When general contractors who perform work on construction projects subject to the New York Lien Law file for bankruptcy protection, subcontractors and suppliers that take advantage of the provisions of Article 3-A of the New York Lien Law (New York Lien Law §§70-79-a) can maximize recoveries on their claims against the debtor/contractor and utilize the tools available through the bankruptcy process to obtain greater negotiating leverage and oversight over the debtor/contractor’s operations.

Article 3-A of the New York Lien Law

Article 3-A creates a trust fund for monies received in connection with an improvement to real property, and designates the recipient of the funds—whether an owner, general contractor, or first tier subcontractor—as the trustee for such funds until the claims of the limited beneficiaries of the trust fund are paid or discharged. The beneficiaries of the Article 3-A trust fund are limited to, among others, each “subcontractor, architect, engineer, surveyor, labor or materialman” who contributed to the improvement of real property. New York Lien Law §71(2)(A). A separate trust is created for each construction project, and the contractor as trustee is required to maintain separate books and records for each construction project. New York Lien Law §§70(2), 75. The contractor/trustee acquires no property rights in the trust assets until all outstanding claims of Article 3-A trust fund beneficiaries have been paid or discharged. New York Lien Law §70(3).

Trust Fund Assets and Property Of the Estate in Bankruptcy

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