Construction projects are complex. So is construction law. Case in point: Indiana’s Mechanic’s Lien Statute. This law greatly enhances the ability of general contractors and subcontractors to recover payment, but only if the byzantine provisions of the Statute are strictly followed. A recent decision by the Indiana Court of Appeals illustrates this complexity.
In Feitler v. Springfield Enterprises, landowners hired a general contractor to build a home on their property. The general contractor hired several subcontractors to complete certain portions of the construction work. In the midst of the project, the general contractor ceased business operations, notified the owners that it would not complete the home, and notified the subcontractors that it would not make any further payments.
The general contractor’s cessation of operations set off a flurry of legal maneuvers under the Mechanic’s Lien Statute.
Mechanic’s Lien Statute Provisions
The Mechanic’s Lien Statute provides that anyone who performs construction work is entitled to a lien on the property on which the work was performed. To acquire a valid lien on a single-family dwelling, the lien must be recorded within 60 days of the last work performed or material supplied.
Residential subcontractors, i.e. those contractors who do not have a contract directly with the homeowner, must also record a pre-lien notice within 30 days of the first work performed or material supplied. The purpose of the pre-lien notice is to make homeowners aware of all entities that have performed work and that may have the right to assert liens.
Homeowners may nonetheless avoid the threat of subcontractor mechanic’s liens if the written agreement with the general contractor prohibits mechanic’s liens and the agreement is recorded, thereby notifying any subcontractors that they do not have any mechanic’s lien rights.
Finally, to the extent that owners have not paid general contractors all amounts due, subcontractors may hold liens on any such unpaid amounts. This lien is known as a Personal Liability Notice.
Which Subs Recovered Payments?
In Feitler, one subcontractor succeeded in recovering payment from the owners while several others failed. After the general contractor ceased work, the cabinetry subcontractor smartly negotiated a separate agreement directly with the owners in which the owners guaranteed payment. After performing its work, the cabinetry subcontractor recorded its mechanic’s lien without first recording a pre-lien notice. The owners did not pay
and argued that the failure to record the pre-lien notice voided the mechanic’s lien.
The Court of Appeals initially agreed and ruled for the owners. But after the cabinetry subcontractor pointed out that the Statute requires the pre-lien notice only when there is not a contract directly with the owner, the Court reversed itself by ruling that the cabinetry subcontractor was not required to record a pre-lien notice and the owners must pay for the cabinets.
Several other subcontractors did record pre-lien notices before recording their mechanic’s liens, but did not negotiate a contract directly with the owners. Consequently, because the contract between the owners and the general contractor prohibited mechanic’s liens, the other subcontractor’s mechanic’s liens were invalid.
The other subcontractors also sent Personal Liability Notices to the owners in an attempt to recover any funds that the owners had not yet paid to the general contractor. The Court of Appeals determined that the evidence was inconclusive regarding whether the owners had paid the general contractor in full. Accordingly, the Court ruled that a trial must be held on this issue.
Contractors Take Notice
Contractors should take notice that even three appellate judges in the Feitler case didn’t get the language of the Mechanic’s Lien Statute right on their first try. Feitler serves as a warning to closely review the facts of each case and the provisions of the Mechanic’s Lien Statute when there is a possibility of non-payment for a construction project.
Steve Hoar, a partner at Kahn, Dees, Donovan & Kahn, LLP, is a litigator focusing on business disputes. He has represented clients in construction cases that have been resolved through arbitration and through the courts, including oral argument before the Indiana Supreme Court. Steve has also handled thousands of matters in which he enforces payment using legal tools such as liens, judgments, and garnishments.
For more information about Indiana’s Mechanic’s Lien Statute or any area of construction law, contact Steve at (812) 423-3183 or SHoar@KDDK.com, or contact any member of the KDDK Construction Law Practice Team.