L.C. Whitford Co., Inc., et al. v Babcock & Wilcox Solar Energy, Inc., formerly known as Fosler Construction Company, Inc., et al.
Attorneys and Parties
Brief Summary
Construction payment trust under New York Lien Law Article 3-A and whether a contractor-trustee may use later-received settlement trust funds to reimburse itself for earlier advances paid to subcontractors.
Granted a preliminary injunction barring disbursement of the settlement funds without further court order and required a $50,000 undertaking.
Nothing; the order granting the preliminary injunction was affirmed.
The settlement proceeds are trust assets under Lien Law § 70 [impresses a trust on funds paid or payable to a contractor under or in connection with a contract for an improvement of real property]. As trustee, the contractor must apply trust assets to the beneficiaries enumerated in Lien Law § 71 (2) (a) [permits use of trust assets for enumerated expenditures, including payment of claims of subcontractors, laborers, and material suppliers] and lacks authority to reimburse itself for "costs of the improvements" before satisfying trust claims. Using trust assets for self-reimbursement would breach the contractor’s fiduciary duties and risk diversion, warranting injunctive relief under Lien Law § 77 (3) (a) [permits the court to issue a preliminary injunction in a trust enforcement action].
Background
Babcock & Wilcox Solar Energy, Inc. (BWS), the general contractor on three St. Lawrence County solar projects (409 Ferris Road, 641 Ferris Road East, and 641 Ferris Road West), reached an October 15, 2024 settlement with the project owners totaling $4,978,477, which included $1,264,470 directly attributable to the three Ferris projects. BWS agreed to indemnify the owners against subcontractor liens. Plaintiffs, subcontractors on the projects, had filed liens and separately seek $6,910,317 for labor and materials. BWS notified plaintiffs it intended to use the settlement proceeds to reimburse itself for project costs it advanced to subcontractors. Plaintiffs commenced a Lien Law § 77 trust action to enforce the trust and sought to enjoin BWS from disbursing the settlement funds, asserting such use would be an improper diversion.
Lower Court Decision
Supreme Court (St. Lawrence County) granted a preliminary injunction prohibiting BWS from disbursing the settlement funds without further court order and required plaintiffs to post a $50,000 undertaking.
Appellate Division Reversal
Affirmed. The majority held the settlement proceeds are contractor trust funds under Lien Law Article 3-A and cannot be used by BWS to reimburse itself for "costs of the improvements" before paying statutory beneficiaries. The court relied on the fiduciary character of contractor-trustees and the prohibition against applying trust assets to the trustee’s own debts absent a surplus after satisfying all beneficiaries. A dissent would have allowed reimbursement from later-received trust funds for earlier proper payments to subcontractors, reasoning that the statute does not make timing dispositive and that allowing reimbursement furthers the remedial purpose of ensuring payment to those who improved the property.
Legal Significance
Clarifies in the Third Department that settlement proceeds paid to a contractor under or in connection with a construction contract are trust assets, and a contractor-trustee may not self-reimburse advances to subcontractors from later-received trust funds unless and until all trust beneficiaries are paid and a surplus remains. Reinforces fiduciary constraints on contractor-trustees and supports injunctive relief to prevent potential diversion in Lien Law Article 3-A trust actions.
In New York, contractor-settlement proceeds are Article 3-A trust funds; a contractor-trustee like BWS cannot use those funds to reimburse itself for advances until all subcontractor and other trust claims are satisfied, and courts may enjoin disbursement to protect trust beneficiaries.