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Choate Requirement - State Law | |
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[73-2 USTC ¶9636]Avco Delta Corporation Canada Ltd., Plaintiff v. United
States of America, Canadian Parkhill Pipe Stringing, Inc., d/b/a
Parkhill Pipeline, Inc., Canadian Parkhill Pipe Stringing, et al.,
Defendants, Natural Gas Pipeline Company of America, et al., Third
Party Defendants Albert & Harlow, Inc., a/k/a Albert
Equipment, Inc., Standard Service and Supply Co., and Russell B.
Scott, d/b/a Service Parts Supply Co., Counterdefendants-Appellants
v. United States of America, and Canadian Parkhill Pipe Stringing,
Inc., et al., Defendants-Appellees United States of America, et
al., Defendant-Appellant v. Wolf Battery & Electric, Inc.,
Wolf-Jacobson, Inc., Clifford Rygh, et al., Trustees of Central
Laborers Pension Fund, Laborers International Union of North
America, Jackson P. Newlin, and (CA-7), U. S. Court of Appeals, 7th Circuit, Nos. 72-1428,
72-1899, Robert
C. Strodel, Albert R. Kingery, John Schripp, 900 First Nat'l Bank
Bldg., Peoria, Ill., for plaintiff. Scott P. Crampton, Assistant
Attorney General, Jack Teplitz, Department of Justice, Washington,
D. C. 20530, Donald B. MacKay, United States Attorney,
Springfield, Ill., for defendants. James D. Wing, 2100 Marine
Plaza, Milwaukee, Wis., for Albert & Harlow, Jackson P. Newlin,
First Nat'l Bank Bldg., Peoria, Ill., for Clifford Rygh, John G.
Satter, Jr., 110 W. Water St., Pontiac, Ill., for Wolf Battery
& Electric, Before
FAIRCHILD, CUMMINGS, and PELL, Circuit Judges. PELL,
Circuit Judge: These
appeals involve various claimants to two funds presently held in custodia
legis by the district court. 1 [Interpleader Fund] I.
One fund originally consisted of $216,337.44 which was deposited
with the court by Natural Gas Pipeline Company of America
(Natural), a third party defendant in the suit, under a
counterclaim of interpleader under 28 U. S. C. §1335. The funds
had been retained pursuant to the provisions of a construction
contract between Natural and Canadian Parkhill Pipe Stringing,
Inc., a/k/a Parkhill Pipeline, Inc. (Parkhill, Inc.), a defendant
in the initial suit and now a counterdefendant. The pertinent
provisions of the construction contract concerning this retainage
are as follows: 120
Invoicing and Payment .1 . . . .3 Each invoice shall be paid by the Company [Natural] to
Contractor [Parkhill] on or before the tenth (10th) office day of
Company following receipt of such invoice at Company's Chicago
office, subject however, to the following: .31 Company shall retain ten (10%) per cent of all invoices
(hereinafter referred to as "retainage"), except
invoices for extra work, and such retainage shall be paid to
Contractor: .311 After Contractor has been notified by Company in writing
that all work to be done under this Contract is completed to
Company's satisfaction; and .312 After Contractor has furnished Company with an affidavit
(on Company's Form E/C 22), signed by Contractor, stating that all
bills, claims and charges for materials, labor, supplies,
equipment and services incurred by Contractor in connection with
said work have been fully paid and receipts or other proper
evidence of such payment are in the possession of Contractor and
that Contractor has fully paid and satisfied all liability for
contributions, payroll and payroll taxes, use tax or other forms
of taxes, fees, licenses, excises or payments, required by Federal
and state legislation and local ordinances, and has fully complied
with all requirements thereunder, as to all persons employed and
property and material furnished in the performance of said work;
and .313 . . . .314 With respect to Contracts wherein the total contract
price is $25,000.00 or more, after a reasonable period has elapsed
subsequent to the expiration of all time periods, fixed by the
laws of the State in which said work is performed, within which
liens may be filed against the property of the Company . . .. .32 The final invoice shall be paid by Company to Contractor
only after the requirements of Sub-Parts .311 and .312 have been
satisfied. .33 Company may withhold from any invoice, retainage or other
payment due, any amount which in its judgment is necessary to
secure Company against any and all claims asserted against Company
or Contractor and payable by Contractor, and for any claim of
Company against Contractor, whether such claim is liquidated or
unliquidated and whether or not such claim arises by reason of the
operations of Contractor hereunder or from operations of
Contractor independent of this Contract. When any such claim
becomes liquidated, Company may, at its option, apply in
settlement of such claim any amounts up to the total amounts
withheld under this Sub-Part .33. In such event, if the remaining
balance of such amounts withheld shall exceed the amount applied
by Company to settle claims pursuant hereto, such excess shall be
paid by Company to Contractor; and if the amount paid by Company
in settlement of claims pursuant hereto shall exceed the total
amounts withheld, Contractor shall pay the difference to Company. 2 Natural alleged that Parkhill, Inc., had failed to furnished
the affidavit required by the above portions of the contract and
had otherwise failed to demonstrate that all of the above
mentioned liabilities had been satisfied. Natural
named as counterdefendant Parkhill, Inc., which claimed to be
entitled to the entire amount, the United States, which had filed
federal tax liens against Parkhill, Inc., 3
and a multitude of other potential claimants who were creditors of
Parkhill, Inc., most of whom could be classed as either laborers,
materialmen, or subcontractors. Natural itself also claimed the
right to set-off from the retainage in the amount of $11,423.33,
which right arises under subparagraph .33 of Part 120 of the
construction contract set out above. Finally, Natural alleged that
Great American Insurance Company of New York, which Parkhill,
Inc., had obtained as surety on a Labor and Material Payment Bond,
"has refused and failed to perform its obligations under said
bond." Of
the various counterdefendants who filed claims to the retainage,
aside from Parkhill, Inc., and the United States, we need consider
only six. Albert Equipment Co., formerly known as Albert &
Harlow, Inc., filed a claim for $25,304.14. Service Parts Supply
Co. claimed $23,579.33 and alleged that it had filed a lien under
the Illinois Oil and Gas Lien Act, Ill. Rev. Stat. 1971, ch. 82,
§78. Standard Service & Supply Co. filed a claim for
$11,845.76 and also alleged that it had complied with the Illinois
Oil and Gas Lien Act. Both Service Parts and Standard Service
& Supply cross-claimed against the surety, Great American
Insurance Company of America (Great American). After the claimants
answered interrogatories propounded by counsel for Parkhill, Inc.,
Parkhill moved for summary judgment against the above three
claimants on the ground that in fact none of them had properly
perfected any lien rights against the pipeline property of Natural
in accordance with the applicable Illinois lien laws. The district
court on February 25, 1972, dismissed the above three claimants
from the case, although it at the same time granted default
judgments in the amounts of their cross-claims against Parkhill.
They have appealed in cause No. 72-1428. None of the other
claimants dismissed by that order have appealed. Wolf-Jacobson,
Inc., filed a claim for $759.80 arising from a judgment it had
obtained against Parkhill, Inc., on March 25, 1970, with
garnishment proceedings against Natural, as garnishee, begun on
March 30, 1970. Wolf Battery & Electric Service, Inc. (the two
will jointly be referred to hereinafter as "Wolf") also
claimed $977.79 under a March 25, 1970, judgment against Parkhill,
Inc., and a March 30, 1970, garnishment against Natural. Finally,
Clifford Rygh, et al., Trustees of Central Laborers Pensions Fund
(Laborers), filed a claim for $23,616 based on a garnishment suit
in the state court against Parkhill, Inc., with Natural as a
garnishee defendant, instituted April 6, 1970, but not having
reached judgment. The district court in a memorandum decision held
that Wolf's claims "are exactly the type of claim from which
the Retainage was intended to shield Natural, and further that
Natural could have rightfully paid these claims under the
contract." Apparently
on the rationale that Parkhill, Inc., could not have acquired a
property interest in that portion of the retainage and that the
Government's tax lien therefore could not have attached, Wolf's
judgments were ordered paid in full from the retainage. As to the
Laborers' claim, the court held that "by joining Natural as
garnishee in their suit they have attained a position
substantially the same as that of the two Wolf companies, and
therefore they should recover on the same theory." The
district court further allowed Laborers reasonable attorney's fees
under Ill. Rev. Stat. 1971, ch. 13, §13. The Government appeals
in cause No. 72-1899 from this order. As
we understand the district court's theory of the case it is that
Wolf and Laborers were properly claimants directly against the
retainage because they had obtained liens against that fund; that
the United States had obtained rights in the fund through Parkhill,
Inc.; and that although Albert & Harlow, Standard Service, and
Service Parts Supply were now judgment creditors of Parkhill,
Inc., based on the default judgment entered at the time the court
dismissed their claims against the interpleaded fund, their rights
were necessarily inferior to those of the United States under its
prior tax lien which would consume all of the rest of the
retainage, thus meriting dismissal of their claims against the
interpleaded funds. For the reasons hereinafter given we reverse
these holdings. If
the Government is correct that Parkhill, Inc., has the sole
property right in the retainage (less the set-off paid to Natural
by order of the district court on August 22, 1972), then the issue
would be one solely of lien priority. The law is quite clear that
as to questions of priority of liens in the tax field federal law
controls. United States v. Security Trust & Savings Bank
[50-2 USTC ¶9492], 340 U. S. 47, 49 (1950). Thus, in Security
Trust the Court held that a federal tax lien had priority over
an attachment lien recorded prior to the Government's lien but in
which judgment was obtained only after the Government's lien was
filed. A similar result was reached in United States v. City of
New Britain [54-1 USTC ¶9191], 347 U. S. 81, 84 (1954), where
it was held that in order to defeat a federal tax lien a prior
lien valid under state law must be choate, that is, "when the
identity of the lienor, the property subject to the lien, and the
amount of the lien are established." Only when the lien
provided for by state law became choate would the Court apply the
maxim "the first in time is the first in right." Security Trust
was followed in United States v. Acri [55-1 USTC ¶9158],
348 U. S. 211 (1955), to defeat an Ohio attachment lien deemed
"an execution in advance" by the state courts, and in United
States v. Liverpool & London & Globe Insurance Co., Ltd.
[55-1 USTC ¶9136], 348 U. S. 215 (1955), to defeat a prior Texas
garnishment lien where judgment was not obtained until after the
federal tax lien had been filed. More recently, the Court in United
States v. Pioneer American Insurance Co. [63-2 USTC ¶9532],
374 U. S. 84 (1963), gave priority to a federal tax lien against a
mortgagee's claim for reasonable attorney's fees awarded in
prosecuting a foreclosure suit where the federal tax lien was
recorded after the institution of the foreclosure suit but prior
to the entry of the judgment determining the amount of the
attorney's fee, the decision being based on the theory that the
amount not being specifically known, the attorney's fee lien was
not choate. Thus, the Government argues that, its tax lien having
been filed prior in time to any of the other claimants having
obtained a choate lien, it should have absolute priority over all
the claimants. 4 [State Law] The
cited authorities are well established but they do not decide the
case before us as the Supreme Court has also clearly held that
state law governs the question of whether a party has
"property or rights to property" to which a lien,
whether the Government's or that of a private party, can attach.
Thus, in Aquilino v. United States [60-2 USTC ¶9538], 363
U. S. 509 (1960), the Court remanded a case to the New York Court
of Appeals for it to consider whether, under New York law, funds
held by the owner due to the general contractor constituted
"trust funds" for the benefit of subcontractors,
laborers, and materialmen so that the general contractor who had
defaulted on his federal taxes as well as on his payments to the
subcontractors had no "property" or "rights to
property" in the fund (at least until all of the laborers,
materialmen, and subcontractors had been paid) to which the
Government's tax lien could attach. 5 At
the same time, the Court affirmed the Fourth Circuit's holding
that North Carolina law gave the general contractor no property
interest in the amount due under the general construction
contract, except to the extent that such amount exceeded the
aggregate of all amounts due to subcontractors. Therefore, the
Government could recover only so much of the construction price as
would remain unpaid after deduction of a sum sufficient to pay the
subcontractors, United States v. Durham Lumber Co. [60-2
USTC ¶9539], 363 U. S. 522 (1960). It should be noted that the
money due the general contractor in Durham Lumber was not
withheld especially for the purpose of protecting the owner
against liens or to protect subcontractors, but had been withheld
because of a dispute over the amount due. We
are in a situation not unlike that found in United States v.
Chapman [60-2 USTC ¶9667], 281 F. 2d 862 (10th Cir. 1960).
There a telephone company had withheld funds from the general
contractor as authorized by the construction contract, which gave
it the right to require proof of payment of all materialmen before
acceptance of the work. When, after the work on the project had
been completed, the general contractor defaulted on both his
payments to the subcontractors and his federal taxes, the
telephone company brought an interpleader action to determine the
rights to the fund. The court cited Aquilino to the effect
that state law controlled on the issue of whether the general
contractor, Sims, had any property right in the retainage to which
the Government's tax lien could attach. The court held: "That right does not exist because of the failure to pay
the labor and material claims. . . . This accords to the general
rule, recognized in Oklahoma, that contracts must be performed
according to their terms before recovery can be had thereon. As
the contractor-taxpayer had no enforceable right to the money
covered by the retained percentage, there was no property or right
to property to which the tax lien of the United States attached,
except to the extent that the retained percentage exceeded the
labor and material claims." 281 F. 2d at 866-67 (footnotes
omitted). In response, the Government contended that, since under
Oklahoma law the materialmen could not place a lien on the
telephone company's property and since they could not sue the
telephone company because of lack of privity of contract, they
should have no enforceable right to the fund. The court rejected
the contention, stating that the Government was merely relying on
the weakness of the competing title rather than on the strength of
its own claim. "Right to recover from the fund must be based
on the strength of a claimant's title and not on the weakness of
the title of another claimant." 281 F. 2d at 867 (footnote
omitted). Further, the court went on to hold that under Oklahoma
law the materialmen had the right to secure payment from the fund. We
turn then to the issue of (1) whether under Illinois law the
United States has a claim to the fund through the right of
Parkhill, Inc., in that fund, and (2) whether under Illinois law
the various labor and material claimants have rights in the fund
superior to any held by Parkhill, Inc. Under both issues we reach
the same result--that the Government and all materialmen and
laborers not precluded by judgments which have become final are to
share equally in the retainage fund. Turning
to the first issue--whether Parkhill, Inc., has a right to the
retainage--we note the uncontested fact that Parkhill, Inc., has
not complied (and apparently cannot comply) with the contract
terms. No affidavit regarding payment of subcontractors has been
filed. In the district court, Natural initially moved to dismiss
the third party complaint filed against it on this very ground,
that Parkhill's failure to comply with the terms of the contract
terminated its rights. The court denied the motion: "It seems apparent to this court that whether INC's [Parkhill,
Inc.] rights under the contract terms have been terminated or not
makes no real difference here. If such rights were held to be
terminated on the facts of this case, INC would surely have a
cause of action on the basis of quantum meruit, or some
other equitable theory, for any balance of retainage over valid
mechanic's or materialmen's liens, etc., or for the same amount as
would be due INC under the express contract terms. Whether INC has
a cause of action under the express terms of the contract or not,
it does have a cause of action limited to any residue of the
retainage which may remain after Natural has discharged its
liability to others arising out of INC's breach. Thus, in the
opinion of this court, INC does not have any rights against
Natural to that part of the retainage which Natural may be
obligated to pay to others because of INC's breach. It does have a
cause of action for any residue, which is contingent upon their
[sic] being a residue and upon the amount thereof." In
our opinion, Parkhill's claim to the retainage is not enhanced by
a quantum meruit or similar theory. The law of Illinois
appears to be that Parkhill's rights against Natural if predicated
on such an equitable theory must nevertheless proceed on a
"substantial performance" showing. "It was
therefore held and became the rule in Equity, that if the owner
got substantially the thing for which he bargained, he must pay
for it, but he was allowed a credit as compensation for the
deficiencies existing in what he got as compared to what strict
performance would have given him." Watson Lumber Co. v.
Guennewig, 79 Ill. App. 2d 377, 397, 226 N. E. 2d 270 (5th
Dist. 1967). An
action in equity claiming substantial performance has as a measure
of the recovery the contract price less "an amount necessary
to account for the difference between what the owner got by the
actual performance as compared to what he bargained for." Watson
Lumber, supra. The Government and Parkhill, Inc., contend that
Natural has not been damaged at all--that in fact the value of the
actual performance was the same as that for which it had
bargained--that is, it got a finished pipeline free of all liens.
This theory has a facial appeal, but it neglects the fact that the
construction contract indicates, in our reading thereof, that
Natural desired to have its subcontractors paid regardless of
whether or not the subcontractors could assert liens against
Natural's property. The fact that an owner may wish to have his
subcontractors paid where they have no lien rights was recognized
in Board of Education of City of Chicago v. Chicago Bonding and
Surety Co., 218 Ill. App. 20 (1st Dist. 1920), where the court
held that a subcontractor suing in the name of a municipal
corporation which could not be sued by the subcontractor could
recover on the bond given by the contractor which had promised to
pay for all labor and material used. This result was reached
despite the surety's contention that since the bond was to
indemnify the Board of Education, which had not been, and could
not be, sued and thus had not suffered any damage from the
contractor's default, there should be no recovery. In
discussing a similar contract provision, the Ninth Circuit in Cove
Irrigation District v. American Surety Co. of New York, 42 F.
2d 957, 960 (9th Cir. 1930), cert. denied, 292 U. S. 891,
quoted from Builders' Lumber & Supply Co. v. Chicago
Bonding & Surety Co., 166 N. W. 320, 321 [167 Wis. 167
(1918)], in which the Supreme Court of Wisconsin said: "If that was not deliberately intended for the benefit
of third parties--for the benefit of materialmen and laborers--why
was it inserted? It was already provided that the contractor
should furnish the material and labor for the construction of the
work. It was not necessary for the avoidance of mechanics' liens,
because the property of a municipality is not subject thereto. It
was not necessary to make the contractor personally liable to
laborers and materialmen, because that liability would arise from
the contracts of employment of laborers and purchase of materials.
We cannot assume that this provision was introduced into the
contract for its resounding effect or for an idle purpose. It
is highly commendable on the part of municipalities to secure
protection for those who render services and furnish materials in
and about the construction of their public works. Indeed it is
good business policy for them to do so. . . ." (Emphasis
added.) See also Harris v. American Surety Co. of New York,
372 Ill. 361, 24 N. E. 2d 42 (1939). However,
the courts have not interpreted the rights and interests of third
parties to be limited to contracts in which a public body was the
owner and therefore lien-proof. In Fidelity & Deposit Co.
of Baltimore v. Rainer, 220 Ala. 262, 125 So. 55 (1929), the
Alabama Supreme Court, on reconsideration, held that a materialman
had a direct right of action on a bond to indemnify the owner in a
private construction contract where the bond provided that the
general contractor should pay for all labor and materials. The
court stated: "We are not impressed with that line of judicial
decision which assumes that the owner, the promisee, has no
concern for those whose labor and material enter into his
building, other than mere protection of himself by way of
indemnity. He may provide for them a remedy on the bond, to
prevent their proceeding against him under the lien laws. He may
want the bond to protect them as an assurance that labor and
material will be procured and the work done without delay and
confusion. He may require it simply as a just protection to
those whose labor and material enter into his building."
125 So. at 59. (Emphasis added.) Thus, it is clear that there are valid reasons for Natural's
having bargained for Parkhill, Inc., to pay all laborers and
materialmen, irrespective of whether there existed a possibility
of liens against its property. If
we look at the words of the construction contract, we find support
for the above view that Natural contemplated that either all
claims arising from the project would be paid by Parkhill, Inc.,
or else the retainage found would be available for their payment.
Subparagraph .312, besides requiring the affidavit that the
contractor has paid all bills and claims for materials, labor,
supplies, and equipment, also specifies that the contractor must
have paid "contributions, payroll, and payroll taxes, use
taxes or other forms of taxes, fees, licenses, excises or
payments, required by Federal and state legislation. . . ."
As was agreed at oral argument, there was no way that the owner of
the property (Natural) could have been liable for the failure of
the contractor to pay federal payroll taxes. Unless subparagraph
.312 is to be considered a meaningless piece of
"boilerplate" in the construction contract. Natural
bargained for payment of laborers and materialmen. We know of no
reason for Natural not being entitled to performance of this
provision of the contract as well as those pertaining to the
construction of the pipeline. In
a legal sense, damage was suffered by Natural from the failure of
Parkhill, Inc., to pay the subcontractors, materialmen, laborers,
and taxes as it had agreed in the contract, i. e., there
was not "substantial performance." It is difficult, if
not impossible, to know how to measure such damages suffered by
Natural. Suffice it to say that it would not be captious or
ingenuous to say that the retainage was in one sense a liquidated
damages clause since the measure of damages was so difficult to
calculate in advance and the amount could not be deemed a penalty.
In this sense, Natural's desire to pay the other claimants to the
fund--expressed in its motion to dismiss the initial third party
claim of Parkhill, Inc.--reflects a desire to use the retainage,
or liquidated damages fund, to remedy as much of the actual damage
as possible. [Validity of Claims] We
conclude that Parkhill, Inc., and therefore the Government, has an
absolute right to the retainable only insofar as it is not subject
to the prior claims of others. We therefore turn to the validity
of the claims of the various subcontractors, laborers, and
materialmen who are parties to this appeal. 6 Illinois
law is clear that absent proper compliance with the provisions of
the appropriate lien statute a subcontractor has no right of
action against the owner of property. Vanderlaan v. Berry
Constr. Co., 119 Ill. App. 2d 142, 255 N. E. 2d 615 (4th Dist.
1970). In Vanderlaan, the court refused to consider the
type of argument accepted by the district court in Durham
Lumber Co., supra, similar to a quasi-statutory right of the
subcontractor against the owner who has notice of the contractor's
default, even though the mechanics' lien statute specifically
speaks in remedial terms. Ill. Rev. Stat. 1971, ch. 82, §39.
Further, the court in Hill Behan Lumber Co. v. Marchese, 1
Ill. App. 3d 789, 275 N. E. 2d 451 (2d Dist. 1971), rejected a
similar argument and also held that the subcontractor was not
"entitled to an equitable lien on the grounds of unjust
enrichment." 275 N. E. 2d at 453. Although
it is clear from the above that Illinois courts would not
generally recognize a right of action against the owner of
property by an unpaid subcontractor, absent compliance with a lien
statute, this does not mean that the subcontractors, laborers, and
materialmen have no rights in the present case. None of the cases
cited by the Government or by Parkhill, Inc., dealt with claims by
subcontractors to a retainage fund such as the one before us. As
indicated above, it cannot be said that this fund was created
solely for the protection of Natural. It covers claims for which
Natural could not be held personally liable. In addition, if the
retainage were solely for the purpose of protecting Natural from
liens and any similar claims, then it would be superfluous since
subparagraph .33 gives Natural complete discretion to withhold
from any payments "any amount which in its judgment is
necessary to secure Company against any and all claims asserted
against Company or Contractor and payable by Contractor. . .
." Since
subparagraph .312 cannot be dismissed purely in terms of
protection of Natural against liens, upon either of two
alternative bases the subcontractors and creditors of Parkhill,
Inc., specified in subparagraph .312 are entitled to recover.
First, these creditors were the third party beneficiaries to the
contract and therefore attained a direct right of action against
the fund. Second, even if they had no contractual right in the
fund, Illinois courts in the exercise of their equitable powers in
a dispute between the contractor, suing in equity under the
doctrine of substantial performance, and the creditors of the
contractor, claiming equitable rights to the fund through Natural,
would, in our opinion, prefer those creditors. The
law of third party beneficiaries has traveled a lengthy road since
Bourne v. Mason, 86 Eng. Rep. 5, 1 Vent. 6 (1669, K. B.),
in which the court gave judgment for the defendants in a suit by a
creditor beneficiary on the ground that the plaintiff was "a
stranger to the consideration," contra as to a donee
beneficiary, Dutton v. Poole, 83 Eng. Rep. 523, 2 Lev. 210
(1677, K. B.). By the nineteenth century, the Exchequer had
accepted such causes. In Robertson v. Wait, 155 Eng. Rep.
1360, 8 Ex. 299 (1853), Baron Parke upheld the right of a third
party beneficiary to recover on a trust theory, in spite of the
fact that the contract used no trust language nor contained any
indication that the contract was for the benefit of the third
party. The leading American case initially recognizing the rights
of a third party beneficiary to sue on a promise was Lawrence
v. Fox, 20 N. Y. 268 (1859), holding that the plaintiff who
was the creditor of Holly could sue the defendant on the
defendant's promise to Holly to pay plaintiff Holly's debt when
the defendant borrowed a similar sum of money from Holly. The
rule in Illinois presently appears to be "that if a contract
be entered into for a direct benefit of a third person not a party
thereto, such third person may sue for breach thereof. The test is
whether the benefit to the third person is direct to him or is but
an incidental benefit to him arising from the contract. If direct
he may sue on the contract; if incidental he has no right of
recovery thereon." Carson Pirie Scott & Co. v. Parrett,
346 Ill. 252, 257, 178 N. E. 498 (1931). To the same effect, Phodes
Pharmacal Co. v. Continental Can Co., 72 Ill. App. 2d 362,
369, 219 N. E. 2d 726 (1st Dist. 1966). 7 With
these Illinois cases in mind, we turn to the present case in which
the construction contract specifically withholds final payment
until the general contractor provides an affidavit that all his
bills have been paid. Initially, we should note that there is no
problem with the fact that at the time of the signing of the
construction contract the specific creditors of Parkhill, Inc.,
were not known. As Corbin stated: "Of course the beneficiary
must be identified before he has an enforceable right; but it is
not necessary that he should be identified or identifiable at the
time the contract is made. It is enough that he be identified at
the time performance is due." 4 Corbin on Contracts §781,
at 70 (1951). A
materialman may be a third party beneficiary of a promise by a
general contractor to obtain a surety bond for the prompt payment
of all laborers and materialmen, and, in the context of a
government contract, an unpaid materialman of a subcontractor was
allowed to sue the general contractor who had failed to provide
such a bond as he had covenanted in the construction contract. Strong
v. American Fence Constr. Co., 245 N. Y. 48, 156 N. E. 92, 94
(1927) (opinion by Cardozo, C. J.): "Security to materialmen
and laborers was the end and aim of the transaction. If the
promise was not for them, it was without significance or
reason." Nor does the promise have to be for the sole benefit
of the third party who is suing as long as it was "for his
direct or substantial benefit." Beck v. Reynolds Metals
Co., 163 F. 2d 870, 871 (7th Cir. 1947) (opinion by then
Circuit Judge Minton, relying on Illinois cases). [Third-Party Beneficiary] Thus,
we need to decide whether there was created a third-party
beneficiary relationship for the materialmen, laborers, and other
creditors so that they have rights under Illinois law, the
creation flowing from the contract requirements that Parkhill,
Inc., provide an affidavit of payment before receiving the
retainage from Natural coupled with the provision that Natural
could, if it so chose, pay any liquidated claims that arose out of
the construction contract and charge Parkhill, Inc. Certainly the
claimants are direct beneficiaries of the promise, and, although
the promise may not have been solely for their benefit but also
for the protection of Natural, it must have been substantially for
their benefit since some of the specified creditors could not
obtain liens against Natural's property, specifically, e.g.,
the Government's claim for taxes. As noted above, a similar
analysis has been applied to cases involving materialmen
attempting to recover on a contractor's bond on a government job.
See Southwestern Portland Cement Co. v. Williams, 32 N. M.
68, 251 P. 380 (1926); Board of Education of City of Chicago v.
Chicago Bonding and Surety Co., supra. It
would appear, therefore, that the various parties specified in
subparagraph .312 do have a right to sue for their unpaid bills to
the extent of the retainage fund available. Whatever funds that
are still being retained by the owner of the property are subject
to such a third-party beneficiary's suit. As Professor Corbin has
stated, "they [courts] may well interpret a bond [or
retainage] that is expressly conditioned on the payment of
laborers and materialmen as being a promise to pay them and made
for their benefit. The words reasonably permit it, and social
policy approves it." 4 Corbin, supra §800, at 177-78.
(Footnote omitted.) However,
in our opinion, even if the Illinois courts would not give the
claimants a direct right to the retainage fund as third party
beneficiaries, we would still reach the same result. Although the
general right of a materialman or subcontractor to an equitable
lien against the property of the owner, if he has failed to
perfect his statutory lien was rejected in Hill Behan Lumber
Co. v. Marchese, supra, this does not mean that Illinois
courts would refuse to impose an equitable lien on retainage funds
such as we have in the present case. The entire thrust of the
court's decision in Hill Behan Lumber was that since
statutory liens are in derogation of the common law the claimant
must strictly comply with all of the statutory prerequisites in
order to obtain any rights. This does not reflect on whether or
not equity would impose a trust on certain funds specifically
retained under the construction contract by the owner in part to
protect the materialmen, laborers, and subcontractors. [Equitable Liens] "The
essential elements of equitable liens include (1) a debt, duty or
obligation owing by one person to another . . ., and (2) a res to
which that obligation fastens, which can be identified or
described with reasonable certainty." Marshall Savings
& Loan Ass'n v. Chicago National Bank, 56 Ill. App. 2d
372, 378, 206 N. E. 2d 117 (2d Dist. 1965). In the present case,
we have both of the elements for an equitable lien. As we have
seen above, there was a duty, created by the construction
contract's own language in the subparagraphs relating to the
retainage, which ran from Natural to the subcontractors, laborers,
and materialmen. This duty, however, related only to the specific
res to which it fastened--the retainage fund. It is in this way
that the Hill Behan Lumber case is distinguishable, since
in that case there was no specifically created contractual duty
nor a specific res to which the duty attached. Further,
even if there were no specific contractual duty created by the
contract, equity might well imply one insofar as the retainage
fund was concerned. As the Eighth Circuit stated in Theater
Realty Co. v. Aronberg-Fried Co., Inc., 85 F. 2d 383, 388 (8th
Cir. 1936), Pomeroy [3 Pomeroy, Eq. Jr. (4th Ed.) §1239] notes
that equitable liens may originate in express contracts, but "the
rule is not limited to specific agreements, for, 'in addition to
the general doctrine that equitable liens are created by executory
contracts which in express terms stipulate that property shall be
held, assigned, or transferred as security for the promisor's debt
or other obligation, there are some further instances where equity
raises similar liens without agreement therefor between the
parties, based either upon general considerations of justice (ex
aequo et bono) or upon the particular equitable principle that he
who seeks the aid of equity in enforcing some claim must himself
do equity.'" As the same circuit said in United States Fidelity &
Guaranty Co. v. Sweeney, 80 F. 2d 235, 238 (8th Cir. 1935),
"Laborers and materialmen, however, have an equitable right
to payment from funds due a contractor on a public improvement in
preference to general creditors . . .. In
any event, we are confident that if the Illinois courts had been
confronted with the issue of priority of funds held as retainage,
in part for the payment of subcontractors, laborers, and
materialmen, an issue on which none of the parties has cited a
controlling case, they would reach a similar conclusion. Justice
clearly compels such a result, especially when we note that the
general contractor, whose claim to the retainage fund in equity is
by way of a claim of substantial performance, does not have clean
hands relative to the claims of the unpaid subcontractors,
materialmen, and laborers. We
draw support for this view from Pearlman v. Reliance Insurance
Co., 371 U. S. 132 (1962), in which the Supreme Court had to
decide who had priority to a retainage fund such as we have here.
The surety on the performance bond had paid all of the
contractor's bills for labor and materials and sought to obtain
the retainage fund as a partial reimbursement. The contractor's
trustee in bankruptcy opposed the claim arguing that the surety
was just another creditor and that the retainage fund was an asset
of the bankruptcy estate. The Supreme Court held that the surety
could recover as subrogee of the laborers and materialmen (see
concurring opinion, 371 U. S. at 142): "We therefore hold in accord with the established legal
principles stated above that the Government had a right to use the
retained fund to pay laborers and materialmen; that the laborers
and materialmen had a right to be paid out of the fund; that the
contractor, had he completed his job and paid his laborers and
materialmen, would have become entitled to the fund; and that the
surety, having paid the laborers and materialmen, is entitled to
the benefit of all these rights to the extent necessary to
reimburse it." 371 U. S. at 141. (Footnote omitted.) Thus, the Court held the rights to the retainage fund of
those taking through the rights of the materialmen (i. e.,
the surety) to be superior to those taking through the rights of
the general contractor (i. e., the trustee in bankruptcy).
Similarly, in American Surety Co. v. Westinghouse Electric
Manufacturing Co., 296 U. S. 133 (1935), the Court held in
reference to priority to a retainage fund on a Government contract
that the materialmen had superior rights to those of the surety
who was claiming as the subrogee of the general contractor. In
summary, we are of the opinion that, on this matter of first
impression in Illinois, under either of the legally acceptable
theories the Illinois courts would hold that those classes of
creditors specifically identified in subparagraph .312 have rights
to the retainage fund. 8
Thus, Parkhill, Inc.'s interest in the fund is limited to any
residue after all valid claims properly before the court have been
paid in full. Since most of the claimants have not appealed the
district court's granting of summary judgment against them, such
rights as they otherwise would have had may have been waived. 9
Insofar as the other claimants who are presently before us are
concerned, including the United States, since federal withholding
taxes are specifically mentioned in subparagraph .312, we
interpret the contract as allowing them to share in a pro rata
fashion to the amounts of their claims arising out of this
particular construction project. Since, at oral argument, it was
contended that some of the claims against Parkhill, Inc., are
based on other construction projects, we remand to the district
court to ascertain the facts and, if this is true, to reduce the
claims by any such amount. Further, it is necessary for the
district court to adjudicate the validity and the precise amount
of the Government's tax claim before any pro rata distribution can
be made. Parkhill has indicated that the amount is overstated and
will be actively contested. As
we noted in the statement of this case, the district court in
allowing the Laborers' claim also granted attorneys' fees of
$4,275.00. Whether or not this allowance should be included in the
initial sharing of the retainage is not an easily resolvable
question. If the claim were derivable through Parkhill, then the
statutory provision for attorneys' fees in suits for wages would
indubitably be applicable. The claims, however, do not come
through Parkhill. We have assumed, without expressly articulating
the thought, that the total of the claims will exceed the amount
of the retainage. If that assumption is correct, and it usually
seems to be in this type of litigation, then other claimants will
be proportionately deprived when the pro rata processing occurs.
The legislature of Illinois by enacting Ill. Rev. Stat. ch. 13, §13,
obviously desired to make unpaid laborers whole without their
having to bear collection expenses. While paying due respect to
this laudable motivation, we are of the opinion that the allowance
of claims at this point should be limited to the unpaid claims
themselves and should not include collection costs such as
attorneys' fees. Accordingly, the attorneys' fees will not be
properly allowable on the Laborers' claim. Of course, if our
assumption on the relationship of assets to claims is incorrect
and there should be a surplus returnable to Parkhill, Laborers
would be in a position to proceed toward recovery of the
statutorily allowed fees. There
is one other claimant to this fund whom we must consider. The
district court in its Decision and Order granted priority to the
claim of an attorney for Parkhill, Inc., one Because
of the decision we have reached above with respect to the rights
to the retainage of various creditors of Parkhill, Inc., we do not
have to resolve the controversy. Since we have held that the
Government's rights to a portion of the retainage arise from its
being listed as one of the classes of creditors in subparagraph
.312, rather than from the federal tax lien statute, Wetmore
cannot claim any rights under 26 U. S. C. §6323(b)(8). [Partial Release of Escrow Funds] II
The second fund involved in this appeal is the residue which
resulted from the sale of construction equipment after a chattel
mortgagee was paid. The priority of the chattel mortgage was
established in Avco Delta Corporation Canada Ltd. v. United
States [71-1 USTC ¶9194], 321 F. Supp. 241 (S. D. Ill. 1971),
aff'd [72-1 USCT ¶9359], 459 F. 2d 436 (7th Cir. 1972).
The residue fund is approximately $600,000.00. The Government has
filed a tax lien against this fund. The various Parkhill Companies
contend that the Government is now taking a position inconsistent
with that advanced in the prior litigation in this court. Parkhill
petitioned the district court for a partial release of the escrow
fund on the basis that the Government has "seized and tied up
all of the assets" of the various Parkhill Companies,
that the inconsistent position of the Government is due to the
fact that Parkhill has substantial defenses to the Government's
claim, and that the Government's actions "deny the
constitutional guarantees of due process and representation by and
assistance of counsel contained in the Fifth and Sixth Amendments
to the United States Constitution." The district court
ordered "[t]hat $60,000 be released from said escrow fund . .
. to be drawn on now and in the future by [Parkhill] INC., [Parkhill]
Insofar
as the district court granted a partial release of funds to pay
already accrued legal expenses, it was in error since the payment
of those expenses does not clearly affect the ability to obtain
counsel in future proceedings. But we are also compelled to
reverse the entire release of funds on the basis of prematurity as
required by our decisions in Illinois Redi-Mix Corp. v. Coyle
[66-1 USTC ¶9435], 360 F. 2d 848 (7th Cir. 1966), and United
States v. Brodson [57-1 USTC ¶9386], 241 F. 2d 107 (7th Cir.
1957) (en banc), cert. denied, 354 U. S. 911. The facts of
the present case are basically indistinguishable from those in Illinois
Redi-Mix Corp., supra. In both cases there was an interpleaded
fund with claims put forth by general creditors of the taxpayers,
the taxpayer itself, and the Government. In both cases it was
alleged that all of the assets of the various
corporation-taxpayers were subject to notices of levy or impounded
in the interpleader action. This court stated, in reversing the
district court's order allowing a partial release, "The claim, in substance, is that the vendor
corporations will be denied a fair trial in the Tax Court at some
time in the future if a portion of the interpleaded fund is not
released. But it is presently impossible to determine whether any
constitutional violations will occur; that can be decided only
after the trial. Therefore, the issue is not ripe for judicial
determination. . . . The constitutional question in this case was
prematurely decided." 360 F. 2d at 849-850. The
Parkhill Companies attempt to distinguish their case from Illinois
Redi-Mix on the ground that in their case the Government has
seized the property not only of the allegedly delinquent taxpayer,
but also of two corporations, Construction and |