Contractors should beware of advancing their own funds on a New York job to pay workers, subcontractors, and materialmen before receiving job payments from the Owner. The Third Department recently held that money advanced by a Contractor could not be reimbursed from settlement funds between the Contractor and Owner so long as there are pending subcontractor claims. To do so violated New York Lien Law trust statutes. L.C. Whitford Co. Inc., v Babcock & Wilcox Solar Energy Inc., December 18, 2025 New York Appellate Division Third Department. 

Babcock & Wilcox Solar (“B&W”) entered into three contracts to build solar energy facilities in upstate New York. On each project, B&W subcontracted with subcontractors (including Whitford). 

The Owner and B&W had a dispute resulting in the Owner terminating B&W. B&W sued the Owner for breach of contract. Before termination, the Owner paid $8.3 million to B&W on the projects. B&W used these payments and its own funds to pay $20.8 million for project work, labor, and material, creating a severe negative cash flow. 

Whitford and other subcontractors were owed money by B&W and filed mechanics liens against the project properties. The subcontractors brought a separate New York Lien Law trust action against B&W in which B&W, the Owner and the subcontractors stipulated that during its pendency, future moneys the Owner might pay to B&W would not be disbursed except on 10 days written notice to the subcontractors. Eventually, B&W settled with the Owner with B&W to receive $1.4 million. The subcontractors were notified. 

The subcontractors moved for a preliminary injunction as to any distribution from the settlement, praying that the court hold the settlement as a Lien Law trust asset and pay the subcontractors. B&W wanted to use the settlement to reimburse itself for its own personal funds advanced earlier to pay for project labor and material. The lower court directed the settlement to be escrowed pending the trust action’s resolution. B&W appealed.

The Third Department unanimously held that the settlement was a trust asset. But in a 3-2 split, the majority held B&W could not repay itself from the settlement—to do so would violate certain Lien Law filing requirements and would be a breach of B&W’s fiduciary duties as a Lien Law trustee. The dissent argued that the majority misunderstood the statutory Lien Law trust. Importantly, the dissent recognized the chilling effect this ruling may have on a Contractor who refuses to advance personal funds to keep a project moving while awaiting payments from the Owner. The result discourages a Contractor from advancing money to pay his own employees, subcontractors, and materialmen, and prevents a job from proceeding if the Owner delays payment. 

The New York Lien Law creates three types of statutory trusts: 

• a Contractor’s trust;
• a Subcontractor’s trust (at each tier); and
• an Owner’s trust. 

Only a Contractor’s trust, which concerns upstream funding, is relevant to findings in the Whitford decision.

The Contractor is a trustee for moneys he receives from the Owner and any funds payable to the Contractor in addition to the contract price by reason of any transaction, event, or circumstance in the making or in the contract’s performance. The settlement fund in Whitford was deemed a trust asset. 

Under the statutory trust, the Contractor uses job revenue to pay job costs only. The Contractor is a fiduciary managing the trust assets, seeing to it that the money goes to trust beneficiaries. The beneficiaries of the Contractor’s trust are those in privity with the Contractor on the job including, his job workers, his job subcontractors, and his job materialmen. 

The Contractor misuses (diverts) trust assets both civilly and criminally when money from one job is used elsewhere. The money coming from the job is supposed to stay there and be used for project purposes only. After satisfying or discharging all project beneficiary claims (normally by project’s end), the Contractor has more than an equitable title. He can use remaining money to pay his general administrative overheads and take his profit. Practically speaking, this is impossible, as a Contractor must cover the costs of his overhead throughout the project, and under federal income tax accounting, the Contractor must recognize revenue (and profit) on multi-year jobs annually, not all at job’s end. 

The statutory trust is not a panacea. Where the trustee properly disbursed all trust assets but there are unpaid beneficiaries (job costs exceeded job revenue), the trustee may be liable to subcontractors for breach of contract, not for breach of trust. 

The Lien Law trust is like a normal trust, except where the statute says or implies otherwise. For example, a normal trust comes into effect when property is transferred to the trustee. The Lien Law trust is an inchoate trust. It comes into effect when the Contractor enters into a contract (with the Owner) to perform work, even though the Contractor may not have started work and/or earned anything. The rights to funds he will earn in the future are deemed statutory trust assets. Further, the Lien Law establishes a single trust for the whole job. 

In a normal trust, the trustee treats beneficiaries impartially. In the statutory trust, the Contractor as trustee can favor one beneficiary over another, at least until a court orders the Contractor not to. A normal trustee cannot commingle assets of separate trusts. The Lien Law trustee may commingle funds from different jobs/trusts as long as his books and records can be separated for each job.

Under a normal trust, the trustee running a business for the trust may borrow from a lender using UCC financing for receivables unless the trust prohibits this. The trustee describes this in reports and accountings. The statutory trust affects lender UCC financing of a Contractor’s New York improvement’s receivables. The financing lender who knows that a receivable comes from a New York improvement must file a Notice of Lending (or assignment) specific to the job. Without a filing, the lender with guilty knowledge misuses (diverts) trust assets. When there is a filing, the Contractor trustee is entitled to a credit in a civil diversion action to the extent he can show the advance was actually used on the job. The Notice of Lending filing requirements apply where Contractor and lender are not the same person; the Contractor cannot sue himself for an unpaid loan. 

Normal trust law allows a trustee to use his personal funds to pay legitimate claims against the trust because the trust benefits. The trustee is later indemnified by the trust. Under normal trust law, a trustee does not automatically succeed on his indemnity claim. He must show that he paid proper claimants, properly acted furthering trust purposes, did not violate the trust’s terms, and the amount paid was reasonable. 

The Lien Law does not speak to indemnity but provides that the trustee cannot acquire beneficiary claims by assignment or otherwise when paying claims. 

The Lien Law does, however, provide a defense to a criminal prosecution for diversion after self-financing. If the trustee “made advances of his personal funds for trust purposes and the amount of trust funds applied for a purpose other than the trust purposes … does not exceed the amount of advances of personal funds of the trustee actually applied for the purposes of the trust, such application or consent thereto shall be deemed justifiable…” 

When properly analyzed, Whitford was a trust distribution battle between unpaid subcontractors and Contractor on an indemnity claim. Earlier self-financed advances substituted for a later settlement. The settlement, in escrow, had not yet been diverted and might be used to pay beneficiaries. However, this decision will stifle Contractors from coming out of pocket, and potentially harm project-ending settlements with Owners in the process.

Until now, a Contractor has not made Lien Law filings and kept detailed records regarding self-financing. A Contractor, experiencing negative cash flow, might believe it was unnecessary to make Lien Law filings if the Contractor self-financed a Friday job payroll, anticipating receipt of a Monday Owner job payment. After L.C. Whitford Co. Inc., v Babcock & Wilcox Solar Energy Inc., such a Contractor has breached the statutory trust and may be civilly liable for a diversion.

If you have questions about reimbursements, please contact Eugene directly at ehg@gdblaw.com.