Lien Law Art. 3-A requires contractors and owners of construction projects financed through bank loans to hold funds in trust for the benefit of contractors and workers performing the work. If Lien Law Art. 3-A trust fund are applied to a non-trust purposed before all trust claims are satisfied, anyone involved in the trust fund diversion can be subject to individual liability. This article examines the requirements and procedures under New York Lien Law § 76 for a Lien Law Art. 3-A trust beneficiary to examine books and records or receive a verified statement from the trustee, the remedies available if the trustee fails to comply, and how courts have interpreted these provisions.
I. Defining the Lien Law Art. 3-A Trust, Trustee and Beneficiary
Trustee: In the scope of Lien Law § 76, the trustee is typically the project owner or contractor tasked with the fiduciary duty of managing the trust funds. Contractors are always required to hold payments in trust under Lien Law Art. 3-A, but owners are only subject to this requirement where the work is funded through a construction loan. These Lien Law Art. 3-A trust funds must be applied to covering the costs associated with labor, materials, and services rendered for the construction project. The trustee must ensure that these funds are disbursed for this purpose before they may be applied to any non-trust purpose, maintaining the trust's integrity for the project's duration.
Beneficiary: The beneficiary encompasses a wide array of stakeholders in the construction process, including but not limited to contractors, subcontractors, workers, and suppliers. These entities and individuals hold trust claims, establishing their legal right to a portion of the trust funds as compensation for their contributions to the construction project. The law recognizes their vested interest and provides them with the tools to ensure that they are justly compensated from the trust funds.
II. Request for Examination or Verified Statement
Under Lien Law § 76, a beneficiary holding a trust claim is entitled to examine the trustee's books and records relating to the trust and make copies, or to receive a verified statement of the entries relating to the trust. Matter of Bette & Cring, LLC v Brandle Meadows, LLC, 81 A.D.3d 1152 (3rd Dept., 2011), NY Professional Drywall of OC, Inc. v. Rivergate Dev., LLC, 100 A.D.3d 216 (3rd Dept., 2012). To do so, the beneficiary must serve a written request containing the name and address of the beneficiary, the name and address of the trustee, the location of the improvement, and the amount of the trust claim. The examination may occur within 10 days at a designated time and place. If the beneficiary requests a verified statement, the trustee must provide it within 10 days. The trustee can apply to the court to vacate the beneficiary's request.
III. Response to a Demand for a Verified Statement
Upon receipt of such a demand, the trustee is mandated to facilitate the examination and copying of the relevant records within ten days at a designated location or, alternatively, must provide a verified statement within the same timeframe. This process ensures an unprecedented level of transparency and accountability, allowing beneficiaries to verify that the funds are being managed and utilized as intended, thereby safeguarding their interests and entitlements. Failure to comply with a demand for a verified statement of lien law trust funds creates a presumption that the trustee has diverted trust funds to non-trust purposes.
IV. Court Intervention and Enforcement
If the trustee fails or refuses to comply with the beneficiary's request, the beneficiary may apply to the court for an order directing the trustee to comply.
Courts have strictly interpreted the procedural requirements under § 76. For example, in Ciavarella v. People, 36 Misc. 2d 1083, 1085 (N.Y. Sup. Ct. 1962), the court denied a motion under § 76 because the moving party failed to serve a request as required by the statute. Conversely, In re Silverstein, 30 Misc. 2d 510 (N.Y. Sup. Ct. 1961) granted a contractor's § 76 application, ordering the owner to comply with the contractor's request for a statement.
Lien Law § 76 provides the primary remedy for beneficiaries to ascertain the status of trust assets. If a trustee disputes a claim, § 76 enables the beneficiary to examine the books or obtain a statement to determine if funds were diverted, as seen in cases like Frontier Excavating, Inc. v. Sovereign Constr. Co., 30 A.D.2d 487 (4th Dept., 1968). The section is construed liberally to serve the purpose of Lien Law Article 3-A in protecting beneficiaries' right to payment from improvement funds. However, beneficiaries must strictly adhere to § 76's procedural requirements to obtain relief.
Conclusion
New York Lien Law § 76 enhances the construction industry's financial integrity by clearly defining trustee and beneficiary roles, and instituting transparency and accountability mechanisms. This law safeguards the rights of workers, suppliers, and subcontractors, ensuring construction projects are managed fairly and ethically. If you have been served with a Lien Law § 76 demand, or if you are a trust beneficiary and wish to learn how project trust funds have been applied, contact Sophie Wang or any of the attorneys at Muchmore & Associates PLLC for an initial consultation.
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. Sophie graduated summa cum laude with a Bachelor of Laws from East China School of Political Science and Law. Read more.
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