Aquilino v. U.S.

• Decision Date: 07 July 1961
• Docket Number: No. 2,No. 1,1,2
• Citation: 219 N.Y.S.2d 254,10 N.Y.2d 271,176 N.E.2d 826
• Parties: , 176 N.E.2d 826, 8 A.F.T.R.2d 5325, 61-2 USTC P 9571 Robert AQUILINO et al., Copartners Doing Business under the Name of Home Maintenance Co., Respondents, v. UNITED STATES of America, Appellant, et al., Defendant, and Colonial Sand and Stone Co., Inc., Respondent. (Action) COLONIAL SAND AND STONE CO., Inc., Respondent, v. UNITED STATES of America, Appellant, et al., Defendants, and Home Maintenance Company, Respondent. (Action)
• Court: New York Court of Appeals Court of Appeals

Page 254

219 N.Y.S.2d 254

10 N.Y.2d 271, 176 N.E.2d 826, 8

A.F.T.R.2d 5325,

61-2 USTC P 9571

Robert AQUILINO et al., Copartners Doing Business under the

Name of Home Maintenance Co., Respondents, v. UNITED STATES of America, Appellant, et al., Defendant, and Colonial Sand and Stone Co., Inc., Respondent.

(Action No. 1.)

COLONIAL SAND AND STONE CO., Inc., Respondent, v. UNITED STATES of America, Appellant, et al., Defendants, and Home Maintenance Company, Respondent. (Action No. 2.)

Court of Appeals of New York.

July 7, 1961.

Robert M. Morgenthau, U. S. Atty., for Southern Dist. of New York, New York City (Stephen Kurzman and Burton M. Fine, New York City, of counsel), for appellant.

Kenneth J. Breskin, Mount Vernon, Jacob I. Goodstein, New York City, Charles S. Friedman, Mount Vernon, and Isidore Zamore, New York City, for respondents.

FULD, Judge.

This case is before us on remand from the United States Supreme Court. When it was previously here (3 N.Y.2d 511, 169 N.Y.S.2d 9), we concluded that a tax lien asserted by the United States was superior to claims advanced by subcontractors and, in consequence, held the Government entitled to a sum of money owed under a general construction contract performed by the taxpayer. The Supreme Court, believing that we had slighted State law and given undue emphasis to Federal decisions, vacated the judgment and remanded the case for further consideration (363 U.S. 509, 80 S.Ct. 1277, 1285).

Fleetwood Paving Corporation owes the United States Government a sum of money representing unpaid withholding and social security taxes. In December, 1951, and March, 1952, the local Collector of Internal Revenue received assessment lists including assessments against Fleetwood. Some time later, Fleetwood, as general contractor, agreed with one Ada Bottone to remodel a restaurant which she owned. Thereafter in the summer of 1952, Fleetwood entered into subcontracts with Home Maintenance Company and Colonial Sand and Stone Company to furnish labor and materials for the remodeling job.

On October 31, 1952, some days before the subcontractors, who had completed their work, filed their respective notices of mechanic's liens against the owner's realty, notice of the Federal tax liens was filed against Fleetwood. The owner thereupon deposited in court the sum of $2,200, which she still owed Fleetwood, and it is this fund which the competing claimants seek.

The courts below, each giving different reasons, denied the Government's claim of priority for its tax lien and granted the plaintiffs' motions for summary judgment. We reached a contrary decision; it was our opinion that the Government's lien was asserted against the indebtedness of the owner to the contractor-taxpayer and that such indebtedness constituted 'property' and 'rights to property,' as those terms are used in the controlling Federal statute (Internal Revenue Code of 1939, U.S. Code, tit. 26, § 3670 (now numbered § 6321), 26 U.S.C.A. § 6321).

As indicated above, the Supreme Court found our approach to the resolution of the problem unsatisfactory. In United States v. Bess, 357 U.S. 51, 78 S.Ct. 1054, 2 L.Ed.2d 1135, the court had explicitly declared that section 3670 of the Internal Revenue Code 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law' (357 U.S. 55, 78 S.Ct. 1057). Quoting this language, the Supreme Court sent the present case back to us so that we might 'ascertain the property interests of the taxpayer under state law' and then apply Federal law to determine the priority of the competing claims (363 U.S. at pages 515-516, 80 S.Ct. 1281). More specifically, we were directed to explore the meaning and impact of former section 36-a of our Lien Law, Consol.Laws, c. 33 and to determine whether under its terms the contractor-taxpayer holds bare legal title to the sum due from the owner, as trustee for the subcontractors, or whether it has full ownership of the debt, subject only to a lien in favor of the subcontractors.

It is to be noted at the outset that we are called upon to construe a statute no longer on the books and deal with law as it existed between 1942 and 1959. Section 36-a of the Lien Law, enacted in 1930, was repealed in 1959, its provisions, with modifications, being transferred to a new article 3-A. (L.1959, ch. 696, enacting Lien Law, §§ 70-79; see 1959 Report of N.Y.Law Rev.Comm., p. 185; N.Y.Legis.Doc., 1959, No. 65(F).)

Section 36-a was one among a series of provisions of the Lien Law directed against various injurious and irresponsible practices in the construction industry. Chief among the evils sought to be eradicated was that of 'pyramiding,' a practice whereby owners or contractors use money advanced in the course of one project, as loans or as contract payments, to commence or complete another project. In the case of a contractor, the so-called trust found provisions of the Lien Law prohibited diversion, to purposes unrelated to a particular improvement, of contract payments from the owner which were intended to pay the expense of that improvement, including the cost of labor and materials. (See 1942 Report of N.Y.Law Rev.Comm., pp. 298-306; N.Y.Legis.Doc., 1942, No. 65(H), pp. 28-36.)

The device which the Legislature used, throughout all the versions of section 36-a, to attempt to prevent the misuse of building contract payments was that of declaring that 'The funds received by a contractor from an owner for the improvement of real property * * * constitute trust funds in the hands of such contractor to be applied first to the payment of claims of subcontractors * * * laborers and materialmen arising out of the improvement'. If this legislative declaration and the legislative history of the trust fund provisions were all that were before us, the conclusion that the fund at issue in this case is the res of a trust held by the contractor rather than his own property would be relatively free from doubt. The fact is, however, the various other provisions of the statute, as well as a number of cases decided by this and other courts, complicate our decision.

In its earliest version, section 36-a, after designating the moneys received by the contractor a 'trust fund', prescribed only one means of enforcing the trust, namely, a criminal prosecution. As originally enacted in 1930, the section provided that 'any contractor * * * who applies or consents to the application of such (trust) funds for any other purpose (than the payment of the claims of the statutory beneficiaries) and fails to pay the claims hereinbefore mentioned is gulity of larceny'. On the basis of this language, this court, after disposing of the case on other grounds, stated in Raymond Concrete Pile Co. v. Federation Bank & Trust Co., 288 N.Y. 452, 462, 43 N.E.2d 486, 491, that 'The purpose of the sections (25-a and 36-a) * * *is solely penal and not to provide civil remedies.' This statement, as well as others similar to it, has been heavily relied upon in a number of cases. See, e. g. Gramatan-Sullivan v. Koslow, 2 Cir., 240 F.2d 523, 525; Case v. Panzarella, 27 Misc.2d 854, 35 N.Y.S.2d 388, affirmed 266 App.Div. 962, 44 N.Y.S.2d 811; Travis v. Nansen, 176 Misc. 44, 26 N.Y.S.2d 590.

However, the primary ground for decision in the Raymond Concrete case was that the statutory beneficiaries of the Lien Law trust were not privileged to trace payments made to the contractor-trustee into the hands of an assignee for value, absent proof that the assignee had actual notice of the existence of unpaid claims for supplies and materials (288 N.Y. at page 459, 43 N.E.2d at page 489). This holding, as distinguished from the dicta in the case, clearly supports the view that a section 36-a contractor-trustee holds the funds he receives as trustee, rather than as owner, until he has paid the claims of all of the statutory beneficiaries.

In any event, though, even if we were to accept the dicta of Raymond Concrete as authoritative and treat the case as holding that the provisions of the Lien Law did not provide for a true trust since they did not allow for a civil remedy, the holding must be limited to sections 25-a and 36-a as they read before 1942. In that year, 1942, Laws 1942, c. 808, § 4, the Legislature amended section 36-a by adding the following language:

'Such trust may be enforced by civil action maintained as provided in article three-a of this chapter by any person entitled to share in the fund, whether or not he shall have filed, or had the right to file, a notice of lien or shall have recovered a judgment for a claim arising out of the improvement. For the purpose of a civil action only, the trust funds shall include the right of action upon an obligation for moneys due or to become due to a contractor'.

And a new article 3-A was added to the Lien Law, entitled 'Enforcement of Trusts' (L.1942, ch. 808), to provide, among other matters, that the trust provisions may be enforced by a 'representative action brought for the benefit of all persons entitled to share in the (trust) fund' (Lien Law, § 71).

Although these 1942 amendments seem, on their face, to be designed to overcome the effect of the dicta in the Raymond Concrete case, 288 N.Y. 452, 43 N.E.2d 486, supra, the fact is that they were prepared before the decision was handed down. Actually, the amendments were designed to resolve problems raised by Wickes Boiler Co. v. Godfrey-Keeler Co., 2 Cir., 116 F.2d 842 and Amiesite Const. Co. v. Luciano Cont. & Bldg. Co., 284 N.Y. 223, 30 N.E.2d 483. (See 1942 Report of N.Y.Law Rev.Comm., pp. 297-298; N.Y.Legis.Doc., 1942, No. 65(H), pp. 27-28.) In the former case, the trust benefits under the Lien Law were held to be available only to those who had perfected mechanic's liens, and, in the latter case, it was decided that a subcontractor's right to moneys owing to a contractor, but still in the hands of the State which had contracted for the...