Certain general contractors were adjudicated bankrupts after
having defaulted both on the payment of federal taxes and on the
payment of amounts due to certain subcontractors on the
construction of buildings in North Carolina. The owners of the
buildings paid to the trustee in bankruptcy the amount remaining
due under the contract, and it was agreed that the subcontractors
could assert the same rights against the trustee as they could have
asserted against the owners. Under §§ 6321 and 6322 of the Internal
Revenue Code of 1954, the United States claimed priority for its
tax lien on the "property and rights to property" belonging to the
general contractors. The Federal Court of Appeals held that, under
North Carolina law, the general contractors had no property
interest in the amount due under the general construction contract,
except to the extent that such amount exceeded the aggregate of all
amounts due to subcontractors, and that, therefore, the Government
could recover only so much of the construction price as would
remain unpaid after deduction of a sum sufficient to pay the
subcontractors.
Held: since the Court of Appeals is much closer to
North Carolina law than is this Court, and since this Court cannot
say that the Court of Appeals' characterization of the taxpayers'
property interests under that law is clearly erroneous or
unreasonable, the judgment is affirmed. Pp.
363 U. S.
523-527.
257 F.2d 570 affirmed.
Page 363 U. S. 523
MR. CHIEF JUSTICE WARREN delivered the opinion of the Court.
This case involves the competing claims of the Federal
Government and certain subcontractors to a sum of money owed to the
taxpayers under a general construction contract.
The taxpayers, Michael & Embree, were general contractors
doing business at Durham, North Carolina. Early in 1954, they
agreed to construct certain buildings for persons herein referred
to as the "owners." This work was completed on July 15, 1954, but
because the owners disputed the amount due under the contract,
payment to the taxpayers was delayed.
In completing the construction work, the taxpayers had utilized
the services and materials of numerous subcontractors, most of whom
had not been compensated. The respondents are two such
subcontractors, who in January and February, 1955, gave the owners
notice of their respective claims against the taxpayers.
On January 18, 1955, the taxpayers were adjudicated bankrupts.
At that time, there was an unpaid balance of $5,250 due from the
owners under the construction contract. After extensive
negotiations between the owners, the trustee in bankruptcy, and the
subcontractors, it was agreed that the owners would absolve
themselves from further liability by paying the $5,250 to the
trustee, and that the subcontractors could thereafter assert the
same rights against the trustee as they could have asserted against
the owners. This arrangement was approved by both the Superior
Court for Durham County, North Carolina, and the federal bankruptcy
court.
Another claimant of the money deposited with the trustee was the
Federal Government, which on August 13, 1954, and November 22,
1954, had assessed the taxpayers for uncollected withholding and
unemployment insurance
Page 363 U. S. 524
taxes. By virtue of Sections 6321 [
Footnote 1] and 6322 [
Footnote 2] of the Internal Revenue Code of 1954, a
federal tax lien attached to all "property and rights to property"
belonging to the taxpayers at the time the assessments were made.
The Government contended that the money owing under the
construction contract was property of the taxpayers to which the
tax lien attached.
The referee in bankruptcy, attempting to resolve the competing
claims against the fund as if the parties were before a state
court, decided that the rights of the Federal Government under its
tax lien were superior to those of the respondents. The District
Court for the Middle District of North Carolina disagreed, and held
that the respondents were entitled to payment of their claims
before the Government could satisfy its tax lien. On appeal, the
Court of Appeals for the Fourth Circuit affirmed, 257 F.2d 570. We
granted certiorari.
359 U. S. 905.
In affirming the judgment of the District Court, the Court of
Appeals stated that the nature and extent of the general
contractors' property rights, to which the tax lien attached, must
be ascertained under state law. The court then undertook an
extensive analysis of the relevant North Carolina statutes
[
Footnote 3] and cases. It
found that the North Carolina law provides as follows:
subcontractors
Page 363 U. S. 525
who have not been paid by the general contractor have a direct,
independent cause of action against the owner to the extent of any
amount due under the general construction contract, and any money
owed by the owner under the construction contract must first be
used to satisfy subcontractors' claims of which the owner has
notice. Moreover, to insure that the owner will receive notice of
outstanding subcontractors' claims, the North Carolina statute,
N.C.Gen.Stat.1950, § 44-8, requires the general contractor, before
receiving any payment, to furnish the owner with a statement of all
sums due subcontractors, and if the general contractor fails to
supply the required statement, he is guilty of a misdemeanor.
N.C.Gen.Stat.1950, § 44-12. Finally, the court found further
evidence of the direct and independent nature of the
subcontractors' claims against the owner in N.C.Gen.Stat.1950, §
44-9, which provides that, should the owner pay the general
contractor after receiving notice of a subcontractor's claim, he
will nevertheless be liable to the subcontractor to the extent of
the amount which was due under the construction contract at the
time notice was received.
Based upon these considerations, the Court of Appeals held that,
under North Carolina law, the general contractor did not have a
property interest in the face amount, as such, of the general
construction contract. Specifically, the court said that,
"except to the extent the claim of the general contractor
exceeds the aggregate of the claims of the subcontractors, the
general contractor has no right which is subject to seizure under
the tax lien."
Id., 257 F.2d at 574. Therefore, concluded the court,
since, under North Carolina law, the taxpayers possessed merely a
right to the residue of the fund, and since the Government's tax
lien attached to the property interests of the taxpayers as defined
by state law, the Government can recover only
"so much of the construction price as will
Page 363 U. S. 526
remain unpaid after the owners have deducted a sum sufficient to
pay the subcontractors."
Id. at 575.
The Court of Appeals was correct in asserting that the
Government's tax lien attached to the taxpayers' property interests
in the fund as defined by North Carolina law.
Aquilino v.
United States, ante, pp.
363 U. S. 509,
363 U. S. 513;
[
Footnote 4]
United States
v. Bess, 357 U. S. 51,
357 U. S. 55;
cf. Morgan v. Commissioner, 309 U. S.
78,
309 U. S. 82. It
is suggested that the courts of North Carolina have never
specifically described the nature of the property rights created by
the North Carolina statutes involved in this case, and that the
Court of Appeals' interpretation of those statutes is probably
incorrect. However, where "[t]he precise issue of state law
involved . . . is one which has not been decided by the . . .
[state] courts," this Court has said that,
"[i]n
Page 363 U. S. 527
dealing with issues of state law that enter into judgments of
federal courts, we are hesitant to overrule decisions by federal
courts skilled in the law of particular states unless their
conclusions are shown to be unreasonable."
Propper v. Clark, 337 U. S. 472,
337 U. S.
486-487. Since the Court of Appeals is much closer to
North Carolina law than we are, and since we cannot say that the
court's characterization of the taxpayers' property interests under
that law is clearly erroneous or unreasonable, [
Footnote 5] the judgment is
Affirmed.
[
Footnote 1]
"Section 6321. Lien for taxes:"
"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."
[
Footnote 2]
"Section 6322. Period of lien:"
"Unless another date is specifically fixed by law, the lien
imposed by section 6321 shall arise at the time the assessment is
made and shall continue until the liability for the amount so
assessed is satisfied or becomes unenforceable by reason of lapse
of time."
[
Footnote 3]
N.C.Gen.Stat.1950, §§ 44-6 to 44-12.
[
Footnote 4]
This case points up the distinction we drew in
Aquilino. The facts here show how it simply begs the
question to suggest that the principle of the lien priority cases
is somehow subverted or evaded by recognizing that what constitutes
the taxpayer's property in the first place is a question of state
law. The facts show, too, that it does not promote clarity to
substitute, for the property interests created by state law, a rule
of federal property law the main feature of which seems to be an
inquiry into what the consequences would be if state law were
different from what it in fact is. It is said that we should regard
the subcontractor's interest as equivalent to a lien on the general
contractor's claim against the owner, overlooking the fact that the
law of North Carolina, as interpreted by the Court of Appeals,
indicates that there is no such claim. If we are to equate the
subcontractor's interest with something it is not, it would be much
more appropriate, in terms of similarity, to equate it with the
usual mechanic's lien of a subcontractor on the owner's property
being improved -- which, of course, is not the general contractor's
property, and which could not be taken by the United States under a
lien against the general contractor. This only points up the lack
of precision and content in the proposed federal definition of
property.
See also Fidelity & Deposit Co. of Md. v. New
York City Housing Auth., 241 F.2d 142, cited with approval in
United States v. Bess, 357 U. S. 51,
357 U. S.
55.
[
Footnote 5]
See Sims v. United States, 359 U.
S. 108,
359 U. S. 114;
Ragan v. Merchants Transfer & Warehouse Co.,
337 U. S. 530,
337 U. S. 534;
Estate of Spiegel v. Commissioner, 335 U.
S. 701,
335 U. S.
707-708.