Appeals Court Determines Indiana Material Supplier Contracted with Subcontractor, Not a Material Supplier; It’s a Win!
In Indiana, a material supplier who contracts with another material supplier is not entitled to mechanic’s lien rights. However, one Indiana Court of Appeals’ judge dug in to further clarify what constitutes a material supplier versus a subcontractor. A case that started as “material supplier to material supplier” shifted to a case of “material supplier to subcontractor” and the lien claimant in limbo was granted mechanic’s lien rights.
Mechanic’s Lien Rights for Commercial Projects in Indiana
You are not required to serve a preliminary notice to secure mechanic’s lien rights on a commercial project in Indiana, though we recommend serving a non-statutory notice, which notifies all parties that you are furnishing to the project.
Your mechanic’s lien, or sworn statement and notice of intention to lien, should be filed within 90 days from your last furnishing. And, in the event you remain unpaid, you should file suit within 1 year from filing the lien and within 30 days from receiving a notice to commence suit from the owner. [IC 32-38-3]
Indiana is a full balance lien state, which means the lien is enforceable for the full amount owed, regardless of payments made by the owner. (This is important in today’s case.)
As mentioned earlier, in Indiana a material supplier contracting with a material supplier is not entitled to mechanic’s lien rights. Why not? Well, in the case we are about to review, the Judge stated:
“This Court has noted that the prohibition of supplier-to-supplier-based liens ‘promote[s] honesty and fair dealing among the parties to a construction contract.’ …If the supplier of another supplier has a right to a lien, any supplier—no matter how far removed from a project’s owner—has the same right… Thus, without the supplier-to-supplier prohibition, a distant supplier could assert a lien against an owner with whom it has had no contact by showing only that it furnished material for a project and that the material was used therein.”
Some may be inclined to argue that no matter how far down the ladder of supply you are, if you supply materials to a construction project and those materials are incorporated in the project, you should have the right to file a lien. In theory, I would agree with that – I think parties in the ladder of supply should be entitled to a right to recover payment. However, I do understand the Judge’s comments about remoteness. I understand that property owners would be at a disadvantage if there are oodles of random material suppliers filing liens on their property. But might I be so brazen and suggest Indiana look at instituting a preliminary notice? A notice that all parties would serve, alerting the owner of possible lien claimants. (A novel idea, I know.) I digress; on with the case.
A Subcontractor, not a Material Supplier
In the case of Service Steel Warehouse Co., L.P. v. United States Steel Corp., the ladder of supply looks a bit like this:
United States Steel Corp. (US Steel) contracted with Carbonyx Inc. (Carbonyx) Carbonyx contracted with Steven Pounds dba Troll Supply (Troll). Troll contracted with CPN Ventures LLC dba Texas Steel (TX Steel) to assist with fabrication and with Service Steel Warehouse Co., L.P. (SSW) to supply materials.
SSW supplied structural steel to the project. Most of the steel was shipped to TX Steel’s warehouse for fabrication (Troll helped with fabrication). At some point, a dispute resulted in US Steel paying Troll $1,780,249 for its fabrication work. However, Troll did not pay SSW the $563,084 SSW claimed it was owed. So, SSW filed a mechanic’s lien within 90 days from its last furnishing. When the lien failed to prompt payment from the owner (US Steel), SSW proceeded with suit to enforce its lien.
US Steel, having already paid over $1.7M to Troll, challenged the validity of SSW’s lien, arguing SSW and Troll were both material suppliers. And, as we now know, material suppliers to material suppliers do not have lien rights in Indiana.
Initially the court sided with US Steel, and that’s how we get here – to SSW’s appeal. Upon appeal, SSW argued Troll was a subcontractor, because Troll performed labor (off-site) in the fabrication of the structures for the project.
US Steel argued subcontractors must perform on-site labor, meaning they must be at the physical project location performing labor. And, since Troll didn’t provide labor at the actual project location, it must be a material supplier.
The Court of Appeals disagreed with US Steel’s argument because statute and case law don’t specify that labor must occur on-site.
“To qualify as a subcontractor, the party must perform some portion of the work for which the owner originally contracted. It is not necessary that the work be done at the construction site, but work must be performed to the contract’s plans and specifications. The work can be performed on material supplied to another subcontractor of the contractor, but the material cannot be generic, stock, off-the-shelf items or items generally available without modification—it must be fabricated uniquely or specially by the contractor for the requirements of the particular project.”
The Court of Appeals went on to say the labor must be substantial for a party to be considered a subcontractor. What constitutes substantial? Apparently, the thousands of labor hours Troll provided to fabricate the structure components.
“Here, the designated evidence establishes that Troll Supply performed a definite and substantial portion of the prime contract between U.S. Steel and Carbonyx. Based on Carbonyx’s unique plans and specifications, Troll Supply fabricated the majority of the steel components needed for the Project. The components required thousands of labor hours to produce. And the Project’s carbon alloy synthesis process could not have functioned without them. We therefore find that Troll Supply was a subcontractor, not a material supplier, under Indiana’s mechanic’s lien statute.”
Earlier I mentioned Indiana is a full balance lien state. For US Steel, this means if SSW’s lien is valid and enforceable, US Steel will need to pay SSW for its claim – even though, US Steel already paid Troll.
“Accordingly, we hold that Service Steel’s mechanic’s lien is not barred by the supplier-to-supplier prohibition and the trial court erred in entering summary judgment in favor of U.S. Steel on Service Steel’s mechanic’s lien foreclosure claim.”
Not a Done Deal
Now, the case was remanded, which means the whole gang heads back to court to argue other points of the lien validity, like whether the lien was filed timely. But it’s a checkmark in the win column for this material supplier.
Pro Tip: Whenever possible, use a construction attorney when proceeding with suit. You want an attorney that will argue the finer points and details of construction related law; like whether on-site vs off-site work will determine whether a party is a subcontractor or material supplier.