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National Surety Corp. v. Barth

Decided: March 2, 1953.


On appeal, on certification granted to the Chancery Division of the Superior Court.

For affirmance -- Chief Justice Vanderbilt, and Justices Heher, Oliphant, Burling, Jacobs and Brennan. For reversal -- None. The opinion of the court was delivered by Vanderbilt, C.J.


This appeal, certified on our own motion, presents the question whether the State of New Jersey can set off its claim for unemployment and disability tax obligations in an action against it for moneys owing upon contracts for public housing work.

On October 31, 1947 and March 12, 1948, respectively, Arthur F. Barth, a contractor, entered into contracts with the Administrator of Public Housing and Development Authority in the Department of Economic Development of the State of New Jersey (hereinafter called Administrator) for the alteration, repair, and rehabilitation of two public housing projects located on Lake Street and Laidlaw Avenue in Jersey City. Plaintiff National Surety Corporation, as surety, and Barth, as principal, executed a performance bond to the Administrator for each contract as required by law. One of the purposes of the bond requirement is to assure "payment by the contractor, and by all subcontractors, for all labor performed or materials, provisions, provender or other supplies, teams, fuels, oils, implements or machinery used or consumed in, upon, for or about the construction, erection, alteration or repair of such buildings, works or improvements." (R.S. 2:60-207). The Lake Street project was completed and accepted by the Administrator on October 19, 1948, and the Laidlaw Avenue job was finished and received the approval of the Administrator on March 28, 1949. The Administrator still retains some $10,592.63 due to Barth under the two contracts, which sum, however, is insufficient to pay all claims for materials furnished and labor performed on the two projects. Barth defaulted in some of his payments for labor and materials on both jobs, with the result that National Surety Corporation in accordance with the terms of the bonds paid many of these claims.

Meanwhile on February 7, 1949 the United States filed with the Administrator a notice of levy in the amount of $3,118.79 plus interest for withholding taxes due from Barth, only a part of which arose out of these two contracts. On

January 10, 1950 Charles Martini and Frand Martini recovered judgments in the Hudson County Court against Barth for $883.83 and $1,980, respectively, on claims unrelated to the two state contracts. These judgments were docketed in the Superior Court on January 19, 1950, and on January 31, 1950 levy was made upon the funds held by the Administrator. The State's claim arises out of Barth's indebtedness for taxes under the Unemployment Compensation Law and the Temporary Disability Benefits Law in the total amount of $9,083.76, as evidenced by three certificates of debt filed with the Clerk of the Superior Court. The State waives any preferential claim it may have for that amount of these taxes which arose out of the performance of the contracts in question. On May 4, 1950 National Surety Corporation instituted this action in the Chancery Division of the Superior Court, naming as defendants Barth, the Director of the Division of Budget and Accounting, the Administrator, the Martinis, some unpaid suppliers of labor and materials, and the United States of America. The purpose of the suit was to obtain exoneration to the extent that the funds held by the Administrator might be applied to the demands of the defendant suppliers, and subrogation to the extent that plaintiff had paid certain of the defendants on account of their claims against Barth. Meanwhile, Charles Martini and Frank Martini obtained in the Law Division of the Superior Court an order directed to Barth and to the Administrator to show cause why the court should not order the Administrator as garnishee to pay the Martini judgments under their levy. The State (Division of Employment Security of the Department of Labor and Industry) intervened to assert its setoff against Barth. On December 28, 1950 the two actions were consolidated in the Chancery Division. In National Surety Corporation v. Barth, 8 N.J. 121 (1951), we determined that the State had given its consent to be sued.

The Chancery Division, 20 N.J. Super. 100, held that the $10,592.63 in the hands of the Administrator was a trust fund for the benefit of those who had furnished labor, material

and equipment on the two projects and therefore the State could not set off its claims against this fund. The claim of the United States was held to be no greater than that of the contractor and was subordinate to the claims of the materialmen and laborers, except that the United States was allowed to share in the fund to the extent of $604.04 representing workmen's wages withheld by Barth on these two jobs but not paid to the United States Government. The Martini judgments, which arose out of claims totally unrelated to the two jobs, were also held to be subordinate to the rights of laborers and materialmen.

The only appeal before this court is that of the State, which contends that N.J.S.A. 2:60-212 (now N.J.S. 2 A:44-148) does not impress a trust upon the moneys due from the State to Barth, and also that no such trust exists under general principles of equity, and therefore, it argues, its setoff of Barth's obligations under the Unemployment Compensation Law and Temporary Disability Benefits Law is proper.

N.J.S.A. 2:60-212 provides:

"All money paid by the State of New Jersey or by any agency, commission or department thereof, or by any county, municipality or school district in the state, to any person pursuant to the provisions of any contract for any public improvement made between any such person and the state or any agency, commission or department thereof, or any county, municipality or school district in the State, shall constitute a trust fund in the hands of such person as such contractor, until all claims for ...

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