Century Indemnity Company v. Riddell

• Decision Date: 30 April 1963
• Docket Number: No. 17354.,17354.
• Citation: 317 F.2d 681
• Parties: CENTURY INDEMNITY COMPANY, Appellant, v. Robert A. RIDDELL, District Director of Internal Revenue for the Los Angeles District of California, Appellee. Robert A. RIDDELL, District Director of Internal Revenue for the Los Angeles District of California, Appellant, v. CENTURY INDEMNITY COMPANY, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

317 F.2d 681 (1963)

CENTURY INDEMNITY COMPANY, Appellant, v. Robert A. RIDDELL, District Director of Internal Revenue for the Los Angeles District of California, Appellee.

Robert A. RIDDELL, District Director of Internal Revenue for the Los Angeles District of California, Appellant, v. CENTURY INDEMNITY COMPANY, Appellee.

No. 17354.

United States Court of Appeals Ninth Circuit.

April 30, 1963.

Arthur H. Deibert and A. L. Burford, Jr., Los Angeles, Cal., for appellant and cross-appellee.

Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, I. Henry Kutz, Sharon L. King, Dept. of Justice, Washington, D. C.; Francis C. Whelan, U. S. Atty., and Richard G. Sherman, Asst. U. S. Atty., Los Angeles, Cal., for appellee and cross-appellant.

Before CHAMBERS and MERRILL, Circuit Judges, and TAVARES, District Judge.

TAVARES, District Judge.

Both parties in this case — namely, Century Indemnity Company (hereinafter called Century) and Robert A. Riddell, District Director of Internal Revenue for the Los Angeles District of California (hereinafter called Director) — have appealed from portions of a judgment involving federal income withholding taxes on wages for the period between December 7, 1953, and September 17, 1954. The decision below being oral, is unreported.

Century, the surety on the bond of a subcontractor White-Ahlgren Co., Inc. (hereinafter called White-Ahlgren or the subcontractor) was assessed by the Director for federal withholding taxes as an alleged "employer" under certain provisions of the Internal Revenue Code of 1939, as enacted by the Current Tax Payment Act of 1943, and as further amended,¹ and the applicable Treasury Regulations.²

Century paid the assessments under protest, and brought this action for refund thereof.

The case below also involved claims for refund of certain other sums paid under protest by Century on the Director's claim of liability for taxes under the Federal Insurance Contributions Act, and the Federal Unemployment Taxes Act, which claims were decided below favorably to Century and from which the Director has not appealed, the lower court having held that Century was not the "employer" within the meaning of the applicable statutes for the purpose of those taxes.

The facts found by the lower court and which are based upon substantial evidence, are as follows:

Century is a Connecticut corporation qualified to do business in California. On October 6, 1953, White-Ahlgren entered into a subcontract with Marine Development, Inc. (hereinafter called Marine or the Contractor) whereby White-Ahlgren undertook to complete the concrete work on a one thousand unit Wherry Housing project, Camp Pendleton, California. In connection with the subcontract, and as required by applicable statutes and regulations, White-Ahlgren applied for and secured a contract bond from Century and executed the usual indemnity agreement, all in the amount of the subcontract price of some $549,000. This bond was executed by White-Ahlgren as principal and Century as surety, and ran to Marine as owner and Republic National Bank of Dallas, Texas, as mortgagee. Under the bond, Century guaranteed to Marine and the mortgagee the faithful performance of the subcontract and payment for all labor and material incurred in connection with such performance. Work under the subcontract began December 7, 1953.

At the time the bond was executed, White-Ahlgren, by agreement with Century, obtained a commercial checking account in the Security Trust and Savings Bank of San Diego, California, (hereinafter called the Bank) which was designated as "White-Ahlgren Trust Account No. 1" (hereinafter called the Trust Account). Under the arrangement made at the inception of this account and subsequent modifications thereof, White-Ahlgren and Century had joint control of this account and the resolutions and signature cards filed with the bank, as interpreted by the parties and by the court, required all checks drawn against the Trust Account to be signed by an authorized representative of White-Ahlgren on the one hand, and countersigned on the other hand by any one of several designated representatives of Century, who were to sign as "trustee" or "attorney-in-fact" of Century.³

The subcontract provided, among other things, (a) for monthly progress payments less 10% and less all previous payments, etc. and (b) that subcontractor should pay all Social Security and other taxes imposed on subcontractor as employer in connection with the labor provided by subcontractor under the contract.

The application for the bond contained a usual provision, in Section FOURTH, that the Century as surety should be subrogated to all rights, privileges and properties of the subcontractor in said contract and that the subcontractor did thereby "assign, transfer and convey to said Company all the deferred payments and retained percentages rising out of this contract, and any and all monies and properties that may be due and payable" to said subcontractor "and the balance of the contract price remaining and unpaid at the time of the happening" of any one of certain specified contingencies "or that may thereafter become due and payable" to subcontractor "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 * * * sustained or incurred by it" under the bond. The bond also provided for payment to the subcontractor of any over-plus remaining in Century's possession, after its full reimbursement, and that if the subcontractor defaulted in the performance of the contract, Century as surety had the right at its option to proceed, or procure others to proceed, with the performance of the contract.

Except for retention payments withheld by the prime contractor in the sum of some $54,000 and paid directly by the prime contractor to Century on December 17, 1954, all progress payments made by the prime contractor under the subcontract were required to be, and were, deposited in this Trust Account. The only job being performed by White-Ahlgren during the entire period in question was the subcontract here involved and at no time did White-Ahlgren receive any funds from another job during this period, although it apparently had some prospects, later proved unfounded, of collecting some money from a previous job which it assigned to Century in May, 1954.

White-Ahlgren also had, for at least part of the period in question, a general commercial account at the same bank, with which account Century had no connection.

On the same day the Trust Account was opened $25,000 was deposited therein, of which $10,000 was advanced by the prime contractor and $15,000 was a loan to White-Ahlgren by a Mrs. Clausen.

This Trust Account continued in existence until December 6, 1954. Although there were some negotiations in March, 1954, indicating that the price contractor was dissatisfied with the subcontractor's work, no final action was taken to supersede the subcontractor and White-Ahlgren continued to perform under the contract, as modified to allow weekly rather than semi-monthly progress payments by Marine, until its completion.

About mid-February 1954 White-Ahlgren found it had underbid on the subcontract due to some mistake in estimating the job, and became unable to pay all materialmen and incidental labor in connection with the subcontract, and so notified Century. Century ultimately paid the creditors of White-Ahlgren the total sum of $119,000, made recoveries in connection with its claims asserted under the terms of the bond and indemnity agreement in the amount of some $70,000, leaving a final net loss to Century of some $48,000.

Century never paid or advanced any of its own funds to meet the payroll of White-Ahlgren except for $1,090 deposited in the Trust Account in September, 1954, to enable the subcontractor to meet in full its final payroll upon completion of the subcontract. The subcontractor's payrolls were prepared and checks were issued for its employees in the following manner:

(a) Beginning with the subcontract, Mrs. Higgins, bookkeeper for the subcontractor, prepared weekly payroll sheets. The foreman delivered the time cards and from them Mrs. Higgins computed the hours, rate of pay, applicable deductions, and the net figure.

She then prepared a recap of the total payroll showing each employee\'s name, hours worked, rate of pay, gross amount due, total tax deductions, and net amount due, and a copy of the payroll recap was furnished to the representative of Century before the checks hereinafter mentioned were countersigned by such representative.

(b) For the period between December 7, 1953, and March 8, 1954, a weekly check payable to White-Ahlgren in the gross amount of each weekly payroll was drawn on the Trust Account, signed by an authorized representative of White-Ahlgren and countersigned by Century\'s representative as trustee and turned over to White-Ahlgren. Between January 12, 1954 and March 8, 1954, a similar check in the net amount of the payroll (gross amount less deductions) was likewise drawn and signed and delivered to White-Ahlgren\'s general account and checks to the individual employees were drawn from this account by White-Ahlgren. However, by mistake, instead of the individual payroll checks being drawn by White-Ahlgren on its own separate general account as intended in respect of these earlier payments, White-Ahlgren at first drew a number of individual checks on the Trust Account, which were honored by the Bank, although not countersigned by Century\'s representative as required; 148 such checks in the amount of some $9,600 were so written and paid before this was discovered, the dates being from December 18, 1953, through January 8, 1954; by letter to the Bank dated January 15, 1954

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