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IN THIS LIEN LAW DISPUTE OVER PAYMENT PURSUANT TO CONSTRUCTION CONTRACTS, DEFENDANTS DID NOT DEMONSTRATE AS A MATTER OF LAW THAT THE RESTORATION OF IMPROPERLY DIVERTED TRUST ASSETS WITH NON-TRUST ASSETS LIMITED DEFENDANTS’ DAMAGES (FOURTH DEPT).

The Fourth Department, reversing (modifying) Supreme Court in this Lien-Law construction-contract action, over a dissent, determined defendants did not demonstrate as a matter of law that the improper diversion of trust assets was cured by the restoration of trust assets with non-trust assets:

“[T]he primary purpose of [Lien Law] article 3-A and its predecessors . . . [is] to ensure that those who have directly expended labor and materials to improve real property [or a public improvement] at the direction of the owner or a general contractor receive payment for the work actually performed” … . “Use of trust assets for any purpose other than the expenditures authorized in Lien Law § 71 before all trust claims have been paid or discharged constitutes an improper diversion of trust assets, regardless of the propriety of the trustee’s intentions” … . Under Lien Law article 3-A, a trust beneficiary may maintain an action “to recover trust assets from anyone to whom they have been diverted with notice of their trust status” … . * * *

… [T]he court erred in granting defendants’ motion in part by limiting the potential damages in the diversion causes of action to a maximum of $104,205.99 based on Top Capital’s [defendant’s] alleged restoration of trust assets through payments made with non-trust assets … . Plaintiffs allege that approximately $1.4 million in trust assets was improperly diverted by defendants. The court, in limiting the potential recovery on the diversion causes of action, credited not just Top Capital but all defendants for the approximately $1.3 million Top Capital paid DiMarco [plaintiff] from non-trust assets after the trust fund was depleted. That was error because defendants failed to establish their entitlement to a restoration defense as a matter of law. Contrary to defendants’ assertion, the Court of Appeals has rejected the argument that a defendant can cure an improper diversion of trust assets, and therefore avoid liability for that diversion, by a subsequent payment from non-trust assets … . DiMarco Constructors, LLC v Top Capital of N.Y. Brockport, LLC, 2021 NY Slip Op 02680, Fourth Dept 4-30-21

 

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