What Counts as Diversion of Construction Trust Funds?

Reviewed September 7, 2026.

Article 3-A requires construction trust assets to be used for the purposes of the particular trust before they are applied elsewhere. The analysis starts with the asset and the trustee, not simply with an unpaid invoice.

Identify the trust asset

Lien Law § 70 identifies qualifying receipts and rights to payment. Trust assets can include receivables before cash arrives. An owner’s trust and a contractor’s or subcontractor’s trust are not defined identically.

Check the permitted purpose

Section 71(1) concerns an owner’s trust; § 71(2) identifies contractor and subcontractor trust purposes. These include qualifying project claims for labor, materials and professional services, specified taxes and employment contributions, benefits and wage supplements, bond and insurance premiums, and certain home improvement owner payments. They are not limited to buying materials, and unrelated company expenses do not become trust purposes just because the company is a contractor.

Apply the payment-before-diversion rule

Under § 72, applying trust assets to a non-trust purpose before all trust claims are paid or discharged can be a diversion, even where no trust claim existed at the moment of the transaction. Do not distribute an apparent profit without accounting for remaining and later-arising trust obligations.

Section 75 requires project-specific records and allocation. Missing records create presumptive evidence, not an automatic finding that every officer committed a crime. Civil liability, participation, criminal intent and bankruptcy discharge involve additional requirements. Reconcile each project’s receivables, receipts and obligations before transferring funds elsewhere.

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

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