By: Alexander A. Miuccio Thomas H. Welby Published: March 2008

Trust Funds Assure Payment to Subs and Suppliers

New York’s construction trust fund statutes are designed to ensure payment adownsfor labor and material furnished to a particular project. The statutes provide that monies received for a construction project by an owner, contractor or subcontractor are trust funds held by them as trustees for payment to those performing work or furnishing materials for the project. The statutes were intended to prevent owners, contractors and subcontractors from using the trust monies to pay creditors on other projects or keeping the monies for themselves.

In the recent case of Matter of SN Contracting, Inc. v. Bank of New York Mellon Corporation, a judgment creditor of a contractor sought to attach the contractor’s bank accounts for the purpose of satisfying the judgment. The bank accounts contained trust monies for the benefit of subcontractors and material suppliers.

Background

In May 2005 the Bank of New York obtained a judgment against SN Contracting, Inc. and its president, Solaman Mia, in the amount of $111,488.22. In July 2007, seeking to enforce the judgment, the Bank of New York served a restraining notice upon Washington Mutual Bank. Two Washington Mutual accounts were attached, one in the name of the contractor, and the other in the name of the corporate president, Solaman Mia. The total deposits in the two bank accounts was $72,630.87.

The contractor, through its attorney, requested that that the Bank of New York voluntarily release the attachment. The contractor claimed that since the two bank accounts held trust assets relating to two specific construction projects, the monies could not be used to satisfy the judgment obtained by the Bank of New York. According to the contractor, monies were owed to subcontractors and suppliers on both projects. The contractor stated that the restraining notice resulted in a refusal of Washington Mutual to honor checks drawn on the accounts, and that as a result, the contractor was unable to pay its subcontractors and suppliers on both jobs. When the Bank of New York refused to voluntarily release the attachment, the contractor sued for an order canceling and vacating the restraining notice and releasing the attachment.

Decision

The Court noted that Article 3-A of the Lien Law creates trust funds of certain construction payments or funds to ensure payment to subcontractors and suppliers. The Court further noted that the statutory provisions were intended to ensure that funds obtained as payment for the performance of construction contracts are in fact used to pay the cost of the labor and material furnished on those jobs. The Court went on to state that “the contractor must hold those trust assets for certain expenditures arising out of the improvement it incurred in the performance of its contract, including the payment of claims of subcontractors.” In this case, the Court determined that the subcontractors’ claims for work performed were trust claims and that the subcontractors were designated “beneficiaries” of the contractor’s “trust” under the Lien Law.

In determining whether the $72,630.87 contained in the bank accounts could be used to satisfy the judgment, the Court evaluated whether the monies were indeed trust funds. The Court noted that the contractor had received payments totaling $73,000.00 in connection with the two projects, and that the contractor had paid $32,600.00 to subcontractors and suppliers in connection with the two projects. Since $73,000.00 in trust assets were received and $32,600.00 of those trust assets were paid out, the Court held that the balance, i.e. $40,400.00, of the attached funds were trust assets which must be paid to subcontractors and suppliers on the two projects. The Court held that the remaining $32,230.87 in the two bank accounts were non-trust assets that could be levied upon by the Bank of New York and may be applied towards satisfying its May 2005 judgment in the amount of $111,488.22.

Comment

The construction trust-fund statutes are a valuable tool for collecting money for labor performed or materials supplied. This may be the only source of recovery where mechanic’s lien rights are not available or the claimant is not protected under a labor and material payment bond. It is only fair that job claimants, who have provided the wherewithal that made possible the construction of the project should be the beneficiaries of the “trust funds” received by the owner, contractor or subcontractor.

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