Opposition Brief — Schmoll v. United States

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CITATIONS

Cases :

Cherry Cotton Mills, Inc. v. United States, No. 187, Oct. T.

1945, decided March 25, 1946__..........---.-------- 6

Henningsen v. United States Fidelity & Guaranty Co., 208

St Oi MOR an vdwawnndsdabuchvennthhukeksecskuvsanuks G

Illinois ex rel. Gordon v. United States, No. 749, Oct. T. 1945,

I RIE TE, BO iain cccuncsntunasanesnensecan= 5,7

Maryland Casualty Company v. United States, 100 C. Cls.

ib nica cb wackkidnncnsdeiek eh bhi ste whe nWeanneensue 9, 10

Morgenthau v. Fidelity & Deposit Co., 94 F. 2d 632_____-_- 9

Philadelphia National Bank v. McKinlay, 72 F. 2d 89__-. - 10

Prairie State Bank v. United States, 164 U. 8. 227._____.- 9

United States v. Emory, 314 U. 8. 423__...__----------.-- 5, 6, 7

United States v. Knott, 298 U. 8. 544____---__---------- 6, 7,8

United States v. National Surety Co., 254 U. 8. 78.-..---- 6

United States v. Texas, 314 U. S. 480__________-_- eee 7

United States v. Waddill Co., 323 U. S. 353____-___--_--- 5, 7,9

United States, F. & G. Company v. Sweeney, 80 F. 2d 235-- 10

Statutes:

Act of August 24, 1935, c. 642, 49 Stat. 793, 40 U.S. C. 270a_ 12

Bankruptcy Act, Secs. 64, 67 (11 U. S. C. 104, 107)___-__- 10

as i AON he OR Rs MED acc npncccusknewenboetes 4, 6, 7, 12

Miscellaneous:

Rogge, The Differences in Priority of the United States in

Bankruptcy and in Equity Receiverships (1929), 43

PERE: Cas BT. DB e is od ncccptkdennbcchakns teneneee bes 10

711692—46

Juthe Supreme court of the Wnited States

OctToBER TERM, 1946

No. 244

DEWEY SCHMOLL, SUCCESSOR ASSIGNEE FOR THE

BENEFIT OF CREDITORS, ETC., AND NATIONAL

Surety CORPORATION, PETITIONERS

v.

Tue UnrtTep STATES

ON PETITION FOR A WRIT OF CERTIORARI TO THE COURT

OF CLAIMS

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINION BELOW

The opinion of the Court of Claims (R. 64-72)

has not yet been reported.

JURISDICTION

The judgment of the Court of Claims was en-

tered on January 7, 1946 (R. 72). Motions for a

new trial filed by petitioners and respondent were

overruled on April 1, 1946 (R. 72-73). The peti-

tion for a writ of certiorari was filed on June 28,

1946. The jurisdiction of this Court is invoked

(1)

2

under Section 3 (b) of the Act of February 13,

1925, as amended by the Act of May 12, 1939.

QUESTION PRESENTED

Whether in a suit for the balance due on certain

construction contracts, brought by the insolvent

contractor’s assignee and the surety who had satis-

fied all labor and material claims, the United

States, by virtue of R. S. 3466, is entitled to offset

debts due the United States by the contractor for

(1) capital stock taxes, and (2) for correcting

defective work under two separate contracts on

which there had been a different surety.

STATUTES INVOLVED

The relevant portions of the statutes involved

are set forth in the App@hdia, infra, pp. 12-13.

STATEMENT

Between November 19, 1933 and March 19, 1935,

Murch Brothers Construction Co., Inc. (the ‘‘con-

tractor’’), entered into 17 contracts with the

United States for the construction and remodeling

of post offices (R. 32). National Surety Corpora-

tion (the ‘‘surety’’), a petitioner herein, became

surety on the payment and performance bonds

furnished to the United States pursuant to the Act

of August 24, 1935 (Appendix, infra, pp. 12-13)

(R. 34). On June 22, 1935, due to lack of funds, |

the contractor suspended work on the contracts

(R. 34). On June 27, 1935, the United States

terminated the contractor’s right to proceed, and

stienieenenaninienmtnaassincnetestieniaiilllll

3

let contracts to others for the completion of the

work (R. 35). On January 3, 1936, the contractor

made an assignment for the benefit of its creditors

(R. 32). The surety paid labor and material

claims totaling $202,011.66, and it was agreed be-

tween the surety and the successor assignee for

the benefit of creditors (the petitioners herein)

that the surety was entitled to be subrogated for

that amount (R. 47). After deducting the total

amount which the United States paid to the con-

tractor and to the completing contractors, there

remained an unpaid balance of $55,197.57 of the

total of the contract prices (R. 47). From this

balance, the General Accounting Office deducted :

(1) $31,547.80 as expenses incident to the con-

tractor’s default, (2) $2,552.43 for correcting de-

fective work done by the contractor on separate

Veterans’ Administration contracts upon which

the National Surety Corporation had not been

surety, and (3) $206.53 for capital stock taxes

which the contractor owed the United States—a

total deduction of $34,306.76 (R. 48). The Gen-

eral Accounting Office then suspended payment of

the acknowledged balance because of its uncer-

tainty as to the person to whom payments should

be made (R. 37). Thereafter, petitioners in-

stituted eleven suits in the Court of Claims to

recover $64,175.83, for the balance allegedly due

on the contracts, for damages from delay allegedly

caused by the United States, and for work per-

4

formed under protest by the contractor (R. 1-11).

The United States filed a general traverse in each

ease, and, by order of the court, the cases were

consolidated (R. 27, 32). On April 5, 1944, the

United States filed a counterclaim for the items

deducted by the General Accounting Office (R. 27-

31), and petitioners filed a replication thereto

(R. 27-31). After a trial on the merits, the Court

of Claims entered Special Findings of Fact and

Conclusion of Law, sustaining the deductions

made by the General Accounting Office, but award-

ing judgment, in favor of the surety, for $30,-

015.58, of which $9,124.77 was for damages for

delays caused by the Government, and the re-

mainder for the net balance due on the contracts

(R. 32-64, 69-72).

ARGUMENT

Contrary to petitioners’ contentions, the ques-

tion here presented is a narrow one. The only

problem is whether, where an insolvent debtor

has made an assignment for the benefit of credi-

tors, the priority in payment conferred on a debt

due the United States takes precedence over a

claim to unpaid contract balances made by a

surety who has paid claims for labor and material.

Section 3466 of the Revised Statutes provides

that: ‘Whenever any person indebted to the

United States is insolvent * * * the debts

due to the United States shall be first satisfied”’

(Appendix, infra, p. 12). The court below held

5

that the contractor herein, having made an assign-

ment for the benefit of its creditors, had mani-

fested its insolvency in a manner covered by the

statute (United States v. Emory, 314 U. S. 423,

426); that the claims of the United States for

capital stock taxes and for correcting defective

work under other contracts were entitled to prior-

ity over the claim of the surety; and that such

claims might be offset against the contract bal-

ance withheld by the Comptroller General. In so

holding, we submit that the court below was

clearly correct.’

1. Since the offset items were unquestionably

‘‘debts due to the United States,’’ they would, in

an action against the assignee, be entitled to pri-

ority over claims of other creditors (Illinots ex

rel. Gordon v. United States, No. 749, Oct. 7,

1945, decided April 22, 1946; United States v.

Emory, 314 U. 8. 423), including claims secured

by liens where such liens were not specific and

perfected. See United States v. Waddill Co.,

323 U. S. 353, 355, and cases there cited. Assum-

ing, as petitioners contend (Pet. 7-13), that the

surety herein has an equitable lien upon the un-

paid contract balances, the surety’s claim could

not prevail over that of the United States in an

Petitioners have apparently abandoned their contention

made in the court below (R. 64-66) that the General Ac-

counting Office erred in deducting, as an expense incidental

to the contractor’s default, the rental paid for temporary

quarters for post offices between the completion dates speci-

fied in the contracts and the actual dates of completion.

6

action against the assignee, since such a lien is

neither specific nor perfected.’

The fact that in the instant case the Govern-

ment’s claim is asserted as an offset to the claim

of petitioners, rather than in an original proceed-

ing against the assignee, in no way alters the Gov-

ernment’s right to priority. By permitting the

offset, the court below not only obeys “‘the plain

command of § 3466 that ‘debts due to the United

States shall be first satisfied’ ’’ (United States v.

Emory, 314 U. S. 423, 426), but avoids “ ‘cireu-

ity of action, inconvenience, expense, consumption

of the courts’ time, and injustice’ ”’ (Cherry Cot-

ton Mills, Inc. v. United States, No. 187, Oct. T.

1945, decided March 25, 1946). Moreover, the

decision below is consistent with United States v.

National Surety Co., 254 U. S. 73, where this

Court flatly rejected the contention of a surety

that, having fulfilled the obligation of its bond, it

was entitled, under R. S. 3468, to share in the

bankrupt’s assets equally with the Government.

* Petitioners also argue that “the surety is a party to the

contract with the United States and has a legal right in addi-

tion to his equitable lien, to receive from the United States

the balance of the contract price” (Pet. 13-16). But, as the

court below observed (R. 69), “the agreement of the United

States that the surety should become subrogated to its princi-

pal’s rights against it must be understood to have been made

subject to the limitation that the Government should never-

theless have the priority given it” by R. S. 3466. Cf. United

States v. Knott, 298 U. S. 544, 547. Moreover, any agree-

ment to waive R. S. 3466 would be beyond the authority of

the contracting officer.

7

The fundamental error common to both the

petition and the brief amicus curiae * is the failure

to recognize that the unqualified command of R.

S. 3466 cuts across the rights of a subrogee in the

same manner as it supersedes other legal or equit-

able rights. Regardless of the rights normally

accorded to a surety by the courts, such rights

must yield to the plain command that in case of an

assignment for the benefit of creditors, the “debts

due to the United States shall be first satisfied.”’

There is no reason why the right of the United

States to preference here as against its debtor’s

surety should be any less than it was in United

States v. Knott, 298 U. S. 544, as against the State

Treasurer in possession of a trust fund; in United

States v. Emory, 314 U. 8S. 423, as against wage

claimants; in United States v. Texas, 314 U. S.

480, as against state gasoline tax liens; in United

States v. Waddill Co., 323 U. 8. 353, as against

a landlord’s lien and a municipal tax lien; or in

Illinois ex rel. Gordon v. Untied States, supra,

as against a State’s claim to unemployment com-

pensation taxes.

Both petitioners and the amicus urge that

R. S. 3466 cannot apply because the withheld

money in the hands of the United States does

not belong either to the assignee or to contractor,

but constitutes a trust fund retained by the

3 A brief amicus curiae in support of the petition has been

filed by the Association of Casualty and Surety Executives.

8

United States for the benefit of the person found

to be entitled thereto. But that was the precise

argument rejected by the Court in United States

v. Knott, 298 U. S. 544, 548-551. There a Florida

statute required all surety companies doing busi-

ness to deposit certain securities with the State

Treasurer, who held the fund in trust for the

protection and benefit of all Florida claimants

against the depositing surety company. Under

the state statute the United States was not a

beneficiary of the trust fund (298 U. S. at 549).

This Court held that the creation of the trust

fund did not divest the surety company of title

thereto and that, in the absence of a specific,

perfected lien, the United States was entitled to

priority in payment out of the fund.‘ We sub-

mit that the fund here retained by the United

States aiffered in none of its essential aspects

* This Court said (298 U.S. at 550-551) :

“Obviously, the deposit did not divest the company’s title

to the securities. No one was appointed trustee; and, at the

time of the deposit, there was no ascertainable beneficiary.

Who would share in the proceeds of the securities could not

be known until they were exhausted in satisfaction of judg-

ments, or until the entry of the decree of distribution in a

suit authorized by the 1933 amendment. While in the case

at bar the Supreme Court declared that the deposit created

a ‘trust fund,’ the term appears to have been used to connote

an inchoate general lien for the benefit of those persons who

may become entitled to be paid from the proceeds, either as

unsatisfied judgment creditors, or as Florida creditors at the

time when insolvency supervenes. Such an interest lacks the

characteristics of a specific perfected lien which alone bars

the priority of the United States.”

o

from the fund involved in the Knott case. Until

the insolvency of the contractor occurred, the

surety, at the best, had only an inchoate lien.

Cf. United States v. Waddill Co., 323 U.S. 353,

359.

Notwithstanding petitioner’s assertion (Pet. 5,

8-9), there is no conflict between the decision

below and Maryland Casualty Company v. United

States, 100 C. Cls. 513. In the Maryland Casualty

case, where the Government was denied the right

to offset a tax claim against the balance due

under the contract, in derogation of the surety’s

interest, the court below denied priority to the

Government on the ground that there had been

no formal insolvency, as is ‘‘evidenced by a

bankruptcy, receivership, or assignment for the

benefit of creditors’? (100 C. Cls. 513, 518). In

the instant case the insolvency of the contractors

has been manifested in one of the ways required

by the statutes, namely, by a formal assignment

for the benefit of creditors (R. 32).

Both petitioners and the amicus apparently are

confused as to the scope of the ruling of the court

below. They assert conflicts with subrogation

cases wherein the United States was asserting

no priority under R. 8. 3466 but was, at the best,

a stakeholder,’ e. g. Prairie State Bank v. United

* Contrary to the assertion of the brief amicus curiae (pp.

2-3), there is no conflict between the decision below and

the decisions in Henningsen v. United States Fidelity &

Guaranty Co., 208 U. S. 404; Morgenthau v. Fidelity & De-

10

States, 164 U. S. 227; they confuse cases in bank-

ruptey, where priority was denied the United

States because of existing liens, with equity pro-

ceedings;* and they seek to establish the im-

portance of the question here presented by urging

that the ruling of the Court of Claims in Mary-

land Casualty Company v. United States, 100

C. Cls. 513, requires affirmance, although the

question posed by that case is not here present.’

posit Co., 94 F. 2d 632 (App. D. C.); and Philadelphia

National Bank v. McKinlay, 72 F. 2d 89 (App. D. C.). In

none of these cases was a claim asserted by the United States

as against a claim of the surety, nor was R. S. 3466 involved.

* The petitioners cite (Pet. 11, 16-17, 19-20) a number of

cases such as United States F. & G. Company v. Sweeney,

80 F. 2d 235 (C. C. A. 6), for the proposition that the subro-

gee of materialmen and wage earners takes priority over the

claims of the United States for taxes. However, these cases

have no significance in an equity proceeding. See Rogge,

The Differences in the Priority of the United States in Bank-

ruptcy and in Equity Receiverships (1929), 43 Harv. L. Rev.

251. Under Sec. 67 of the Bankruptcy Act (11 U.S. C.

107), a valid lien is superior to the trustee’s title and the

trustee takes subject to the lien. Accordingly, the order of

priority fixed under Sec. 64a of the Bankruptcy Act (11

U. S. C. 104), which provides for the order of payment of

the assets of the bankrupt estate, necessarily is junior to

claims under existing liens.

* Petitioners and the brief amicus curiae heavily rely upon

the refusal of the General Accounting Office to follow the

doctrine of the Maryland Casualty case (Pet. 5-6; Br. 2-5).

But that fact is obviously of no relevance here as it is not

the doctrine of the Maryland Casualty case but an exception

thereto that is here before this Court for review. If peti-

tioners are dissatisfied with the action of the General Ac-

counting Office in cases similar to the Maryland Casualty

case, where there has been no formal act of insolvency, their

11

The mere statement of these contentions demon-

strates their inapplicability to the present case.

CONCLUSION

The decision below is clearly correct and there

is no conflict. It is therefore respectfully sub-

mitted that the petition for a writ of certiorari

should be denied.

J. Howarp McGrata,

Solicitor General.

| JOHN F. SonNETT,

Assistant Attorney General.

AUL A. SWEENEY,

JOSEPH B. GOLDMAN,

Attorneys.

Aveust 1946.

appropriate remedy is before the Court of Claims, which

presumably will again apply the doctrine of the Maryland

Casualty case in such situations.

APPENDIX

1. Rev. Stat. 3466, 31 U. S. C. 191, provides as

follows:

Priority established.—Whenever any per-

son indebted to the United States is insol-

vent, or whenever the estate of any deceased

debtor, in the hands of the executors or

administrators, is insufficient to pay all the

debts due from the deceased, the debts due

to the United States shall be first satisfied ;

and the priority established shall extend as

well to cases in which a debtor, not having

sufficient property to pay all his debts,

makes a voluntary assignment thereof, or

in which the estate and effects of an ab-

sconding, concealed, or absent debtor are

attached by process of law, as to cases in

which an act of bankruptcy is committed.

2. Section 1 of the Act of August 24, 1935,

c. 642, 49 Stat. 793, 40 U. S. C. 270a, provides in

part as follows:

(a) Before any contract, exceeding $2,000

in amount, for the construction, alteration,

or repair of any public building or public

work of the United States is awarded to

any person, such person shall furnish to

the United States the following bonds,

which shall become binding upon the award

of the contract to such person, who is here-

inafter designated as ‘‘contractor’’:

(1) A performance bond with a surety

or sureties satisfactory to the officer award-

ing such contract, and in such amount as

(12)

perenne enaeeesereeseseee

13

he shall deem adequate, for the protection

of the United States.

(2) A payment bond with a surety or

sureties satisfactory to such officer for the

protection of all persons supplying labor

and material in the prosecution of the work

provided for in said contract for the use of

each such person. Whenever the total

amount payable by the terms of the con-

tract shall be not more than $1,000,000 the

said payment bond shall be in a sum of one-

half the total amount payable by the terms

of the contract. Whenever the total

amount payable by the terms of the con-

tract shall be more than $1,000,000 and not

more than $5,000,000, the said payment bond

shall be in a sum of 40 per centum of the

total amount payable by the terms of the con-

tract. Whenever the total amount payable

by the terms of the contract shall be more

than $5,000,000 the said payment bond shall

be in the sum of $2,500,000.

U.S. GOVERNMENT PRINTING OFFICE: 1946