Lien Law. Thomas K. O Gara, Esq. 09

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1 Lien Law, Esq. 09

2 LIEN LAW Presented By: Albany Law School Alumni CLE May 5, Canal View Boulevard, Suite 600, Rochester, NY Phone: Fax:

3 LIENS: Overview Purely a creation of statute Strict compliance, but liberally construed to favor contractor, subcontractor, etc. Does not create a RIGHT to payment; Creates security interest to ENFORCE right to payment Encumbers real property or public funds Purpose: Secure Payment & Notify Buyers 180 Canal View Boulevard, Suite 600, Rochester, NY Phone: Fax:

4 Type of Projects What is a Lien? Public Project: Attaches to the money the Government appropriated for the project. Private: Attaches to the real property Federal: No lien rights Who can file? Anyone who provides services for improvement of real property at the direct or implied request of owner Some affirmative action of course of conduct by owner. (Lease) Subs, sub-subs, suppliers, materialmen, etc. No third-tier subs. No for Union Benefits. 180 Canal View Boulevard, Suite 600, Rochester, NY Phone: Fax:

5 Logistics: When and Where Private Project: When: Anytime during construction, but no later than 8 months after completion of work. 4 months for single family dwelling. Punchlist, remedial, warranty work won t extend. Where: County Clerk where project located. Proof of service within 35 days. Public Project: When: Any time during construction, but no later than 30 days after completion & acceptance. Where: 1) Head of Construction and 2) Head of Funds (Finance). Proof of service with lien. 180 Canal View Boulevard, Suite 600, Rochester, NY Phone: Fax:

6 What Can You Lien For? Improvements made to real property with Owner s express or implied consent. Includes: Labor and material, interest, rental equipment, change orders Excludes: Attorneys fees, consulting fees, lost profits, delay damages Due and Owing at Time of Lien. Lien Fund created when lien is filed. If Owner pays over lien then liability. Impacts Subs more than GCs 180 Canal View Boulevard, Suite 600, Rochester, NY Phone: Fax:

7 Contents of the Lien Lien Law 9 Private Lien Lien Law 12 Public Lien. Description of the Property (private)- Description of the Property (preferably by block and lot). Improper description voids lien. Misdescription of Owner or Contractor does not. Dates labor and materials first and last supplied to project. Minor defects are not fatal. Amendments Generally need Court Order (Valid Lien) Lien can be reduced by amendment within 60 days (20 days notice) Can file successive lien, if enough time. 180 Canal View Boulevard, Suite 600, Rochester, NY Phone: Fax:

8 OWNER S RESPONSE Pay or Demand GC remove In most contracts Demand Itemized Statement Useful if trying to prove willful exaggeration. Demand to Foreclose Lienor Has 30 days to foreclose or lien discharged Deposit money into Court Move to Discharge Defects on its face. Bond 180 Canal View Boulevard, Suite 600, Rochester, NY Phone: Fax:

9 AFTER FILING Lien Valid for 1 year; permitted 1 year extension as of right Extension even if lien bonded. Need Court Order after extension. Willful Exaggeration - Strong Penalties Waiver: Not in advance, only upon payment Priority: Liens of same class treated the same Building Loans for mortgage may have priority. 180 Canal View Boulevard, Suite 600, Rochester, NY Phone: Fax:

10 TRUST FUNDS Lien Law article 3-A Most significant, least utilized Purpose: Ensure that those who provided labor and materials for construction projects are paid for the work performed Funds received by owners, contractors, or subcontractors are trust assets No interest/legal right to money until ALL beneficiaries paid IN FULL. Money must first be applied to trust asset. Trust begins when any trust asset comes into existence. Ends when all beneficiaries paid in full. UNTIL ALL BENEFICIARIES PAID IN FULL, AT THE END OF THE PROJECT, TRUST FUNDS CANNOT BE USED FOR NON-TRUST PURPOSE. Applies to both private and public projects. 180 Canal View Boulevard, Suite 600, Rochester, NY Phone: Fax:

11 TRUST FUNDS Trust Purpose: pay subs, taxes (payroll, unemployment), bond premiums, benefits & wages. Non-Trust Purpose: Loan interest, office expense, other projects, profits, factors. Beneficiaries: Those improved real property; generally those entitled to file a lien. Any use of trust funds for non-trust purpose is a diversion. Trustees have discretion so long as trust purpose. 180 Canal View Boulevard, Suite 600, Rochester, NY Phone: Fax:

12 TRUST FUNDS Failure to keep separate accounts prima facie proof of diversion Contractor can rebut Liability against parties that KNOWINGLY received trust funds Banks, Factors Right to inspect books and records or Demand a Verified Statement (money in and out). Diversion can carry personal liability; criminal charges One year to sue from project completion. 180 Canal View Boulevard, Suite 600, Rochester, NY Phone: Fax:

13 CASE STUDY Price Trucking v. AAA Environmental, Inc. - GC had LOC with Bank. - Bank swept GC s account on daily basis; applied to LOC. - GC does not pay subcontractors on private construction project. - Subcontractors sue Bank for diversion of trust assets under Lien Law article 3-A. 180 Canal View Boulevard, Suite 600, Rochester, NY Phone: Fax:

14 QUESTIONS? 180 Canal View Boulevard, Suite 600, Rochester, NY Phone: Fax:

15 I. How do lien rights arise? NEW YORK CONSTRUCTION LIEN LAW ERNSTROM & DRESTE, LLP A. Definition of a Lienor 1. To understand what a lienor is, it is important to understand what a mechanic s lien is. Strictly a creature of statute, the mechanic's lien protects persons who provide labor or materials for the improvement of real property at the request or with the consent of the owner (or his contractors or subcontractors) by allowing them to create either a lien against the improved realty (in the case of private improvements) or against the funds committed to the project by the state, municipality, or public corporation (in the case of public improvements). 2. A lienor is anyone who possesses a lien right, which is discussed in more detail in the following sections. Generally, in the context of construction mechanic s liens, a lienor is someone whose labor or materials have improved a property. Once a lien right is obtained, a lienor is someone who possesses an interest in the real property, or, in the case of public improvements, claims a right to the contract funds which have been dedicated to the improvement. B. Comparison of lien rights in New York versus other jurisdictions 1. Lien law rights are entirely creatures of statute, and each state has its own lien law. Therefore, those rights may be very different from jurisdiction to jurisdiction (i.e., from state to state). No lien rights exist at all on federal projects. To protect subcontractors and suppliers on such projects, Congress passed the Miller Act, which requires surety payment bonds on most federal projects. Such bonds are intended to provide rights similar to those provided by state lien laws. Bond claim rights will be discussed in more detail below. New York is unique in that it mandates a surety payment bond for most public projects and also allows liens on public projects. 2. Many jurisdictions follow the federal model -- sometimes with a twist. For example, some jurisdictions do not permit liens on public works projects, while permitting them on private jobs. Some jurisdictions allow liens on both private and public works. 3. The bottom line is that there are almost as many sets of rules concerning liens as there are states in the union. This is a crucial point. One cannot assume that lien rights are the same from state to state. To the contrary, you should assume that they are different. For example: ALBANY LAW SCHOOL ALUMNI CLE ERNSTROM & DRESTE, LLP May 5, 2016

16 II. Who possesses lien rights? a. In Pennsylvania, it is perfectly permissible for a contract to provide that lien rights on the project are waived in advance -- but to do the same in New York is void as against public policy. b. In Ohio, the failure to file a statement protesting a lien within a certain time requires the public owner to pay the funds over to the lienor. c. In Tennessee, a subcontractor may file a lien, but only after filing a notice of non-payment within ninety days of performing the work. In addition, the Tennessee lien of a subcontractor lapses after ninety days unless the subcontractor brings a lien foreclosure action. 4. These are but a few examples of how the myriad of lien law statutory schemes contains traps for the unwary. A subcontract containing a lien waiver clause that is perfectly legal in Pennsylvania will be struck down in New York. Conversely, where an owner on a Pennsylvania project requires a contractor to include a lien waiver in its subcontracts and the contractor fails to do so, the contractor may have breached the contract. The important thing to recognize is that lien rights may differ as to what projects are lienable, who may file liens, how and where to file liens, when to file liens, and whether the ability to file liens can be waived entirely. A. PRIVATE IMPROVEMENTS 1. Lien Law 3 provides, in part: B. PUBLIC IMPROVEMENTS A contractor, subcontractor, laborer, materialman, landscape gardener, nurseryman, [ ] who performs labor or furnishes materials for the improvement of real property with the consent or at the request of the owner thereof, or of his agent, contractor or subcontractor, shall have a lien for the principal and interest, of the value, or the agreed price, of such labor or materials upon the real property improved and upon such improvement, [ ]. Materials actually manufactured for but not delivered to the real property, shall also be deemed to be materials furnished. 1. Lien Law 5 provides, in part: A person performing labor for or furnishing materials to a contractor, his subcontractor or legal representative, for the construction or demolition of a public improvement pursuant to a contract by such contractor with the state or a public corporation, shall have a lien for the principal and interest of the value or agreed price of such labor or ALBANY LAW SCHOOL ALUMNI CLE ERNSTROM & DRESTE, LLP May 5, 2016

17 materials upon the moneys of the state or of such corporation applicable to the construction or demolition of such improvement, to the extent of the amount due or to become due on such contract, and under a judgment of the court of claims awarded to the contractor for damages arising from the breach of such contract by the state [ ]. 2. Public improvements do not include improvements where the beneficial interest is not the state or a public corporation. A public improvement lien can only be filed pursuant to a contract with the State or public corporation. Lien Law 5. a. Therefore, beware if the lien is for a public improvement. The Smithsonian Institute does not qualify as "the state" or "a public corporation. See Madison Restoration Corp. v. Smithsonian Institute, 985 F.Supp. 434 (S.D.N.Y. 1997). 3. Public corporation defined as "a municipal corporation or a district corporation or a public benefit corporation as such corporations are defined in section three of the general corporation law." Lien Law 2(6). 4. Municipal corporation defined as "a county, city, town, village and school district." N.Y. Gen. Constr. Law 66(2). 5. District corporation defined as "any territorial division of the state, other than a municipal corporation." N.Y. Gen. Constr. Law 66(2). 6. Public benefit corporation defined as "a corporation organized to construct or operate a public improvement wholly or partly within the state, the profits of which enure to the benefit of this or other states, or to the people thereof." N.Y. Gen. Constr. Law 66(4). 7. Exception for Industrial Development Agency projects (IDA) - IDA projects involve public property and private fund of money. Since property interest will ultimately vest in a private entity, file lien as a private improvement lien. Lien, therefore, attaches to the property. C. Union Benefit Funds cannot file a mechanic s lien on public or private projects. EklecCo v. Iron Workers Locals 40, 361 & 417 Union Security Funds, 170 F. 3d 353 (2d Cir. 1999). The Lien Law is preempted by ERISA. III. What items are lienable? A. Labor: 1. In general, labor costs are properly lienable to the extent that the labor directly benefits the property. ALBANY LAW SCHOOL ALUMNI CLE ERNSTROM & DRESTE, LLP May 5, 2016

18 a. Labor used to install materials in an improvement is properly lienable. b. Labor expended to manufacture materials to be used in an improvement is not properly lienable. c. Supervision is properly lienable where supervision of the actual construction is performed at the request of the owner. 2. Benefits: Definition of labor includes benefits and wage supplements due or payable for the benefit of any labor (Lien Law 3 & 5). B. Materials: 1. Materials specially manufactured for but not delivered to a specific improvement are lienable. 2. Materials accepted by the owner or contractor but stored off site are properly lienable. 3. Delivery of materials to the site is sufficient-- materials need not be incorporated into an improvement to be claimed on a lien. C. Equipment Rental: Reasonable rental value of machinery, tools and equipment is included in the definition of materials and are therefore lienable items. D. Temporary Work: Temporary work reasonably required during the process of construction is properly lienable. E. Overhead & Profit: 1. Overhead items such as employee benefits and wage supplements such as retirement benefits, disability, life insurance, holiday and vacation pay, payroll taxes and unemployment insurance, are lienable. 2. Profit to the extent it is included as a component of the base contract price is properly lienable. F. Lost Profits: Lost profits are not properly lienable. G. Contract Damages: Damages that may be recoverable under a contract, including delay damages, are not properly lienable. H. Extras: Change orders and extra work consented to or authorized by the owner or contractor are properly lienable. ALBANY LAW SCHOOL ALUMNI CLE ERNSTROM & DRESTE, LLP May 5, 2016

19 IV. Lien Waivers A. Generally, a lien waiver prior to payment is invalid in New York. The Lien Law provides that any agreement by which a person agrees to waive a lien right is void as against public policy and wholly unenforceable. Lien Law 34. Section 34 does, however, go on to provide that it is permissible for a contract to require a written waiver of the right to file a mechanic s lien simultaneously with or after payment for the labor performed or materials furnished has been made Any contractual provision that is seen as an impediment to contractor s rights under the lien law is also void and unenforceable. American Architectural, Inc. v. Marino, 109 A.D.3d 773 (2d Dep t 2013). B. Mechanic's lien waivers cannot be required as precondition for payment and may only be required either at the time payment is made or thereafter. U.W. Marx, Inc. v. Koko Contracting, Inc., 97 A.D.3d 893 (3d Dep t 2012). 1. Lien release must be able to be changed; otherwise will be viewed as merely a receipt of payment. V. How are liens filed? A. PRIVATE IMPROVEMENTS 1. Filing Requirements a. Time to File: (Lien Law 10): During the progress of the work and furnishing of materials OR within 8 months of the final performance of work or final furnishing of materials by the lienor (4 months if the work is performed or materials furnished to a single family dwelling). - Lien for retainage only can be filed upon to 90 days after the date the retainage was due to be released. b. Where to File: (Lien Law 10): In the Office of the Clerk of the County in which the real property which has been improved is located. c. Contents of Notice of Lien: (Lien Law 9) - Name and address of lienor. Lien Law 9(1). - Name and address of lienor's attorney, if any. Lien Law 9(1-a). - Name of owner of property to be liened and interest of owner, as far as known to lienor. Lien Law 9(2). - Name and person whom lienor was employed by or who furnished materials, or with whom he had a contract. Lien Law 9(3). - Labor performed and/or materials furnished and the agreed price or value thereof. Lien Law 9(4). - Amount unpaid to lienor. Lien Law 9(5). - Date of first and last work performed and materials furnished. ALBANY LAW SCHOOL ALUMNI CLE ERNSTROM & DRESTE, LLP May 5, 2016

20 Lien Law 9(6). - Description of the property subject to the lien. Lien Law 9(7). - Signature and verification. Lien Law 9(7). 2. Notice Requirements: Lien Law 11 & 11-b. a. An OWNER must be served with a copy of the lien. Service must be five days before or 30 days after the filing of the notice of lien. Proof of service on the owner must be filed within 35 days with the Clerk of the County in which the property is located. Lien Law 11. b. Lienor must also serve the CONTRACTOR, SUBCONTRACTOR, assignee, or legal representative to whom the lienor supplied labor or materials. Service must be five days before or 30 days after the filing of the notice of lien. Proof of service must be filed within 35 days with the Clerk of the County in which the property is located. Failure to do so terminates the notice of lien. Lien Law 11-b. 3. Duration: A properly filed private improvement lien is valid for one year from the date of filing. The lien may be extended, once as of right. Lien Law 17. B. PUBLIC IMPROVEMENTS 1. Filing Requirements a. Time to File: At any time before the construction or demolition work is completed and accepted by the state or public corporation, or within 30 days after such completion and acceptance by the public owner. Lien Law 12. b. Where to File: Notice of lien for public improvement must always be filed with two distinct persons: - Head of the department or bureau having charge of such construction. Lien Law 12; AND - Comptroller of state, or with the financial officer of the public corporation, or other officer or person charged with the custody and disbursements of the state or corporate funds applicable to the contract under which the claim is made. Lien Law 12. c. Contents of Notice of Lien: (Lien Law 12). - Name and residence of lienor; - Name of contractor or subcontractor for whom the labor or materials were provided; - Amount claimed to be due or to become due, and dates when ALBANY LAW SCHOOL ALUMNI CLE ERNSTROM & DRESTE, LLP May 5, 2016

21 due; - Description of public improvement; - Description of the labor and materials; - General description of the contract pursuant to which the public improvement was construed or demolished; and - Signature and verification. 2. Notice Requirements: For a public improvement lien, the lienor must serve, the contractor, subcontractor, assignee, or legal representative for whom he supplied labor or materials. If the lienor had no direct contractual relationship with the contractor, he must also serve the contractor. This service should be made simultaneous with the filing of the lien and the lien itself should contain an affidavit attesting to proper service upon these entities. Failure to include this proof of service on the lien renders the lien a nullity. Lien Law 11-c. 3. Duration: A properly filed public improvement lien is valid for 1 year from the date of filing of the lien. The lien may be extended as of right. Lien Law 18. VI. How are lien rights preserved and perfected? A. Extensions of Lien 1. PRIVATE IMPROVEMENTS - Lien Law 17 a. Private liens may be extended once as of right prior to the expiration of the lien (within one year of the date of filing of the lien) by the lienor filing an Extension of Mechanic's Lien with the County Clerk of the county in which the real property is located. The Extension should recite the names of the lienor and the owner of the property, a description of the real property, the amount of the lien, and the date of filing the original Notice of Lien. This extension is good for one year. Additional extensions may only be granted by court order upon application of the lienor. Court ordered extensions are also good for one year. b. NOTE: Liens for single family dwellings may only be extended by order of the court. Such an extension is good for one year and additional court orders may be obtained. c. If a lien foreclosure action has not been commenced (and a notice of pendency filed), all liens must be properly extended (even those that have been discharged by the filing of an undertaking or mechanic's lien discharge bond), or else they will expire. ALBANY LAW SCHOOL ALUMNI CLE ERNSTROM & DRESTE, LLP May 5, 2016

22 2. PUBLIC IMPROVEMENTS - Lien Law 18 B. Foreclosure Actions a. Public improvement liens may be extended once as of right prior to the expiration of the lien (within 1 year of the date of filing of the public improvement lien) by the lienor filing an Extension of Mechanic's Lien with the same two entities with which the original public improvement lien was filed. The Extension should recite the name of the lienor and the contractor or subcontractor for whom the labor was performed or materials supplied, a description of the public improvement, the amount of the lien, and the date of filing the original public improvement lien. This extension is good for one year. Additional extensions may only be granted by court order upon application of the lienor. Court ordered extensions are also good for one year. b. If a lien foreclosure action has not been commenced (and a notice of pendency filed), all public improvement liens must be properly extended (even those that have been discharged by the filing of an undertaking or mechanic's lien discharge bond) or else they will expire. 1. PRIVATE IMPROVEMENTS - Lien Law 43 a. Enforcement of the lien is by civil action that is equitable in nature; b. Private improvement lien is enforced against the real property improved or the lien discharge bond surety; c. All owners and other lienors must be joined as party defendants, unless the lien is bonded off; - Must name all lienors or entities with interest in the property. d. Can obtain deficiency judgment, as in other foreclosure proceedings; e. Suit must be brought in county where real property located; f. Arbitration clause in contract does not bar foreclosure proceedings, but must comply with statutory filing of Notice of Pendency. 2. PUBLIC IMPROVEMENTS - Lien Law 42 a. Public improvement liens are enforced in the same manner and in the same courts as private improvement liens; b. Public improvement liens are enforced against the fund of money held by the public entity for the public improvement, or the lien discharge bond surety; c. All owners (unless lien discharge bond) and other lienors must be joined as party defendants, as well as the State if the lien was against ALBANY LAW SCHOOL ALUMNI CLE ERNSTROM & DRESTE, LLP May 5, 2016

23 state funds; d. Can obtain deficiency judgment, as in other foreclosure proceedings. C. Priority of Liens: The priority of mechanic s liens is the most confusing issue in mechanic's lien practice. Following are some basic rules that, subject to exception, are helpful in determining the priority of a lien: 1. Generally, a mechanic's lien has priority over any claim that was filed against the real property after the notice of lien was filed, except claims of others who improved the property or other mechanics lienors. Lien Law 13 (1). 2. Among mechanics' liens of the same class there is parity, regardless of when the notice of lien was filed. Lien Law 13 (1). There are statutory preferences for laborers over all other lienors and for subcontractors and materialmen over their contractors. Lien Law 25(3), 25(4), A recorded purchase money mortgage has priority over all subsequently filed claims, including liens. 4. A mortgage, building loan mortgage, or conveyance of any kind, if recorded before the improvement began, has priority over any lien to the extent of advances made prior to the filing of the notice of lien. Lien Law 13(1-a), 13(2), 13(3). 5. A lien has priority over any mortgage, building loan mortgage, or conveyance of any kind recorded more than four months after completion of the improvement. Lien Law 13 (4). 6. A mortgage, building loan mortgage, or conveyance that was recorded after the improvement began but within four months of its completion has priority over a lien only if the mortgage or conveyance includes a trust covenant. Lien Law 13(1-a), 13(2), 13(3). 7. A lien never has priority over an assignment of moneys due, or to become due, under a contract for the improvement of real property; at best, the lien has parity. Lien Law 13(1-a), 13(6). 8. A lien always has priority over a creditor whose debt is not based upon an improvement of the property, regardless of whether the claim is based on an assignment, an attachment, or a judgment, and regardless of the time of recording of the claim. Lien Law 13(1). 9. A lien has priority over any advances made under any contract or mortgage after the notice of lien was filed. Lien Law 13(4). ALBANY LAW SCHOOL ALUMNI CLE ERNSTROM & DRESTE, LLP May 5, 2016

24 VII. How are Liens Discharged? A. Release/Satisfaction: Payment to the lienor of the amount claimed, or of a lesser amount will discharge the lien in full or in part. For the full or partial discharge to be effective, the lienor should be required to execute a full or partial Satisfaction or Release of Lien. Once this is filed, the lien will be discharged. B. Deposit into Court: A lien may be discharged by the owner or a contractor depositing monies with the court having jurisdiction or the Governmental agency having control over the project funds. The amount of the deposit will be at least equal to the full amount of the lien plus one year s interest, and may also include certain costs and expenses. The amount must be sufficient to satisfy any judgment that might be entered in an action to foreclose upon the lien. The deposit of money with the court does not equal an admission of liability on the lien. C. Lien Discharge Bond: An owner or a contractor may also discharge a lien by posting a bond, sometimes called an undertaking, with the Clerk of the County where the property is located or with the financial officer of the public entity in charge of the public improvement. As with the deposit of monies, the amount of the bond is set by the court and will at least equal the full amount of the lien plus one year s interest. The posting of a lien discharge bond does not equal an admission of liability on the lien. D. Court Order: A court may discharge a lien by virtue of defects in the lien or in the filing of the lien. For example, a lien may be defective because the lienor failed to give notice as required; because it was not filed within the statutory period required; or because it was not filed with the appropriate entities. A lien will not be discharged summarily unless the defect is obvious. Otherwise, a challenge to the lien as defective must await the commencement of a lien foreclosure action. E. Other responses from Owner: 1. Demand Statement for Itemized Lien (Lien Law 38). This shall set forth the items of labor and/or material and the value thereof which make up the amount for which he claims a lien, and which shall also set forth the terms of the contract under which such items were furnished. Response due in 5 days. 2. Demand to Foreclose (Lien Law 21-a & 59): Must give lienor 30 days to foreclose on lien or it will be discharged. Generally done by Order to Show Cause. ALBANY LAW SCHOOL ALUMNI CLE ERNSTROM & DRESTE, LLP May 5, 2016

25 VIII. Defenses to Lien Claims A. SUBSTANTIVE DEFENSES 1. Quality/Completion of the Work: A lienor s failure to complete its contract work will serve as a defense, in whole or in part, to its lien claim. So too will the lienor s failure to correct defective or poor quality work. 2. Nothing Due and Owing: New York is a single pay state, meaning the owner of an improvement, whether public or private, is only obligated to pay once for the labor and material going into that improvement. Therefore, a lien can only be enforced to the extent there are monies owed by the owner to the general contractor at the time of filing the lien. This is called the lien fund. Because a lien attaches to the monies owed to the party directly above the lienor in the contractual chain, if there is nothing due or to become due from the owner to the general contractor, then there is no lien fund against which a subcontractor or materialman can enforce its lien. The same is true for each tier of subcontractors and materialmen on a project. B. PROCEDURAL DEFECTS 1. Defective Lien Filing: A lien may be defeated if filed untimely, incorrectly, with the wrong entity or without proper notice as required. Unless such defects are obvious on their face, such defects can only be successfully asserted in the context of a lien foreclosure action. 2. Willful Exaggeration of Lien: Any lien that willfully exaggerated the amount claimed is void. Lien Law 39. To establish the defense of willful exaggeration, a movant must show that such discrepancy in amount was the result of the lienor s intentional and deliberate exaggeration rather than honest mistakes or disagreements concerning the terms of the agreement. Fiberglass Fabricators, Inc. v. C.O. Falter Const. Corp., 117 A.D.3d 1540 (4th Dep t 2014). IX. NY Lien Law Article 3-A Trust a. A lienor that is found to have willfully exaggerated the amount of its lien will also be subject to liability to the owner or general contractor equal to the amount of the exaggeration plus costs incurred in posting a lien discharge bond, interest on money deposited into court, and reasonable attorney s fees. A. Definition of Construction Trusts Lien Law 70: Funds received by an owner, General Contractor, or Subcontractor in connection with an improvement to real property. This includes a future right to receive, even if contingent upon performance, or present right to pursue. ALBANY LAW SCHOOL ALUMNI CLE ERNSTROM & DRESTE, LLP May 5, 2016

26 B. What is a construction trust: Lien Law 71: Funds borrowed or used for an improvement of real property, or received from a contract for a public improvement, are to be held in trust and disbursed for first trust purposes, before being used for non-trust purposes. Trustees do not have legal right to construction trust funds (bare legal title) until all beneficiaries have been paid in full until after the end of the project. C. How trust funds may be applied Lien Law 71 (2): 1. Pay claims of subcontractors, architects, engineers, surveyors, laborers, and materialmen; 2. Payroll taxes; 3. Taxes and unemployment insurance contributions arising by reason of employment; 4. Benefits or wage supplements; or 5. Premiums on surety bonds or insurance for the project. D. Requirements and Rights of Construction Trust: 1. Diversion of Trust Funds Lien Law 72: Any payment, transfer or application of trust assets for any purpose other than outlined in 71(2) before payment of or discharge of all trust claims is a diversion of trust assets, whether or not there are trust claims in existence at the time of the transaction. a. Liability against an entity that receives trust funds with knowledge of trust status, including a factor or bank. LeChase Data/Telecom Serv., LLC v. Goebert, 6 N.Y.3d 281 (2006); Price Trucking v. AAA Envir., Inc., 111 A.D.3d 1315 (4th Dep t 2013). A potential defense is a holder in due course of a negotiable instrument or of a purchaser in good faith for value without notice that the transfer to him is a diversion of trust funds. b. Trust assets shall not be levied upon or subject to a restraining notice as the individual property of the trustee. 2. Notice of Lending Lien Law 73: Notice of lending constitutes defense to action against transferee of trust assets. 3. Authority of Trustee in Administering Trust Funds Lien Law 74: Trustee generally authorized to determine the order and manner of payment of any trust claims and to apply any trust asset to any purpose of the trust. 4. Deposit of Funds of Trust; Books or Records to be Kept Lien Law 75: Trustee shall keep books or records with respect to each trust of which he is trustee. Not necessary to use separate accounts. ALBANY LAW SCHOOL ALUMNI CLE ERNSTROM & DRESTE, LLP May 5, 2016

27 5. Books or records shall contain: - Trust assets receivable. - Trust accounts payable. - Trust funds received. - Trust payments made with trust assets. - Transfers in repayment of or to secure advances made pursuant to Notice of Lending. a. Failure to keep books and records is presumptive evidence of trust diversion. 6. Right of Beneficiaries to Examine Books or Records and Make Copies, or to Receive Statement - Lien Law 76: a. May make written request, thirty days after trust claim became payable, to: - Examine books or records and make copies, or - Receive verified statement setting forth entries with respect to the trust. E. Action to Enforce Trust Lien Law 77: 1. May be brought by any holder of trust claims, including any person subrogated to the right of a beneficiary of the trust holding a trust claim, in a representative action for all beneficiaries similarly situated class action. 2. Statute of Limitations: Can be commenced at any time during the improvement or within one year after completion of improvement, or, in case of subcontractors or materialmen, after one year from date final payment became due on contract, whichever is later. F. Misappropriation of Trust Funds Lien Law 79-a: Constitutes larceny and punishable as provided in penal law. Individual must have intent to defraud in order to be personally and criminally liable. ARA Plumbing & Heating Corp. Abcon Associates, Inc., 44 A.D.3d 598 (2d Dep t 2007). ALBANY LAW SCHOOL ALUMNI CLE ERNSTROM & DRESTE, LLP May 5, 2016