General Insurance Company of America v. The Joint Meeting of Essex and Union Counties

98-737 (U.S. Dist. Ct. D. N.J. 1998) (Unpublished)
  • Opinion Date: August 4, 1998

LIENS; PRIORITY—An assignment of proceeds made well before a tax delinquency occurs and before a federal tax lien is filed gives the assignee superior rights to those of the taxing authority.

A contractor entered into an agreement with a governmental agency to build a sludge dewatering facility. The agreement provided that all disputes were to be decided by arbitration in accordance with American Arbitration Association rules. A surety issued a construction payment bond for the contractor, as principal, in favor of the governmental agency.

A year into the agreement, the contractor filed an arbitration demand for alleged breaches by the agency. Six months later, the contractor assigned all monies earned or to be earned under the construction agreement to the surety. Six years later, the arbitrators issued a $36,000,000 award in favor of the contractor.

The assignment to the surety was made in 1991. The contractor failed to make federal employment tax payments for the third and fourth quarters of 1992. The taxes were assessed on December 14, 1992 and March 22, 1993, respectively. Notices of federal tax liens with respect to the assessments were filed on April 26, 1993 and May 25, 1993, respectively. The IRS served the surety a Notice of Levy for the assessments’ unpaid balances on or about December 11, 1997 in the total amount of $447,732.07, claiming a portion of the arbitration award.

The Court found that the 1991 assignment was made well before the tax delinquency issue arose and well before the IRS imposed the lien on the contractor’s property. As such, the taxpayer “had no interest whatsoever in the contract balance damages due from [the governmental agency] which formed the basis of the award.” No money was owed at that time to the contractor against which the IRS could levy. The surety had financed the entirety of the award. When the governmental agency satisfied the award, the monies were paid to the surety and not the contractor because the contractor no longer had any right, title, or interest in the award. Since the money belonged to the surety before the IRS lien was in effect, the IRS’s motion to direct payment of the federal tax claim before distribution of the award to the surety was denied.