    arrears."    Meanwhile,   Insite

continued to submit applications for progress payments, with the

total amount requested eventually reaching $591,953.

             The bankruptcy court reasoned that Insite's failure to

cure its initial default deprived it of any property interest

whatsoever in the withheld funds, including excess funds.                   As a

matter of contract law, the bankruptcy court was correct.               Under

standard principles governing the interpretation of contracts for

services, including for construction, the service provider is due

nothing until the full project is complete -- unless the contract

itself provides for a different arrangement.                 See Restatement

(Second) of Contracts § 234 & id. cmt. f11; see also Constructora


       11
        Comment f provides the following illustration of this
principle:
             A contracts to do the concrete work on a
             building being constructed by B for $10 a
             cubic yard.   In the absence of language or
             circumstances   indicating   the   contrary,
             payment by B is not due until A has finished
             the concrete work.


                                     - 20 -
Bauzá v. García López, 129 D.P.R. 579, 1991 P.R.-Eng. 735,859,

P.R. Offic. Trans. (1991) (noting that, "if one of the parties [in

a construction contract] does not fulfill his obligation, the other

party may consider the contract dissolved" (citing 31 P.R. Laws

Ann. § 3052)).        The Walsh-Insite contract did specify a different

arrangement      in    the     multiple        provisions   governing     progress

payments, reflecting the parties' understanding that Insite would

need partial payment as the project moved forward so that it could

remain current with its subcontractors and suppliers.                   Two of the

progress-payment provisions are of particular significance to

Insite's claim here.

            First, section 3.2 states that "the Subcontractor's

progress payment application shall be submitted to the Contractor

in   a   form   and    with    content    and     documentation      acceptable   to

Contractor and Owner." The approved form, contained in the record,

requires    Insite     to     certify    that     "the   work   covered   by    this

application for payment has been completed in accordance with the

contract documents, that all amounts have been paid by [Insite]

for work for which previous Certificates for payment were issued

and payments received from [Walsh], and that current payment shown

herein is due."       (Emphasis added.)          Second, section 3.6, which is

labeled "Time of Payment," conditions the progress payments on the

recipient's     compliance      with     the    contract.       It   provides   that




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payments will be made to Insite according to the specified schedule

"[i]f Subcontractor is in compliance with this Subcontract."

          These provisions are problematic for Insite because

both, in effect, require Insite to be up-to-date in paying its

suppliers and subcontractors, and Insite admits that it was not.

Insite acknowledges that, starting in at least November of 2011,

it did not pay all amounts due to its suppliers for work that was

the basis for progress payments previously made by Walsh.    Unable

to certify that it had paid those debts, Insite could not submit

a proper application for progress payments.        And, hence, the

applications for the progress payments at issue here could not

satisfy the section 3.6 contingency requiring Insite to be "in

compliance with this Subcontract."     Having failed to comply with

the contract's requirements for receipt of progress payments,

Insite had no right to payment under the contract until -- under

ordinary contract principles -- it had completed the job.       See

Restatement (Second) of Contracts § 234.     Insite never fulfilled

that prerequisite.

B. Non-Contractual Recovery

          As noted above, neither the bankruptcy court nor the

district court considered whether Insite would have an alternative

basis under Puerto Rico law for payment of any amount that, absent

its default, would have been due under the contract.      In other

words, the question remains whether Insite may have an equitable


                              - 22 -
claim against Walsh in the unusual circumstances of this case.

See Restatement (Second) of Contracts § 240 (noting that, in some

cases, a party's material breach may nonetheless leave open the

possibility of "restitution in accordance with the policy favoring

avoidance of unjust enrichment" (citing §§ 370-77)); see also U.S.

Steel v. M. DeMatteo Const. Co., 315 F.3d 43, 49–50 (1st Cir. 2002)

(noting that, under Massachusetts law, a subcontractor "who in

good faith substantially performs a contract may recover in quantum

meruit" (quoting J.A. Sullivan Corp. v. Commonwealth, 494 N.E. 2d

374, 378 (Mass. 1986)).

          Because     the   bankruptcy    court   here   granted   summary

judgment based on the Pearlman doctrine without addressing the

parties' contentions regarding the value of Insite's post-default

performance and the amount of Walsh's costs, those factual issues

remain undeveloped.    Nor did the court address whether Insite, as

a defaulting subcontractor, would have a "legal or equitable"

property interest under Puerto Rico law if the court found that

the value of Insite's performance exceeded Walsh's costs.              11

U.S.C. § 541(a)(1).


          Accordingly, we vacate the bankruptcy court's judgment

and remand for further proceedings to resolve the competing claims

of the parties about money owed or not owed.        See First Indem. of

Am. Ins. Co. v. Modular Structures, Inc. (In re Modular Structures,

Inc.), 27 F.3d 72, 80 (3d Cir. 1994) (remanding under similar



                                 - 23 -
circumstances "to determine if any other factors might establish

that    any   part   of    the   funds   were   'owed'   to   [the    defaulting

contractor]"). If the court finds that Walsh benefited at Insite's

expense, the court "first must determine the scope of [Insite's]

property rights" under state law, if any, in the value of its

performance.      In re Montreal, Me. & Atl. Ry., 888 F.3d at 7.             If

Insite has a property interest under state law, the bankruptcy

court should "then look to federal law, which 'dictates to what

extent that interest is property of the estate.'"             Id. (quoting In
re WEB2B Payment Sols., Inc., 815 F.3d at 405).12

                                         IV.

              For the reasons stated, we vacate the judgment of the

district court and remand the matter to the district court with

directions to vacate the bankruptcy court's judgment and remand

the    matter   to   the    bankruptcy     court   for   further     proceedings

consistent with this opinion.             The parties shall bear their own

costs on appeal.


              So ordered.


       12As a final matter, the bankruptcy court correctly
determined that the letters sent from Walsh to Insite accusing the
latter of being in default did not violate the automatic stay.
See Am-Haul Carting, Inc. v. Contractors Cas. and Sur. Co., 33 F.
Supp. 2d 235, 242 (S.D.N.Y. 1998) (finding that general
contractor's notice of default to subcontractor, in and of itself,
did not violate the automatic stay). The court astutely explained
that, unlike a case in which a creditor accuses a bankrupt debtor
of defaulting in order to collect a debt, here, the debtor (Insite)
was attempting to collect from Walsh. In this context, Walsh's
accusations of default were defensive, and were not attempts to
obtain property of the estate in violation of the automatic stay.


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