New York has two sets of rules every bonded contractor should know. The first is the bond law: State Finance Law §137 sets out how payment bonds on public improvements work and who can claim on them. The second is the trust fund statute: Article 3-A of the Lien Law, which treats the money flowing through a construction project as trust money for the people who did the work. The second can matter to you personally.
This article is general education, not legal advice. Statutes change and their application depends on the facts. Confirm the requirements for your project with the awarding agency or a New York construction attorney.
Payment Bonds on Public Improvements: State Finance Law §137
Section 137 provides for a payment bond on contracts for public improvements, to be required before the contract is approved. The bond guarantees prompt payment of money due “to all persons furnishing labor or materials to the contractor or any subcontractors” on the work. The statute says this bond is in addition to any other bond required by law for completing the work, so the payment bond and the performance bond are separate obligations.
For smaller jobs, section 137 lets the head of the state agency, public benefit corporation or commission, at its discretion, dispense with the performance and payment bonds when the aggregate contract amount is under $100,000. When the bonds are waived, the statute allows 20% to be retained from each progress payment until the work is completed and accepted. Waiver is discretionary, not automatic, so check the bid documents.
Who can claim
Anyone who has furnished labor or material to the contractor, or to a subcontractor of the contractor, in the prosecution of the work can sue on the bond in its own name if it has not been paid in full within 90 days after the last of its labor was performed or material was furnished. “Material” includes the reasonable rental value of equipment actually used, and unpaid wages and fringe benefits are covered as well.
The 120-day notice for lower-tier claimants
A claimant that contracted with a subcontractor but has no contractual relationship, express or implied, with the contractor that furnished the bond has no right of action unless it gives written notice to that contractor within 120 days from the date the last of its labor was performed or material was furnished. The notice must state with substantial accuracy the amount claimed and the party for whom the labor was performed or to whom the material was furnished. It is served by personal delivery or by registered mail to the contractor’s office, place of business or residence, and notice the contractor actually receives by other means is also sufficient.
The one-year suit deadline
Except as provided in Labor Law §220-g, no action on the bond may be commenced after one year from the date the public improvement has been completed and accepted by the public owner. The clock runs from completion and acceptance of the project, not from your last day on site.
Federal projects in New York are a different matter: they fall under the Miller Act, not section 137. See our Miller Act guide, and for how claims play out in general, our article on payment bond claims.
Performance Bonds on New York Public Work
Section 137 itself is a payment bond statute. In practice, the requirement for a performance bond on New York public work usually comes from the contract documents and the rules of the awarding body, whether that is a state agency, a public authority, a city or a school district. A full-value performance bond alongside the payment bond is common on public construction, but the amount, form and any exemptions are set by the bid documents, so treat them as the controlling source. Our performance bond requirements by state and payment bond requirements by state pages summarize New York alongside the other states.
Lien Law Article 3-A: The Trust Fund Statute
Article 3-A (sections 70 through 79-a) is what sets New York apart. Under section 70, funds received by an owner for an improvement of real property, and funds received by a contractor or subcontractor under a contract for an improvement or a public improvement in New York, are assets of a trust. The owner is trustee of its funds, and each contractor and subcontractor is trustee of the funds it receives, with a separate trust for each contract. The trust arises automatically, whether or not anyone signs a document acknowledging it.
Who the money is held for
Under section 71, a contractor’s or subcontractor’s trust funds must be held and applied for expenditures arising out of the improvement, including:
- Claims of subcontractors, architects, engineers, surveyors, laborers and materialmen
- Withheld payroll taxes and taxes based on the purchase price or value of materials or equipment, plus unemployment insurance and other employment contributions
- Benefits and wage supplements the trustee is obligated to provide
- Premiums on surety bonds filed and on insurance accrued during the improvement
Beneficiaries hold trust claims whether or not they filed, or could have filed, a mechanic’s lien.
Diversion
Section 72 defines a diversion as any transaction by which a trust asset is paid, transferred or applied for a purpose other than a trust purpose before all trust claims are paid or discharged, whether or not trust claims exist at the time. A trustee who does it or consents to it commits a breach of trust. Using one job’s receipts for another job, overhead or an owner’s draw while that job’s subs are unpaid can be a diversion.
Books and records
Section 75 requires the trustee to keep books or records for each trust showing trust assets receivable, trust accounts payable, trust funds received, trust payments made, and transfers made to repay or secure advances. Separate bank accounts are not required if the books clearly allocate deposits to each trust. The important part is the penalty for poor bookkeeping: failure to keep these records is presumptive evidence that the trustee applied trust funds for non-trust purposes. Under section 76, a beneficiary whose claim has been payable for 30 days can demand, in writing, to examine those books or receive a verified statement.
Enforcement and criminal exposure
Under section 77, the holder of any trust claim, including a person subrogated to a beneficiary’s rights, can sue to enforce the trust in a representative action for all beneficiaries. Remedies include an accounting and recovery of diverted assets.
Section 79-a goes further. A trustee, or any officer, director or agent of the trustee, who applies or consents to the application of trust funds for non-trust purposes is guilty of larceny, punishable as provided in the Penal Law, in the circumstances the section describes. For a contractor or subcontractor, that includes failing to pay a trust claim within 31 days of the time it is due. The section carves out good-faith disputes (if the claim is paid within 31 days after the dispute is finally resolved) and certain repayments of advances that were actually used for trust purposes. The same presumption from missing books applies here too.
Why This Matters to Your Surety and Your Bonding
On a bonded job, the people the trust protects and the people the payment bond protects are largely the same: subs, suppliers and workers. When trust money is diverted, those parties go unpaid, and the payment bond is often where they turn. The surety pays, then looks to you and your indemnitors for reimbursement under the indemnity agreement. Many indemnity agreements already say that contract funds are held in trust for labor and material claims, as our guide to personal indemnity agreements explains, and New York puts a statute behind that idea. Section 77 also expressly lets a party subrogated to a beneficiary’s rights enforce the trust.
Underwriters read diversion as a sign of trouble. Robbing one job to pay another often means cash flow is already stretched or losses are being hidden. It is one of the patterns covered in our article on underwriting red flags, and it can shrink or end a bond program quickly.
Why personal assets are at risk beyond the indemnity
The indemnity agreement puts the personal assets of the people who signed it behind the surety’s losses. Article 3-A adds a separate layer. Section 79-a names officers, directors and agents of the trustee individually, so a person who applies or consents to a diversion can face criminal exposure whether or not he or she signed the indemnity. And because missing books are presumptive evidence of diversion, sloppy accounting alone can leave you having to prove you did not divert. If you are facing a trust fund claim or an inquiry, talk to New York counsel right away.
Practical habits that protect you
- Keep job-by-job records that match the section 75 categories, even if all funds sit in one account.
- Pay trust claims on each job from that job’s receipts before using the money for anything else.
- Document any good-faith dispute in writing, and pay promptly once it is resolved.
Public Improvement Liens
New York also allows a lien against public funds. Under Lien Law §5, a person performing labor for or furnishing materials to a contractor or subcontractor on a public improvement has a lien on the money of the state or public corporation applicable to the improvement, to the extent of the amount due or to become due on the contract. Under section 12, the notice of lien is filed with the head of the department or bureau in charge of the work and with the comptroller or financial officer, at any time before the improvement is completed and accepted and within 30 days after completion and acceptance. Under section 18, the lien generally lasts one year from filing unless an action to foreclose is started or the lien is extended or continued. A contractor can discharge it under section 21 with a bond equal to 110% of the lien, among other methods.
The Bottom Line
In New York, job money is trust money. Pay your subs and suppliers from the funds for their job, keep books that would hold up under a section 76 demand, and treat the 120-day notice and one-year suit deadline under section 137 as hard dates.
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