Gallet Dreyer & Berkey, LLP | Homeowners Given Powerful New Weapon for Use against Home Improvement Contractors
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Homeowners Given Powerful New Weapon for Use against Home Improvement Contractors

06/07/2011 | Summer 2011 Newsletter
Homeowners in New York City who believe they have been ripped off by an unlicensed home improvement contractor have long had a very useful tool available to them — the Home Improvement Business provisions of the Administrative Code of the City of New York.

Those provisions (versions of which have been enacted in many neighboring counties) require that a home improvement contractor must be licensed. If it is not, the contractor may not file a mechanic’s lien and may not sue the homeowner for failing to pay for the work — even if the work has been done and money would otherwise have been due.

But where the contractor is licensed, or there is no further money due to the contractor, that remedy is of little help to a damaged homeowner. The Appellate Division, Second Department recently handed down a case which may provide a potent weapon for these homeowners.

The case involved a home improvement on Long Island where the contractor had breached the contract and abandoned the project. At the time of the abandonment, the contractor had been overpaid. In addition to seeking the added cost to complete the work, the homeowner argued that the contractor failed to hold and apply the money it received for the benefit of the project, but rather misappropriated the funds. This was an argument based on Article 3A of the Lien Law — the trust fund provisions of that law.

Article 3A is rather arcane, dealing with an esoteric subset of the Lien Law. In simple terms, it provides that contractors who receive payment for construction work are required to hold the money as a trust fund for the benefit of all of its subcontractors and suppliers who provide improvements to the project. The contractor may not even keep any of those funds for its own profit until all trust fund beneficiaries (the subcontractors and suppliers) have been paid in full. If the contractor fails to use the trust funds for a valid trust purpose, the contractor can be said to have committed a trust fund “diversion” which can subject not only the contractor, but its officers or agents, individually, to both civil and criminal penalties.

What was unusual about this case, however, was that Article 3A was applied not for the benefit of an unpaid subcontractor or supplier, but for the benefit of the homeowner. Relying on a little-used provision in Article 3A, the court held that a home improvement contractor must deposit into a bank account all moneys received from a homeowner, which deposits remain the property of the homeowner until they are spent on the costs of improving the premises or until the project is completed. In essence, they remain trust funds for the benefit of the homeowner. Use of these trust assets for any purpose other than an expenditure permitted by the Lien Law constitutes an improper diversion, regardless of the contractor’s intentions.

And to the extent that the corporate officers of the contractor were responsible for the diversion of these trust funds, the court held that they could be personally liable for the missing money. 

Not a bad weapon to have in your arsenal. And a warning to home improvement contractors everywhere.