General contractor can pay subcontractor's sub-subcontractors and vendors without violation Lien Law Article 3A

In Metro Foundation Contractors, Inc. v. Marco Martelli Associates, Inc., the Appellate Division affirmed the trial court's denial of summary judgment to a subcontractor that claimed the general contractor had violated New York's Prompt Payment Act (G.B.L. Article 35E) and New York's trust fund provisions (Lien Law Article 3A).  Apparently the general contractor determined that the subcontractor inexcusably defaulted under the subcontract and didn't pay the subcontractor.  However, the general contractor did pay the subcontractor's sub-subcontractors and vendors.  The subcontractor claimed these were improper payments and diversions of trust funds.  The Appellate Division confirmed that the sub-subcontractors and vendors were proper lien law trust fund beneficiaries and, as such, ruled that the general contractor did not divert funds by paying them directly (assuming the correct amounts were paid). 

The Court also notes that the Prompt Payment Act does not give a subcontractor that is not paid the drastic remedy of summary judgment without more proof.  While the decision is light on details, it sounds like the subcontractor argued that the mere non-payment violated the Prompt Payment Act.  What the Court says is that the subcontractor still has to prove its claim (i.e. it performed properly and was not paid).  This result is in line with the language of the Prompt Payment Act which specifically provides that a general contractor can withhold payment if there is a dispute over performance.  Of course if it later turns out that the general contractor fabricated the performance issue the subcontractor could still have a potential Prompt Payment Act claim.  Stay tuned...

Vincent T. Pallaci is a partner at the New York law firm of Kushnick Pallaci, PLLC where his practice focuses primarily on the area of construction law.  He can be reached at (631) 752-7100 or vtp@kushnicklaw.com