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N.J. Superior Court, Appellate Division A-2746-02T3; Appellate Division; opinion by Hoens, J.A.D.; decided and approved for publication on July 6, 2004. Before Judges Newman, Parrillo and Hoens. On appeal from the Law Division, Burlington County, BUR-L-00255-95. [Sat below: Judge Baldwin.] DDS No. 43-2-7296 The Construction Trust Fund Act, which imposes a trust on all money paid for public construction projects until all performance claims are fully paid, extends beyond those who are in the direct contractual chain to those who come into possession of funds generated from public projects knowing their source; here, where defendant-third party participated in the diversion of funds paid to the contractor for public projects knowing of their source, the decision finding him in violation of the Act is affirmed. Defendant Steven Cucinotti appeals from an order granting summary judgment in favor of plaintiff Reliance Insurance Company for $331,943.68 together with interest and costs, based on the trial judge’s determination that Cucinotti was subject to and in violation of the New Jersey Construction Trust Fund Act, N.J.S.A. 2A:44-148. The Lott Group Inc. was a general and electrical contractor on public projects. Plaintiff issued payment and performance bonds on Lott’s behalf in favor of each of the public entities with whom it had contracted. The bonds ensure the completion or performance of the work and payment to laborers, materialmen and suppliers. Frank W. Lott IV, personally and in his capacity as the chief executive officer of Lott Group Inc., and Lott Holdings Inc., Lance C. Lott, Susan Lott and Denise Lott, executed a continuing indemnity agreement in favor of Reliance in partial consideration for issuance of the bonds. That agreement impressed a trust on all contract funds in favor of Reliance. After execution of the agreement, Reliance began to issue payment and performance bonds requested by Lott for its work on public projects. Three contracts are relevant here: (1) the 1991 contract between Lott and R.M. Shoemaker for electrical work on the Monmouth County Correctional Facility; (2) the 1992 contract between Lott and Trenton State College relating to construction of a music building; and (3) a 1991 contract with the U.S. Coast Guard. Late in 1992, the Lott corporations began to experience financial difficulties. Individuals and entities that had furnished labor, materials or supplies and to whom payment was outstanding began to make claims on Reliance pursuant to the bonds. In addition, Frank Lott contacted Reliance to try to secure help in meeting his obligations. Reliance began paying claims and agreed to provide Lott with a cash infusion so that his companies could meet their general payroll obligations. At about the same time, Frank Lott retained the services of Steven Cucinotti, the president and majority shareholder of Developmental Resources Group Inc. (DRG) and its wholly owned subsidiary, Frazier Development Company. DRG was a management company that performed consulting work for troubled businesses and Frazier Development Company was a construction company. When Cucinotti was retained, Lott was facing the termination by his bank of a $1.5 million line of credit. Cucinotti advised him to draw down the $800,000 remaining on the line and to deposit it into a new account at a different bank to create a secure fund to use as working capital. However, the line was closed before he was able to transfer the funds. Lott also told Cucinotti that he was unable to collect approximately $2 to $3 million owed to him for work performed, which was significantly compromising the cash flow of the business. Lott entered into a general consulting agreement with DRG under which Cucinotti would assist him in devising a way to address his financial crisis so that he would be able to complete all of his unfinished construction projects, if possible, while minimizing his personal exposure to Reliance and to other bonding companies under the continuing indemnity agreements. Cucinotti knew that all of the projects in which Lott and his company were involved were publicly funded and that all of the payments Lott received were public monies. As part of the consulting agreement, he reviewed the status of all of the ongoing projects, analyzed the financial records of the Lott Group and became familiar with the payment history on all of Lott’s projects. Cucinotti also participated in meetings in which Lott and representatives of Reliance discussed the bonded projects, the status of payments to Lott, his outstanding obligations in connection with those projects, and the indemnity agreements. Cucinotti was aware that Reliance had begun an audit of the books and records of the Lott entities and he was concerned that Lott would be forced out of business. Lott and Cucinotti devised a strategy to deal with the continuing financial crisis. As part of this strategy, Lott deposited $600,000 received as progress payments on the Shoemaker, Trenton State and Coast Guard projects into a new bank account. This was accomplished by first depositing a $603,354.72 progress payment on the Coast Guard contract into Lott’s business payroll account at Farmers & Mechanics State Bank. Shortly thereafter, a $305,426 progress payment on the Shoemaker contract and a $26,517.68 progress payment on the Trenton State contract were used to open a new account at Mount Holly State Bank. Then, $300,000 of the sum that had first been deposited into the payroll account from the Coast Guard progress payment was added to the new account at the Mount Holly State Bank. Finally, Lott Group transferred $600,000 from that account into a separate account in the name of DRG. Cucinotti used that account to make payments on Lott’s behalf for purposes other than the bonded obligations. Lott certified that the strategy to divert payments from the bonded projects to other purposes was Cucinotti’s idea. Cucinotti asserted that the plan was devised by Lott and that he only acted pursuant to Lott’s instructions respecting the use of that money. Among the disbursements, however, was a transfer of $300,000 into an account held by Frazier. Those funds were regarded by the two as a loan from Lott. Reliance formally declared Lott in default and stepped in to complete the work on the Shoemaker and Trenton State contracts. Based on Frank Lott’s agreement to assist Reliance in its completion of the projects, and in light of his assertion that he and the other indemnitors lacked the resources to repay any of the losses that Reliance would incur on the projects, Reliance agreed to release Lott Group from its obligations under the construction contracts and to release Frank Lott and the other indemnitors personally from their obligations under the indemnity agreement. When Reliance took over the outstanding Lott projects, Cucinotti ceased his work under the consulting agreement. The money that had been diverted into the DRG account, however, to the extent that it had not previously been paid out, remained there. Cucinotti continued thereafter to issue checks from that account to pay for Lott’s personal debts and obligations long after the time when the Lott corporate entities had defaulted on the bonded contracts and had been released by Reliance. Neither Cucinotti nor Lott advised Reliance about the funds in the DRG account. Reliance filed its complaint against the two Lott companies, all of the individual indemnitors and DRG. Having learned about the agreement between Lott and DRG and about the diversion of funds from the bonded projects into the DRG account, it sought to rescind its release of the Lott companies and the individual indemnitors and to recover compensatory and punitive damages from them based on theories of fraud, conversion, breach of fiduciary duty, breach of the indemnity agreement, breach of constructive trust and breach of their statutory trust obligations under 2A:44-148. As to DRG, the complaint sought a declaration that the funds diverted from the bonded obligations were subject to the contract-based constructive trust imposed by the indemnity agreement and that they were similarly protected by the statutory trust created by the Construction Trust Fund Act, 2A:44-148. The complaint also sought restitution from DRG, imposition of a constructive trust and an equitable lien on any remaining funds held by it, compensatory and punitive damages, and an accounting by DRG of its disposition of any of those monies. Reliance settled its claims against the Lott companies and the Lotts personally. It was granted leave to file its amended complaint, adding claims directed to Cucinotti individually as well as claims directed to Frazier. It asserted that DRG, Frazier and Cucinotti personally were liable to the surety for conspiracy, theft, receiving stolen property, conversion, fraud, tortious interference, breach of statutory trust pursuant to the terms of the Construction Trust Fund Act, and breach of the trust impressed on the funds by the indemnity agreement. Reliance moved for summary judgment. The motion judge found that Cucinotti was personally liable to Reliance for the funds diverted from the Trenton State and Shoemaker contracts under the Construction Trust Fund Act and the participation theory. Cucinotti argues on appeal that the Construction Trust Fund Act is not broad enough to encompass actions of individuals who are not signatories to a construction contract and that there were genuine issues of material fact concerning the extent of his knowledge of the source of the funds in dispute. He also argues that the judge erred in his analysis of the participation theory by applying it to a contractual rather than to a tort claim. The primary purpose of the Construction Trust Fund Act is to protect “those who have claims for labor, material and other charges incurred in fulfilling the contract between the governmental body and its contractor.” Montefusco Excavating & Contracting Co. v. Middlesex County, 82 N.J. 519, 525 (1980). Hiller & Skoglund, Inc. v. Atlantic Creosoting Co., 40 N.J. 6, 21 (1963), held that the act’s language, while not explicitly so stating, “sufficiently evidence[s] legislative intent that a duty should exist throughout the contractual chain, requiring the parties to apply payments only for purposes of the project, at least where the recipient knows the source of the funds.” Cucinotti argues that although Lott was plainly subject to the act, he is beyond its reach. He contends that because he was neither an agent nor an employee of Lott, the act is not sufficiently broad in scope to impose a trust on the money once it left Lott’s account and was deposited into the DRG account. He argues that he acted as Lott’s bank, holding the money and disbursing it only as directed by Lott. He points out that the act has been held not to apply in that circumstance and that it therefore cannot impose any obligation on him. His analysis is disagreed with. First, in American Lumberman’s Mut. Cas. Co. v. Bradley Constr. Co., 127 N.J. Eq. 500 (Ch. 1940), aff’d, 129 N.J. Eq. 278 (E.&A. 1941), an insolvent contractor had deposited progress payments into a general operating account in its bank. The bank had then taken funds from that account in repayment of the contractor’s bank loan. The surety sought to recover the funds on the theory that those funds were held in trust because they were payments due on the bonded obligations. The Court rejected the surety’s claim because once the funds were intermingled in the account, they had lost their trust character. Most important, the underlying decision turned on the fact that the bank was unaware of the source of the funds on deposit. The impracticality of requiring a bank to monitor the source of every deposit into a general operating account and to thereafter trace each penny of each payment was noted. “So long as the bank had no notice to the contrary[,] it would have the right to assume that the contractor was committing no breach of trust in drawing checks against his general bank account.” The plain implication is that, had the bank been aware that the only sources of the funds were public projects, a different result might have obtained. The implication is inescapable that, in general, the trust imposed by the statute on the funds continues to follow them throughout the contractual chain and beyond it to any recipient of those funds, at least with respect to those who know that the source of those funds is a public project. Second, Cucinotti was not acting as the equivalent of a bank. Unlike a banking institution, he knew that all of the construction work Lott did was pursuant to public contracts. He knew that the source of the money that was being deposited into the DRG account was publicly funded contracts. He also knew that the projects were backed by surety bonds and that Lott was personally liable to the surety under the indemnity agreement. He does not contest the fact that he advised Lott not to tell Reliance about his financial condition. Nor does he contend that he was unaware that when Reliance stepped into Lott’s shoes, the funds remaining in the DRG account were being hidden from Reliance and used for Lott’s personal expenses. Third, while Cucinotti argues that he was merely acting as an accountant for Lott and that he was not specifically aware that the funds in question came from the particular contracts as to which Reliance was the surety, nothing in the act or in the legislative intent requires such particularized knowledge. For purposes of the trust imposed on money paid pursuant to public construction projects, it is sufficient that the recipient of the funds know that the source is a public project. Alternatively, Cucinotti argues that the act cannot be applied to him because only part of the funds that were deposited into the DRG account were from projects funded by state governmental entities. Some came from the Coast Guard contract, a federally funded project to which the act would not apply. Because at least some of the funds transferred by Lott were outside the act’s scope, he contends that the requisite knowledge of the source of the funds is too attenuated to support judgment against him. He is incorrect. First, the record is clear that the entirety of the progress payments from the Trenton State and Shoemaker contracts first deposited into the Mount Holly account were transferred into the DRG account, with an additional $300,000 being added thereafter from the Farmers and Merchants account into which the Coast Guard funds had been deposited. There is no doubt about the manner in which the funds can now be designated as being attributable to the state, as opposed to the federal, projects. Second, regardless of whether the particular funds were generated by state or federal contracts, they were paid to Lott from public sources and Cucinotti was aware that all of the work performed by Lott was based on public contracts. Finally, the suggestion that the federally generated funds could be diverted with impunity from the public purpose overlooks the impact of the Miller Act, 40 U.S.C.A. �� 3131-3134, requiring that contractors on public projects post payment and performance bonds, and that has been interpreted to impose a similar obligation. Held: The Construction Trust Fund Act extends beyond those who are, strictly speaking, in the direct contractual chain to those who come into possession of funds generated from public projects with knowledge of the source, as did Cucinotti. This conclusion is based on the determination that the act was fundamentally intended to ensure that public money is devoted to public purposes by impressing a trust on that money until it achieves that purpose. The protection afforded by the act would be hollow indeed if the trust it imposes could be so easily avoided by diversion of the funds to a third party whose only role is to make payments inconsistent with the public purpose. The record here provides ample ground on which to hold that the trust imposed by the act on the funds continued after they were diverted through Cucinotti. Certainly Cucinotti’s knowledge was sufficient for the trust to be imposed on the funds. Whether he created the idea of the diversion of funds or merely acted to facilitate it, he knew that the funds coming from Lott were generated by public projects. No more particularized knowledge was required to support the imposition of the trust on those funds pursuant to the act. His contention that he cannot be subject to the protection afforded by the act because he was not specifically aware of the act is rejected. Neither the act nor the decisions interpreting it require specific knowledge of its terms. Rather, it is merely knowledge of the source of the funds that is required for the imposition of the statutory trust. Cucinotti next contends that the trial court erred in holding him personally liable. Reliance rested its theory of personal liability on the participation theory articulated in Saltiel v. GSI Consultants, Inc., 170 N.J. 297 (2002), a decision released while the Reliance summary judgment motion was pending. The only issue is whether the trial judge correctly analyzed and applied the participation theory to these facts. Plainly, he did. Saltiel‘s holding is found in its adoption of a rule by which a corporate officer can be held personally liable for wrongful acts. It held: “a corporate officer can be held personally liable for a tort committed by the corporation when he or she is sufficiently involved in the commission of the tort. A predicate to liability is a finding that the corporation owed a duty of care to the victim, the duty was delegated to the officer and the officer breached the duty of care by his own conduct.” Id. at 303. The individual’s act of participating is significant, the motivation is not. The participation theory holds a corporate officer or director personally liable for his participation in the corporation’s wrongdoing, even if he derived no personal benefit. He remains personally liable if he “acted on behalf, and in the name of, the corporation.” Ibid. Cucinotti argues that he cannot fall within the scope of the participation theory. He argues that Saltiel specifically rejected the application of the theory to matters of contract, as a result of which it therefore cannot apply to him. This court disagrees. The essence of the claim made here against Cucinotti arises from the Construction Trust Fund Act rather than from the contractual relationship between Lott and Reliance as represented by the indemnity agreement or from any contract between Cucinotti and Lott. Saltiel made plain that claims of statutory violations fall within the scope of the participation theory. Cucinotti’s assertion that his active assistance in diverting funds protected by the Construction Trust Fund Act fell short of the behaviors the Supreme Court intended to reach by way of the participation theory is unpersuasive. The acts of an individual corporate officer, whether for personal gain or not, which operate to subvert the protective purposes of the act cannot be shielded by the artifice of his use of a corporation to achieve the diversion. Affirmed. � Digested by Judith Nallin [The slip opinion is 28 pages long.] For appellant � Michael J. Troiani, of the Pa. bar, admitted pro hac vice (Stein & Troiani; Robert P. Stein on the brief). For respondent � Scott D. Baron (Wolff & Samson).

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