Appellate Division First Department Confirms that Project Owners and Other "Upstream" Contractors Have Standing to Utilize Lien Law Article 3-A Remedies
It is well understood that contractors for construction projects in New York State have statutory obligations for funds that they’ve received in connection with construction projects. Under New York Lien Law Section 70, those contractors, and their officers are deemed statutory trustees of those funds. As a result, those contractors and their officers are deemed trustees of funds received which must only be used for monies owed to Lien Law Trust Beneficiaries – i.e.: those funds can only be paid to those who provided work, labor, and materials for the construction project at issue who are deemed “beneficiaries” of the trust. Those trustees are also required to account for those funds received and are subject to the various remedies set forth in Lien Law Article 3-A.
But what happens if you aren’t a subcontractor, materialman, or other person/company that provided project labor or material who is owed money by an “upstream” contractor on a “non-home improvement" project? If you aren’t such a “downstream” party, then you are not deemed “beneficiary” of the trust under the New York Lien Law? Instead, what if you are a project owner, or a construction manager/general contractor who is dealing with a recalcitrant “downstream” contractor or other labor/material supplier that you’ve paid money to – which hasn’t paid its own subcontractors and labor/material suppliers. What can you do then under the Lien Law?
Although the NY Lien Law unambiguously gives certain rights and remedies to the Lien Law Trust “beneficiaries” to enforce the Trust Fund provisions of Lien Law Article 3-A, there is no such clear provision for project owners and other “upstream” parties on non “home improvement contracts”. For home improvement contracts, Lien Law 71-a permits a project owner and upstream contractor to utilize Article 3-A remedies against downstream parties. However, the law has been relatively unsettled as to remedies available to upstream parties on non-“home improvement contracts”.
In a comprehensive decision issued on August 24, 2024, the Appellate Division, First Judicial Department provided much needed clarity to those up-stream “owners” and “contractors” on “non-home improvement” projects. Although the Second Department previously addressed the issue of whether these “owners” and upstream parties had standing to assert Lien Law Article 3-A claims in J. Petrocelli Constr. Inc. v. Realm Elec. Contractors, Inc., 15 A.D.3d 444 (2d Dep’t 2005)(general contractor had standing under Lien Law Art. 3-A) and Wallkill Med. Dev. LLC. V. Sweet Constructors, LLC, 83 A.D.3d 695 (2d Dep’t 2011), the First Department (which covers Manhattan and the Bronx) had not previously addressed this important standing issue. In Flintlock Construction Services, LLC v. HPH Services, Inc., No. 2023-00591 and 2023-01976, 2024 N.Y. Slip. Op. 04282 (1st Dep’t August 22, 2024), the First Department adopted the Second Department’s earlier reasoning to re-confirm that an “upstream” general contractor or project owner has standing to assert Lien Law Article 3-A claims (such as trust fund diversion) against its subcontractors based upon the principle of subrogation.
Not only did the First Department in Flintlock confirm an “upstream” party could seek recovery under Lien Law Article 3-A, but the First Department also discussed the quantum of proof necessary to hold an individual officer liable for Lien Law Trust Fund diversion. In Flintlock, the First Department confirmed the trial court’s finding of personal liability because that officer was the sole person authorized to issue checks and wire transfers on behalf of the trustee subcontractor who had received monies from the general contractor; thus, any “purported “lack of knowledge” of funds diverted by the subcontractor was implausible.
Therefore, Flintlock has provided upstream general contractors and project owners with much needed clarity concerning their rights and potential remedies under Article 3-A of the New York Lien Law to seek recovery against recalcitrant “downstream” contractors who it has paid money to. Now, these upstream parties have another tool that can be utilized since they can invoke Lien Law Article 3-A remedies in addition to any contractual remedies that they may have.
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