American Fidelity Co. v. Delaney

• Decision Date: 08 September 1953
• Docket Number: No. 1164.,1164.
• Citation: 114 F. Supp. 702
• Parties: AMERICAN FIDELITY CO. v. DELANEY, Collector of Internal Revenue, et al.
• Court: U.S. District Court — District of Vermont

114 F. Supp. 702

AMERICAN FIDELITY CO. v. DELANEY, Collector of Internal Revenue, et al.

No. 1164.

United States District Court D. Vermont.

September 8, 1953.

COPYRIGHT MATERIAL OMITTED

A. Luke Crispe, Brattleboro, Vt., Allen A. Backer, Manchester, N. H., for American Fidelity Co.

Joseph A. McNamara, U. S. Atty., Burlington, Vt., Frederick G. Rita, Sp. Asst. to the Atty. Gen., for the United States.

Osmer C. Fitts, Paul N. Olson, Brattleboro, Vt., for Atlantic Corp.

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 made 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.

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 the 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, § 4909, sub-sections 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 shall 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 during 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.

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 indemnitor in said contract, and said indemnitor 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 indemnitor, 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 indemnitor 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 surety-ship it has executed for the undersigned indemnitor."

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...