Whether a Labor Law § 220-b(2)(a)(1) Department of Labor Notice of Cross-Withholding has payment priority over the claims of Lien Law Article 3-A trust beneficiaries where the notice is for underpaid wages earned in a project unrelated to the project which led to the creation of the trust.

No. Because Lien Law Article 3-A trust assets comprise funds "due or earned or to become due or earned" by a contractor for a public improvement, whereas a Notice of Cross-Withholding cannot attach before funds are due or earned by a contractor, the trust beneficiaries have a superior right to the funds over that of other claimants.

D.C. White Company ("White") entered into an agreement with the Queensbury Union Free School District ("Queensbury") to be the general contractor for a project to renovate the School District's buildings (the "Queensbury Project"). White procured payment and performance bonds from RLI Insurance Company ("RLI"). White subsequently defaulted on the Queensbury Project, and Queensbury terminated the contract. RLI undertook performance of the contract, spending $176,000 to finish the project and to pay all claims due under Lien Law Article 3-A. Under Lien Law Article 3-A, "funds . . . received by a contractor under or in connection with a contract for . . . a public improvement . . . and any right of action for any such funds due or earned or to become due or earned, shall constitute assets of a trust." Lien Law § 70[1]. The trust beneficiaries of the resulting trust included suppliers, subcontractors, and laborers who contributed to the construction project. The New York Department of Labor ("DOL") served a Notice of Withholding to Queensbury for $19,510.15, pursuant to Labor Law § 220-b(2)(a)(1), for White's failure to pay prevailing wages during construction. DOL also served a Notice of Cross-Withholding for $27,000.23, for White's failure to pay prevailing wages during construction of an unrelated project. Queensbury partially paid the amount due to RLI and withheld the remaining balance for payment to the DOL, as per the DOL Notices.

RLI conceded that DOL's Notice of Withholding had priority to its claim but brought suit to compel the DOL to withdraw its Notice of Cross-Withholding and enjoin Queensbury from paying the amount to DOL. The Supreme Court denied RLI's petition, reasoning that no distinction between a Notice of Withholding and a Notice of Cross-Withholding exists under Labor Law § 220-b(2)(1)(a), and since RLI conceded the validity of the Notice of Withholding, the Notice of Cross-withholding was also valid. The Appellate Division affirmed, stating that Labor Law § 220-b(2)(1)(a) gave the DOL authority to seize funds from public entities that retain funds due to an offender.

The Court of Appeals reversed the decision, stating that RLI was subrogated to the rights of the trust beneficiaries and therefore had priority of payment over the DOL. The Court of Appeals reasoned that under Lien Law Article 3-A, funds become trust assets as soon as they come into existence, even before they become due and are earned by the contractor. Additionally, the trust assets cannot be diverted for non-trust purposes until all trust claims have been paid or discharged. Therefore, the DOL's Notice of Cross-Withholding could not have attached before the funds became trust assets. Since RLI paid all outstanding claims of the trust beneficiaries pursuant to its obligation, it assumed the rights of the trust beneficiaries. Therefore, since the claims of the trust beneficiaries have superiority over the DOL Notice of Cross-Withholding, RLI had payment priority over the DOL.