New York’s Lien Law imposes strict trust fund obligations on owners, contractors, and subcontractors. Funds received in connection with a construction project must be used to pay project-related expenses, including subcontractors, suppliers, and labor. When those funds are diverted for other purposes, it can give rise to serious claims for trust fund diversion under Article 3-A of the Lien Law.

These claims are often complex, involve multiple parties, and can expose individuals and companies to significant liability.

Kushnick Pallaci PLLC represents contractors, subcontractors, suppliers, and other trust beneficiaries in pursuing and defending trust fund diversion claims throughout New York.

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What Is Trust Fund Diversion Under New York Law?

Under Article 3-A of the Lien Law, certain construction-related funds are deemed “trust funds.” These funds must be used for specific project-related purposes. Improper use of those funds—whether intentional or due to poor accounting practices—can result in liability for diversion.

Trust fund diversion claims often arise alongside other construction disputes, including mechanic’s lien enforcement, breach of contract claims, and broader construction litigation.

For a deeper analysis of how courts evaluate these claims, see our discussion of trust fund diversion claims and strict proof requirements.

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Common Situations That Lead to Trust Fund Claims

Trust fund diversion issues frequently arise in situations involving:

• Failure to pay subcontractors or suppliers despite receipt of project funds
• Use of project funds for unrelated business expenses
• Improper accounting or commingling of funds
• Disputes over entitlement to payments under the contract
• Insolvency or financial distress during a project

In many cases, these issues overlap with payment disputes and claims involving mechanic’s lien foreclosure or contract enforcement.

Understanding how payment rights and lien strategies interact can be critical, particularly in light of common risks discussed in our overview of construction payment challenges and lien strategies.

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Trust Fund Diversion Litigation and Enforcement

Trust fund diversion claims are often litigated in conjunction with other causes of action, including breach of contract and lien enforcement. These cases may involve detailed financial analysis, project accounting, and the tracing of funds.

We represent clients in all aspects of trust fund diversion litigation, including:

• Prosecuting claims on behalf of trust beneficiaries
• Defending contractors and other parties accused of diversion
• Seeking accountings and financial disclosures under the Lien Law
• Coordinating trust fund claims with related construction litigation matters

Because these claims are highly fact-specific, early evaluation of the financial records and project history is critical.

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Accounting and Record-Keeping Obligations

The Lien Law imposes strict requirements for maintaining trust fund records. Failure to properly maintain and produce these records can create additional exposure and complicate the defense of a claim.

These issues often intersect with disputes involving contract compliance and payment procedures, particularly where documentation requirements were not followed under the governing construction contract.

Proper documentation and compliance with contractual notice and accounting requirements can make or break a claim, as discussed in our analysis of common legal problems in the construction industry.

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Trust Fund Claims in the Context of Construction Disputes

Trust fund diversion claims rarely arise in isolation. They are often part of a broader dispute involving payment issues, project delays, or performance disputes.

Understanding how these claims interact with lien rights, contract provisions, and litigation strategy is essential to protecting your position.

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Speak With a Trust Fund Diversion Attorney

If you believe construction trust funds have been misused—or if you are facing a claim under the Lien Law—you can speak directly with an attorney who handles these matters every day.

Call (631) 752-7100 or contact us to discuss your situation.