Caristo Constr. Corp. v. Diners Financial Corp., 21 N.Y.2d 507 (1968)
A lender who receives payments under an unfiled assignment of accounts from a subcontractor and simultaneously returns “advances” of equal amounts may be liable for diversion of trust funds under the Lien Law, particularly if the lender fails to file a notice of lending and the funds are not demonstrably used for trust purposes.
Summary
Caristo Construction, a general contractor, sued Diners Financial, a factor, for diverting trust funds under the Lien Law. Raymar Contracting, a subcontractor, assigned its accounts receivable to Diners Financial for a revolving credit line. Caristo paid Raymar, who then turned the payments over to Diners. Diners, in turn, gave Raymar its own checks of equal amounts. Raymar failed to pay its subcontractors, leading Caristo to pay them under its payment bond. The court held that Diners Financial was liable for diversion because it received trust payments and applied them to its loan account without ensuring they were used for trust purposes, and because it failed to file the assignment. The court reasoned that Diners’ actions defeated the purpose of the Lien Law’s protections for subcontractors and suppliers.
Facts
Caristo Construction was the general contractor for the Victory Memorial Hospital construction. Raymar Contracting was the subcontractor for heating, air-conditioning, and ventilation. Raymar assigned all its accounts receivable to Diners Financial (formerly Simpson Factors) to secure a revolving credit. Diners Financial knew these accounts arose from construction projects and were thus trust funds under the Lien Law. Diners Financial did not file the assignment or a notice of lending. As Caristo paid Raymar, Raymar turned the payments over to Diners Financial, who then gave Raymar checks in equal amounts. Raymar failed to pay its subcontractors $53,899.12, which Caristo paid under its bond. Caristo also incurred $1,029.10 in excess completion costs.
Procedural History
Caristo Construction sued Diners Financial for diversion of trust assets. The trial court ruled in favor of Diners Financial. The Appellate Division reversed, granting judgment to Caristo. Diners Financial appealed and Caristo cross-appealed, seeking excess completion costs and attorney’s fees. The New York Court of Appeals affirmed the Appellate Division’s order in all respects.
Issue(s)
1. Whether a lender, receiving payments under an unfiled assignment of accounts from a defaulting subcontractor and simultaneously returning equivalent “advances,” is liable for diverting trust funds under the Lien Law.
2. Whether the general contractor is entitled to recover attorney’s fees in this action.
3. Whether the general contractor is entitled to recover the excess cost of completion from the factor.
Holding
1. Yes, because the lender received payments intended for trust beneficiaries and applied them to its outstanding loans, while also failing to file the assignment as required by the Lien Law.
2. No, because the general contractor is suing only on its own behalf, and attorney’s fees in such representative actions are generally allowed only from the recovered fund or property.
3. No, because the excess cost of completion resulted from the subcontractor’s breach of contract, not from the diversion of funds.
Court’s Reasoning
The court emphasized that Article 3-A of the Lien Law was designed to create trust funds to assure payment of subcontractors and suppliers. The factor’s actions exposed it to liability in two ways: First, it received trust payments and applied them to the loan account, which was not a permissible trust purpose. The “exchange” of checks was, in effect, new advances after the repayment of old ones under the revolving credit. The court noted, “If, at any time, the factor had elected not to give its ‘exchange’ check for the Caristo check it would nevertheless have been entitled under the assignment to retain the Caristo payment.” Second, the factor provided Raymar with checks free of any indication that the proceeds arose from entrusted funds, which facilitated the diversion of funds. By accepting the assigned trust funds under the revolving credit, the factor participated in a diversion of trust assets under section 72 of the Lien Law. Failure to file a “notice of lending” deprived Raymar’s materialmen and subcontractors of an important protection. The court distinguished Trinca & Assoc, v. Tilden Constr. Corp. because in that case, the assignments had been properly filed and the factor made payments directly to the trust beneficiaries. The court also rejected the factor’s arguments that it was a purchaser for value and that the trust was discharged. As for attorney’s fees and excess completion costs, the court sided with the Appellate Division in denying the claims by the contractor.