Personal Liability for Trust Fund Diversion By Home Improvement Contractor
On the typical construction project, a general contractor (“GC”) owes certain duties to the subcontractors and suppliers (collectively “Subs”) beneath it with respect to the payment of money. The Lien Law (in Article 3A) provides that money that a GC receives from the Owner must be held in trust for the Subs. The GC is a “trustee” of those monies and if it fails to make payment to the Subs, the GC can be guilty of a trust fund diversion—which is not only a civil wrong, but potentially a crime.
These duties are typically owed by the GC to its Subs, not to the Owner. If there is a diversion of those funds by the GC, it is the Subs that have a remedy, not the Owner.
But in the home improvement setting the rules are different. Where the New York Home Improvement Business Law applies, Article 3A of the Lien Law imposes additional obligations on the GC to hold any funds received from the Owner in an escrow account, where they would remain the property of the Owner until substantial completion of the project. The use by the GC of these trust funds for any purpose “other than the expenditures authorized by the Lien Law before all trust claims [to the Subs] have been paid or discharged constitutes an improper diversion of trust assets.”
A recent case in the Supreme Court in Brooklyn sustained a lawsuit against a home improvement contractor where it was alleged that the contractor co-mingled funds from other jobs and used or applied a portion of the paid funds for purposes unrelated to the construction and renovation work of the home improvement contract. The Owner’s claim was bolstered by the fact that the contractor failed to maintain records concerning the trust and was unable to establish that it had held the owner’s funds in escrow.
Perhaps the noteworthy feature of this rule, applicable to home improvement contractors, is that the Owner can assert a claim for personal liability against the officer or agent of the corporation responsible for the improper diversion of trust funds. So even though an officer may be acting within the scope of corporate authority, he or she can be personally liable for a diversion of the Owner’s trust funds before all Subs have been paid.
This is a powerful weapon in the hands of an Owner of a home improvement—one not available to Owners on other commercial projects.