Article 3A of the New York Lien Law encompasses a set of lesser-known yet immensely influential regulations governing the handling of funds in construction projects throughout the state. These regulations stipulate that any funds received for construction purposes must be utilized solely for payment to contractors and suppliers who are owed money, before being allocated for any other use. Article 3A also imposes stringent guidelines on the recipients of these funds, known as the “trustees” of the Lien Trust Funds, requiring them to ensure that all beneficiaries are paid before diverting the funds for alternative purposes.

The individuals entitled to the funds are referred to as the “beneficiaries” of the Lien Trust Funds. Under the Lien Law, beneficiaries possess various special rights, including the ability to examine the trustee’s books and records (often the general contractor’s) and the authority to hold the corporate principals of the trustee personally accountable for any misappropriation of trust funds. In the event of trust fund diversion, the beneficiaries retain the right to initiate a lawsuit to trace and recover the funds from the trustee. New York law mandates that such actions to recover diverted trust funds be filed as class actions, wherein the initiating beneficiary represents all beneficiaries of the trust fund, and the recovered funds are distributed among them. Notably, Article 3A allows beneficiaries involved in class actions to seek reimbursement of their attorneys’ fees from the trustees, and potentially obtain punitive damages. This approach benefits both large and small claimants as it enables them to pool their resources and collectively pursue the claim against the trustee, thereby reducing individual pursuit costs.

Trust fund diversion litigation often serves as a means for beneficiaries to recover funds that might otherwise be unrecoverable. For instance, if the trustee is a contractor who has gone out of business, and the owner has already paid the contractor, thus extinguishing any mechanic’s lien rights, the beneficiaries’ most viable option for recovery often involves pursuing the corporate principals for trust fund diversion. Notably, in addition to personal liability for diverting lien law trust funds, trust fund diversion liability cannot be discharged through bankruptcy.

At Kushnick | Pallaci, PLLC, our attorneys possess extensive experience in trust fund diversion litigation, having successfully handled claims from the initial stages through to judgment and collection. If you are owed money on a construction project in New York State, we encourage you to reach out to us to discuss your rights and explore how we may assist you in recovering the funds owed to you.