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Bank Was Not a Statutory Lien Law Trustee; Question of Fact Whether Bank Was Aware Funds Were Diverted Lien Law Trust Funds

Plaintiff, a subcontractor in an environmental remediation project run by defendant AAA Environmental, sued on behalf of similarly situated subcontractors alleging that the arrangement AAA had with First Niagara Bank violated Lien Law article 3-A.  By that arrangement, each night funds from AAA’s operational account would be transferred to AAA’s line of credit account to reduce the balance. If the amount to be charged to AAA’s operational account exceeded the funds available, funds would be automatically transferred from the line of credit account to the operational account. Supreme Court determined the arrangement violated the Lien Law finding that Niagara Bank had notice the funds were diverted Lien Law trust funds and the bank was not a holder in due course. The Fourth Department disagreed and held Niagara Bank is not a Lien Law statutory trustee and there was a question of fact whether Niagara Bank had notice it was receiving diverted Lien Law trust funds:

First Niagara is not a Lien Law statutory trustee under the facts of this case and thus cannot be held liable for a violation of the Lien Law on that basis. “A lender is not a statutory trustee because ‘[n]o one other than an owner, contractor, or subcontractor is designated as a prospective trustee in article 3-A [of the Lien Law]’ ” … .  Although the Court of Appeals has held that a lender may become a statutory trustee when a contractor assigns its right of payment from the owner to the lender as security for a loan and the owner makes payments directly to the lender until the contractor’s debt is repaid …, First Niagara received no such assignment here.

…[T]he court erred in determining as a matter of law that it had actual notice that it was receiving diverted Lien Law trust funds, and thus could be held liable under Lien Law § 72 (1).  …

…[T]he court erred in applying a constructive notice standard in determining that First Niagara was not a holder in due course, and thus could be liable under Lien Law § 72 (1).  As the Court of Appeals noted in I-T-E Imperial Corp.—Empire Div. v Bankers Trust Co. (51 NY2d 811), “[w]ith the adoption . . . of the Uniform Commercial Code, the concept of notice under [UCC] article 3 (and by analogy under article 4 as well . . . ) has, as we have held in Chemical Bank of Rochester v Haskell (51 NY2d 85), been changed from an objective to a subjective standard, and that change must be deemed to have amended the Lien Law as well” (id. at 813-814…).

Furthermore, “[t]he purpose of UCC 3-304 (7)—unique to New York and Virginia—[is] to require that questions of notice . . . be determined by a subjective test of actual knowledge rather than an objective test which might involve constructive knowledge” … . Price Trucking Corp… v AAA Environmental Inc…m 1088, 4th Dept 11-8-13

 

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