Contractor Held Liable for Diversion of Trust Funds

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 liability for the trust diversion.

In the recent case of Marcor Construction, Inc. v Bil-Ray Aluminum Siding of Queens, Inc., the court held that the contractor and its chief operating officer were liable for diversion of trust funds.

Bil-Ray retained Marcor as a subcontractor to perform roofing and siding work on homes owned by customers of Bil-Ray. The jobs were funded either directly by the homeowners or by a third-party lender who extended credit to the homeowners. Bil-Ray received payments either directly from its customers or from third party lenders on behalf of those homeowners. When Bil-Ray ceased operations, its chief operating officer used his discretion in determining which invoices submitted by Marcor and other subcontractors and suppliers would be paid.

Marcor sued Bil-Ray for the unpaid work it performed and moved for summary judgment, claiming that Bil-Ray diverted trust funds in its possession that should have been used to pay for work performed by Marcor as a subcontractor. The trust funds consisted of the payments received by Bil-Ray from the homeowners and third-party lenders. In support of its motion for summary judgment, Marcor submitted an affidavit from one of Bil-Ray\'s former employees attesting to the existence of the trust funds and Bil-Ray\'s (and its chief operating officer\'s) failure to apply the trust monies to pay Marcor the amount due for work performed under its subcontract.

The court granted Marcor\'s motion and held both Bil-Ray and its chief operating officer liable for the diversion. In so holding, the court credited the former employee\'s account of Bil-Ray\'s chief operating officer diverting trust funds from Marcor\'s project for non-trust purposes. The court also noted that Bil-Ray submitted no explanation other than stating that someone other than its chief executive officer was responsible. The court further held that Bil-Ray\'s chief operating officer was personally liable to Marcor because he knowingly and actually participated in the diversion.

The construction trust fund statute is a valuable tool for collecting money for work performed or materials supplied for a project. This 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.

If you would like more information regarding this topic please contact Alexander A. Miuccio at amiuccio@wbgllp.com or call (914) 607-6480