Opinion
No. 4917.
Argued May 2, 1961.
Decided June 30, 1961.
1. The issue of whether and to what extent a taxpayer had property or rights to property to which a lien for unpaid federal unemployment and withholding taxes could attach is determinable by state law.
2. In an action to determine the relative priority of the claims of the United States for unpaid unemployment and withholding taxes and of a surety on the taxpayer's payment and performance bond to a sum of money retained by a school district pending final acceptance of work contracted for by the taxpayer principal who had defaulted after assigning to the surety "any and all moneys . . . that may become due and payable . . . on account of said contract" it was held that by virtue of the assignment the surety became fully entitled to the fund retained by the district prior to the time the federal tax assessment was made and that the taxpayer therefore had no property interest in the fund to which the lien of the United States could attach.
PETITION, by a subcontractor under RSA ch. 447 to enforce a claim against the named defendant as principal contractor with the Auburn school district. The contract was for the erection of a school at a price of $57,984, and the contractor agreed "to provide all the plant, labor and materials and to perform all the work shown and described on the Drawings, the Specifications and all Addenda thereto." The contractor furnished a payment and performance bond under date of August 16, 1957, executed by the defendant Employers' Fire Insurance Company as surety.
On January 31, 1958 the building was accepted by the district "as being substantially completed." This petition was filed on April 18, 1958, following notice as required by RSA 447:17, filed on April 4, 1958. Thereafter, between April 14, 1959 and May 20, 1960, the surety was required to pay $8,541.54 to other subcontractors which the contractor had failed to pay. On May 27, 1960, was ordered to pay the plaintiff's claim in the sum of $4,406, with interest and costs, and by the decree was subrogated to the plaintiff's rights.
The contract between the district and the contractor provided for retention of ten per cent of all payments, one-half of these retentions to be paid "upon completion and acceptance of the work" and the balance thirty to sixty days "after . . . final acceptance of said work . . . as being entirely to their satisfaction in accordance with this Contract." Under this provision, the district holds a balance of $2,876.03.
The contractor is indebted to the United States of America for unemployment and withholding taxes aggregating $7,524.79 plus interest. Of this amount taxes totalling $4,749.57 were assessed on December 12, 1958; $1,449.88 on April 2, 1959; and $1,305.34 on or after June 29, 1959.
The issue of the relative priority of the claims of the United States and the surety was submitted to the Superior Court upon an agreed statement of facts. The Court (Griffith, J.) ruled that the tax liens of the United States take precedence, and ordered the district to pay the balance in its hands to the United States. All questions of law presented by the surety's exception to this ruling and order were reserved and transferred by the Presiding Justice, upon an agreed statement of facts.
The contractor's bond in the sum of $57,984 is conditioned upon performance of the construction contract; payment for materials and labor; and payment of all losses suffered by the district "by reason of failure or default on the part of" the contractor, subject however to prior payment of claims for labor should the penal sum be insufficient to satisfy both the latter claims and that of the district. The application for the bond provided in part that "a default within the meaning of this obligation shall be . . . the failure of the [contractor to pay] . . . bills for labor and materials in connection with the work . . . when they become due and payable . . . ."
By the application the contractor assigned all materials to the surety "as of the date hereof," to be "in full force and effect, as of the date hereof, should the undersigned fail, refuse or be unable to complete the said work in accordance with the terms of the contract covered by said bond, or in event of any default on the part of the undersigned under said contract."
The assignment further provided: "In further consideration of the execution of the said bond, the undersigned does hereby agree, as of this date, that the said Company, shall as surety on said bond, be subrogated to all rights, privileges and properties of the undersigned as principal and otherwise in said contract, and does hereby assign, transfer and convey to said Company all the deferred payments, and retained percentages, and any and all moneys and properties that may be due and payable at the time of such breach or default, or that may thereafter become due and payable to said undersigned on account of said contract, or account of extra work and materials supplied in connection therewith, hereby agreeing that all such moneys, and the proceeds of such payments and properties, shall be the sole property of the said Company, and to be by it credited upon any loan, cost, damage, charge and expense sustained, or incurred by it as above under its bond of suretyship."
Sheehan, Phinney, Bass, Green Bergevin and Richard A. Morse (Mr. Morse orally), for the surety, Employers' Fire Insurance Company.
Maurice P. Bois, United States Attorney, and Alexander J. Kalinski, Assistant United States Attorney (Mr. Kalinski orally), for the United States of America.
Under the terms of its agreement with the defendant surety, the contractor, as principal on the bond, assigned to the surety "any and all moneys . . . that may become due and payable at the time of . . . default, or that may thereafter become due and payable . . . on account of said contract." It is evident from the agreed facts, that a default occurred within the meaning of the contract between the contractor and the surety at least as early as April 4, 1958, when under RSA 447:17 the plaintiff filed its notice of a claim in excess of any sum in the hands of the district indicating that the contractor had failed to pay bills for labor and materials when they became due. The contractor's failure to pay subcontractors was likewise a default under its contract with the district "to provide all . . . labor and materials." Bender v. Neillsville Bank, 10 Wis.2d 282.
It follows that by the terms of the assignment from the contractor to the surety of all moneys due from the district, the surety became fully entitled on or before April 4, 1958 to the balance retained by the district. American Employers Ins. Co. v. School District, 99 N.H. 188. See 4 Corbin, Contracts, s. 875, p. 512.
It is expressly provided by the statute creating the liens of the United States for taxes, that the liens "shall arise at the time the assessment is made." 26 U.S.C. s. 6322. The earliest assessment in this case was on December 12, 1958, or better than eight months after the rights of the surety under its assignment had become absolute. The federal statute further provides that the lien "shall be . . . upon all property and rights to property . . . belonging to" the taxpayer. 26 U.S.C. s. 6321. And while interpretation of the statute rests with the United States Supreme Court (United States v. Gilbert Associates, 345 U.S. 361, 363), that court holds that the issue of "whether and to what extent the taxpayer had `property' or `rights to property' to which the tax lien could attach" is to be determined by state law. Aquilino v. United States, 363 U.S. 509, 512-513. See also, United States v. Durham Lumber Co., 363 U.S. 522; United States v. Bess, 357 U.S. 51, 55.
Under the law of this state, on the date of the earliest assessment of federal taxes, which was December 12, 1958, the contractor had no property or right of property in the funds retained by the district. It had previously assigned to the surety all of its interest in the funds, as "moneys . . . due and payable at the time of . . . default," which had also previously occurred. As assignee, the surety was then entitled to proceed directly against the district. Marsh v. Garney, 69 N.H. 236. See United States v. Durham Lumber Co., 363 U.S. 522, supra, 525. If the interest of the surety at the outset could be regarded as a security interest only (see United States v. Ball Construction Co., 355 U.S. 587), when default occurred it became immediately enforceable, and complete right to the funds vested irrevocably in the surety which was thereupon obligated to satisfy the subcontractors' claims. RSA 447:15-18. See 4 Corbin, Contracts, s. 903 supp. and footnote 72.
As taxpayer, the contractor had no property interest in the funds to which the lien of the United States could attach. Central Surety Insurance Corp. v. Martin Infante Co., 272 F.2d 231 (3d Cir. 1959); Matter of City of New York (USA v. Coblentz) 5 N.Y.2d 300, cert. den. 363 U.S. 841. It could not compel the district "to pay the retained percentage to [it] because of [its] failure to pay the laborers and materialmen." United States v. Chapman, 281 F.2d 862-864, 866 (10th Cir. 1960); Fidelity Deposit Co. v. New York City Housing Authority, 241 F.2d 142 (2d Cir. 1957). It follows that the claim of the surety to the funds in the hands of the district takes precedence over the tax claims of the United States, and that the ruling and order of the Trial Court were erroneous.
This conclusion makes it unnecessary to consider whether the surety is likewise entitled to prevail by subrogation to the rights of the district by reason of the statutory transfer to the surety of the district's liability to subcontractors. RSA ch. 447, supra. See United States v. Durham Lumber Co., 363 U.S. 522, 525, supra; American Bridge Co. v. Company, 87 N.H. 62, 63.
Exception sustained.
All concurred.