Regnante, Theodore C

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Boston College Law ReviewVolume 2 | Issue 1 Article 2910-1-1960Federal Tax Lien—Rights of Surety v. FederalGovernment—Property Interest underPennsylvania Law.—Atlantic Refining Company v.Continental Casualty CompanyTheodore C. RegnanteFollow this and additional works at: http://lawdigitalcommons.bc.edu/bclrPart of the Property Law and Real Estate Commons, and the Tax Law CommonsThis Casenotes is brought to you for free and open access by the Law Journals at Digital Commons @ Boston College Law School. It has been acceptedfor inclusion in Boston College Law Review by an authorized administrator of Digital Commons @ Boston College Law School. For more information,please contact nick.szydlowski@bc.edu.Recommended CitationTheodore C. Regnante, Federal Tax Lien—Rights of Surety v. Federal Government—Property Interestunder Pennsylvania Law.—Atlantic Refining Company v. Continental Casualty Company, 2 B.C.L. Rev.162 (1960), http://lawdigitalcommons.bc.edu/bclr/vol2/iss1/29EBOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEWFederal Tax Lien—Rights of Surety v. Federal Government—PropertyInterest Under Pennsylvania Law.—Atlantic Refining Company v. Con-tinental Casualty ComPany. 1—Plaintiff refining company, as owner, en-tered into a no-lien construction contract for the building of two servicestations. The agreement gave the owner the right to withhold certain pay-ments to the contractor if the latter failed to pay materialmen? Upon com-pletion of the project the owner withheld final payment because of suchfailure, and the surety company, as required under its contract, paid thematerialmens' claims. After the execution of the surety agreement, butprior to payment by the surety, the federal government filed a lien againstthe contractor for unpaid withholding and F.I.C.A. taxes. The owner fileda bill of interpleader to determine who had priority to the withheld funds.The U.S. District Court (W. D. Pa.) HELD, inter alia: (1) the con-tractor did not have any property rights in the withheld balance of thecontract price .upon which liens for federal taxes might attach, and (2) thesurety was subrogated to the rights of the owner in the withheld paymentsand was entitled to receive them.Section 6321 of Int. Rev. Code of 1954 provides that "if any personliable to pay any tax neglects or refuses to pay same after demand, theamount . . . shall be a lien in favor of the United States on all property andrights of property . . . belonging to such person."2 In the leading case ofUnited States v. Bess," the Supreme Court held that the section creates noproperty rights but merely attaches consequences, federally defined, to rightscreated under state law.° It is well settled that the lien for federal taxes ex-tends only to property in which the taxpayer has an interest.° Since the con-tracts in the instant case were made and performed in Pennsylvania the courthad to decide whether the contractor taxpayer had under the law of that stateany property interest in the withheld funds."' It reasoned that since thecontractor failed to pay the materialmen whose claims substantially equaledor exceeded the balances withheld, the express promises of the contractorto the owner to pay materialmen were materially breached .° Consequently,the contractor had no property interest in the withheld funds to which a1 183 F. Supp. 478 (W. D. Pa. 1960).2 The contract stated: "The final payment shall be made within thirty (30) daysafter final test and acceptance of the work, provided the contractor shall have sub-mitted to the owner a satisfactory release of liens showing that all claims and billsfor labor and materials have been met and paid as hereinbefore provided."3 26 U.S.C. § 6321 (1958).4 357 U.S. 51 (1958).5 Fidelity and Deposit Company of Maryland v. New York City Housing Authorityand United States, 241 F.2d 142 (2d Cir. 1957).8 United States v. Burg°, 175 F.2d 196 (10th Cir. 1949).7 Erie Railroad Company v. Tompkins, 304 U.S. 64 (1937); Fidelity and DepositCompany of Maryland v. New York City Housing Authority and United States, supranote 5.8 A material failure of performance by one party to a contract not justified by theconduct of the other discharges the latter's duty to give the agreed exchange. Restate-ment, Contracts § 274-75 (1932) ; Wright v. Barber, 270 Pa. 186, 113 A. 200 (1921).162CASE NOTESfederal tax lien could attach. 9 In the absence of a Government appeal itappears that there has been a retreat from the Government's previous posi-tion that private contractual provisions cannot diminish the government'srights under the tax statutes." The Government's contention has been thatthe contractor's interest in any earned but unpaid funds is a right to propertysubject to tax liens, notwithstanding contractual provisions limiting thecontractor's right to payment." The weakness of this position lies in thefact that it would give the Government money which the contractor neveractually received. Dismissing the claim of the U.S., the court found nodifficulty in bringing Pennsylvania law into accord with federal cases bydeclaring that in a no-Iien construction contract the owner has an equitableobligation to see that materialmen are paid and, when the surety pays them,the surety is subrogated to the rights of the owner in the withheld balancesas of the date of the original contract."The surety in the instant case also claimed it was entitled to the fundsunder equitable assignments given to it by the contractor at the time of theexecution of the bonds, an issue never reached by the court. Assuming thecourt did find the contractor had a property interest in the withheld fundsand that there had been a valid equitable assignment to the surety, wouldthe federal government have been given priority in withheld payments?The decision probably would have been in the affirmative under the so-called inchoate lien doctrine.Under this doctrine a lien, competing with a federal tax lien, to beentitled to priority must not only be prior in time but also be perfectedand choate.' 3 To meet these requirements, (I) the property subject to thelien must be definite, (2) the identity of the lienor established, and (3) theamount of the lien be exact and determined with finality." Whether theserequirements are met is to be decided as a matter of federal, not state, law."In the instant case, even though the assignment was made previous to thefiling of the tax lien, the status of the interest of the surety-assignee wasmerely that of an unperfected security interest holder, the lien being in-choate until its certainty was established, that is, at the time of payment tothe materialmen. This event did not occur until after the federal tax lienattached. The doctrine of the inchoate lien has been the subject of severe0 Lancaster County National Bank's Appeal, 304 Pa. 437, 155 A. 859 (1931); PrairieState National Bank of Chicago v. United States, 164 U.S. 227 (1896) ; Sundheim v.Philadelphia School District, 311 Pa. 90, 166 A. 365 (1933).1 '9 United States v. Kings County Iron Works, 222 F.2d 232 (2d Cir. 1955).11 United States v. Manufacturers Trust Co,, 198 F.2d 366 (2d Cir. 1952).12 Henningsen v. United States Fidelity and Guaranty Co., 208 U.S. 404 (1907);Prairie States National Bank of Chicago v. United States, supra note 9.13 United States v. Security Trust & Savings Bank, 340 U.S. 47 (1950).14 Illinois ex rel. Gordon v. Campbell, 329 U.S. 362 (1946).15 United States v. Gilbert Associates, 345 U.S. 361 (1953). This is in direct con-trast to the question of a "property interest", discussed above, which is a matter ofstate law. The Supreme Court has introduced inconsistency into an area of law whichby its very nature demands uniformity.163BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEWcriticism," and possibly the court in the instant case, by deciding that thecontractor had no property interest in the funds, has found a loophole toavoid the harsh application of this doctrine.THEODORE C. REGNANTEJudgments—Collateral Estoppel Used Defensively by One Not a Party,or in Privity with Party, to Former Action.—Emil Eisel v. ColumbiaPacking Co.'—A products liability action was brought in the Federal Dis-trict Court in Massachusetts by a Connecticut consumer of ham against thepacker, a Massachusetts corporation. In a previous action brought by theconsumer in the state courts of Connecticut both the retailer and packer hadbeen named as parties defendant. On motion by the packer, he had beendropped as a party defendant, the action thereafter being prosecuted onlyagainst the retailer. Judgment was had by the retailer on a finding that theconsumer's injuries did not result from any defective condition of the ham.The packer, relying on the prior adjudication, moved for judgment in thepresent action, contending that the consumer was collaterally estopped frommaintaining the suit. HELD: the plaintiff having had full opportunity to liti-gate his claim against the retailer, and having been unsuccessful for reasonsunrelated to any personal defense of the retailer, is precluded from relitigatingthe same issue against the packer. While every man is entitled to his dayin court there is no persuasive public policy allowing the relitigation of aclaim when the issue has been fully tried in substantially the same contextin a prior suit. Where the successful prosecution of a suit against a retailerwould permit of the defendant's indemnification by the manufacturer, uni-lateral estoppel precludes the unsuccessful plaintiff from subsequently suingthe manufacturer on substantially the same issue, the policy of the doctrineof res judicata being that there should be an end to litigation.The plea of res judicata is available when the parties and issues in aprior case are identical to those presently before the court.2 In such caseeach of the parties is estopped from setting up his claim or defense againstthe other, there being, consequently, a mutuality of estoppel. However,where a party has several claims against two or more persons, he maypursue his remedy against each separately (absent procedural rules requiringjoinder) and he is not precluded by a failure of successful prosecutionagainst one, from thereafter pursuing his claim against the other. But ajudgment for a defendant will not be conclusive against the plaintiff in asubsequent action brought by him against a new defendant, unless a favor-able judgment for the plaintiff in the first case would have either permitted16 macLachlan, Improving the Laws of Federal Liens and Priority, 1 B. C. Ind. &Corn. L. Rev. 73 (1959). Kennedy, The Pernicious Career of the Inchoate and GeneralLiens, 63 Yale L.J. 905 (1954).1 181 F. Supp. 298 (D. Mass. 1960).2 Old Dominion Copper Mining and Smelting Co. v. Bigelow, 203 Mass. 159, 89N.E. 193 (1909), aff'd, 225 U.S. 111 (1911).164

Federal Tax Lien—Rights of Surety v. Federal Government—Property Interest under Pennsylvania Law.—Atlantic Refining Company v. Continental Casualty Company

Federal Tax Lien—Rights of Surety v. Federal Government—Property Interest under Pennsylvania Law.—Atlantic Refining Company v. Continental Casualty Company

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