In most business disputes, liability stays at the corporate level. Construction payment disputes in New York are different. Under Article 3-A of the New York Lien Law, construction trust funds create personal liability for individual officers and agents who divert trust assets. This is one of the most powerful — and most frequently misunderstood — tools in New York construction law.
At Travis & DeBlase PLLC, our construction litigation practice regularly handles trust fund diversion claims on both sides. Understanding how these claims work is essential for anyone involved in New York construction projects.
How Article 3-A Trust Funds Work
New York Lien Law Article 3-A designates certain construction funds as trust assets. When an owner pays a general contractor, those funds become trust assets held for the benefit of subcontractors and suppliers who performed work on the project. Similarly, when a general contractor pays a subcontractor, those funds become trust assets for the sub-subcontractors and material suppliers further down the chain. The trustee — typically the contractor or subcontractor receiving the funds — has a statutory obligation to use those funds to pay the trust beneficiaries before applying them to other purposes.
When Diversion Becomes Personal
The critical feature of Article 3-A is that trust fund obligations are not limited to the corporate entity. Individual officers, directors, and agents who participate in or authorize the diversion of trust funds face personal liability. This means that a contractor who uses funds earmarked for subcontractors to pay unrelated business expenses, cover overhead on other projects, or make distributions to owners may be personally liable for the diverted amounts — even if the company later goes bankrupt.
New York courts have interpreted the “agent” designation broadly. Anyone who exercises authority over the trust funds — including bookkeepers and project managers in some circumstances — may face personal exposure.
Practical Compliance Steps
For contractors and subcontractors handling trust funds, compliance requires maintaining separate accounts for trust funds (or at minimum, meticulous accounting records that track trust fund balances), paying trust beneficiaries before applying funds to overhead or profit, maintaining detailed records of all fund receipts and disbursements, and ensuring that all individuals with authority over funds understand their trust obligations. Failure to maintain adequate books and records creates a presumption of diversion under New York law, shifting the burden to the trustee to prove compliance.
For Unpaid Subcontractors and Suppliers
If you are a subcontractor or supplier who has not been paid on a New York construction project, trust fund diversion claims provide a powerful avenue for recovery that goes beyond the corporate entity. Unlike standard breach of contract claims, trust fund claims can reach the personal assets of the individuals who controlled the funds. When combined with mechanic’s lien rights, trust fund claims create multiple layers of protection for unpaid construction participants.
Facing a construction payment dispute? Contact Travis & DeBlase PLLC at (212) 248-2120 or schedule a consultation to discuss your options with our construction litigation team.