Lien Law Article 3-A Trust Fund Diversion: How NYC Subcontractors Hold the GC's Officers Personally Liable
Updated: 24 hours ago
Under Lien Law § 79-a(1)(b), a New York general contractor that holds a subcontractor's progress payment and then fails to pay that trust claim within 31 days of its due date, while using the money for any non-trust purpose, is guilty of larceny under the Penal Law, unless it disputes the claim in good faith and pays within 31 days after the dispute is finally determined. That statutory trigger has been on the books for decades, yet most NYC subs and suppliers never invoke it. A Lien Law Article 3-A trust fund diversion claim is the single most powerful remedy you have when the general contractor spends your money on another job or on personal expenses. Done right, it reaches past the corporation and attaches personal liability to the officers who signed the checks. Done wrong (filed late, pleaded as a solo lawsuit, or aimed only at the shell corporation), it gets dismissed before any of that matters.
Key takeaways
Progress payments a GC receives on a private NYC job are statutory trust funds for subs, suppliers, and labor.
Officers who knowingly participated in diverting those funds can be sued personally; the corporation is not a shield.
Missing or incomplete books and records create a statutory presumption of diversion against the corporation.
You generally have one year from completion of the improvement to sue, so waiting on promises to pay is dangerous.
The claim must be pleaded as a class action for all trust beneficiaries, not a solo lawsuit.
Why does waiting out the GC's "we'll pay next week" promises destroy a Lien Law Article 3-A trust fund diversion claim?
Because the statute gives you a hard one-year window and because the GC's principals use that year to move money. Under Lien Law § 77(2), a trust-enforcement action generally must be commenced within one year after completion of the improvement, or (for subcontractors and materialmen) one year from the date final payment under your contract became due, whichever is later. That clock runs regardless of how patient you are being, and the Second Department has confirmed that completion means completion of all the work on the improvement, not just your scope. Holt Construction Corp. v. Grand Palais, LLC, 108 A.D.3d 593 (2d Dep't 2013).
A common mistake is waiting too long. Business owners and homeowners get strung along by promises to pay, to come back and fix the work, or to deliver the materials. Those promises rarely come true, and the delay gives the other side time to move assets out of the company or out of their own name before a lawsuit begins. For a subcontractor sitting on an unpaid $600,000 requisition from a GC on a Williamsburg hotel job, three months of "the owner hasn't paid us yet" calls is three months the principal is using to re-title a Queens condo, close out the operating bank account, or spin up a successor LLC with the same crew and address.
Bonding off your mechanic's lien does not discharge your Article 3-A trust claim. These are two separate rights, and the Holt court made clear that even after a lien is discharged by bond, the trust diversion case against the corporation and its principals keeps running on its own one-year track. If you let the trust claim lapse because the lien was "handled," you have given away your best route to personal liability against the individuals.
Avoid this by treating the 31-day trigger under § 79-a(1)(b) as your real clock. Once payment is 31 days past due and not disputed in good faith, you already have enough to put the GC's counsel on written notice that trust funds appear to have been diverted and that the officers face personal exposure. That letter alone often moves the money. For broader timing issues on the lien side, see our overview of New York Lien Law Article 3-A trust fund claims.
Why is suing only the GC corporation, and not its officers personally, a costly mistake?
Because Lien Law § 79-a makes any "officer, director or agent" of the corporate trustee who applied or consented to the application of trust funds for a non-trust purpose guilty of larceny, and courts hold such officers civilly liable when they knowingly participated in the diversion. If your judgment is only against the GC entity, you are chasing a shell that likely has no bank balance and no assets by the time you win. The officers who actually directed the money elsewhere, the president who cut the check to the luxury car dealer, the controller who paid down another job, are the ones with collectible assets.
The appellate courts have affirmed this personal-liability rule in exactly this fact pattern. In Holt Construction Corp. v. Grand Palais, LLC, 108 A.D.3d 593 (2d Dep't 2013), the Second Department entered judgment of $935,342.55 against a president who used sale proceeds to pay other debts rather than the contractor beneficiaries. In Medco Plumbing, Inc. v. Sparrow Construction Corp., 22 A.D.3d 647 (2d Dep't 2005), the court affirmed a judgment of roughly $1.8 million against both the corporation and its individual principal based on the principal's knowing participation in the diversion. And at the pleading stage, Kulback's Inc. v. Buffalo State Ventures, LLC, 197 A.D.3d 890 (4th Dep't 2021), confirmed that allegations the individual representatives used mortgage-funded trust money for non-trust purposes were enough to state a personal-liability claim against those individuals.
The standard, repeated across every department, is "knowing participation." Corporate officers may be personally liable for trust funds wrongfully diverted by their corporation when they knowingly participated in the diversion. That means your complaint has to allege, with real facts, what each officer knew and did: which bank account they controlled, which checks they signed, which non-trust payments they authorized. A generic allegation that "defendant Smith is an officer of the GC" will not survive a motion to dismiss.
Avoid this mistake by subpoenaing (or demanding, if you can get it voluntarily) the GC's bank signatory cards, cancelled checks, and QuickBooks ledgers at the earliest possible moment, and by naming every officer whose signature appears on diverted-fund transactions. For context on how these claims coordinate with your lien rights, see our guide on New York mechanic's liens.
Why does filing your trust claim as a solo lawsuit, instead of a class action under § 77(1), lead to dismissal?
Because Lien Law § 77(1) requires a trust-enforcement action to be brought as a representative action "for the benefit of all beneficiaries of the trust," conforming as nearly as possible to the practice and procedure of a class action under CPLR Article 9. If your pleading treats the case as a simple two-party collection action, the GC's counsel will move to dismiss on exactly that ground. In Atlas Building System Inc. v. Rende, 236 A.D.2d 494 (2d Dep't 1997), the Second Department addressed a $200,000 diversion but still required that notice go to the other trust beneficiaries before the case could proceed. The court remitted rather than dismissing, which was a mercy, not a guarantee.
The First Department has been similarly flexible when the defendants sleep on the procedural issue. In West End Interiors, Ltd. v. Aim Construction & Contracting Corp., 286 A.D.2d 250 (1st Dep't 2001), the court reinstated the trust claim against the GC's principal on the condition that the subcontractor move for class certification under CPLR 902 within 30 days, noting that defendants had not moved to dismiss on procedural grounds. That is a thin lifeline, not a strategy.
You avoid this mistake by captioning the complaint as a representative action on behalf of all trust beneficiaries from the start and by moving for class certification promptly once the case is filed. Section 77(1) expressly allows a court to waive the numerosity element of a true class action in its discretion, so even a project with only a handful of unpaid subs still qualifies. What the courts will not waive is the requirement to plead the case in a representative capacity. And they will not let you add it years later, after the trustee's officers have moved their assets.
If you also have a disputed lien on the same project, review our discussion of how to file a mechanic's lien in New York so you track the lien and trust claim deadlines separately.
Why does ignoring the books-and-records presumption let the GC's officers escape?
Because Lien Law § 75 requires every trustee to keep specific records of trust assets receivable, trust claims payable, trust funds received, and trust payments made, and § 79-a(3) makes the trustee's failure to keep those records "presumptive evidence" of diversion. If you never demand those records and never put the gap on the trial record, the presumption never gets triggered and the burden stays on you to prove the diversion the hard way, invoice by invoice.
The Second Department has been emphatic about how weak the GC's excuses will be once the presumption is in play. In Medco Plumbing, Inc. v. Sparrow Construction Corp., 22 A.D.3d 647 (2d Dep't 2005), the trustee tried to defend by saying the corporate books had been seized by the Manhattan District Attorney's office. The court rejected that: "the mere assertion that such books and records were kept was insufficient to avoid the statutory presumption." It added that the defendants' assertions about which records were taken were conclusory and vague, and that they had not shown any attempt to regain possession of them. In our view, excuses like "the accountant has them" or "they were in the storage unit that flooded," offered without specifics or any real effort to recover the records, will fare no better. Once the presumption applies, the trustee has to come forward with evidence that it did not divert the trust funds.
There is one First Department wrinkle worth knowing. In Forest Electric Corp. v. Karco-Davis, Inc., 259 A.D.2d 303 (1st Dep't 1999), the court held that the statutory presumption of diversion (which the court cited as Lien Law § 75(4)) applies against the corporate trustee but not automatically against an individual officer. The sole officer's admissions and control over finances raised fact issues sufficient to defeat his motion for summary judgment, but the plaintiff did not win summary judgment against him on the presumption alone. So if your case is in Manhattan or the Bronx, plan to prove the individual's personal participation with testimony, emails, and financial records, not just by pointing to missing books.
Avoid this mistake by demanding the § 75 records in your first document request, serving a deposition notice targeted at the trust bookkeeping, and moving to compel early if the records don't come. When the trustee can't produce them, you file a motion for partial summary judgment or an in limine ruling establishing the presumption before trial.
Why does stacking duplicative fraud and fiduciary duty claims weaken an Article 3-A case?
Because courts dismiss common-law claims that merely repackage a claim already pleaded elsewhere in the complaint, and every dismissed count signals to the judge that the complaint was over-pleaded. In Kulback's Inc. v. Buffalo State Ventures, LLC, 197 A.D.3d 890 (4th Dep't 2021), the Fourth Department reinstated the Lien Law trust claim against the individuals but upheld the dismissal of the breach-of-fiduciary-duty count as duplicative of the statutory trust claim and the fraud count as duplicative of the breach-of-contract claim. The fiduciary-duty count added nothing the trust claim did not already cover. The fraud count rested only on alleged misrepresentations of the intent or ability to perform under the contract, so it added nothing beyond the contract claim. Both dismissals gave the defense easy wins on the motion to dismiss.
A tight complaint stays focused on the statutory elements: the existence of the trust under Lien Law § 70, the trust claim as a beneficiary under § 71, the diversion under § 72, and the knowing participation by each named officer in the diversion. You can allege alternative theories like conversion or unjust enrichment against non-trustee third parties who received diverted funds, but against the GC and its officers, the trust claim should carry the load.
We're also seeing more disputes over contracts drafted with AI tools. AI can produce a polished generic contract, but if you don't know what you need it to say, it may leave out the terms that protect you, and that gap has become a real source of litigation. On trust-fund-sensitive subcontracts, the terms that matter (joint-check agreements, lien-waiver sequencing, and required proof of payment to lower tiers) are exactly the ones generic templates skip. If you're a subcontractor signing a form contract on a large NYC job, have the payment and lien sections reviewed before you sign, not after the GC stops paying.
For related strategy questions, see our discussion of pay-if-paid clauses in New York and of how New York's Prompt Payment Act forces owners and GCs to pay contractors on time.
Frequently Asked Questions
How quickly must I act once my subcontract payment becomes past due?
Treat the 31-day trigger under Lien Law § 79-a(1)(b) as the real deadline. Once a trust claim sits unpaid for more than 31 days without a good-faith dispute, you should put the GC and its principals on written notice of potential trust fund diversion. The outer limit under § 77(2) is generally one year from completion of the improvement or your final-payment due date, whichever is later.
What if the general contractor claims it "lost" its books and records?
Vague excuses do not rebut the presumption. Under Medco Plumbing, Inc. v. Sparrow Construction Corp., 22 A.D.3d 647 (2d Dep't 2005), even a vague, unsupported claim that the records had been seized by prosecutors, with no effort to get them back, was not enough. The trustee has to actually produce the § 75 records, and if it cannot, the presumption of diversion applies to the corporation.
Can I recover attorney's fees in a Lien Law Article 3-A trust fund diversion case?
Article 3-A itself does not contain a fee-shifting provision, so fees are generally not awarded in trust-enforcement actions unless your underlying contract provides for them. You can recover interest on diverted funds under § 77(3). The real economic lever is personal liability against the officers, which often makes the case worth bringing even without statutory fee shifting.
Does bonding off my mechanic's lien end my trust claim?
No. The Second Department confirmed in Holt Construction Corp. v. Grand Palais, LLC, 108 A.D.3d 593 (2d Dep't 2013), that discharge of a mechanic's lien by bond does not discharge the Article 3-A trust claim. They are independent rights with independent clocks, so you have to preserve both.
A Lien Law Article 3-A trust fund diversion claim is a tool designed to pierce past a corporate shell and reach the individuals who spent your money on something other than trust purposes. It only works if you move inside the one-year window, plead the case as a representative action, name the officers by name, and force the books-and-records presumption. When those pieces are in place, the GC's principals are personally on the hook, which is exactly the leverage an unpaid sub or supplier needs to get paid. How Reza Yassi goes after money owed to subs and suppliers is covered on the firm's unpaid invoice collection page.
If you or your business is an unpaid subcontractor or supplier on a private NYC construction project and you suspect the general contractor diverted your trust funds, Reza Yassi at Yassi Law PC is ready to help. Call us today at 646-992-2138 for a consultation.
Written by Reza Yassi
Prior results do not guarantee a similar outcome.
This article is for informational purposes only and does not constitute legal advice. Although I am an attorney, I am not your attorney, and reading this article does not create an attorney-client relationship. Laws vary by jurisdiction and may have changed since the publication of this article. For advice specific to your situation, consult a qualified attorney.
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