Central Surety & Insurance Corp. v. Martin Infante Co.

• Decision Date: 08 July 1958
• Docket Number: Civ. A. 407-57.
• Citation: 164 F. Supp. 923
• Parties: CENTRAL SURETY AND INSURANCE CORPORATION, Plaintiff, v. MARTIN INFANTE CO., Inc., et al., Defendants.
• Court: U.S. District Court — District of New Jersey

164 F. Supp. 923

CENTRAL SURETY AND INSURANCE CORPORATION, Plaintiff, v. MARTIN INFANTE CO., Inc., et al., Defendants.

Civ. A. 407-57.

United States District Court D. New Jersey.

July 8, 1958.

McCarter & English, Newark, N. J., by Ward J. Herbert, Newark, N. J., for plaintiff.

Chester A. Weidenburner, U. S. Atty., Newark, N. J., by Charles H. Hoens, Jr., Asst. U. S. Atty., Newark, N. J., for the Government.

W. Ludlow James, Montclair, N. J., for claimant Liberty Mut. Ins. Co.

WORTENDYKE, District Judge.

The present action was instituted by plaintiff in the Chancery Division of the Superior Court of New Jersey. After the United States (Government) was made a defendant as tax claimant, it thereupon removed the action to this Court, in accordance with the provisions of 28 U.S.C. § 1444. The only remaining parties who allege interests in the fund which is the subject of this action are the plaintiff, the United States as tax claimant, and Liberty Mutual Insurance Company in connection with claims for unpaid but earned premiums on certain policies issued to the initial primary defendant.

Plaintiff (Surety) became surety upon a performance and payment bond required by N.J.R.S. 2A:44-143, N.J.S.A., and by the terms of a written contract between Martin Infante Co., Inc. (Infante), as general contractor, and the Board of Education of the Township of Millburn (Board), for the construction of a senior public high school in the Township of Millburn, New Jersey. Both contract and bond were dated August 17, 1954, and the contract was incorporated by reference in the bond.

Infante commenced performance of and received payments under the contract, but was unable to complete his undertaking with his own resources. He suffered the accrual of unpaid claims of subcontractors and materialmen, and assigned his rights under the contract to Surety. Surety paid all the claims of subcontractors and materialmen, took assignments of their respective liens, and completed the contract with the facilities of Infante, but at the cost of Surety's own advances and payments received by it from the Board.

On February 15, 1956 the District Director of Internal Revenue assessed and made demand for payment of Federal taxes due from Infante, and subsequently served upon the Board a notice of levy upon any moneys in its hands due to Infante. The Director claimed a lien upon the subject matter of the levy pursuant to the provisions of 26 U.S.C.A. § 6321. As of the stated date, Infante was entitled to receive no money from the Board under the terms of the contract, because Infante then owed subcontractors and materialmen, for work performed and materials furnished upon and to the job, amounts aggregating a sum in excess of the moneys which the Board had retained under certificates of work completed previously submitted by the architect and engineer. At the time of the claimed accrual of the tax lien Infante owed upon claims of subcontractors and materialmen a sum in excess of $211,000 against which the Board had previously withheld from payments made under the contract the sum of $118,316.91.

In accordance with the provisions of N.J.R.S. 2A:44-141, N.J.S.A., and of this Court's order dated August 27, 1957, the Board (on October 28, 1957) paid into Court the sum of $185,572.58, constituting the balance of the moneys payable by the Board under the contract. This fund was subsequently reduced by the payment to Surety of $86,455.39 pursuant to consent order of this Court dated November 7, 1957.

Among the contentions advanced by Surety as a basis for its recovery of the funds remaining in the registry of this Court is that relating to its status as subrogee of the Board. National Surety Corp. v. Barth, Ch.Div.1952, 20 N.J.Super. 100, 109, 89 A.2d 104, affirmed 1953, 11 N.J. 506, 95 A.2d 145; Board of Education of City of Linden v. Vail, Ch.1931, 108 N.J.Eq. 207, 154 A. 531, affirmed per curiam E. & A. 1933, 113 N.J.Eq. 113, 166 A. 154; Camden County Welfare Board v. Federal Deposit Ins. Co., Ch.Div.1948, 1 N.J.Super. 532, 62 A.2d 416; United States Fidelity & Guaranty Co. v. Triborough Bridge Authority, 1947, 297 N.Y. 31, 74 N.E.2d 226, reargument denied 297 N.Y. 694, 77 N.E.2d 9. Having satisfied all other claimants (except Liberty Mutual Insurance Company, of which more hereafter), Surety now claims to be entitled to this entire balance, free of all claims of the United States, for taxes, interest and penalties, against Infante. The claim of Liberty Mutual Insurance Company is for unpaid earned premiums on workmens' compensation, public liability and group liability insurance policies issued to Infante in connection with various jobs on which Infante was engaged, and rests upon an assignment, dated August 7, 1956, by Infante to Liberty Mutual, of moneys then due or to become due on all such jobs. However, by stipulation, Liberty Mutual has conceded that its said claim is subject to the payment of all necessary expenses for the completion of said jobs and valid debts incurred therefor, to the date of the assignment, including claims of Surety for advancements to effect such completion. In view of the Court's determination set forth herein of the rights in the present fund, we are not here concerned with the claim of Liberty Mutual.

By the terms and conditions of its contract with the Board, Infante became entitled to receive payments thereunder only if (a) there were no outstanding claims against Infante filed with the Board, and (b) receipted bills or other satisfactory evidence had been submitted to the Board that all obligations incurred by Infante and its subcontractors in carrying out the project had been satisfied.¹ Concerning the sums available for payment of the competing claims of Surety and of the United States, I find that Surety received, after the default of Infante, the sum of $402,217.33 (which takes into account the $86,455.69 withdrawn from the registry of this Court pursuant to the aforesaid consent order) but expended, in fulfillment of its obligations under the bond covering the Millburn contract, the sum of $548,061.69. This leaves the Surety with an out-of-pocket loss of $145,844.36 unless it is permitted to reach the $99,117.19 remaining in the registry of this Court since the aforesaid withdrawal.

The situation in which Infante found itself when it admitted default² and called upon Surety to take over is strikingly similar to that which confronted the contractors in Fidelity & Deposit Co. v. New York City Housing Authority, 2 Cir., 1957, 241 F.2d 142; United States Fidelity & Guaranty Co. v. Miller, D.C.W.D.N.C.1956, 143 F.Supp. 941; and in Scott v. Zion Evangelical Lutheran Church, 1955, 75 S.D. 559, 70 N.W.2d 326.

In the Fidelity case the contractor was to install heating and ventilating facilities in a housing project, and when these facilities had been installed and accepted there remained an unpaid balance on the contract. This balance was claimed both by the United States for taxes and by the surety which made payments for labor and materials as required by its bond. The contract required the contractor to pay such claims before he would be entitled to final payment, and the court held, 241 F.2d at page 144:

"* * * classification of interests is a federal question; the existence of interests to be federally classified, however, is solely a question of state law."

The Court then construed the failure to pay the labor and materialmen as a material breach of the contract and concluded that the contractor had no rights thereunder, saying, at pages 146-147:

"We do not understand how the New York courts, or any courts for that matter, could find justification for holding, in the face of so carefully drawn a contract, that a failure to satisfy these conditions is `insubstantial' * * *

"* * * This terminology indicates that while the ultimate aim of the Authority may have been to secure prompt payment for laborers and materialmen, it requires contractually as a condition precedent to payment that the contractor do so.

"We are satisfied * * * that * * * the taxpayer-contractor had no right to the withheld fund. Of necessity, it follows that it had no `right to property' to which a federal tax lien might attach, * * *"

In the Miller case, Judge Warlick, construing 26 U.S.C. § 6321,³ points out 143 F.Supp at page 944, that "Under that section nothing could be plainer than that a lien for federal taxes extend (sic) only to property and rights to property, real or personal, which belongs to the tax payer." The question presented was whether Miller, who had completed his contract except for several minor items, but was in default in the full performance of his contract for the construction of a Federal Housing project by reason of his indebtedness to materialmen and subcontractors, had any interest in moneys in the hands of his surety which were later deposited in the registry of the court. Upon the authority of numerous cited cases and the principle therein stated that "* * * a contractor or a sub contractor or his surety on default coming about, has no property rights in monies due under contracts for construction until and after performance is complete and all labor and materialmen have been paid in full", the court held that the Government could not find property of the tax debtor to which its lien could attach.

In the Zion Church case, many of the authorities cited by Judge Warlick in the Miller case were also cited and to a similar conclusion, which is to be found in the following language of Judge Roberts, speaking for the South Dakota Supreme Court 75 S.D. 559, 70 N.W. 2d 328:

"The question in the instant case is not one of priority and perfection of liens. The decisive question is what amount under the contract was due to * * * (the defaulting contractor). The contractor had no property right in so much of the fund in the hands of the church as was necessary for the payment of claims of materialmen and the

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