Lumbard, Chief Judge, and Friendly and Anderson, Circuit Judges.
Certified Industries, Inc., takes this appeal from an order of the District Court for the Southern District of New York granting the application of the United States for a preliminary injunction which enjoined Certified from proceeding with its action in the New York State Supreme Court to foreclose a lien pending a final determination of the present action brought by the United States.
On September 10, 1962, Carol Management Corporation engaged Meteor Concrete Corporation to supply labor, materials and equipment for the improvement of certain real property at 70 Park Avenue in New York City. The contract price was $80,000. Meteor, in turn, contracted with Certified for the concrete necessary for the making of the improvements at an agreed price of $11,940.69.
After Meteor had been paid $72,981 and had only partially performed, it defaulted on the principal contract. Carol, or its successors, then completed the contract at a cost of $3,541.41, leaving a balance of $3,477.49 due to Meteor. Certified claims that the sub-contract for the concrete was fully performed but that Meteor failed to pay the balance of $3,025.69 due on the contract price. The present action stems from the claim of the United States that Meteor did not remit withholding, social security and unemployment compensation taxes due and owing to the United States based upon work attributable to Meteor's contract with Carol. The amount of the tax claim is $3,891.01.
On July 15, 1963, Certified caused a mechanic's lien to be filed and gave the required statutory notice,*fn1 pursuant to the New York Lien Law, McKinney's Consol. Laws, C.33 on the 70 Park Avenue property to the extent of its unpaid claim against Meteor. An action to foreclose that lien was commenced in the Supreme Court of New York on June 11, 1964. Pursuant to § 19 of the New York Lien Law, Doral Park Avenue Hotel Corporation, Carol's successor, filed with the clerk of the state court an undertaking of Continental Casualty Company that it would pay any judgment recovered in an action to foreclose the mechanic's lien. In accordance with subdivision 4 of § 19, the lien was discharged upon the filing of the bond.
The present action was brought in the Southern District of New York by the United States on June 30, 1965. The United States does not assert a tax lien in this action, but proceeds on the theory that it is entitled to have a trust imposed on the funds owed to Meteor by Carol under the "trust fund" provisions of Article 3-A of the New York Lien Law. This action is the only one in which all of the possible known claimants are parties, although it would appear from the record that the United States had knowledge of the state court proceedings and considered the possibility of attempting to intervene therein.
Certified moved for summary judgment in the state court foreclosure action in the early part of September, 1965. On September 15, 1965, the United States applied for an order of the United States District Court asking Certified to show cause why a preliminary injunction, barring Certified from proceeding with its foreclosure action and its motion therein for summary judgment, should not issue pursuant to Rule 65 of the Federal Rules of Civil Procedure. The application for a preliminary injunction was granted on October 5, 1965 and Certified appeals from that order. 28 U.S.C. § 1292 (a)(1).
The appeal raises a difficult question with regard to federal-state relations. We begin with the premise that the anti-injunction statute, 28 U.S.C. § 2283, which prohibits a federal court from granting "an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments," does not apply where the United States, as a party in interest, seeks such a stay. Leiter Minerals, Inc. v. United States, 352 U.S. 220, 226, 1 L. Ed. 2d 267, 77 S. Ct. 287 (1957). That decision does not mean, however, that a stay is automatically granted simply on the application of the United States. After enunciating the principle above stated, the Supreme Court went on to say that it was also necessary to inquire "whether the granting of an injunction was proper in the circumstances of this case." Leiter Minerals, Inc. v. United States, supra, at 226.
The United States is not entitled to an injunction staying state court proceedings where the state court is the first court to assume jurisdiction over the subject matter property of an action in rem or quasi in rem. United States v. Bank of New York & Trust Co., 296 U.S. 463, 477, 80 L. Ed. 331, 56 S. Ct. 343 (1936); Penn General Casualty Co. v. Pennsylvania, 294 U.S. 189, 195, 79 L. Ed. 850, 55 S. Ct. 386 (1935).*fn2 On the other hand, the mere fact that certain property in possession or custody of the state court is indirectly related to the action in the federal court is not a bar to the exercise of federal jurisdiction "where the final judgment does not undertake to interfere with the state court's possession save to the extent that the state court is bound by the judgment to recognize the right adjudicated by the federal court." Markham v. Allen, 326 U.S. 490, 494, 90 L. Ed. 256, 66 S. Ct. 296 (1946). In that case, the Supreme Court held that it was proper to exercise jurisdiction where the Alien Property Custodian sought a judgment ordering the executor of an estate being administered in California to pay over the net estate.
The principle applied in Markham v. Allen, supra, is derived from a line of cases which hold that the exercise of jurisdiction over property by one court does not prevent other courts from rendering "any judgment not in conflict with that court's authority to decide questions within its jurisdiction and to make effective such decisions by its control of the property." United States v. Klein, 303 U.S. 276, 281, 82 L. Ed. 840, 58 S. Ct. 536 (1938). The actions "to adjudicate rights" of which the Court speaks in Markham v. Allen, supra, are not in rem actions, but those in which the "judgments therein do not deal with the property and order distribution; they adjudicate questions which precede distribution." Commonwealth Trust Co. v. Bradford, 297 U.S. 613, 619, 80 L. Ed. 920, 56 S. Ct. 600 (1936).
There can be little doubt that the initial foreclosure proceeding in the state court was a proceeding in rem, Quimby v. Sloan, 2 E. D. Smith 594, 607, 2 Abb. Pr. 93 (Ct. Common Pleas, 1855), an action in which Certified sought to enforce "an interest in the property improved." Rapid Fireproof Door Co. v. Largo Corp., 243 N. Y. 482, 486, 154 N.E. 531 (1926). Thus, the present Lien Law provides that the mechanic's lien is "upon the real property improved"*fn3 and that an action to foreclose the lien is governed by "the provisions of the real property actions and proceedings law related to actions for the foreclosure of a mortgage upon real property."*fn4 It is, therefore, quite clear that if the bond of Continental Casualty had not been substituted for Certified's mechanic's lien in the state proceedings, the federal court would have been powerless to interfere with the state proceedings. United States v. Bank of New York & Trust Co., supra; Penn General Casualty Co. v. Pennsylvania, supra.
We are, therefore, presented with the question of whether, in the light of the decisions discussed above, the substitution of the bond for the mechanic's lien so altered the character of the state lien foreclosure proceeding that it could be stayed by a federal court. We think that it did not.
After the discharge of a lien by the substitution of a bond, the action continues in form as a foreclosure proceeding for purposes of establishing the validity of the lien. Berger Mfg. Co. v. City of New York, 206 N. Y. 24, 30, 99 N.E. 153 (1912); Hall v. Carl G. Ek & Son Constr. Co., 17 A.D. 2d 558, 236 N.Y.S. 2d 555, 558-559 (4th Dept., 1963), aff'd, 13 N. Y. 2d 825, 192 N.E. 2d 227, 242 N.Y.S.2d 352 (1963). In effect, the filing of the undertaking with the clerk merely shifts the lien from the real property to the bond, thereby enabling the owner of the realty to free his property from the incumbrance of the lien. It is clear, however, that the right to recover on the undertaking is not personal. Milliken Bros., Inc. v. City of New York, 201 N. Y. 65, 74, 94 N.E. 196 (1911). The action remains in equity and, although the surety may be joined as a defendant for convenience sake, ...