Under Lien Law Section 70 ("Definition of trusts"), funds received by an owner of real property for or in connection with an improvement of real property constitute assets of a trust as to which the owner is trustee. Trust assets are to be held by the trustee and applied to payment of the cost of the improvement (Lien Law Section 71; "Purposes of the trust"). Application of trust assets to a purpose other than that of the trust is a diversion of trust assets (Lien Law Section 72; "Diversion of trust assets"). In an Action brought to enforce the trust, a Court may, among other forms of relief, "compel an interim or final accounting by the trustee to identify and recover trust assets in the hands of any person together with interest accrued thereon from the time of the diversion..." (Lien Law Section 77; "Action to enforce trust").
In Holt Construction Corp. v. Grand Palais, LLC, a mechanic's lien filed by the Plaintiff was bonded; the property subject to the lien was then sold. The Plaintiff sought to foreclose on the lien, to set aside the conveyance as fraudulent under Debtor and Creditor Law Section 273 ("Conveyances by insolvent"), and to recover damages for the diversion of trust assets under Lien Law Article 3-A ("Definition and enforcement of trusts"). The Appellate Division modified the judgment of the Supreme Court, Queens County, which had awarded damages to the Plaintiff.
The Appellate Division held that the lower court improperly awarded judgment in favor of the Plaintiff on the cause of action to set aside the conveyance of the property as fraudulent; once the mechanic's lien was bonded "the debt no longer existed for the purposes of Debtor and Creditor Law §273 (citations omitted). Further, "the filing of the bond did not necessitate the dismissal of the...causes of action, which were to recover damages for diversion of trust assets pursuant to article 3-A of the Lien Law."
The Appellate Division also held that the lower court improperly awarded judgment in favor of the Plaintiff on the causes of action seeking damages for violation of the trust fund provision in Lien Law Section 13(5) ("Priority of liens"). Lastly, the Court found that the Supreme Court improperly dismissed the causes of action for diversion of trust assets against a Defendant who was a principal of the Defendant for which the work was done. According to the Appellate Division,
"This Court has held that the individual officers of a corporate trustee may be held personally liable pursuant to Lien Law article 3-A for knowingly participating in a diversion of trust assets [citations omitted]. Here, the record demonstrates that, in contravention of Lien Law § 71(1), [Defendant] Lepow failed to hold the proceeds from the sale of the property to Brisam in trust to pay for the cost of improvements, and that he used those proceeds, in part, to satisfy other various debts in contravention of Lien Law §72. Thus, the Supreme Court should have awarded judgment in favor of Holt [the Plaintiff] against Lepow...on those portions of the...causes of action which sought damages for violations of Lien Law §§ 72 and 77."
The decision of the Appellate Division, dated July 10, 2013, is reported at 2013 WL 3455596.