By: Alexander A. Miuccio Gregory J. Spaun Published: October 2017

Contractor Directed to Account to Sub for All Monies Received and Spent on a Project

New York’s construction trust-fund statutes provide that all payments to a contractor on a project are held as trust funds to be used to pay subcontractors, material suppliers and laborers. The trust fund statutes are intended to prevent contractors from paying creditors on other projects or keeping the monies for themselves, rather than paying for the costs of construction on the project. If the contractor diverts such funds to pay other non-project creditors, personal—and even criminal—liability can be imposed for the trust fund diversion.

Section 76(1) of the Lien Law provides for beneficiaries of the trust, such as unpaid subcontractors, to demand a verified statement from the contractor, itemizing all monies that the contractor received and spent on the project. If the verified statement fails to fully account for the funds on the project, there is a statutory presumption of a wrongful diversion of trust assets, thereby exposing the contractor to liability for the unpaid amount owed to the subcontractor.

In the recent case of Onekey, LLC v Knight Harte Construction, Inc., the court addressed the adequacy of a contractor’s verified statement, as required by the statute.

Background

Onekey was the general contractor for a construction project on East 61st Street in New York City, and Knight Harte was a subcontractor retained to furnish and install the millwork and carpentry work. The base contract sum was $253,050, which was increased to $467,842 as a result of change orders. A dispute arose over Onekey’s payments to Knight Harte, with Onekey claiming that Knight Harte completed less than 56% of its work under the contract and, having been paid $237,863, Knight Harte was actually overpaid by $2,311. Knight Harte, on the other hand, claimed that it had completed its work at the project, and it was owed $235,082.

Knight Harte filed a mechanic’s lien on the project seeking the $235,082 it claimed was owed. It served a demand under Lien Law §76(1) for a verified statement on Onekey “setting forth the entries contained in Onekey, LLC’s books and records” with respect to the trust funds received by Onekey in connection with the project. In response, Onekey sent Knight Harte a single page spreadsheet setting forth the items from Knight Harte’s schedule of values, and the amounts paid by Onekey to Knight Harte for these items. Thereafter, Knight Harte requested that the court direct Onekey to provide a proper verified statement of trust, arguing that it was entitled to a detailed accounting covering all of the trust funds received from the owner, not simply records relating to Knight Harte. Onekey argued in opposition that inasmuch as it had obtained a mechanic’s lien discharge bond that would secure payment to Knight Harte, the primary purpose of the trust fund statutes—to assure payment to subcontractors—had been met. Therefore, according to Onekey, there was no longer a need to provide Knight Harte with a more detailed verified statement.

Decision

The court determined that the verified statement provided by Onekey was inadequate because it only related to Knight Harte, which is only a portion of the required trust. It did not contain the statutorily required entries regarding what trust assets were received, what trust payments were made by Onekey, or the specific information underlying each trust transaction. The spreadsheet furnished by Onekey was also deficient because it did not set forth “the names, addresses, dates of payment or receipt, dates sums become due or are earned or become payable, conditions of payment, nature of claims paid, whether by check or cash, or other relevant details, as required by the statute”. The court directed Onekey to provide a further verified statement of all trust assets it received in compliance with the trust fund statute.

Comment

Construction trust fund statutes can be a valuable tool for unpaid subcontractors and material suppliers. They impose fiduciary trustee duties upon a contractor to use the funds it receives to pay project subcontractors, material suppliers and laborers. A right to recover under the construction trust fund statute for diversion of trust funds may be the only source of recovery where there are no mechanic’s lien rights or where there is no protection under a labor and material payment bond. 

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