The opinion of the court was delivered by: CASHIN
On or about October 18, 1955, defendant, The City of New York (City), acting through the Commissioner of Public Works, entered into Contract No. 179464 with defendant, William Casey and Sons, Inc. (Casey), whereby Casey was to construct certain sewers. In connection with the construction contract, performance and payment bonds were executed by Casey, as principal, and defendant Maryland Casualty Company (Maryland), as surety, on October 4, 1955. On February 7, 1956 Casey gave an 'all-moneys' assignment of moneys due or to become due under the contract to plaintiff, First National Bank in Yonkers (Bank).
Casey commenced work on the contract and for a time performed satisfactorily. In accordance with the terms of the contract, five partial or progress payments were made by the City, some to Casey and some to the Bank as per the assignment. Under the payment clause of the contract, a requisition for such payments could be made no oftener than once a month. After the requisition was submitted, the Engineer, if the requisition were satisfactory, would, within 8 days of the submission, certify a voucher for the payment which the Commissioner would approve. Thereupon the voucher would be delivered to the Comptroller for payment within 15 days from the filing of the voucher in his office. Not the entire amount of the requisition would be certified for payment, however. Rather, 5 percent of the value of the work performed would be retained by the City pending final acceptance of the entire job. Payment Estimate No. 6 was so submitted and a voucher theron certified and approved, which voucher was received in the Comptroller's office on either May 28 or May 29, 1956. This voucher was in the amount of $ 47,133.90.
However, in the middle of May 1956 Casey experienced financial difficulties and notified the surety that it would need financial assistance in completing the contract. The surety thereupon set up a program whereby it advanced funds for payroll and material bills of the contractor with relation to the job. Despite the assistance of the surety, the City was not satisfied with Casey's performance and, on June 6, 1956, notified Casey to appear before the Commissioner to explain why it should not be held in default. On June 13, 1956, after Casey had been heard on both June 11 and June 13, a formal default of the contract was declared.
By the time Casey was declared in default, Maryland had advanced for payroll and material bills, the sum of $ 57,993.91. Maryland completed the contract at a net loss of $ 682,637.52. As of the same time the Bank had advanced $ 50,000 to Casey, which, for the purpose of these motions, will be assumed to have been expended in connection with the contract under question.
Assessments for withholding taxes were made by the defendant United States of America (Government), demands given and liens filed according to the following table:
Assessment Outstanding Notice Tax
Type of Tax Amount & Demand Lien
Tax Period Date Assessed Balance Given File d
Withholding 9/30/55 4/11/55 $773.43 $773.43 5/4/56 1/25/57
Withholding 12/31/55 2/29/55 38,957.89 38,957.89 3/15/56 1/25/57
Withholding 3/31/55 5/31/55 42,222.42 41,598.45 7/13/56 8/16//56
Withholding 6/30/55 8/23/55 29,139.40 29,061.12 9/19/56 8/24//56
Total Amount Outstanding -- $110,390.83.
Defendant, Liberty Mutual Insurance Company (Liberty), furnished workmen's compensation and public liability insurance coverage to Casey for the project. Liberty claims it is due, for unpaid insurance premiums, the amount of $ 39,903.24.
Defendants, Charles M. Hanson, Charles W. Grant, James Martin and Robert M. Johnson, as Trustees of the New York City Carpenters' Welfare and Pension Fund (Trustee) obtained a judgment against Casey in the amount of $ 4,109.76 for welfare and pension fund contributions due for the years 1955 and 1956. A subpoena with injunction was served upon the City on August 28, 1956.
The action was originally instituted in the Supreme Court of the State of New York, County of New York, for the amount covered by Payment Estimate No. 6. However, subsequent pleadings by way of cross-claims have brought before the court the entire amount of the contract price remaining in the hands of the City. Apart from the payment covered by Estimate No. 6, there is due under the contract, or will become due upon final acceptance, an additional sum of $ 9,715.24 for work done by Casey subsequent to the date of submission of requisition No. 6 and prior to the date of formal default. There is, or will be, due also the amount of $ 77,789.43 representing retained percentages, $ 60,434.60 of which is allocable to the partial payments earned by Casey prior to formal default.
Presently before the court are motions for summary judgment brought on by the Government and by Maryland. Maryland demands the entire contract balance of $ 117,283.74. The Government demands so much of the sum as will compensate it for its unpaid taxes plus interest and penalties. The Bank opposes summary judgment on the ground that there are triable issues of fact and that, in any event, its rights are superior to the Government's and Maryland's. Liberty supports Maryland in its argument that it is entitled to summary judgment as against the Government and the Bank. Liberty argues further, however, that its claims against Casey are within the terms of Maryland's payment bond and that, therefore, Maryland, as a condition to obtaining summary judgment, should be ordered to pay Liberty's claim. The Trustee contends that its judgment is in the nature of wages and thus is entitled to priority.
The Government bases its right to priority over the competing claim of Maryland on the provisions of 26 U.S.C. § 6321, which reads as follows:
'If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.'
It is not argued by the Government that the section quoted creates any rights to which a tax lien can attach. Rather, the existence of property rights to which a tax lien can attach is a question of state law.
It is argued by the Government that if the law of the State of New York (obviously applicable here since the contract was made in New York, to be performed in New York, with payment to be made in New York) vested in Casey a 'right to property' in any funds in the hands of the City at a time when the possibility of a tax lien under 26 U.S.C. § 6321 existed, no subsequent condition such as a default on the part of the contractor giving rise to claims on the part of the City for excess costs, would act to divest the Government of its lien rights.
This, the Government further argues, follows since the doctrine of relationship back has been completely rejected by the Supreme Court where such relationship back would act to defeat a tax lien. True it is that the doctrine of relationship back of state created liens has been rejected by the Supreme Court in some instances.
However, under the facts of the instant case, the problem of whether a similar treatment will be given to the rights of a surety arising after the attachment of tax liens is not presented.
Under the terms of the construction contract, the City had the right to declare the contractor in default in the event of the happening of certain specified contingencies. It is undisputed that the formal declaration of default did not occur until June 13, 1956, since it was on this date that the letter declaring Casey in default was dispatched, and on this date that Maryland was notified that the City would look to it for completion of the contract. It is equally true that prior to this declaration of default there was in the hands of the City a voucher based upon Estimate No. 6 certifying that the amount of $ 47,133.90 was due and payable to Casey or his assignee, the Bank. A blind adherence to mere form would compel the conclusion that the Government's lien, good at least as against Maryland, attached to the fund covering Estimate No. 6 at least on June 13, 1956, i.e., fifteen days subsequent to the last possible date the voucher could have been filed in the office of the Comptroller. Slavish formalism need not, however, bind the court under the circumstances here present.
In the middle of May 1956 Casey found himself in financial difficulties. Accordingly, a program was set up whereby the surety advanced funds to the contractor for the payment of labor and materials. As of the date of formal default, the amount so advanced was $ 57,993.91. Nor was the date of default, June 13, 1956, the date when the City first became dissatisfied with the performance of Casey. Rather, on June 6, notification was sent to Casey to appear before the Commissioner of Public Works to explain why he should not be held in default. Casey did so appear on June 11 and June 13 but his explanation apparently was not availing since on the latter date the formal notification of default was ...