Enforcing a Judgment Against a Contractor Just Got Easier09/05/2014 | Fall 2014 Newsletter
A judge in the Supreme Court of Kings County (Brooklyn) recently rebuffed efforts by a contractor to vacate a restraining notice and execution on its bank account after its subcontractor got an award against it in arbitration. The court placed the burden of proof squarely on the contractor to establish that the funds in its account were trust funds.
Experienced practitioners are familiar with the difficulty of enforcing judgments against contractors. The problem isn’t necessarily that they don’t have money in the bank upon which to execute judgment. The problem is, it is often other people’s money, not theirs.
When contractors are paid by an owner, the money they receive must be held in trust for the benefit of any subcontractors and suppliers who worked for the contractor on that project. Until every subcontractor and supplier is fully paid, it is not considered the contractor’s money; it is a trust fund for the benefit of others. And since it is not the contractor’s money until everyone is paid, a creditor cannot restrain its bank account or enforce a judgment against it.
Traditionally, a contractor has merely had to inform the creditor’s attorney that the bank account contains only trust funds and the enforcement action, as a practical matter, is stalled in its tracks. A recent case, however, may reflect a significant swing of the pendulum in favor of the judgment creditor.
A judge in the Supreme Court of Kings County (Brooklyn) recently rebuffed efforts by a contractor to vacate a restraining notice and execution on its bank account after its subcontractor got an award against it in arbitration for $93,000. The contractor argued that its account held money it had received from a variety of project owners “earmarked for payment to subcontractors and suppliers” for their construction work on those other projects, and thus constituted trust funds held for others. It listed 20 checks drawn on that account to various subs and suppliers. The court was not convinced.
The judge did not take issue with the commingling of the funds from multiple projects. That is permitted so long as separate books and records are scrupulously maintained. The contractor’s problem was that it did not sufficiently prove that the source of the funds on deposit was from construction projects and that it was specifically due to subs and suppliers. It failed to annex copies of checks showing the dates they were issued, bank statements establishing where the funds originated, or its accounting books and records. In short, it failed to prove that the deposits in the account were trust funds. Therefore, the court refused to stay enforcement of the subcontractor’s judgment against it.
The significance of this case is that the burden of proof has rarely been so squarely placed on the contractor to establish to a certainty that the funds in its account were trust funds—not an easy task. As a result of this decision, that contractor’s account will be depleted by $93,000, potentially leaving other subs and suppliers (trust fund beneficiaries themselves) without their money, and leave the contractor potentially liable for civil and criminal penalties for trust fund diversion under Article 3A of the Lien Law. But from a creditor’s perspective, collecting a judgment against a contractor may just have gotten a little bit easier.
About the author: Randy Heller is a partner at Gallet Dreyer & Berkey LLP. His practice focuses on construction law and litigation, representing contractors and owners in construction related matters. Mr. Heller has been named a Super Lawyer by the New York Times Magazine as one of the top attorneys in construction law in the New York metropolitan area, and by New York magazine as one of the Best Lawyers of New York. Mr. Heller can be reached at email@example.com.