241 F.2d 142 (2nd Cir. 1957), 82, Fidelity & Deposit Co. of Maryland v. New York City Housing Authority

Docket Nº:82, 24196.
Citation:241 F.2d 142
Party Name:FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Plaintiff-Appellant, v. NEW YORK CITY HOUSING AUTHORITY, Caruso-Sturcey Corporation, Arnold Lewis, as assignee of Caruso-Sturcey Corporation, People of the State of New York, Defendants, and United States of America, Defendant-Appellee.
Case Date:February 08, 1957
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 142

241 F.2d 142 (2nd Cir. 1957)



NEW YORK CITY HOUSING AUTHORITY, Caruso-Sturcey Corporation, Arnold Lewis, as assignee of Caruso-Sturcey Corporation, People of the State of New York, Defendants, and United States of America, Defendant-Appellee.

Nos. 82, 24196.

United States Court of Appeals, Second Circuit.

February 8, 1957

Argued Dec. 13, 1956.

Page 143

Maurice, McNamee & Dart, New York City (Stewart Maurice and Robert F. Dart, New York City, of counsel), for plaintiff-appellant.

Paul W. Williams, U.S. Atty., for the Southern Dist. of New York, New York City (Arthur B. Kramer and Miriam R. Goldman, Asst. U.S. Attys., New York City, of counsel), for defendant-appellee.

Before SWAN, MEDINA and WATERMAN, Circuit Judges.

MEDINA, Circuit Judge.

This case was tried below on an agreed statement of facts. Caruso-Sturcey Corporation contracted on June 21, 1949 with the New York City Housing Authority to install heating and ventilating facilities on a housing project. The contract required Caruso to give a performance bond, not involved in this litigation, and a payment bond for laborers and materialmen. This the contractor did when it executed the bonds on July 11, 1949 with Fidelity and Deposit Company of Maryland.

When the heating and ventilating facilities had been installed and accepted by the owner on March 1, 1952, there was an unpaid balance on the contract, amounting to $46, 392.31. The principal claimants to this fund are Fidelity, which had made payments for labor and materials aggregating $75, 650.09, from December 11, 1950 through November 13, 1951, as required by its bond, on Caruso's failure to make such payments when due, and the United States by reason of tax liens, for withholding taxes retained by Caruso from the wages of its employees, but not remitted. The tax assessments run from April 11, 1950 through September 12, 1951; and the total of these is $47, 639.68.

On September 14, 1951, Caruso made an assignment for the benefit of creditors, pursuant to the provisions of the New York Debtor and Creditor Law, McKinney's Consol. Laws, c. 12, to defendant Arnold Lewis; and there is a subsidiary claim of the defendant State of New York arising out of certain corporation and franchise taxes owing by Caruso.

In form the suit is one by Fidelity in equity against the Housing Authority to recover the fund. Caruso's assignee filed an answer containing a counterclaim but failed to appear at the trial. The State of New York asserted its claim against the fund for taxes. The United States pleaded a claim to the fund under Section 3670 of the Internal Revenue Code of 1939, 26 U.S.C. § 3670. 1

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The fund was awarded by the court below to the United States on the theory that the defaulting taxpayer Caruso, under its contract, had a conditional right to the fund, that this right was a 'right to property' within the meaning of Section 3670, and that the United States thus had a valid tax lien on the entire fund. As the tax lien thus found to exist would take superiority over any claim by Fidelity, it became unnecessary for the court otherwise to pass upon the nature and sufficiency of Fidelity's claim. Nor was consideration given to the claim of the State of New York, for the same reason. As we have concluded that there were no rights of Caruso upon which the government tax lien could attach, there must be a new trial in which all the issues raised by the pleadings and not yet disposed of may be adjudicated, including the rights of the State of New York, although the appeal to this court is by Fidelity alone.

The first issue to be considered is whether the defaulting taxpayer under its contract had a conditional right to the withheld fund. The contract was made and performed in New York. The New York Court of Appeals has had occasion to consider a similar contract that also required as a condition precedent to payment proof that the contractor had satisfied claims of materialmen and laborers. 'So long as such claims were outstanding and unpaid and so long as (the owner) had the right to withhold and apply, ' it held, 'the contractor had no rights to the fund, and, consequently, had no property interest therein upon which (the United States) could place a lien.' United States Fidelity & Guarantee Co. v. Triborough Bridge Authority, 297 N.Y. 31, 37, 74 N.E.2d 226, 228. And again: 'A failure by the contractor to pay for labor and material was just as much a failure to perform and carry out the terms of the contract as an abandonment of the work would have been.' Ibid., 297 N.Y. at page 36, 74 N.E.2d at page 228.

For the highest court of the State of New York, in short, a failure to pay laborers and materialmen is a breach of contract and a contractor who fails to make such payments has no right under the contract. This decision, if binding here, disposes of the holding below: without a finding that the defaulting taxpayer has some right that may be classified as a 'right to property, ' there can be no federal tax lien. But is it binding here?

Section 3670 imposes a tax lien on 'all property and rights to property' of a defaulting taxpayer. In adopting this legislation, the Congress did not create property interests on which a lien might be imposed; there is no suggestion that it authorized the federal courts to do so. On the contrary, it took for granted here, as it normally does in the tax law, the vital existence of state laws creating and maintaining various interests. The statute was fashioned to require the courts to determine for federal purposes whether those state-created interests are 'property' or 'rights to property.' That classification of interests is a federal question; the existence of the interests to be federally classified, however, is solely a question of state law.

This distinction was formulated by the Supreme Court in Morgan v. Commissioner, 309 U.S. 78, 80, 60 S.Ct. 424, 426, 84 L.Ed. 585, which also involved the tax law....

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