Trust Fund Diversion
Similar, although not completely identical, to attorney escrow accounts, general contractors handling funds received by owners in connection with work performed by a subcontractor are (in the eyes of the law) holding onto “trust funds.” What that means, in simple terms, is that the general contractor is holding onto money that belongs to someone else (i.e., other people’s property). Generally, when you take someone else’s money and use it on yourself or for third parties (other than those the funds are to be paid to), the law generally considers that theft, which is both unlawful and criminal.
Trust fund diversion litigation is not as clean and quick as other kinds of construction litigation. The claim is essentially one member of the class of beneficiaries bringing forth a complaint on behalf of the entire class of beneficiaries. See e.g. Access Plumbing Corp. v. 1184 Brighton Dev., LLC, 2011 NY Slip Op 50599(U) (Kings County, 2011). Due to the procedural requirements in properly commencing these kinds of actions, it is usually considered a last resort “nuclear” option. It is common for the local District Attorney’s office to get involved, as the State is interested in prosecuting the criminal aspect of the underlying facts (e.g., Polo Electric, Corp. v. McGovern & Company, LLC, Index No. 653243/2016 (New York County, 2016)).
Practice Commentary: for general contractors, especially outside of Manhattan, the common pitfall seems to be failure to comply with Section 76 of the Lien Law. Compliance must be both accurate, complete, and timely. Failure with respect to any shortcoming in the response to the subcontractor(s) can have both civil and criminal consequences. It’s important to recognize that Section 76 demands are not negotiable and cannot simply be delayed or ignored.
If you are a contractor, subcontractor, or any lower tier subcontractor or material-man, and you believe your dispute over money concerns “trust funds” or money specifically allocated and paid by the owner on account of your work, give us a call for a confidential and free consultation.