Johnson Service Co. v. Roush

• Citation: 355 P.2d 815,57 Wn.2d 80
• Decision Date: 06 October 1960
• Docket Number: No. 35319,35319
• Court: United States State Supreme Court of Washington
• Parties: JOHNSON SERVICE COMPANY, a Corporation, and American Air Filter Company, Respondents, v. Leo ROUSH, doing business as Roush Plumbing and Heating Company, et al., Defendants, American Surety Company of New York et al., Appellants.

Page 80

57 Wn.2d 80

355 P.2d 815

JOHNSON SERVICE COMPANY, a Corporation, and American Air Filter Company, Respondents, v. Leo ROUSH, doing business as Roush Plumbing and Heating Company, et al., Defendants American Surety Company of New York et al., Appellants.

No. 35319.

Supreme Court of Washington, Department 1.

Oct. 6, 1960.

Rehearing Denied Dec. 16, 1960.

Lewis L. Stedman, Seattle, Clifford O. Moe, Ephrata, for American suretY co.

Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, A. F. Prescott, Carolyn R. Just, Department of Justice, Washington D. C., Dale M. Green, U. S. Atty., Robert Frazier, Asst. U. S. Atty., Spokane, for United States.

John J. O'Connell, James A. Furber, Olympia, for respondent State.

Gibson & Palmer, Quincy, for respondent Westover and Hope.

Ries & Kenison, Moses Lake, for respondent Moses Lake Consol. Dist. No. 161.

DONWORTH, Judge.

This case involves the priority of payments from a fund of $16,118.54, which constitutes the unpaid balance on the contract price under a construction contract. The adverse claimants are the Federal Government, the Washington State Tax Commission, the American Surety Company of New York, Moses Lake Consolidated School District No. 161, and the contracting firm of Westover and Hope.

The case comes to us upon a short record. The facts are stipulated and may be summarized as follows:

On or about February 3, 1954, Moses Lake Consolidated School District No. 161 (hereinafter referred to as the school district) contracted with the Roush Plumbing and Heating Company (hereinafter referred to as the taxpayer) to do certain mechanical work on an addition to the Knoll's Elementary School building for a contract price of $66,697.62.

As required by RCW 39.08.010, the taxpayer executed a performance bond to insure the performance of its contract with the school district. Under the performance bond, the American Surety Company of New York (hereinafter referred to as the surety) was the obligor, and the school district, the obligee.

Under the terms of the contract, the taxpayer was to complete the work by October 17, 1954. The contract contained a provision whereby the taxpayer was to pay the school district, as liquidated damages, $100 a day for each day beyond the specified completion date that the contract remained uncompleted. The taxpayer did not complete the work under his contract until December 10, 1954, fifty-four days after the specified completion date.

Upon completion of the contract, there remained in the hands of the school district the sum of $16,118.54. Of this amount, $10,004.63 represented fifteen per cent of the total contract price required by RCW 60.28.010 to be retained by the school district to satisfy any unpaid claims of laborers and materialmen, and to satisfy any taxes incurred by the taxpayer under RCW Title 82, which may be due the state of Washington.

Various unpaid laborers and materialmen, who had furnished labor and materials to the taxpayer with respect to the principal contract, filed notices of lien claims with the school district. The surety paid the claims of those laborers and materialmen who, in its opinion, had complied with the statutes pertaining to filing notice of intent to claim a lien (RCW 39.08.030 to 39.08.060). The surety received assignments of these claims as of the date of their payment. Altogether, the claims paid by the surety, including attorneys' fees, interest and costs, amounted to $15,002.42.

The firm of Westover and Hope furnished labor and materials in the sum of $743.03 to the taxpayer in connection with the contract. However, the surety refused to pay this claim on the ground that the provisions of RCW 39.08.030, relating to the giving of notice, had not been complied with.

By virtue of its performance of the contract, the taxpayer incurred a liability to the state tax commission for taxes imposed by RCW Title 82. The state of Washington and the surety stipulated that the amount of taxes due and owing was $2,223.25.

Also, in connection with the performance of the contract, the taxpayer became indebted to the United States for federal withholding, social security, and unemployment taxes in the total amount of $9,036.93. These taxes were assessed, and notices of liens were filed with the county auditor pursuant to RCW 60.68.010. After receiving notice and demand for payment, the taxpayer made partial payments totaling $1,834.81, thereby reducing its liability to the United States to $7,202.12.

This action originated when the Johnson Service Company, a materialman, brought suit against the taxpayer and the surety to recover for labor performed and material furnished under the principal contract. Various other materialman claimants, the state of Washington, and the United States were joined as party defendants and filed answers and cross-complaints. Thereafter, the surety paid off the claims of the Johnson Service Company and the various other lien claimants (with the exception of Westover and Hope) and was substituted as a party in their stead.

Following a pretrial conference on April 29, 1957, the matter came on for trial on September 22, 1958, before the court sitting without a jury. On January 2, 1959, the trial court filed a memorandum opinion. Findings of fact, conclusions of law, and judgment were filed on March 20, 1959.

In arriving at its judgment, the trial court divided the $16,118.54 into two funds. The first fund of $10,004.63 constituted the fifteen per cent retained by the school district, under RCW 60.28.010, for the benefit of laborers and materialmen and the state tax commission. The second fund consisted of the excess of $6,113.91.

In distributing the retained percentage fund of $10,004.63, the trial court awarded $2,223.25 to the state tax commission; $993.03 to Westover and Hope ($743.03 for labor and materials plus $250 attorneys' fees); and the remainder of $6,788.35 to the surety in partial satisfaction of its claim for $15,002.42.

As to the excess fund of $6,113.91, the trial court held that the school district was entitled to $5,400 as liquidated damages under the construction contract for the taxpayer's failure to complete the work within the specified time. The difference of $713.91 ($6,113.91 less $5,400) was awarded to the United States in partial satisfaction of its federal tax liens.

After the above distribution, the taxpayer remained indebted to the United States in the sum of $6,448.21 and to the surety in the sum of $8,214.07, for which amounts the trial court entered judgment against the taxpayer.

Following the entry of judgment, the United States filed a motion for a new trial, which was denied.

The United States and the surety have appealed.

The United States assigns eight errors, most of which are merely cumulative. In essence, it is claimed that the trial court erred in holding that the United States had no right to any of the money which comprised the fifteen per cent retained percentage fund.

The United States contends that its tax liens are valid against the retained percentage fund and are entitled to priority of payment over the claims therein of Westover and Hope, the surety, and the state tax commission.

Whatever interest the United States might have herein is predicated upon section 6321 of the Internal Revenue Code of 1954, 26 U.S.C.A. § 6321, which reads as follows:

'If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.' (Italics ours.)

Thus, the initial question to be resolved is not one of priority, but one of property. It must first be determined to what extent, if any, the taxpayer had 'property' or 'rights to property' in the retained percentage fund to which the federal tax liens could attach. This is a matter to be ascertained under state law. As the United States supreme court so recently stated in Aquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365:

'The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had 'property' or 'rights to property' to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that 'in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property * * * sought to be reached by the statute.' [§ 6321, supra] Morgan v. Commissioner, 309 U.S. 78, 82, 60 S.Ct. 424, 426, 84 L.Ed. 585. Thus, as we held only two Terms ago, Section 3670 [§ 6321 of the 1954 Code] 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law * * *.' United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135. * * *.'

See, also United States v. Durham Lumber Co., 363 U.S. 522, 80 S.Ct. 1282, 4 L.Ed.2d 1371.

As previously stated, the money comprising the retained percentage fund was withheld by the school district pursuant to RCW 60.28.010, which provides:

'Contracts for public improvements or work by the state, or any county, city, town, district, board, or other public body, shall provide, and there shall be reserved from the moneys earned by the contractor on estimates during the progress of the improvement or work, a sum equal to fifteen percent of such estimates, said sum to be retained by the state, county, city, town, district, board, or other public body, as a trust fund for the protection and payment of any person or persons, mechanic, subcontractor or materialman who shall perform any labor upon such contract or the doing of...