Court Opinion

ID: 9857393
Source: CourtListenerOpinion
Date Created: 2023-09-24 14:33:17.126472+00
Date Added: 2024-06-11T09:38:38.710752
License: Public Domain

MARTIN, Circuit Judge
(dissenting).
I would reverse the judgment and remand this cause to the district court, with direction that the sum of $7,076.15 be paid from the funds in the registry of the court to the United States Collector of Internal Revenue in partial payment of the tax lien of the United States for $13,029.28.
It may be conceded that, in ordinary circumstances, a surety who makes good under his contract of suretyship upon default of the principal contractor acquires an equitable lien against the unpaid balance in the hands of the obligee of the bond and that such equitable lien, upon payment by the surety, relates back to the date of the contract. But, to my thinking, it does not follow, from this that such equitable lien is superior to the perfected lien of the United States for unpaid taxes of the defaulting contractor, for periods subsequent to the date of the contract of suretyship but prior to the date of payment by the surety, to the extent that interest must be allowed the surety on the principal sum paid by it when such allowance would completely exclude the Government tax- lien, Which attached to the funds involved before the surety *983expended money in performance of its obligation under the bond.
Nor do I think the authorities cited, but not discussed, in the opinion of the court support the conclusion reached. In re Zaepfel and Russell, D.C., 49 F.Supp. 709, affirmed Farmers State Bank v. Jones, 6 Cir., 135 F.2d 215; Farmers’ Bank v. Hayes, 6 Cir., 58 F.2d 34; Prairie State Nat. Bank of Chicago v. United States, 164 U.S. 227, 17 S.Ct. 142, 41 L.F.d. 412. None of these cases dealt either with interest or with tax liens. The controversies in them were between surety companies and banks, and were decided upon principles of subrogation, by which priority was accorded to the claims of the sureties over the claims of banks advancing money to the contractors.
In this case, the obligee of the faithful performance bond who had in possession retained percentages was served by the Collector with a notice of levy and warrant for distraint on August 12, 1943, followed by service of final notice and demand on August 16, 1943. The Collector appropriately recorded his notice of tax lien on August 13, 1943. The obligee notified the sureties that, on August 20, 1943, the $13,-029.28 internal revenue taxes claimed out of the $59,647.72 retained percentages in its hands would be paid to the Collector, in compliance with his demand, unless the obligee was restrained from doing so. On August 19, 1943, payment to the Internal Revenue Collector was stayed, and ultimately enjoined, by the filing of this action by the sureties.
After the sureties paid off the material and labor claims, there were sufficient retained funds ($59,647.72) in the hands of the obligee to pay in full the amount expended by the sureties ($52,571.57) and leave a balance of $7,076.15 to be paid pro tanto on the tax lien of the United States, if this action had not been brought. To allow the surety companies to absorb this sum in interest, to the exclusion of the United States in the partial collection of its taxes, seems to me inequitable in the circumstances. Such allowance is certainly not supported by direct authority.
Moreover, my reasoning by analogy differs from that of the majority opinion. The question before us is new; but the facts here are not too far afield to enable us to receive guidance from the applicable rules in bankruptcy, receivership and reorganization proceedings. It should be remembered that while no insolvency proceedings were pending against the contractor, he was nonetheless insolvent at the time this action was brought. See Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 67 S.Ct. 237, for discussion of the balancing of equities with respect to the allowance of interest in bankruptcy, receivership and reorganization matters. See People of State of New York v. Maclay, 288 U.S. 290, 53 S.Ct. 323, 77 L. Ed. 754, for discussion of the priority of United States tax claims over claims of a state for franchise taxes given precedence by state law over other intervening claims. Upon the principles derivable from these authorities and from Michigan v. United States, 317 U.S. 338, 63 S.Ct. 302, 87 L.Ed. 312, and upon logical reasoning, I think the equitable lien of the sureties is equitably satisfied by reimbursement to them of the principal sum expended in fulfilment of their obligation, without added allowance of interest on such amount.
A surety is limited to recovery of his actual loss, and no profit may be made by him at the expense of other creditors of his principal. While interest is not generally the equivalent of profit, it may become so when balanced against the equities of other creditors of the principal. Especially is this true when, as in the instant case, the United States is a tax-lien creditor protesting against the allowance of six percent interest on a related-back lien accruing from the insolvency of a defaulting principal, whose faithful contractual performance the surety had guaranteed. There are relatively few six percent investments in the portfolios of insurance companies.