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November 18, 1957


The opinion of the court was delivered by: MORGAN

This matter is before the District Court on three distinct petitions by the United States, the State of New York and the Massachusetts Bonding & Insurance Company, each appealing from a decision of the Referee in Bankruptcy, the Hon. James R. Privitera, dated September 12, 1956.

On or about May 15, 1947, the Fago Construction Corporation, hereinafter referred to as the corporation, entered into a flood control contract with the United States Government at Bath, New York, and for a V.A. Hospital Contract in Buffalo, New York. On May 15, 1947, the Massachusetts Bonding & Insurance Company became surety upon the bankrupt's corporation performance and payment bonds as required under the Miller Act, Title 40 U.S.C.A. Section 270a, b, c, d. In April 1948, the Fago Construction Corporation advised the surety that it was in trouble financially and could not proceed with both jobs without financial assistance. As a result, the bankrupt corporation gave the surety a collateral chattel mortgage on its equipment, and Dominic S. Fago, the principal stockholder, gave a collateral real property mortgage on some property owned by him. The surety further presented the following program for the bankrupt corporation. Since the Bath Flood Control job was a Federal contract, and since the surety was not entitled under the Assignment of Claims Act, 41 U.S.C.A. § 15, to take a direct assignment of contract balances, the bankrupt executed two documents, one being a letter of authority directed to the United States Engineer in charge to send all checks for estimates to the surety's claim manager at Buffalo, N.Y., J. Herbert Crafts; the other being a 'power of attorney' authorizing Mr. Crafts to endorse checks payable to the bankrupt on each job. The letters of authority were filed with the U.S. Engineer's office in Baltimore and Buffalo, while the power of attorney to endorse checks was filed with the Treasury Department. A joint bank account in the name of Mr. Crafts and the bankrupt's secretary, Mr. Bieniek, was opened, and into this account, all funds were deposited with all checks signed by Messrs. Crafts and Bieniek. The agreement further provided that as the work progressed on both jobs, money becoming available under the two contracts would be deposited in the special account. Under this arrangement, $ 79,499.12 in contract balances was deposited in the joint account. However, Dominic Fago managed to obtain a check from the United States Government for $ 25,893 which he did not deposit in the joint account. Of this amount, $ 14,000 wound up in Fago's personal account, $ 9,500 of which was used to purchase land for another of his corporations, Permanent Residences, Inc. This transaction occurred prior to the bankruptcy. After the bankruptcy, the trustee obtained a blanket mortgage from Permanent Residences, Inc. and was eventually paid in full plus interest.

 During the period from January 22, 1947 through September 28, 1948, the bankrupt corporation was delinquent in the payment of a variety of Federal Taxes aggregating $ 47,168.60. Notice of this assessment was filed in the office of the Clerk of the United States District Court for the Western District of New York on December 15, 1948 and on January 24, 1949. A progress payment of $ 51,868.41 became due to the corporation, but the collector exercised his paramount right of setoff and applied it toward the payment of the delinquent taxes which were satisfied of record on January 26, 1949. On March 31, 1949, an involuntary petition for an adjudication in bankruptcy was filed against the Fago Construction Corporation with an adjudication of bankruptcy following shortly thereafter.

 The appeal concerns the following claims:

 1. Claim No. 90 for New York State franchise taxes for the following periods: April 25, 1947 to January 31, 1948, tax of $ 564.75 plus $ 28.25 interest; for period February 1, 1948 to January 31, 1949, tax of $ 284.83; February 1, 1949 to March 31, 1949, tax of $ 25, for a total tax of $ 901.83.

 2. Claim No. 109 of State of New York for taxes under Article 12A of New York State Tax Law in the amount of $ 14.26.

 3. Claim No. 140 for New York State unemployment insurance taxes for $ 7,913.68; of this amount $ 7,791.18 was for the period July 1, 1947 to December 31, 1948. A tax warrant was filed for this amount of April 11, 1949 in the Clerk's Office of Erie County.

 4. Claim No. 101 by United States for unemployment and withholding taxes in the amount of $ 19,469.66 which accrued during the quarters ending December 1947, September 1948 and December 1948. This claim was filed on July 5, 1949.

 5. Claim No. 121 by United States for $ 11,696.74 for unemployment taxes (FUTA) accruing during the year 1947-1948. This claim was filed on September 27, 1949.

 6. Claim No. 30 by the Massachusetts Bonding & Insurance Company for various causes of action for $ 217,584.06, including its alleged right to subrogation of the Government's claims.

 The learned Referee decided on the following order of distribution:

 First: The payment of all administration costs and expenses and allowances to be made to the parties and attorneys entitled thereto.

 Second: Payments of the Franchise Taxes owing to the State of New York under Claim No. 90.

 Third: Payment of the balance remaining to the Massachusetts Bonding and Insurance Company on its claim of subrogation to the rights ...

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