a.) General Information Concerning Mechanic’s Lien

Owners and operators often secure contracts with outside companies for construction or improvement projects, ranging from painting and repair of heating and air conditioning to landscaping, snow removal, and maintenance. They should be cautious not to allow mechanic’s liens to be asserted against the real estate under their control. A mechanic’s lien is a claim created by statute to secure payment of the price or value of work performed and/or the materials furnished in erecting or repairing a building or other structure or otherwise improving the real estate. The lien attaches to the land as well as the buildings and improvements erected upon it. Recording a lien in the recorder’s office in the property’s county is an early step toward the possible forced sale of the property to satisfy the claim.

The concept of a mechanic’s lien is that those who have furnished labor and materials to perform a service, thereby increasing the real estate value, are entitled to have their payment for labor and materials secured by the real estate itself. The purpose is to promote “justice and honesty” and to prevent the inequity of an owner or operator enjoying the fruits of the labor and materials furnished by others without compensation. Even where the owner or operator has paid full compensation to a prime contractor for improvements, unpaid subcontractors or suppliers may assert liens.

I. Persons Entitled to Liens

The following construction creditors are within the class of persons protected by a mechanic’s lien on real estate: contractors, subcontractors, mechanics, companies leasing construction equipment and tools (whether or not an operator also is provided by the lessor), journeyman, laborers, and “all other persons performing labor or furnishing materials or machinery” on the project. (Ind. Code § 32-28-3-1.)

A “contractor” makes an agreement with another to perform work and retains in himself control of the means, method, and manner of producing the product without being subject to the employer’s control, except as to the result under circumstances where neither party has the right to terminate the contract at will. A general or prime contractor is the party who has contracted directly with the owner or operator or with a construction manager acting as the owner or operator’s agent.

A subcontractor contracts to perform part of the work or to furnish some of the materials required under the general or prime contractor’s scope of work. A subcontractor agrees to do something for another but is not controlled by the manner or method of accomplishing the result for which s/he contracted.

A first-tier subcontractor has a direct contract with the general or prime contractor. A second-tier subcontractor contracts with a first-tier subcontractor and may be known as a sub-subcontractor. If a subcontractor of either tier performs on-site labor, it is protected by the mechanic’s lien statute. Generally, anyone who does work at a jobsite as a contractor or subcontractor has lien rights. The operative fact is on-site performance of work.

A material supplier sells materials and equipment used in the construction project and may contract with the owner or operator, general or prime contractor, or a first or second-tier subcontractor. A material supplier who directly supplies the owner or operator is permitted to file a lien upon the project. A supplier to the general or prime contractor also has lien rights. Similarly, a supplier to a subcontractor is afforded protection under the lien laws. A material supplier to a material supplier (e.g., a manufacturer who sells to a dealer/supplier) is considered too remote and outside the scope of lien coverage.

Moreover, laborers are within the class of potential lien claimants. Indiana statute extends lien rights to “all other persons performing labor.” Construction equipment lessors are within the protected class and have the right to file mechanic’s liens on projects on which their equipment has been used. However, the lien can only be claimed for the value of the equipment used on the project or for the time the equipment was used. Registered engineers, surveyors, and architects also are protected statutorily. (Ind. Code § 32-28-11-1.)

Indiana law prohibits no-lien contracts except in single-family and duplex housing.

II. Property Subject to a Lien

The property subject to a mechanic’s lien is extensive and may include the entire real estate upon which the improvement is situated. (Ind. Code § 32-28-3-2.) Courts have construed a lien as encumbering an entire tract on which a building was erected, even though other buildings were on the tract. Even if a portion of the land is unimproved, it still is subject to a lien. (Ind. Code § 32-28-3-2.) A lien may not be asserted jointly against several unrelated, separate, and distinct improvements. This rule has been narrowly applied, an example of which is an attempted lien against several houses in a subdivision. This rule does not apply to a lien related to improvements constructed as interrelated components of a common real estate development.

III. Amount of Lien

A claimant is entitled to a lien to the extent of the value of the labor performed and materials furnished. (Ind. Code § 32-28-3-1.) Generally, if filed by a general or prime contractor, this amount is limited to the unpaid contract balance. Where the lien claimant is a subcontractor, the claim’s value is not necessarily measured by the price of the contract between the subcontractor and the prime contractor. The contract price, however, is considered strong evidence of the reasonable value.

In addition to the value of the improvement, the lienholder may recover prejudgment interest and attorney fees by way of a mechanic’s lien. These are paid out of the proceeds of the sale of the real estate. Indiana law expressly provides for attorney fees. (Ind. Code § 32-28-3-14.)

b.) Notice and the Formalities of a Mechanic’s Lien

Indiana’s mechanic’s lien laws require a notice of intention to hold a mechanic’s lien. Such notice must contain: (1) the amount claimed; (2) the name and address of the claimant; (3) the name of the owner; (4) the latest address of the owner as shown on the property tax records of the county; and (5) the legal description of the property and the street number, if any. Case law suggests a claimant also must include a description of the structure improved by the lienholder’s work. (Ind. Code § 32-28-3-3.)

A notice of intention to hold a mechanic’s lien must be filed with the recorder of the county where the real estate lies within 90 days after the labor is performed or the materials or machinery is furnished. The courts have held that the notice must be filed within 90 days after last performing labor or furnishing materials or machinery – i.e., within 90 days after the claimant’s contract for performing labor or furnishing materials or machinery is completed. Even though the law lends guidance in determining when work was last performed or completed, that issue may still be the subject of litigation.

c.) Notice of Personal Liability to Owner

Indiana mechanic’s lien laws also provide for notice of personal liability to the owner. This notice helps ensure payment to a subcontractor or materials supplier by impounding contract proceeds and imposing personal liability on the owner. (Ind. Code § 32-28-3-9.) This law allows subcontractors, construction equipment lessors, and material suppliers who furnish work or materials on a project to notify the owner establishing the claim for services rendered for which the contractor is indebted and stating that he/she holds the owner responsible for the debt. Once the notice is given, the owner is liable for payment of the claim, not to exceed the amount that the owner owes – or may thereafter owe – the contractor.

Providing notice is intended to protect  owners and general contractors from the failure of the general contractor to pay those with a contractual right to payment. This statute also permits a subcontractor or materials supplier furnishing labor or materials to a prime contractor to acquire a lien upon the accounts receivable of the general or prime contractor due from the owner. The notice protects the owner insofar as it puts the owner on notice that the prime or general contractor is not paying those beneath it and enables the owner to withhold sufficient funds to pay those claims. “No-lien” contracts, which can bar lien rights in some situations, do not bar personal liability notice claims. Notice of personal liability can be given to the owner at any time before the owner has fully paid the contractor. The personal liability notice does not have a strict time limitation, but the notice must be given when contract proceeds or retainage has been earned but not yet paid from the owner to the prime contractor. Thus, if the owner has paid all of the money due to the general contractor before the receipt of the notice, the owner does not have to pay a second time. If the owner continues to pay the general contractor after receiving the notice, s/he does so at his/her own risk.

Keywords: unpaid vendors, unpaid bills, unpaid invoices, contractor dispute