United States v. Commonwealth of Pa., Dept. of Highways, Civ. A. No. 70-3538.

Citation349 F. Supp. 1370
Decision Date03 October 1972
Docket NumberCiv. A. No. 70-3538.
PartiesUNITED STATES of America v. COMMONWEALTH OF PENNSYLVANIA, DEPARTMENT OF HIGHWAYS, Defendant and Third-Party Plaintiff, v. NATIONAL SURETY CORPORATION, Third-Party Defendant (as to Commonwealth of Pennsylvania), v. SAUL, EWING, REMICK AND SAUL, Third-Party Defendant (as to National Surety Corporation) and the Hanover Insurance Company, Third-Party Defendant (as to National Surety Corporation), et al. and J. Paul Martin, Trustee in Bankruptcy of O'Brien & Redmond, Intervenor.
CourtU.S. District Court — Eastern District of Pennsylvania




John F. Penrose, Asst. U. S. Atty., Philadelphia, Pa., for U. S. A.

Edward A. Hosey, Asst. Atty. Gen., Dept. of Transp., Harrisburg, Pa., for Commonwealth of Pa.

Paul J. Donnelly, Philadelphia, Pa., for National Surety Corp.

Norman R. Bradley, Philadelphia, Pa., for Saul, Ewing, Remick & Saul, third-party defendant.

Melvin Lashner, Adelman & Lavine, Philadelphia, Pa., for J. Paul Martin.

Herbert A. Barton, Swartz, Campbell, & Detweiler, Philadelphia, Pa., for The Hanover Ins. Co.


BRODERICK, District Judge.

Presently before this Court are Motions for Summary Judgment filed by all parties in the above-captioned matter pursuant to Rule 56 of the Federal Rules of Civil Procedure. After having fully considered the pleadings, the stipulation of facts of the parties hereto and the memoranda of law in support of these motions, this Court has determined that there is no genuine issue as to any material fact and that certain of the parties are entitled to judgment as a matter of law.

This civil action was commenced on behalf of the United States of America (hereinafter referred to as Federal Government) against the Commonwealth of Pennsylvania, Department of Highways (hereinafter referred to as State) for failure to honor a levy for unpaid taxes. State, in turn, sued the National Surety Corporation (hereinafter referred to as National) because National is the party to which State paid the funds upon which Federal Government now claims a valid levy. National then sued two entities to which a portion of the funds, which it had received from State, had been paid, to wit, a partnership of lawyers, Saul, Ewing, Remick and Saul (hereinafter referred to as Saul, Ewing), and a surety company, Hanover Insurance Company (hereinafter referred to as Hanover). J. Paul Martin (hereinafter Trustee), Trustee in Bankruptcy of James J. O'Brien and Daniel L. Redmond, Jr. Ind. and t/a O'Brien and Redmond (hereinafter referred to as O'Brien and Redmond), then intervened in this action claiming not only title to the fund upon which Federal Government claims a valid levy but also claiming title to all other funds which National received from State as the balance due on certain contracts between State and O'Brien and Redmond.

In essence, this action involves nine contracts between State and O'Brien and Redmond and the issues presented this Court are which entity or entities have the right to the proceeds from these contracts.

During the years of 1958 to 1961, State entered into nine contracts with O'Brien and Redmond for improvement of certain sections of highways and/or bridges. These nine contracts were for Delaware County, Beaver County, Erie County, Wyoming-Susquehanna County, Bradford County, Somerset County-Route 55144, Somerset County-Route 55028, Cambria County and Bedford County. Hanover was the surety on labor and material bonds for the Delaware and Beaver County contracts; Globe Indemnity Co. (hereinafter referred to as Globe) was surety on a labor and material bond for the Erie County contract; and National was surety on labor and material bonds for the remaining six contracts. O'Brien and Redmond completed all of the work which was required to be performed in connection with all of the above-described contracts but failed to pay certain claims for labor and materials in connection with each of the above-described contracts. O'Brien and Redmond were declared bankrupt. The balance due on all nine of the contracts was paid by State to National; Trustee now claims the right to all of these proceeds, while Federal Government claims the right to the proceeds paid by State to National on only the Delaware, Beaver and Erie County contracts.

Each of the contracts entered into between the State and O'Brien and Redmond were identical in form and contained the following provision, as set forth in pertinent part, in respect to payment of labor and material claims by O'Brien and Redmond:

2. The contractor further covenants and agrees that all of said work and labor shall be done and performed in the best and most workmanlike manner and that prompt payment will be made in full for labor and materials used in the work, and that all and every of said materials and labor shall be in strict and entire conformity, in every respect, with the said specifications and drawings and shall be subject to the inspection and approval of the chief engineer of the Department of Highways . . . (emphasis added).
. . . . . .
8. The bond, given by the contractor, in a sum equal to fifty (50) per centum of the total contract price of the work to be done, to secure a proper compliance with the terms and provisions of this contract and as well as the Additional Bond in like sum for the prompt payment in full of labor and material are hereto attached and made a part hereof.
9. All questions or disputes, where the aggregate amount of such claims exceeds three hundred dollars ($300.00), respecting any matter pertaining to this contract or any part thereof or any breach of said contract shall be referred to the Board of Arbitration . . . .

All of the labor and material payment bonds, on which O'Brien and Redmond was the principal, the State was the obligee, and either National, Hanover or Globe were the sureties, furnished in connection with the above-described contracts were identical in form. The labor and material bonds provided in part that:

The condition of this obligation is such that if the above bounded principal shall and will promptly pay or cause to be paid in full all sums of money which may be due any person, co partnership, association, or corporation for all material furnished and labor supplied or performed in the prosecution of the work, whether or not the said material or labor enter into and become component parts of the work or improvement contemplated . . . then this obligation to be void, otherwise to remain in full force and effect.
. . . . . .
Recovery by any person, co partnership, association, or corporation hereunder shall be subject to the provisions of the Act of June 22, 1931, P.L. 881, which Act shall be incorporated herein and made a part hereof, as fully and completely as though its provisions were fully and at length herein recited.

The bonds of National were executed in reliance on and in consideration of a General Indemnity Agreement executed by O'Brien and Redmond as Indemnitors and delivered to National as Surety on September 26, 1960. The General Indemnity Agreement provides as follows in pertinent part:

4. If any such bond be given in connection with a contract, the Surety in its sole discretion is hereby authorized . . . (c) in the event of any default in the performance of the contract, or the breach of any bond connected therewith, or the failure to diligently prosecute the work under the contract or pay for labor and materials used in the prosecution of the contract, to take possession of the work under the contract, . . . and to take any other action which the Surety may deem appropriate.
5. The Indemnitors hereby assign, transfer, pledge and convey to the Surety (effective as of the date of such bond, but only in the event of default, breach or failure as referred to in preceding Section 4) all of their rights under the contract, including their right, title and interest in and to (1) all subcontracts let in connection therewith and such subcontractors' surety bonds, . . . and (3) any and all sums due or which may thereafter become due under such contract and all sums due or to become due on all other contracts, bonded or unbonded, in which the Principal or Indemnitors have an interest (emphasis added).

National filed Financing Statements on May 17, 1962 and July 9, 1962, under provision of the Uniform Commercial Code (hereinafter referred to as U.C.C.), covering the assignments to National of all of the right, title and interest of O'Brien and Redmond in the construction contracts between O'Brien and Redmond and the State dated May 23, 1961 and June 7, 1961, in Somerset, Bedford, Cambria, Susquehanna-Wyoming and Bradford Counties, and all money or payments which might be or become due O'Brien and Redmond at the time of any breach or default of these contracts on account of the contracts or on account of extra work or materials supplied therewith, as more fully set forth in the General Indemnity Agreement dated September 26, 1960.

In an action by O'Brien and Redmond against State before the Board of Arbitration of Claims of the Commonwealth of Pennsylvania (hereinafter referred to as Board of Arbitration) O'Brien and Redmond, on April 19, 1963, set over and assigned to National with National's right to collect same, any award that might be made to O'Brien and Redmond in this action. National then filed Financing Statements under provision of the U.C.C. on May 7, 1963 and May 10, 1963, which covered this Assignment of Claim.

On the Somerset-55144, Somerset-55028, Bedford, Cambria, Wyoming-Susquehanna and Bradford County contracts, the total amounts paid by National for labor and material claims are: (a) Prior to O'Brien and Redmond Bankruptcy: $130,085.10 and (b) To Date: $159,629.54. On the Somerset-55144, Somerset-55028, Bedford, Cambria and Bradford County contracts, the total amount paid by National for labor and material claims...

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