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GRAMATAN-SULLIVAN, INC. v. KOSLOW

March 29, 1956

GRAMATAN-SULLIVAN, Inc., Plaintiff,
v.
Nathan KOSLOW, individually and as principal of an unincorporated entity or assumed name doing business as 'C.N.K. Co.,' Defendant



The opinion of the court was delivered by: PALMIERI

The plaintiff, a supplier of building materials, seeks to recover part of a debt of $ 33,421.89 concededly owed to it by a building contractor, A. Shaw & Co., Inc. (Shaw). It brings this action to impress a trust on funds paid to the defendant Koslow by Shaw in liquidation of a money debt. The action is brought under §§ 36-a and 71 of the New York Lien Law, McK.Consol.Laws, c. 33. Jurisdiction is founded upon diversity of citizenship. *fn1"

Sections 36-a and 71 of the Lien Law provide as follows:

 '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 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 * * *. Such trust may be enforced by civil action maintained as provided in article three-a of this chapter by any person entitled to share in the fund, whether or not he shall have filed, or had the right to file, a notice of lien or shall have recovered a judgment for a claim arising out of the improvement. For the purpose of a civil action only, the trust funds shall include the right of action upon an obligation for moneys due or to become due to a contractor, as well as moneys actually received by him.' Lien Law, § 36-a, as amended L.1942, c. 808, § 4, eff. Sept. 1, 1942.

 'A trust described in section * * * thirty-six-a * * * of article two of this chapter may be enforced by any person entitled to share in the trust fund in a representative action brought for the benefit of all persons entitled to share in the fund.' Lien Law, § 71, added, L.1942, c. 808, § 15, eff. Sept. 1, 1942.

 It was established at the trial that Villa-Manor Realty Co., Inc., (Villa Manor) owner of the realty improvement, paid two installments on its contract with Shaw at the end of May and the beginning of June, 1954. Both payments were by check. The first, dated May 28th, was for $ 3,000. The second, dated June 4th, was for $ 8,900. Both checks were endorsed over by Shaw, the contractor, directly to defendant Koslow on the dates drawn. Koslow deposited them in his bank account on the same dates.

 The total of the two checks, $ 11,900, is the amount sued for in this action. Plaintiff contends that at the time of the indorsement over, the checks were held by Shaw in trust for its benefit. *fn2" Thus it maintains that Koslow is liable for the return of trust funds improperly diverted.

 As of May 28th, however, the date of Shaw's first payment to Koslow, there were no job claims outstanding against the contractor. Gramatan-Sullivan had neither made nor contracted for any deliveries to Shaw. On June 1st, 2nd and 3rd, the plaintiff delivered sand and mortar to Shaw at a total price of $ 321.60. This was the only job debt proved to have been incurred by Shaw prior to June 4th, the date of the contractor's second payment to Koslow. At no time had Shaw and the plaintiff entered into a contract for future deliveries. Nor did the course of business between them reflect a formal contractual relationship. Plaintiff's delivery invoices show a number of deliveries between June 4th and August 25th totaling $ 33,429.81. These invoices bear the legend: 'Terms: 2% -- 10 days, 30 Net.'

 From the facts shown, it is apparent that the plaintiff seeks, as to the first check, to impress a trust upon funds received and paid out by Shaw at a time when there were no job claims outstanding against the contractor. As to the second check, it asserts a trust in excess of claims outstanding against the contractor at the time of the alleged diversion.

 Thus, the main question in the case is whether § 36-a creates a trust for the benefit of all potential job claimants or whether, on the contrary, the trust arises only to the extent of unsatisfied, outstanding claims. For reasons stated more fully hereafter, it is held that the statutory trust arises only in the event that there are unpaid claims outstanding and only to the extent of such claims.

 The plaintiff may recover nothing in excess of the $ 321.60 representing the goods delivered prior to Shaw's second payment to Koslow. As to that sum, the evidence established that Shaw's payment to Koslow was a diversion of trust funds concerning which the defendant Koslow had constructive notice. To that extent, therefore, plaintiff's claim to recovery against Koslow is granted. Discussion of the bases for these determinations, as well as of the grounds for sustaining the Court's jurisdiction, follows.

 The scope of the limitations imposed by § 36-a on a contractor's freedom to dispose of funds due or received from an owner has not been precisely delineated by the New York Courts. But the nature of the trust was defined by the New York Court of Appeals in Raymond Concrete Pile Co. v. Federation Bank & Trust Co., 1942, 288 N.Y. 452, 43 N.E.2d 486. The Court there stated:

 'The statute does not give rise to a fiduciary relationship between a contractor and his subcontractor or, if once created, continue it under any and all contingencies. Whether the moneys in the hands of the contractor are or may be the subject-matter of a trust depends exclusively upon the fact, arising, existing and shifting according to time and circumstance, that the contractor fails to pay the claims mentioned in the section. Nothing in the section bars (their use) for any purpose (the contractor) may see fit provided he does not fail to pay all such claims out of other moneys which he may then have or which he may afterwards receive * * * no trust arises * * * from the mere fact that the contractor received and has in his hands moneys in payment on account of an * * * improvement.' Supra, 288 N.Y. at page 459, 43 N.E.2d at page 489.

 An earlier opinion, by the Appellate Division, reflects a similar interpretation of the statute. Suit had been brought by a job claimant against a bank to recover the amount of checks received by a contractor on account of an improvement and deposited in its bank account. The bank had applied the money deposited to satisfy the contractor's debts to it. The Court denied recovery on the ground that the bank had had no knowledge, at the time of deposit, that there were any job claims outstanding against the contractor. Vulcan Rail & Construction Co. v. Westchester County, 2d Dept.1937, 250 App.Div. 212, 293 N.Y.S. 945.

 The clear import of these cases is that no trust arises under § 36-a of the Lien Law in the absence of unpaid claims outstanding against the contractor. This analysis accords with the construction of a similar statute by the Supreme Court of Wisconsin. Danischefsky v. Klein-Watson Co., 1932, 209 Wis. 210, 244 N.W. 772. *fn3" The Wisconsin Court held that in the absence of any outstanding unpaid job claims, the fund had, in the hands of the contractor, the same status it would have had ...


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