Homeowner Standing to Bring a Construction Trust Diversion Claim

Reviewed September 7, 2026.

New York’s construction trust law can protect homeowners who advance money for home improvement work. That protection should not be described as an automatic rule that every owner on every commercial or public project is a trust beneficiary.

What Ippolito decided

In Ippolito v. TJC Development, LLC, 83 A.D.3d 57 (2011), the Second Department recognized homeowners’ standing based on the home improvement trust protections in Lien Law § 71-a and the return-of-advance-payment provision in § 71(2)(f). Claims against individual officers alleged to have participated in diversion survived dismissal.

The outcome had an important limit: the claim against the contractor corporation was barred because it could and should have been raised in the earlier arbitration. The ruling did not finally establish the individuals’ liability. Prior litigation or arbitration can therefore affect which trust claims remain available.

Advance payments and potential defenses

Section 71-a regulates qualifying home improvement advance payments, including escrow and permitted application of funds. Owner breach is not a blanket right to keep every advance: the statute includes limits concerning reasonable liquidated damages and prior written notice. Substantial performance or proper application of funds also must be evaluated under the actual statute and facts; they do not erase other beneficiaries’ rights or earlier diversion automatically.

An officer is not liable merely because of a corporate title. Participation in the alleged diversion and the applicable proof matter. Nor is every diversion judgment automatically immune from bankruptcy discharge. Bullock v. BankChampaign, N.A., 569 U.S. 267 (2013) requires a culpable mental state for fiduciary defalcation under the federal bankruptcy provision.

Review the contract, payment history, use of funds, prior proceedings and applicable limitation period before selecting a remedy.

Kushnick Pallaci PLLC assists clients throughout New York with construction trust fund diversion claims. Contact 631-752-7100 or vtp@kushnicklaw.com.

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