Wickes Boiler Co. v. Godfrey-Keeler Co.

• Citation: 116 F.2d 842
• Decision Date: 24 December 1940
• Docket Number: No. 142.,142.
• Parties: WICKES BOILER CO., Inc., v. GODFREY-KEELER CO., Inc.
• Court: U.S. Court of Appeals — Second Circuit

116 F.2d 842 (1940)

WICKES BOILER CO., Inc., v. GODFREY-KEELER CO., Inc.

No. 142.

Circuit Court of Appeals, Second Circuit.

December 24, 1940.

Solomon S. Friedman, of New York City, for debtor-appellant Godfrey-Keeler Co., Inc.

Broadwin & Mannheimer, of New York City, (Joel Irving Friedman, of New York City, of counsel), for petitioner-appellee Wickes Boiler Co.

Before SWAN, AUGUSTUS N. HAND, and, CLARK, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

The debtor, Godfrey-Keeler Co., Inc., entered into a contract with the Brooklyn Yarn Dye Company to install a power plant and heating system in the premises of the latter. Contemporaneously the contractor entered into sub-contracts with The Wickes Boiler Company, Inc., that the latter should furnish boilers and insulating panels for the plant and heating system. Thereafter, Godfrey-Keeler Co. filed a petition for an arrangement under Chapter XI, § 301 et seq., of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq., and an order was made continuing the debtor in possession. The boilers and panels were installed and, at the time the petition for an arrangement was filed, $1,810.50 remained due The Wickes Boiler Company from Godfrey-Keeler Co. under the sub-contract. It appears that there is a sufficient balance due Godfrey-Keeler Company under its contract with Brooklyn Yarn Dye Company to pay all laborers and materialmen. The Wickes Boiler Company claims that it is entitled to the moneys due for installing the power plant and heating system to the extent that is necessary to pay the balance due it of $1,810.50, and prays that the amount remaining due from the Brooklyn Yarn Dye Company be impressed with a trust in its favor accordingly. It has never filed a mechanic's lien but relies on § 36-a of the New York Lien Law Consol. Laws, c. 38, which reads as follows: "§ 36-a. Contractor who diverts funds guilty of larceny. The funds received by a contractor from an owner for the improvement of real property are hereby declared to constitute trust funds in the hands of such contractor to be applied first to the payment of claims of subcontractors, architects, engineers, surveyors, laborers and materialmen arising out of the improvement, and to the payment of premiums on surety bond or bonds filed and premiums on insurance accruing during the making of the improvement and any contractor and any officer, director or agent of any contractor who applies or consents to the application of such funds for any other purpose and fails to pay the claims hereinbefore mentioned is guilty of larceny and punishable as provided in section thirteen hundred and two of the penal law."

A balance of $8,806.50 was due the debtor from Brooklyn Yarn Dye Company at the time when the petition for the arrangement was filed. As we have already intimated, this was sufficient to pay all laborers and materialmen. Under these circumstances the District Court held that this balance when received by the debtor would, by virtue of Section 36-a, supra, become a trust fund for the benefit of such creditors and that The Wickes Boiler Company was entitled to have it impressed with a trust to the extent of its claim for $1,810.50.

In York Trim Corp. v. Ardsley Trading Corp., 169 Misc. 656, 7 N.Y.S.2d 843, the Special Term of the New York Supreme Court reached essentially the same conclusion that the District Court did here. The difference between that case and this is that there the claim was made by a materialman who had furnished supplies to a contractor engaged in building a public improvement, while here the boilers were furnished by the claimant to the contractor engaged in installing a plant for a private corporation. The materialman there relied on provisions of the New York Lien Law which in 25-a has a provision applicable to contracts for public improvements like the one covering private contracts in 36-a.

The debtor calls attention to the words of the statute that: "funds received by a contractor from an owner for the improvement of real property are * * * declared to constitute trust funds in the hands of such contractor", and argues that the balance due from the owner is not "received by" or "in the hands of such contractor". Nevertheless it may be contended that the statute places a contractor in a fiduciary relation to laborers and materialmen in respect to his claim against the owner, so that the moment it is collected active duties arise to apply it according to the terms of the statute "to the payment of claims of sub-contractors * * *", and prior to that time the duty exists to enforce the claim for the benefit of creditors for whose benefit it is to be applied when received. If such an argument is sound, an assignment to a bona fide purchaser for value and without notice would pass a good title to the claim free of equities though, as respects the contractor, it would result in a breach of trust since it would defeat the very object of the statute.

It may be added in support of the sub-contractor's position that it has an inchoate interest in its claim existing prior to the time of collection which resembles a mechanic's lien that may be inchoate before filing but is validated by filing even after a prior petition in bankruptcy. Gates & Co. v. Stevens Construction Co., 220 N.Y. 38, 115 N.E. 22; In re New York-Brooklyn Fuel Corporation v. Fuller, 2 Cir., 11 F.2d 802. These two decisions, as well as many others, establish that a trustee in bankruptcy (whose rights the debtor here...