United States v. Seaboard Surety Company

• Decision Date: 07 November 1961
• Docket Number: Civ. A. No. 8415.
• Citation: 201 F. Supp. 630
• Parties: UNITED STATES of America, Plaintiff, v. SEABOARD SURETY COMPANY, Jim O'Boyle, Defendants.
• Court: U.S. District Court — Northern District of Texas

201 F. Supp. 630

UNITED STATES of America, Plaintiff, v. SEABOARD SURETY COMPANY, Jim O'Boyle, Defendants.

Civ. A. No. 8415.

United States District Court N. D. Texas, Dallas Division.

November 7, 1961.

Barefoot Sanders, U. S. Atty., Dallas, Tex., for plaintiff.

Randolph Scott, Dallas, Tex., for defendants.

ESTES, Chief Judge.

This is a suit instituted by the Plaintiff, United States of America, as a third-party beneficiary to a contract entered into between the defendant Seaboard Surety Company and the defendant taxpayer-subcontractor, Jim O'Boyle, to recover withholding, F.I.C.A. (Social Security) and F.U.T.A. (unemployment) taxes owed by O'Boyle, the taxpayer-subcontractor.

The facts have been stipulated and are, as follows:

Three contracts are involved in this suit — a principal contract, a subcontract, and a performance bond.

The principal contract was entered into between the District Engineer, United States Army Engineer District, Albuquerque, New Mexico, as Contracting Officer, and C. H. Leavell & Company and Dan R. Ponder, Inc., as Eligible Builders. The relevant provision of this contract is as follows:

"GENERAL PROVISIONS. Section 41. Federal, State and Local Taxes (Except Real and Personal Property Taxes).

"(b) Except as may be otherwise provided in this Housing Contract, the contract price includes all Federal, State and local taxes and duties in effect and applicable to this Housing Contract on the contract date, except taxes from which the eligible builder or the transactions or property covered by this Housing Contract are then exempt. Duties and Federal transportation taxes are included in the contract price unless otherwise specifically excluded."

The subcontract was entered into between C. H. Leavell & Co., Contractor, and Jim O'Boyle & Co. (sole proprietorship), Sub-Contractor. The relevant provisions of this contract are as follows:

"SECTION 5. Insofar as the provisions of the general contract do not conflict with specific provisions herein contained they and each of them are hereby incorporated into this Subcontract as fully as if completely rewritten herein. The Subcontractor agrees that he will so perform this agreement as not to violate any terms, a covenant or condition of said general contract. The relationship of the Subcontractor hereunder towards the Contractor shall be the same as that of the Contractor towards the Owner under said general contract and the relationship of the Contractor hereunder to the Subcontractor shall be the same as that of the Owner towards the Contractor under said general contract.

"SECTION 14. The Subcontractor agrees to pay and does hereby accept full and exclusive liability for the payment of any and all contributions or taxes for Unemployment Insurance and/or Old Age Retirement Benefit, Pensions or Annuities, now or hereafter imposed by the Government of the United States, and/or by the Government of any state or territory of the United States, which are measured by the wages, salaries or other remunerations paid to persons employed by the Subcontractor on work performed under the terms of this Subcontract; also Subcontractor agrees to pay and hereby accepts full and exclusive liability for the payment of, any and all Sales or Use Taxes, or taxes measured by receipts in connection with the work under this Subcontract."

The contract bond was entered into between Jim O'Boyle & Co., Principal, and Seaboard Surety Company, Surety, and said contract relates to the performance of the subcontract between C. H. Leavell & Co. and Jim O'Boyle & Co. Relevant provisions of this contract bond are as follows:

First paragraph:

"NOW, THEREFORE, if the Principal shall well and truly perform and fulfill all the undertakings, covenants, terms, conditions and agreements of said contract Subcontract referred to above and any extensions thereof that may be granted by the Contractor, and during the life of any guaranty required under the contract, and shall also well and truly perform and fulfill all the undertakings, covenants, terms, conditions and agreements of any and all modifications, additions, or alterations of said contract that may hereafter be made, and shall also promptly make payment in full to all persons, firms, partnerships, corporations or others, supplying labor and/or material, and/or services, and/or utilities and/or equipment, etc. in the prosecution of the work provided for in said contract and any and all modifications, additions or alterations of said contract that may hereafter be made, and shall also fully indemnify and save harmless the Contractor from all cost and damage which it may suffer by reason of failure so to do and shall fully reimburse and repay the Contractor all outlay and expense which the Contractor may incur in making good any such default, then this obligation shall be void; otherwise, to remain in full force and effect." * * *

Last paragraph:

"Said Surety and said Principal further agree that this bond shall inure to the benefit of, and may be sued directly upon, by any person, firm or corporation furnishing labor, material, services, utilities and/or equipment, etc., in the prosecution of the work provided for in said contract, or any modifications, additions or alterations thereto, who has the right to establish a lien or claim against owner and/or owner's property, premises or improvements and/or any funds accrued, or to accrue, from owner to Contractor, and/or who has right of action on Contractor's bond given to owner under federal, state or municipal laws or regulations; and this bond shall be construed to require the Surety and the Principal to pay directly to such person, firm or corporation the amount of its claim for labor, material, service, utilities and/or equipment, etc., furnished in the prosecution of such work."

The statutes involved are the Miller Act, 40 U.S.C.A. § 270a et seq.; the Internal Revenue Code of 1954, Sections 31(a) (1), 3402(a) and 3403, 26 U.S.C.A. §§ 31(a) (1), 3402(a), 3403 as to the withholding tax, Section 3301, 26 U.S. C.A. § 3301 as to the F.U.T.A. (unemployment) tax, and Section 3301, 26 U.S. C.A. § 3101 as to the F.I.C.A. (Social Security) tax.

It is uncontested that the unpaid tax liability for withholding, F.I.C.A., and unemployment (F.U.T.A.) taxes owing by Jim O'Boyle and arising out of wages paid for labor and services rendered Jim O'Boyle & Co., on the subcontract is as follows:

                 2d Q 1958 Withholding Tax        $ 1,705.00 plus interest
                 2d Q 1958 FICA Tax                   825.00 plus interest
                 3d Q 1958 Withholding Tax         12,619.36 plus interest
                 3d Q 1958 FICA Tax                 6,852.13 plus interest
                4th Q 1958 Withholding Tax          3,459.90 plus interest
                4th Q 1958 FICA Tax                 1,677.04 plus interest
                      1958 FUTA Tax                 7,526.32 plus interest
                                                  ________________________
                                                  $34,664.75 plus interest
                

The legal question involved is whether under the terms of the principal contract, subcontract and contract bond, the plaintiff, United States of America, is entitled to recover as a third party beneficiary from the defendant surety company for withholding, F.I.C.A. and F.U.T.A. taxes owing by O'Boyle, the taxpayer-subcontractor, and arising out of the subcontract for which the surety company issued a contract bond.

Plaintiff urges that it is entitled to recover under three theories: (1) that the United States of America is a third-party beneficiary for the withholding taxes as a claimant "supplying labor" within the first paragraph of the contract bond; (2) that the United States of America is a third-party beneficiary for the F.I.C.A. and F.U.T.A. taxes under the provisions of Section 14 of the subcontract and the first and last paragraphs of the contract bond; (3) that the United States of America is a third-party beneficiary for all the involved taxes under the provisions of Section 41(b) of the principal contract, Section 5 of the subcontract, and the first and last paragraphs of the contract bond.

With reference to Point No. 1, plaintiff's theory is that the United States of America is a supplier of labor and is entitled to recover under the Miller Act. The cases have established beyond any reasonable question that the wages withheld for taxes from laborers' salaries are not wages within the terms of the bond, but are taxes due by the employer to the United States of America. United States Fidelity & Guaranty Co. v. United States, 201 F.2d 118 (10th Cir., 1952); United States v. Crosland Construction Co., 217 F.2d 275 (4th Cir., 1954); General Casualty Co. v. United States, 205 F.2d 753 (5th Cir., 1953); Westover v. William Simpson Const. Co., 209 F.2d 908 (9th Cir., 1954); United States v. Zschach Const. Co., 209 F.2d 347 (10th Cir., 1954); First National Bank in Yonkers v. City of New York, 177 F.Supp. 175 (S.D.N.Y.1959); and Central Bank v. United States, 345 U.S. 639, 73 S.Ct. 917, 97 L.Ed. 1312 (1953).

While the obligation of the surety in the instant case relates to payment of persons supplying "labor and materials," typical of Miller Act bonds, it is evident from the terms of the bond that this bond does not come within the purview of the Miller Act. The bond was made for the benefit of the General Contractor, C. H. Leavell & Co., and guaranteed to the General Contractor the payment of all labor, materials, tools, services and equipment in connection with the O'Boyle subcontract for the masonry work. There is nothing in the bond contract showing that the surety contracted for more than to guarantee to the General Contractor the payment of all labor, materials, tools, services and equipment of the subcontractor. The bond here was not furnished to the United States of America, as provided for in the Miller Act. Since the unpaid taxes are not wages so as to entitle the United States of America to the benefits of the statutory bonds required under...