Surety's Interest Page2

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[58-1 USTC ¶9516]Arthur L. Vermillion, Plaintiff v. Lynn Brodrick et al., Defendants

U. S. District Court, Dist. Kan. , Civil Action No. W-1007, 3/26/58

[1939 Code Sec. 3672--changed in 1954 Code Sec. 6323]

Priority of claims: Tax liens v. surety's chattel mortgage: Surety's completion of construction jobs after contractor's default: Assignment for benefit of creditors.--A contractor defaulted on two municipal construction jobs and the surety, as required by his surety contracts, assumed responsibility for completion of the jobs, thereby sustained a financial loss. Although the surety paid all federal taxes incident to the two jobs which accrued during the period of its control and supervision, the contractor was in default to the Government on FICA and withholding taxes on employees' earnings for periods before, during and after this period on these and/or other construction contracts. Prior to its completion of the two defaulted construction contracts the surety filed and had recorded a chattel mortgage upon the defaulting contractor's machinery and equipment. Subsequently, with the consent of the Government, the surety and all his other creditors, the insolvent contractor assigned his assets to a trustee for the benefit of creditors under an agreement providing that the proceeds of the trustee's sale of the mortgaged machinery and equipment would be substituted for these specific assets. Incident to the liquidation of the insolvent contractor's business the trustee sold the mortgaged assets, paid the net proceeds therefrom into Court and petitioned the Court to determine the relative priority of the Government and the surety as to these funds. The Court held that the Government's lien for taxes covering the period before the contractor's default became a general lien against their property on the date when the assessment list was received and, since it was received prior to the recording of the surety's chattel mortgage was entitled to first priority only as to such taxes. The surety had a superior claim to the balance of the funds.

Holmes, Mitchell & Holmes, Donald I. Mitchell, 623 Beacon Building , Wichita 2, Kan. , for plaintiff. William C. Farmer, United States Attorney, William F. Kolbe, Department of Justice, Washington, D. C., George Peabody, Beacon Building, Wichita 2, Kan., for United States. Foulston, Siefkin, Schoeppel, Bartlett & Powers, 608 Fourth National Bank Building, Wichita 2, Kan., for Employers Mutual Casualty Co., defendant.

Stipulation of Fact

SAVAGE, District Judge:

COME NOW the defendants, United States of America and Employers Mutual Casualty Company, a corporation, and make the following stipulation of fact for the sole purpose of submitting this controversy to the court for decision.

1. This is an action in the nature of an interpleader action and the court has jurisdiction of the parties and the funds.

2. The defendant, Employers Mutual Casualty Company, is a corporation organized and existing by virtue of the laws and the statutes of the state of Iowa , with its principal offices at Des Moines , Iowa , and is authorized to do business in the state of Kansas .

3. The intervention of the United States of America is sanctioned and directed by the Attorney General of the United States and is authorized and requested by the Commissioner of Internal Revenue by the United States. The United States of America is a corporation sovereign and body politic.

4. The claims of the United States of America and the Employers Mutual Casualty Company are superior and prior to the claims of all other parties defendant.

5. The registry of this court has in its possession the sum of Seven Thousand One Hundred Seventy-one and 63/100 Dollars ($7,171.63). The claim of the United States of America is in the sum of Seven Thousand Four Hundred Twenty-eight and 32/100 Dollars ($7,428.32), plus interest from the due date of the taxes assessed. The claim of Employers Mutual Casualty Company is in the sum of Seven Thousand and Forty and 18/100 Dollars ($7,040.18), with interest as provided by law from February 22, 1952 . Each of these parties contend their claim and right to the funds in the hands of the registry of this court is superior to the rights of the other.

6. On July 21, 1950 , N. W. Ricke and Edward J. Ricke, a partnership doing business under the firm name and style of Ricke Bros. Construction Co., entered into a contract with the City of Pratt , Kansas for the construction of certain street improvements and sewer improvements for the City of Pratt , Kansas . The Ricke Bros. Construction Co. was required to furnish a statutory bond in compliance with the General Statutes of Kansas . Pursuant to the contract, and in accordance with the Statutes, N. W. Ricke and Edward J. Ricke made application to the defendant, Employers Mutual Casualty Company, for such statutory bond, a copy of which application and bonds is attached hereto, made a part of this stipulation, and marked Exhibit "A" [not reproduced herein]. Pursuant to such application, the statutory bond was duly executed and was filed with the Clerk of the District Court of Pratt County, Kansas on July 28, 1950 .

7. On December 15, 1950 , the Ricke Bros. Construction Co. entered into a contract with the City of Anthony , Kansas to install certain curbing and guttering in that City. The Ricke Bros. Construction Co. was required to furnish a statutory bond in compliance with the General Statutes of Kansas . Pursuant to the contract, and in compliance with the statutes, N. W. Ricke, as a partner, made application to the defendant, Employers Mutual Casualty Company, for such statutory bond. The application, statutory bond, performance bond, proposal and contract are attached hereto, made a part of this stipulation, and marked Exhibit "B" [not reproduced herein]. Pursuant to such application, the statutory bond and performance bond were executed and duly filed with the Clerk of the District Court of Harper County, Kansas on April 2, 1951 .

8. On January 1, 1951 , the Ricke Bros. Construction Co. defaulted on the contracts with the City of Pratt and the City of Anthony , Kansas . Defendant Employers Mutual Casualty Company, under its bonds and applications, supervised the completion of the operation of Ricke Bros. Construction Co., met the payroll, and undertook to cause the contracts to be completed and performed, as required by the bonds and applications. Representatives of the Employers Mutual Casualty Company had actually appeared and inspected the jobs and made payments for work performed in December of 1950. Employers Mutual Casualty Company paid all federal taxes which accrued pertaining to the completion of the contracts while such completion was under its supervision and control.

9. The Employers Mutual Casualty Company continued to cause the contracts to be performed and to meet its obligations under the bonds and applications until final completion of the contracts and the determination of its loss on February 22, 1952 . The net amount of loss to the Employers Mutual Casualty Company under both contracts was Seven Thousand and Forty and 18/00 Dollars ($7,040.18).

10. The Employers Mutual Casualty Company notified the City of Anthony by letter of the default and its assignment under the application of bond on January 4, 1951 and caused such notification to be filed with the City Clerk on January 5, 1951 . A copy of such notification is attached hereto, made a part of this stipulation, and marked Exhibit "C". The City of Pratt, Kansas was notified on January 4, 1951 by a letter directed to the City Clerk, a copy of which is attached hereto, made a part of this stipulation, and marked Exhibit "D". Said letter was received by the Clerk of Pratt, Kansas , on or about January 5, 1951 .

11. The Commissioner of Internal Revenue assessed federal internal revenue taxes for the years 1950 and 1952, together with penalties and interest thereon as provided by law, against the defendant taxpayers Norbert W. Ricke, a/k/a N. W. Ricke, and Edward Ricke, doing business as Ricke Bros. Construction Co., Anthony, Kansas. The amounts assessed and the outstanding balance of the aforesaid taxes together with pertinent dates are as follows:

12. The Employers Mutual Casualty Company filed a document captioned a chattel mortgage on January 10, 1951 at 11:45 o'clock a. m., the same being recorded in Book "N", covering the principal machinery owned and operated by the Ricke Bros. Construction Co. A copy of this document is attached hereto, made a part of this stipulation, and marked Exhibit "E".

13. On May 13, 1953 , N. W. Ricke, of the Ricke Bros. Construction Co., executed an assignment for the benefit of creditors, Exhibit "A" attached to complaint, which is made a part of this stipulation by reference. Arthur L. Vermillion, complainant herein, was thereby appointed Trustee. The Ricke Bros. Construction Co. was insolvent at the time of the execution of such assignment for the benefit of creditors. The Trustee proceeded to and did liquidate the assets of the Ricke Bros. Construction Co., including the property listed in Exhibit "E", but did not include any payments made by City of Anthony or the City of Pratt after date of default. The Trustee made payments to the secured and preferred claims that had priority over all creditors. The Trustee was unable to determine whether the claim of the Employers Mutual Casualty Company or the claim of the United States of America for taxes was superior and filed this action to determine the priority to the funds. The court has allowed fees to the Trustee and his attorneys as reflected by the file.

14. The United States of America made demands for payment on account of the assessments set forth in paragraph 11 of this stipulation.

15. The assignment for benefit of creditors referred to in paragraph 13 was made with the knowledge and consent of the United States of America and the Employers Mutual Casualty Company and all other parties to the action with the understanding that the proceeds from the sale of said machinery and equipment should stand in the place and stead of such property.

16. Neither Employers Mutual Casualty Company or United States of America has attempted to enforce this claim against the property or funds by any other judicial proceeding.

Supplemental Stipulation of Fact

COMES NOW the United States of America and Employers Mutual Casualty Company and make the following additional stipulation:

1. The complainant, Arthur L. Vermillion, sold the machinery listed in the chattel mortgage (Exhibit "E") for the total sum of $8,600.68. He made a payment of $1,014.00 to satisfy the mortgage in favor of the Bank referred to in the chattel mortgage (Exhibit "E"). The said complainant paid to the Clerk of the District Court the sum of $9,458.23.

Journal Entry of Judgment

Now on this 21st day of March, 1958, the above entitled matter comes regularly on for trial before the court, the complainant appearing by his attorney, Donald I. Mitchell, the defendant United States of America appearing by and through its attorneys, William F. Kolbe and George Peabody, the defendant Employers Mutual Casualty Company appearing by and through its attorneys Foulston, Siefkin, Schoeppel, Bartlett & Powers. None of the other defendants appearing in person or by counsel.

THEREUPON, the court is advised that William Porter, Trustee in Bankruptcy, will not appear and that a ruling has previously been entered, although not journalized, against his intervening petition and claim.

THEREUPON, the court being duly advised and having examined the record finds that all parties have been duly notified of the setting of the cause for hearing. The court further finds, that all of the parties, except those appearing, are in default and have failed to present evidence in support of their claims and that judgment should be rendered against them.

THEREUPON, the court finds that the fee previously allowed the complainant and his counsel are just and proper and have been approved by the parties and should be approved by the court.

THEREUPON, the court receives into evidence and reads the stipulation of fact as submitted by the defendant United States of America and defendant Employers Mutual Casualty Company.

THEREUPON, the cause is duly argued to the court by counsel for the defendants United States of America and Employers Mutual Casualty Company.

THEREUPON, the court being duly and fully advised makes and enters his conclusions of law as follows:

1. The court has jurisdiction of the parties and subject matter of the action.

2. The claims of the United States of America and Employers Mutual Casualty Company to the funds now held by the Registry of the Court are prior, superior and paramount to the claims of all other parties.

3. The bond applications executed by Ricke Brothers Construction Company on July 21, 1950 and December 15, 1950 did not constitute a choate lien against the machinery, equipment and assets at the time of its execution.

4. The lien of the United States of America for WT and FICA Taxes covering the period 5/1/50 through 6/30/50 in the amount of $1223.46 became a general lien against the property of the Ricke Bros. Construction Company on September 29, 1950, the date the assessment list was received, and is superior to the claim of Employers Mutual Casualty Company under their bond applications.

5. The document attached to the stipulation of fact and marked Exhibit "E" is a valid chattel mortgage and was a mortgage lien against the property described in said mortgage from and after its execution on January 10, 1951 .

6. The claim of Employers Mutual Casualty Company to the money in the Registry of the Court representing the proceeds from the sale of the machinery described in the mortgage (Exhibit "E"), is superior and prior to the claims of the United States of America which became liens subsequent to January 10, 1951 .

7. The United States of America is not entitled to priority over the referred to chattel mortgage in the funds by virtue of the assignment for the benefit of creditors.

THEREUPON, the court requests the contesting parties to provide the court with additional evidence disclosing the amount of the proceeds realized from the sale of the machinery and equipment (Exhibit "E"), and the disbursement of funds.

THEREUPON, said cause is duly continued until March 26, 1958 at which time the parties appear as above.

THEREUPON, the contesting parties submit their supplementary stipulation of fact which is by the court received.

IT IS THEREFORE BY THE COURT CONSIDERED, ORDERED, ADJUDGED, AND DECREED that the claim of the intervenor, William Porter, Trustee in Bankruptcy, be and the same is hereby denied and disallowed.

IT IS FURTHER BY THE COURT CONSIDERED, ORDERED, ADJUDGED, AND DECREED that the claim of the Board of County Commissioners of Harper County, Kansas, the claim of the City of Anthony, Kansas, and the claim of the State of Kansas, Employment Security Division in and to the funds held by the Registry of the Court in this action are hereby denied and disallowed.

IT IS FURTHER BY THE COURT CONSIDERED, ORDERED, ADJUDGED, AND DECREED that the Clerk of the Court shall pay to the United States of America the sum of $1774.01 from the funds now held by the Registry of the Court in this action.

IT IS FURTHER BY THE COURT CONSIDERED, ORDERED, ADJUDGED, AND DECREED that the Clerk of the Court, after making the payment provided to the United States of America, and after deducting the costs of this action, shall pay the balance of all funds held by it in this action to the defendant Employers Mutual Casualty Company.

IT IS FURTHER BY THE COURT CONSIDERED, ORDERED, ADJUDGED, AND DECREED that judgment be entered in favor of the United States of America and against the defendants Norbert W. Ricke, a/k/a N. W. Ricke, d/b/a Ricke Bros. Construction Company, for the outstanding balance with interest from the date of assessment.

IT IS BY THE COURT SO ORDERED.

 

 

[54-2 USTC ¶9519]Alabama-Tennessee Natural Gas Company, Plaintiff v. Lehman-Hoge & Scott, et al., Defendants

In the District Court of the United States for the Northern District, Northwestern Division, of Alabama, Civil Action No. 827, 122 FSupp 314, April 23, 1954

Lien for taxes: Validity against surety.--After the contractor had defaulted, plaintiff completed the construction contract itself. On completion of the contract it paid into court the retained percentages due the contractor. It was held that the lien of the surety who had paid the contractor's creditors under a payment and performance bond was superior to the lien of the United States for withholding and FICA taxes which had not attached at the time of the assignment by the contractor to the surety of the monies payable under the construction contract.

H. A. Bradshaw, 1151/2 East Mobile Street, Florence, Ala., Marshall, Batman & Day, 710 Ohio Street, Terre, Haute, Ind., C. Eugene Fowler, 513 North 21st Street, Birmingham 3, Ala., for plaintiff, Alabama-Tennessee Natural Gas Company. J. Haran Lowe, Ramsey-McCormick Building, Birmingham, Ala., McDonald, McDonald & Kuhn, Memphis, Tenn., Calloway & Reid, Empire Bank Building, Dallas, Tex., for Dunn Brothers. Mitchell & Poellnitz, Florence, Ala., George W. Yancey, Comer Building, Birmingham, Ala., for Century Indemnity Company. Peach, Caddell & Shanks, Decatur, Ala., Harris & Harris, Decatur, Ala., for Crowe & Crowe Hardware Co. Russell A. Lynne, Decatur, Ala., for Clayton D. Blankenship. Clopper Almon, Sheffield , Ala. , for Louis S. Stein Bag Company. McBurney & Colebeck, 5 Bliss Building, Florence , Ala. , for Hawkinds Equipment Company. Frank M. Johnson, Jr., United States Attorney, Birmingham , Ala. , for United States .

Findings of Facts, Conclusions of Law, and Judgment

Statement of the Case

GROOMS, District Judge:

The plaintiff, Alabama-Tennessee Natural Gas Company, filed an action of Interpleader against Lehman-Hoge & Scott, The Century Indemnity Company, the United States , and, by amendment, J. L. Head, and a number of other creditors of Lehman-Hoge & Scott. It is alleged in the complaint that on, to wit, September 25, 1950 the plaintiff entered into a contract with Lehman-Hoge & Scott for the construction of a natural gas pipe line from a point near Decatur , Alabama , under and across the Tennessee River . The contractor defaulted, and Alabama-Tennessee was compelled to take over and complete the contract. After the contract was completed, Alabama-Tennessee admitted owing, under its contract, the sum of $30,598.35, which it paid to the register of this court.

The complaint alleges that each of the parties defendant claims that the contractors are indebted to them, and claims a right to or lien on said retained percentages so paid to the register of this court.

The United States intervened and asserted its claim to said funds so paid into court, and alleged that Lehman-Hoge & Scott had collected from employees income, withholding and FICA taxes in the amount of $50,552.21, and claimed that it had a prior lien and claim to said sum paid into court.

J. L. Head, doing business as J. L. Head Insurance Agency, intervened and claimed that Lehman-Hoge & Scott owed him the sum of $29,323.89, for premiums due and unpaid on insurance placed by him, as agent for Lehman-Hoge & Scott, and asserted that he had a prior lien and claim to said fund by virtue of an assignment or assignments of Lehman-Hoge & Scott to him.

The Century Indemnity Company, as Surety on the bond of Lehman-Hoge & Scott which covered the Tennessee River crossing pipe line contract, asserted its claim to the funds so paid into court, and claimed that it, as Surety, paid to creditors of the contractor, who had furnished materials to the contractor which were used in the performance of the Tennessee River crossing contract, a sum in excess of sixty thousand dollars, and that it had a prior claim to said funds so paid into court.

No other creditors of Lehman-Hoge & Scott appeared in this Intervenor action, and asserted a lien or claim to this fund.

[Issues]

On February 25, 1954 this court made and entered an order on pretrial stating the pleadings and the issues to be as follows:

1. Complaint and amendments; complaint in intervention of the United States; answer as amended of Century Indemnity Company and claim and answer to cross action of J. L. Head, doing business as J. L. Head Insurance Agency; and request for affirmative relief against J. L. Head; answer to complaint of intervention of the United States and request for affirmative relief as to the United States; answer of J. L. Head, doing business as J. L. Head Insurance Agency and claim based on an assignment, and request for affirmative relief.

2. It was agreed by all of the parties that the following are all of the issues in controversy in this cause:

Plaintiff, suing under Title 28, Section 1335, of U. S. C. A. in interpleader, claims that it had a contract with H. F. Lehman, V. V. Lehman, Phil Hoge and Pete Scott, doing business as Lehman-Hoge & Scott, hereinafter called the partners, for the construction of a certain pipe line known as the River Crossing Contract at Decatur, Alabama; that said partners defaulted on said contract and plaintiff was compelled to take over and complete same; upon the completion of which there was the sum of, to wit, $30,589.34 remaining in the hands of the plaintiff. The defendants, The Century Indemnity Company, J. L. Head, doing business as J. L. Head Insurance Agency (hereinafter referred to as J. L. Head), and intervenor, United States, have made claim to said balance which plaintiff had paid into the registry of this court, pending the granting of relief under its bill of interpleader. Plaintiff prays that the court determine the parties to whom the funds rightfully belong, and upon a final hearing that it be discharged with costs, together with an attorney's fee.

The defendant, J. L. Head, filed his answer to the complaint, and also a claim to the funds, asserting that by virtue of an assignment from the partners the plaintiff is indebted to him in the amount of $29,232.89, together with interest in the amount of $430.20, and that said claim is a prior claim and superior claim, and should be paid in preference to any claim of the United States and The Century Indemnity Company.

The intervenor, United States, answers the complaint and filed its claim in intervention, asserting that the partners were and are indebted to it in the amount of $53,663.38 for withholding, F. I. C. A. and F. U. T. A. taxes, and that said taxes constitute a lien against the partners and upon said fund, and that said lien is prior and superior to the claims of The Century Indemnity Company and J. L. Head.

Century Indemnity Company answered the complaint and intervention of the United States and claim of J. L. Head, and asserts that it is entitled to the funds which have been paid into court by virtue of the fact that it executed a payment and performance bond guaranteeing the payment of all materials and labor used in the execution of said contract and guaranteeing the faithful performance of said contract; that said contractor defaulted, and it was compelled to pay material and labor claims in the amount of $60,580.78. It claims that by virtue of its conventional assignment taken at the time it executed its said bond and by virtue of its equitable lien and its right of subrogation, it is entitled to all of said funds, and that its claim is superior to and prior to that of the United States and J. L. Head.

This cause coming on to be heard was, on the 15th day of April, 1954, at Florence, Alabama, tried to the court without the intervention of a jury, and in conformity with the pretrial order of February 25, 1954. The court having considered the evidence adduced upon the trial by the parties hereto, heard oral argument of counsel, now proceeds to make and enter the following finding of facts, conclusions of law and judgment.

Finding of Facts

(1) On, to wit, September 25, 1950 the Alabama-Tennessee Natural Gas Company entered into a contract with Lehman-Hoge & Scott, a partnership composed of H. F. Lehman, V. V. Lehman, Phil Hoge and Pete Scott, for the construction of a natural gas pipe line from a point near Decatur, Alabama, under and across the Tennessee River, referred to as the "River Crossing Contract". The River Crossing Contract provided that the contractor furnish the usual or customary performance and payment bond. The contractor applied to The Century Indemnity Company for the bond, and executed an application for the bond and agreement of indemnity. In the contract of indemnity, which was a part of the application for the bond, Lehman-Hoge & Scott agreed that should they fail or be unable to complete the contract in accordance with its terms, or abandon the work, or fail to comply with the terms or conditions of the contract, that as of date of the execution of the application for the bond, they assigned, transferred and conveyed to The Century all deferred payments and all retained percentages arising out of the contract, and any and all monies and property that may be due and payable to Lehman-Hoge & Scott and the balance of the contract price remaining unpaid to the contractor. The contractor failed to complete the River Crossing Contract, and Alabama-Tennessee Natural Gas Company took over the completion of the construction of the River Crossing Contract and completed same according to the terms and provisions of the contract. After the contract was completed, Alabama-Tennessee had on hand (as retained percentages) the sum of $30,589.34, which it had withheld as retained percentages, under and as provided for in the Alabama-Tennessee River Crossing Contract. This sum was paid to the register of this court, at the time of the filing by the Alabama-Tennessee Natural Gas Company of its complaint of intervention.

(2) The bond originally issued by The Century Indemnity Company to Alabama-Tennessee Natural Gas Company, covering the Tennessee River crossing, was a performance and lien bond and not a payment bond. In May of 1951 the Standard Oil Company, a creditor of Lehman-Hoge & Scott, on account of materials furnished to Lehman-Hoge & Scott on the Tennessee River Crossing Contract, for itself and for other creditors of Lehman-Hoge & Scott so situated, filed a civil action numbered 817 in this court, against The Century Indemnity Company and others, claiming that the bond issued by The Century Indemnity Company should have been both a performance and a payment bond, and asked the court to reform the bond so that it would be both a performance and a payment bond.

[Judgment Against Surety]

On May 9, 1952 the United States District Court for the Northern District of Alabama, Northwestern Division, entered an order and decree reforming the bond made by Lehman-Hoge & Scott as Principal, and The Century Indemnity Company, as Surety, to read as both a performance and payment bond, and ordered The Century to pay all valid claims for materials and supplies furnished Lehman-Hoge & Scott on the Tennessee River Crossing Contract, appointed a Special Master to hear and determine and pass upon the validity of the claims of such creditors of Lehman-Hoge & Scott, ordered the creditors to intervene in the action and file their claims with the clerk of this court, and for notice to be given to all creditors. The Special Master so designated, on November 10, 1952 , submitted his report, in writing, to this court, finding that The Century Indemnity Company, as Surety on the bond of Lehman-Hoge & Scott, owed to such creditors a sum of money in the aggregate largely in excess of sixty thousand dollars. The Master's report was confirmed by this court on, to wit, January 30, 1953 , with a few minor and unimportant exceptions.

It appearing to the Court, in Civil Action No. 817, that all of the creditors of Lehman-Hoge & Scott who furnished materials and supplies to Lehman-Hoge & Scott, which were used and consumed in the performance of the Tennessee River Crossing Contract, had agreed to accept 75% of the amounts found to be due by the court, in judgment rendered on the 30th day of January, 1953, with the exception of Howard Powell, who agreed to accept $20,000.00 in full settlement of his claim, the Court made and entered a judgment of date of July 13, 1953, and ordered and adjudged:

"(1) The said judgment rendered in this cause on January 30, 1953, in favor of various claimants, has been settled and discharged by Century Indemnity Company paying to the register of this court the sum of $60,580.78 on June 9, 1953.

"(2) That said parties shall, by accepting payment of said amounts, less the deduction therefrom on account of attorneys' fees hereinafter provided for, be deemed to have transferred and assigned to Century Indemnity Company their said claims, and it appearing to the Court that the judgments in favor of said parties were rendered against Century Indemnity Company by reason of the fact that Century Indemnity Company executed the bond reformed in this cause as surety for the defendants, H. F. Lehman, V. V. Lehman, Phil Hoge and P. J. Scott, who were the principals therein, doing business under the partnership name of Lehman, Hoge & Scott, said bond being dated September 25, 1950, and having been reformed by judgment of this court in this cause both as to the principals and as to the surety, and that said judgments were rendered on account of said parties having furnished labor and material to said principals as said terms were defined in the bond as reformed, it is adjudged that Century Indemnity Company is entitled to be and is hereby subrogated to all of the rights of the parties in whose favor judgments were rendered against it as against the principals in said bond, and said judgments are hereby assigned to and vested in Century Indemnity Company."

The Century Indemnity Company introduced in evidence checks of the register of this court, showing that the register had disbursed the funds thus paid into this court by The Century Indemnity Company in accordance with the decree of July 13, 1953, and that each and all of such creditors had accepted payment of the amount provided to be paid in said decree, by cashing the checks thus issued by the register of this court.

[Certificate of Assessment]

The sole evidence introduced by the United States in support of its claim was two transcripts of the accounts of the taxpayer, signed by Frank Scofield, Collector of Internal Revenue, bearing date of April 3, 1951, designated as certificate of assessments and payments of Lehman-Hoge & Scott, Phil Hoge, P. J. Scott, H. F. and V. V. Lehman of Harlington, Texas, certifying that the transcripts were true and correct. The transcripts showed that the taxes were due and unpaid by Lehman-Hoge & Scott to the United States for WT, F. I. C. A. and F. U. T. A. taxes for the second, third and fourth quarters of 1950, in the amount of $50,552.51. The Century objected to the certificates.

The Century, in its answer to the Claim of Intervention of the United States, did not admit that Lehman-Hoge & Scott, or the individual members of the partnership, owed the government the taxes claimed, or that the government had filed any lien or given any notice, or that the assessment was correct, and set out that it had no knowledge or notice of the correctness of the claim of the United States, as this information was peculiarly within the knowledge of Lehman-Hoge & Scott and the United States, and called for strict proof.

J. L. Head, doing business as J. L. Head Insurance Agency, offered no evidence in support of his claim, and relied, to prove his claim to the fund, on the exhibits to his complaint in intervention, consisting of a letter bearing date of January 15, 1951, addressed to Alabama-Tennessee Natural Gas Company, signed Lehman-Hoge & Scott by V. V. Lehman, advising that the partnership was indebted to J. L. Head in the sum of $29,323.89, and authorizing Alabama-Tennessee to pay over this sum to Head, and another letter, of January 20th, signed Lehman-Hoge & Scott by P. J. Scott, addressed to Alabama-Tennessee Natural Gas Company, authorizing and instructing Alabama-Tennessee to pay to J. L. Head the sum mentioned in the letter of January 15, 1951, also a telegram of January 16, to Mr. Prouty of the Alabama-Tennessee Natural Gas Company, again authorizing the payment to Head, and requesting acknowledgment of the telegram by a collect telegram; also a letter bearing date of January 20, 1951, addressed to Alabama-Tennessee Natural Gas Company, signed The Century Indemnity Company by J. L. Head, authorized agent, again authorizing the payment to Head of said sum; letter bearing date of January 27, 1951 to Alabama-Tennessee signed Lehman-Hoge & Scott, again requesting payment of said sum to Head, and advising that to avoid any uncertainty the partnership assigned said sum to Head. J. L. Head, in response to request by The Century, admitted, in writing:

"The letter of January 20, 1951, addressed to Alabama-Tennessee Natural Gas Company, to the attention of Mr. Prouty, and signed The Century Indemnity Company by J. L. Head, authorized agent, in which request was made for payment of $29,323.80, was not with specific authority from The Century Indemnity Company, nor any agent, servant or employee of The Century Indemnity Company. This admission was offered in evidence by The Century."

Alabama-Tennessee Natural Gas Company, in connection with its interpleader action, in securing bond required by court before entering an order enjoining creditors from further proceeding in the State court on their claims for materials furnished to Lehman-Hoge & Scott on the Tennessee River Crossing Contract, and expenses incurred by its attorneys and representatives in connection with the interpleader action, expended the amount of $1426.91. The attorneys of record for Alabama-Tennessee Natural Gas Company in the interpleader action are entitled to a reasonable attorneys' fee for preparing, filing and representing the Alabama-Tennessee Natural Gas Company in this interpleader action.

Conclusions of Law

The question for determination by the court is:

Which of the contestants, the United States, J. L. Head or The Century Indemnity Company has the superior right to the funds held by the register of this court?

The United States claims it has a prior lien to the fund for the Income, Withholding and F. I. C. A. taxes assessed against Lehman-Hoge & Scott. J. L. Head claims a superior right, arising from the letters and telegrams from Lehman-Hoge & Scott to Alabama-Tennessee Natural Gas Company. The Century Indemnity Company asserts that it has a prior lien and claim to the fund by virtue of the assignment to it by Lehman-Hoge & Scott in the application for the bond, at the time it executed by bond as Surety for Lehman-Hoge & Scott on the Tennessee River Crossing Contract. The Century contended that it has a superior lien over the other claimants under the basic law of suretyship, which gives a surety, who is called upon to make good under its contract of suretyship upon default of the principal, an equitable lien against any sum withheld as retained percentages in the hands of one for whose protection the bond was given. The Century also claimed that its right to said fund was superior to the rights of the United States and J. L. Head by virtue of its payments to creditors, and the decree of this court of July 13, 1953, subrogating it to the rights of creditors whose claims it had paid.

The taxes withheld by Lehman-Hoge & Scott from the wages of employees is a tax debt. Central Bank v. U. S. , 345 U. S. 639 [53-1 USTC ¶9408].

A surety who makes good under his contract of suretyship, upon default of the principal contractor, acquires an equitable lien upon the unpaid balance in the hands of the person in whose favor the bond runs, and such equitable lien, upon payment by the surety, relates back to the date of the contract of suretyship, although prior to the date of the payment by the surety. U. S. F. & G. Co. v. U. S., 201 Fed. (2d) 118 (10th) [53-1 USTC ¶9249]; Glenn v. American Surety Co., 160 Fed. (2d) 977 (6th) [47-1 USTC ¶9220]; New York Casualty Co. v. Zwerner, D. C., 58 Fed. Supp. 473 [45-1 USTC ¶9140]; General Casualty Company of America v. United States, 205 Fed. (2d) 753 (5th) [53-2 USTC ¶9483]; U. S. F. & G. Co. v. Triborough, 74 N. E. (2d) 226 [47-2 USTC ¶9327];American Fidelity Company v. Denis W. Delaney, Collector of Internal Revenue for the District of Massachusetts, et al., (U. S. District Court for the District of Vermont), 114 Fed. Supp. 702 [53-2 USTC ¶9620].

The assignment in the application for the bond by the principal to the surety has priority over the claim of the United States for taxes, which were not due the United States at the time of the assignment. Engleman v. Commodity Credit Corp., 107 Fed. Supp. 930.

[Assignment to Insurance Agency]

Lehman-Hoge & Scott, at the time of the attempted assignment to Head, had no right to have and receive any payment from Alabama-Tennessee Natural Gas Company as they had defaulted in the performance of the contract, had failed to pay for materials and supplies used up to the time of the default in the performance of the contract, hence had no right to assign any part of the balance under the contract to Head.Maryland Casualty Co. v. Dupree, 136 S. 811, 223 Ala. 420.

A road contractor's surety, completing work on contractor's default, with resultant expenditures of large sum, held entitled, by specific assignment, express terms of contract and general principles of law of subrogation, to amount payable on completion of work as against Bank which loaned money to contractor. Citizens Bank of Guntersville v. Pearson, 217 Ala. 391, 116 S. 350.

The surety's right to funds in the hands of the obligee, to the extent of the amount the surety was compelled to pay under the bond, was superior to the contractor's right to such funds, and superior to the right of the United States to such funds. The rights of the government could be no greater than those of the contractor. U. S. F. & G. Co. v. Triborough, 74 N. E. (2d) 226 [47-2 USTC ¶9327].

The assignment to The Century, contained in application for bond, and Century's equitable lien on retained percentages, and The Century's subrogation are not repugnant or inconsistent. There is nothing in the nature of an equitable lien which would prevent it from having its origin in such an assignment and subrogation. Exchange State Bank v. Federal Surety Co., 28 Fed. (2d) 485 (8th).

A surety does not assume the shoes of the debtor whose performance he assured--rather he takes the position of the creditor who has been satisfied by the surety. Lacy v. Maryland Casualty Co., (CCA 4th), 32 Fed. (2d) 48-51, 50 Am. Jur. Subrogation Section 110.

In view of the court's findings of facts and conclusions of law, the court rules that the lien and right of The Century Indemnity Company to the retained percentages so retained by Alabama-Tennessee Natural Gas Company under and in accordance with the terms and provisions of the contract with Lehman-Hoge & Scott, and paid into court by the obligee in the bond executed by The Century, as Surety, is prior to and superior to the claims and rights of the United States and J. L. Head, doing business as J. L. Head Insurance Agency.

The Century's claim to the fund is prior to and superior to the claims of the United States and of J. L. Head because of:

(1) Its equitable lien.

(2) The assignment of September 25, 1950 .

(3) By subrogation as ordered in decree of this court as of July 13, 1953 .

Judgment

It is, therefore, ordered, adjudged and decreed by the court:

(1) That the lien and claim of The Century Indemnity Company to the $30,589.34 paid to and held by the register of this court by the obligee in the bond executed by The Century Indemnity Company, as Surety, is prior to and superior to the claims and rights of the United States and of J. L. Head, doing business as J. L. Head Insurance Agency.

(2) The Alabama-Tennessee Natural Gas Company shall be paid out of said funds so held by the register of this court the sum of $1,426.91 to reimburse it for expenses incurred in this intervenor action.

(3) The attorneys of record for Alabama-Tennessee Natural Gas Company in the Intervenor Action are entitled to and shall be paid out of said funds so held by the register of this court the sum of $2,303.87, as attorneys' fees for representing Alabama-Tennessee Natural Gas Company in this action.

(4) The register shall deduct from said sum so held an amount equal to any unpaid court costs in this action and shall apply same to the payment of said costs.

(5) The Century Indemnity Company shall have and be paid the balance of said sum so held by the register of this court.

(6) The register of this court is directed to make distribution of said funds and make payments as herein provided.

 

 

[53-2 USTC ¶9620]American Fidelity Company v. Denis W. Delaney, Collector of Internal Revenue for the District of Massachusetts, John E. Burns, Deputy Collector In Charge, District of Massachusetts, et al.

In the United States District Court for the District of Vermont, 114 FSupp 702, September 8, 1953

Lien for taxes: Validity against mortgagees, etc.: Withholding and FICA taxes: Taxes withheld from employees.--Plaintiff, surety for a contractor who contracted to build a highway for the State of Vermont, paid the truckers, some bills for materials and the salary of the contractor's engineer. It was held that the surety's equitable lien was perfected prior to the filing of the tax liens by the United States and further that plaintiff was not liable, under the bonds given the State of Vermont, to the United States for contractor's failure to pay withholding and FICA (Federal Insurance Contributions Act) taxes, nor liable as an employer for taxes withheld from the employees of the contractor. As against Atlantic Corporation which made loans to the contractor, plaintiff was entitled to reimbursement for the salary paid to the contractor's engineer, the bill for gravel purchased by the contractor and a part of the attorney fees.

A. Luke Crispe, Brattleboro , Vt. , for plaintiff. Joseph A. McNamara, United States Attorney, Burlington , Vt. , for defendants Delaney and Burns. Joseph A. McNamara, United States Attorney, Frederick G. Rita, Assistant Attorney General, Washington, D. C., for the United States. Osmer C. Fitts, Brattleboro, Vt., Philip MacCausland, Essex Junction, Vt., for defendant Atlantic Corporation. Elliott Barber, Attorney General, Montpelier , Vt. , for the State of Vermont .

Statement of the Case

GIBSON, District Judge:

The American Fidelity Company, a Vermont corporation, filed a complaint against Denis W. Delaney, Collector of Internal Revenue for the District of Massachusetts, John E. Burns, Deputy Collector in Charge, District of Massachusetts, George E. Duteau, of Springfield , Massachusetts , and the Atlantic Corporation, a corporation organized and existing under the laws of the Commonwealth of Massachusetts .

Service was made on the United States by delivering the summons to the United States Attorney for the District of Vermont, and by sending copies by registered mail to the Attorney General of the United States and to the Commissioner of Internal Revenue, Washington, D. C. Service on the defendant George E. Duteau was made upon the authorized agent of said Duteau, and service on the Atlantic Corporation was made upon the Secretary of State of the State of Vermont, who was the duly authorized agent of the said Atlantic Corporation.

This complaint was answered by the Atlantic Corporation. Defendants Delaney and Burns each moved to dismiss for lack of jurisdiction. This motion was denied. The Plaintiff, shortly after the filing of its complaint, moved for leave to make the United States of America and the Department of Internal Revenue defendants in the action. This motion was granted. Shortly thereafter, the United States of America petitioned for leave to intervene, and upon leave being granted, filed its complaint in intervention. Both the plaintiff and Atlantic Corporation make answer to the intervener's complaint. With issue thus joined, the intervener moved for the dismissal of the original complaint as against Delaney, Burns and the Department of Internal Revenue. This motion was granted. The plaintiff then moved to join the State of Vermont and David V. Anderson, its Auditor of Accounts, as parties defendant. This motion was granted. Service of the motion and of the order granting the motion were accepted by the Attorney General of the State of Vermont , who also filed an answer to the complaint of the plaintiff. The Attorney General of the State of Vermont did not, however, appear at the trial and present any evidence.

Thus at the time of the hearing, the parties to this action were the American Fidelity Company as plaintiff, George E. Duteau and the Atlantic Corporation as defendants, the United States of America as an intervener, and the State of Vermont and David V. Anderson, its Auditor of Accounts, as defendants, these last two being in the nature of stakeholders. The defendant Duteau having filed no answer, the complaint as to him was taken as confessed. In effect, this action is brought by the plaintiff for judgment declaratory of the rights of the parties with respect to a certain fund held by the State of Vermont respecting the final payment upon a contract for road work between the defendant Duteau and the State of Vermont .

[Issues]

The basic issues here to be decided are:

1. Was the American Fidelity Company liable to the United States under its surety bonds for withholding and FICA taxes withheld by the defendant Duteau from the wages of his employees but not paid to the United States ?

2. Were the liens of the United States for the income, withholding and FICA taxes assessed against defendant Duteau entitled to priority over the American Fidelity Company and defendant Atlantic Corporation?

3. Was American Fidelity Company liable for taxes withheld from the employees of the defendant Duteau as an employer under Section 1621(d)(1) of the Internal Revenue Code?

4. If plaintiff is entitled to be reimbursed, how much is it entitled to and how much is the defendant Atlantic Corporation entitled to, if any?

Findings of Fact

A hearing was held in this matter at Brattleboro , Vermont , on the first day of June, 1953, and upon consideration of the pleadings, the stipulation as to agreed facts and evidence, I find the following facts:

1. The plaintiff was and is a corporation existing under the laws of the State of Vermont .

2. The former defendant, Denis W. Delaney, at the time of the filing of the complaint, was the United States Collector of Internal Revenue for the District of Massachusetts, and the former defendant John E. Burns was the Deputy Collector in charge of the United States Internal Revenue District of Massachusetts. Subsequent to the bringing of the complaint, the defendant Delaney ceased being the United States Collector of Internal Revenue for the District of Massachusetts, and since the United States has become an intervening party, the complaint as to Messrs. Delaney and Burns has been dismissed.

3. The defendant George E. Duteau is a resident of Springfield , Massachusetts , and was and is engaged in the general contracting business.

4. The defendant Atlantic Corporation was and is a corporation organized and existing under the laws of the Commonwealth of Massachusetts .

5. On June 10, 1949 , the defendant George E. Duteau contracted with the Vermont State Highway Department and the Vermont Highway Board, under the terms of which contract he was to construct a highway from Jamaica to Winhall , Vermont , for the sum of $310,625.78.

6. The laws of the State of Vermont (Vermont Statutes, Revision of 1947, Section 4909, subsections IV and V) and the regulations of the State Highway Department required said Duteau, as a contracting party, to furnish contract bonds to the State of Vermont and the Commissioner of Highways for the State of Vermont . Such bonds were filed, each in the amount of $155,312.89.

The condition of the first bond, commonly known as a Performance Bond, read as follows:

"NOW, THEREFORE, THE CONDITION OF THE ABOVE OBLIGATION IS SUCH that, if the above bounden principal and his subcontractors and his or their agents and servants shall well and truly keep, do and perform, each and every, all and singular the matters and things in said contract set forth and specified to be by the said Principal kept, done and performed at the time and in the manner in said contract specified and stall pay over, make good and reimburse the State of Vermont all loss or losses and damage or damages which the above named Obligee, the State of Vermont, may sustain by reason of failure or default on the part of the Principal or his subcontractors, or his or their agents and servants, to fully carry out the terms of said contract, then this obligation shall be void; otherwise, to be and remain in full force and effect."

The condition of the second bond, commonly known as a Wages and Material Bond, read as follows:

"NOW, THEREFORE, THE CONDITION OF THE ABOVE OBLIGATION IS SUCH that, if the above bounden Principal shall pay, settle, liquidate and discharge the claims of all creditors for material, merchandise, transportation, labor, rent, hire of vehicles, power shovels, rollers, concrete mixers, tools, and other appliances used or employed in carrying out the terms of said contract between said Principal and the State of Vermont, and shall pay all taxes, both State and municipal, and contributions to the Vermont Unemployment Compensation Commission accruing buring the term of performance of said contract, this agreement to make such payment being in compliance with the requirements of Section 4909 of the Vermont Statutes to furnish security thereunder, and being in fact such security, then this obligation shall be void; otherwise, to be and remain in full force and effect."

Accordingly, said defendant Duteau, on the 7th of June, 1949 , signed contract bonds with the plaintiff, as hereinbefore described, and filed them with proper officials of the State of Vermont .

[Agreement Between Contractor and Plaintiff]

7. In arranging for these contract bonds, defendant Duteau, in his application for the bonds and as a consideration for the plaintiff becoming his bondsman, agreed, amongst other things, as follows:

"That the said company, as surety on said bond, as of this date shall be subrogated to all rights, privileges and properties of the indemnator in said contract, and said indemnator do hereby assign, transfer, and convey to said company all the deferred payments and retained percentages arising out of this contract, and any and all monies and properties that may be due and payable to said indemnator, and the balance of the contract price remaining unpaid at the time of the happening of any of the occurrences mentioned in the first paragraph of the next preceding section or that may thereafter become due and payable to said indemnator on account of this contract or on account of extra work or materials supplied in connection therewith hereby agreeing that all such monies and the proceeds of such payments and properties shall be the sole property of the said company, and to be by it credited upon any loss, damage, charge, and expense (of whatever kind or nature, including premium charges) sustained or incurred by it under any bond of suretyship it was executed for the undersigned indemnator."

8. Notice of this assignment hereinbefore described was given by the plaintiff to defendant State of Vermont and its Highway Department on the 28th of June, 1949 .

9. Sometime in June, 1949, the defendant George E. Duteau commenced construction of the highway project running from Jamaica to Winhall. In early 1950 the plaintiff was notified by the Commissioner of Highways of the State of Vermont that defendant George Duteau was having financial difficulty; was having trouble with his truckers and certain materialmen; and had some threatened labor disputes and that this was impeding the proper construction of the highway which Duteau had contracted to build.

10. Thereafter, sometime towards the last of June, 1950, the plaintiff, through its agents, having investigated this complaint, agreed with the Highway Department and defendant Duteau that the plaintiff would pay certain truckers who were independent contractors, and some other bills for materials but it was to have nothing to do with the payrolls and it would not pay any of the employees of defendant Duteau who were working on the road. It did not maintain any control of any kind over the employees, nor did it control who would or would not be employees. It did not advance payroll money. In return for this agreement of the plaintiff to pay certain truckers for amounts due them by defendant Duteau and take care of future payments to certain truckers for work to be performed in the construction of this highway and to pay certain other miscellaneous bills, the Commissioner of Highways agreed to give all checks and state vouchers due said defendant Duteau to the plaintiff, that it might be reimbursed for moneys advanced by it, all as provided for in the assignment above recited, and this was subsequently done. However, the plaintiff advanced $18,523.94 more than it was reimbursed.

11. After this agreement was made in the latter part of June, 1950, work on the highway continued. However, the Commissioner of Highways, after investigation, objected to the manner of construction and so notified defendant Duteau. As a result of these objections, the Highway Commissioner notified defendant Duteau, in substance, that it was very doubtful if the road construction would be accepted by the State of Vermont unless the then man in charge of the construction, namely, George Duteau, Sr., father of defendant Duteau, was removed from his position as Construction Superintendent and a competent engineer put in. The Commissioner of Highways likewise so notified the plaintiff. As a result of this the plaintiff arranged to secure the services of one Kenneth Jones to be the Supervising Engineer on the job for the purpose of getting the job completed and accepted. Although engineer Jones was actually picked by the plaintiff as a competent Supervising Engineer and although he was paid by the plaintiff, he actually took over the work as Supervising Engineer of the project at the request of and with the full consent of the defendant Duteau. Defendant Duteau removed his own father, Mr. Duteau, Sr., from the post of Supervising Engineer and installed Mr. Jones in it. Mr. Jones, the engineer, was actually paid the sum of $1,200.00 by the plaintiff for his work as Supervising Engineer from the time he took over, early in November, 1950, until the project was completed and the highway accepted. The plaintiff has not been reimbursed for this amount by the defendant Duteau, although it seeks such reimbursement. However, from the first of November, 1950, when said engineer Jones was first employed as Superintendent, until the acceptance of the project by the State of Vermont, all payrolls, except the $1,200.00 item hereinbefore listed, were paid by defendant Duteau and said defendant Duteau had the same control and supervision over this project as he exercised when his father, George Duteau, Sr., was Superintendent. The job was finally completed and the work accepted on about December 12, 1950 . After its completion and acceptance, the Commissioner of Highways caused the job to be sectioned, as required by the rules and regulations of the Highway Department, and thereafter issued to defendant Duteau and to the plaintiff its final statement of work done and materials used under the constructions contract hereinbefore referred to. This final statement showed a balance due from the State of Vermont , through its Department of Highways, in the amount of $25,229.09.

12. After the receipt of the final statement, and before any tax lien was filed, the plaintiff made requests upon the Department of Highways for the payment to it of the $18,523.94, which it claimed was the amount necessary to reimburse the plaintiff for moneys which it had expended, itemized as follows:

Paid by plaintiff to material men and

truckers .....................................         $15,023.30

Paid by plaintiff to Kenneth Jones

for his services as Supervising Engineer .....           1,200.00

Paid by it to its attorney, A. Luke

Crispe, for services rendered by

him in negotiating the adjustment

of the truckers' claims against defendant

Duteau, and for various

negotiations with the 

Vermont
 
State

Highway Department which were

made necessary because of the

Highway Department's dissatisfaction

with the progress and type of

work on this highway .........................           1,930.38

For services and expenses of said

Attorney Crispe in defending defendant

Duteau at the request of

the plaintiff in the lawsuit brought

by one Janet Hoadley Jacques for

gravel .......................................             370.26

                                                       $18,523.94

 

13. On May 11, 1951, the State Highway Board, not disputing the fact that the plaintiff had advanced the sums demanded by it, refused to turn over this sum upon the ground that there existed a controversy between the Vermont Highway Department and defendant Duteau over the amount due from the State of Vermont to said defendant Duteau under the construction contract.

[Collector Intervened]

14. On the 14th of May, 1951, the intervener United States, through John E. Burns, then Deputy Collector in charge of the United States Internal Revenue for the District of Massachusetts, caused notice of a tax lien under the Internal Revenue laws to be filed, in which it now claims a balance due the United States from said defendant Duteau in the amount of $26,404.17. These taxes are broken down as follows:

15. After the filing of this tax notice, the plaintiff was notified by the Highway Department that no payments would be made to the plaintiff or any other person until a final disposition and adjudication had been made of the priority and validity of this tax lien.

16. The law of Vermont provides, as I have stated, that a prime contractor in a case such as this must file a surety bond for the benefit of labor and material men, as was done here. However, in order to obtain the benefit of such security, a claimant must file with the Commissioner of Highways a sworn statement of his claim after the claimant ceases to perform labor or furnish labor, materials, appliances and equipment as aforesaid, or within ninety days from the time such taxes or contributions to the Vermont Unemployment Compensation Commission are due and payable. At no time did the defendant United States of America or any of its representatives ever file any such sworn statement as to taxes alleged due to the United States from defendant Duteau arising out of this highway contract.

17. Of the taxes as assessed against defendant Duteau, the following are attributable to the highway contracts hereinbefore referred to:

Withheld Taxes

5/14/50-7/2/50 ....         $1,743.47

7/9/50-9/24/50 ....          2,488.76

9/30/50-12/3/50 ...            807.50

                            $5,039.73

F. I. C. A. Taxes

                               Employer          Employee

5/14/50-7/2/50 .......          $294.65          $ 294.65

7/9/50-9/24/50 .......           418.73            418.73

9/30/50-12/3/50 ......           100.05            100.05

                                $813.43          $ 813.43

Withheld taxes .......                          $5,039.73

F. I. C. A. taxes ....                           1,626.86

Total ................                          $6,666.59

[Assignment to Atlantic Corp.]

18. On or about July 14, 1950, the defendant Duteau executed and delivered to the defendant Atlantic Corporation an assignment of all moneys due and to become due under the contract for the construction of a highway between Jamaica and Winhall, less the amount of moneys advanced or paid or agreed upon for payment by the plaintiff under its Compliance Bond. This assignment reads as follows:

"For value received, I, George E. Duteau, of 1125 Page Boulevard, Springfield, Mass., hereby assign, transfer and set over unto Atlantic Corporation, 338 Park Square Building, Boston 16, Massachusetts, all monies now due or to become due to me, (less the amount of money advanced or paid or agreed upon for payment by the American Fidelity Co. to pay bills on the contracts bonded by them) from, or payable to me by, State of Vermont, under its contract dated June 7, 1949 in the amount of $310,625.75, for construction of highway in the Towns of Jamaica, Winhall, Vermont, as general collateral security for money advanced to me today by said Atlantic Corporation, together with interest and finance charges thereon, and also for all debts and liabilities whatsoever, past, present and future, of mine to said Atlantic Corporation, direct, indirect, contingent, joint or several; with full power and authority to sue for, collect, receive, adjust, and compromise any and all of the same.

"If said amount or any parts thereof shall be paid directly to me, then I shall hold all such payments and receipts in trust for said Atlantic Corporation and turn the same over to it promptly and in the same checks, drafts, orders or cash in which the same are received by me.

"Signed and Sealed, in triplicate, this 14th day of July, 1950.

s/ George E. Duteau

Witness:

s/ G. Rosenbaum

" July 14, 1950

Atlantic Corporation

Boston , Massachusetts

"We herewith accept and assent to the above referred to assignment and agree to turn over to you all monies received by us on the above contract less the amount of money advanced or paid or agreed upon for payment by us for bills on the contracts bonded by us; but any surplus of funds on the Jamaica-Winhall, Vermont contract over the monies advanced or paid or agreed upon for payment by us, will be turned over to you to the extent of fully reimbursing you for all monies loaned to George E. Duteau to cover payrolls on said Jamaica-Winhall, Vt. contract, providing such procedure is agreeable to the assignee, regardless of our obligations on other bonds for George E. Duteau. Any funds not necessary to reimburse you for said payrolls may be retained by us for our protection on such other obligations.

AMERICAN FIDELITY COMPANY

By: s/ Clark B. Bristol

Vice President"

[ Atlantic 's Loans to Contractor]

19. That thereafter the defendant Atlantic Corporation loaned to defendant Duteau $33,279.50 to pay net payrolls, or, in other words, the take-home pay of the employees of defendant Duteau who were working on the Jamaica-Winhall highway project. Defendant Duteau still owes the defendant Atlantic Corporation $33,279.50, which is the amount loaned to defendant Duteau by defendant Atlantic Corporation for the take-home pay of the employees on the Jamaica-Winhall highway project.

20. There is due from the State of Vermont the sum of $25,229.09 under the terms of the contract of June 10, 1949 , between defendant Duteau and the Vermont State Highway Department and the Vermont Highway Board. This sum is now due and has been due for some time, but the State of Vermont has refused to pay this sum to anyone until a final disposition or adjudication had been made regarding the priority and validity of the tax lien of the United States . The State of Vermont has further refused to issue any check or voucher to the plaintiff or anyone else.

21. The defendant Atlantic Corporation claims and agrees that $15,023.30 is due the plaintiff as claimed by the plaintiff, but disputes the following items of the plaintiff's $18,523.94 claim:

(a) $1,200.00 paid by it to Kenneth Jones as the Supervising Engineer to finish the highway job and secure its acceptance;

(b) $1,930.38 paid by it to its attorney, A. Luke Crispe, for services rendered by him in negotiating the adjustment of the truckers' claims against defendant Duteau, and for various negotiations with the Vermont State Highway Department which were made necessary because of the Highway Department's dissatisfaction with the progress and type of work on this highway.

(c) $370.26 for services and expenses of said Attorney Crispe in defending Duteau at the request of the plaintiff in the lawsuit brought by one Janet Hoadley Jacques for gravel.

Conclusion of Law

The first question presented is this: Were the liens of the defendant United States for the income, withholding and FICA taxes assessed against defendant Duteau entitled to priority over the American Fidelity Company and defendant Atlantic Corporation?

The question is--Which of the contestants possessed a superior right to the funds held by the State of Vermont ? The plaintiff asserts a lien in its favor which it claims originated on May 6, 1949 . The defendant United States claims that it has a priority lien over the plaintiff's lien because of its tax lien notice filed in May of 1951. The defendant Atlantic Corporation supports the plaintiff's contention since, if the plaintiff's lien has priority over the United States ' lien, its own lien, too, will have priority over the United States ' lien.

It is the contention of the United States that the plaintiff's lien was at best an inchoate right which hadn't been perfected; that if it did attach to anything, it attached to the funds which remained in the hands of the State of Vermont after the final "sectioning" or accounting by its Highway Department; that by the theory of subrogation, the plaintiff gained only such rights as defendant Duteau had.

These arguments seem clearly untenable. The contract of suretyship which contained the subrogation agreement was signed by Duteau on June 7, 1949 . On the 28th of June, 1949 , notice of this subrogation assignment was filed with the Highway Department of the State of Vermont . Starting in June of 1950, the plaintiff advanced moneys under its contract of suretyship. It continued to make such advances until the construction job was completed and approved by the State of Vermont in December of 1950. Some time after this approval, but before May 14, 1951 , the State of Vermont computed and ascertained the balance due and payable under the contract. And finally, on May 14, 1951 , the United States filed notice of its tax lien.

It seems basic to the law of suretyship that a surety who is called upon and makes good under its contract of suretyship upon default of its principal, or to prevent its principal being defaulted, acquires an equitable lien against any sum remaining in the hands of the one for whose protection the bond was given. Aetna Life Ins. Co. v. Middleport, 124