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Reliance Insurance Company v. The Lott Group, Inc.

370 N.J. Super. 563, 851 A.2d 766 (App. Div. 2004)

CONSTRUCTION TRUSTS—The reach of New Jersey’s Construction Trust Fund Act extends beyond individuals who are in the direct contractual chain and extends to persons who come to possess funds generated from public projects if they have knowledge of the source of the funds.

An insurance company issued payment and performance bonds on a general contractor’s behalf in connection with public works contracts. As partial consideration for issuing the bonds, the contractor’s CEO gave the insurance company a continuing indemnity agreement, both personally and in his capacity as the CEO. The agreement created a trust on the entire price of the contractor’s contracts in favor of the insurance company.

When the contractor encountered financial difficulties, its creditors began to file claims against the bonds. The insurer began paying the claims and even agreed to provide the contractor with additional funds to meet general payroll obligations. At the same time, the CEO hired a consultant to devise a way to address the financial situation so that the contractor could complete its unfinished projects and minimize the CEO’s personal exposure to the insurance company. The two devised a strategy by which the contractor would divert progress payments for other purposes. The insurance company then declared the contractor in default on the bonded projects and then sued the consultant for violating the Construction Trust Fund Act (Act). Specifically, it sought a declaration that the diverted funds were subject to the contract-based constructive trust under the indemnity agreement and that the diverted funds were property of the statutory trust created under the Act. The lower court held that the consultant was personally liable.

On appeal, the consultant asserted that the Act did not encompass the actions of an individual who was not a signatory to a construction contract. Furthermore, he argued that there were genuine issues of fact as to the extent of his knowledge of the source of the funds. He also claimed that the diversion strategy was the CEO’s idea, not his. The Appellate Division held that the reach of the Act extends beyond individuals who are in the direct contractual chain and extends to persons who come to possess funds generated from public projects if they have knowledge of the source. It ruled that the Act was intended to ensure that public money is devoted to public purposes by placing that money in a trust until it achieves that purpose. The Appellate Division also held that regardless of whether the consultant had created the diversion strategy or had merely facilitated it, he knew that the funds had been generated by public projects. Therefore, the Court affirmed his liability.


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