Commercial Division Blog

Posted: May 7, 2021 / Categories Commercial, Construction

Lien Law Claim Not Defeated by Later Payment Out Of Non-Trust Assets

On April 30, 2021, the Fourth Department issued a decision in DiMarco Constructors, LLC v. Top Capital of N.Y. Brockport, LLC, 2021 NY Slip Op. 02680, holding that a Lien Law claim cannot be defeated by evidence that an improper diversion of trust fund assets was cured by a later payment of non-trust assets, explaining:

We further agree with plaintiffs on their appeal that the court erred in granting defendants' motion in part by limiting the potential damages in the diversion causes of action to a maximum of $104,205.99 based on Top Capital's alleged restoration of trust assets through payments made with non-trust assets, and we therefore modify the order by denying defendants' motion in its entirety. Plaintiffs allege that approximately $1.4 million in trust assets was improperly diverted by defendants. The court, in limiting the potential recovery on the diversion causes of action, credited not just Top Capital but all defendants for the approximately $1.3 million Top Capital paid DiMarco from non-trust assets after the trust fund was depleted. That was error because defendants failed to establish their entitlement to a restoration defense as a matter of law. Contrary to defendants' assertion, the Court of Appeals has rejected the argument that a defendant can cure an improper diversion of trust assets, and therefore avoid liability for that diversion, by a subsequent payment from non-trust assets. Defendants rely on dicta in that case wherein the Court of Appeals posited that, if non-trust fund assets are used "to pay trust claims and there had been no loss to anyone, then there would have been no ultimate diversion or loss for which the defendant would be liable. Under such circumstances, the salutary purposes of the rather rigorous regulations of the Lien Law would not be avoided or blunted. Here, however, plaintiffs allege that $1,783,320.22 remains due for labor and materials and that approximately $1.4 million of the trust assets intended to pay for the same was improperly diverted by defendants. Thus, this is not the hypothetical double-recovery situation envisioned by the Court of Appeals where there has been no loss to anyone even assuming funds were improperly diverted. Indeed, to hold otherwise would open the door to the practice of pyramiding, in which owners or contractors use loans or payments advanced in the course of one project to complete another, one of the very evils that the Lien Law was intended to guard against.

(Internal quotations and citations omitted).

We frequently litigate disputes over the sale or leasing of, or construction relating to, commercial property. Contact Schlam Stone & Dolan partner John Lundin at if you are involved in a dispute regarding a commercial real estate transaction or construction.