By: WBG, LLP Published: August 2011

Contractor May Be Personally Liable for Diversion of Trust Funds

The trust fund provisions of New York’s Lien Law provide that monies received by an owner, such as a building loan, and monies received by a contractor or subcontractor are trust funds to be held by them as trustees for payment to those performing work and supplying materials on their behalf for the project. The statute is intended to prevent owners, contractors and subcontractors from diverting trust monies from a project to pay creditors on other projects or keeping the monies for themselves.

Where there has been an improper diversion of trust monies, a corporation’s officers may be personally liable for the unpaid project debts of the corporation, even though the officer was acting for the corporation. In the recent case of Ippolito v. TJC Development, LLC, the appellate court ruled on whether a corporate officer could be personally liable for diversion of trust funds.


TJC Development, LLC contracted to substantially renovate a residence located in Babylon, New York. A dispute arose between the contractor and the homeowners, and the homeowners ultimately terminated the contractor. In addition to claims against the contractor for defective work and performance, the homeowners also sued the contractor and the contractor’s principals for trust fund diversion under the Lien Law. According to the homeowners, the contractor received payments from the homeowners for work performed, but the contractor failed and refused to pay the project’s subcontractors and suppliers. Since the contractor’s principals directed the distribution of funds received from the homeowners, the homeowners argued that the principals were personally liable for trust fund diversion.

The contractor argued that the homeowners’ trust fund claims were improper and should be dismissed. According to the contractor, its principals were not personally liable since the homeowners contracted with a company and made payments to that company, and therefore only the company was a trustee of funds received by the homeowners. In addition, the contractor argued that the homeowners did not have any right to claim against the contractor for trust fund diversion. Rather, according to the contractor, such a claim would only belong to the contractor’s subcontractors and suppliers, not the homeowners.

The contractor made a motion for summary judgment, requesting that the trust fund diversion claims against it and its principals be dismissed. The trial court ruled in favor of the contractor and its principals. The homeowners appealed.


The appellate court reversed, ruling in favor of the homeowners. In its decision, the court stated that Article 3-A of the Lien Law creates trust funds out of certain construction payments or funds to assure payment to subcontractors, suppliers, architects, engineers and laborers. The purpose of Article 3-A is to ensure that those who actually perform the work and furnish materials are paid. The court noted that upon receipt of payments from the owner, the contractor is required to pay its subcontractors and suppliers for work performed. According to the court, the funds remain the property of the owners until the proper distribution of the trust funds by the contractor. Accordingly, the court held that the homeowners had the right to maintain trust fund diversion claims against a contractor who diverted funds.

In addition, the court noted that officers and directors of a company are guilty of the crime of larceny if they divert trust funds. Since a company’s officers and directors can be charged criminally, the court reasoned that they may also be held personally liable for the money damages caused by their diversion of trust funds. Accordingly, the court held that the homeowners could claim against the contractor and its principals, personally, for misappropriation of the trust funds.


The construction trust fund statute is 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 have expired, the claimant is not protected under a labor and material payment bond or where the project debtor is bankrupt. Personal liability of corporate officers for diversion of trust funds is not dischargeable in bankruptcy. It is only fair that project claimants, who have provided the wherewithal that made possible the construction of the project, should be allowed to sue corporate officers for personal liability where they direct trust funds for purposes other than paying the claims of unpaid material suppliers or subcontractors on that project.

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