As many contractors and subcontractors know, despite high quality work, sometimes payment is hard to come by. No business can last if it isn’t compensated for its work. Contractors and sub-contractors are well aware of the general availability of the mechanic’s lien statute (Ind. Code sec 32-28-3 et seq.) as a means of obtaining payment from a recalcitrant client.
For the uninitiated, the mechanic’s lien statute generally provides that when property is improved through the application of labor or services, then the party providing such labor or services may place a lien on the property to compel payment. (Ind. Code sec 32-28-3-1).
Importantly, the mechanic’s lien statute provides that the lienholder shall also recover attorney’s fees and the cost of collection. See Clark v. Hunter, 861 N.E.2d 1202, 1209 (Ind. Ct. App. 2007) (award of reasonable attorney’s fees is mandatory). The recovery of attorney’s fees is important among other reasons because (1) construction disputes can be fact intensive and therefore expensive, and (2) the owner often has the “deep pockets” and can wear down the unpaid lienholder.
Often, a payment dispute arises between the general contractor and a sub-contractor, not the property owner and general contractor. An owner of property can avoid liability for attorney fees by paying the general contractor the full amount due under the contract. (Ind. Code sec. 32-28-3-14(b)).
Recently, the Indiana Supreme Court considered a case in which the owner paid its general, the general did not pay its subcontractors, and the subcontractors filed contract claims against the general and a mechanic’s lien foreclosure claim against the owner.
The owner paid the full amount owed to its general, and the general filed a surety bond to remove the lien.
The general claimed that because the owner paid the contractual amount owed, and the surety bond removed the lien, that the subcontractor could not recover its attorney’s fees. The Indiana Court of Appeals supported.
If the decision had stood, unpaid subcontractors would have been unable to recover attorney’s fees any time the property owner paid its general contractor the full contractual sum and the general contractor does not pay its subcontractor and instead posted a surety bond to release the subcontractor’s lien. Unpaid subcontractors locked in a dispute with a general contractor would have lost the ability to recover attorney’s fees. The result would have rendered many small subcontractors unable to engage in a costly legal fight to secure their rights to payments for their work but their attorneys’ fees to collect those payments.
On transfer, the Indiana Supreme Court disagreed with the Court of Appeals, holding that “it would be an unfair and certainly unintended result if … a general contractor could post a surety bond and avoid paying the attorney’s fees that it would otherwise have to pay if a subcontractor foreclosed on a lien, thereby leaving the subcontractor in a worse position than if it had foreclosed—especially when the subcontractor cannot object to the posting of a surety bond.” Goodrich Quality Theaters, Inc. v. Fostcorp Heating and Cooling, Inc., 39 N.E.3d 660, 665 (Ind. 2015).
The Indiana Supreme Court went on to hold that “it is therefore only fair that the subcontractor lienholders be fully protected and allowed to recover attorney’s fees … upon [general contractor] Roncelli’s filing of the undertaking and posting of the surety bond.” Id.
In the end, the court decided that so long as the subcontractor was right (that it was entitled to be paid), then the subcontractor is also entitled to recover its attorney’s fees.
As a result, subcontractors retain this necessary tool in a dispute to collect its rights.
The full decision in Goodrich can be found here. This article is not intended to be a definitive discussion regarding the complexities of a mechanic’s liens. For a thorough discussion of mechanic’s liens in Indiana, or any other related issues, please contact Syd Steele firstname.lastname@example.org , Steve Runyan email@example.com or any of our attorney’s here. It would be our pleasure to assist you in protecting your legal rights.