(dissenting). Plaintiff had the burden of proving facts sufficient to charge the bank with knowledge of the trust character of the funds. The trial court, who saw and observed the witness, reached the conclusion that there was “ a total failure of proof by the plaintiff in all essential and vital elements necessary to be established to warrant a recovery. Its case rests on conjecture and surmise.” (174 Misc. 206, 209.)
In Barclay v. Corn Exchange Bank Trust Co. (155 Misc. 684; affd., 243 App. Div. 692; affd., 267 N. Y. 630) essentially the same issues were presented. In that case, on July 21, 1933, the contractor owed the bank on unpaid notes upwards of $93,000 and the bank knew the contractor had financial difficulties and that he worked for the State and other public authorities. When the bank, on July twenty-first, learned the contractor had made an assignment for the benefit of creditors, it paid itself the balance of the proceeds of the check issued by the State of New York to the order of the contractor. The plaintiff claimed the proceeds were trust funds diverted by the bank in violation of section 25-a of the Lien Law. As indicated in the case on appeal before this court, the issue presented was whether the plaintiff sustained the burden of proof to establish facts sufficient to charge the bank with knowledge. There, as here, an antecedent personal indebtedness of the contractor to the bank was paid out of the funds that were the proceeds of a check paid to a contractor for a public improvement. This court, by a divided court, affirmed the judgment in favor of the defendant bank, dismissing the complaint upon the merits, and was affirmed by the Court of Appeals without opinion. We think the ruling in the Barclay case is here controlling.
A similar conclusion has been reached by the Second Department in Vulcan Rail & Construction Co., Inc., v. County of Westchester (250 App. Div. 212) on appeal from a judgment entered on the renort of an official referee. In that case, also, the bank had applied *31the proceeds of a check to a contractor for a public improvement in payment of the contractor’s debt to the bank. The facts occurred before enactment of section 25-a but after the enactment of section 36-a of the Lien Law, which plaintiff contended applied to public as well as private improvements. The Second Department said: “ The dismissal of the claims against the bank was also correct for another reason. Even if section 36-a did apply, it imposes a trust upon the fund only ‘ in the hands of such Contractor.’ The bank would not be liable unless it participated knowingly in a diversion of the fund. The official referee found, upon ample evidence, that the bank had no knowledge of any claims on the part of laborers, materialmen or others mentioned in the statute. Consequently it had no knowledge that the moneys received from the county were trust funds, and it could not have been aware of any misappropriation. In such circumstances, there is no liability on the part of the bank. (Clarke v. Public Nat. Bank & Trust Co., 259 N. Y. 285.) ”
Section 25-a is penal in nature and punitive in character. By its terms it places responsibility for disposal of the funds on the contractor who, of course, knows whether his materialmen and others have been paid, unless by notice it is brought home to the bank that the contractor has not paid materialmen and laborers.
There is no such thing as a trust without a beneficiary. If materialmen and subcontractors, etc., were paid, there would be no trust fund in the proceeds of the checks, for there would be no beneficiaries thereof. The onerous burden the majority opinion places on banks should not be imposed unless the knowledge necessary for the liability is established by clear and convincing evidence.
The judgment dismissing the complaint should be affirmed.
Judgment dismissing the complaint on the merits reversed, with costs. All findings inconsistent with this determination should be reversed and such new findings made of facts proved on the trial as are necessary to sustain the judgment hereby awarded. Thereupon the action will be remitted to Special Term to take additional proofs in accordance with the arrangement entered into between the respective parties. Settle order on notice.