Wolverine Insurance Company v. Phillips

• Decision Date: 12 August 1958
• Docket Number: Civ. No. 1015.
• Citation: 165 F. Supp. 335
• Parties: WOLVERINE INSURANCE COMPANY, Toy National Bank, and Loren Mahoney, Plaintiffs, v. V. Lee PHILLIPS, District Director of Internal Revenue, and United States of America, Defendants.
• Court: U.S. District Court — Northern District of Iowa

165 F. Supp. 335

WOLVERINE INSURANCE COMPANY, Toy National Bank, and Loren Mahoney, Plaintiffs, v. V. Lee PHILLIPS, District Director of Internal Revenue, and United States of America, Defendants.

Civ. No. 1015.

United States District Court N. D. Iowa, W. D.

August 12, 1958.

Charles F. Stilwill and Kenneth T. Wilson, Sioux City, Iowa, for plaintiffs.

F. E. Van Alstine, U. S. Dist. Atty., and Theodore G. Gilinsky, Asst. U. S. Dist. Atty., for defendants.

GRAVEN, District Judge.

The controversy in this case is between a surety on the bond of a defaulting building contractor and the Government as the holder of tax liens against such contractor as to the sum of $10,168.46 being held in escrow.

On May 26, 1955, Mr. and Mrs. Loren H. Mahoney, hereinafter referred to as Owner, entered into a contract with Ericsson and Kochen, hereinafter referred to as the Contractor, relating to the construction of a residence in Sioux City, Iowa. That contract contained, among other provisions, the following:

"No. 1—Scope of the Work—The Contractor shall furnish all of the materials and perform all of the work shown on the drawings and described in the specifications entitled `Specifications of Materials and Labor Necessary and Required for the Erection and Completion of a Residence for Mr. and Mr. (sic) Loren H. Mahoney at Number 6 West 37th Street Place, Sioux City, Iowa' prepared by the Owner; and shall do everything required by this agreement the general conditions of the contract, and specifications and the drawing.

"No. 2—Time of completion—The work to be performed under this contract shall be commenced at once and shall be substantially completed December 1, 1955.

"No. 3—Performance bond—Performance bond in the full amount of the contract is to be furnished by the Contractor and paid for by the Owner.

"No. 4—The contract sum—The Owner shall pay the Contractor for the performance of the contract, subject to the additions and deductions provided therein, as follows: $30,591.00

"No. 5—The payments shall be made in accordance with the specifications.

"No. 6—Acceptance and final payment —Final payment shall be due ten days after substantial completion of the work provided the work to be then fully completed and the contract fully performed. The Contractor shall furnish lien waivers on all labor and materials.

"No. 7—The contract documents— The conditions of the contract, the specifications and the drawings, together with this agreement, form the contract, and they are as fully a part of the contract as if hereto attached or herein repeated."

The specifications, as noted, are made a part of the contract. One paragraph of the specifications provides as follows:

"Progress Payments:

"The owner shall make payments on account the contract as provided therein, as follows: payment of one-third of the contract will be made upon completion of the basement portion of the structure. Two-thirds of the amount of the contract will be paid when the contractor is ready to begin the interior finishing of the structure and the balance due on the contract will be paid upon completion."

On July 20, 1955, the Contractor made application to the Wolverine Insurance Company for a bond. That Company will be hereinafter referred to as the Surety. In certain provisions of the application the Contractor is referred to as the Indemnitor and the Surety as the Company. Paragraph VIII of the application provides, in part, as follows:

"That the Indemnitor * * * further agrees in the event of any breach or default on his part in any of the provisions of the contract and/or bond that the said Company shall be subrogated to all the rights and properties of the Indemnitor in such contract, including deferred and reserved payments, current and earned estimates and final payments, and any and all moneys and securities that may be due and payable at the time of such default * * * or that may thereafter become due and payable on account of said contract * * *."

On July 22, 1955, the following bond was issued:

"Performance Bond

"Know All Men By These Presents:

"That Ericsson & Kochen Construction Company of Sioux City Iowa (Here Insert The Name and Address Or Legal Title Of The Contractor) as Principal, hereinafter called Contractor and Wolverine Insurance Company, a Michigan Corporation of Battle Creek, Michigan, authorized to do business in the State of Michigan as Surety, hereinafter called Surety, are held and firmly bound unto Mr. and Mrs. Loren H. Mahoney of Sioux City, Iowa (Here Insert The Name and Address Or Legal Title Of The Owner) as Obligee, hereinafter called Owner in the amount of Thirty Thousand Five Hundred Ninety-one and ---- No/100 Dollars ($30,591.00) for the payment whereof Contractor and Surety bind themselves their heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these presents "Whereas, Contractor has by written agreement dated May 26, 1955 entered into a contract with Owner for Constructing one family, brick construction dwelling 6 West 37th Street Place, Sioux City, Iowa in accordance with drawings and specifications prepared by Gene Bratt, Sioux City, Iowa (Here Insert Full Name And Title) which contract is by reference made a part hereof, and is hereinafter referred to as the Contract.

"Now, Therefore, The Condition Of This Obligation is such that, if Contractor shall promptly and faithfully perform said Contract, then this obligation shall be null and void; otherwise it shall remain in full force and effect.

"Whenever Contractor shall be, and declared by Owner 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.

"Any suit under this bond must be instituted before the expiration of two (2) years from the date on which final payment under the Contract falls due.

"No right of action shall accrue on this bond to or for the use of any person or corporation other than the Owner named herein or the heirs, executors, administrators or successors of Owner.

"Signed and sealed this 22nd day of July A.D. 1955.

"(Signatures)"

The Contractor commenced the construction of the residence in the summer of 1955. On July 26, 1955, the Owner paid the Contractor the sum of $10,305.91 as a progress payment and on October 5, 1955, the Owner paid the Contractor the sum of $10,263 as a further progress payment. Later a number of parties filed mechanics' liens against the property. It does not appear that the progress payments were paid to those parties, except that the sum of $1,000 was paid to one of them.

On November 15, 1955, the Government made an assessment against the Contractor for federal taxes in the amount of $5,168.27. On December 15, 1955, a Government tax lien for that amount was filed in Woodbury County, Iowa.

Under the terms of the contract the residence was to be completed by December 1, 1955. At that date the residence was still incomplete. The house was finally completed and accepted by the Owner on May 24, 1956. In February 1956, while the residence was still uncompleted, there were a number of claims for materials and labor furnished for the residence which were unpaid. Starting on February 3, 1956, a large number of mechanics' liens were filed against the property. The Owner made demand upon the Surety to perform under its bond in connection with those liens. On February 12, 1956, the Government made an assessment against the Contractor for federal taxes in the amount of $2,950.64. On February 13, 1956, a Government tax lien for that amount was filed in Woodbury County, Iowa. On February 20, 1956, the Government made an assessment against the Contractor for federal taxes in the amount of $1,764.20. On February 21, 1956, a Government tax lien for that amount was filed in Woodbury County, Iowa. Three notices of levy for parts of the above taxes were duly served upon the Owner on January 24, April 23, and May 3, 1956. On February 23, 1956, the Contractor executed the following assignment to the Surety:

"ASSIGNMENT

"FOR and in consideration of the sum of One Dollar ($1.00) in hand paid by Wolverine Insurance Company of Battle Creek, Michigan, receipt whereof is hereby acknowledged, the undersigned, Frank H. Kochen and Conrad L. Ericsson, doing business under the name and style of Ericsson & Kochen Construction Co., hereby sell, assign, transfer and set over to the said Wolverine Insurance Company all of their right, title and interest in and to any balance now due them or to become due them from Mr. and Mrs. Loren H. Mahoney, pursuant to a contract entered into between the undersigned and the said Mr. and Mrs. Loren H. Mahoney for the construction of a dwelling house at 6 West 37th Street Place, Sioux City, Iowa, and the undersigned do hereby further authorize and direct the said Mr. and Mrs. Loren H. Mahoney to pay to the said Wolverine Insurance Company or its designee all monies due or to become due the undersigned

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