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 assets of a statutory trust. The recipient, as trustee must apply the funds to the costs of improvement before diverting them to 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. The purpose of the statute is to ensure that those 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 participate in a diversion of trust assets to a non-trust purpose is personally liable to statutory trust beneficiaries. 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 an adverse contracting party lacks assets, 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 additional complication of a class action may not be warranted. However, where the direct contracting parties seeks to use corporate shells to avoid payment, Lien Law Art. 3-A provides powerful remedies to compel the payment of trust claimants.
About Author
Sophie Wang graduated from the University of California, Berkeley School of Law in 2013, where she served as an editor of the Berkeley Business Law Journal. Read more.
Questions? Contact us today.
Related Articles
