Wednesday, March 13, 2013

Court says mechanic's lien provides standing for subcontractor to pursue trust violation against owner

There is some dispute under New York law regarding whether a subcontractor has standing, as a beneficiary, to pursue a claim for trust diversions directly against an owner.  On March 5, 2013 the First Department made their opinion partially clear:  if the subcontractor has filed a mechanic's lien then, even in the absence of contractual privity, the subcontractor has standing to bring a claim under Article 3A of the Lien Law.  The decision was Rebar Lathing Corp. v. Century Maxim Constr. Corp.  The question remains whether a subcontractor may pursue a trust fund diversion claim against an owner if the subcontractor did not file a mechanic's lien.  Implicit in the First Department's ruling here is that the subcontractor may not.

It would seem to me that this decision is right on point and gels nicely with the stated intent of Article 3A of the Lien Law.  However, the implicit indication that lack of a mechanic's lien means no standing for a subcontractor to pursue a trust diversion claim is troubling.  If the purpose of Article 3A is to make sure that those entitled to payment on a construction project receive funds earmarked for that purpose, why would a subcontractor lack standing to pursue the trust funds from the owner directly?  Technically, the general contractor as trustee should pursue the claim on behalf of all beneficiaries but if the general contractor refuses is the subcontractor out of luck?  Stay tuned...

Vincent T. Pallaci is a partner with the New York law firm of Kushnick  | Pallaci, PLLC.  His practice concentrates on the areas of construction law, including prosecuting and defending trust fund diversion actions in New York.

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