A Contractor should beware of self-financing with his own funds on a New York job to pay his workmen, 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. The decision may require a Contractor to file Lien Law notices of the self-financing, to avoid intractable litigation. Perhaps more importantly, the decision will discourage contractors from coming out of pocket to fund construction projects.

In Whitford, Babcock & Wilcox Solar (“B&W”) entered into three contracts to build solar farm facilities in upstate New York. On each project, B&W subcontracted with Smoke River and other subcontractors.

The Owner and B&W had a dispute resulting in the Owner terminating B&W. B&W claimed the Owner breached the contracts. 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.

Smoke River and other subcontractors, who were owed money by B&W, 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 the action’s 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.

B&W wanted to use the settlement to reimburse itself for its own personal funds advanced earlier to pay for project labor and material. Smoke River did not consent. It 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. 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 progressing if the Owner delays payment.

The New York Lien Law creates three types of statutory trusts: a Contractor’s trust, a subcontractor’s trust, and an Owner’s trust. Only a Contractor’s trust, which concerns upstream funding from the Owner, is relevant 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 Whitford settlement fund was unanimously held to be a trust asset.

Under the statutory trust, the Contractor uses job revenue to pay job costs only. The Contractor is a fiduciary manager of 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, his job materialmen, and his job insurers and sureties.

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 be used for project purposes only. After paying or discharging all project beneficiary claims (normally by project’s end), the Contractor has more than an equitable title. Lien Law §70(3). 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 such 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 cure-all. Where the Contractor trustee properly disbursed all trust assets but there are unpaid subcontractor beneficiaries (job costs exceed job revenue), the Contractor 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 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. Lien Law §77(a)(3)(iv). Subcontractors, such as excavators, performing early in a job are more likely to be paid than finishing subcontractors (such as painters). 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 and contain the entries required under Lien Law §75(3).

Under a normal trust, the trustee running a business for the trust may borrow from a lender using financing for receivables unless the trust prohibits this. The trustee describes this in reports and accountings.

The New York Lien Law trust provisions allows the Contractor to assign future Owner receivables but it affects financing receivables of a New York improvement. The financing lender who has actual knowledge that receivables come from New York improvements must file a Notice of Lending under Lien Law §73 signed by the contractor specific to each job. The Notice of Lending identifies the Contractor, the lender, the job, and the amount of future Owner payments to be paid to the lender. The Notice of Lending does not state the amount the lender advanced. Alternatively, a Lien Law Notice of Assignment with similar information can be filed.

Based on common law trust principles, the lender with such actual knowledge is a party to diversion of trust assets. The lender filing a Notice of Lending/Assignment has an affirmative defense. 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. Otherwise, a Contractor advancing personal funds to pay job costs could assess financing charges and divert trust assets from their proper use.

Normal trust law allows a trustee to use his personal funds to pay lawful claims (against the trust) when the trust is illiquid. 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, acted in good faith 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 a beneficiary’s claim by assignment or otherwise. Lien Law §71(3). The section does not distinguish between Contractor and Contractor/trustee when a beneficiary’s claim is paid. The Contractor who pays a subcontractor’s invoice discharges the debt and the Contractor’s duty to pay. So too the trustee’s payment with trust assets discharges the subcontractor beneficiary’s claim and the trustee’s duty. If not, the Contractor/trustee could accumulate beneficiary claims, and reimburse himself as trustee at job’s end before other unpaid beneficiaries.

Lien Law §79-a(2) 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…”

Until now, a Contractor did not make Lien Law filings and keep detailed records regarding self-financing. A Contractor, experiencing negative cash flow, might believe it was unnecessary to make Lien Law filings if the Contractor billed the Owner for work performed, the Contractor internally transferred funds to meet a Friday job payroll anticipating receipt of a Monday Owner job payment, and on Tuesday reimbursed himself for the transfer. The Contractor would make journal entries of the internal transfer (as a loan or increase in equity), the payment of the Friday payroll as expense, receipt of Monday’s Owner payment as income, and Tuesday’s reimbursement for the internal transfer (reducing loan or equity).

When properly analyzed, Whitford was a trust priority battle between unpaid subcontractors, and B&W asserting an indemnity claim. The court should have set the matter down for a hearing. The court has the discretion to ratably distribute the settlement, instead of favoring B&W’s self-financed payment of early job performing trust beneficiaries.

Under the majority opinion in L.C. Whitford Co. Inc., v Babcock & Wilcox Solar Energy Inc., the Contractor must within days of an internal transfer of funds file a Lien Law Notice of Assignment of future Owner moneys from Contractor (as trustee/assignor) to Contractor (personally). The Contractor must sign the Notice as trustee. The Contractor must keep records under Lien Law §75(3). The Contractor must prepare and sign an assignment of Owner payments up to a specific amount, for no consideration. Objectively, the Contractor is documenting a manufactured transaction. But the documents may be necessary for the Contractor to avoid breaching the Lien Law trust with potential liability up to the amount in the assignment.