Cosmopolitan Mutual Casualty Co. v. Monarch Concrete Corp. , 176 N.Y.S.2d 122 ( 1958 )

Per Curiam.

In this supplementary proceeding, Psaty & Fuhrman, Inc., a third party, and its secretary, Hyman Green-berg, appeal from a Special Term order adjudging the third party guilty of contempt and imposing a fine of $4,410.39. The order followed the confirmation of the report of an Official Referee who found the third party guilty of contempt after a hearing upon the issues.

On June 1, 1956, the creditor obtained a judgment against the debtor and an execution issued thereon was returned unsatisfied. On June 11,1956, a third-party subpoena in supplementary proceedings was served upon Hyman Greenberg, an officer of Psaty. The subpoena contained an order, pursuant to section 781 of the Civil Practice Act restraining the “ transfer * * * of * * * any property belonging to the judgment-debtor, or to which he may be entitled or which may thereafter * * * become due to such judgment-debtor.” About two weeks later, in lieu of appearance for examination, the third party filed an affidavit with the creditor, substantially stating that, the debtor had previously received all moneys due to it and that Psaty had advanced to the debtor $97,099.58 in excess thereof, which the debtor had agreed to repay on demand. Thereafter, in October, the debtor certified by affidavit that, after the service of the subpoena, the third party paid material bills owed by Monarch and paid sums approximating $30,000 to the debtor, to be used to meet payrolls. As a result, by order to show cause dated November 9, 1956, the creditor moved to punish Psaty for contempt. The reference and - the determination noted above followed.

On October 8, 1954, Psaty entered into a contract with the debtor, who was to perform the concrete work in the erection of an incinerator by Psaty as general contractor. By its terms, payments were to be made to Monarch by Psaty during the course of construction. In January, 1956, Monarch declared it could not fulfill its obligation under the contract. Psaty then had alternative choices. It had the right to discharge the subcontractor and finish the job itself or it could have engaged another to complete the work. It chose, however, to continue with Monarch. It is a reasonable inference that the course undertaken by Psaty was to its advantage as compared with the other means available to it.

In continuing with Monarch, Psaty again had the option to proceed in one or more ways. For example, it might have undertaken to pay Monarch’s mechanics, laborers and material suppliers itself. By arrangement, however, Monarch continued to supply labor and material. Psaty issued checks to Monarch, allegedly for the purpose of paying for these items. The proof, however, does not indisputably establish that all the funds were thus used. Psaty actually made 19 payments approximating $40,000 directly to Monarch after the subpoena was served upon it, and in addition, paid some $15,000 to materialmen for materials delivered to Monarch.

The Referee found that these funds were “ a use and transfer * * * by the third-party of * * * the property of the debtor, and the payment by the third-party of debts contracted by the debtor for materials and supplies ordered and used by it in the performance of its contract.” Special Term confirmed this finding. The determination finds support in the record, especially since by a letter dated January 10, 1956, when Monarch originally defaulted, Psaty was given the sole discretion to pay such bills as it chose to satisfy and to charge the payments to the debtor’s account. The agreement also provided that in the event that the total exceeded the contract price, the excess was to be repaid by the debtor.

It is not without significance that the arrangement made by Psaty and Monarch was not disclosed to Cosmopolitan, the creditor, after the subpoena containing the restraint was served. Instead, Psaty, as already indicated, advised the creditor, under oath, that no money was due to Monarch and that it had been overpaid in a substantial amount. The creditor had the right to rely upon the sworn statement. It would be inequitable to hold that a creditor relied upon such verified proof at its peril. To hold otherwise would, in effect, place a premium upon concealment and would virtually destroy the worth-while practice of accepting an affidavit in lieu of a full-scale examination.

A party who cavalierly chooses to ignore an injunctive order, regular on its face, must accept the consequences if the order is sustained (Matter of Sverd v. Mostel, 283 App. Div. 128). Under the circumstances here, the third party had the burden of establishing that it did not violate the order and that payments made were not funds belonging to or owed to the debtor. Psaty had the right under the Civil Practice Act, and was not deprived of the opportunity, to apply to the court for a release of the restraint, or to make full disclosure of its proposed action and obtain the consent of the creditor. Moreover, it is not disputed that Psaty paid approximately $4,700 to creditors of Monarch for debts other than for material or labor.

As Special Term indicated, to permit a debtor and a third party, by arrangement, to favor selected creditors creates preferential treatment intolerable as a matter of public policy.

We cannot say, upon the record before us, that Psaty sustained the burden of establishing that the funds it disbursed after the order was served were not funds due or to become due to the debtor:

In the order, from which Hyman Greenberg individually appeals, Special Term directed that, in the event Psaty fails to pay the fine, Greenberg may be apprehended, arrested and committed to jail by the Sheriff, upon proof of personal service of the order upon him. The order, however, contains no finding that Greenberg was guilty of contempt, or that any action on his part, after the service of the subpoena with its restraining provisions, impaired, impeded, or prejudiced the rights of the creditor. Nor did the Beferee make such specific findings with respect to Greenberg. In the absence of the appropriate findings by Special Term, the order with respect to Greenberg cannot be sustained (see Matter of Rose Co. v. Tompkins & Bevers, 248 App. Div. 605).

Under the circumstances, the order should be modified, on the law and the facts, to strike the final decretal paragraph therein, and as modified otherwise affirmed, with costs to the respondent.