Article 3A of the Lien Law provides that monies received by a contractor or subcontractor for a construction project are trust funds to be held by them as trustees for payment to those performing work or supplying materials for the project. The statute is intended to prevent owners, contractors and subcontractors from either using the trust monies to pay creditors on other projects or keeping the monies for themselves, rather than paying for the costs of construction on the project. If the trust funds available for a project are diverted from that trust, the owner, contractor or subcontractor may incur personal liability for the trust fund diversion.
Section 76 of the Lien Law allows beneficiaries of the Lien Law, such as unpaid contractors or subcontractors, to demand a verified statement of the trust, itemizing all monies it has received and all monies it has spent on the project. If the contractor’s verified statement fails to fully account for the funds it received 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 of the subcontractor’s claim.
In the recent case of Anthony DeMarco & Sons Nursery, LLC v. Maxim Construction Service Corporation, the contractor, to his peril, faced the consequences of submitting a deficient verified statement under Section 76 of the Lien Law.
LeChase Construction Services, LLC was the general contractor for a construction project undertaken by the Dormitory Authority of the State of New York at SUNY Binghamton. Maxim Construction Service Corporation was the site contractor. Maxim entered into a subcontract with Anthony DeMarco & Sons Nursery, LLC, whereby DeMarco was to provide certain landscaping services for the project. Although Maxim paid the subcontractor, DeMarco claimed that it was owed additional monies and filed a mechanic’s lien to secure these funds. In response, LeChase withheld a sum from Maxim representing 1½ times the amount of DeMarco’s lien.
Subsequent to the filing of its lien, DeMarco demanded that Maxim furnish a verified statement of trust under Section 76 of the Lien Law. Maxim ignored the demand, so DeMarco obtained a court order compelling Maxim to provide the statement. When Maxim ultimately supplied the verified statement, DeMarco deemed it to be deficient and thereafter moved to compel Maxim to fully respond to its demand. The court agreed with DeMarco that Maxim’s statement was deficient, but rather than just compel Maxim to provide an adequate statement, it granted DeMarco summary judgment against Maxim, finding that Maxim was liable for the diversion of statutory trust funds.
On appeal, the appellate court agreed with the trial court that the contractor’s verified statement failed to set forth the dates and amounts of the trust assets receivable, trust accounts payable, trust funds received, or a sufficiently detailed breakdown of the total amount of payments made with trust funds, all of which are required under Section 75 of the Lien Law.
When reviewing the statement provided by the site contractor, it was clear that there was a $4 million gap between the monies Maxim reported receiving from the general contractor LeChase, and what Maxim paid to the various trades on the project. While a portion of this gap may have been attributable to direct labor and equipment costs on the project paid by Maxim, a sizeable sum remained unaccounted for. Accordingly, because the data contained in the verified statement lacked the level of detail required by the statute, and because Maxim failed to provide a complete accounting of its received trust assets, as was required, the appellate court affirmed the trial court’s finding that the statement of account was deficient. Further, because Maxim had a sufficient opportunity to provide a proper itemized statement, and because Maxim provided no reasonable explanation for its failure to do so, the appellate court held that Maxim failed to overcome the statutory presumption of an improper diversion of trust assets. Accordingly, the appellate court held that the trial court properly awarded summary judgment to DeMarco, rather than giving Maxim another opportunity to remedy the deficiencies in its verified statement.
This case serves as a reminder to contractors of the importance of keeping proper records of trust funds received and spent on a construction project and, more importantly, the severe consequences that can befall a contractor who does not do so. A recovery for diverted trust funds may be the only source of recovery where mechanic’s lien rights have expired and the claimant is not protected under a labor and material payment bond. Personal liability of corporate officers for diversion of trusts funds is not dischargeable in bankruptcy and, in extreme cases, could result in criminal prosecution for larceny.
It is only fair that project claimants who have provided the labor and material that made possible the construction of the project should be allowed to sue corporate officers for personal liability where they divert trust funds for purposes other than paying the claims of unpaid contractors, subcontractors or material suppliers on that project.