Court Opinion

ID: 5833238
Source: CourtListenerOpinion
Date Created: 2022-01-12 22:30:58.754498+00
Date Added: 2024-06-11T08:43:30.972295
License: Public Domain

Suozzi, J. P. (concurring in part and dissenting in part).
I dissent from so much of the majority’s determination as affirms the defendants’ judgment of conviction on 15 counts of larceny in violation of section 79-a of the Lien Law for misappropriation of $777,851 of building loan trust funds and of $245,408.76 of vendees’ deposits, for a total $1,023,259.76, during the period October 31, 1973 to December 13, 1973 and of violating sections 352-h and 359-g of the General Business Law for misappropriating vendees’ contract advances.
In my opinion, these convictions must be reversed and a new trial granted because of errors which permeated the trial and resulted in prejudice to the defendants that can only be remedied by a new trial.
A reading of the trial court’s decision rendered after a nonjury trial discloses that in reaching its verdict on the charges involved in these convictions, the court erroneously (1) invoked and relied upon the presumption created by subdivision 3 of section 79-a of the Lien Law from the failure to keep proper books and records, (2) deemed the repayment defense as an affirmative one to be proved by the defendants by a fair preponderance of the evidence, and (3) refused to consider reimbursement or payment of preloan expenditures not itemized in the loan agreements in connection with this defense.
THE PRESUMPTION CREATED BY SUBDIVISION 3 OF SECTION 79-a of the lien law
This section provides as follows: "3. Failure of the trustee to keep the books or records required by section seventy-five shall be presumptive evidence that the trustee has applied or consented to the application of trust funds received by him as money or an instrument for the payment of money for pur*663poses other than a purpose of the trust as stated in section seventy-one.”
Both the record and the Trial Judge’s decision establish that the defendants’ records and books played a crucial role in establishing the People’s case and in the court’s finding the defendants guilty of the larceny charges.
The following extractions from the trial court’s decision establish this beyond any peradventure of doubt:
"On their direct case, the People introduced, inter alia, VM’s books of account containing the daily entries of cash receipts and disbursements. These records listed all checks drawn on VM’s checking account and included notations designating the purposes for which the checks were issued, but not the source of the funds. In addition, the People introduced VM’s accounts payable ledgers (N.C.R. sheets), the bank statements and cancelled checks. Also introduced were the offering plan for the sale of apartment homes in Village Mall Town Houses Condominium, the building loan agreement made with WFSLA, the building loan mortgage and affidavits submitted by VM to WFSLA. Each affidavit recites that it was executed to induce WFSLA to make the advances under the construction loan agreement. In evidence, also, are the mortgage note and checks issued as building loan advances. * * * "In arriving at its verdict * * * the court itself analyzed the books containing the daily accounts of cash receipts, the disbursements, and the purposes for which each check was issued. In analyzing the books, the court determined the amount of trust funds and non-trust funds available on a daily basis. The court also determined whether the source of the trust funds was the purchasers’ escrow deposits or moneys from the building loan agreement, or both.”
These acknowledgments of the People’s and the trial court’s reliance on the defendants’ records and books to prove and find guilt, respectively, are inconsistent with the assertion that the defendants failed to keep proper records and books and that this failure was presumptive evidence of larcenous misappropriation of trust funds by the defendants.
Even assuming that these books and records did not measure up in every detail to the strict prescription of the statute, the analysis of these records by the People’s expert which was relied on to establish the People’s case, and the independent analysis of these same records by the trial court to reach its verdict, belie any assertion or claim that there was such a *664failure to keep proper records as to give rise to the statutory presumption of guilt. Under these circumstances, the defendants’ compliance in keeping records and books as to the source of the trust funds and their application was necessarily sufficient to render the presumption a legally unsound basis for these convictions. Neither does the defendants’ obviously unsuccessful impugning, as the trial court found, of the accuracy, adequacy and integrity of the bookkeeping procedure provide a sound predicate for invoking this statutory presumption.
The majority avoids the issue of the presumption’s application to the facts presented here by questioning the necessity of this presumption and the court’s reliance on it to sustain the convictions. Needless to say, I do not share my colleagues’ doubts. The trial court’s discussion of this issue in its extensive decision was pointless if it did not deem it necessary to find guilt and did not in fact rely upon it to sustain the convictions.
The admonition in People v Van Keuren (31 AD2d 711, 712, affd 27 NY2d 556), that the Lien Law "has been and should be sparingly used for penal purposes” makes it that much more imperative that the trial of this rare criminal prosecution under this statute for misappropriation of trust funds should have been free of this erroneously invoked presumption to insure a proper trial.
On this ground alone, a reversal is required and a new trial should be held at which the prejudicial impact of this statutory presumption is avoided.
THE REPAYMENT DEFENSE (PURSUANT TO LIEN LAW, § 79-A, SUED 2)
This provision reads:
"2. Notwithstanding subdivision one of this section, if the application of trust funds for a purpose other than the trust purposes of the trust is a repayment to another person of advances made by such other person to the trustee or on his behalf as trustee and the advances so repaid were actually applied for the purposes of the trust as stated in section seventy-one, or if the trustee has made advances of his personal funds for trust purposes and the amount of trust funds applied for a purpose other than the trust purposes of the trust does not exceed the amount of advances of personal *665funds of the trustee actually applied for the purposes of the trust, such application or consent thereto shall be deemed justifiable and the trustee, or officer, director or agent of the trustee, shall not be deemed guilty of larceny by reason of such application or by reason of his consent thereto.”
In finding that this repayment defense "had not been met” the decision of the trial court makes it abundantly clear that in reliance on People v Rallo (46 AD2d 518, affd 39 NY2d 217), the repayment defense herein provided was construed as an affirmative defense with the burden of proof on the defendants to establish the defense by a preponderance of the evidence (Penal Law, § 25.00).
A reading of the trial court’s decision discloses that this finding was also premised on the undisputed fact that none of the preloan expenditures which the defendants asserted as the basis of their defense were itemized in any of the loan documents. From this the trial court reasoned that the expenditures did not qualify as "costs of improvements” as defined by subdivision 5 of section 2 of the Lien Law.
Unlike the trial court, the majority construes the repayment defense as an ordinary one which the People must disprove beyond a reasonable doubt. Nevertheless, the majority adopts the trial court’s rationale as to the repayment defense and holds that it had not been established.
Accepting the majority’s view of this repayment defense as an ordinary one, I cannot agree with my colleagues’ application of it to the facts presented.
The People’s expert conceded that prior to the creation of the trust funds from the loan advances and the vendees’ deposits, the preloan expenditures relating to the construction of the project totaled $1,186,688, an amount which exceeds the misappropriations for which the defendants were convicted.
The former mortgage officer of the bank which made the loan advances to the defendants and who was presented as a People’s witness, admitted that at the time of the first advance the project was approximately 20% completed. Although this same witness denied that it was understood and contemplated that the defendants could apply part of the first advance towards one half of the land value, to wit, $850,000 (half of the ultimate land value of $1,700,000), he did acknowledge that the loan advances could be used to pay subcontractors for work they had done previously and that $800,000 to *666$900,000 was for soft cost items of construction (appraisal, mortgage and brokerage fees, taxes, etc.).
Both the trial court’s decision and the majority’s opinion completely disregard the testimony on the premise that the reimbursement or payment of a preloan expenditure not recited in any loan agreement is not a proper basis for asserting the repayment defense.
As a result of this posture taken at the trial, no findings were made by the Trial Judge in this regard and none can now be made as to which, if any, of the misappropriations were actual reimbursement or payment of preloan expenditures.
I respectfully submit that the posture taken at trial with respect to the nature of the repayment defense and the burden of proof and as to preloan expenditures (other than land acquisition costs) not referred to in the loan documents resulted in prejudicial error to the defendants which requires a reversal and a new trial.
By limiting preloan expenditures which are itemized in the loan documents as the sole basis for establishing this statutory repayment defense, the trial court and the majority have rendered this provision totally superfluous and meaningless, and have effectively obliterated this defense in criminal prosecutions. By this interpretation, the legislative intent and purpose of this defense are completely frustrated.
If, as the Trial Judge and the majority postulate, only preloan expenditures itemized in the loan documents qualify for reimbursement advances and payment of preloan obligations (other than for land acquisition costs), there could never be a factual situation in which this defense could be asserted in a criminal prosecution under the Lien Law. If these expenditures were itemized there would be no basis for a civil suit, much less a criminal prosecution.
In order to give this repayment defense any scope or purpose, the provision must be construed as providing a defense to absolve one of criminal liability for repayment of nonitemized preloan expenditures (other than loan acquisition costs).
There is nothing in the legislative history to indicate to the contrary. Section 79-a of the Lien Law is derived from section 1302-c of the former Penal Law which was enacted in 1959, repealed in 1965 and added the same year to the Lien Law, without substantial change, as section 79-a.
Although section 1302-c of the former Penal Law incorpo*667rated several scattered provisions of the Lien Law, subdivision 2 thereof, which contained the repayment defense, was a new provision and according to its legislative history, it gave the trustee "a defense to a larceny charge where the application of trust funds for a non-trust purpose is a repayment of advances actually applied for a trust purpose and where the trustee has made advances from his personal funds and the amount of trust funds applied for a non-trust purpose does not exceed the amount of advances of personal funds actually applied for the purposes of the trust.” (1959 Report of NY Law Rev Comm, p 225.)
There is absolutely no indication in this legislative history to indicate or suggest that preloan expenditures had to be listed in the building loan documents in order for the trustee to invoke the repayment defense. Just as this defense was applicable to preloan expenditures not itemized in the loan documents (there being no limiting language in section 1302-c of the former Penal Law), it is similarly applicable now to preloan expenditures not referred to in any of the loan documents.
Accordingly, the resolution of the question of defendants’ criminal responsibility must await a new trial free of error as to the nature of the defense and the burden of proof at which time consideration should be given to preloan expenditures not itemized in any of the loan documents.
If there is any fault to be found in the results flowing from such an interpretation, one must look to the Legislature to eliminate this defense and not require that it be ignored or emasculated by circuitous or nugatory construction.
Rabin and Cohalan, JJ., concur with Lazek, J.; Suozzi, J. P., concurs in part and dissents in part, with an opinion.
Four judgments of the Supreme Court, Queens County, all rendered May 23, 1978, modified, on the law, by (1) reversing the convictions of all defendants under counts 213, 214, 215 and 216, and the sentences imposed thereon, and the said counts are dismissed and (2) reversing the conviction of defendant Naples under count 222, and the sentence imposed thereon, and said count dismissed as to Naples. As so modified, judgments affirmed, and case remitted to the Supreme Court, Queens County, for further proceedings pursuant to CPL 460.50 (subd 5).