NY Lien Law – Duane Morris Construction Law

A recent decision from the New York Appellate Division, Third Department, reinforces how strictly New York courts apply the trust-fund rules of Article 3-A of the Lien Law, particularly when settlement funds are involved. In L.C. Whitford Co., Inc. v. Babcock & Wilcox Solar Energy, Inc., the Court held that a general contractor could not use settlement proceeds to reimburse itself for project costs it claimed to have advanced, even where those advances were used to pay subcontractors.

The case arose out of several solar construction projects that ended in disputes and delays. The project owners and the general contractor ultimately resolved their disputes through a confidential settlement that resulted in a multimillion-dollar payment to the contractor. Subcontractors with pending mechanic’s liens objected when the contractor stated that it intended to apply a portion of the settlement funds to reimburse itself for monies it had previously advanced on the jobs.

The Appellate Division agreed with the subcontractors. The Court concluded that the settlement proceeds were trust assets under Article 3-A because they were paid in connection with contracts for the improvement of real property. Once funds are deemed trust assets, the Lien Law strictly limits how they may be used. For a contractor acting as trustee, those funds must be applied first to pay subcontractors, laborers, and material suppliers.

The contractor argued that it should be allowed to reimburse itself because it had used its own money to pay subcontractors when project funds were exhausted. The Court rejected that argument, emphasizing that the Lien Law does not permit a contractor‑trustee to place itself ahead of unpaid trust beneficiaries. The statutory language governing the use of trust assets “is mandatory.” Unlike an owner, a contractor has no statutory right to apply trust funds toward its own “costs of improvement.” Until all valid trust claims are satisfied, the contractor has no beneficial interest in the trust funds at all.

Because the proposed reimbursement would have diverted trust assets away from subcontractors with unresolved claims, the Court held that it would violate the contractor’s fiduciary obligations under Article 3-A. The injunction barring any use of the settlement funds without court approval was therefore properly granted.

The dissent took a different view, reasoning that nothing in the statute prohibits the use of trust assets to reimburse payments made for proper trust purposes before trust assets were available. It cautioned that the majority’s interpretation could discourage contractors from advancing their own funds to keep projects moving when owners fail to pay on time. The majority, however, reaffirmed that Article 3‑A is designed to protect subcontractors first and foremost, even if doing so places the financial risk of such advances squarely on the contractor.

The decision underscores that settlement proceeds from construction projects are not available for contractor reimbursement when trust claims remain unresolved. Contractors who front their own funds do so at their own risk, while subcontractors retain strong protections under Article 3‑A to ensure settlement funds are used exclusively to satisfy trust claims..

Jose A. Aquino (@JoseAquinoEsq on X) is a special counsel at Duane Morris LLP’s New York office, where he is a member of Construction Group, specializing in construction law, lien law, and government procurement law. He is also a member of the Cuba Business Group.

This blog is prepared and published for informational purposes only and should not be construed as legal advice. The views expressed herein are those of the author and do not necessarily reflect the views of Duane Morris LLP or its individual attorneys.

In New York, construction professionals face a distinct legal challenge when public improvements are carried out by private entities without public financing. Under the New York Lien Law, a “public improvement” refers to work performed on real property owned by the state or a public corporation. Mechanic’s liens apply only to private real property, while public improvement liens can be filed only against public funds. In the absence of either, contractors and suppliers lack a lien-based remedy to secure payment for their labor or materials.

To address this gap, the legislature amended Section 5 of the Lien Law in 2004 to require a payment bond for public improvement projects exceeding $250,000 when no public fund has been established. This bond guarantees prompt payment to contractors, subcontractors, and suppliers and serves as the exclusive financial safeguard in such cases. The statute as amended provides in pertinent part:

“Where no public fund has been established for the financing of a public improvement with estimated cost in excess of two hundred fifty thousand dollars, the chief financial officer of the public owner shall require the private entity for whom the public improvement is being made to post, or cause to be posted, a bond or other form of undertaking guaranteeing prompt payment of moneys due to the contractor, his or her subcontractors and to all persons furnishing labor or materials to the contractor or his or her subcontractors in the prosecution of the work on the public improvement.”

Unlike traditional payment bonds—which are typically posted by contractors or subcontractors as part of their contractual obligations—the Section 5 bond must be posted by the private developer. This statutory requirement shifts the financial responsibility upstream, placing the burden on the entity commissioning the work rather than those performing it. This framework ensures workers and suppliers receive payment even when lien rights are unavailable.

While this Section 5 bond protects against nonpayment in the absence of public funds, developers also typically require contractors to furnish other types of bonds within the construction agreement. These include payment bonds, which ensure compensation for subcontractors, suppliers, and laborers, and performance bonds, which guarantee that the contractor completes the work as specified under the contract. Though separate from the Section 5 bond, these additional bonds serve complementary roles—one aimed at securing financial compensation, the other enforcing contractual execution.

A key distinction exists between mechanic’s liens and payment bond claims. Mechanic’s liens typically permit recovery only for unpaid amounts owed to the defaulting party. If a contractor or subcontractor has already been paid, downstream parties—such as unpaid subcontractors or sub-subcontractors—may be left without lien rights. In contrast, payment bond claims offer broader protection. An unpaid party may still recover under the bond even when no outstanding obligation remains to the defaulting contractor or subcontractor, provided the claim is timely and complies with the bond’s terms.

Together, these provisions form an integrated framework of financial and legal safeguards. For those engaged in public improvement projects without direct public financing, understanding these requirements is essential to managing risk and securing payment.