Surety's Interest Page4

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The facts in the instant case present a different situation. Steelcraft was the principal on the payment bond executed to the Commodity Credit Corporation with Fireman's Fund Indemnity Company as surety, and is therefore liable for the unpaid material bills as principal upon this bond under the Miller Act. In United States Fidelity and Guaranty Co. v. United States , 10 Cir., 201 Fed. (2d) 118, 121 [53-1 USTC ¶9249], the court said:

"On the date of the execution of the subcontract, the prime contractor had a specific right of ownership in any funds accruing to the subcontractor from the performance of the subcontract. The right to withhold these funds upon default was superior to any other claim against the fund as the property of the subcontractor."

This specific right of ownership has even been held to extend to interest on the sums expended by a surety. Glenn v. American Surety Co., 6 Cir., 160 Fed. (2d) 977 [47-1 USTC ¶9220]. Steelcraft as the principal on the bond had a definite ownership in the amount due Hewkin for a specific amount at all times. Steelcraft retained the ownership of the funds to be paid to Hewkin until the contract was fully performed. This amount was determinable by deducting from the subcontract price the amount which Steelcraft had advanced to Hewkin from time to time as the work progressed. Since Steelcraft is liable under the Miller Act to the materialmen for their unpaid bills it was entitled to retain sufficient funds to reimburse itself, based upon its prior right of ownership which existed from the inception of the subcontract. United States Fidelity and Guaranty Co. v. United States, supra; Glenn v. American Surety Co., supra. See also General Casualty Co. of America v. United States, 5 Cir., 205 Fed. (2d) 753 [53-2 USTC ¶9483]; Karno-Smith Co. v. Maloney, 3 Cir., 112 Fed. (2d) 690 [40-2 USTC ¶9533]; In re Caswell Const. Co., Inc., N. D. N. Y., 13 Fed. (2d) 667 [1 USTC ¶189]; American Fidelity Co. v. Delaney, D. Vt., 114 Fed. Supp. 702 [53-2 USTC ¶9620]; Great American Indemnity Co. v. United States, W. D. La. , 120 Fed. Supp. 445 [54-2 USTC ¶9469]; New York Casualty Co. v. Zwerner, N. D. Ill., E. D., 58 Fed. Supp. 473 [45-1 USTC ¶9140].

The terms of the contract obligated Hewkin to "furnish all materials and supplies," thereby creating an implied condition of the subcontract that the materialmen would be paid. Houston Fire and Casualty Insurance Co. v. E. E. Cloer, 5 Cir., 217 Fed. (2d) 506; United States v. United States Fidelity and Guaranty Co., 2 Cir., 113 Fed. (2d) 888. The materialmen are thus third-party beneficiaries of Steelcraft's specific ownership in the amount due Hewkin derived by and from the date of the subcontract. The government's claim is based upon the failure of Hewkin to pay his taxes and he and his property alone are liable for their payment. See Central Bank v. United States, 345 U. S. 639 [53-1 USTC ¶9408]. Steelcraft is not liable for the payment of Hewkin's taxes to the government. United States v. Crosland Const. Co., 4 Cir., 217 Fed. (2d) 275 [55-1 USTC ¶9112]. See Great American Indemnity Co. v. United States , supra. Since Hewkin was not entitled to receive payment until be complied with his subcontract he had no right of ownership in the amount still due and the lien of the government never attached to this fund. The rights of the government rose no higher than those of the taxpayer whose right to the withheld sum never accrued. Great American Indemnity Co. v. United States, supra; F. H. McGraw & Co. v. Sherman Plastering Co., D. C. Conn., 60 Fed. Supp. 504, affirmed 2 Cir., F. H. McGraw & Co. v. Milcor Steel Co., 149 Fed. (2d) 301, cert. denied 326 U. S. 753. To hold otherwise would impose upon Steelcraft double liability, that is, to the government and the unpaid materialmen. This would be inequitable. See Karno-Smith Co. v. Maloney, 3 Cir., 112 Fed. (2d) 690 [40-2 USTC ¶9533].

The bank contends that its assignment is superior to the claim of the materialmen. Steelcraft acknowledged the assignment but it is obvious that Hewkin thereby intended to assign only his profit to be received under the subcontract. See Mueller v. Northwestern University, 195 Ill. 256. Furthermore, the bank could stand in no better position against Steelcraft than Hewkin, its assignee. Reeve v. Smith, 113 Ill. 47; Angelina County Lumber Co. v. Michigan Cent. R. Co., 252 Ill. App. 32.

The bank does have priority over the tax claim of the government. This is not disputed by the government. The assignment to the bank was executed long before the government's taxes were assessed. By virtue of 26 U. S. C. A. 6323 (formerly 3672) the bank is a purchaser to the extent of the amount it advanced to Hewkin as present consideration for the assignment. National Refining Co. v. United States , 8 Cir., 160 Fed. (2d) 951 [47-1 USTC ¶9221]. Cf. Scovil v. United States , 348 U. S. 218 [55-1 USTC ¶9137]; R. F. Ball Construction Co. v. Jacobs, W. D. Texas, 140 Fed. Supp. 60 [56-1 USTC ¶9514].

This court therefore concludes that Steelcraft is entitled to an order that it be discharged upon the payment of $15,361.51 into this court and the materialmen are entitled to be paid their claims. The balance remaining after the payment of these claims of the materialmen must be paid to the bank. Since this absorbs the entire fund withheld there is nothing to be paid to the government on withholding taxes.

Findings of fact, conclusions of law and final order may be submitted.

 

 

[55-1 USTC ¶9407]United States of America, for the use and benefit of F. J. Gregg and W. L. Budlong; R. Hugh Haynes, trading as Service Plumbing and Heating Company; W. A. Browne, trading as Cavalier Electric Company; R. Lee White, trading as Lee White Hardware Company, Plaintiff v. Seaboard Engineering Corporation and U. S. Casualty Company, a New York Corporation, Defendants

In the United States District Court for the Eastern District of Virginia, Newport News Division, Consolidated Civil No. 344, March 5, 1955

[1939 Code Sec. 3672--similar to 1954 Code Sec. 6323]

Collection of taxes: Liability of surety under Miller Act payment bond.--The government was not entitled to recover from the taxpayer, a surety under two payment bonds which it had executed pursuant to the so-called Miller Act and in connection with two federal construction contracts between its principal and the government, Federal income withholding taxes and Federal Insurance Contributions Act taxes which were unpaid and owing by its principal. Such taxes were not within the coverage of the Miller Act payment bonds since the bonds merely promised that taxpayer's principal would promptly pay all persons furnishing labor or materials for use in the performance of the construction contracts. The decision by CA-4 in U. S. v. Crosland Construction Co., Inc. et al., 217 Fed. (2d) 275, 55-1 USTC ¶9112, was followed. [Note: The District Court's prior memorandum opinion in this case (54-2 USTC ¶9605) reached a contrary decision, but since the same issue was on appeal to CA-4 in the Crosland case, the parties stipulated that entry of judgment should await the decision of CA-4 in Crosland and an order continuing the case was so entered. Accordingly, since the District Court entered judgment for the taxpayer in accordance with the Crosland case, its prior memorandum opinion is of no effect.]

John M. Hollis, Assistant United States Attorney, Norfolk , Va. , for United States . Richard Newman, Melson Building , Newport News , Va. , for plaintiff. Maurice B. Shapero, Bank of Commerce Building , Norfolk , Va. , and E. Sclater Montague , First National Bank Building , Newport News , Va. , for United States Casualty Corp. and Seaboard Engineering Corp.

Judgment Order

WILKIN, District Judge:

This cause was referred on February 10, 1953 , to Special Master Rob ert M. Saunders who, after taking testimony filed his report of April 1, 1954 .

It was found, among other things, by the Special Master that the United States Casualty Company (hereinafter sometimes called Casualty Company) was liable on two payment bonds that it had executed as surety in connection with two federal construction contracts between the Seaboard Engineering Corporation and the United States . These payment bonds were furnished in accordance with the Act of August 24, 1935 , c. 642, 49 Stat. 793, the so-called Miller Act, and the condition or promise of each bond was that Seaboard Engineering Corporation would promptly pay all persons furnishing labor or materials for use in the performance of these construction contracts.

In the proceedings before the Special Master the United States asserted claims against the Casualty Company on its two payment bonds for federal income withholding taxes and the employees' portion of Federal Insurance Contributions Act taxes assessed against and owed by Seaboard Engineering Corporation for the second quarter of 1952. These taxes arose out of the performance of the two federal construction contracts covered by the payment bonds.

The Special Master refused to allow the claims of the United States on the ground that these claims were not within the coverage of the payment bonds excepted by the Casualty Company. The United States filed an exception to this portion of the report of the Special Master. Oral argument was heard on this exception on July 21, 1954 , and briefs were thereafter submitted.

Thereafter, on September 3, 1954, the court rendered its Memo Opinion [54-2 USTC ¶9605] in which it expressed the view that the claims by the United States asserted in this proceeding were within the coverage of a Miller Act payment bond and in said memorandum of said date announced that in its opinion the United States was entitled to recover from the Casualty Company.

Inasmuch as similar issues to those asserted in this case were then in process of adjudication before the United States Circuit Court of Appeals, Fourth Circuit, in the matter of United States of America, Appellant v. Crosland Construction Company, Inc., Pacific Employers Insurance Company, and American Indemnity Company, Appellees, Case No. 6891 [55-1 USTC ¶9112], the following was stipulated by counsel for both the United States of America and counsel for Seaboard Engineering Corporation and U. S. Casualty Company, a New York corporation, and said stipulation was filed by Order of this Court among the papers in this cause in the following words and figures, to-wit:

"STIPULATION

"It is hereby agreed and stipulated by the undersigned attorneys for the United States and the United States Casualty Company that entry of judgment in the above-entitled cause shall not be made until after the decision of the Court of Appeals in United States v. Crosland Construction Company now pending on appeal. It is further stipulated that in event any judgment is entered for the United States it shall bear interest from September 3, 1954 ."

Simultaneously with the filing of the foregoing Stipulation, the Court entered an Order in the following words, to-wit:

"ORDER

"This day came the United States of America and U. S. Casualty Company, a New York Corporation, by counsel, and submitted at the bar of the court a STIPULATION IN WRITING, which is herewith ordered filed, and pursuant to said stipulation it is ORDERED that this proceeding be continued generally until the further Order of this Court."

Thereafter, on the 1st day of December, 1954, the United States Circuit Court of Appeals, Fourth Circuit, rendered its decision in United States of America, Appellant v. Crosland Construction Company, Inc., Pacific Employers Insurance Company, and American Indemnity Company, Appellees, 217 Fed. (2d) 275 [55-1 USTC ¶9112], holding: "Though measured by the amount of wages, the money due the United States was owing as taxes and not as wages. Such a claim is not covered by the bond in this case."

In accordance with the announced decisions of the Tenth Circuit, the Ninth Circuit, the Fifth Circuit and the Fourth Circuit, the Court reverses its memo opinion rendered on September 3, 1954 in this proceeding and concludes that the claims by the United States of America for federal income withholding taxes and the employees' portion of Federal Insurance Contributions Act taxes are not within the coverage of the Miller Act payment bond and, therefore, the United States is not entitled to recover in this proceeding.

Accordingly, it is further ORDERED that the report of the Special Master be approved and confirmed.

WHEREFORE, it is hereby ORDERED, ADJUDGED and DECREED that judgment be entered in favor of the defendant, U. S. Casualty Company, a New York corporation.

 

 

[54-1 USTC ¶9404] United States of America , Plaintiff v. Crosland Construction Company, Inc., Pacific Employers Insurance Company and American Indemnity Company, Defendants

In the United States District Court for the Eastern District of South Carolina, Columbia Division, C. A. 3580, 120 FSupp 792, April 30, 1954

Collection of taxes: Liens: Priority of surety's interest.--Sureties of taxpayer paid the sub-contractors whom taxpayer had not fully compensated. The court held that surety's liens thus arising on amounts due the taxpayer on the indemnified contract relate back to the date of the contract between the contractor and the hospital, as the surety has all the rights of his principal. Such lien was prior in time over the government's tax lien which was perfected after the contract had been performed.

Collection of taxes: Liens: Priority to assigned funds.--Sureties, holding an assignment from the taxpayer for amounts due to the taxpayer on a contract which sureties indemnified, have priority over the government's tax lien by reason of the assignment, which was delivered according to the provisions of the application for the contract bond.

Collection of taxes: Federal Priority Statute.--Taxpayer's sureties, who had paid off taxpayer's obligations to sub-contractors, are not subject to the Federal Priority Statute, R. S. 3466, as taxpayer must be in bankruptcy proceedings for that statute to apply. Here the taxpayer was insolvent but not in bankruptcy.

Collection of taxes: Liens: Liability of sureties.--Sureties were held not to have insured the collection of taxes owing by taxpayer, when they indemnified "wages" to be collected from taxpayer. Sums withheld from wages of employees of taxpayer do not constitute "wages" within the meaning of the surety contract.

N. Welch Morrisette, Jr. for plaintiff. Cooper, Gary , Whaley and McCutchen, Columbia , S. C., for defendants.

Opinion and Order

WYCHE, District Judge:

This action was instituted on February 24, 1953, by the United States of America for unpaid taxes due it by the defendant Crosland Construction Company, Inc. for income withholding taxes for the third and fourth quarter-year periods (periods ending September 30th and December 31st) of 1950, for all four quarter-year periods of 1951, for federal insurance contributions taxes for the third quarter-year period (period ending September 30th) of 1950, and for federal unemployment taxes for the years 1949, and 1950. The total amount of taxes claimed to be owing the Government by the taxpayer, including interest and penalties, is Thirty-Seven Thousand, Three Hundred Ninety and 41/100 ($37,390.41) Dollars. By its amended answer, the taxpayer denies any tax liability in excess of Thirty-Two Thousand, Three Hundred, Eighty-Two and 95/100 ($32.382.95) Dollars, including interest and penalties. The defendants Pacific Employers Insurance Company and American Indemnity Company are sureties on the taxpayer's performance bond issued pursuant to a construction contract between taxpayer and the Newberry County Memorial Hospital , Newberry , South Carolina . The construction contract was entered into June 10, 1949 , in the amount of Two Hundred, Twenty-Four Thousand, Seven Hundred One and no/100 ($224,701.00) Dollars. The taxpayer and the sureties entered into a performance bond bearing date of June 29, 1949 . The taxpayer's application for contract bond bears date of July 6, 1949 . Of the total taxes due the Government, only Two Thousand, Four Hundred Eighty-Four and 31/100 ($2,484.31) Dollars, arise from performance of the hospital contract; the remainder is from other construction contracts performed by the taxpayer during the same or at about the same time as the hospital contract.

It does not appear that the sureties were involved in any job other than the Newberry Hospital . The taxpayer answered the complaint and subsequently filed an amended answer which admits its liability for taxes in the amount of Thirty-Two Thousand, Three Hundred Eighty-Two and 95/100 ($32,382.95) Dollars, but denies liability for any amount in excess of that sum. Taxpayer further denies any liability on the part of the sureties for any taxpayer's unpaid taxes, on their performance bond or otherwise.

The sureties served notice of a motion for an order dismissing the complaint as to them on the ground that it failed to state a claim upon which relief could be granted. Subsequently, the Government moved for leave to amend its complaint, which motion was granted in an order of the court dated December 2, 1953 , with leave to the defendants to file amended answers, motions, or to otherwise plead to the complaint as amended. Thereafter the sureties amended their previous motion to dismiss by filing an amendment thereto.

The case is now before me upon the amended motion of the sureties to dismiss. Arguments were based on the pleadings and affidavits submitted by the parties. The affidavits having been made a part of the record and having been considered by the court, I stated that the motion to dismiss on behalf of the sureties would be treated as a motion for summary judgment under Rule 12(b); no objection was made thereto by any party and the motion will be so treated.

The Collector of Internal Revenue received the assessment lists for withholding taxes as follows:

                       Assessment             Notice

Period Ended           List Rec'd         and Demand

9-30-50
                  
12-14-50
           
12-27-50

12-31-50
                  
4-16-51
            
4-20-51

3-31-51
                   
5-17-51
             
6-6-51

6-30-51
                   
9-19-51
            
9-25-51

9-30-51
                    
1-3-52
             
1-3-52

12-31-51
                  
3-13-52
            
3-14-52

 

The Collector of Internal Revenue received the assessment list for federal insurance contributions taxes on December 14, 1950 , notice and demand for payment being made on December 27, 1950 .

The Collector of Internal Revenue received the assessment lists for federal unemployment taxes for 1949, on March 19, 1951 , and for 1950, on April 7 1952 .

The Government filed notices of tax liens for the unpaid taxes on July 20, 1951 (for $29,782.72) and January 9, 1952 , (for $8,501.65) in the offices of the Clerk of Court, Richland County , Columbia , South Carolina , and the Clerk of Court, United States District Court, Eastern District of South Carolina, Charleston , South Carolina .

On January 5, 1952, and long after construction on the hospital contract had been completed, the taxpayer executed a written assignment to the sureties of retained percentages or sums due taxpayer on the hospital contract, in consideration of the sureties' payment of certain outstanding claims of materialmen and sub-contractors against the taxpayer incurred in the performance of the hospital contract. These claims were paid by the sureties, which they were obligated to do under their bond, and they suffered losses thereby in excess of Three Thousand ($3,000.00) Dollars, over and above the amount of the retainage. All work had been completed on the Newberry Hospital before January 5, 1952 ; the sureties did not supervise any work or complete the same.

On January 10, 1952 , the Government served a levy on the Newberry County Memorial Hospital for payment of Forty Thousand, One Hundred Ninety-Eight and 63/100 ($40,198.63) Dollars, in taxes claimed due by taxpayer. The total amount then remaining unpaid under the construction contract was Twenty-Four Thousand, One Hundred, Eighty-Seven and 35/100 ($24,187.35) Dollars. This amount was paid to the sureties by the hospital on November 6, 1952 , by reason of the assignment of January 5, 1952 .

The Government claims it has a lien under Title 26 USCA Sections 3670, 3671, 3672 and related sections, on the Twenty-Four Thousand, One Hundred, Eighty-Seven and 35/100 ($24,187.35) Dollars, assigned to the sureties by taxpayer and paid to them by the hospital, superior to the written assignment or any lien or claim of the sureties to this sum. The Government also asserts that even without a prior and superior lien under the statutes, it is entitled to priority in payment over the sureties by reason of the so-called "priority" statute (Section 3466 R. S., 31 USCA Section 191). In addition, the Government claims the sureties are liable on their performance bond in the amount of Two Thousand, Four Hundred, Eighty-Four and 31/100 ($2,484.31) Dollars, for the taxes owed by taxpayer from performance of the hospital contract.

The Government has a lien on all property of the taxpayer by statute. 26 USCA 3670. The lien arose at the time the assessment lists were received by the Collector. 26 USCA 3671. The first assessment lists received by the Collector were those received on December 14, 1950 .

By paying the materialmen and sub-contractors on the hospital contract, upon the taxpayer's inability to pay, the sureties did what they were required to do under their performance bond. The assignment of January 5, 1952 , was executed and thereafter the sureties paid the materialmen and sub-contractors. But even without the assignment of January 5, 1952 , the sureties were required to satisfy the claims of these unpaid materialmen and sub-contractors under the terms of the performance bond.

Upon the sureties' performance under their bond obligation, they acquired an equitable lien against any sum remaining in the hands of the one for whose protection the bond was given. This lien relates back to the date of the contract and is superior to any lien arising thereafter. Prairie State Bank v. United States, 164 U. S. 227, 17 S. Ct. 142, 41 L. Ed. 412; Henningsen v. U. S. Fidelity & Guaranty Co., 208 U. S. 404, 28 S. Ct. 389, 52 L. Ed. 547; Town of River Junction v. Maryland Casualty Co., (C. A. 5) 110 Fed. (2d) 278, Cert. den. 60 S. Ct. 1077; Standard Acc. Ins. Co. v. Federal Nat. Bank, (C. A. 10) 112 Fed. (2d) 692, affirmed on rehearing, 115 Fed. (2d) 34; Exchange State Bank v. Federal Surety Co., (C. A. 8) 28 Fed. (2d) 485, 488; Claiborne Parish Sch. Bd. v. Fidelity & Deposit Co. of Maryland, (C. A. 5) 40 Fed. (2d) 577, 579; Maryland Casualty Co. v. Dulaney Lumber Co., (C. A. 5) 23 Fed. (2d) 378, 380; Fidelity & Deposit Co. v. Union State Bank, (D. C. Minn.) 21 Fed. (2d) 102, 104; In re Van Winkle, (D. C. Ky.) 49 Fed. Supp. 711; United States F. & Guaranty Co. v. John R. Alley & Co., (D. C. Okla.) 34 Fed. Supp. 604; Southern Surety Co. v. J. R. Holden Land & Lumber Co., (C. A. 8) 14 Fed. (2d) 411, 413; American Fidelity Co. v. Delaney, (D. C. Vt.) 114 Fed. Supp. 702. It is superior to the Government's lien for unpaid taxes. American Surety Co. v. City of Louisville M. H. Comn. (D. C. Ky. ) 63 Fed. Supp. 486, affirmed 160 Fed. (2d) 977 [47-1 USTC ¶9220]; Glenn v. American Surety Co., (C. A. 6) 160 Fed. (2d) 977 [47-1 USTC ¶9220]; United States Fidelity & Guaranty Co. v. United States, (C. A. 10) 201 Fed. (2d) 118 [53-1 USTC ¶9249]; New York Casualty Co. v. Zwerner, (D. C. Ill.) 58 Fed. Supp. 473 [45-1 USTC ¶9140]; American Fidelity Co. v. Delaney, (D. C. Vt.) 114 Fed. Supp. 702 [53-2 USTC ¶9620]. The performance bond was executed on June 29, 1949 ; therefore, the sureties' lien is superior to any lien arising thereafter, including the Government's lien for taxes which dates from December 14, 1950 .

In addition to an equitable lien, the sureties have a written assignment of any funds remaining in the possession of the hospital under the provisions of the application for contract bond. Such a provision is valid and enforceable. Lacy v. Maryland Casualty Co., (CA 4) 32 Fed. (2d) 48. Accordingly, the rights of the sureties to the funds remaining in the hands of the hospital were not determined solely by the assignment of January 5, 1952, but by bond and application therefor (in view of the sureties' performance under the bond) and by the sureties' equitable lien.

The Government's rights to the funds in the hands of the hospital are no greater than the rights of the taxpayer. F. H. McGraw & Co. v. Sherman Plastering Co., (D. C. Conn.) 60 Fed. Supp. 504, affirmed, 149 Fed. (2d) 301, cert. den. 326 U. S. 753, 66 S. Ct. 92, 90 L. Ed. 452; United States Fidelity & Guaranty Co. v. United States , (CA 10) 201 Fed. (2d) 118 [53-1 USTC ¶9249].

Upon performance under its bond, a surety is subrogated to the rights of the obligee to any funds remaining in possession of the latter which were retained under the contract with the principal. Farmer's Bank v. Hayes, (CA 6) 58 Fed. (2d) 34; Lacy v. Maryland Casualty Co., supra. See, Amer. Surety Co. v. Bethlehem Bank, 314 U. S. 314, 62 S. Ct. 226, 68 L. Ed. 214; In re Baltimore Pearl Hominy Co., (CA 4) 5 Fed. (2d) 553 [1 USTC ¶130].

The Government's claim of priority over the sureties to the funds retained by the hospital is based on Section 191, 31 USCA, which gives the United States priority in payment of funds of an insolvent under certain conditions. It is claimed that the taxpayer was without sufficient assets to meet its obligations and was therefore insolvent at the time of the assignment of January 5, 1952 . It is admitted by the taxpayer that it was without assets sufficient to meet its obligations sometime prior to this assignment. In that sense the taxpayer is and was insolvent. However, the taxpayer continued in business after this assignment and, in fact, still is in business. No claim is made that the taxpayer has been adjudged a bankrupt or that receivership or bankruptcy proceedings have been brought against it or that it has made a general assignment for the benefit of creditors.

The "priority" statute applies only to cases involving some type of insolvency court proceedings disposing of an insolvent's estate. Conard v. The Atlantic Insurance Co., 1 Pet. 386, 7 L. Ed. 189; United States v. Oklahoma, 261 U. S. 253, 43 S. Ct. 295, 67 L. Ed. 638; Bramwell v. U. S. Fidelity Co., 269 U. S. 483, 46 S. Ct. 176, 70 L. Ed. 368; Glenn v. American Surety Co., (C. A. 6) 160 Fed. (2d) 977 [47-1 USTC ¶9220]; Davis v. Pringle, (CA 4) 1 Fed. (2d) 860, affirmed 268 U. S. 315, 45 S. Ct. 549, 69 L. Ed. 974; Davis v. Miller-Link Lumber Co., (CA 5) 296 Fed. 649; United States v. The Pomare (D. C. Hawaii), 92 Fed. Supp. 185; American Surety Co. v. City of Louisville M. H. Comn., (D. C. Ky.) 63 Fed. Supp. 486, affirmed, 160 Fed. (2d) 977 [47-1 USTC ¶9220]; New York Casualty Co. v. Zwerner, (D. C. Ill.) 58 Fed. Supp. 473 [45-1 USTC ¶9140]; United States v. Woodside, (D. C. S. C.) 34 Fed. Supp. 281. See also, United States v. Hooe, 3 Cranch 73, 2 L. Ed. 375; Prince v. Bartlett, 8 Cranch (12 U. S.) 431, 434, 3 L. Ed. 614; Brent v. Bank of Washington, 10 Pet. 596, 611, 9 L. Ed. 547; Beaston v. The Farmers' Bank of Delaware , 12 Pet. 102, 132, 9 L. Ed. 1017; and In re Baltimore Pearl Hominy Co., (D. C. Md.) 294 Fed. 921 [1924 CCH ¶2861], reversed on other grounds, (CA 4) 5 Fed. (2d) 553 [1 USTC ¶130]. This is not a proceeding involving the disposition of an insolvent's estate; therefore, the "priority" statute has no application.

Whether the sureties are liable on their bond for the taxpayer's taxes resulting from performance of the hospital contract will now be determined. Taxes owed by the taxpayer are owed by virtue of law and not because of any contractual relationship. Central Bank v. United States, 345 U. S. 639, 73 S. Ct. 917, -- L. Ed. -- [53-1 USTC ¶9408]; United States Fidelity & Guaranty Co. v. United States, (CA 10) 201 Fed. (2d) 118 [53-1 USTC ¶9249]. See, American Fidelity Co. v. Delaney, (D. C. Vt.) 114 Fed. Supp. 702; New York Casualty Co. v. Zwerner, (D. C. Ill.) 58 Fed. Supp. 473 [45-1 USTC ¶9140]; Westover v. William Simpson Construction Co., (CA 9) 22 L. W. 2384 ( 1-28-54 ) [54-1 USTC ¶49,022].

Sums withheld by the taxpayer from the wages of its employees do not constitute "wages" within the terms of a surety's bond for wages. United States Fidelity & Guaranty Co. v. United States, supra; United States v. Zschach Const. Co., (D. C. Okla.) 110 Fed. Supp. 551 [53-2 USTC ¶9529] (holding that a surety's bond is to indemnify the owner and not the United States for taxes). The sums retained by the hospital and assigned by the taxpayer to the sureties were for payment of materialmen and sub-contractors and no part of this sum was used to pay wages of employees of the taxpayer. But even if the sureties had paid wages owing to the employees of the taxpayer, the sureties still would not be liable for the taxes in this case. See, United States Fidelity & Guaranty Co. v. United States , supra; American Fidelity Co. v. Delaney, supra; Westover v. William Simpson Construction Co., supra. It follows that the sureties are not liable on their bond for the taxpayer's unpaid taxes arising from the hospital contract.

Accordingly,

IT IS ORDERED, That the defendants Pacific Employers Insurance Company and American Indemnity Company, sureties, have judgment entered in their favor, and

IT IS SO ORDERED.

 

 

[56-2 USTC ¶10,076]Wayne C. Huddleston v. U. S. Air Conditioning Corporation et al. The United States of America for the use of R. F. Zimmerman & Co. v. The Travelers Indemnity Company et al.

U. S. District Court, So. Dist. Tex., Corpus Christi Div., C. A. 1271, 1312, 9/22/56

[1939 Code Secs. 3670, 3671--covered in 1954 Code Secs. 6321, 6322]

Assessment: Lien for taxes: Fund withheld by general contractor from subcontractor.--A general contractor withheld certain money due a subcontractor on an Air Force base construction job because the subcontractor had failed to pay materialmen. The money was deposited in the district court in connection with an interpleader action. The Government intervened, asserting tax liens against the deposited fund for taxes due by the subcontractor, and claimed that it had a prior specific and perfected lien against the fund since the lien related back to and attached on the dates the assessment lists were received by the District Director. The court refused to sustain the Government's position, pointing out that the statute provided for a lien against property belonging to the taxpayer. Here, the court found, the subcontractor had no property rights in the withheld money because, by agreement, the general contractor could not pay him until he had furnished proof of payment of materialmen. Specifically, the court held that at the time the assessment lists were received by the District Director, the subcontractor had no property or right to property in the hands of the general contractor, and no equity to which the tax lien could or did attach. The general contractor's right to apply the withheld funds toward the payment of materialmen was good even against the Government.

Gus Kowalski, Kingsville, Tex., Kleberg, Mobley, Lockett & Weil, Jones Building, Corpus Christi , Tex. , for plaintiff Huddleston. L. L. Gragg, Jones Building, Corpus Christi, Tex., for U. S. Air Conditioning Corporation. Carter, Stiernberg & Skaggs, Post Office Box 809, Harlingen, Tex., for R. F. Zimmerman & Co. Malcolm R. Wilkey, United States Attorney, Willard I. Boss, Assistant United States Attorney, Houston, Tex., for Intervenor, United States of America. Elmer H. Theis, Medical Professional Building, Corpus Christi, Tex., for East Texas Plumbing Supply Co. Lewright, Dyer, Sorrell & Redford, J. M. Burnett, Driscoll Building, Corpus Christi, Tex., for Travelers Indemnity Company. Ungerman, Hill & Ungerman, Wilson Building, Dallas, Tex., for Minneapolis-Honeywell Regulator Co. Lloyd & Lloyd, Alice, Tex., for Roger J. Seaman.

[Interpleader Action]

ALLRED, District Judge:

These consolidated actions primarily involve the rights of four claimants to $4,735 deposited in the registry of the court by Huddleston, in an interpleader action. The Government has intervened, asserting liens against the fund for taxes due by Leo Gist who was a subcontractor under Huddleston in the construction of a dental clinic building at Harlingen Air Force Base. As a result of pretrial hearings, detailed and difficult stipulations were worked out. The court is appreciative of the careful and painstaking efforts of all counsel in the case in entering into stipulations and avoiding a long and complicated trial.

Huddleston is the successor to Huddleston-Seaman Construction Company, which was the general contractor for construction of the building at Harlingen Air Force Base; as such, he is subject to all the liabilities and has all the rights of the original contractor. Therefore Huddleston's name will be used throughout this memorandum just as though he were the original contractor.

[Materialmen Not Paid by Subcontractor]

Gist, the subcontractor, completed his contract with Huddleston but did not pay for materials furnished by four suppliers as hereafter set out. Traveler's Indemnity was surety on Huddleston's bond given as provided in the Miller Act, 40 U. S. C. A. 270a et seq. The unpaid claims are as follows:

United States Air Conditioning Co. .....         $3,228.50

R. F. Zimmerman & Co. ..................          1,994.00

Minneapolis-Honeywell Regulator Co.

(balance) ..............................            190.00

East Texas Plumbing Co. ................            341.93

Total ..................................         $5,754.43

 

These unpaid claims total more than the amount tendered into court (4,735.00) to say nothing of the Government's tax claims totaling $9,916.96.

Huddleston completed the contract, the building was accepted and final settlement made May 3, 1954 . During the construction, the contractor received progress payments of 90%, as provided in the contract. Huddleston, in turn, made 90% payments to Gist from time to time. These payments totaled $20,908.65, the last payment ($4,441.34) being made February 28, 1954 . Prior to that time, Huddleston had learned from Gist's suppliers that he was not paying them promptly and had determined not to make further payments to him except upon proof that he had paid all of such suppliers. At the time of the last payment on February 28, 1954, after considerable discussion, it was agreed between Huddleston and Gist (1) that out of the $4,441.34 paid that day, Gist would pay Zimmerman's claim ($1,994.00); and (2) that no further payments would be made to Gist but the balance would be held by Huddleston till Gist furnished proof of payment of outstanding bills. Both of them understood that at the time that Huddleston would be liable under the Miller Act for supplies and labor owned by Gist and the agreement was made in order that Huddleston might protect himself against such claims.

[Prime Contractor Withheld Funds]

After the last payment on February 28, 1954 , a balance of $3,709.37 was due Gist under the contract. This amount was withheld by Huddleston. It would have been sufficient to pay all outstanding bills provided Gist paid the Zimmerman bill, as agreed, out of the $4,441.34 payment of February 28th. In March or April 1954, Huddleston learned that Gist had not paid Zimmerman. Therefore "Huddleston awarded to Gist contracts to do other work in Corpus Christi in an effort to give Gist opportunity to make a profit to be applied by Huddleston to reimbursement for the excess of (a) amounts paid and owed to Gist and his suppliers over (b) the contract price as to the dental clinic. Gist authorized such reimbursement at the time of the agreements to do such additional work."

As stated, Huddleston has paid $4,735 into the registry of the court. This represents the $3,709.37 withheld from Gist on the Harlingen contract and $1,025.63 withheld on the Corpus Christi job under the agreement.

Huddleston was in direct and daily supervision of the Harlingen job, familiar at all times with the labor and materials performed for and furnished to Gist by various suppliers, including those whose claims are involved here, and approved such labor and materials so provided in performance of Gist's subcontract, although he did not know until later of the exact contract or invoice prices. After the two agreements with Gist as to withholding moneys due on either job, Huddleston paid three Miller Act claimants (on the Harlingen job) as follows:

Minneapolis-Honeywell .......          $500.00 
Mar. 8, 1954

Gist and Hargis Electric

Co.
 .........................         $207.32 
Aug. 16, 1954

Gist and Southern Engine

& Pump Co. ..................         $524.00 
Aug. 16, 1954

 

Huddleston later (November 10, 1954) issued a check to East Texas Plumbing Company for its account $341.93. Their representatives were to meet for delivery of the check but failed, for some reason, to do so. Huddleston also issued checks later (November 13, 1954) to the other claimants (Zimmerman, U. S. Air Conditioning Co., Honeywell), with Gist, or his company, as joint payee. These checks were issued, although they totaled more than the $4,735 due Gist on both the Harlingen and Corpus Christi jobs, "because Huddleston was familiar with the Miller Act and knew he would be liable for unpaid labor and materials supplied to Gist." None of these checks have been paid because of failure to secure Gist's endorsement promptly and later demands made by the Collector of Internal Revenue (after notice of Levy, December 8, 1954 ), that payment be stopped. This was the first notice Huddleston or the claimants had of the tax claims against Gist.

[Government Intervenes]

The Government claims the fund in the registry by virtue of alleged tax liens, Internal Revenue Code (1939) 3670, 3671, asserting that the lien relates back to and attached on the dates the assessment lists were received by the District Director of Internal Revenue, the first being May 17, 1954 , for $2,466.88. ¹ The Government takes the position that it has a prior specific and perfected lien against the fund whereas the other claimants have only a right to garnish the fund. ²

[Statute Discussed]

Section 3670 of Title 26, in effect at the time, provided for a lien in favor of the Government for unpaid taxes, "upon all property and rights to property, whether real or personal, belonging to such person," ³ (the taxpayer). Section 3671 provided that, unless another date was specifically fixed by law, the lien should arise at the time the assessment list was received by the collector, etc. Section 3672 provided that the lien should not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof had been filed by the collector in the manner therein prescribed. Before becoming lost in discussion of the many cases as to priority of liens, it would be well to remember the basic fact that the lien provided by Section 3670 is on property and rights to property BELONGING TO THE TAXPAYER. Here, Gist's right to the balance due on both contracts with Huddleston was burdened with the equitable and contractual right of Huddleston to refuse to pay him until Gist furnished proof of payment of all outstanding bills; and to Huddleston's right to pay such accounts for his own protection against such claimants; and to the agreement in March or April, 1954, authorizing Huddleston to reimburse himself for any excess of the amounts paid or owed Gist and his suppliers over the contract price as to the dental clinic. Any demand on Gist's part for payment of either balance would have been denied by any court because he had nothing coming until all claims were paid. Any garnishing creditor of Gist's, or even The Government on its tax claims, could stand in no better position than Gist as against Huddleston. ⁴ The Miller Act does not purport to give suppliers of materials, etc., a lien on funds due the subcontractor; rather it is a right of action on the bond required by the act, provided proper notice is given. But the requirement as to notice is to be, and has been, liberally construed, to the point that an oral notice by the supplier, later acknowledged in writing by the prime contractor, has been held sufficient. ⁵

[Question of Notice]

Here there can be no doubt that Zimmerman, Honeywell and East Texas Plumbing gave sufficient written notice to Huddleston, within 90 days after the last of the supplies, etc. were furnished; so that not even Huddleston may now urge, and he does not urge, lack of written notice. The situation is a bit different as to U. S. Air Conditioning Corporation. There is no showing that it gave notice, or that Huddleston acknowledged such claim in writing, within 90 days. It is clear, however, that Huddleston knew that the air conditioning equipment had been furnished, when it was furnished, the amount of the claim and that Gist had not paid it,--all within the 90 day period. It is equally clear that within the 90 day period Huddleston recognized such claim and held back money for the purpose of paying it, along with others, at the time of the agreement of February 28, 1954 . Huddleston says in his affidavit that Gist agreed to pay Zimmerman's account ($1,994.00) out of the $4,441.34 final payment of February 28th. Gist did not keep his agreement. If he had paid the Zimmerman account, there would have remained, so far as we are concerned here, only the claims of U. S. Air Conditioning Corporation, East Texas, and the balance due Honeywell, all three totaling $3,760.43. ⁶ This is so close to the $3,709.37 withheld by Huddleston that it shows he knew almost exactly what was due these three unpaid suppliers. So it appears that the reason for the supplemental agreement in March or April, 1954, whereby Huddleston was also to withhold Gist's profits on the Corpus Christi houses, was that Huddleston had been notified in writing, April 12, 1954 , that Zimmerman had not been paid. ⁷

The 90 days notice requirement is for the protection of the prime contractor and his surety in order that he may do exactly what Huddleston did here--hold back sufficient moneys to indemnify him or his surety. Since he knew of U. S. Air Conditioning's claim, held back enough to take care of it and later committed himself in writing to pay it, he hardly could be heard to plead in a Miller Act case that he did not get the written notice within 90 days. It is clear that Huddleston waived such requirement during the 90 day period and agreed to pay in writing after the 90 days, by, among other things, the issuance of checks for the amounts claimed. Huddleston wanted to be protected against such claims, perhaps against a lawsuit even though he might have the right to plead that there was not sufficient notice within 90 days; therefore he withheld from Gist sufficient moneys to pay all of them except Zimmerman. He took his chance as to Zimmerman by relying upon Gist to pay this claim out of the February 28th payment. The remaining claimants should not suffer when Huddleston held out sufficient moneys to pay them, and could have held back sufficient [moneys] to pay the Zimmerman claim but saw fit to rely on Gist to pay that account. As pointed out, Huddleston retrieved and bettered his position by $1,105.63 by holding back that amount on the profits on the Corpus Christi job. (He lacked $968.37, however, of getting enough to take care of the Zimmerman claim in full.)

[Tax Lien Did Not Attach]

I find it unnecessary to discuss all the propositions and authorities asserted by the parties. Suffice to say that, as to the Government's claim for liens, I hold that, at the time the assessment lists were received by the District Director, ⁸ Gist had no property or rights to property in the hands of Huddleston and no equity to which the lien could or did attach. Huddleston had a specific right of ownership to any funds due Gist, superior to any tax lien of the Government. ⁹ He had a right, under the agreements with Gist, made long before the Government's tax lien attached, to reimburse himself for any amounts due Gist and his suppliers. This really is not a case as to priority of liens between the claimants and the Government. Rather it is between the right of Huddleston on the one hand to see that the money withheld by him is applied to the payment of claims for which he was or might be liable and the Government on the other. Huddleston's right to so apply the funds was and is good against Gist. It was and is good against the Government.

This also disposes of the Government's contention that a fee cannot be allowed to Huddleston's attorneys who were compelled to institute the action because of demands of the Government. The suppliers' claims total more than the funds against which the Government asserts its tax liens.

Zimmerman timely filed his action under the Miller Act and is entitled to recover against Travelers as surety to the extent that it does not secure payment from Huddleston as principal. U. S. Air Conditioning, East Texas and Honeywell are entitled to recovery against Huddleston who may apply the funds in the registry to the payment, pro rata, of all the claims. A fee of $1,000 will be allowed Huddleston's attorneys out of such fund. The remainder will be prorated between Zimmerman , U. S. Air Conditioning, East Texas and Honeywell in proportion to their claims. In addition, Zimmerman will be given judgment against Huddleston's surety, Travelers, for the difference between the total of his share of the funds on deposit, and his share of the attorney's fees, and the $1,994.00.

The foregoing is adopted as findings of fact and conclusions of law.

The Clerk will notify counsel to submit an order accordingly.

¹ The dates the other assessment lists were received were as follows: June 22, 1954 , ($6,024.70); September 9, 1954 , ($1,425.32).

² As in Kings County Iron Works, 2 Cir., 224 Fed. (2d) 232 [55-2 USTC ¶9536] and United States v. White Bear Brewing Co., Inc., et al., 350 U. S. 1010 [56-1 USTC ¶9440], reversing 7 Cir., 227 Fed. (2d) 359 [55-2 USTC ¶9776].

³ Emphasis mine throughout unless otherwise indicated.

⁴ Cf. Great American Indemnity Co. v. United States , (D. C., La. ), 120 Fed. Supp. 445 [54-2 USTC ¶9469], United States v. Bank of Shelby, 5 Cir., 68 Fed. (2d) 538 [4 USTC ¶1226].

⁵ Houston Fire & Casualty Insurance Company v. United States , 5 Cir., 217 Fed. (2d) 727, in which, however, the written acknowledgment was within 90 days of the last delivery.

⁶ Of course, at the time of the agreement there also was due the amounts paid Gist and Hargis, Gist and Southern, and the $500 paid on Honeywell's account; but the amount due Gist on the Harlingen contract was sufficient to take care of these and U. S. Air Conditioning, East Texas and the Honeywell balance.

⁷ See Exhibit H. Pretrial Order.

⁸ May 17, June 22, September 9, 1954 .

⁹ United States Fidelity & Guaranty Co. v. United States , 10 Cir., 201 Fed. (2d) 118 [53-1 USTC ¶9249].

 

 

[62-1 USTC ¶9229]A. J. Bankhead doing business as Airtrol Engineering Company, Plaintiff v. Maryland Casualty Company, Irving Ward-Steinman, R. F. Zimmerman & Company, Inc., and United States of America, Defendants

U. S. District Court, East. Dist. La., Baton Rouge Div., Civil Action No. 2131, 197 FSupp 879, 9/26/61

[1954 Code Sec. 6321]

Priority of liens: Federal tax lien: Surety's subrogration claim.--The Federal tax lien on retained percentages was held to be prior to a surety's claim of subrogation for amounts paid to materialmen and laborers on behalf of a defaulting subcontractor. The latter claims were not perfected and lacked specificity as to any particular fund.

David W. Rob inson and Watson, Blanche, Wilson, Posner & Thibaut, 137 St. Ferdinard St., P. O. Box 36, Baton Rouge 2, La., for plaintiff. Elven E. Ponder and Major & Ponder, 5053 Government St., Baton Rouge, La., Paul M. Hebert, Dean of Law School, Louisiana State University, Baton Rouge, La., Victor A. Sachse, III, of Breazeale, Sachse, Wilson & Hebert, 701-719 Fidelity National Bank Bldg., Baton Rouge, La., M. Hepburn Many, United States Attorney, New Orleans, La., Prim B. Smith, Jr., Assistant United States Attorney, and Leonard Fuhrer of Gravel, Sheffield & Fuhrer, 611 Murray St., Alexandria, La., for defendants.

WRIGHT, District Judge:

This suit in interpleader involves the sum of $11,208.39 paid into the registry of the court by Airtrol Engineering Company, representing retained percentages on a subcontract between Airtrol and the Yerby Tin Shop. Upon default by Yerby, his surety, Maryland Casualty Company, was called upon to complete the subcontract and now claims the retained funds. The United States has assessed withholding taxes against Yerby and it likewise claims the fund. While the representative of Yerby's estate and a materialman are interpleaded, the dispute is essentially between Maryland and the United States .

On October 29, 1956 , Airtrol signed a contract with the Louisiana State Authority to provide air conditioning facilities for Louisiana State University at Baton Rouge . Airtrol subcontracted the sheet metal work for the air conditioning to Yerby on December 12, 1956 . Maryland executed a performance bond for Yerby's contract on November 1, 1956 . Pursuant to this bond Yerby assigned all payments due or to become due under the contract to Maryland in case of default. Payment terms for the Airtrol-L. S. U. contract and the Airtrol-Yerby contract both provided for thirty-day estimates of work completed and retention of percentages until completion and acceptance of the work.

With the work 95 per cent complete, Yerby encountered financial difficulties. On January 3, 1958 , Airtrol formally put Yerby in default and called upon Maryland to complete the work. On January 6, 1958 , Yerby also called upon Maryland to perform. On January 8, 1958 , the United States assessed withholding taxes against Yerby in the amount of $13,988.01. A later assessment on March 3, 1958 , will be disregarded since the January 8 assessment would exhaust the fund.

After Yerby's default Maryland expended $21,911.49 in completing the work and satisfying prior claims arising before Yerby's default. The job was accepted by the Louisiana State Authority on February 6, 1958 . On the same day R. T. Zimmerman filed a mechanic's lien pursuant to La. R. S. 9:4801 and La. R. S. 38:2241. ¹ A similar lien was filed by John T. Megison, a foreman, on March 2, 1958 . Both the Zimmerman and the Megison claims arose before default. Maryland satisfied these claims and asserts the lien rights arising thereunder by subrogation.

On default the retainage on the Yerby contract amounted to $11,208.29. Being faced with several claimants to this fund, Airtrol filed this interpleader.

Although Maryland 's claim rests on three grounds, its principal reliance is on the proposition that the retainage in suit never became the property of Yerby and consequently there was nothing to which the federal tax lien could attach. The United States claims that Yerby had a right to the retained percentages which was perfected on completion of the job, and, under applicable federal law, its claim is prior to all other liens or claims on the fund.

The contest between the federal tax collector and private claimants for various funds, while of relatively recent origin, has a complexity beyond its years. ² When the fund involved is retained percentages held by an owner in the presence of a defaulting contractor and an incomplete building, and contest is even more recent but of comparable complexity, involving, as it does, a host of decisions interpreting priorities, ³ relation back, ⁴ the "no debt" theory, ⁵ and, more recently, the application of state property law and federal priority law. ⁶ From the older cases, and now from recent Supreme Court decisions, certain general principles emerge.

Federal tax liens are not property rights; they are claims to property which require perfecting as do other claims. ⁷ Being statutory liens, ⁸ they take preference over open accounts and inchoate and unperfected liens. ⁹ Likewise, assignments, without more, although prior in time to federal tax assessments, are subordinate to the tax lien because of the greater dignity of the tax lien under federal law. ¹⁰

Private claimants may assume a variety of positions. They may be simple creditors, or holders of mechanic's liens, or assignees, or sureties, or subrogees to private liens, or subrogees to private rights. For a private lienor to take preference over a federal tax lien, its lien must be perfected by prior recordation, ¹¹ or other "perfecting" device cognizable by federal law. Its priority may be based on a theory of relation back to the date of creation of the original debt. ¹² For a private assignee to take preference over a federal tax lien, he apparently must reduce his assignment to judgment, although this is not altogether certain.