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Verified Statement Demonstrated Site Contractor’s Improper Use of Funds Held in Trust for the Payment of Subcontractors—Plaintiff Subcontractor Entitled to Summary Judgment on Liability Re: Subcontractor’s Mechanic’s Lien

The Third Department affirmed Supreme Court’s grant of summary judgment to plaintiff subcontractor in plaintiff’s action against the site contractor seeking payment for completed work. Plaintiff alleged it was underpaid for its work and filed a mechanic’s lien. The general contractor withheld 1 1/2 times the amount of the lien from its payment to the site contractor.  The plaintiff demanded a verified statement from the site contractor (showing the receipt and disbursement of funds held by the site contractor in trust for subcontractors) pursuant to Lien Law 76. The verified statement submitted by the site contractor indicated a multi-million dollar discrepancy between the amount it received and the amounts paid out. Because of the discrepancy, the site contractor was found to have used the funds it held in trust for subcontractors for purposes other than the trust. Plaintiff was therefore entitled to summary judgment on liability:

Pursuant to Lien Law article 3-A, owners, contractors and subcontractors are required to maintain funds in trust in order to “provide[] protection to certain parties involved in the improvement of real property, ensuring that they will be properly compensated for their services” … . Specifically, and insofar as is relevant here, “[t]he funds received by a contractor or subcontractor. . . shall be a separate trust and the contractor or subcontractor shall be the trustee thereof” (Lien Law § 70 [2]). A trustee, in turn, is required to, among other things, maintain books or records with respect to each trust, detailing the trust assets receivable, trust accounts payable, trust funds received, trust payments made with trust assets and transfers in repayment of or to secure advances made pursuant to a notice of lending … . A beneficiary of such a trust is entitled to, among other things, “receive a verified statement setting forth the entries with respect to the trust contained in such books or records” … . “Any use of the trust funds other than the payment of claims under the contract . . . is an improper diversion of trust assets” …, and the trustee’s failure to keep the statutorily required books and records “shall be presumptive evidence that the trustee has applied or consented to the application of trust funds . . . for purposes other than a purpose of the trust” (Lien Law § 75 [4]). Anthony DeMarco & Sons Nursery, LLC v Maxim Constr. Serv. Corp., 2015 NY Slip Op 06394, 3rd Dept 7-30-15

 

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