This matter comes before the court for determination of priorities as to funds now held by the Clerk of this court, resulting from an interpleader action by plaintiff.
On January 31, 1958 the United States assessed Earle R. Aiken, trading as Aiken's Upholstering Company, in the sum of $3,383.91 for arrearages on unpaid withholding taxes for the years 1955, 1956, and 1957. After making three unsuccessful demands upon Aiken for payment, a federal tax lien was filed with the Clerk of Atlantic County on March 21, 1958.
On June 21, 1958 Aiken contracted with the Board of Education of the City of Pleasantville for the manufacture, repair and cleaning of drapes to be used in the auditorium of the Senior High School. Pursuant to the requirements of N.J.S. 2 A:44-143 et seq. , Aiken and the Hartford Accident and Indemnity Co. (hereafter referred to as Hartford) executed a surety bond in favor of the Board of Education, materialmen, and laborers under the contract.
Reinhart, Inc. (hereafter referred to as Reinhart) supplied Aiken with material necessary for this contract. As security for these materials, Aiken executed to Reinhart an assignment of $1,350 due him from the Board of Education upon completion of this contract. This assignment was subsequently filed with the Secretary of the Board of Education on August 9, 1958. However, despite the advance of Reinhart, Aiken was still unable to complete the contract with his own resources. Upon notice from the Board of Education of his imminent default, Hartford, on August 29, 1958, advanced the sum of $425 by draft payable jointly to Aiken and Hygienic Sanitation Co., Inc., a materialman, to enable the contract to be completed. The completed work was then accepted by the Board of Education on September 2, 1958. However, prior to this acceptance, five judgment creditors of Aiken had, on August 4 and August 25, 1958, attempted to make executions under their respective judgments upon the Board of Education. The claims upon which these judgments were rendered did not arise from the performance of the contract between Aiken and the Board of Education.
Upon acceptance of this work on September 2, 1958, the Board of Education, after deduction of part payments, owed Aiken the sum of $3,350. Then, on September 5, 1958, the United States served a levy under its federal tax lien against Aiken upon the Board for these funds. The Board of Education, because of these various claims filed with it for these funds, filed a complaint in interpleader, and as a result of an order entered therein, these funds were deposited with the Clerk of this court.
All the claimants to these funds, with the exception of the United States which has intervened, are parties defendants to this action.
Not only do Reinhart, Hartford, and the five execution creditors each claim priority, but likewise does the United States. The United States contends that it is entitled to priority under 26 U.S.C.A. § 6321 (Internal Revenue Code of 1954) which provides:
"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." (Emphasis added)
The problem of determining the priorities between federal tax liens and other claims made under state law against the taxpayer has long been troublesome. It must be recognized that the rights of the United States under § 6321 cannot extend beyond those of the taxpayer whose alleged right to property is sought to be levied. The lien of the United States is no greater than the right of Aiken to these funds. Bankers Title & Abstract Co. v. Ferber Co. , 15 N.J. 433 (1954); Damato v. Leone Construction Co. , 41 N.J. Super. 366 (App. Div. 1956). Therefore a basic issue herein is whether Aiken had any "property" or "rights to property" in these funds.
In regard to this issue the United States Supreme Court has in recent decisions established the "choice of law" criteria to be used in making this determination. In Aquilino v. United States , 363 U.S. 509, at pages 512-514, 80 S. Ct. 1277, at page 1280, 4 L. Ed. 2 d 1365 (1960), the court stated:
"The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had 'property' or 'rights to property' to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that 'in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property. * * * sought to be reached by the statute.' * * * The application of state law in ascertaining the taxpayer's property rights and of federal law in reconciling the claims of competing lienors is based both upon logic and sound legal principles. This approach strikes a proper balance between the legitimate and traditional interest which the State has in creating and defining the property interest of its citizens, and the necessity for a uniform administration of the federal revenue statutes."
See also United States v. Durham Lumber Co. , 363 U.S. 522, 80 S. Ct. 1282, 4 L. Ed. 2 d 1371 (1960); United States v. Bess , 357 U.S. 51, 78 S. Ct. 1054, 2 L. Ed. 2 d 1135 (1958).
Thus it is necessary to examine the law of New Jersey to resolve the question of priorities herein. Hartford, the surety company, claims to be subrogated to both the rights of Hygienic Sanitation Co., Inc. and the Board of Education to the funds in question. As counsel has correctly stated in his brief, the right of subrogation of the surety exists where it has paid claims guaranteed by it on behalf of the contractor. Key Agency v. Continental Casualty Co. , 55 N.J. Super. 58 (Ch. Div. 1959), affirmed 31 N.J. 98 (1959); Stulz-Sickles Co. v. Fredburn Construction Corp. , 114 N.J. Eq. 475 (Ch. 1933). On August 29, 1958 Hartford made a payment of $425 to Aiken and Hygienic Sanitation Co., Inc., jointly. (Hygienic Sanitation Co., Inc. was a materialman under the contract herein.) By virtue of that payment, Hartford stands in the position of the materialman, Hygienic Sanitation Co., Inc. However, Hartford has made no payments to the Board of Education, nor has the Board made any claims for any such payment. Aiken did not default under his contract with the Board, but in fact did fulfill his obligations to the satisfaction of the Board. If Aiken had defaulted and Hartford was required to pay the Board directly for the default, then Hartford would be subrogated to the rights of the Board. In absence of such facts, the Board has no claims against this fund which can be subrogated to Hartford; therefore, Hartford's claim herein is solely that of a materialman.
Although the United States contends that Reinhart has made no claim as a materialman, the court is satisfied that the pleadings do sufficiently reflect Reinhart's position as a materialman. In addition, Reinhart also took an assignment of $1,350 of the funds to become due Aiken from the Board upon the acceptance of the ...