201 F.2d 118 | 10th Cir. | 1952
Lead Opinion
The Construction Department of the United States Army entered into a contract with C. H. Leavell and Company for the construction of the Missile Building at White Sands Proving Grounds in New Mexico. Leavell entered into a subcontract with Kendrick Electric, Inc., for performance of part of this work. The United States Fidelity and Guaranty Company executed the payment bond for Kendrick required by the Miller Act.
In its conclusions of law the trial court held that Kendrick agreed to and accepted full and exclusive liability for the payment of these withholding taxes and that it was obligated to the United States for their payment and that under the surety company’s bond for the performance of Kendrick’s obligations it became liable for their payment.
It is true that in Paragraph 12 of the subcontract Kendrick assumed and accepted “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, * * * ” imposed by the Government and measured by the wages paid to its employees. But this did not create the liability on Kendrick’s part for the payment of these taxes. It was merely declaratory of Kendrick’s existing liability under the federal tax laws.
26 U.S.C.A. § 1401(a) and 26 U.S.C.A. § 1622(a) deal with the imposition of withholding taxes. Section 1401(a) provides that the tax imposed by § 1400 shall be collected by the employer by deducting the amount thereof from the employee’s wage. Section 1622(a) provides that “Every employer making payment of wages shall deduct and withhold upon such wages a tax equal to * * *.” 26 U.S.C.A. § 1623 provides that “The employer shall be liable for the payment of the tax required to be deducted and withheld under this sub-chapter [§ 1622], and shall not be liable to any person for the amount of any such payment.” A similar provision is contained in 26 U.S.C.A. § 1401(b). By Treasury Regulation 116 § 405.301 and Regulation 128 § 408.304 the employer’s liability for the tax attaches whether or not he withholds it from the wages and the 'amount withheld from the wages of an employee shall be allowed to him as a credit on his income tax liability
The trial court’s conclusion that Kendrick breached its construction contract with Leavell was not predicated on the ground that it had failed to discharge its tax liability for these withholding taxes to the Government. Rather the court seems to have concluded that the sums withheld constituted wages and failing to' pay them over to the Government constituted a breach of the contract requiring it to pay all wages.
The Government in its brief cites a line of cases in support of its contention that failure to pay taxes such as these imposes-liability under similar payment bonds. A detailed analysis of each case would unduly extend this opinion. Typical of this line of cases are Standard Accident Insurance Co. v. United States for Use and Benefit of Powell, 302 U.S. 442, 58 S.Ct. 314, 82 L.Ed. 350, and Illinois Surety Co. v. John Davis Co., 244 U.S. 376, 37 S.Ct. 614, 61 L.Ed. 1206. In the Standard Accident Insurance Company case the Supreme Court held that a common carrier’s claim for freight charges for the transportation of materials used in the construction of a federal building was one for labor and materials within the meaning of the act requiring the bond, and in the Illinois Surety Company case the Supreme Court held that the rental for cars and the expense of loading the plant there involved and freight thereon used in fulfillment of the contract constituted labor and materials within the act requiring a bond from the contractor. The facts in the other cases relied upon also distinguish them and make them inapplicable to the question before us. These cases as well as the others all hold that the Miller Act and the acts preceding it should be liberally construed in determining what constituted furnishing labor, material or supplies, but no case to which our attention has been called goes so far as to hold that an employer’s tax liability is within the provision of the bond merely because wages were used in paying
The Government further asserts that “The liability of the subcontractor to deduct and withhold a part of the wages of its employees, and to pay over to the -Collector the portion of wages so withheld, was as much a part of the liability of the prime contractor under its Miller Act bond to pay for labor and material as was its liability to pay the net ‘take-home’ wages of -such employees.” The reasons that impel us to conclude that Kendrick’s liability for these taxes was not a liability for the payment of wages and that failure to pay them to the Government was not a breach of its contractual obligation to pay all wages and material claims requires the same conclusions with respect to this contention. The debate on the floor of Congress indicates that the performance bond of the Miller Act was to make the contractor liable for default by reason of his inability to complete the contract or by reason of failing to meet the requirements and specifications as to material, and that the payment bond was to insure the contractor’s liability for claims of subcontractors, material-men and laborers.
Finally it is contended that the Government’s lien for these taxes is superior to the surety’s claim to these funds. This contention has been decided against the Government in a series of cases. As pointed out in the application for the payment bond, Kendrick assigned' to the surety company all its right, title and interest in and to any funds it was entitled to receive from the principal contractor, Leavell, to indemnify it against liability to which it might become subjected by virtue of Kendrick’s breach of its construction subcontract. At the time the surety company became liable and discharged its liability by paying all material, supply and labor claims, the fund in question was due Kendrick from Leavell. When a surety is called upon and makes good under its contract of suretyship upon default of its principal, it acquires an equitable lien against any sum remaining in the hands of the one for whose protection the bond was written due to its principal upon discharge of his obligation under its bond. This equitable lien relates back to the date of the contract and is superior to a Government lien for unpaid taxes subsequent to the date of the contract of suretyship although prior to the date of payment by the surety.
The case of the United States v. Security Trust & Savings Bank, 340 U.S. 47, 71 S. Ct. 111, 95 L.Ed. 53, upon which the Government relies is distinguishable upon the facts. There it was held that the equitable doctrine of relation back will not operate to-defeat the specific and perfected tax lien of the United States. In that case the Federal Government had perfected its tax lien against real estate belonging to1 a defendant debtor in the state court in an action in which the plaintiff had caused an attachment lien to be filed against the debtor’s property. Under California law the attachment gave him only an inchoate lien which became perfected upon the entry of judgment. The effect of the decision by the Supreme 'Court is that the judgment subsequent to the perfection of the Government’s tax lien did not relate back to the date of the filing of the attachment so as to give the judgment creditor a lien superior to the tax lien of the Government. It is to be noted that both liens attached to property belonging to the defendant debtor, property that was his at all times. Such is not the case here. On the date of the execution of the subcontract the prime contractor had a
The judgment of the trial court is reversed and the cause is remanded to proceed in conformity with the views expressed herein.
. 40 U.S.C.A. § 270a.
. 20 U.S.C.A. § 35.
. 'Ereasury Regulation 116 § 465-461.
. In its conclusion of Law No. 2 the court stated that .“Under the terms of the subcontract, Kendrick Electric, Inc., was and is obligated to pay all wages due labor used in performance of such sub-contract and that the withholding taxes for which the United States makes claim are part of the wages due said labor, having been previously deducted and withheld by the employer, and that under the surety bond, on default by said employer Kendrick Electric Inc., the surety, plaintiff herein, became liable for the payment of such withholding taxes.”
. United States v. New York, 315 U.S. 510, 316 U.S. 643, 62 S.Ct. 712, 86 L.Ed. 998.
. Congressional Record. Volume 79, Page 13, 382.
. Glenn v. American Surety Co., 6 Cir., 160 F.2d 977; New York Casualty Co. v. Zwerner, D.C., 58 F.Supp. 473; Farmers’ Bank v. Hayes, 6 Cir., 58 F.2d 34; Prairie State National Bank v. United States, 164 U.S. 227, 17 S.Ct. 142, 41 L. Ed. 412.
Dissenting Opinion
(dissenting).
It seems to me that my colleagues take too narrow a view of the coverage intended by the terms of the performance and payment bond in this case. Under the statute and the provisions of the bond, the surety has the primary obligation to pay the wages of the laborers upon default of the contractor. This obligation extends to the full amount of the wages earned and not just a percentage or portion of them. I can see no reason why. this obligation should be diminished because the law requires that a portion of the wages be diverted to the United States for the payment of income taxes and other benefits for the wage earners. By holding the surety responsible for the amounts withheld from the wages under the law, no more is required than what the surety agreed to do and for which it was paid a premium. To so hold does not injure or mislead the. surety or extend its liability in any manner.
Where a wage earner has assigned his wages or a portion of them to a third party, the surety is responsible to the assignee if the employer defaults. United States Fidelity & Guaranty Co. v. United States for the Benefit of Bartlett, 231 U.S. 237, 34 S.Ct. 88, 58 L.Ed. 200; Title Guaranty & Trust Co. v. Crane Co., 219 U.S. 24, 31 S.Ct. 140, 55 L.Ed. 72; Third National Bank of Miami v. Detroit Fidelity & Surety Co., 5 Cir., 65 F.2d 548, certiorari denied, 290 U.S. 667, 54 S.Ct. 88, 78 L.Ed. 577; United States, to Use of Fidelity National Bank v. Rundle, 9 Cir., 100 F. 400; National Market Co. v. Maryland Casualty Co., 100 Wash. 370, 170 P. 1009, 174 P. 479, 1 A.L.R. 450; Northwestern Nat. Bank v. Guardian Casualty & Guaranty Co., 93 Wash. 635, 161 P. 473; 43 Am.Jur., Public Works and Contracts, Sec. 152; Anno. 77 A.L.R. 149. I see no essential difference in this case and the assignment cases. The liability remains exactly the same as though the full amount of the wage earned was due to the wage earner. Under such conditions, the surety should bear any loss in the total amount of the wages earned even though a portion of the wages bears the label of a tax. This type of case is easily distinguishable from those where it was sought to hold the surety liable for ordinary taxes of the employer.
In determining whether the amounts withheld are part of wages earned or strictly a tax, the provisions of the Miller Act and the bond should be given a liberal construction to require full coverage of the bond. Fleisher Engineering & Construction Co. v. United States, for Use and Benefit of Hallenbeck, 311 U.S. 15, 61 S.Ct. 81, 85 L.Ed. 12; Massachusetts Bonding & Ins. Co. v. United States, for Use of Clarksdale Machinery Co., 5 Cir., 88 F.2d 388. I would affirm the judgment.