New York Supreme Court, Appellate Division, Third Department

Case no.: CV-24-2057
Date filed: December 18, 2025

A New York appeals court has ruled that a general contractor, having settled its disputes with the project owners, could not use settlement funds to reimburse itself for advances it had made to subcontractors. The state lien law imposed a trust on those funds, and a court hearing was required prior to any disbursement.

A group of project owners, not identified in the court opinion, awarded three contracts to Babcock & Wilcox Solar Energy Inc. (BWS) for construction of neighboring solar power facilities in St. Lawrence County.

The project was plagued by delays. During the resulting dispute, the owners did not make timely payments to BWS. At the same time, the general contractor made payments to its subcontractors and suppliers on invoices for labor, materials and equipment for which BWS had not been paid by the project owners. These “advances,” from the contractor’s own funds, enabled continued work on the project.

The project owners and BWS settled their disputes, with the owners paying BWS $4,978,477. The contracts were terminated, and BWS agreed to indemnify the owners against the payment of any subcontractor or supplier liens on the property. There were $6.9 million in contested liens at the time.

BWS notified its subcontractors and suppliers that it intended to use a portion of the settlement proceeds “to reimburse itself for the payment of the costs of the improvements that it advanced and paid to subcontractors, suppliers and laborers.” The subs and suppliers objected, asking the St. Lawrence County Supreme Court to enjoin the disbursement of any settlement funds without a further court order.

The trial court granted the injunction. Article 3-A of the New York Lien Law imposes a trust on any funds paid or payable to a contractor under a contract for improvements to real estate. The trust benefits parties that furnished labor or materials to the project. BWS appealed the grant of the injunction.

The Supreme Court of New York, Appellate Division, issued a split 3-2 decision on what it called a “question of first impression.” The majority said the lien law was clear—a trust was imposed on any payment received from the project owner, including settlement proceeds. The contractor/trustee may use the funds for the “payment of claims” submitted by subs and suppliers, but the contractor may not use the funds to pay off its general obligations.

“BWS had no authority to reimburse itself with the settlement funds for moneys advanced on the project and doing so would be a breach of its fiduciary duties as a trustee. As such, Supreme Court duly exercised its discretion by enjoining BWS from utilizing the funds pending further court approval.”

The dissenting opinion argued that when the contractor paid subcontractor invoices despite nonpayment by the project owner, the contractor was essentially loaning money for the improvement of the owner’s property. This was a proper trust purpose, so reimbursement would not be covering general obligations. Nothing in the statute prohibits reimbursement for money advanced prior to the availability of the trust assets.

“[W]e would find that the payments advanced by BWS to the subcontractors for services rendered unto the subject projects unquestionably constitute a proper use of trust assets under the Lien Law and, as such, that BWS may be reimbursed for its payments from trust assets that are subsequently received.”

The progress payment applications and other invoices paid by the contractor were presumably itemized. This documentation can be used when seeking “further court approval” of reimbursement.

Perhaps a contractor could reduce the likelihood of challenge by notifying each individual subcontractor and supplier of the specific invoices the contractor had paid with its own funds. This would be preferable to a general statement of reimbursement for “the costs of the improvements.” The majority opinion, however, flatly stated the contractor has no authority to make disbursements without a court order. This will be burdensome for any contractor seeking to close out a project using settlement proceeds received from the project owner.

Participants:
For L. C. Whitford, et al.: Steven W. Klutkowski, Buffalo, New York
For Babcock & Wilcox: Gregory J. McDonald, Rochester, New York

Before: Judges Garry, Lynch, Ceresia, Fisher, and Mackey

Opinion by: Judge Lynch (majority) and Judge Mackey (dissent)

Outcome: Injunction order affirmed.

Source: Please click here to read the complete opinion.