The Benefits of NY Lien Law Section 76

Pursuant to Article 3A of the Lien Law, beneficiaries of construction trust funds may demand that trustees of such funds produce certain books and records of the trust so that the beneficiary may verify that all expenditures by the trustee were proper trust expenditures.  This is done through the service of a Demand Pursuant to §76 of the Lien Law.

The trustee’s failure to provide the books and records creates a legal presumption that a trust fund diversion occurred.  The presumption can be extremely beneficial to the beneficiary in a legal proceeding.  This is because when a trust fund diversion occurs, the principals (usually the general contractor and/or the owner), can be held personally liable.  Not only does it subject the principal of the trust funds to personal liability, but when a trust fund diversion occurs, the trustee may be subject to punitive damages AND may be responsible for paying the attorney’s fees of the beneficiaries.  A judgment based upon a trust diversion is also not discharged in bankruptcy.

To prove a trust diversion, the beneficiary must demonstrate that the party complained of was a trustee of funds.  By establishing that the party was a principal of the trust, you can establish that the general contract/owner was responsible to maintain certain books and records as required by the Lien Law.

Importantly, the trustee has no right to fail to respond to such a demand.  The trustee must make an application to the court requesting permission to not respond.  The most common reason that a trustee will object to a demand made under Section 76 is that the purported beneficiary is, in fact, not a beneficiary.  However, rather than ignore the demand, the trustee should seek legal counsel to obtain judicial permission to reject the demand.

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