Court Opinion

ID: 5752926
Source: CourtListenerOpinion
Date Created: 2022-01-12 17:00:19.121187+00
Date Added: 2024-06-11T08:41:20.111752
License: Public Domain

GfiBson, P. J., and Taylor, J.
(dissenting). The lucid opinion of Mr. Justice Sohxrxok at Trial Term (46 Misc 2d 266) seems to us to present an accurate analysis of the issues and to reach the correct conclusions and determination; and we write only in outline and merely to place somewhat greater emphasis on the element of fraudulent concealment, which seems to us to have been well established.
It is clear that General and Central evolved what must have initially appeared to have been a mutually advantageous arrangement whereby General sold its product to Central at preferential prices, thereby improving Central’s competitive bidding position, as General, in turn, gradually displacing its competitor, became Central’s principal supplier. Central’s financial condition deteriorated, for reasons which do not appear, and although, as the trial court was warranted in finding, its losses steadily mounted and its insolvency was an established fact and one well known to General and, indeed, a subject of discussion between the two companies, General nevertheless continued to supply materials upon credit. The series of year-end balances due is significant: 1952 — $0.00; 1953 — $0.00; 1954 — $179.35; 1955 —$83,984.40; 1956 —$118,320.60; 1957 — $160,787.51; 1958 —$199,716.21; 1959 —$402,175.73. The contracts with which this litigation is concerned were performed in 1959. In that year, Central’s purchases from General rose to $697,000. On July 10, 1959 — the date of the critical letter — the balance due was $372,845. There is abundant evidence that Central’s financial operations were controlled by General, *256through the close supervision of its representative, Van Cleve, who directed the application of Central’s receipts, and by the dominance of General’s officers in Central’s affairs generally. The trial court correctly found it “ evident that Central’s continued operations were dependent entirely upon General’s indulgence and financial support.” The basis of General’s agreement to continue shipments, despite Central’s acknowledgment of its insolvency, was the condition imposed by General that no account due it should be permitted to extend beyond the lien date. Thus, the trial court found, 1 ‘ General sought to assure payment by the surety if Central could no longer pay old bills with new moneys.” The court’s opinion continued: ‘ ‘ The inevitable occurred in December, 1959 when General filed a lien on the Wayne County job. The following March 31st it filed a lien on the Cayuga County job. The result was to put Central out of business.”
The record is scarcely susceptible of any inference other than the conclusion that when the surety company’s inquiry for credit verification and “ any other pertinent information that might be advantageous in our efforts to underwrite three fifty per cent performance and payment bonds ”, was received, General was, in all things fiscal, Central’s alter ego; and Central, having surrendered control of its financial operations, enjoyed a status little different from that of a subsidiary affiliate. Quite aside from all the other evidence, General’s representative, the watchdog Van Cleve, virtually admitted, or so it could be found, that funds from current contracts were being used to pay for materials supplied by General to earlier jobs. Thus there becomes significant, and apparently a matter of affirmative misrepresentation, the statement in General’s letter of July 10,1959: “ We are informed that the balance will be paid shortly as the State of New York is about to make payment of estimate covering this material(Emphasis supplied.) Upon the entire record it is apparent that at the time of respondent surety company’s inquiry, as theretofore, General’s interest in Central’s obtaining adequate bonding was a vital one.
“ The contract of suretyship imports entire good faith and confidence between the parties in regard to the whole transaction * * * [and] the slightest fraud on the part of the creditor, touching the contract, annuls it ” (50 Am. Jur., Surety-ship, § 163, p. 1011) and “ where the obligee is applied to by the proposed surety for information, and he assumes to answer the inquiry at all, or where the obligee volunteers information to the surety, it is his duty fully to disclose to the surety relevant *257information in Ms possession as to the material facts bearing on the risk ” (op. cit., § 166, pp. 1013-1014; emphasis supplied). The principles stated are supported by respectable authority. (See Phillips v. United States Fid. & Guar. Co., 200 App. Div. 208, affd. sub nom. Stoddard v. United States Fid. & Guar. Co., 234 N. Y. 618, mot. for rearg. den. 236 N. Y. 555; Stoddard v. Maryland Cas. Co., 234 N. Y. 619, mot. for rearg. den 236 N. Y. 555 [arising out of the collapse of the same bank]; Matter of First Citizens Bank & Trust Co. of Utica v. Sherman, 250 App. Div. 339; Copper Process Co. v. Chicago Bonding & Ins. Co., 262 F. 66.)
The proof of General’s direction of, and participation in Central’s diversions of payments (Lien Law, § 25-a, now § 70) is effective, although not indispensable, as establishing General’s motivation in writing the surety company as it did and as lending support to the inferences reasonably to be drawn from the other circumstances preceding and surrounding General’s letter. The trial court also found in this proof an additional basis for its determination, holding: ‘1 The evidence establishes that General aided and abetted Central in the violation of the trust provisions of the Lien Law. Its conduct enabled it to secure payment of old debts; it also enabled Central to incur the obligations here in suit. Under equitable principles General should not be permitted to profit from its own misdeeds (Grace v. Corn Exch. Bank Trust Co., 287 N. Y. 94 [1941]).” We agree with these conclusions; and consider that the felonious larceny which would be constituted by the diversion (Penal Law, § 1302-c) is not to be as lightly passed over as the majority opinion would have us do; and the fact, if it is such, that the original victims were subsequently paid seems no reason to permit a co-conspirator to recover at the expense of the surety. In any event, the judgment is, in our view, fully sustainable on either of the grounds discussed. Consequently, we vote to affirm.
Herlihy and Reynolds, JJ., concur with Aulisi, J.; Gibson, P. J., and Taylor, J., dissent and vote to affirm in an opinion.
Judgments modified, on the law and the facts, so as to award deficiency judgments in favor of the appellant against respondent Newark Insurance Company for $137,748.27, with appropriate interest and costs, and, as so modified, affirmed, with costs to appellant.