New York offers additional debt collection remedies and relief against owners, officers, and corporations using funds for their own purposes rather than paying subcontractors, vendors, and suppliers.
Monies owed to subcontractors, vendors, and suppliers in connection with the improvement of real property not paid over by a general contractor or subcontractor give rise to an action against the general contractor or subcontractor, its owners, and officers.
The trust fund provision of Article 3-A of the New York State Lien Law provides that monies received by a general contractor or subcontractor (representing payment for work performed by the subcontractor or goods supplied by the supplier in connection with an improvement of real property) belong to the subcontractor or supplier and must be paid over to them in a timely manner.
The general contractor or subcontractor is a trustee under Article 3-A. Black’s Law Dictionary defines a trustee as “One who, having legal title to property, holds it in trust for the benefit of another and owes a fiduciary duty to that beneficiary.”
Monies paid to the contractor or subcontractor for the work performed by tier subcontractor, supplier, or vendor for the improvement of real property are held in trust. The funds belong to the subcontractor or supplier not the contractor or subcontractor.
If the funds are used for any purpose other than intended, the use can be considered a diversion of funds. The subcontractor, supplier, or vendor is not required to file a mechanic’s lien to pursue a trust fund violation.
Subcontractors or suppliers can name the officers or owners personally if they divert funds, assets, of the trust for themselves. When a violation of the trust fund occurs, legal action should name the officers or owners individually in addition to demanding the balance owed from the corporation for work, labor, and services, or goods sold and delivered.
The summons and complaint filed with the court should, in addition to other allegations, state that:
- Funds that were to be paid to the contractor as trust funds as defined by the Lien Law to be held in trust and used only for the purpose of paying for the labor, materials, equipment, and services relating to a project.
- The claimant should identify themselves as a beneficiary of the trust funds received by the corporation and its owners or officers providing that there may be other beneficiaries to the fund.
- The corporation and its owners or officers made unauthorized, illegal, unjustified, and improper payments and diversions of the trust funds and applied them for purposes other than paying for labor, materials, equipmeñt and services furnished in connection with the project, notwithstanding sums due and owing to claimant/beneficiary of the trust.
- The violation was willful. The corporation and its officer and/or owner’s diversion, receipt, and/or use of such trust funds was with notice and knowledge of the source and origin thereof and with notice and knowledge of the claims of subcontractors, laborers, suppliers, and materialmen, which were entitled to payment out of such trust funds as statutory beneficiaries thereof.
- The action as described, was a violation of the law by diverting the funds, and the subcontractor, supply or vendor, the claimant, plaintiff in the case is entitled to judgment against the owner, officers, and company.
If you have a debt collection matter that needs resolving, contact Frank, Frank, Goldstein and Nager for a consultation. We have the experience that pays.
