Rochester Fire Damage Rules: The Trust and the Records

What Article 3-A Does

Article 3-A of the Lien Law is titled Definition and Enforcement of Trusts. It contains sections 70 through 79-a: the definition of trusts, the purpose of the trust and who its beneficiaries are, diversion of trust funds, a defence for transferees, the authority of a trustee, the deposit of trust funds and record keeping, the right of beneficiaries to examine records, the action to enforce the trust, relief after judgment, and the provision making diversion larceny.

It is not a fire statute. It is a construction payment statute, and a fire loss walks straight into it because of one subdivision.

Which Subdivision?

Section 70(5)(f). Among the assets of the trust of which an owner is trustee are funds received as proceeds of any insurance payable because of the destruction of the improvement, or its removal by fire or other casualty. The one carve-out is the amount required to reimburse the owner for premiums paid out of funds other than trust funds, which is not deemed part of the trust assets. So the premiums you paid come back to you; the rest arrives clothed as a trust.

Who Is the Trustee

Section 70(2): the funds received by an owner, and the rights of action with respect to them, for or in connection with each improvement, shall be a separate trust and the owner shall be the trustee of it. The same structure applies at each level, with a contractor holding funds received under each contract as a separate trust and a subcontractor likewise.

Note the word separate. Each improvement is its own trust, so money for one property is not fungible with money for another.

When It Begins

Section 70(3) provides that every such trust shall commence at the time when any asset of it comes into existence, whether or not there shall be at that time any beneficiary of the trust.

Commentary on the article has made the implication explicit: money paid over must be held in trust for beneficiaries even if, at the time of payment, no liability to any subcontractor or supplier has yet been incurred.

Why Does That Matter to a Fire Owner Specifically?

Because it removes the intuition most people work from. Owners assume that money is only committed once they owe somebody, and that until then it is simply theirs. Under this article the character attaches on arrival. An insurance payment that lands three weeks after a fire, before any contractor has been chosen, is already trust money for the purposes of the statute.

The Records Requirement

Section 75 governs the deposit of trust funds and the books or records to be kept. Where the trustee deposits trust funds in a bank or other depositary, they are to be deposited in the trustee's name. Separate accounts are not required provided proper books and records are kept.

The records themselves are detailed. Where the trustee has assigned, paid or otherwise transferred any trust asset in consideration of, as security for, or in repayment of advances applied to a trust purpose, the record must show the name and address of the person to whom the asset was transferred, the date of the transfer, a description of the asset, the amount, the amount of the consideration or of the advances secured or repaid, and the date or dates when that consideration was paid or those advances made, and the manner of payment.

And the Consequence of Not Keeping Them

Section 75(4): failure of the trustee to keep the books or records required by the section shall be presumptive evidence that the trustee has applied, or consented to the application of, trust funds actually received as money or an instrument for the payment of money for purposes other than a purpose of the trust as specified in section 71.

New York courts have applied that consistently. It is well settled that failure of such a trustee to maintain the requisite books and records constitutes presumptive evidence of diversion, a point made in People v. Miller and applied in People v. Grates and People v. Cahoon.

Is That Presumption Unbeatable?

No, and there is appellate authority in New York holding that a jury instruction on the presumption can go too far and impermissibly shift the burden of proof to a defendant. That is a matter for lawyers in a contested case. The practical point for an owner is far simpler: the cheapest possible response to a presumption that arises from the absence of records is to keep records, starting on the day money arrives.

We publish no assessments of any individual's trust position and nothing here is legal or accounting advice. Where insurance proceeds have been received on a fire loss in New York, a lawyer is the right person to advise on how Article 3-A applies to your circumstances, and it is a short conversation worth having early.

Beneficiaries Can Ask to See Them

Section 76 gives any beneficiary of the trust holding a trust claim the right, upon request and after the expiration of thirty days from a specified date, to examine the books or records and make copies, or to receive a statement.

So the records are not simply a defensive habit. They are a document set that somebody with a claim is entitled to look at, which is another reason for them to exist before anybody asks.

The Criminal Limb, and Who It Points At

Section 79-a makes diversion larceny. The subdivision most often quoted, section 79-a(1)(b), provides that any trustee of a trust arising under the article, and any officer, director or agent of such trustee, who applies or consents to the application of trust funds received by the trustee for any purpose other than the trust purposes as defined in section 71, is guilty of larceny and punishable as provided in the penal law, where such funds were received by the trustee as contractor or subcontractor and the trustee fails to pay, within thirty-one days of the time it is due, any trust claim arising at any time.

So This Is Aimed at Contractors?

That subdivision is framed around funds received as contractor or subcontractor, and the reported prosecutions are contractor cases. An owner's obligations under sections 70 and 75 are real and are civil in character. We set the distinction out because getting it wrong in either direction is unhelpful: an owner frightened into paralysis is as badly served as one who thinks nothing applies. How the article bears on your particular position is a question for a New York lawyer.

Which Means the Article Can Work For You

The situation this reaches most often after a fire is not an owner misusing money. It is a restoration contractor who takes a large insurance draw, does part of the work, does not pay their own subcontractors and suppliers, and then becomes hard to reach.

In that scenario the contractor is the trustee, the funds they received are trust assets, the subs and suppliers are beneficiaries, and the 31 day provision and the records presumption both point at them rather than at you. Owners frequently write that money off without understanding that Article 3-A exists.

What This Means Practically

Keep a ledger from the first payment. Date, amount, who it went to, what for, and how it was paid. It costs nothing and it answers the presumption in section 75(4).

Keep the money identifiable. Separate accounts are not required where proper records are kept, and a separate account makes proper records considerably easier.

Pay the people who did the work. Before anything unrelated, where trust claims exist.

Get receipts and lien waivers. Evidence that a beneficiary has been paid is worth as much as the payment.

Your Options, Compared

Keep the money, repair, record everything. The route the article contemplates.

Sell and deal with the proceeds as a contract term. Ordinary, and the term needs drafting rather than assuming.

Spend it on other things while trades are unpaid. The conduct the article is about.

Hand it all to a contractor and stop watching. The route where the article ends up protecting you, after a delay you did not need.

Across Rochester and Monroe County

The statute is statewide and what varies is the size of the sums and the type of contractor involved. The northern neighbourhoods are covered under the northeast and northwest, the south under the South Wedge and Highland, and the southwest under the Nineteenth Ward. Further pages deal with Park Avenue and the east side, the inner suburbs and the wider region.

Those outer areas include Irondequoit, Greece, Brighton, Gates, Henrietta, Penfield and Webster, with Canandaigua, Geneva, Brockport and Newark beyond them.

The full index is on our service area index.

Rules Questions

Do I Need a Separate Bank Account?

Section 75 does not require one where proper books and records are kept, and in practice a separate account makes those records much easier to produce.

What If the Money Already Went Into My Ordinary Account?

Common, and not fatal. Start recording now and take advice on the position rather than assuming either that it is fine or that it is not.

My Contractor Will Not Account to Me.

Section 76 gives a beneficiary rights to examine records, and the trust obligations run against a contractor holding your funds. Take it to a lawyer.

Primary Sources

New York Lien Law Article 3-A, sections 70, 71, 72, 73, 74, 75, 76, 77, 78, 79 and 79-a
Section 70(2), (3), (5)(f) and (6)(c) — owner, contractor and subcontractor trusts
Section 75(1) to (4) — deposit, records and the presumption of diversion
Section 79-a(1)(b) and (3) — larceny and the records presumption
People v. Miller, 23 A.D.3d 699; People v. Grates, 66 A.D.3d 1517; People v. Cahoon