Interesting Twist on Lien Law Trust Funds
Print Article- Posted on: Dec 19 2025
In a previous BLOG article, “Real Property Owners and Contractors Should be Aware of the Trust Fund Provisions of New York’s Lien Law,” we discussed Article 3-A of New York’s Lien Law, much of which is reiterated here.
Article 3-A of New York’s Lien Law establishes a system of trusts to ensure that certain individuals or entities that contributed services, labor, and/or materials to a construction project for the improvement of real property are paid for their efforts. See, e.g., Aspro Mech. Contracting, Inc. v. Fleet Bank, N.A., 1 N.Y.3d 324, 328 (2004); Chase Lincoln First Bank N.A. v. New York State Elec. & Gas Corp., 182 A.D.2d 906 (3rd Dep’t 1992); Park East Const’n Corp. v. Uliano, 233 A.D.3d 888, 889 (2nd Dep’t 2024).
The Lien Law generally recognizes two types of trusts. Lien Law § 71; see also Dick’s Concrete Co. Inc. v. K. Hovnanian at Monroe II, Inc., 20 Misc.3d 1145(A) (Sup. Ct. Orange Co. 2008). The first is the Owner Trust, of which the owner is the trustee. The assets of the Owner Trust “shall be held and applied to the cost of improvement.” Lien Law §71(1). Claimants under an Owner’s Trust include contractors, subcontractors, architects, engineers, surveyors, laborers, and materialmen. Lien Law §71(3)(a). In general, the assets of an Owner Trust consist of funds received by an owner for the improvement of real property. Most frequently, trust assets in this category consist of construction loan proceeds. Lien Law § 70(5).
Second is the Contractor/Subcontractor Trust, of which the contractor or subcontractor is the trustee. The assets of the Contractor/Subcontractor Trust must be used for the payment of certain obligations resulting from the improvement of real property. (Lien Law § 71(2).) Most frequently, trust assets in this category consist of the payments received by the contractor from the owner (in the case of a contractor trust) or received by a subcontractor from a contractor (in the case of a subcontractor trust) pursuant to the subject construction contract. Lien Law § 70(5).
Any funds that are deemed to be trust fund assets under the Lien Law can only be disbursed to appropriate trust fund beneficiaries pursuant to the trust fund provisions of the Lien Law. DiMarco Constructors, LLC v. Top Capital of New York Brockport, LLC, 193 A.D.3d 1375, 1376 (4th Dep’t 2021) (citations omitted). A typical scenario illustrating the need for the protections afforded by the trust fund provisions of the Lien Law is where a contractor receives payment from an owner on a current project, but uses those funds to pay a subcontractor on a prior project. Although this happens routinely, such payments are prohibited under the Lien Law and could result in the contractor’s failure to pay proper trust fund beneficiaries working on the current project.
The law is clear that the assets of a Lien Law trust fund can only be used for Lien Law purposes–namely, the payment of the costs of improvement. Lien Law § 71. Any other use of trust funds is deemed a “diversion of trust funds” pursuant to Lien Law § 72. See, e.g., Aspro Mech., 1 N.Y.3d at 329. “Diversions” may result in civil and/or criminal penalties against a trustee responsible for the diversion. Lien Law § 77; Lien Law § 79-a (1).
A contractor that pays itself before paying all trust fund beneficiaries is likely to be deemed to have committed a trust fund diversion. In this regard, pursuant to the Lien Law “… [e]very such trust shall commence at the time when any asset thereof comes into existence, whether or not there shall be at that time any beneficiary of the trust.” (Lien Law § 70(3).) This language makes plain that any money paid by an owner to the contractor must be held in trust for trust fund beneficiaries even if, at the time of such payment, the contractor has not yet incurred any liability to any subcontractors on, or materials suppliers to, the project. However, under some circumstances, an owner, as trustee, can use trust funds to reimburse itself to the extent that such reimbursement is for the “cost of improvements.” Fentron Architectural Metals Corp. v. Solow, 101 Misc2d 393, 396 (Sup. Ct. N.Y. Co. 1979); Lien Law § 2(5).
Under the Lien Law, while a trustee is not required to maintain separate bank accounts for each project and is entitled to commingle trust fund assets with its other funds, it must keep detailed books and records setting forth specific items relating to trust funds received and disbursed. Lien Law § 75; Fentron, 101 Misc2d at 396. The failure of a trustee to maintain the detailed records required by § 75 of the Lien Law constitutes presumptive evidence that the trustee “has applied or consented to the application of trust funds actually received by him…for the payment of money for purposes other than a purpose of the trust as specified in [§71 of the Lien Law].” Lien Law § 75(4); see also Medco Plumbing, Inc. v. Sparrow Const. Corp., 22 A.D.3d 647, 648 (2nd Dep’t 2005).
L.C. Whitford Co., Inc. v. Babcock & Wilcox Solar Energy, Inc., a case decided on December 18, 2025, by the Appellate Division, Third Department, found that settlement funds from the resolution of disputes between a general contractor and an owner were lien law trust funds.
The defendant in L.C. Whitford was a general contractor (“GC”) to owner with respect to “the construction of multiple solar photovoltaic electric power facilities” (the “Project”). The plaintiff was a subcontractor on the Project that was not fully paid by GC and, accordingly, filed liens against the Project. The Project resulted in numerous disputes between the GC and owner. The disputes were resolved through a settlement by which the owner agreed to pay the GC a sum of money and the GC agreed to indemnify the owner against subcontractor liens (which included plaintiff’s lien).
The GC provided notice that it was going to use the proceeds of the settlement with the owner to “reimburse itself for the payment of the costs of the improvements that it advanced and paid to subcontractors, suppliers and laborers” on the Project. In response, the plaintiff/subcontractor commenced the action (under Lien Law § 77) to enforce the lien law trust “contending that [GC]’s proposal to reimburse itself would be an improper diversion of trust assets.” The motion court granted the motion of plaintiff/subcontractor for an injunction prohibiting the GC from disbursing the settlement funds.
The Third Department affirmed on the GC’s appeal and stated:
Article 3-A of the Lien Law impresses with a trust any funds paid or payable to a contractor under or in connection with a contract for an improvement of real property. Given this statutory definition, we readily conclude that the settlement funds at issue constitute trust funds under Lien Law article 3-A (see Lien Law § 70 [1], [6]). The Court of Appeals has repeatedly recognized that the primary purpose of Lien Law article 3-A is to ensure that those who have directly expended labor and materials to improve real property at the direction of the owner or a general contractor receive payment for the work actually performed. With respect to a contractor’s trust, the parties entitled to a beneficial status are expressly enumerated in Lien Law § 71 (2) (a)-(f). Pursuant to Lien Law § 71 (2) (a), “[t]he trust assets of which a contractor is trustee shall be held and applied for enumerated expenditures arising out of the improvement of real property,” including “payment of claims of subcontractors, architects, engineers, surveyors, laborers and materialmen” (Lien Law § 71 [2] [a] [emphasis added]). The language is mandatory and does not include the “cost[s] of improvement,” which is a term specifically defined to address an owner’s costs (Lien Law § 2 [5]; see Lien §§ 70 [5]; 71 [1]. [Some citations, internal quotation marks, brackets and ellipses omitted, emphasis in original.]
The Court also noted that while an owner trustee may reimburse itself for certain “costs of improvement,” contractor trustees may not. In this regard, the Court stated:
As noted above, [GC] informed plaintiff[] that it intended to reimburse itself for “the costs of the improvements.” While a trustee owner may have authority to do so, the Lien Law accords no such authority for a contractor trustee. To the contrary, a contractor-trustee holds the trust assets in a fiduciary capacity akin to that of the trustee of an express trust and thus, does not have a sufficient beneficial interest in the moneys, due or to become due from the owner under the contract, to give him a property right in them, except insofar as there is a balance remaining after all subcontractors and other statutory beneficiaries have been paid. Consistent with these fiduciary obligations, the contractor is statutorily prohibited from applying trust assets to his personal debts to the detriment of valid trust claims. In short, [GC] has no authority to reimburse itself with the settlement funds for moneys advanced on the project and doing so would be a breach of its fiduciary duties as a trustee. As such, Supreme Court duly exercised its discretion by enjoining [GC] from utilizing the funds pending further court approval (see Lien Law § 77 [3] [a]). [Some citations and internal quotation marks omitted.][1]
Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.
This article is for informational purposes and is not intended to be and should not be taken as legal advice.
[1] It should be noted that there was a written dissent in which one Justice concurred.
Tagged with: Commercial Litigation, Lien Law, Lien Law Trust Funds
