• The Devil Is In The Difference: An Analysis of the NJ & NY Trust Fund Acts and the Proposed Act in PA
  • February 29, 2012 | Authors: Jonathan A. Cass; Michael P. Decktor
  • Law Firm: Cohen Seglias Pallas Greenhall & Furman PC - Philadelphia Office
  • In the construction industry, contractors often re-allocate or divert progress payments received on one project to satisfy unrelated financial obligations. This practice seriously and negatively impacts lower-tier contractors who expected to be paid from the now diverted progress payment. In an effort to prevent such diversions, many states, including New York, New Jersey, and soon, Pennsylvania, have enacted Trust Fund statutes limiting the ways in which a progress payment recipient can allocate funds. However, in comparing the Trust Fund statutes of these states, it becomes clear that New Jersey's Trust Fund statute does not apply to private construction projects. Hence, the New Jersey Trust Fund statute does not provide the same level of protection to subcontractors, and other lower-tier contractors, provided by sister states in New York, and in Pennsylvania (assuming that the proposed statute is enacted).

    In Pennsylvania, the proposed Trust Fund statute is titled, "Contractor Commingling of Funds Held in Trust Act." Proposed Senate Bill No. 1227 (introduced October 20, 2011). The proposed statute applies to both public and private projects, and does not require that the funds be maintained in a separate bank account. Rather, the contractor/trustee can commingle the funds with other non-trust fund monies without being subject to civil or criminal penalties. However, officers of the trustee are potentially subject to personal liability if they knowingly use funds for any purpose other than to pay their subcontractors on the particular construction project at issue.

    Similarly, New York's Trust Fund Act, contained under the broader umbrella of the New York Lien Law, applies to all improvements to real property or construction of public and private construction projects. The New York statute applies to contractors and subcontractors, and the trust arises upon receipt of the funds intended for payment to a lower-tier subcontractor or supplier. Again, officers of the trustee are subject to personal liability if they knowingly use funds for any purpose other than to pay subcontractors on a specific construction project.

    However, unlike the New York and proposed Pennsylvania Trust Fund statutes, the New Jersey Trust Fund statute does not apply to private projects. As a result, a subcontractor involved in a private project that wrongly believes it is protected under the New Jersey Trust Fund statute, may fail to take timely actions to preserve its lien rights under the Statute. Under New Jersey's Lien Fund statute, if a subcontractor on a private project files a construction lien claim for funds that an owner already has paid to a contractor, the subcontractor's lien will not be deemed valid and enforceable. In such a situation, even if the contractor diverts or re-allocates the funds to another project, the subcontractor's only course of action will be to file suit against the contractor, without recourse to the protections of the lien law, or the threat of personal liability against the owner of the contractor to ensure recoverability of the judgment.

    By contrast, in New York and, as currently proposed in Pennsylvania, the frustrated subcontractor working on a private project would have the option of filing suit under the applicable Trust Fund Act if the general contractor, rather than paying the subcontractor the amount it is owed, misappropriates funds. This option usually is quite attractive given that both the New York and potentially Pennsylvania Trust Fund statutes hold officers of general contractors personally liable if they are found to have diverted trust funds.

    Subcontractors should be mindful of this critical distinction in the New Jersey Trust Fund statute in order to ensure that every road to recovery is preserved in the event of non-payment on a private construction project. With so many similarities between construction contract enforcement statutes applicable across the Mid-Atlantic region, the devil is often in the differences between the various statutes of the different states. You should consult your legal counsel for assistance in recovering damages pursuant to a trust fund claim.