A Subcontractor’s Trust Claim Against an Owner: The Rebar Lathing Decision

Reviewed September 7, 2026.

Whether a subcontractor can enforce an owner’s Article 3-A trust requires identification of the particular trust and the claimant’s statutory basis for beneficiary status. It is different from a claim against the subcontractor’s own payment obligor.

In Rebar Lathing Corp. v. Century Maxim Construction Corp., 104 A.D.3d 406 (2013), the First Department affirmed denial of a motion to dismiss the subcontractor’s trust claim against the owner. Although there was no direct contract, the subcontractor had filed a valid mechanic’s lien, which supplied a basis for the owner-trust claim under Lien Law § 71(3)(a).

Do not assume that filing any notice proves standing

The decision concerned a valid lien and the owner’s trust. It did not establish that a bare filing automatically proves a trust claim, or that a subcontractor without a lien can never pursue any Article 3-A remedy against any defendant.

Review § 70 to identify actual trust assets and § 71 to identify the relevant trust claims. An owner’s trust and a contractor’s trust can have different assets and beneficiaries. Contractual privity, statutory liability and the status of any lien require separate attention.

Even where standing exists, diversion, recoverable relief, timeliness and the representative-action requirements of § 77 still must be established.

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

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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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A Complete § 76 Trust Statement: Lessons from Bette & Cring

Reviewed September 7, 2026.

A trustee cannot replace a properly requested verified trust statement with a vague balance summary or assume that later inspection of records cures an earlier deficient response.

In Matter of Bette & Cring, LLC v. Brandle Meadows, LLC, 81 A.D.3d 1152 (2011), the Third Department directed the trustee to supply a compliant statement. Later access to records did not moot the earlier demand, and referring the contract dispute to arbitration did not eliminate the statutory information obligation.

The deficiencies included conditional receivables, line-of-credit details, funds received from unit sales, the purposes and contractual basis of payments, and lending-related transfers. Simply saying that funds were not receivable without conditions did not identify what those conditions were.

Use the statutory categories

Review all five categories in Lien Law § 75: receivables, payables, receipts, trust payments and applicable lending transfers. Under § 76, the statement must also identify the people who made or consented to payments and be properly verified.

Check the demand’s eligibility, service and timing. Ordinary beneficiary requests are generally available after the claim has been payable thirty days and no more frequently than monthly; compliance is generally due within ten days. A dispute about entitlement should be addressed through the statutory court procedure rather than silence.

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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Maintaining Proper Lien Law Trust Records to Avoid Liability

Reviewed September 7, 2026.

New York construction trust obligations require more than keeping enough money in a bank account. A trustee needs records showing the source of trust assets, obligations to beneficiaries and the purpose of each expenditure.

Identify the trust and its assets

Lien Law § 70 defines separate owner, contractor and subcontractor trusts. Assets can include both funds received and rights to payment. A trust can arise before any beneficiary’s claim presently exists. Identify the particular contract, improvement, trustee and assets instead of assuming every unpaid invoice proves diversion.

Separate project records; bank accounts may be shared

Section 75 expressly permits funds of different trusts in one bank account if the records clearly allocate deposits and withdrawals to each trust. It does not impose a universal requirement for a specially titled trust account or a separate bank account for every job. A separate account may be a useful control, but it does not replace the statutory books and records.

The records must cover more than a bank balance. Maintain the required information for:

• Trust assets receivable: the person owing payment, identifying transaction, amount and due date.
• Trust accounts payable: beneficiaries, obligations, amounts and dates due.
• Funds received: source, date, amount, form of receipt and deposit information.
• Payments made: recipient, date, amount, method, trust purpose and relevant contract or work details.
• Applicable lending transactions: advances, transfers, assignments and the information required for a notice-of-lending arrangement.

Keep supporting contracts, invoices, payroll records, payment applications, bank records, checks and allocation schedules. Reconcile each project ledger regularly.

Use assets for that trust’s purposes

Section 71 defines permitted expenditures and beneficiaries; qualifying labor, materials and certain project taxes, insurance and bond costs may be included. Using one project’s trust assets for another job or taking profit before the trust obligations are satisfied can create diversion liability under § 72.

For example, if Project X receives $100,000 and pays $75,000 in proper trust expenses, the $25,000 bank balance is not automatically profit. Determine outstanding and potential trust obligations and whether the trust has terminated before releasing remaining assets. If a Project X beneficiary remains unpaid, using that balance to purchase Project Z materials may constitute diversion.

Respond to beneficiary requests

Under § 76, an eligible beneficiary may choose inspection and copying of trust records or a verified statement. The statute generally allows a request after a claim has been payable for 30 days, no more often than monthly, and provides a ten-day response period. Proper identification and service are required. A summary saying the owner has not paid does not replace the required records.

Understand the consequences and deadlines

Missing required records creates presumptive evidence of diversion under § 75; it is not an automatic final judgment. Civil remedies can include accounting, recovery of diverted assets and damages. Individuals who participate in a diversion can face personal liability, but corporate status alone does not establish it. Criminal liability under § 79-a has its own requirements and exceptions. Punitive damages and attorney-fee awards are not automatic.

Bankruptcy treatment also requires separate analysis. In Bullock v. BankChampaign, N.A., 569 U.S. 267 (2013), the Supreme Court required a culpable mental state for fiduciary defalcation under 11 U.S.C. § 523(a)(4), including knowledge or gross recklessness. It is inaccurate to say every Article 3-A judgment necessarily survives an individual’s bankruptcy.

Section 77 generally limits a trust-enforcement action to one year after completion of the improvement, with a later final-payment-due trigger available to subcontractors and materialmen as stated in the statute. It also provides representative-action requirements and an exception for a trustee’s final-accounting action. Obtain a claim-specific deadline analysis; a records request does not automatically extend the time to sue.

Kushnick Pallaci PLLC assists with construction trust accounting disputes and diversion claims and construction payment litigation. Vincent T. Pallaci is the firm’s managing member. Call 631-752-7100, email vtp@kushnicklaw.com or consult the current Long Island and New York City office information.

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