United States v. AMERICAN EMPLOYERS'INSURANCE CO.

• Decision Date: 08 April 1961
• Docket Number: Civ. No. 3618.
• Citation: 192 F. Supp. 873
• Parties: UNITED STATES of America for the Use of the HOME INDEMNITY COMPANY, a corporation, Assignee, Plaintiff, v. AMERICAN EMPLOYERS' INSURANCE COMPANY, a corporation, and Oil Capital Construction Company, a corporation, Defendants, and United States of America, Interpleaded Defendant, and York Electric Construction Company, a corporation, Additional Indispensable Party Defendant.
• Court: U.S. District Court — District of South Dakota

192 F. Supp. 873

UNITED STATES of America for the Use of the HOME INDEMNITY COMPANY, a corporation, Assignee, Plaintiff, v. AMERICAN EMPLOYERS' INSURANCE COMPANY, a corporation, and Oil Capital Construction Company, a corporation, Defendants and United States of America, Interpleaded Defendant and York Electric Construction Company, a corporation, Additional Indispensable Party Defendant.

Civ. No. 3618.

United States District Court D. North Dakota, Northeastern Division.

April 8, 1961.

Harold D. Shaft, of Shaft, Benson & Shaft, Grand Forks, N. D., and John Murphy, of Tucker, Murphy, Wilson & Siddens, Kansas City, Mo., for plaintiff, Home Indemnity Co.

Robert Vaaler, of Day, Stokes, Vaaler & Gillig, Grand Forks, N. D., for defendants, American Employers' Ins. Co. and Oil Capital Const. Co.

Robert L. Handros and John M. Burzio, Tax Division, United States Department of Justice, Washington, D. C., for interpleaded defendant, United States of America.

RONALD N. DAVIES, District Judge.

Oil Capital Construction Company (hereinafter Oil Capital) was prime contractor under a contract with the United States for certain construction work on the Grand Forks, North Dakota, Air Force Base. American Employers' Insurance Company (hereinafter American Employers') issued performance and payment bonds thereon under provisions of the Miller Act, 40 U.S.C.A. §§ 270a, 270b.

On February 11, 1957, Oil Capital made a subcontract with York Electric Construction Company (hereinafter York) whereby York agreed to furnish certain materials and labor for construction of utilities required under the prime contract. A performance bond was executed and delivered on February 25, 1957, by The Home Indemnity Company (hereinafter Home Indemnity) conditioned upon the faithful performance of the subcontract by York. The performance bond among other things provided:

"Whenever Contractor (York) shall be, and declared by Owner (Oil Capital) to be in default under the Contract, the Owner having performed Owner's obligations thereunder, the Surety may promptly remedy the default, or shall promptly

"(1) Complete the Contract in accordance with its terms and conditions, or

"(2) Obtain a bid or bids for submission to Owner for completing the Contract in accordance with its terms and conditions, and upon determination by Owner and Surety of the lowest responsible bidder, arrange for a contract between such bidder and Owner and make available as work progresses (even though there should be a default or a succession of defaults under the contract or contracts of completion arranged under this paragraph) sufficient funds to pay the cost of completion less the balance of the contract price, but not exceeding, including other costs and damages for which the Surety may be liable hereunder, the amount set forth in the first paragraph hereof. The term `balance of the contract price', as used in this paragraph, shall mean the total amount payable by Owner to Contractor under the Contract and any amendments thereto, less the amount properly paid by Owner to Contractor."

Prior to commencing work under the subcontract, York notified both Home Indemnity and Oil Capital that due to financial difficulties it would not be able to perform the subcontract. Oil Capital immediately called upon Home Indemnity as surety to make good the default of its principal, York. Under terms of the performance bond Home Indemnity was confronted with a choice either of completing or reletting the subcontract. Oil Capital expressed a desire that York be allowed to undertake performance if at all possible. York was in default on several other contracts upon which Home Indemnity was acting as surety, and therefore Home Indemnity anticipated substantial suretyship losses. Desirous of keeping its anticipated losses to a minimum, Home Indemnity allowed York to proceed under certain conditions.

York executed an assignment of the subcontract price to Home Indemnity; a joint control account was set up in which deposit was to be made of the subcontract funds; and Oil Capital was authorized to pay certain of York's suppliers directly. Other material suppliers were to be paid from the joint control account after Home Indemnity's approval. Material costs in excess of the deposits in the control account were to be paid from funds advanced by Home Indemnity. Payroll expenses were supplied to York by Home Indemnity upon submission of payroll vouchers. Net payroll costs only were advanced, no provision being made for the payment of withholding taxes.

After making this agreement on April 12, 1957, York was allowed to proceed with the work commencing the week of April 25, 1957, and so far as York was concerned, finishing the week of September 25, 1957. Certain odds and ends called the "punch list" remained, and Home Indemnity employed Jayhawk Electric Construction Company (Jayhawk) to complete the subcontract. This was done by November 28, 1957, but as a dispute arose over the amount due Jayhawk, they were not paid by Home Indemnity until April 7, 1958.

A total of $22,852.47 was deposited in the joint control account from payments made by Oil Capital on the subcontract. Of this amount $19,791.38 was paid out for material expenses, and the balance of $3,061.09 was withdrawn by Home Indemnity for its own use. In addition to amounts paid out of the joint control account, Home Indemnity made necessary labor and material payments and thereby suffered a suretyship loss of $21,794.81.

The United States Government made assessments for payroll withholding taxes against York on May 31, 1957, November 15, 1957, and March 7, 1958, respectively, filing notices of tax liens on January 3 and on June 4, 1958. Notice of levy and demand were served on Oil Capital for the unpaid taxes.

Upon completion of the subcontract there remained due and owing an unpaid portion of the subcontract price which Oil Capital refused to deliver. Home Indemnity, use plaintiff here, as York's assignee, pursuant to Sections 270a and 270b of the Miller Act, supra, brought this action against Oil Capital and its surety, American Employers'. The defendants answered jointly, admitting liability but pleading the Federal tax liens as an affirmative defense. A motion to interplead the United States was granted, whereupon the Government answered, asserting the tax liens and crossclaiming against the use plaintiff, Home Indemnity, for the sum of $2,345.25 plus interest for payroll taxes not paid by York on the Grand Forks Air Force Base project. The tax liens asserted include York's tax liabilities incurred on the Grand Forks job, but the Government contends that Home Indemnity is liable on its bond for this sum independently of the tax liens.

The Government moved to add York as an indispensable party defendant which motion was granted. York did not appear or answer, and judgment for $11,175.71, the full amount of the taxes plus interest, will be entered against York in favor of the United States of America.

On trial it was stipulated that the total tax liability of York was $11,175.71 plus interest, and the sum left due and owing under the subcontract was $12,000. Oil Capital and its surety, American Employers', admitting liability, have paid into this court the $12,000 now in dispute.

The Government bases its claim to the fund here in issue upon 26 U.S.C.A. § 6321, which reads so far as is here relevant:

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount * * 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."

The section following provides that a lien for taxes "shall arise at the time assessment is made." 26 U.S.C.A. § 6322.

Section 6321 creates no property rights but merely attaches consequences, Federally defined, to rights created under state law, United States v. Bess, 357 U.S. 51, 78 S.Ct. 1054, 2 L.Ed. 2d 1135; and the right to recover from the fund must be based upon the strength of a claimant's title and not on the weakness of the title of another claimant, United States v. Chapman, 10 Cir., 281 F.2d 862.

The Government contends that York completed the subcontract, merely obtaining financial aid from its surety, Home Indemnity. To better understand the Government's argument, the following is quoted from the Government's brief, pp. 8, 9:

"Counsel for Home Indemnity, in their brief, cite numerous cases to show that, if a taxpayer-contractor defaults on performance of his contract, according to applicable state law there is no sum due him under the contract, to which federal tax liens can attach. All of this is, in general, good and settled law, with which the Government has no dispute. However, this law has nothing whatever to do with the case at bar. Rights to the fund in issue in the instant case do not arise under a contract governed by state law. They arise under a bond issued pursuant to the Miller Act, and rights under such a bond are governed by federal law, i. e., Sections 1 and 2 of the Act. Leibman v. United States for Use and Benefit of Cal. Elec. Supply Co., 153 F.2d 350 (C.A.9th); Continental Casualty Co. v. Schaefer, 173 F.2d 5 (C.A.9th), certiorari denied, 337 U.S. 940 69 S.Ct. 1517, 93 L.Ed. 1745, rehearing denied 338 U.S. 840 841 70 S.Ct. 35, 94 L.Ed. 514."

The Government then argues that only York as supplier of labor or materials could recover from American Employers' under the Miller Act.

With this contention this Court does not agree, but finds that, in effect, York was a mere agent of Home Indemnity and was the vehicle utilized by the surety in completing the subcontract as required by the performance bond. Central Surety & Insurance Corp. v. Martin Infante Co., 3 Cir., 272 F.2d 231.

It is true that original jurisdiction in this action was predicated on the Miller Act which gives the use plaintiff the right to proceed directly against the prime contractor's...