Pursuant to New York Lien Law Article 3-A, all funds received by a contractor for a construction project, or by an owner under a construction loan, constitute trust finds. The recipient owner/contractor, as trustee, must pay the contractors downstream who have earned those funds, before diverting the funds for any other purpose. Any application of trust assets for a purpose other than the construction costs specified under New York Lien Law § 71 is deemed an unlawful diversion of trust assets, a larceny, that also pierces the corporate veil. This is an extremely powerful law that every owner/contractor should consider when they are in possession of a subcontractor’s trust funds.
The purpose of the statute is very simple, it tries to ensure that contractors who have
expended labor and materials to improve real property receive payment. Pursuant to New York Lien Law § 77, any officer, director or agent of such trustee, who participates in a diversion of trust assets to a non-trust purpose is personally liable to statutory trust beneficiaries(an unpaid contractor). Lien Law § 77 requires that any action to enforce the trust be brought as a class action on behalf of all trust beneficiaries.
In the event that a statutory trustee violates duties imposed by Lien Law Art. 3-A, Lien Law § 77 authorizes trust beneficiaries to commence a class action seeking the following relief:
(1) identification and recovery of trust assets in the hands of any person;
(2) setting aside as a diversion any unauthorized payment, assignment, or other transfer;
(3) recovery of damages for breach of trust or participation therein;
(4) enforcement on behalf of the trust of any right of action constituting a trust asset;
(5) determination of the existence and amount of any trust asset or of any trust claim;
(6) distribution of any available trust assets; and
(7) such other relief as the court may deem necessary and proper.
A trust arising under Lien Law Article 3-A may be enforced by any trust claimant. This includes any person subrogated to the right of a trust beneficiary, such as an owner who pays a subcontractor directly. Under Lien Law § 77(2), an action to enforce a Lien Law Art. 3-A trust must be commenced no later than one year after completion of the improvement. Statutory trusts under Lien Law Art. 3-A are wholly independent of the Lien Law provisions concerning mechanic’s liens. A trust beneficiary need not file a lien in order to preserve his Lien Law Art. 3-A rights.
Because it imposes personal liability, Lien Law Article 3-A is most useful where the entity that owes the contractor money is judgment proof, but its principals are solvent. If the claim is adequately securitized by the real property, payment of money into court, or a lien discharge bond, the filing of a class action to enforce your Article 3-A rights may not be warranted.
However, where the direct contracting parties seek to use corporate shells to avoid payment,
Lien Law Art. 3-A provides powerful remedies to compel the payment of trust claimants.
As a subcontractor in the construction industry, it is essential to be aware of New York’s Lien Law Article 3-A, which establishes a statutory trust for funds received by a contractor or owner for a construction project. The critical purpose of this law is to ensure that contractors who have performed get payment!
It is also important to understand that an action to enforce a Lien Law Art. 3-A trust must be commenced no later than one year after completion of the improvement. This means that as
a subcontractor, you should act promptly if you have not received payment for your work or
materials. MGSN.Net interviewed Attorney Gerard McCabe to understand from his experience how the subcontractor sector can benefit from a 3-A audit.
Mr. McCabe, recounts,
“There have been several cases where the enforcement of Lien Law Article 3-A has played a crucial role in resolving disputes in the construction industry. One such case involved the audit of a general contractor’s books and records in connection with a Lien Law Art. 3-A claim by a subcontractor.
In this case, the general contractor had hired a subcontractor to perform electrical work on a construction project. The subcontractor had not been paid for its work and filed a Lien Law Art. 3-A claim seeking relief. As part of the claim, the subcontractor requested an audit of the general contractor’s books and records related to the project.
The audit revealed that the general contractor had diverted funds from the construction project for non-construction purposes. Specifically, the general contractor had used the funds to pay off personal debts and expenses unrelated to the project. This constituted an unlawful diversion of trust assets under Lien Law Art. 3-A.
As a result of the audit, the subcontractor was able to identify and recover trust assets in the hands of the general contractor. The court set aside the unauthorized payments made by the general contractor and awarded damages to the subcontractor for breach of trust.”
This case illustrates the power of Lien Law Article 3-A in protecting the rights of subcontractors and other trust beneficiaries in the construction industry. By establishing a statutory trust for construction project funds, this law provides a means for those who have
expended labor and materials to improve real property to receive payment. The ability to request an audit of a general contractor’s books and records can also help to identify any unlawful diversions of trust assets and hold responsible parties accountable for their actions.
In conclusion, the enforcement of Lien Law Article 3-A through an audit of a general contractor’s books and records played a critical role in settling a dispute between a subcontractor and a general contractor. This case highlights the importance of understanding and utilizing the remedies provided by this law to protect the rights of trust beneficiaries in the construction industry.
In summary, Lien Law Article 3-A provides powerful remedies to subcontractors who have not received payment for their work or materials. By understanding this law and acting promptly, if necessary, you can. protect your rights as a trust beneficiary and ensure that you receive payment for the services you have provided in a construction project.
