General Crushed Stone Co. v. State

• Decision Date: 28 May 1965
• Docket Number: No. 2,No. 1,1,2
• Citation: 23 A.D.2d 250,260 N.Y.S.2d 32
• Parties: The GENERAL CRUSHED STONE COMPANY, Plaintiff-Appellant, v. The STATE of New York, Central New York Contracting Co., Inc., and Newark Insurance Company, Defendants-Respondents. ActionThe GENERAL CRUSHED STONE COMPANY, Plaintiff-Appellant, v. The STATE of New York, Central New York Contracting Co., Inc., Newark Insurance Company, B. R. DeWitt, Inc., and Michael Montermorano and Santo Montermorano, d/b/a M. A. Montermorano and Sons, Defendants-Respondents. Action
• Court: New York Supreme Court — Appellate Division

Page 32

260 N.Y.S.2d 32

23 A.D.2d 250

The GENERAL CRUSHED STONE COMPANY, Plaintiff-Appellant, v. The STATE of New York, Central New York Contracting Co Inc., and Newark Insurance Company, Defendants-Respondents.

Action No. 1 The GENERAL CRUSHED STONE COMPANY, Plaintiff-Appellant, v. The STATE of New York, Central New York Contracting Co Inc., Newark Insurance Company, B. R. DeWitt, Inc., and Michael Montermorano and Santo Montermorano, d/b/a M. A Montermorano and Sons, Defendants-Respondents.

Action No. 2.

Supreme Court, Appellate Division, Third Department.

May 28, 1965.

McClung, Peters & Simon, Albany (Homer E. Peters, Albany, of counsel), for plaintiff-appellant.

Mackenzie, Smith, Lewis, Michell & Hughes, Syracuse (John F. Lawton, Syracuse, of counsel), for defendant-respondent Newark Insurance Co.

Louis J. Lefkowitz, Atty. Gen., Paxton Blair, Sol. Gen., Albany, for defendant-respondent State.

Charles H. McCarthy, Syracuse, for defendant-respondent Central New York Contracting Co., Inc.

Before GIBSON, P. J., and HERLIHY, REYNOLDS, TAYLOR and AULISI, JJ.

AULISI, Justice.

The plaintiff, General Crushed Stone Company, hereinafter called 'General', appeals from those parts of the judgments which dismissed its actions against the Newark Insurance Company (Newark) for deficiency judgments on two labor and materials bonds.

The Trial Court in a comprehensive decision found that General, the materialman, improperly conspired with the Central New York Contracting Co., Inc., (Central), a contractor, to violate the trust fund provisions of Lien Law section 70; that General also fraudulently concealed its knowledge that Central was in a precarious financial position so as to induce Newark to write the bonds in issue for Central and dismissed General's complaints in both actions. Sections 70 and 71 of the Lien Law in essence establish a trust fund of the monies received by the contractor on any improvement of real property in New York State. The beneficiaries of this trust include the creditors of the contractor on that particular improvement (e. g., suppliers, laborers, etc., see Aquilino v. United States et al., 10 N.Y.2d 271, 219 N.Y.S.2d 254, 176 N.E.2d 826). Therefore, any payment of monies from a present job to a creditor of a previous job before payment is made to the creditors, suppliers, laborers, etc., of the present job would be a diversion of that trust fund (Lien Law, section 72; American Blower Corp. v. James Talcott, Inc. et al., 18 Misc.2d 1031, 194 N.Y.S.2d 630, affd. 11 A.D.2d 654, 203 N.Y.S.2d 1018, mot. for lv. to rearg. or for lv. to app. den. 11 A.D.2d 928, 206 N.Y.S.2d 533, affd. 10 N.Y.2d 282, 219 N.Y.S.2d 263, 176 N.E.2d 833).

Newark is not a beneficiary of the Lien Law's trust fund for the amount here in dispute (see Aquilino v. United States et al., supra; Chittenden Lumber Co. v. Silberblatt and Lasker, Inc., 288 N.Y. 396, 43 N.E.2d 459) and General is not the trustee that would be held liable for a violation in this case. Newark, nevertheless, contends and the Trial Court found that General's knowledge of the alleged violation by Central was such as to give it 'unclean hands' so as to make it inequitable for General to recover on the surety. Newark urges that Central paid past debts out of present proceeds but we find no satisfactory proof to sustain this allegation. The evidence in the record does not establish what monies were actually paid to General by Central, whether funds from present or prior jobs. Newark's expert witness used a somewhat arbitrary 'first-in, first-out' accounting method which, though sufficient for other purposes, is hardly suitable as a means of tracing the funds from any particular job (see Matter of Treister and Son, Inc., D.C., 145 F.Supp. 144; Importers' and Traders' Nat. Bank v. Peters, 123 N.Y. 272, 278-279, 25 N.E. 319, 320; Idoni v. Down, 170 Misc. 303, 8 N.Y.S.2d 719). Furthermore, assuming that present proceeds were paid to General for past debts there would be no violation unless some beneficiary of the trust fund was prejudiced thereby. The record does not indicate that during the time this practice was employed there was any beneficiary other than General who remained unpaid. Admittedly General supplied the materials on Central's Wayne County and Cayuga County jobs. It has not been paid. Therefore, we are unable to escape the conclusion that it should be paid by the surety that assured payment.

We perceive no basis for a finding of unclean hands. The relationship of General and Central was essentially that of creditor and debtor. They, therefore, were entirely within their rights to arrange a convenient method to settle their accounts (F. H. McGraw and Co., Inc. v. Milcor Steel Co., 2 Cir., 149 F.2d 301, cert. den. 326 U.S. 753, 66 S.Ct. 92, 90 L.Ed. 452; Bank of California v. Webb, 94 N.Y. 467).

The other question before us is whether General fraudulently induced Newark to issue a surety bond to Central for the Wayne County and Cayuga County jobs. The only direct contact Newark had with General was a letter it sent to General, as it did to all other suppliers of Central, requesting information about Central. The letter, sent July 7, 1959, asked General to verify a balance of $116,986 which Central, in a financial statement it had supplied to Newark, stated that it owed General as of January 1, 1959. Newark also asked for 'any other pertinent information'. On July 10, 1959, General replied that as of January 1, 1959, Central owed General $133,164.54 and that 'the amount owed at the present time is considerably larger'. Actually, it was then $372,845.61. General's letter was neither fraudulent nor misleading. It was sufficient to put Newark on notice that Central might be deep in debt. However, Newark not only failed to request further information from General but did not make any inquiries of Central concerning the discrepancy or the greater debt revealed by General.

We are not impressed with Newark's claim that it was misled by its reliance upon General's letter. It had in its files detailed reports from Dun and Bradstreet on Central dating from January 1, 1959 to June 4, 1959; it had replies from other materialmen of Central, from sub-contractors and other contractors; from banks and former underwriters of Central. We conclude that having undertaken this risk after an investigation of Central's financial status, which was insufficient only because of Newark's own limitation, it can not now seize upon one letter, in itself not misleading, to avoid meeting its obligation.

In Hartford Acc. & Ind. Co. v. Kranz, 7 A.D.2d 604, pp. 605-607, 184 N.Y.S.2d 918, p. 920, the Court stated:

'We are satisfied that the record failed to disclose any fraudulent concealment. He who claims fraud must prove it and it was plaintiff's obligation to prove 'representation, falsity, scienter, deception and injury'. Ochs v. Woods, 221 N.Y. 335, 338, 117 N.E. 305, 306; Reno v. Bull, 226 N.Y. 546, 550, 124 N.E. 144, 145.

'In Howe Machine Company v. Farrington, 82 N.Y. 121, 125, the defendant gave a bond to the plaintiff company to indemnify Davis, one of its salesmen, for past and future indebtedness. The Court said at page 127: 'The defendant had no communication with the company before signing it. The bond in terms referred to an existing indebtedness of Davis. The defendant made no inquiry of the company to ascertain the particulars, and the company made no representation. If the defendant deemed it material to be informed of the origin, nature or extent of the existing indebtedness, he should have inquired of the company before executing the bond. The company was under no duty to seek the defendant and make the disclosure. It was bound to act with good faith toward the defendant; but to hold the surety discharged by the omission to advise him of the particulars of the previous transactions with Davis, in the absence of any inquiry on the subject, would establish a rule which would make instruments of the character of the one in question of comparatively little value.'

'In Western New York Life Insurance Company v. Clinton, 66 N.Y. 326, a bond was issued conditioned on the appointment of the principal Clinton, as agent of the plaintiff, to procure life insurance, collect premiums and pay to the plaintiff all money belonging to it. Two agreements had been executed between the parties. In one of them the plaintiff appointed Clinton as an agent to procure applications and insurance and to forward premiums and renewals to the plaintiff. By a second instrument, plaintiff allowed Clinton a commission upon moneys collected on behalf of the insurance agency. In an action to recover on the bond, defendant contended it only covered the first agreement. In denying this contention, at pages 331, 332 the court said: 'Nor does it relieve the defendants from liability upon the bond, because the sureties had no knowledge of the second agreement until after the execution of the bond. Even if they were misled by the principal, at whose request the bond was executed, as to the character and extent of the obligation assumed, it is no valid defense to this action, unless it appears that the plaintiff was a party to the fraud practiced upon the defendants. Casoni v. Jerome, 58 N.Y. 315, 321; McWilliams v. Mason, 31 N.Y. 294. The position that the obligee in a bond is bound to seek out the sureties and explain to them the nature and extent of their obligation at the point of losing the security, or that he is to be held responsible for the fraudulent representations or concealment of the principal of any of the facts, is somewhat novel, and is not upheld by any adjudged case. It is the duty of the sureties to look out for themselves and ascertain the nature of the obligation embraced in the undertaking, and any other rule would not only work...