Sunday, July 23, 2017

Supreme Court: Criminal Intent Required for Punitive Damages Under Article 3A

Lien Law Article 3A has become increasingly popular (or unpopular if you are the accused) in construction claims.  In general, Article 3A requires that contractors hold funds they are paid in trust for all beneficiaries of the project and that such funds not be used for a "non-trust purpose" until the claims of all beneficiaries are resolved.  Lien Law Section 77 vests the Court with the power to impose punitive damages in the appropriate case.  But not every case of a trust diversion warrants the imposition of punitive damages.

In Jorge v. Piola Property Management, the Nassau County Supreme Court was faced with a motion seeking to dismiss various portions of a home owner's claim against a contractor including a claim for punitive damages under Article 3A.  The Court granted the motion to the extend of dismissing the claim for punitive damages.  In doing so, it cited to controlling Second Department authority that says a trust diversion claim must include "criminal intent" in order to trigger punitive damages.  Essentially, this allows for a "good faith dispute" defense to the contractor.   Interestingly, the motion was a 3211(a)(7) motion to dismiss which appeared to have made while the case was in its infancy.  You have to wonder what the Court would do if facts come out in discovery showing that there was such "criminal intent."  Stay tuned...

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