
    Isaac Levison and Jacob Hanauer, Plaintiffs, v. Illinois Surety Company and Frank Paul, Defendants.
    First Department,
    May 7, 1915.
    Debtor and creditor—assignment of moneys to be received from Federal government—bond securing payment of loan made to carry out Federal contract — embezzlement — use of funds contrary to requirements of contract — appeal — issue not raised at trial.
    Although the Federal statute declares that all assignments of claims against the United States shall be void unless they are freely made and executed after the allowance of the claim, the ascertainment of the amount due and the issuance of a warrant for the payment thereof, a corporation having a contract to furnish machinery to the United States government, and about to enter into the performance thereof, may give to persons advancing it money for the purpose of the contract a valid and enforeible bond with surety conditioned for the fulfillment of the corporation’s promise to repay said loans by turning over to the lenders moneys received from the Federal government under the contract. This, because a bond conditioned for the payment of moneys when received from the United States is not prohibited by the Federal statute, and an action thereon is not an action upon an assignment of sums to be earned under a Federal contract.
    A recovery against the surety on said bond may be had, although there was an express provision that the surety should be liable only in the event that the person who was to pay over the money should “ commit an act of larceny or embezzlement of any of the said funds entrusted to his care,” and the breach complained of consisted in depositing warrants for moneys received from the government to the bank account of the corporation rather than turning them or their proceeds over to the lenders. As said agent of the corporation had been authorized by it to pay the moneys to the lenders, the acts aforesaid were within the words larceny or embezzlement as used in the bond.
    
      Where the right of the lenders to apply moneys received by the borrower from the Federal government on a balance due them under other assignments was not questioned at trial, and such right was expressly created by the contract, the objection to a recovery for the general balance due cannot be taken for the first time upon appeal.
    Scott, J., dissented, with memorandum.
    Motion by the defendant, Illinois Surety Company, for a new trial upon a case containing exceptions, ordered to be heard at the Appellate Division in the first instance upon the verdict of a jury in favor of the plaintiff rendered by direction of the court after a trial at the New York Trial Term in October, 1914.
    
      I. Gainsburg [Joseph P. Segal with him on the brief], for the plaintiffs.
    
      L. Laflin Kellogg [Alfred C. Pette with him on the brief], for the defendant surety company.
   Laughlin, J.:

The plaintiffs were copartners engaged, under the name of Commercial Trades Company, in the business of advancing money to contractors on the security of assigned claims for moneys to grow due under their contracts. Vermilye & Power, Inc., was .a domestic corporation engaged in the business of furnishing machinery and supplies to contractors and others, and had various contracts to furnish machinery and supplies to the United States government. Business relations between Vermilye & Power, Inc., and the plaintiffs were negotiated and established in behalf of that company by the defendant Frank Paul, who was its secretary and treasurer. Section 3477 of the United States Devised Statutes declares that all assignments of claims against the United States shall be null and void, unless they are freely made and executed * * * after the allowance of such a claim, the ascertainment of the amount due, and the issuing of a warrant for the payment thereof.” Owing to these statutory provisions, it was recognized that the plaintiffs could not collect from the United States government under assignments of claims to grow due from it to Vermilye & Power, Inc., and for that reason at the outset the execution of a bond on which this action is based was negotiated. Payments on account of government contracts were made by United States treasury warrants. On the 30th day of August, 1909, the board of directors of Vermilye & Power, Inc., duly adopted a resolution authorizing the treasurer to open an account for the company with any solvent bank or trust company in the borough of Manhattan and to deposit therein any funds coming into his custody, and it was amended on January 25, 1910, by providing that he should be the only person authorized to indorse the name of the company to any check, bill, note or draft payable to the company on accounts due and owing to the company, or to any checks, notes, drafts or other negotiable instruments made by it. On the 1st day of November, 1910, Paul as principal and the defendant company as surety, executed a bond which recites that Paul and the plaintiffs were about to enter into a contract with V ermilye & Power, Inc., “for the purpose of discounting certain payments due the said Vermilye & Power, Inc., from the United States Government,”-and that said company had authorized Paul “to receive funds from the United States Government in settlement of ” payments due to it from the government “ and to pay over the same” to the plaintiffs “as they are received.” The bond was in the penal sum of $5,000, and it was expressly conditioned for the payment over to the plaintiffs by Paul of “all moneys received by him from the United States Government on account of bills discounted by ” the plaintiffs “ for the said Vermilye & Power, Inc.” The bond contained a proviso to the effect that the surety should not be liable for any funds not collected from the United States government on account of bills so discounted, and this is followed by a sentence as follows: “ Said surety shall be liable only in the event that the said Frank Paul shall commit an act of larceny or embezzlement of any of the said funds entrusted to his care.” After the execution of the bond Vermilye & Power, Inc., executed various assignments to the plaintiffs of moneys due and to grow due to it under contracts with the United States government, providing that all remittances received by it on account of the contracts should be received in trust for the plaintiffs, and that “ the identical checks or moneys constituting such remittances shall be immediately turned over ” to the plaintiffs. The plaintiffs advanced seventy-five per cent of the face of the claims thus assigned, and it was provided that it should receive four per cent for its services and charge interest at the rate of six per cent on advances, and account to the assignor for any surplus. It was further provided in the assignments that any deficiency in the collection of any moneys due under an assignment might be collected by the plaintiffs at their option out of moneys that might become due to the assignor out of any previous or subsequent assignment. The course of business outlined by the bond and assignments was followed until the matters arose out of which this action grew.

Paul received remittances from the United States government on account of claims covered by five different assignments to the plaintiffs, which he evidently indorsed and deposited to the credit of the assignor, instead of following the course of business agreed upon, namely, of indorsing and transferring the treasury warrants to the plaintiffs. This action is brought to recover on account of the failure of the defendant Paul to turn over these treasury warrants, or the proceeds thereof, to the plaintiffs; but the plaintiffs only demand the balance owing to them for moneys advanced on account of various assignments. The court directed a verdict in favor of the plaintiffs on a motion made by both parties for a direction of a verdict, by which the facts were submitted to the court, and thereupon ordered the exceptions taken by the surety company to be heard in the first instance at the Appellate Division.

The learned counsel for the surety company contends at the outset that the bond is void as being in violation of the provisions of the Federal statute quoted.

I am of opinion that the contention is without merit. In York v. Conde (147 N. Y. 486) our Court of Appeals construed these provisions of the Federal statute as invalidating such assignments only as against the government, hut as not prohibiting the enforcement thereof against the fund in the hands of the assignor after collection. It is contended by counsel for the surety company that York v. Conde has, in effect, been overruled by the subsequent decision of the United States Supreme Court in National Bank of Commerce v. Downie (218 U. S. 345); hut we think not, for there the assignor never became entitled to receive the moneys from the United States owing to the fact that he became a bankrupt before they became payable, and the court held that his trustee in bankruptcy took the same unaffected by the prior assignment. The Supreme Court granted a writ of error to review York v. Conde ( Conde v. York, 168 U. S. 642) and dismissed it after argument, on the ground that it involved no right based on the Federal statute, but evidently approved the decision of our Court of Appeals, which was again brought to the attention of that tribunal on the argument of National Bank of Commerce v. Downie (supra), but no reference was made to it in the opinion. Moreover, York v. Conde has been followed by our Court of Appeals in Matter of Hone (153 N. Y. 522) and Central Trust Co. v. West India Improvement Co. (169 id: 314), and it has recently been followed in Manhattan Commercial Co. v. Paul, the defendant in this action (159 App. Div. 924) where the court sustained assignments like those to which reference has been made. We are of opinion, therefore, that the decision in York v. Conde has not been overruled in any respect, and at least not to such extent that it is not authority to support this action, which is based, not upon the assignments, but upon the bond executed to the plaintiffs by Paul and the surety company conditioned for the payment of the moneys to the plaintiffs by Paul when received by him, which in no view can be said to be prohibited by the Federal statute.

Another question, not free from doubt, arises, and that is as to whether it was incumbent upon the plaintiffs to show actual larceny or embezzlement; but I am of opinion that the bond should be construed as intended as security for the payment of the moneys by Paul to the plaintiffs. He had been authorized by his company to pay the moneys to the plaintiffs, and his company caused the bond to be given that he would do so. The bond was given on the theory that the moneys when collected belonged to the plaintiffs, and they did. An application or appropriation of the funds to any other purpose was intended, I think, by the parties to constitute the larceny or embezzlement as those terms are used in this bond. I am of opinion, therefore, that there was a breach of the surety company’s undertaking when Paul indorsed and delivered the warrants to his company and allowed it to receive the money instead of turning them or the proceeds over to plaintiffs.

Counsel for the surety company now contends that the plaintiffs were not entitled to receive and retain warrants, or the proceeds thereof, on account of a general balance owing to them by the assignor for all of which assignments were not proved; and on that theory he contends that the verdict is excessive in any event. This contention is equally without merit, for, as has been seen, by the express provisions of the assignments the plaintiffs were entitled to receive the moneys on account of any balance owing under any other assignment, and they showed the general balance owing without any question having been raised on the trial with respect to their having like assignments for all the advances made by them. If such objection had been taken the plaintiffs might have met it by proving the assignments. It appears to have been assumed without objection that they had like assignments with respect to the entire balance, and it is now too late to take the objection which might have been met by competent proof had it , been taken on the trial.

These are the only points which merit discussion in an opinion.

It follows that the exceptions taken by the surety company should be overruled and judgment awarded in favor of the plaintiffs on the verdict, with costs.

Ingraham, P. J., McLaughlin and Clarke, JJ., concurred; Scott, J., dissented.

Scott, J. (dissenting):

I dissent on the ground that the facts do not show any larceny or embezzlement on the part of Paul.

Exceptions overruled and judgment directed in favor of plaintiffs on the verdict, with costs.  