COLUSA-GLENN PRODUCTION CR. ASS'N v. Phoenix Ins. Co.

• Decision Date: 02 August 1956
• Docket Number: No. 33942.,33942.
• Citation: 145 F. Supp. 844
• Parties: COLUSA-GLENN PRODUCTION CREDIT ASSOCIATION, a California Corporation, Plaintiff, v. PHOENIX INSURANCE COMPANY OF HARTFORD, CONNECTICUT, a Connecticut Corporation; James C. Berlinger et al., Defendants, United States of America, Plaintiff in Intervention.
• Court: U.S. District Court — Northern District of California

145 F. Supp. 844

COLUSA-GLENN PRODUCTION CREDIT ASSOCIATION, a California Corporation, Plaintiff, v. PHOENIX INSURANCE COMPANY OF HARTFORD, CONNECTICUT, a Connecticut Corporation; James C. Berlinger et al., Defendants United States of America, Plaintiff in Intervention.

No. 33942.

United States District Court N. D. California, S. D.

August 2, 1956.

Cushing, Cullinan, Duniway & Gorrill, San Francisco, Cal., for plaintiff.

Laughlin, McKalson & Crable, Chico, Cal., Hewitt & McBride, Yuba City, Cal., Manwell & Manwell, Arthur S. Powell, Marysville, Cal., Ira B. Langdon, Stockton, Cal., for defendants.

Lloyd S. Burke, U. S. Atty., San Francisco, Cal., for plaintiff in intervention.

EDWARD P. MURPHY, District Judge.

This is an action under 28 U.S.C. § 1335 by the holder of certain funds, amounting to $12,411.40 and now deposited in the registry of this Court, for a determination of the respective rights in that sum of the United States and a surety, the Phoenix Insurance Company of Hartford, Connecticut.

The surety issued its bond to guarantee the performance of a building contract by one Berlinger, a contractor. The other party to the contract was the Colusa-Glenn Production Credit Association, hereinafter called owner. The bond was executed on November 21, 1953, and the building contract on November 27, 1953. The contract provided for the usual ten per cent withholding provision until completion of the entire job, and for progress payments upon architects' certificates only. The contract further provided that time was of the essence and that the building was to be completed by May 24, 1954.

Pursuant to this contract, the owner paid to the contractor approximately $46,000 prior to June 1, 1954. On that date, the contractor was in default in several respects, including the time provision in the contract. The government filed a notice of tax lien upon the owner on June 1, 1954, and several days thereafter the contractor left the job altogether and did no further work. On June 1, 1954, no amount of money was due and owing to the contractor under the contract, whether as withheld portions, or as portions of the contract price certified for payment by the architects.

The surety now stepped in and performed its obligations to the owner under its bond. It paid off certain liens and arranged for the completion of the job by another contractor, thereby incurring costs in excess of the withheld sum of $12,411.40. Upon completion of the job, the surety made demand upon the owner for the remainder of the contract price. In view of conflicting demands made by the United States, the owner filed this suit.

The United States bases its claim upon tax assessments becoming effective as liens upon any property of Berlinger on the following dates and in the following amounts: 11/18/53, $6,952.32; 2/8/54, $1,820.40; 6/3/54, $657.95. These assessments were received in the office of the Collector on the dates and in the amounts indicated, and therefore became liens against "all property and rights to property * * * belonging to such person", here Berlinger. 26 U.S. C. §§ 3670-3672.¹

The United States urges its claim as being prior to any liens not perfected in the manner provided by 26 U.S.C. § 3672(a). Under recent Supreme Court decisions, there seems to be no doubt that a federal tax lien is superior to a surety's general claim arising out of the equitable doctrine of subrogation. See, for examples of liens inferior to federal tax liens because not sufficiently perfected, United States v. Acri, 1955, 348 U.S. 211, 75 S.Ct. 239, 99 L.Ed. 264; United States v. Scovil, 1955, 348 U.S. 218, 75 S.Ct. 244, 99 L.Ed. 271; United States v. Liverpool & London & Globe Insurance Co., Ltd., 1955, 348 U.S. 215, 75 S.Ct. 247, 99 L.Ed. 268; United States v. Security Trust & Savings Bank, 1950, 340 U.S. 47, 71 S.Ct. 111, 95 L.Ed. 53; and Phoenix Indemnity Co. v. Earle, 9 Cir., 1955, 218 F.2d 645.

However, all of these cases determine the priority of federal tax liens where there is some property of the taxpayer, or rights to property, to which such liens may attach. In the Acri case, supra, the property was cash and bonds unquestionably belonging to the taxpayer. In the Scovil case, supra, the property was a fund resulting from sale of assets of the taxpayer corporation. In the Liverpool case, supra, the property was an insurance fund, again unquestionably the property of the taxpayer. In the Security Trust case, supra, the property was four parcels of real estate belonging to the taxpayer. In the Phoenix case, supra, the court specifically found that the taxpayer had not defaulted under the contract, 218 F.2d 645, at page 647; the inference is plain that the rights to property to which the federal tax lien attached in that case were the sums owing to the contractor by reason of his substantial performance of the contract.

Likewise, two recent cases cited by the government after oral argument, dealing with the priority of federal tax liens as against the surety's claim to funds withheld under a building contract, must be read as deciding questions of priority only, without resolving the issue of whether the contractor in circumstances such as those present here has any rights to property to which the government liens can attach. This Court finds itself in agreement with the opinion of Justice Hofstadter in Aetna Casualty & Surety Co. v. Horticultural Service, Inc., Special Term, N. Y. County, 1956, 1 Misc.2d 956, 147 N.Y.S.2d 422. In that case, no mention is made of the default of the contractor there involved, and it must be assumed that the property rights disputed were rights to money under a building contract substantially performed. The other case cited, Fidelity & Deposit Co. v. New York City Housing Authority, D.C.S.D.N.Y.1956, 140 F.Supp. 298, contains an express finding by Judge Dimock that the contractor completed the construction. See 140 F. Supp. 298, at page 300. The sole default there was that the contractor had failed to pay all the laborers and materialmen, as he had contracted with the owner to do. The surety in that case contended that the contractor, not having paid his laborers and materialmen, despite the fact that he had finished the building, had no right to the withheld funds. To this, Judge Dimock replied:

"The answer is a short one. The contractor's right to the withheld funds, even though conditioned upon acts which the contractor had not performed, was nevertheless an existing right albeit subject to the condition. The Government tax liens attached to it. If the surety is protected here it is not because the lien did not attach to the contractor's interest but because the contractor's interest was subordinate to that of the surety." Id. at page 301.

The issue confronting us here is whether Berlinger, the contractor, had any rights to the sums withheld by the owner after June 1, 1954. Unlike the contractor in the Fidelity Deposit case, supra, Berlinger here committed a breach which must be held to go to the essence of the contract. He was in default with respect to the element of time of completion, provided in the contract to be of the essence. He was in default with respect to payments to his sub-contractors and others. And if these violations of his duties under the contract leave any doubt as to whether they were such a breach of his contract as to dissolve the contract altogether and forfeit his conditional rights under the contract, the fact that he walked off the job completely and never...