Home Indemnity Company v. FH Donovan Painting Co.

• Decision Date: 17 December 1963
• Docket Number: No. 17330.,17330.
• Parties: The HOME INDEMNITY COMPANY, a Corporation, Appellant, v. F. H. DONOVAN PAINTING CO., Inc., Bankrupt; Donald B. Kramer, Trustee of F. H. Donovan Painting Co., Inc., Bankrupt; State of Texas, and United States of America, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

325 F.2d 870 (1963)

The HOME INDEMNITY COMPANY, a Corporation, Appellant, v. F. H. DONOVAN PAINTING CO., Inc., Bankrupt; Donald B. Kramer, Trustee of F. H. Donovan Painting Co., Inc., Bankrupt; State of Texas, and United States of America, Appellees.

No. 17330.

United States Court of Appeals Eighth Circuit.

December 17, 1963.

James E. McDaniel, St. Louis, Mo., made argument for appellant and Herbert E. Barnard, McDonald, Barnard, Wright & Timm, St. Louis, Mo., was on the brief with him.

Gideon H. Schiller, Clayton, Mo., made argument for appellee Donald B. Kramer, St. Louis, Mo., Trustee of F. H. Donovan Painting Co., and was on the brief.

Sam Lane, Asst. Atty. Gen., Austin, Tex., made argument for appellee State of Texas and filed brief with Waggoner Carr, Atty. Gen., of Texas.

Arthur E. Strout, Atty., Dept. of Justice, Washington, D. C., made argument for the appellee United States and John B. Jones, Jr., Acting Asst. Atty. Gen., Washington, D. C., Meyer Rothwacks, I. Henry Kutz and Arthur E. Strout, Attys., Dept. of Justice, Washington, D. C., and also Richard D. FitzGibbon, Jr., U. S. Atty., and Harold F. Fullwood, Asst. U. S. Atty., were on the brief for the United States.

Before VOGEL and MATTHES, Circuit Judges, and ROBINSON, District Judge.

MATTHES, Circuit Judge.

This appeal in a bankruptcy proceeding presents the following questions for our determination:

1. Whether the sum of $39,711.11 paid as wages by The Home Indemnity Company (Surety) between the date of contractual default (March 31, 1960) of F. H. Donovan Painting Co., Inc. (Bankrupt), and the date of Donovan's bankruptcy (May 4, 1960), constituted wages within the meaning of §§ 64, sub. a(2) of the Bankruptcy Act, Title 11 U.S.C.A. § 104, sub. a(2), requiring allowance as a wage priority claim.

2. Whether the wage priority claim allowed in favor of Surety in the amount of $17,974.25 for wages due workmen prior to Donovan's default was properly subordinated in full to payment of the tax claimed by the United States in the amount of $31,855.91 and the tax claimed by the State of Texas in the amount of $2,995.27.

The memorandum opinion of the Referee in Bankruptcy which incorporated his findings of fact and conclusions of law, was adopted in toto by the district court and appears as part of the court's order affirming the action of the bankruptcy court. In Re F. H. Donovan Painting Co., E.D.Mo., 220 F.Supp. 811 (1963). Surety has appealed.

There is no dispute as to the facts. They were stipulated and Surety concedes that the factual findings of the referee, appearing in his memorandum opinion, are correct. This being so, we forego another detailed recitation of the factual background and shall confine our review of the facts to those deemed essential to a proper understanding and disposition of the issues before us.

Donovan was the subcontractor of Robertson Construction Company by virtue of five separate written contracts with Robertson, identical as to pertinent terms, obligating Donovan to paint 500 housing units at Fort Hood, Texas. Separate labor and material bonds and separate performance bonds were executed by Donovan as principal and The Home Indemnity Company as surety, in which Robertson, the general contractor, was named as obligee. The five contracts totaled $258,500, and the five performance bonds were for one-half of that amount, or $129,250.

On March 31, 1960, Donovan notified Surety that it was unable to meet current payrolls, considered itself in default of its obligations under the contracts, requested Surety to make preparations to complete the project, and advised that a voluntary petition in bankruptcy would be filed. A similar notice was given Robertson. On the same day Donovan stopped operations, Surety took over, and thereafter completed the project.

From March 31, 1960, to date of bankruptcy, May 4, 1960, Surety paid wages to workmen in the sum of $39,711.11; additionally, Surety paid the sum of $17,974.25 as wages to workmen who had been employed by Donovan and which was due them from the latter at the time it defaulted in the performance of the contracts. The workmen duly assigned their wage claims against Bankrupt to Surety for the amounts paid to them by Surety.

Surety filed a claim in the bankruptcy court for a total of $90,141.68; $17,974.25 was allowed as a wage priority claim, and $64,611.43 was allowed as a general unsecured claim.

Bankrupt owed the United States for taxes in the total amount of $31,855.91, and a tax priority claim of the fourth class was allowed for this amount. Of this total, only $13,987.88 ($3,333.08 in F.I.C.A. Taxes and $10,654.80 in withholding taxes) was incurred on the Fort Hood job bonded by Surety, while the balance of the claim was for taxes due the United States unrelated to the bonded project.

Bankrupt also owed the State of Texas $2,995.27 for state unemployment taxes which were incurred on the Fort Hood project, and a tax priority claim was allowed Texas for this amount.

Having determined that Surety was entitled to a wage priority in the amount of $17,974.25, the bankruptcy court then concluded that the priority claim should be subordinated in payment to the claims of the United States and the State of Texas. See 220 F.Supp. at 821-822.

Surety first contends, as it did below, that the amount it paid as wages, $39,711.11, from Donovan's default to the date of Donovan's bankruptcy, should also be allowed as a wage priority claim, asserting that it "claims priority on all of these wages paid by reason of the assignment placed on the reverse side of each of said checks prior to delivery to the workmen."

But Surety has failed to recognize that the amounts which it paid for work and labor performed on the project after Bankrupt's default on March 31, 1960, was not in discharge of wages due from Bankrupt. The facts show and the referee found that,

"At that time the surety company took possession of the work under the contract and completed same in accordance with its contractual obligation and right so to do. It did not subcontract the work, but hired direct some of the employees who had been working on the job, and hired other new employees. It deducted income withholding and payroll taxes, federal and state, and paid same to the governments. It supervised and controlled the work. Donovan Painting Company, the bankrupt corporation, did not participate in the operation after it defaulted and abandoned the contract. The workers who were paid these wages during this period were employees of the surety company, and not of the bankrupt." 220 F.Supp. at 817.

This finding is binding upon Surety and in our view is dispositive of its contention. We have considered In Re Dutcher, W.D.Wash., 213 F. 908 (1914), relied upon by Surety, and for the reasons stated by the bankruptcy court, 220 F.Supp. at 817, we too conclude that Dutcher is not controlling and does not require an allowance of the amount in question as a wage priority claim.

The second issue to be resolved, relating to the subordination of Surety's $17,974.25 claim — undisputed as a wage priority — to payment of the tax priority claims of the United States and the State of Texas, presents a two-pronged question. First, whether Donovan was obligated under the subcontracts to pay taxes which were incurred on the Fort Hood project. Surety asserts that there was no contractual obligation imposed upon Donovan to pay such taxes; there was no liability under the performance bonds for payment of these debts of the bankrupt Donovan; and consequently no basis for subordinating its second class claim to payment of the fourth class claims of the United States and Texas. Secondly, the argument is made that Surety's claim is for wage priorities, not as a surety, but as assignee of the wage earners, and thus should not be subordinated to payment of any portion of the tax claims, and in no event should be subordinated to payment of taxes due the United States from Bankrupt which were not related to the Fort Hood project.

The first of these contentions must be resolved against Surety.

Each of the subcontracts contained this provision:

"Subcontractor shall accept full and exclusive liability for the payment of any and all taxes and contributions for unemployment insurance, old age retirement benefits and life pensions and annuities which may now or hereafter be imposed by the United States or any State, * * *. Subcontractor shall likewise pay any and all taxes, sales taxes, use taxes, excise assessments or other charges levied by any governmental authority on or because of the work to be done hereunder, or any equipment, supplies or materials used in the performance thereof." (Emphasis supplied).

Each of the performance bonds was conditioned upon faithful performance by the principal (Donovan) of the respective subcontract. The bonds also specifically referred to the subcontracts and provided that such "subcontract is by reference made a part hereof." It is a fundamental rule of construction that where the contract which is the subject of the performance bond is referred to in the latter, that the contract is to be regarded as a part of the undertaking of the surety under the bond. Massachusetts Bonding & Insurance Co. v. Feutz, 8 Cir., 182 F.2d 752, 756-757 (1950); United States v. Phoenix Indemnity Co., 4 Cir., 231 F.2d 573, 575 (1956). It is equally well-settled that where, as here, there is a compensated surety, the performance bond and the contract upon which it is based are construed most strongly against the surety and in favor of indemnity. American Casualty Co. of Reading, Pa. v. Brezina Const. Co., 8 Cir., 295 F.2d 603, 607, fn. 6 (1961); Massachusetts Bonding & Insurance Co v. Feutz, supra, 182 F.2d at 756.

Surety argues that the contractual provision above set out does not constitute a promise to pay taxes but is "merely a statement that the Subcontractor Donovan is liable for the payment and consequently...