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Home Improvement Contractors Might Be Held Accountable For Trust Fund Fraud

Sep 12

A general contractor ("GC") often has financial responsibilities to the suppliers and subcontractors (collectively, "Subs") under his authority. Article 3A of the Lien Law requires that money received by a GC from the Owner be kept in trust for the Subs. The GC may engage in a trust fund diversion class action lawsuit if it doesn't compensate the Subs. This might be a criminal violation as well as a civil wrong.

These obligations belong to the GC's Subs, not the Owner. If the GC diverts that money, the Subs have recourse rather than the Owner.

However, the limitations are a bit looser when it comes to house improvement. If the New York Home Improvement Business Law is in force, Article 3A of the Lien Law mandates that the GC hold onto any money received from the Owner in an escrow account up until the project is substantially finished, at which point they revert to the Owner and become their property. Before the GC wrongfully transferred any trust monies for any use "other than those expenditures permitted by the Lien Law," all trust claims [to the Subs] had been paid or canceled.

Since it was claimed that the contractor utilized or used a part of the granted money for non-contractual purposes, the contractor for a home renovation project recently discovered that the contractor was able to win a lawsuit against the contractor. The contractor's failure to establish the trust and its inability to demonstrate that it had kept the owner's funds in escrow strengthened the owner's claim.

The most significant feature of this clause, which relates to home renovation contractors, is that the Owner may bring legal action against any officer or representative of the company who misappropriates trust money. Even while following the corporation's rules and procedures, an official of the company might still be held personally liable.

Owners of home renovation projects have a useful tool at their disposal that owners of other kinds of business ventures don't have.