Understanding Article 3-A Trust Fund Claims in New York

By Kushnick Pallaci PLLC
Updated September 7, 2026.

Article 3-A of the New York Lien Law protects construction funds for the people and businesses entitled to payment from a project. A trust-fund claim requires a careful review of the contracts, payment history and accounting records. It can involve both the company that received the funds and people who participated in a diversion.

Which construction funds are trust assets?

Lien Law § 70 identifies the funds and rights to payment that create a statutory trust. An owner's trust and a contractor's or subcontractor's trust have different statutory sources. Each improvement or contract must be analyzed separately; a job's bank balance alone does not answer whether a trust exists.

For contractors and subcontractors, permitted expenditures under § 71 include qualifying claims for subcontract work, labor, materials and design services, as well as specified taxes, benefits, insurance and bond premiums connected with the improvement. Project payroll is not automatically an improper expense.

What constitutes diversion?

Under § 72, applying a trust asset to a non-trust purpose before all trust claims are paid or discharged can constitute diversion. Paying an unrelated job's debts or taking money for a personal expense can create a problem. A trustee's voluntary act or consent to diversion constitutes a breach of trust; a civil claim is not limited to transactions proved to be intentionally fraudulent.

Are separate bank accounts required?

Not invariably. Lien Law § 75 permits funds from separate trusts in the same bank account if the books clearly identify each trust's deposits, withdrawals and allocation. Combining funds in an account is therefore not, by itself, proof of diversion. Using one project's funds for another project's obligations is a different issue.

The trustee must maintain the records the statute requires, including assets receivable, trust accounts payable, funds received and trust payments made. Missing records can create a statutory presumption against the trustee. Our guide to maintaining Lien Law trust records explains the documentation contractors should organize.

How should a claim be evaluated?

Preserve the contracts, change orders, invoices, bank statements, payment applications, payroll records and job ledgers. Reconcile the receipts and expenditures for the particular trust. A defense may challenge whether assets were trust funds, whether the claimant is a beneficiary, whether the disputed expenditure served a trust purpose, or whether a statutory defense applies. Paying every claimed invoice is not the only possible defense.

Corporate status does not resolve the question of personal liability. The individual's conduct and participation must be examined. Likewise, liability of a recipient of funds requires attention to the circumstances and statutory protections, including the good-faith purchaser provision in § 72. Unpaid invoices alone do not establish every element of a claim.

Help with an Article 3-A dispute

Kushnick Pallaci PLLC represents construction businesses in New York trust-fund diversion claims and defenses. If you receive a demand or lawsuit, preserve the accounting records and obtain advice promptly so that response and claim deadlines can be assessed.

Contact Kushnick Pallaci PLLC or call (631) 752-7100.

This article provides general information, not advice about a particular project or dispute.

OSHA Settlement Corrections: The True Value Remand

Reviewed September 7, 2026.

In Secretary of Labor v. True Value Company, OSHRC No. 16-0597 (April 27, 2017), the Commission set aside a final order approving a settlement that inadvertently left a citation item unresolved.

The parties' agreement withdrew one item but omitted another. The judge submitted the incomplete disposition for docketing, and the order became final. The Commission used Federal Rule of Civil Procedure 60(a) to address the oversight and remanded for further proceedings.

Check every citation item before signing

Match the settlement against the citation: item numbers, classification, penalty, abatement obligations, payment dates and any continuing commitments. Confirm what is withdrawn, amended, admitted or still contested.

This historical correction does not mean a final OSHA order can routinely be reopened. Under OSHA's contest procedures, employers generally have 15 working days after receipt to contest citations or penalties. An informal conference does not automatically extend that period. Preserve the contest deadline while negotiating.

Kushnick Pallaci PLLC assists clients throughout New York with OSHA citation defense and representation. Contact 631-752-7100 or vtp@kushnicklaw.com.

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Contractor Defense and Fall-Protection Evidence: Giordano v. Tishman

Reviewed September 7, 2026.

In Giordano v. Tishman Construction Corp., 152 AD3d 470 (2017), the First Department held that factual disputes prevented summary judgment for either side on the Labor Law claims at issue.

A worker fell approximately 30 feet after stepping onto a scaffold brace that gave way. Although he wore a harness and double lanyard, the parties disputed whether adequate anchorage points were available and whether he could remain tied off throughout the work. Those questions also prevented resolution of the sole-proximate-cause argument as a matter of law.

Preserve usable evidence

For owners and contractors defending a claim, a statement that a harness was supplied does not complete the analysis. Preserve the equipment, anchorage information, site photographs, work instructions, training records and witness accounts, while addressing immediate safety needs.

This historical decision did not dismiss the worker's case or eliminate statutory liability. It illustrates why the actual protection available and the circumstances of the task matter. Coverage notice and contractual risk-transfer issues should be addressed promptly alongside the defense.

Kushnick Pallaci PLLC assists clients throughout New York with construction litigation and contractor defense. Contact 631-752-7100 or vtp@kushnicklaw.com.

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Pay-if-Paid Clauses and Shortened Claim Deadlines: Polar Bear Mechanical

Reviewed September 7, 2026.

In Polar Bear Mechanical, Inc. v. Walison Corp., 2017 NY Slip Op 50848(U), the Appellate Term rejected a payment condition that shifted the owner's nonpayment risk to the subcontractor. That ruling did not save the subcontractor's late lawsuit.

The separate deadline still mattered

The agreement expressly severed unenforceable provisions and required suit within six months after an early termination. The court enforced that deadline on the record presented and affirmed dismissal of the claim against the contractor and surety. It also corrected the lower court's jurisdiction analysis: the pleaded claim could be read as one to establish a lien and recover a personal judgment.

Read payment and enforcement terms together

A clause's effect matters more than its label. A condition making payment depend entirely on the owner's payment presents a different issue from a reasonable payment-timing term. Likewise, an invalid payment condition does not automatically invalidate every contractual deadline. Record termination dates, final-application dates, notice requirements and the separate deadlines for liens and bonds in a deadline calendar before waiting for upstream payment.

Kushnick Pallaci PLLC assists clients throughout New York with construction contract drafting and review. Contact 631-752-7100 or vtp@kushnicklaw.com.

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Punitive Damages for Trust Diversion: More Than a Disputed Payment Is Required

Reviewed September 7, 2026.

Not every construction trust violation supports punitive damages. The facts supporting civil recovery, punitive relief and criminal liability must be evaluated separately.

In Jorge v. Piola Property Management LLC, 2017 NY Slip Op 50837(U), the New York Supreme Court in Nassau County dismissed the punitive-damages portion of a homeowner’s Article 3-A claim at the pleading stage. The remaining contract and trust claims survived the motion, subject to the applicable representative-action requirements.

The court applied Second Department authority requiring facts showing larcenous intent for the punitive claim. Bare assertions of knowing diversion and failure to pay a disputed amount were insufficient. The ruling did not hold that a prior criminal conviction was required, or that the absence of punitive damages eliminated a civil trust claim.

Separate the remedies and supporting proof

Lien Law § 77 provides broad civil trust-enforcement remedies. Section 79-a separately addresses criminal misappropriation and includes a good-faith-dispute provision. That provision should not be treated as permission to apply trust assets to unrelated purposes.

Review the payment records, authorized uses, disputed obligations and evidence of intent before asserting or defending enhanced damages. Surviving a pleading motion is also distinct from proving liability at trial.

Kushnick Pallaci PLLC assists clients throughout New York with construction trust fund litigation. Contact 631-752-7100 or vtp@kushnicklaw.com.

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