1 N.Y.3d 324 (2004)
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A lender who becomes a trustee under Lien Law Article 3-A by virtue of an assignment of contract rights must provide explicit notice to trust beneficiaries (e.g., subcontractors) when using trust assets to repay its own loans, and the filing of a mortgage referencing the assignment is insufficient notice.
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Summary
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Aspro Mechanical Contracting, Inc. sued Fleet Bank alleging diversion of trust funds under Lien Law Article 3-A. Berry Street, a contractor, assigned its rights under a contract with NYCHA to Fleet as security for a loan. NYCHA made payments directly to Fleet, which Fleet used to pay down Berry Street’s debt. Aspro, a subcontractor, claimed Fleet diverted trust assets by paying itself before paying subcontractors. The Court of Appeals held that Fleet, as a trustee, breached its fiduciary duty by failing to provide adequate notice to the trust beneficiaries when it used trust funds to repay its loans, even though Fleet had filed mortgages referencing the assignment.
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Facts
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Berry Street Corp. contracted with NYCHA to construct residential buildings. Norstar Bank (later Fleet) loaned Berry Street money, secured by mortgages and an assignment of Berry Street’s rights under the NYCHA contract. NYCHA agreed to make payments directly to Fleet. Fleet applied these payments to Berry Street’s debt and discharged its mortgages. Aspro Mechanical Contracting, a subcontractor of Berry Street, sued Fleet, claiming Fleet had diverted trust funds.
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Procedural History
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Aspro initially filed a special proceeding, which was dismissed without prejudice. Aspro then commenced an action under Lien Law § 77. The Supreme Court granted Aspro’s motion for summary judgment on liability. The Appellate Division affirmed. Fleet appealed to the Court of Appeals.
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Issue(s)
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Whether a lender, who becomes a trustee under Lien Law Article 3-A by virtue of an assignment of contract rights, provides sufficient notice to trust beneficiaries of its use of trust assets to repay its own loans by filing mortgages referencing the assignment, or whether a more explicit notice, such as a