Fidelity & Deposit Co. v. New York City Housing Auth.

• Decision Date: 18 April 1956
• Citation: 140 F. Supp. 298
• Parties: FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Plaintiff, v. NEW YORK CITY HOUSING AUTHORITY, Caruso-Sturcey Corporation, Arnold Lewis, as Assignee of Caruso-Sturcey Corporation, People of the State of New York, and United States of America, Defendants.
• Court: U.S. District Court — Southern District of New York

140 F. Supp. 298

FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Plaintiff, v. NEW YORK CITY HOUSING AUTHORITY, Caruso-Sturcey Corporation, Arnold Lewis, as Assignee of Caruso-Sturcey Corporation, People of the State of New York, and United States of America, Defendants.

United States District Court S. D. New York.

April 18, 1956.

Maurice, McNamee & Dart, New York City, for plaintiff. Stewart Maurice, Robert F. Dart, New York City, of counsel.

Irving Wise, New York City, for defendant New York City Housing Authority.

Jacob K. Javits, Atty. Gen. of New York, for defendant People of State of New York. Samuel Backlar, Asst. Atty. Gen., of counsel.

Paul W. Williams, U. S. Atty., for Southern Dist. of New York, New York

City, for the United States. Maurice N. Nessen, Asst. U. S. Atty., New York City, of counsel.

DIMOCK, District Judge.

Fidelity and Deposit Company of Maryland, surety on the bond of Caruso-Sturcey Corporation, a building contractor, brings this action to recover the sum of $46,392.51 from defendant New York City Housing Authority, hereinafter referred to as the owner. That sum is an amount equal to the unpaid balance of the contract price for heating and ventilating work that the contractor agreed to do at Ravenswood Houses. By its agreement with the owner, the building contractor had engaged not only to do the required construction but also to pay its laborers and materialmen. However, while it completed the construction, it failed to pay all the laborers and materialmen. Because of this default, the owner withheld final payment pursuant to a requirement of the contract. The surety on the contract, pursuant to the obligation of its bond, paid the laborers and materialmen. The surety seeks reimbursement of the amount it paid to them.

Defendant United States of America asserts a claim to the withheld funds because of tax liens against the property of the contractor.

Granting recovery to either the surety or the Government will exhaust the withheld funds. Since the owner must not be required to pay twice, the question here presented is as to the relative superiority of the respective claims of the surety and the Government against the owner.

The Government's right to a lien is created by section 3670 of the 1939 Internal Revenue Code, 26 U.S.C. § 3670, which reads as follows:

"§ 3670. Property subject to lien.

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

The period of the Government's lien is fixed by section 3671, 26 U.S.C. § 3671, which reads as follows:

"§ 3671. Period of lien

"Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time."

Section 3672(a), 26 U.S.C. § 3672(a), makes the Government's lien invalid against a subsequent mortgagee, pledgee, purchaser, or judgment creditor unless notice thereof has been filed by the collector. It reads:

"§ 3672. Validity against mortgagees, pledgees, purchasers, and judgment creditors

"(a) Invalidity of lien without notice. Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector * * *."

The chronology is as follows:

The contract and the surety bond were executed before any payments by the surety to the contractor's laborers and materialmen and before any of the Government's liens accrued. The surety's payments to the contractor's laborers and materialmen were made during the period from December 11, 1950, to November 13, 1951. The Government's liens accrued during the period from April 4, 1950, to September 12, 1951. It thus appears that, if the relative rights of the surety and the Government depend upon the chronology of the surety's payments to the laborers and materialmen and of the accrual of the liens of the Government, the method of determining the respective amounts due would be to arrange the payments of laborers and materialmen and of tax liens in a single list in chronological order and to allocate a sufficient amount to meet each payment of a creditor and each tax lien beginning with the oldest until the withheld funds were exhausted.

The surety argues that, when a surety, at the request of the contractor, agrees with the owner to make good the default of the contractor, there is an implied term of the arrangement between the three that the owner will pay to the surety any part of the unpaid contract price necessary to reimburse the surety for his expenditures in making good the contractor's default. Thus, under the terms of the arrangement, the surety's rights would not be derivative through the contractor but direct against the owner. The property competed for would not be the property of the contractor at all. The surety would not have a lien on the chose in action. A claimant against the contractor, like the Government here, would have no standing to assert rights against this chose in action running directly from the owner to the surety. Thus no questions of priority or "relating back" would be involved.

The Supreme Court in United States v. Munsey Trust Co., 332 U.S. 234, 67 S.Ct. 1599, 91 L.Ed. 2022, has expressly rejected this theory that a surety is the promisee of a promise by the owner to reimburse him out of withheld funds for expenditures made in fulfillment of his obligation to make good the default of the contractor in failing to pay laborers and materialmen. In the Munsey Trust case a contractor had failed to carry out its obligation to pay its laborers and materialmen in accordance with its contract with the Government which occupied the position of owner in that case. The surety had paid the laborers and materialmen and sought to recover retained percentages from the Government. The Government pleaded as set-offs sums due from the contractor on account of breaches of other contracts. The surety urged the very point here under discussion saying that there was a direct promise by the Government to the surety which could not be affected by any sum owed by the contractor to the Government under some other contract. The court rejected the argument saying, 332 U.S. at page 243, 67 S.Ct. at page 1604:

"Respondent's contention then comes to this: that by requiring the contractor to furnish assurances that he will perform his obligations to laborers and materialmen, the government has deliberately decreased the ordinary safeguards it would have had to enforce the contractor's obligations to it. We see nothing in the words of the contract or the statute to lead us to this conclusion."

The owner certainly could not have set off against the obligation to pay the withheld cash a debt due from the contractor as permitted in the Munsey Trust case if, as the surety here contends, the obligation ran direct to the surety.

The surety advances another theory under which, as is asserted, the contractor would be without any interest in the withheld funds to which the Government tax liens could attach. It is contended that, at the time of the accrual of the Government's tax liens against the contractor, the contractor, not having paid his laborers and materialmen, had no right to the withheld funds.

The answer is a short one. The contractor's right to the withheld funds, even though conditioned upon acts which the contractor had not performed, was nevertheless an existing right albeit subject to the condition. The Government tax liens attached to it. If the surety is protected here it is not because the lien did not attach to the contractor's interest but because the contractor's interest was subordinate to that of the surety.

We are thus brought to the question of the nature of the interest of the surety. I have already decided that the surety has no rights of its own to the withheld fund. That leaves three parties through whom the surety might have derivative rights: the contractor, the laborers and materialmen, and the owner.

The surety has no derivative rights through the contractor. A surety's only right against his principal is indemnification. That is a simple chose in action against the principal which gives the surety no property right in any part of the principal's property. United...