Lien Law Trusts can be more powerful than a mechanic’s lien and can help you get paid when you take on a construction project. When a contractor doesn’t get paid, one of the first things they can do is get a mechanic’s lien in place. A lien can be a valuable tool to enforce the right to get paid. However, a mechanic’s lien can come with a minefield of problems and expenses. An alternative for companies to consider is Lien Law Trusts.
In common law, a trust is created when one party seeks to protect assets. A parent might set up a trust for their child. The parent is the grantor and the child is the beneficiary. The parent might designate an attorney, bank or some other representative to manage the trust.
A trustee is charged with legal responsibility for taking care of the beneficiary, which is a duty of trust and fidelity. Their motive must always be in the best interests of the beneficiary, not themselves. If they take money from the trust, they are responsible, and in some cases can be charged with larceny under the Penal Law.
This concept of a trust between a trustee and beneficiary applies to construction projects in New York. In NY, a contractor that receives payment on a project becomes trustee of those funds. As a trustee, the contractor must apply the trust fund assets for the trust purposes before the contractor applies the money to its own overhead or profit. Trust purposes include payment of subcontractors, vendors, and labor. If the trustee/contractor uses trust funds for some purpose other than the payment of trust fund obligations, then the contractor may have diverted trust funds.
A diversion of trust funds can carry serious legal implications, like personal liability for the individuals that were knowingly diverting trust funds. The corporate form does not protect these individuals from personal liability. Strong public policy reasons encourage the liability of corporate principals and officers who knowingly and willfully participate in the diversion. They have taken money that belongs to another and spent it in violation of the trust. A diversion of trust assets can be a criminal larceny. A diversion of trust assets can be criminal because the diverting trustee has taken funds which are not its property and applied them for some purpose other than those defined by statute.
The New York trust fund statutes permit an unpaid beneficiary to demand a complete accounting from its trustee. The accounting must be verified under oath, and provide a detailed analysis of all trust fund assets received by the general contractor. The accounting will include a detailed check-by-check analysis of all payments made with trust fund assets. They require that each check be identified, together with the check number, date, payee and payee’s address.
Discovery in trust fund litigation should include a complete report from the contractor’s cost accounting system. These are programs where contractors enter all costs assessed against a project. Cost accounting programs will show labor dollars paid, materials purchased and application of project funds to overhead. Overhead may include a contractor’s general conditions such as the project site trailer, site storage facilities, vehicles dedicated to the site and project manager. Remember that a trustee must first apply trust funds for payment of the beneficiaries. A trustee which takes trust assets to pay its overhead or profit may be diverting trust assets. The information contained in a complete job cost accounting report can be beneficial to the subcontractor or vendor.
Whenever a subcontractor or vendor is unpaid, they should consider utilizing the trust fund statute.
The information provided in this article is not intended to serve as specific legal advice for any particular situation. Competent legal and experienced counsel should be consulted.