Reviewed September 7, 2026.
The 2010 appellate decision discussed in the original article was affirmed by the Court of Appeals in Mount Vernon City School District v. Nova Casualty Co., 19 NY3d 28 (2012). The surety remained liable under its performance bond after the contractor defaulted.
At the contractor's request, the school district had transferred approximately $214,000 of earned contract funds to the Department of Labor. The surety argued that the transfer improperly diverted funds and discharged its obligation. The Court did not decide whether that transfer violated the Lien Law. The nonperforming surety lacked standing as a subrogated trust beneficiary, and it failed to establish the material alteration or actual prejudice needed for its discharge theory.
Do not treat the decision as permission to divert funds
The ruling addresses this surety's defenses on a particular record. Owners and contractors still need to evaluate trust-fund restrictions and payment instructions before redirecting project money.
The Court also distinguished completion expenses from attorney fees incurred suing the surety: the bond did not unmistakably authorize recovery of the latter. Review the actual bond language before assuming that litigation fees are recoverable.
Kushnick Pallaci PLLC assists clients throughout New York with performance-bond and surety disputes. Contact 631-752-7100 or vtp@kushnicklaw.com.
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