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BLOG / 11.15.19 /Jacob E. Amir

Criminality for Corporate Lien Law Diversion

Lien Law Section 79 criminalizes the diversion of trust funds from the purpose created by the trust. In layman’s terms, that basically means that a contractor who receives payments from a property owner for a project must use the payments for the purposes intended under the project (e.g., labor, subcontractors, vendors, etc.). Diverting those funds to other purposes or for other use subjects the contractor to potential prosecution for larceny.

But who is a contractor? Or more precisely, is the “contractor” for Lien Law Section 79 purposes the entity which is the party to a contract with the owner, or is the “contractor” the principals of the entity?  One may assume that the corporate shield protects the individual principals from wrongdoing or liability committed by the contractor entity. Of course, you know what is said about those who “assume” too much.

Last month, a decision out of the Fourth Department[1] (from a case in Monroe County) held that under Lien Law § 79, the principal of an entity contractor was a “trustee” as defined under the Lien Law. Therefore, that principal’s conviction for grand larceny in the third degree was affirmed.  Although the “person” who entered into the contract with the harmed owner was a corporation, that corporation’s principal was its sole shareholder, its sole authorized signatory of the account in which trust funds were deposited, and he held himself out in writing as the actual contractor.

The point of this discussion is not to suggest that if a contractor were to divert trust funds, the contractor should do so through a more corporate structure. Quite the contrary, the case law applies common sense and reason when holding wrongful parties to account in a Lien Law §79 diversion claim. Yes, establishing proper corporate norms and structures is a good and valuable business practice. But responsibility for malfeasant acts will fall on those who are actually in control, corporate shields notwithstanding.

[1] People v. Cahoon, 2019 WL 4893064 (4th Dep’t 2019).