City of Vermillion, SD v. Stan Houston Equipment Co.

• Citation: 341 F. Supp. 707
• Decision Date: 18 April 1972
• Docket Number: Civ. No. 70-115S.
• Parties: CITY OF VERMILLION, SOUTH DAKOTA, a municipal corporation, Plaintiff, v. STAN HOUSTON EQUIPMENT CO., a corporation, et al., Defendants.
• Court: United States District Courts. 8th Circuit. United States District Courts. 8th Circuit. District of South Dakota

341 F. Supp. 707

CITY OF VERMILLION, SOUTH DAKOTA, a municipal corporation, Plaintiff, v. STAN HOUSTON EQUIPMENT CO., a corporation, et al., Defendants.

Civ. No. 70-115S.

United States District Court, D. South Dakota, S. D.

April 18, 1972.

Martin Weeks, of Bogue & Weeks, Vermillion, S. D., for plaintiff.

Everett A. Bogue, of Bogue & Weeks, Vermillion, S. D., for defendants Stan Houston Equipment Co., Holter, Montgomery and Odenbrett, Christensen, and National Bank of S. D.

Deming Smith, of Davenport, Evans, Hurwitz & Smith, Sioux Falls, S. D., for defendant Egger Steel Co.

Lee McCahren, Vermillion, S. D., for defendant Williams.

Joe W. Cadwell, Trustee in Bankruptcy, Sioux Falls, S. D., pro se.

James W. Donahoe, Vermillion, S. D., for defendant Fullerton Lumber Co.

R. D. Hurd and David R. Dienapp, Asst. U. S. Attys., Sioux Falls, S. D., for defendant Treasury Dept. of the U. S., I.R.S.

MEMORANDUM DECISION

NICHOL, Chief Judge.

The City of Vermillion (hereinafter referred to as City) began a declaratory judgment action against the defendants in the First Judicial Circuit of the State of South Dakota on July 30, 1970. The action sought to have the Court determine to whom the City should pay the proceeds of a public improvement contract between the City and one Laverne Odegaard, d/b/a Odegaard Construction of Vermillion (hereinafter referred to as Contractor), who has filed a bankruptcy petition. The United States Attorney on behalf of the Internal Revenue Service (hereinafter referred to as I.R.S.) removed the case to this Court under 28 U.S.C.A. Sec. 1442.

The Contractor and the City entered into a public improvement contract for the construction of tennis courts on September 10, 1969. On October 15, 1969, the Contractor assigned his interest in the proceeds of that contract to the National Bank of South Dakota, Vermillion Branch, (hereinafter referred to as Bank) to secure any present debts owed to or future advances from the Bank. This assignment was accepted by the City on October 17, 1969, and filed with the Clay County¹ Register of Deeds on November 28, 1969.

The I.R.S. served on the City auditor a notice of levy against the proceeds of the contract between the City and the Contractor for $3,700.19 on December 1, 1969. On December 15, 1969, the I.R.S. filed with the Clay County Register of Deeds a notice of tax lien for $3,675.91 upon all the property and rights to property of the Contractor.

On December 30, 1969, Fullerton Lumber Company garnished the contract proceeds in the hands of the City for debts owing by the Contractor which were not related to the public improvement contract. This garnishment was dismissed with prejudice by the state circuit court on November 19, 1970.

Public improvement liens for services and materials were filed with the City auditor as follows: Ludey Williams, d/b/a Ludey's Ready Mix Service, January 7, 1970 — $6,250.02; Vermillion Lien Insurance Agency, January 7, 1970 — $435.40 (now claiming only $272.40); George S. Christensen, January 7, 1970 — $748.28; Egger Steel Company, January 8, 1970 — $6,046.50; Stan Houston Equipment Company, January 19, 1970 — $303.67; and the National Bank of South Dakota, August 6, 1970 — $2,596.47.

The Contractor filed a bankruptcy petition on January 15, 1970. On February 12, 1970, the I.R.S. released its levy of December 1, 1969. The I.R.S. served a new notice of levy on May 12, 1970, against money owed the Contractor by the City, for $7,107.06. Final demand was made upon the City by the I.R.S. on July 23, 1970.

The City accepted the tennis courts on July 20, 1970, at which time it owed the Contractor $22,497.10 for work done. The City has paid $19,654.22 to one of the defendants, the National Bank of South Dakota, Vermillion Branch, to be held, without interest, in trust for those creditors (defendants) this court finds have priority. The City has withheld an additional $2,842.88 owing under the contract. The City claims this sum to be a setoff in the following amounts: services rendered to the Contractor not related to the public improvement contract — $137.32; a debt owed by the Contractor to Ludey Williams as a subcontractor on work done for the City not related to the contract here in question — $1,350.06; money paid to other contractors to complete the tennis courts — $1,355.50.

The Employment Security Department of the state of South Dakota claims that the Contractor owes $89.44 in unpaid taxes which it is now demanding be paid from the contract proceeds.

Since an agency of the United States, the I.R.S., is a party to this action, federal law as to priority of claims must govern. United States v. Equitable Life Assurance Society of the United States, 384 U.S. 323, 331, 86 S.Ct. 1561, 16 L.Ed.2d 593 (1966). The applicable federal law is 26 U.S.C.A. § 6323(a) & (h). Under that section we must look to state law in determining if a party is entitled to priority as a holder of a security interest, a mechanic's lienor or a judgment lien creditor. State law also applies in determining property ownership. Aquilino v. United States, 363 U. S. 509, 514, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960).

MECHANICS LIENORS

Statutory liens are excepted from the provisions of the Uniform Commercial Code (S.D.C.L. Ch. 57 (1967) ) by S.D. C.L. Sec. 57-35-3 (1967) (U.C.C. Sec. 9-102(2) ). Therefore, S.D.C.L. Ch. 5-22 (1967) granting public improvement liens to certain suppliers is applicable.

Egger Steel Company met all of the requirements of S.D.C.L. Ch. 5-22 (1967) and was granted summary judgment on June 25, 1971.

A public improvement lien has no validity unless an "action to enforce" it is commenced within 30 days from the acceptance of the work for which the lien is claimed. S.D.C.L. Sec. 5-22-7 (1967). The public body in control of money due or owing under a public improvement contract can commence an action to "determine" such liens before paying any claimant. S.D.C.L. Sec. 5-22-4 (1967). That section also allows "(a)ny person claiming a lien, if he be a defendant, (to) set forth such lien by answer." However, if the lien claimant chooses to enforce his lien by answer, he must answer within the 30 days provided by S.D.C.L. Sec. 5-22-7 (1967).

The City accepted the work of the Contractor on July 20, 1970. Stan Houston's only action to enforce was on April 23, 1971, when it filed its answer. Ludey Williams' only action to enforce was on April 22, 1971, when he filed his answer. George Christensen's only action to enforce was on August 31, 1970, when he filed his answer. Since no action was taken by these defendants within 30 days after acceptance of the work by the City, any liens which they may have had were discharged by virtue of S.D.C.L. Sec. 5-22-8(2) (1967).

The Vermillion Lien Insurance Agency claims a lien for the premium on the Contractor's performance bond and liability insurance. This defendant is not a person within S.D.C.L. Sec. 5-22-1 (1967) who furnished "skill, labor, materials, machinery, or supplies, services, or equipment, in connection with the carrying on of any work of construction, alteration, or repair of any public improvement. ..."

In addition the Vermillion Lien Insurance Agency did not comply with the 30 day provisions of S.D.C.L. Secs. 5-22-4 & 7 (1967) since the only action to enforce the lien was taken by answer on August 31, 1970. Therefore, any lien which it may have had was discharged by virtue of S.D.C.L. Sec. 5-22-8(2) (1967).

The Employment Security Department of the state of South Dakota claims a lien under S.D.C.L. Secs. 5-18-16 & 17 (1967). Those sections require a public corporation on a public improvement contract not to pay the contractor until he obtains a certificate from the Employment Security Department of the state of South Dakota that the department has been paid all contributions and interest due it by the Contractor. It does not provide for any lien in favor of the Employment Security Department of the state of South Dakota against the proceeds of the public improvement contract.

SECURITY INTERESTS

The City's claim for an equitable setoff is partially based on debts owed the City and Williams by the Contractor on claims totally unrelated to the public improvement contract here in question. Although under S.D.C.L. Sec. 57-35-17 (1967) (U.C.C. Sec. 9-104(i) ), setoffs are specifically excluded from the secured transactions filing provisions of the Uniform Commercial Code (S.D.C.L. Chs. 57-35 to 57-39 (1967) ), the City was unable to cite any law allowing such a setoff priority over secured claims. Since state law does not give the setoff priority it is precluded under 26 U.S.C. A. Sec. 6323(a).

The City remains liable under the public improvement contract for the entire amount of the alleged setoff ($2,842.88). All of the parties except the United States stipulated that the City paid $1,355.50 to other contractors in order to complete the tennis courts and that that sum was no longer owing the Contractor. However, the failure of the United States to so stipulate left that fact in issue. At trial the City offered no evidence to prove such payments. The record shows only that the City owed the Contractor for the amount of $22,497.10 for work done. Thus the amount allegedly paid to other contractors to complete the tennis courts has not been proved and is not a proper setoff.

The Bank's claim for a public improvement lien fails since they did not furnish "skill, labor, materials, machinery, or supplies, services, or equipment" under S.D.C.L. Sec. 5-22-1 (1967). They merely furnished the Contractor with money which could not be traced to the public improvement contract at trial. Additionally the Bank did not comply with the 30 day provisions of S.D.C.L. Secs. 5-22-4 & 7. The only action to enforce the lien that the bank took was by answer on September 18, 1970.

Under Aquilino v. United States, 363 U.S. 509, 514, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960), state law applies as to...