Opinion ID: 751538
Heading Depth: 2
Heading Rank: 1

Heading: Titan's Claim v. Article 3-A Trust Fund Beneficiaries

Text: 17 Titan maintains that the district court erred when it determined that Titan's claim as a completing surety was inferior to Article 3-A trust claims. Titan argues that its claim to the Contract Fund is superior to 3-A trust claims, a priority it earned when it became equitably subrogated to the rights of both Farney and TBTA in the Contract Fund. 18 Section 70(1) of New York Lien Law states that funds received by a contractor under or in connection with a contract for ... a public improvement in this state, ... and any right of action for any such funds due or earned or to become due or earned, shall constitute assets of a trust. N.Y. Lien Law § 70(1). It is undisputed that the proceeds of the contract at issue are trust funds under Section 70 of the New York Lien Law. 19 That said, the next inquiry is the order of priority. The priority of claimholders is established by section 77 of the Lien Law. First priority is given to claims for taxes and for unemployment insurance and other contributions due by reason of employment. N.Y. Lien Law § 77(8)(a). 20 Second priority is given to trust claims of laborers for daily or weekly wages. Id. at (8)(b). 21 Third priority is given to trust claims of laborers for benefits or wage supplements. Id. at (8)(c). 22 Fourth priority is given to certain claims to a laborer's wages made by third parties. Id. at (8)(d). 23 Remaining trust claims are distributed pro rata. § 77(8). 24 Titan misunderstands its rights under New York law. Generally in a public improvement contract, the contractor is required to find a surety that will secure the performance of his contract. Upon default by the contractor, the surety, pursuant to a performance bond, completes the contract, at its own cost and expense. It then becomes equitably subrogated to the rights of the contractor and certain of the rights of the owner in the unpaid balance of the contract price. See Tri-City Electric Co., Inc. v. People, 96 A.D.2d 146, 149, 468 N.Y.S.2d 283, 286 (N.Y.App.Div.1983); Scarsdale National Bank & Trust Co. v. United States Fidelity & Guaranty Co., 264 N.Y. 159, 190 N.E. 330 (1934). Under a performance bond, a completing surety becomes entitled to the money still owed by the owner to the defaulting contractor, but only after the claims of all 3-A trust fund beneficiaries are first satisfied. Tri-City Electric Co., Inc., 96 A.D.2d at 149, 468 N.Y.S.2d at 286. It is perfectly clear that the rights of a surety in the trust proceeds do not trump those of the Article 3-A trust fund beneficiaries. Id. at 152, 468 N.Y.S.2d at 287-88. 25 Titan places great faith in Scarsdale National Bank & Trust Co. v. United States Fidelity & Guaranty Co., 264 N.Y. 159, 190 N.E. 330 (1934), to demonstrate that its claim should have taken priority over the claims of the 3-A trust beneficiaries. Titan argues that, like the surety in Scarsdale, it was entitled to the entire amount of the Contract Fund. Titan's faith is misplaced. 26 Scarsdale dealt with a priority fight between an assignee of a defaulting contractor and a completing surety. There were no trust beneficiaries. Scarsdale held that the assignee was entitled only to whatever rights the assignor, the defaulting contractor, had. The surety, having completed the duties the contractor owed to the property owner, became subrogated to the rights of the owner as against the contractor; and because the surety completed the project it had a claim to withheld money superior to the defaulting contractor. A fortiori, the surety also had priority over the claim of a mere assignee of the contractor. 27 Scarsdale and its progeny stand for the unremarkable proposition that an assignee stands in the shoes of his assignor when it comes to awarding priorities. The district court's decision is in complete accord with Scarsdale. After the claims of all the designated Article 3-A trust beneficiaries were paid, Titan was awarded the remainder (almost 50%) of the Contract Fund over the claims of Farney's judgment creditor. It is entitled to no more.