Reviewed September 7, 2026.
New York’s construction trust law can protect homeowners who advance money for home improvement work. That protection should not be described as an automatic rule that every owner on every commercial or public project is a trust beneficiary.
What Ippolito decided
In Ippolito v. TJC Development, LLC, 83 A.D.3d 57 (2011), the Second Department recognized homeowners’ standing based on the home improvement trust protections in Lien Law § 71-a and the return-of-advance-payment provision in § 71(2)(f). Claims against individual officers alleged to have participated in diversion survived dismissal.
The outcome had an important limit: the claim against the contractor corporation was barred because it could and should have been raised in the earlier arbitration. The ruling did not finally establish the individuals’ liability. Prior litigation or arbitration can therefore affect which trust claims remain available.
Advance payments and potential defenses
Section 71-a regulates qualifying home improvement advance payments, including escrow and permitted application of funds. Owner breach is not a blanket right to keep every advance: the statute includes limits concerning reasonable liquidated damages and prior written notice. Substantial performance or proper application of funds also must be evaluated under the actual statute and facts; they do not erase other beneficiaries’ rights or earlier diversion automatically.
An officer is not liable merely because of a corporate title. Participation in the alleged diversion and the applicable proof matter. Nor is every diversion judgment automatically immune from bankruptcy discharge. Bullock v. BankChampaign, N.A., 569 U.S. 267 (2013) requires a culpable mental state for fiduciary defalcation under the federal bankruptcy provision.
Review the contract, payment history, use of funds, prior proceedings and applicable limitation period before selecting a remedy.
Kushnick Pallaci PLLC assists clients throughout New York with construction trust fund diversion claims. Contact 631-752-7100 or vtp@kushnicklaw.com.
Attorney Advertising. General information, not legal advice.
How can this ruling help subcontractors to obtain the money due them, via the GC?
ReplyDeleteThere are two interesting aspects to the decision. First, it confirms, that owners, as Lien Law trust fund beneficiaries, have standing to bring trust fund diversion claims against contractors. This of course is no help to the subcontractor. However, the second important aspect of the decision is that it confirms, for the first time at the appellate level in the Second Department, that corporate principals can be held personally liable for trust diversion claims.
ReplyDeleteFor many years I have been bringing trust diversion claims on behalf of subcontractors against general contractors and their corporate principals. However, until Ippolito, there were only a few lower level court decisions and a few appellate divisions in other departments (upstate) that specifically held that corporate principals could be held personally liable for trust diversions.
So how can the decision help subcontractors recover the money due them via the GC? Perhaps the most common complaint that I hear from subcontractors is that the general contractor has been paid and has run off with the money without paying the general contractor. As many subcontractors know, if the general contractor was paid, the subcontractor has no lien rights. But the protection afforded is then that the subcontractor can pursue the trust diversion claim against the general contractor.
Many subcontractors have had the experience of spending time and money chasing after a general contractor to recover a debt only to find out that the general contractor is judgment proof. The wonderful thing about trust diversion claims is that it gives the subcontractor a way to pursue not only the general contractor, but the general contractor's corporate principals. If the principal knows he or she will be personally on the hook for the debt there is a much greater chance the subcontractor will be paid.
One of the biggest reasons that trust diversion claims can help a subcontractor get paid is that no only are trust claims grounds for personal liability of the general contractor's corporate principals, but trust diversion claims are no dischargeable in bankruptcy. I have fought corporate principals through bankrtupcy as they attempted to discharge trust liability and while you may need some patience, the trust claim eventually cannot be discharged and remains.
When the GC's corporate principals know that they are personally liable and cannot discharge the debt in bankruptcy the subcontractor has an enormous amount of leverage in the dispute. Trust diversion claims, as opposed to simply bringing a claim for breach of contract, can help the subcontractor ultimatley recover on a debt that may otherwise have vasnished due to the GC going out of business or wiped out in bankruptcy.