United States v. Chapman, 6108.

• Decision Date: 23 August 1960
• Docket Number: No. 6108.,6108.
• Citation: 281 F.2d 862
• Parties: UNITED STATES of America, Appellant, v. L. C. CHAPMAN et al., Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

281 F.2d 862 (1960)

UNITED STATES of America, Appellant, v. L. C. CHAPMAN et al., Appellees.

No. 6108.

United States Court of Appeals Tenth Circuit.

July 29, 1960.

Rehearing Denied August 23, 1960.

Karl Schmeidler, Atty., Dept. of Justice, Washington, D. C. (Abbott M. Sellers, Acting Asst. Atty. Gen., Lee A. Jackson, A. F. Prescott, and George F. Lynch, Attys., Dept. of Justice, Washington, D. C., Paul W. Cress, U. S. Atty., and Leonard L. Ralston, Asst. U. S. Atty., Oklahoma City, Okl., were with him on the brief), for appellant.

Walter J. Arnote, McAlester, Okl. (James B. Bratton and John A. Allford, McAlester, Okl., were with him on the brief), for appellee McAlester Finance Corp.

Granville Tomerlin, Oklahoma City, Okl. (T. L. Blakemore, Sapulpa, Okl., T. H. Eskridge, Tulsa, Okl., John F. Butler, Joe W. Whitten, Oklahoma City, Okl., Winfrey D. Houston, Robert M. Murphy, Stillwater, Okl., and Russell E. Moss, Tulsa, Okl., were with him on the brief), for appellees Labor and Material Suppliers.

No appearance for appellees South-western Bell Tel. Co. and R. J. Sims.

Before BRATTON, LEWIS and BREITENSTEIN, Circuit Judges.

BREITENSTEIN, Circuit Judge.

The issue is whether the United States has a tax claim which takes precedence over other claims to a fund deposited by Southwestern Bell Telephone Company in an interpleader action. The trial court held that a retained percentage of funds due under a construction contract, which was not payable to the contractor-taxpayer until labor and material claims were satisfied, was not property subject to a federal tax lien and that an assignee for security of construction contracts was a purchaser whose rights were not affected by the tax claims. The payment of the laborers, materialmen, and assignee exhausted the deposited fund and left nothing for the United States, which has appealed.

The Telephone Company contracted with R. J. Sims for certain construction work in Oklahoma. Upon the completion of the work Sims left unpaid bills in the amount of $20,151.75, incurred before August 13, 1957, for labor and materials. To secure payment of loans, Sims, by a general assignment made December 19, 1955, and a special assignment made July 3, 1957, assigned to McAlester Finance Corporation his contracts with the Telephone Company. The unpaid balance was $11,697.66, plus interest and attorney's fees. Assessments of unpaid withholding and excise taxes were made against Sims in the period March 18-November 19, 1957, and notices of lien were filed August 6-November 20, 1957, in the total sum of $24,601.09.

The contracts between the Telephone Company and Sims all contained the following pertinent provisions:

"Article VII

"* * * The Telephone Company agrees to pay the Contractor Sims on the twentieth day of each month for 90% of the amount of completed approved work on the first day of the month and agrees to make final payment within ten (10) days after the completion and acceptance of all work by the Telephone Company.

* * * * * *

"Article X

"The Telephone Company shall have the right to require satisfactory proofs of payment, by the Contractor, of all labor and material furnished under this contract, before acceptance of the work, but no action or non-action of the Telephone Company in requiring such proofs shall relieve the Contractor of the duty of causing any and all liens arising out of the contract to be fully satisfied and discharged."

Upon the completion of the work the retained percentage amounted to $27,183.70, and was not paid to Sims because he failed to establish payment of labor and material furnished under the contracts. The Telephone Company brought an interpleader action under 28 U.S.C. § 1335 and paid the retained sum into court. Named as defendants were Sims, the holders of the claims for labor and materials, and the Finance Company. The United States intervened asserting its tax claims.

The Finance Company takes the position that the labor and material claims must first be satisfied out of the fund and that it is then entitled to be paid. The United States contends that its tax claims must be satisfied before any payment may be made out of the fund to the laborers, the materialmen, or the Finance Company.

Under §§ 6321 and 6322 of the Internal Revenue Code of 1954, 26 U.S.C.A. §§ 6321, 6322, the United States has a tax lien upon "all property and rights to property" of the taxpayer at the time of the assessment of the unpaid tax.¹ The United States says that the retained percentage was property of the taxpayer to which its lien attached.

In Aquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277, 1285, the unpaid balance of a general construction contract was claimed by subcontractors who had supplied labor and materials and who had asserted a lien under New York law. The United States asserted that its tax liens under §§ 3670 and 3671 of the Internal Revenue Code of 1939, 26 U.S. C.A. §§ 3670, 3671² took precedence. The New York Court of Appeals, 3 N.Y. 2d 511, 169 N.Y.S.2d 9, 146 N.E.2d 774; 4 N.Y.2d 869, 174 N.Y.S.2d 236, 150 N.E.2d 707, upheld the tax claim and the United States Supreme Courts reversed, holding that state law controls in the determination of the nature of the legal interest which the taxpayer had in the property sought to be reached by the United States in asserting its tax claim. Federal law determines the priority of competing liens asserted against the taxpayer's property or rights to property. As the New York court did not determine the nature of the property rights possessed by the taxpayer under state law, the case was remanded so that such court could "ascertain the property interests of the taxpayer under state law and then dispose of the case according to established principles of law." 80 S.Ct. 1281

United States v. Durham Lumber Company, 363 U.S. 522, 509, 80 S.Ct. 1282, 1285, 4 L.Ed. 1371, decided the same day as the Aquilino case, involved competing claims of the United States for unpaid withholding and unemployment insurance taxes, and of certain subcontractors under a general construction contract. The taxpayers were adjudicated bankrupt and at the time of such adjudication there was an unpaid balance due under the construction contract. This sum was paid to the trustee and the claims were resolved in the bankruptcy proceedings. The Court of Appeals for the Fourth Circuit held that under North Carolina law, except to the extent that the claim of the general contractor exceeded the claims of the subcontractors, the general contractor had no property right which is subject to seizure under the tax lien³ and, hence, the United States could recover only so much of the unpaid balance as remained after the satisfaction of the subcontractors' claims. The United States Supreme Court affirmed on the authority of the Aquilino decision.

There are important differences between these two recent cases and the one now under consideration. In the Aquilino case the subcontractors contended that under the New York lien law⁴ the contractor-taxpayer had no property interest in the balance unpaid by the owner under the construction contract. The Durham Lumber Company case involved North Carolina statutes which expressly create a lien in favor of subcontractors, which is preferred over that of general contractors, and create a primary obligation on the part of the owner to assure the payment of subcontractors.⁵

In the instant case, the labor and material claimants are aided by no such statutes. It is conceded that Southwestern Bell Telephone Company is a public service corporation within the intent of the Oklahoma Constitution,⁶ and that public policy forbids a mechanic's lien against the property of such a corporation when that property is essential to the performance of public purposes.⁷ Further, Oklahoma has no statute such as the New York lien law considered in the Aquilino case, which creates a trust fund in favor of subcontractors and permits an action by a subcontractor upon an obligation for moneys due to a general contractor, as well as moneys received by him. Nor has Oklahoma a statute similar to the North Carolina statute, before the court in the Durham Lumber Company case, which permits a subcontractor to bring a direct, independent action against the owner to the extent of any amount due under a construction contract.

More important than these statutory differences is the difference in the construction contracts. In Aquilino and Durham Lumber Company there was no point raised on the obligation of the owner to pay the balance due on the construction contract. For all that appears in those opinions the obligation to pay was absolute. Here the obligation is dependent upon the satisfaction of a condition precedent, namely, the proof of payment for labor and materials. Article VII of the contract between the Telephone Company and Sims requires the Telephone Company to pay the retained percentage after "completion and acceptance of all work by the Telephone Company." Article X gives the Telephone Company the right to require satisfactory proofs of payment for all labor and material "before acceptance of the work." Such proofs were never furnished and the Telephone Company never accepted the work. Sims, the contractor-taxpayer, could not compel the Telephone Company to pay the retained percentage to him because of his failure to pay the laborers and materialmen.

As said in Aquilino, the federal statute creates no property right but attaches federally defined consequences to rights created under state law. The right to property which the United States asserts is covered by its lien is the right of Sims to compel payment by the Telephone Company of the retained percentage. That right does not exist because of the failure to pay the labor and material claims. The Oklahoma rule is that conduct of a party which dispenses with performance by the adverse party is equivalent to a waiver of the right to require performance.⁸ This...