The New York construction trust fund statute was enacted to ensure that anyone working on a construction project within the state, gets paid. Mechanics liens and bond claims can only do so much. By enacting a construction trust fund statute, this provides an extra layer of protection to ensure construction funds are properly disbursed.
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New York construction trust fund overview
The state of New York takes payments on construction project rather seriously. These laws can be found in New York Lien Law Art. 3-a.
Compared to the construction trust provisions in other states, the regulations in New York are rather extensive. The New York construction trust fund is meant to ensure that anyone working on a construction project within the state gets paid what they’ve earned. Let’s take a look at the duties and responsibilities that are imposed on project participants in New York.
Creation of a trust
A trust is created the moment payment or funds are received for labor or materials supplied for the construction or improvement of the property. Once this occurs, the person receiving payment becomes a trustee. This entails the imposition of certain duties and responsibilities.
Under NY laws, a trustee can be a general contractor, subcontractor, or even a property owner. Including property owners is a particularly unique aspect of the construction trust fund. The statute specifically states 7 different types of funds that must be “held in trust” by an owner. An owner trust will typically be comprised of proceeds from construction loans, mortgages, or insurance payments that are meant to be used to improve the property.
Trustees owe their beneficiaries a fiduciary duty. This means that they must act, financially speaking, in the trust beneficiary’s best interests. So any time project funds are released, trustees must ensure that they are used solely for the benefit of those who earned it. Well, not solely.
Payments from trust assets are only allowed to be disbursed for the specified purposes outlined in the statute. Clearly, the main purpose is the payment of claims of subcontractors, materialmen, architects, and others. However, there are a few other allowable uses of trust assets such as the payment of payroll taxes, unemployment insurance, wage supplements, and bond or insurance premiums.
A trustee is required to keep meticulous records in order to ensure that the funds are properly disbursed to the beneficiaries of the trust. It even explicitly states all that needs to be accounted for. Including accounts payable, accounts received payments made with trust assets, and transfers in repayment of or to secure advances made pursuant to a notice of lending.
Furthermore, the records must be made available to any beneficiary requesting them. This can be achieved by either actually letting them review the books, or providing a verified statement concerning the trust. A beneficiary can actually get a court order to review the books if a trustee fails to comply within 10 days of the request.
Note, that failure to keep books of account creates a presumption of diversion of the funds for non-trust purposes.
How the New York construction trust fund protects payments
Now that we’ve established the responsibilities imposed by the New York construction trust fund act, how does this help project participants get paid?
The greatest protection provided by the statute is that if the project funds are for used for any other purpose than those set forth in the statute, the trustee can be held personally liable. This allows a beneficiary to have a cause of action directly against the trustee for the diverted amount of funds.
This liability can also extend past the individuals themselves. If the trustee is part of a corporation, any officer or employee who directed or participated in the diversion of funds can also be held personally liable.
Protection against bankruptcy
Contractors filing for bankruptcy during a project can cause all sorts of problems when it comes to recovering payment. Another advantage of having payments held in trust is that the funds are protected from bankruptcy and third party creditors. The US Supreme Court has long held that any property that is held in trust is specifically excluded from the bankruptcy estate.
Not only can the trustee be found personally liable for diverting construction trust funds, but also could be on the hook for criminal sanctions as well. Anyone using trust funds for any other purpose besides the ones enumerated in the statute can be found guilty of larceny under NY Penal Code, Art. 155. Depending on the amount diverted, the charges can range from a class A misdemeanor, to a class B felony!
Although criminal charges under these provisions are relatively uncommon, the mere fact that the possibility exists is an example of how serious the state of New York treats construction payments.
The New York construction trust fund statute offers some valuable protection to ensure that project funds get to those who earned them. Anyone working on a construction project in New York needs to familiarize themselves with these requirements. Not only for the payment security that they provide but the harsh penalties that come with non-compliance.