MASSACHUSETTS BONDING AND INSURANCE COMPANY and United States of America, Claimants-Appellants,
v.
STATE OF NEW YORK, Claimant-Appellee.
In re FAGO CONSTRUCTION CORPORATION, Bankrupt.
No. 337.
Docket 25032.
United States Court of Appeals Second Circuit.
Argued May 12, 1958.
Decided July 11, 1958.
Mark N. Turner, of Brown, Kelly, Turner & Symons, Buffalo, N. Y. (Raymond C. Vaughan, Buffalo, N. Y., on the brief), for claimant-appellant Massachusetts Bonding & Insurance Co.
George F. Lynch, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and I. Henry Kutz, Attys., Dept. of Justice, Washington, D. C., and John O. Henderson, U. S. Atty., W.D.N.Y., and John C. Broughton, Asst. U. S. Atty., Buffalo, N. Y., on the brief), for claimant-appellant United States.
Ruth Kessler Toch, Asst. Atty. Gen. of State of New York, Albany, N. Y. (Louis J. Lefkowitz, Atty. Gen. of State of New York, and Paxton Blair, Sol. Gen., New York City, and Michael P. Geraci, Asst. Atty. Gen., Buffalo, N. Y., on the brief), for State of New York, claimant-appellee.
Before CLARK, Chief Judge, and SWAN and LUMBARD, Circuit Judges.
CLARK, Chief Judge.
This is an appeal in a bankruptcy proceeding in which the parties contest their relative priorities to some $41,000 now left in the bankrupt's estate. Involved are claims of the United States for unpaid withholding, social security, and unemployment taxes, claims of the State of New York for unpaid franchise, motor fuel, and unemployment insurance taxes, and two claims of Massachusetts Bonding and Insurance Company, a surety on two contracts performed in part by the bankrupt.
A petition for adjudication of bankruptcy was filed against Fago Construction Corporation on March 31, 1949, and it was adjudicated a bankrupt on the same day. Prior to bankruptcy, on May 15, 1947, the bankrupt had entered into a contract with the United States for the construction of a flood control project at Bath, New York, at a contract price of $417,860. In compliance with the Miller Act, 40 U.S.C. §§ 270a et seq., it furnished two bonds to the United States — one guaranteeing performance and the other securing the payment of laborers and materialmen. On both bonds Massachusetts Bonding and Insurance Company was the surety pursuant to the bankrupt's applications, in which, as consideration for the bond, it inter alia assigned to the surety, effective upon its default under the contract with the United States, all deferred payments or retained percentages, and any and all moneys and properties that might be due and payable at the time of claim or default, or that might become due and payable to the bankrupt in connection with the contract. And in August 1947, the bankrupt made a similar arrangement with the surety in connection with another contract with the United States for work on a Veterans Hospital in Buffalo, New York.
The record shows that in April 1948, the bankrupt informed the surety that it was in trouble financially and needed the surety's assistance to proceed with the Bath and Buffalo jobs. As a result of this, the surety presented a program to assure completion of the projects and the bankrupt gave the surety a collateral chattel mortgage on its equipment. In addition Dominick S. Fago, the bankrupt's principal shareholder and president, gave the surety a collateral mortgage on certain real property which he owned. Under the surety's program the bankrupt executed a letter of authority addressed to the United States Engineers directing that all checks due on the Bath project be sent to J. Herbert Crafts, the surety's attorney. In addition the bankrupt executed a Treasury form power of attorney authorizing Crafts to receive, endorse, and collect checks in its name drawn on the Treasurer of the United States. The surety and the bankrupt then opened a joint bank account in which the surety deposited substantial sums of its own money and certain checks of the United States for estimates on the Bath job. The bankrupt agreed that all such proceeds would be deposited in that account, which was used to pay labor and material bills on the two projects.
During the course of this arrangement the bankrupt, in breach of its agreement, sought to collect a check from the United States for some $41,000 due on the Bath job. The surety brought an action to attach the check and eventually was successful in collecting those proceeds. Massachusetts Bonding & Insurance Co. v. Fago Construction Corp., D.C.Md.,
Well prior to the adjudication, the bankrupt became delinquent in the payment of federal withholding and social security taxes. Between January 1947 and September 1948, the Commissioner of Internal Revenue received assessment lists on these taxes which, with interest and penalties, aggregated $51,868.41. He duly filed notices of these deficiencies in December 1948 and January 1949. The United States then set this sum off against a progress payment otherwise due to the bankrupt on the Bath job, and a certificate releasing the lien was filed.
The relevant claims filed in this proceeding disclose the following: The United States claims $31,166.40 for social security, unemployment, and withholding taxes for the years 1947 and 1948. The State of New York claims $8,829.77 for franchise, motor fuel, and unemployment insurance taxes for the years 1947, 1948, and 1949. The surety claims for unrecompensed expenditures of over $136,000 on the two projects $51,868.41 as a subrogee to the tax liens of the United States which were satisfied by the setoff and $9,500 as the equitable owner of the proceeds recovered by the trustee which were used by Dominick S. Fago to purchase land for another of his corporations. The referee ruled that the surety became subrogated to the satisfied tax liens and awarded it all the assets of the bankrupt, less administration expenses and the New York franchise taxes. The district court affirmed the referee with regard to the administration expenses and franchise taxes, but accorded third priority to the tax claims of the United States and the remaining tax claims of the State of New York, and fourth priority to the surety's claims. From this judgment both the surety and the United States appeal. The surety argues in substance that the referee's decision was proper. The United States contends that New York was improperly afforded priority on its claim for franchise taxes and that the United States is entitled to priority over New York to the extent of $5,757.41. We proceed to the surety's appeal first.
* The surety contends that it is entitled to be subrogated to the position of the United States in relation to the latter's liens for taxes with interest and penalties of $51,868.41, which were satisfied prior to bankruptcy by setoff against money earned by the bankrupt on the Bath job. Basic, of course, to this contention is that the surety paid the tax, or, in the context of this case, owned the funds against which the setoff was made. But the surety cannot establish this fact, for under the doctrine of United States v. Munsey Trust Co. of Washington, D. C.,
II
The surety also claims that $9,500 in the hands of the trustee belongs to it, and not to the bankrupt's estate. These funds were part of the progress payment of $25,893 made to the bankrupt after the surety commenced supervising the bankrupt's operations. Prior to the bankruptcy the surety instituted an action against Fago and the bankrupt to impress a lien on the real estate purchased with part of the payment and for conversion of the remainder, alleging that the payment belonged to it. The bankruptcy intervened and the action against the bankrupt (now represented by the trustee) was severed. The action against Fago came to trial and resulted in a judgment in favor of the surety for the full amount of the progress payment. This judgment remains unsatisfied. The trustee then instituted an action to impress a lien on the real property purchased with the $9,500. This was settled, and the trustee received a general mortgage on the property which has now been satisfied by payment of $9,500.
The surety's position below and here is that it was entitled to the payment in question which was converted by Fago and the bankrupt. It urges that the trustee recovered the proceeds of the real estate mortgage impressed with a trust in its favor and that the estate now contains at least $9,500 belonging to it. The referee declined to rule on the surety's claim because he found that the surety was otherwise entitled to the major portion of the assets in the estate as a subrogee to the satisfied tax liens of the United States. Therefore he never reached the question which the district court thought necessary to decide, viz., whether the bankrupt, in addition to Fago, converted the payment in question. Thus the district court refused to rule that the $9,500 belonged to the surety because of the failure of the referee to find that the bankrupt converted the payment.
We believe that a finding of conversion is unnecessary to entitle the surety to the $9,500 and that on familiar principles of subrogation the surety has a prior claim to this sum which the record clearly shows represents a traceable portion of a payment made by the United States to the bankrupt under the construction contract which was completed by the surety. It is settled law that a surety which undertakes to complete a construction contract after its principal has defaulted and pays laborers and materialmen becomes entitled to payments due the principal from the owner, here the United States, independent of any formal assignment.1 Prairie State Nat. Bank of Chicago v. United States, supra,
The questions here are whether the bankrupt defaulted so as to bring into operation the rights of the surety, and if so, whether these rights to payments from the owner take priority over tax claims of the State of New York and the United States. Both the State and the United States vehemently argue that the default contemplated in the contract between the bankrupt and the surety never occurred, and hence the assignment never matured; nor did the surety acquire a lien by way of subrogation. To some extent the arrangement created by the bankrupt and the surety whereby construction costs were paid out of the joint account into which they deposited progress payments supports this argument, for nominally the bankrupt continued its operations subject only to financial supervision by the surety. In this way construction activity never ceased and bills were paid without material delay. But to analyze these facts so as to deprive the surety of its claim based on subrogation when it actually provided over $136,000 of its own money to pay laborers and materialmen is too technical to warrant serious consideration. Cf. Century Cement Mfg. Co. v. Fiore,
The trustee in bankruptcy acted upon this state of facts in at least two instances, thereby recognizing the surety's rights to payments from the United States on the contracts. After bankruptcy and after the Bath and Buffalo jobs were completed and accepted, the United States paid to the trustee the final balances due of $8,800 and $3,501.05 respectively which he paid over to the surety. Neither the United States nor the State of New York has taken exception to payments, as well they could not, for, as we have stated, the payments due from the United States after the surety entered the scene were due the surety as a subrogee. The only difference between these sums and the $9,500 here at issue is the ease with which they can be identified as payments on the construction contracts. But the record clearly shows, and neither the United States nor the State of New York contends otherwise, that the $9,500 is a traceable portion of a payment made by the United States on the Bath job. In fact if there was a contrary finding below we would have to reverse it as clearly erroneous.
The remaining question on this aspect of the case is whether the surety's claim as a subrogee takes precedence over the tax claims. This identical issue was treated in a well reasoned opinion by Fuld, J., in United States Fidelity & Guaranty Co. v. Triborough Bridge Authority, supra,
III
The contest between the United States and the State of New York involves two issues: whether or not the State's claim for franchise taxes became a lien entitling it to a priority status superior to that afforded tax claims under § 64, sub. a(4), of the Bankruptcy Act, 11 U.S.C. § 104, sub. a(4); and whether or not the United States procured a similar lien on the bankrupt's property for certain unpaid withholding and social security taxes under the Internal Revenue Code of 1939, §§ 3670, 3671.
Under § 213, sub. 2, of the N. Y. Tax Law, corporate franchise taxes become a lien on the real and personal property of a corporation on the date the corporation is required by § 211, sub. 1, to file its franchise tax report or return. The latter section required the bankrupt to file its returns for each fiscal year on the 15th of May following the close of such fiscal year, but it does not appear from the record that the bankrupt complied with this filing requirement for its fiscal years 1947 (return due May 15, 1948) or 1948 (return due May 15, 1949). Nor does it appear that the State, prior to the bankruptcy, assessed the taxes it now claims or issued warrants to enforce its statutory liens. Clearly the presumed failure of the bankrupt to file the required returns is immaterial, for the statute, § 213, sub. 2, plainly says that the tax becomes a lien "on the date on which the report is required to be filed." But the question arises whether the State's lien for these taxes was sufficiently perfected prior to bankruptcy to gain precedence over the tax claims of the United States.
We are dealing here only with the franchise taxes due for the bankrupt's fiscal year 1947, for its returns for the years 1948 and 1949 were not required to be filed until after the adjudication and hence no statutory liens, inchoate or otherwise, could have arisen within the prescribed time for taxes due for the latter years. Bankruptcy Act, § 67, sub. b, 11 U.S.C. § 107, sub. b.
The United States argues that the State's lien, although perhaps effective against various classes of private creditors in some types of action, see, e. g., In re Century Steel Co. of America, 2 Cir.,
IV
The second aspect of the contest between the State of New York and the United States involves the issue whether the United States has a lien on the assets in the estate, and therefore priority over the State's claims, for a portion of the taxes due it. It now appears that assessment lists were received by the Commissioner of Internal Revenue showing that social security and withholding taxes in the amount of $5,757.41 (including assessed interest) were assessed against the bankrupt prior to the adjudication. Under §§ 3670 and 3671 of the Internal Revenue Code of 1939, this resulted in perfected liens in favor of the United States to the extent of these taxes which arose prior to the bankruptcy, and thus are enforceable as priority claims under § 67, sub. b, of the Bankruptcy Act, 11 U.S.C. § 107, sub. b.
On this issue the United States is met with the contention that it waived or lost its claim by failing to assert it before the referee or the district court. It appears from the record that this "lien theory" was never urged below. It is also clear, however, that the formal claim presented in the proceeding by the United States, and other portions of the record, contained sufficient facts to sustain the lien and the priority. Thus the uncontested claim of the United States showed that the bankrupt owed it social security taxes for the quarter ending December 1948, together with interest which began to run on March 9, 1949, and withholding taxes for the quarters ending December 1947 and 1948, together with interest which commenced to run on November 22, 1948, and February 28, 1949, respectively. Obviously the interest could not begin to accrue until after the taxes were assessed and until after the local collector received from the Commissioner of Internal Revenue the assessment lists in question. Internal Revenue Code of 1939, § 3655. In addition the United States appended to its brief in this court the actual certificates of assessment.
Of course it is always desirable to urge to the district court the legal theories upon which a party claims decision. But as Rule 54(c), F.R.Civ.Proc., points out, it is the court's responsibility to award relief required by the facts on any proper ground, regardless of the theories urged by the parties. Thus on numerous occasions, as noted in the margin,2 we, as well as other courts, have granted relief on legal theories not presented by the parties to the district court. In fact in a recent case similar to this one, the Supreme Court affirmed a recovery by the United States on a "lien theory" never urged to the district court. United States v. Bess,
The distribution of the bankrupt's assets, therefore, should proceed with the payment of administration expenses, including proper counsel fees, and the sum of $9,500 to Massachusetts Bonding and Insurance Company, followed by the payment of $5,757.41 to the United States for taxes owed by the bankrupt which were secured by liens perfected prior to the adjudication, and then by the pro rata payment of all other taxes claimed by the United States and the State of New York, including franchise taxes. All other claims are necessarily postponed.
Order reversed and proceeding remanded for the entry of a decree as directed in this opinion.
Notes:
Notes
We do not reach a consideration of the effect of the assignment executed by the bankrupt in favor of the surety. That issue raises difficult questions under the Anti-Assignment Act, 31 U.S.C. § 203, which are unnecessary to answer here
See, e. g., Columbia Research Corp. v. Schaffer, 2 Cir.,