Contractor-Trustees May Not Use Later-Received Lien Law Article 3‑A Trust Funds to Reimburse Prior Advances: Commentary on L.C. Whitford Co., Inc. v. Babcock & Wilcox Solar Energy, Inc.

Contractor-Trustees May Not Use Later-Received Article 3‑A Trust Funds to Reimburse Earlier Advances: Commentary on L.C. Whitford Co., Inc. v. Babcock & Wilcox Solar Energy, Inc.

I. Introduction

This commentary analyzes the Appellate Division, Third Department’s decision in L.C. Whitford Co., Inc. v. Babcock & Wilcox Solar Energy, Inc., 2025 NY Slip Op 07063 (Dec. 18, 2025), an uncorrected slip opinion from the Supreme Court of New York, Appellate Division, Third Department.

The case arises out of the construction of multiple solar photovoltaic electric power facilities in St. Lawrence County, New York. Defendant Babcock & Wilcox Solar Energy, Inc. (formerly Fosler Construction Company, Inc., and hereinafter “BWS”) was the general contractor. Plaintiffs, including L.C. Whitford Co., Inc., were subcontractors who furnished labor and materials on three projects:

  • 409 Ferris Road Project
  • 641 Ferris Road East Project
  • 641 Ferris Road West Project

After disputes arose between BWS and the project owners concerning delays and other project issues, the parties executed a “Confidential Settlement Agreement and Release” dated October 15, 2024. Under that agreement:

  • The owners agreed to pay BWS a total of $4,978,477.
  • Of that sum, $1,264,470 was directly tied to the termination of the three Ferris Road projects at issue here.
  • BWS agreed to indemnify the owners against any subcontractor liens filed on the projects, including plaintiffs’ liens.

At the same time, plaintiffs had filed mechanic’s liens and were pursuing a separate action to enforce those liens, seeking approximately $6.9 million in unpaid amounts for labor and materials. When BWS notified plaintiffs that it intended to use the newly received settlement funds “to reimburse itself for the payment of the costs of the improvements that it advanced and paid to subcontractors, suppliers and laborers on each of the Ferris Projects,” plaintiffs commenced a trust enforcement action under Article 3‑A of the New York Lien Law (Lien Law § 77) and sought a preliminary injunction to prevent dissipation of those funds.

The central legal issue is a question the dissent expressly labels as one of first impression:

Whether a contractor-trustee under Lien Law Article 3‑A may apply later-received trust funds to reimburse itself for earlier payments that it made from its own (non-trust) funds to subcontractors for proper trust purposes.

Supreme Court (St. Lawrence County, Farley, J.) granted a preliminary injunction, enjoining BWS from dispersing the settlement funds absent further court order, and required plaintiffs to post a $50,000 undertaking. BWS appealed. The Third Department, in a split decision, affirmed the injunction, with Presiding Justice Garry and Justices Lynch (author of the majority opinion) and Ceresia in the majority, and Justices Mackey and Fisher dissenting.

The decision is significant because it squarely addresses the extent of a contractor’s ability to treat its own advances as reimbursable from later-received trust assets, and it does so in the context of the remedial trust scheme of Lien Law Article 3‑A, which governs construction project funds in New York.

II. Summary of the Opinion

A. The Majority’s Holding

The majority holds:

  1. The settlement proceeds paid to BWS by the owners, including the $1,264,470 attributable to the three Ferris Road projects, are trust funds within the meaning of Lien Law Article 3‑A (Lien Law § 70[1], [6]).
  2. As a contractor-trustee, BWS is obligated to hold and apply those trust assets solely for the enumerated statutory purposes in Lien Law § 71(2)(a)–(f), which include the payment of subcontractors’ claims but do not include reimbursement of the contractor’s own “costs of improvement.”
  3. Under existing Court of Appeals precedent, a contractor-trustee has only a limited beneficial interest in trust funds and may not treat those funds as its own property except to the extent that a surplus remains after all trust beneficiaries are paid.
  4. Accordingly, BWS has no authority under Article 3‑A to “reimburse itself” out of the settlement funds for monies it previously advanced on the projects; such self-reimbursement would constitute a breach of its fiduciary duties and an improper diversion or threatened diversion of trust assets.
  5. Because Lien Law § 77(3)(a) authorizes injunctive relief to restrain diversion or threatened diversion of trust assets, Supreme Court acted within its discretion in granting the preliminary injunction and requiring a $50,000 undertaking.

The order is therefore affirmed, with costs.

B. The Dissent’s Position

The dissent (Mackey, J., joined by Fisher, J.) agrees that:

  • The settlement proceeds are Article 3‑A trust funds.
  • The question is whether a trustee may apply subsequently received trust assets to reimburse earlier payments that were initially made with non-trust funds but for proper trust purposes (here, payments to subcontractors).

However, the dissent would answer that question in the affirmative and would reverse the injunction. The dissent’s key points are:

  • Nothing in the text of Lien Law § 71(2) makes the timing of receipts determinative; what matters is whether the trust assets are applied to proper trust purposes (such as payment of subcontractors).
  • BWS’s earlier payments to subcontractors from its own funds were exactly the type of expenditures Article 3‑A is designed to protect.
  • Allowing reimbursement from subsequently received trust funds is not a diversion to “personal debts” (as in Canron); it is simply making the contractor whole for acting to ensure subcontractors were paid despite owners’ funding failures.
  • The majority’s rule is contrary to the remedial purpose of Article 3‑A because it will discourage general contractors from advancing their own funds to pay subcontractors, thereby delaying or endangering payment to those very beneficiaries.

In the dissent’s view, Article 3‑A should be construed to permit a contractor to use later-received trust funds to reimburse earlier advances that were spent on proper trust purposes.

III. Legal and Factual Background: Lien Law Article 3‑A in Context

A. Article 3‑A Trusts in Construction Projects

New York’s Lien Law Article 3‑A creates a set of statutory “trusts” in connection with construction projects. The basic structure is:

  • When an owner receives money (e.g., from a building loan or public funds) for the improvement of real property, that money is impressed with an owner’s trust.
  • When a contractor receives money “under or in connection with a contract for an improvement of real property,” those funds are impressed with a contractor’s trust.
  • The trustee—owner or contractor—must hold and apply the “trust assets” only for specific statutory purposes that relate to the project, primarily payment of those who furnished labor and materials.

The trust structure is designed to prevent “diversion” of construction funds away from legitimate project-related claims (e.g., subcontractors, laborers, suppliers), so that people who improve property are not left unpaid when money has in fact passed through the project.

B. Contractor Trusts and Their Beneficiaries

For a contractor’s trust, the key provision is Lien Law § 71(2), which lists the exclusive permissible uses of the trust assets. Section 71(2)(a) states (in substance) that:

The trust assets of which a contractor is trustee shall be held and applied for expenditures arising out of the improvement of real property, including “payment of claims of subcontractors, architects, engineers, surveyors, laborers and materialmen.”

Those “claims” are the claims of downstream participants in the project chain (subcontractors, suppliers, etc.). They are the trust beneficiaries. The contractor, by contrast, is the trustee and has only a limited interest in the trust assets: it is entitled to any residual balance after all beneficiaries have been paid.

C. “Cost of Improvement” versus Contractor’s Trust Purposes

The Lien Law uses the defined term “cost of improvement” to describe certain categories of expenditures, particularly in the context of an owner’s trust (Lien Law § 2[5]). Those “costs of improvement” include items like:

  • Contract price or reasonable value of labor and materials
  • Architectural and engineering services
  • Certain site acquisition costs
  • Some overhead-like items in specific circumstances

For an owner’s trust, trust assets may be used to pay these “costs of improvement” (Lien Law §§ 70[5], 71[1]). For a contractor’s trust, however, § 71(2) does not refer to “cost of improvement.” Instead, it focuses on payment of claims of subcontractors, laborers, and materialmen, among other specified purposes.

This distinction underpins the majority’s reading that a contractor-trustee cannot use trust assets to cover its own broader “costs of improvement” (e.g., its own cost overruns, financing, corporate overhead) unless and until all trust beneficiaries’ claims have been fully satisfied and a surplus remains.

IV. Detailed Analysis of the Court’s Reasoning

A. Are Settlement Proceeds “Trust Funds”? (Lien Law § 70 and LeChase)

The majority starts from the text of Lien Law § 70(1), which provides that Article 3‑A:

“impresses with a trust any funds paid or payable to a contractor ‘under or in connection with a contract for an improvement of real property.’”

Citing LeChase Data/Telecom Servs., LLC v. Goebert, 6 NY3d 281, 289 (2006), the court notes that this “paid or payable” wording is broad. Section 70(6) further defines “trust assets” to include “funds received by or due and owing to” the trustee under or in connection with such a contract.

Applying these provisions, the majority “readily” concludes that:

  • The funds BWS received under the October 15, 2024 settlement agreement with the owners—including the $1,264,470 directly allocable to the three Ferris Road projects—were paid “in connection with” the contracts for the improvement of those properties.
  • Therefore, those funds are trust funds under Article 3‑A.

In other words, the characterization of the payment as a “settlement” of disputes over delays and other issues does not remove it from the statutory trust scheme; so long as the funds are paid under or in connection with the construction contract, they are impressed with the trust.

B. Who Gets Priority over Contractor’s Trust Funds?

Having determined that the settlement proceeds are trust funds, the majority turns to who is entitled to benefit from those funds and in what order.

Relying on Aspro Mech. Contr. v. Fleet Bank, 1 NY3d 324 (2004), and Harmon v. Fairview Assoc., 25 NY2d 101 (1969), the court emphasizes:

“The primary purpose of Article 3‑A is to ensure that those who have directly expended labor and materials to improve real property receive payment for the work actually performed.” (Aspro, 1 NY3d at 328.)

The list of beneficiaries of a contractor’s trust is exhaustively set forth in Lien Law § 71(2)(a)–(f), and includes:

  • Subcontractors
  • Architects, engineers, and surveyors
  • Laborers
  • Materialmen

Such beneficiaries are entitled to have trust assets applied to their claims before the contractor can consider any part of those assets its own.

C. The Contractor’s Limited Beneficial Interest: Canron

The majority then invokes the Court of Appeals’ seminal trust decision in Canron Corp. v. City of New York, 89 NY2d 147 (1996). Quoting Canron, the majority highlights that a contractor-trustee:

“holds the trust assets in a fiduciary capacity akin to that of the trustee of an express trust and thus, does not have a sufficient beneficial interest in the moneys, due or to become due from the owner under the contract, to give him a property right in them, except insofar as there is a balance remaining after all subcontractors and other statutory beneficiaries have been paid. Consistent with these fiduciary obligations, the contractor is statutorily prohibited from applying trust assets to his personal debts to the detriment of valid trust claims.” (Canron, 89 NY2d at 157–158 [internal quotation marks, citations, and emphasis omitted].)

Two key ideas flow from this quotation:

  1. The contractor’s beneficial interest is purely residual—it only arises once all beneficiaries are fully satisfied.
  2. The contractor is barred from using trust assets for what are effectively its own obligations (“personal debts”) in a manner that harms unpaid beneficiaries.

Although Canron involved a somewhat different factual scenario (use of trust funds to pay a contractor’s bank lender), the majority draws on it to underscore that BWS’s claim to treat the settlement funds as “reimbursement” for its own prior advances collides with this basic fiduciary structure.

D. Distinguishing Contractor and Owner: “Costs of Improvement”

A critical piece of the majority’s reasoning is its parsing of statutory language—particularly the difference between:

  • Permitted uses of owner’s trust assets under Lien Law § 71(1), and
  • Permitted uses of contractor’s trust assets under Lien Law § 71(2).

The majority notes that § 71(2)(a) allows contractor trust assets to be held and applied for:

“payment of claims of subcontractors, architects, engineers, surveyors, laborers and materialmen.” (emphasis added)

By contrast, “cost of improvement” (Lien Law § 2[5]) is a term explicitly associated with an owner’s obligations and is referenced in § 70(5) and § 71(1), but not in § 71(2). The majority reads this omission as intentional: the legislature did not authorize contractor-trustees to use trust funds for the full suite of costs that might be included in “costs of improvement.” Instead, a contractor’s trust purposes are more narrow and beneficiary-focused.

The opinion thus holds that, while:

  • An owner-trustee may have statutory authority to use its trust assets to pay “costs of improvement” (a broader concept),
  • A contractor-trustee does not have equivalent authority to use contractor trust assets to reimburse itself for its own “costs of improvement.”

Consequently, when BWS announced that it intended to use the settlement funds “to reimburse itself for the payment of the costs of the improvements that it advanced,” the majority treats that expression as legally significant: it signals a use of trust funds for the contractor’s own account, not for payment of current, outstanding beneficiaries’ claims.

E. Application to BWS’s Conduct

With that statutory framework in place, the majority’s application to the facts is straightforward:

  1. The settlement proceeds paid to BWS are contractor trust funds under Article 3‑A.
  2. Plaintiffs (subcontractors) are clearly among the Article 3‑A trust beneficiaries (Lien Law § 71[2][a]).
  3. There remain unresolved claims and liens from plaintiffs totaling millions of dollars relating to the same projects.
  4. BWS has announced an intent to apply the new trust funds as “reimbursement” to itself for its own earlier advances—before resolution or payment of plaintiffs’ claims.
  5. Under Canron and the statutory scheme, BWS has no beneficial right to treat those funds as its own property unless and until all trust beneficiaries are paid; therefore its proposed “reimbursement” would improperly divert trust assets.

Accordingly, the majority concludes that BWS’s intended use of the settlement funds would be a breach of fiduciary duty as trustee and a threatened diversion of trust assets.

F. Justification for the Preliminary Injunction (Lien Law § 77[3][a])

Lien Law § 77 provides a procedural vehicle for beneficiaries to bring an action “to enforce a trust” and specifically authorizes courts to:

grant a temporary injunction restraining the trustee of the trust from making any payment or otherwise disposing of trust assets or any part thereof.

The majority concludes that Supreme Court “duly exercised its discretion” by:

  • Enjoining BWS from utilizing the settlement funds “pending further court approval,” and
  • Requiring a $50,000 undertaking from plaintiffs.

The opinion does not expressly elaborate on the traditional three-part preliminary injunction standard (likelihood of success, irreparable harm, and balance of equities), but given the analysis:

  • Likelihood of success is grounded in the majority’s clear view that BWS has no statutory authority to reimburse itself from trust funds while subs remain unpaid.
  • Irreparable harm is implicit: once trust funds are disbursed to the contractor for its own purposes, they may be dissipated, making later recovery difficult or impossible.
  • Balance of equities favors preserving the trust res for unpaid subcontractors whose work directly improved the property.

Thus, the statutory and equitable bases for issuing the injunction converge.

V. The Dissent’s Reasoning and Its Challenge to the Majority

A. The “Question of First Impression”

The dissent frames the case around a specific, novel question:

“whether a trustee can apply subsequently received trust assets to reimburse earlier payments that were initially made with nontrust funds toward proper trust purposes.”

In other words, if a contractor, when trust assets are depleted or unavailable, uses its own funds to pay subcontractors (a concededly proper trust purpose), and then later receives additional trust funds (for the same projects), may the contractor use those newly received trust assets to reimburse itself for those earlier payments?

The dissent answers “yes,” viewing this as fully compatible with the wording and purpose of Article 3‑A.

B. The Dissent’s Factual Emphasis

The dissent underscores several factual points:

  • BWS did, in fact, make various payments to the plaintiff subcontractors for work and services on the projects.
  • Sometimes, it did so using its own funds because trust assets had been “depleted.”
  • Ultimately, BWS paid subcontractors “millions of dollars more than the funds it received from the owners for the subject projects.”
  • Owners had effectively underfunded the projects, and BWS’s advances functioned as a “loan” to the owners, later partially rectified by the settlement.

From this perspective, the dissent views BWS not as a contractor diverting funds for personal gain, but as a party who stepped in to protect subcontractors when the funding stream from owners failed.

C. The Textual Argument: Timing Should Not Matter

The dissent’s core statutory argument is that Article 3‑A regulates how trust assets are used, not the sequence of when funds are received and when expenditures occur. They stress that:

  • Lien Law § 71(2) commands that contractor trust assets “shall be held and applied for” certain purposes, including “payment of claims of subcontractors.”
  • Nothing in the statute states that the payments must occur after trust assets are in hand to qualify as proper uses.
  • Therefore, if a contractor fronts money from its own pocket to pay subcontractors, that outlay is in substance a trust-type expenditure once trust funds later become available.

On this reading, using later-received trust funds to reimburse the contractor merely corrects the timing of the cash flow—it recognizes that the earlier payments were, in effect, proper trust disbursements even though they were temporarily funded from non-trust resources.

D. Purposive Argument: Aligning with Article 3‑A’s Remedial Goals

The dissent also invokes the well-established remedial purpose of Article 3‑A, citing LeChase, RLI Ins. Co. v. N.Y. State Dep’t of Labor, 97 NY2d 256 (2002), and Canron. The stated purpose is to:

“ensure that those who have directly expended labor and materials to improve real property or a public improvement at the direction of the owner or a general contractor receive payment for the work actually performed.”

In the dissent’s view:

  • That protective purpose is not furthered by penalizing a general contractor who overpays subcontractors relative to trust inflows at a given time.
  • If the law denies the contractor any right to reimbursement from later trust funds, contractors will simply cease advancing their own funds to pay subcontractors.
  • Instead, they will wait for owner funds to arrive—funds that may be delayed or may never fully arrive, as was allegedly the case here.

The dissent concludes that the majority’s interpretation, by “penalizing” such advances, is actually anti-remedial—it disincentivizes the very conduct (timely payment of subs) that Article 3‑A is designed to encourage.

E. Distinguishing Canron

The dissent also addresses Canron, the case heavily relied upon by the majority. In Canron, trust funds were used to pay a contractor’s bank lender, which the Court of Appeals held constituted an improper diversion to “personal debts” and undermined trust beneficiaries’ rights.

Here, the dissent argues:

  • There is no evidence that BWS intended to use the settlement funds to pay personal debts or unrelated obligations.
  • The advances BWS seeks to reimburse were used to pay subcontractors’ claims on the projects—exactly the kind of payments Article 3‑A exists to protect.
  • Thus, classifying such reimbursement as “diversion” to personal debts is a mischaracterization of the economic reality.

F. Unanswered Practical Question in the Dissent

One tension, not fully addressed in the dissent, is priority among competing claims when trust funds are insufficient to satisfy everyone. The opinion states that BWS paid “millions of dollars more” to subcontractors than it received from owners and seeks only “partial reimbursement” from the settlement funds. Yet plaintiffs claim to be still owed $6.9 million.

The dissent’s approach raises at least two practical questions:

  1. If trust assets are inadequate to satisfy both:
    • (a) the contractor’s reimbursement claim for prior advances, and
    • (b) the unpaid subcontractors’ current claims,
    which claims should be paid first?
  2. Does the contractor, by virtue of having advanced funds earlier, acquire a sort of beneficiary-like status alongside subcontractors, thereby competing for trust funds?

The majority implicitly answers “no”: the contractor remains a trustee with only residual rights. The dissent does not explicitly resolve how to allocate funds among a contractor’s reimbursement claim and unpaid subcontractor claims when the trust is insufficient for all; its analysis is more conceptual and purposive, focusing on fairness to contractors who have advanced payments.

VI. Precedents Cited and Their Influence

A. LeChase Data/Telecom Servs., LLC v. Goebert, 6 NY3d 281 (2006)

In LeChase, the Court of Appeals considered whether certain funds received in connection with a construction-related financing arrangement fell within Article 3‑A. The Court emphasized the breadth of Lien Law § 70(1), which captures money “paid or payable” to a contractor “under or in connection with” a contract for the improvement of real property.

The significance for L.C. Whitford:

  • LeChase reinforces that Article 3‑A is not limited to straightforward progress payments; it extends to settlement payments, financing proceeds, and other funds that are functionally tied to the construction contract.
  • The Third Department relies on LeChase to support its quick conclusion that the owners’ settlement payments to BWS—even though labeled as resolving disputes over delays and other issues—are nonetheless trust funds.

B. Aspro Mech. Contr. v. Fleet Bank, 1 NY3d 324 (2004)

Aspro involved claims against a bank allegedly complicit in the contractor’s diversion of trust funds. The Court of Appeals described Article 3‑A’s “primary purpose” as ensuring payment to those who furnish labor and materials, and it noted the distinction between owner and contractor trusts and the limited nature of a contractor’s beneficial interest.

In L.C. Whitford, the majority cites Aspro for:

  • The articulation of Article 3‑A’s remedial purpose.
  • Support for the reading that contractor trust assets are not to be used for a contractor’s “costs of improvement,” in contrast to owners’ broader authority under § 71(1) to fund a defined set of “costs of improvement.”

C. Harmon v. Fairview Assoc., 25 NY2d 101 (1969)

Harmon is an early significant Article 3‑A case addressing, among other things, the categories of persons who qualify as beneficiaries of an owner or contractor trust. It emphasizes that the statute enumerates the beneficiary classes and that trust assets must be devoted to satisfying their claims.

The Third Department references Harmon to stress:

  • That the statutory list in § 71(2)(a)–(f) is definitive and does not include contractor self-reimbursement as a primary trust purpose.
  • That subcontractors such as plaintiffs are squarely within the intended beneficiary class, reinforcing the primacy of their claims.

D. Canron Corp. v. City of New York, 89 NY2d 147 (1996)

Canron is perhaps the most influential Article 3‑A case on the nature of the contractor’s fiduciary duties and beneficial interest. It dealt with the use of trust funds by a contractor to pay a lender bank, which the Court of Appeals deemed an improper diversion of trust assets.

Key doctrinal points from Canron that shape L.C. Whitford:

  • A contractor has a fiduciary duty akin to that of an express trustee.
  • The contractor has no property right in trust monies “due or to become due” from the owner, except to the extent of a remaining balance after all beneficiaries are paid.
  • Using trust funds to pay the contractor’s own obligations (e.g., bank loans) constitutes diversion when it prejudices unpaid trust claimants.

The majority in L.C. Whitford uses Canron to:

  • Reject the idea that BWS has a present, beneficial interest in the settlement funds while subcontractors’ claims remain unsatisfied.
  • Equate BWS’s intended “reimbursement” to a form of applying trust assets to its own account, which is impermissible before beneficiaries are fully paid.

The dissent, by contrast, attempts to distinguish Canron on the ground that:

  • In Canron, the contractor used trust funds to pay unrelated, pre-existing personal debts (bank loans).
  • Here, BWS seeks reimbursement for payments it made on behalf of trust beneficiaries (subcontractors), which should not be analogized to paying personal debts.

This difference in how Canron is read underscores the deeper divide between the majority and dissent on whether a contractor’s advancement of its own funds for subcontractor payments creates a reimbursable interest in later trust receipts.

E. Matter of RLI Ins. Co., Sur. Div. v. N.Y. State Dep’t of Labor, 97 NY2d 256 (2002)

RLI Ins. involved competing claims to contract funds on a public project, including claims by a surety and by the State Department of Labor for unpaid wages. The Court of Appeals reaffirmed the protective nature of Article 3‑A and held that trust beneficiaries’ rights are paramount when applying trust assets.

In L.C. Whitford, RLI is cited for:

  • The proposition that diverting trust funds away from statutorily protected claimants violates Article 3‑A.
  • Support for plaintiffs’ contention that using the settlement funds to reimburse BWS rather than safeguard them for unpaid subcontractors would amount to improper diversion.

VII. Complex Concepts Simplified

A. What Is a “Trust” Under Lien Law Article 3‑A?

In everyday language, a “trust” is like a special bank account that belongs not fully to the person holding it, but is held “for the benefit” of others. Under Article 3‑A:

  • Money paid for a construction project is not free cash for the owner or contractor.
  • Instead, it is “trust money” that must be used to pay certain project-related bills first (mainly subcontractors and suppliers).
  • Only if there is money left after everyone in the protected classes is paid can the contractor treat it as profit or reimbursement for itself.

B. Trustee vs. Beneficiary

In the Article 3‑A context:

  • The trustee is the party who receives the money and is responsible for holding and disbursing it—here, BWS as the general contractor.
  • The beneficiaries are the people the law is trying to protect, such as:
    • Subcontractors
    • Suppliers (materialmen)
    • Laborers
    • Design professionals (in some instances)
  • The trustee’s duties are fiduciary, meaning the trustee must act with loyalty and care for the beneficiaries’ financial interests in the trust funds.

C. Trust Assets and Diversion

“Trust assets” are simply the money (or receivables) that fall within the Article 3‑A trust. “Diversion” occurs when the trustee uses trust assets for something other than the permissible list of uses in § 71(2), such as:

  • Paying the contractor’s unrelated debts
  • Covering corporate overhead unrelated to the project
  • Transferring funds to affiliated entities without a proper trust purpose

Diversion can trigger:

  • Civil liability, including personal liability of corporate officers, and
  • In some circumstances, criminal liability (larceny under the Penal Law).

D. “Cost of Improvement” vs. “Payment of Claims of Subcontractors”

The phrase “cost of improvement” is a defined legal term (Lien Law § 2[5]) and is relevant mostly to the owner’s trust. It is broader and can include:

  • Acquisition costs
  • Some finance charges and overhead
  • Fees to architects and engineers

By contrast, the contractor’s trust purpose language in § 71(2)(a) is narrower and speaks specifically of “payment of claims of subcontractors, architects, engineers, surveyors, laborers and materialmen.” This more specific language reflects a tighter focus on downstream project participants.

E. Preliminary Injunction in a Trust Action

A preliminary injunction is a court order that temporarily freezes the situation while a case is being decided. In this context:

  • The court prevents BWS from spending or transferring the settlement funds.
  • The freeze remains until the court can determine who has a right to the money and in what order.
  • The plaintiffs post an “undertaking” (here, $50,000) to cover potential damages to the defendant if it later turns out the injunction was wrongly issued.

Because trust assets can be quickly depleted, the ability to obtain such an injunction is a crucial enforcement tool for subcontractors.

VIII. Impact and Implications

A. Impact on General Contractors’ Payment Practices

The majority’s rule has immediate practical consequences for contractors in New York’s Third Department:

  • If a contractor uses its own money to pay subcontractors when no trust funds are available, it may not be able to recoup those advances from later-received trust funds unless and until all trust beneficiaries’ claims (including presently unpaid ones) are satisfied.
  • This makes such advances economically risky, especially on projects where owner funding is unstable or subject to dispute.
  • Contractors may respond by:
    • Delaying payment to subcontractors until they themselves are paid by owners, and/or
    • Building contract mechanisms that better secure reimbursement rights (e.g., specific security interests outside of Article 3‑A, or escrow arrangements).

The dissent expressly worries that this decision will discourage contractors from acting as “shock absorbers” when owners fail to fund projects timely.

B. Increased Use of Trust-Accounting and Segregation

The decision underscores the need for rigorous trust accounting:

  • Contractors should maintain detailed records showing:
    • All trust funds received (including settlements), and
    • All disbursements to subcontractors, suppliers, and others.
  • Careful tracking is essential to:
    • Demonstrate compliance with Article 3‑A, and
    • Defend against allegations of diversion.

Segregation of trust funds in separate bank accounts, while not always mandatory, becomes a practical best practice to avoid commingling with non-trust assets.

C. Impact on Settlement Structuring and Indemnities

The settlement between BWS and the owners had two salient features:

  • Payment of $4,978,477 to BWS (with $1,264,470 tied specifically to the three Ferris projects), and
  • Indemnification of the owners by BWS against subcontractor liens.

Given this decision:

  • Owners and contractors should anticipate that settlement payments tied to a project will be treated as trust funds subject to Article 3‑A.
  • If a contractor assumes indemnity obligations for subcontractor liens, it must recognize that:
    • It cannot automatically use settlement proceeds to recover its own earlier advances, and
    • Those funds are instead “earmarked” by operation of law for payment of remaining trust beneficiaries.
  • Parties may seek to:
    • Structure settlements to distinguish trust and non-trust components more clearly, or
    • Provide separate funds or security to address contractor reimbursement needs outside the trust structure.

D. Potential for Further Appellate Review

The presence of a well-articulated dissent on an acknowledged “question of first impression” indicates that:

  • This is a live and unsettled area of law, at least until the Court of Appeals has an opportunity to speak directly to the issue.
  • Other Departments of the Appellate Division might take differing approaches if faced with similar facts, especially where the equities strongly favor a contractor who has substantially overpaid subcontractors.

Thus, while L.C. Whitford sets a clear rule in the Third Department, its ultimate statewide status may depend on future appeals and cases.

E. Risk Management for Contractors and Subcontractors

For contractors:

  • Think carefully before using your own funds to pay subs when owner funding is uncertain—these advances may not be recoverable from later trust inflows.
  • Consider:
    • Negotiating contract provisions that provide for interim security or escrow arrangements.
    • Securing personal guaranties or collateral from owners if significant pre-funding of work is expected.
    • Maintaining strong documentation demonstrating that any non-trust funds advanced were used solely for trust-type purposes (even if reimbursement rights are limited).

For subcontractors:

  • This decision strengthens the ability to:
    • Seek injunctions under Lien Law § 77(3)(a) to preserve trust assets (including settlement funds), and
    • Argue that contractor self-reimbursement is subordinate to unpaid subcontractor claims.
  • It highlights the value of:
    • Promptly filing mechanics’ liens where appropriate,
    • Monitoring owner-contractor settlements that may affect project funding, and
    • Invoking Article 3‑A trust remedies early to prevent dissipation of funds.

IX. Conclusion: Key Takeaways and Broader Significance

L.C. Whitford Co., Inc. v. Babcock & Wilcox Solar Energy, Inc. establishes, at least in the Third Department, an important clarification of New York’s Lien Law Article 3‑A:

  • Settlement proceeds paid to a contractor “under or in connection with” a construction contract are trust funds subject to Article 3‑A.
  • A contractor-trustee may not use later-received trust funds to reimburse itself for earlier advances it made from non-trust funds to cover project expenditures, so long as trust beneficiaries (such as subcontractors) remain unpaid.
  • The contractor’s interest in trust funds is strictly residual: it arises only after all statutorily protected beneficiaries have been fully paid.
  • Courts are empowered—and, in appropriate cases, expected—to issue preliminary injunctions under Lien Law § 77(3)(a) to prevent dissipation of such trust funds.

The dissent underscores that this is a contested area, highlighting policy concerns about discouraging contractors from advancing funds to protect subcontractors. Nonetheless, the majority’s rigorous, text-driven reading of Article 3‑A, grounded in Court of Appeals precedents such as Canron, signals a strong commitment to the principle that construction funds—no matter when or in what form they are received—belong primarily to those who furnished labor and materials, not to the contractor’s balance sheet.

Going forward, this decision will likely shape:

  • How owners and contractors structure settlements and indemnification provisions,
  • How contractors manage cash flow and decide whether to advance their own funds, and
  • How subcontractors strategize to secure and preserve trust assets for their claims.

In the broader legal context, L.C. Whitford reflects New York courts’ continued fidelity to the protective, remedial purpose of Article 3‑A and their insistence on strict adherence to the fiduciary nature of construction trust funds, even in complex, post-termination settlement scenarios.

Case Details

Year: 2025
Court: Appellate Division of the Supreme Court, New York

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