Ruling Dismissing Individual Liability Under Lien Law Reversed Where Complaint Alleged Defendants Diverted Funds

On August 26, 2 021, the Fourth Department issued a decision in Kulback's Inc. v Buffalo State Ventures, LLC, 2021 NY Slip Op 04813, holding that it was not proper to dismiss causes of action seeking to hold individuals acting as trustees under a trust for a commercial construction project governed by the Lien Law personally liable where the complaint alleged that the individual defendants expended and diverted trust funds, stating:

We also agree with plaintiff that the allegations in the complaint with respect to the sixth cause of action are sufficient to impose personal liability on the individual defendants (See CPLR 3211 [a] [7]). In the sixth cause of action, plaintiff alleged, inter alia, that BSV executed mortgages to secure funds to pay for the construction work, that those funds were "'trust funds' " and BSV and the individual defendants were the " 'trustees' " as those terms are used in the Lien Law, that BSV and the individual defendants, as trustees, used the trust funds for purposes other than the payment of the claims of contractors, construction managers, subcontractors, laborers and materialmen, and that therefore "BSV and the Individual Defendants have unlawfully expended and diverted such trust funds in violation of the New York Lien Law." According plaintiff the benefit of every possible favorable inference, as wemust, we conclude that the allegations are sufficient to impose personal liability on the individual defendants inasmuch as "[c]orporate officers . . . may be personally liable for trust funds . . . wrongfully diverted by their corporation, provided that they knowingly participated in the diversion by the corporation" (Edgewater Constr. Co. v 81 & 3 of Watertown [appeal No. 2], 1 AD3d 1054, 1057 [4th Dept 2003]).

The attorneys at Schlam Stone & Dolan frequently litigate issues related to New York’s Lien Law. Contact our attorneys at commercialdivisionblog@schlamstone.com if you or a client have questions regarding the Lien Law.

Click here to subscribe to this or another of Schlam Stone & Dolan's blogs.