Conford, Freund and Haneman. The opinion of the court was delivered by Conford, J.A.D. Haneman, J.A.D. (dissenting).
This is an appeal from a judgment of the Chancery Division adjudicating the priority of the claim of Frank Carpenter Co. ("Carpenter," hereinafter) as against plaintiff, Morris Picker, in and to certain moneys in the possession of the defendants City of Bayonne and Jacob Drogin which are being held by them in connection with the performance of a contract between defendant William Brancatella and the city for the construction of a municipal swimming pool by the former.
The controlling facts are found not only in the appendices of the briefs but also in certain supplemental affidavits which the court requested from the parties at and after oral argument
so that such original jurisdiction might be exercised by the court as was necessary to achieve a final determination of the controversy on its merits. R.R. 1:5-4. Supplemental briefs have been submitted by all the parties relating to the record as thus supplemented.
On May 19, 1953 the City of Bayonne adopted an ordinance to provide for the construction of a swimming pool and to authorize the issuance of bonds to finance the major portion of the cost thereof. In 1954 and 1956 amendatory ordinances were passed to increase the sums authorized to be raised for this purpose. The pool was eventually completed. A total of $191,000 was appropriated for the project from the following sources: $144,250 by sale of bond anticipation notes issued pursuant to the Local Bond Law, R.S. 40:1-1 et seq. , as amended; R.S. 40:1-8; $15,000 by a "temporary internal loan from the city's capital cash account," authorized by the 1956 ordinance mentioned above; $20,824.58 by private contributions; and $10,925.42 appropriated from the city's capital account for the pool project as a "down payment," pursuant to N.J.S.A. 40:1-12. Of the above moneys all has been expended on the construction of the pool except for some $3,200 which was retained by the city under the terms of the general contract and is due Brancatella, and the sum of $270.93, which is being held by Drogin under circumstances to be related.
The present appeal reduces itself to a contest between Picker and Carpenter for priority in the distribution of these remaining funds. Picker is the holder of a judgment against Brancatella on a claim having no relation to the execution of the pool project, in the amount of $1,592.75, together with interest and costs. An execution levy to satisfy the judgment was effected April 19, 1956 against moneys due or to become due from the city to Brancatella. Carpenter supplied miscellaneous pool equipment to Brancatella on or about June 15, 1956 in the amount of $4,977.14, for which he has not been paid. Various other claimants against Brancatella appearing in the trial court have, in
effect, abandoned their claims insofar as these funds are concerned.
In January 1956 the city rescinded its contract with Brancatella because of the latter's default. By resolution passed April 3, 1956 the city renewed the contract and, in order to assure payment for labor and materials thereunder, appointed Drogin, a city legal assistant, as trustee, to receive the amounts due Brancatella and to disburse them to "persons entitled thereof." Although the trusteeship took no particular form, the individual resolutions authorizing warrants to be drawn to Brancatella, the first of which was issued in May 1956, indicated that Drogin was to be made joint-payee with Brancatella as trustee for that purpose. Drogin did, in fact, use the funds thus made available by the city to make payments to the various subcontractors and suppliers, whether or not they had first filed lien claims under the Municipal Mechanics Lien Act, N.J.S. 2 A:44-125 et seq. He testified, further, that all payments made directly to Brancatella were for the purpose of meeting his payroll obligations. According to the findings of the trial judge, amply supported by the proofs, Brancatella retained none of the moneys paid him by Drogin, having applied all of them to pay laborers and materialmen on the job.
The swimming pool was opened to the public on or about June 15, 1956. On June 16, 1956 the city engineer certified to the governing body of the city that Brancatella had "satisfactorily completed 100% of his contract" and was entitled to the payment of $12,155.31, being the balance due therefor. On February 11, 1957 Carpenter filed a notice of municipal mechanics lien for the money due him. The city did not adopt a formal resolution of acceptance of the work from the contractor until July 2, 1958.
The city supports Carpenter's claim to priority against Picker in these remaining funds. They base their position on several alternative theories: (a) the Municipal Mechanics Lien Act, N.J.S. 2 A:44-125 et seq.; (b) the Public Trust Fund Act, N.J.S. 2 A:44-148 (erroneously designated as
2 A:44-147 as adopted in the revision of Title 2); (c) the Local Bond Law, N.J.S.A. 40:1-85; and (d) a general equitable trust fund. We have concluded, as did Judge Kilkenny in the trial court, that Carpenter is entitled to priority on the last stated basis and will therefore not discuss the applicability of the others except to the extent that the Local Bond Law will be seen to support the trust fund rationale. Cf. Key Agency v. Continental Cas. Co. , 31 N.J. 98 (1959).
The case at hand is controlled by the holding and reasoning by the Supreme Court in National Surety Corp. v. Barth , 11 N.J. 506 (1953). It would appear that there is no direct statutory authority for the impressment of a trust upon funds due to a general contractor in connection with a public improvement but still in the possession of a government agency. The Public Trust Fund Act, cited above, has particular reference to funds already paid to the contractor, and the Supreme Court, in the Barth case, supra , specifically ruled that the act does not operate to create a trust of funds not yet paid the contractor. The case holds, however, that while the act does not create a trust of funds still held by the public agency, it does not preclude a trust if one is properly impressed under ordinary equitable principles. Barth involved a fund in the hands of the Administrator of Public Housing which consisted of unpaid balances due to the general contractor on two public housing projects. The funds were received by the Administrator from the State Treasurer out of a specially-created State Housing Fund. Claimants to the unpaid balance were two judgment creditors, the surety company (representing, in effect, the claims of unpaid materialmen), the United States Government to satisfy a tax lien against the general contractor and the State to satisfy the general contractor's indebtedness for unemployment compensation taxes. The dates of the claims of the unpaid materialmen in relation to those of the other claimants are not noted. The trial court, consolidating all the other claims, held them inferior to those of the materialmen.
On the appeal taken by the State, the other adverse claimants not appealing, the court, in denying the State's claim, stated:
"A special fund labelled 'State Housing Fund' has been established and all moneys deposited therein are earmarked for the purposes of emergency housing. Withdrawals can be made only upon the signature of the State Commissioner of Taxation and Finance on vouchers certified or approved by the Administrator. The materialmen and laborers, and therefore National Surety Corporation in view of its subrogation rights, have an equitable interest in these funds. Such an interest cannot be defeated by the State by the exercise of a setoff based upon the personal debt of the contractor totally unrelated to the work performed in furtherance of the purposes for which the fund was created." (11 N.J. , at pages 514-515)
See also Goodwillie v. City of Bayonne , 2 N.J. 88 (1949), in which a trust was applied to money in the hands of the city, those funds also constituting part of a specially-created account including federal PWA funds. In the Barth case the court cited Goodwillie as resting on the "equitable principle that once moneys have been received or allocated for a certain purpose such moneys become impressed with a definite trust to be disbursed for that purpose only" (11 N.J. , at page 514).
We regard the general philosophy of these holdings as applicable here. Insofar as the funds yet held by Drogin are concerned, these were explicitly made a trust fund for laborers and materialmen on this project. The situation as to the moneys still being held by the city itself may less clearly reflect a trust than the Drogin escrow arrangement does, but a trusteeship nevertheless inheres therein on the facts before us.
As to that portion of the fund consisting of the money raised by the municipal bond anticipation notes, dominant effect must be accorded the statutory directive that: "The proceeds of the sale of any obligations issued under this article shall be applied only to the purposes for which such obligations are authorized * * *." N.J.S.A. 40:1-85. The "down payment" is required to be appropriated for the
same purpose, N.J.S.A. 40:1-12. Moreover, it was unquestionably allocated by the city thereto. It has been suggested that the proceeds of the sale of securities are in fact being applied to the purposes for which the obligations were authorized when made available to a judgment creditor of the contractor, since the latter's efforts contributed to the construction of the pool. But the whole meaning of the Barth case, in view of the respective relationships of the contending parties to the general contractor in that case, is necessarily antagonistic to such a proposition. Within the holding and reasoning of the decision, moneys held by a public agency for the specific purpose of defraying the cost of a public improvement, under circumstances warranting the conclusion they are held in trust for that purpose, may not be disbursed to a creditor of the contractor to whom they are payable, ahead of those who provided labor and materials for the improvement.
The affidavit of the city comptroller states that the private contribution fund and the internal loan by the city formed, together with the bond anticipation notes and down payment, a "separate appropriation account" in the financial records of the city, and this is not controverted. In any case, all of these moneys clearly were at one time or another "received or allocated for a certain purpose [the pool project]," within the fair application and spirit of the Barth opinion, and, therefore, constituted a trust fund precluded from disbursement to any extraneous creditor of the contractor so long as materialmen or suppliers of labor on the public improvement remained unpaid. The amount of money in the funds in controversy being less than Carpenter's claim, they must be paid to him in entirety.
HANEMAN, J.A.D. (dissenting).
I do not agree with my colleagues' conclusion.
Plaintiff appeals from a judgment of the Chancery Division denying him a lien arising from a levy of execution
upon rights and credits of William Brancatella (Brancatella) in and to certain funds in the possession of the City of Bayonne, and of Jacob Drogin (Drogin), trustee, and granting Frank Carpenter, trading as Frank Carpenter Company (Carpenter), a lien upon said funds.
On or about October 14, 1954 Brancatella entered into a contract with Bayonne for the construction of a municipal swimming pool and bath house. The contract provided, inter alia:
"The Contractor will be paid in monthly approximate estimates for work satisfactorily completed and approved by the Engineer, less ten percent (10%) retained for repairs and less any amount paid by the Municipality by reason of the Contractor having failed to assume the obligations and responsibilities required by this contract.
The Contractor shall guarantee all labor and materials for a period of one year from the date of acceptance of the work by the Municipality, making all needed repairs on the work as it progresses and during this period of one year, except those due to ordinary wear and tear. He agrees that during said period of one year, the Municipality may retain, out of moneys payable to him under this agreement, the sum of five percent (5%) of the amount of the contract; and that, should he fail to make the necessary repairs at once after due notice from the Engineer, the Municipality may expend the same or so much thereof as may be required in making the aforesaid needed repairs; provided, however, that in case of emergency, where in the opinion of the Engineer it would cause serious loss or damage, the Municipality may make repairs without previous notice and at the expense of the Contractor.
Upon receipt of written notice that the work is completed and ready for final inspection and acceptance, the Engineer shall promptly make such inspection. When he finds the work acceptable as specified and contracted for, the Engineer shall promptly issue a final certificate to the effect that the work provided for under this contract has been completed and accepted by him, and the entire balance found to be due to the Contractor shall be paid to the Contractor within thirty days of the date of the final certificate.
The entire balance found to be due to the Contractor shall consist of the difference between the total value of work satisfactorily completed and accepted and the sum of the monthly payments, less five percent retained for repairs as set forth above, and less any amounts paid out by the Municipality by reason of the Contractor having
failed to assume the obligations and responsibilities as ...