Understanding Article 3-A Trust Fund Claims in NY Construction Projects
By Kushnick Pallaci PLLC | www.nyconstructionlaw.com
Introduction
Trust fund diversion is one of the most serious allegations a contractor or subcontractor can face in a New York construction dispute. Governed by Article 3-A of the New York Lien Law, trust fund claims can lead to personal liability for company officers, contractors, and even third-party recipients of construction funds. At Kushnick Pallaci PLLC, we have successfully litigated trust fund cases throughout New York—from Manhattan high-rises to Suffolk County subdivisions—defending clients against aggressive claims and preserving their rights.
What Is Article 3-A of the NY Lien Law?
Article 3-A of the New York Lien Law creates a statutory trust over funds received for the improvement of real property. In simple terms, any money a contractor, subcontractor, or construction manager receives for a job is not theirs to spend freely—it must first be used to pay those who furnished labor or materials on that project.
These funds are held in trust for the benefit of:
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Subcontractors
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Material suppliers
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Laborers
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Design professionals
Until those obligations are paid in full, the funds must be treated separately. Any improper use is considered diversion, even if not intentionally fraudulent.
What Constitutes a Trust Fund Diversion?
A diversion occurs when trust funds are used for any non-trust purpose before all lawful trust claims have been satisfied. Common examples include:
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Paying unrelated corporate expenses (rent, payroll, etc.)
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Transferring funds to a different project
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Commingling funds with other operating accounts
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Paying debts unrelated to the specific construction job
The diversion does not require fraudulent intent—just improper use of trust assets. That’s why even bookkeeping mistakes or cash flow juggling can lead to personal exposure.
A plaintiff bringing a claim must generally show:
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The defendant was a trustee of funds under Article 3-A
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There were valid trust claims that went unpaid
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Funds were used for non-trust purposes before satisfying the trust claims
Who Can Be Liable – Officers, Subs, Suppliers
One of the most far-reaching aspects of Article 3-A is that it extends liability to individuals, not just the corporate trustee. Under the statute and case law, potential defendants include:
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Corporate officers or directors who controlled the funds
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Bookkeepers or employees who directed payments
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Other contractors or suppliers who received diverted trust funds with knowledge
In some cases, even banks or lenders have been drawn in if they participated in or benefited from trust fund diversions. The law is aggressively enforced—especially in cases involving nonpayment and bankruptcies.
Evidence Needed to Prove or Defend a Claim
Whether you’re bringing or defending a trust fund diversion claim, success often hinges on documentation and accounting.
Plaintiffs must show:
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That trust funds existed (e.g., payment from owner to GC)
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That they were unpaid beneficiaries
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That the funds were spent on non-trust purposes
Defendants must show:
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That all trust obligations were paid
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Or that non-trust payments were made only after trust obligations were satisfied
Common types of evidence include:
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Invoices and payment records
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Bank statements and wire transfers
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Subcontract agreements
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Job cost breakdowns
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General ledgers or QuickBooks entries
At Kushnick Pallaci PLLC, we often use detailed accounting analysis, project-specific ledgers, and expert testimony to rebut diversion claims and demonstrate compliance with Article 3-A.
How Kushnick Pallaci PLLC Defends Trust Fund Allegations
Defending a trust fund diversion claim requires both legal precision and a forensic approach to the facts. Our firm routinely defends:
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General contractors accused of diverting funds
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Corporate officers facing personal liability
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Developers and owners sued under accessory liability theories
We use a multi-pronged strategy to:
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Challenge standing and trust fund existence
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Dispute the diversion element with detailed accounting
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Attack improper or inflated trust fund claims
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File counterclaims for breach of contract or overpayment
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Seek dismissal under CPLR based on failure to state a claim
Whether you're defending a six-figure claim or facing a demand for personal contribution, our firm brings deep experience in New York Lien Law litigation.
Conclusion: Trust Fund Claims Demand Immediate Action
If your business is named in a trust fund diversion lawsuit—or you suspect that funds from your project are being misused—don’t wait. These cases escalate quickly and can expose contractors and officers to personal liability, even in the absence of fraud.
At Kushnick Pallaci PLLC, we represent construction professionals throughout New York in trust fund diversion defense, lien foreclosure cases, and breach of contract litigation. Let us help protect your business, your reputation, and your future.
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