David S. Gladish
Attorneys for Appellee
Thomas L. Kirsch
Fred M. Cuppy
Kathryn D. Schmidt
Kevin E. Steele
FIRST BUILDERS OF INDIANA, INC. and Schilling Brothers Lumber and Hardware, Inc.,
Appellees (Plaintiffs below).
) Supreme Court No.
) Court of Appeals No.
Caught up in this dispute was Subcontractor who had not been paid amounts
due from Contractor for materials supplied for use on the project. Subcontractor
joined the lawsuit, filing two claims for payment against Contractor. Subcontractor also
filed a claim against Owner, seeking to enforce a mechanics lien.
Enforcement of a mechanics lien is one of
two statutory mechanisms that Indiana
law provides for subcontractors that have not been paid by their contractors to
seek payment from construction project owners. Ind. Code § 32-8-3-1 through 8
(the Mechanics Lien Statute). The second mechanism, although located in the Indiana
Code chapter dealing with mechanics liens, is completely separate. It imposes personal
liability on project owners in favor of subcontractors that have not been paid
by their contractors, subject to certain limitations that are crucial in this case.
Ind. Code § 32-8-3-9 (the Personal Liability Statute).
As noted, Subcontractor filed a claim against Owner to enforce a mechanics lien
under the Mechanics Lien Statute. Subcontractor also sent a notice to Owner
informing it that Subcontractor would seek to hold it personally liable for the
amounts owed to it by Co
ntractor. However, Subcontractor did not amend its
complaint to assert a claim of personal liability under the Personal Liability Statute.
The Mechanics Lien Statute contains a number of strict notice requirements with which
Subcontractor had not complied. As a consequence, the trial court granted summary
judgment in favor of Owner prior to trial, finding that Subcontractor had not
followed the r
equirements of the Mechanics Lien Statute.
The balance of the
lawsuit continued, involving (at least) the claims between Owner and Contractor and between
Contractor and Subcontractor.
After a bench trial, the trial court found that Owner was not liable
to Contractor b
ecause of Contractors breach of contract. However, the trial court
found that Owner was liable to Subcontractor because Subcontractor held a valid and
enforceable mechanics lien on Owners house. As should be apparent, this was
the very same issue on which the trial court had previously granted summary
judgment in favor of Owner.
The Owner appealed but the Court of Appeals affirmed. While acknowledging that
the trial court was incorrect in finding that Subcontractor was entitled to enforce
echanics lien, the Court of Appeals held that the trial courts judgment
in favor of Subcontractor could properly be affirmed on at [the] alternative legal
theory that Subcontractor was entitle to collect from Owner under the Personal Liability
Statute. Mercantile Natl Bank of Indiana v. First Builders of Indiana, Inc.,
732 N.E.2d 1287, 1290 (Ind. Ct. App. 2000).
The Mechanics Lien Statute
provides a procedure for persons who perform labor or
furnish materials or machinery for construction projects to establish and enforce a lien
on the structure on which they have worked or for which they have
furnished materials or machinery and on the interest of the owner of the
land on which the structure stands or with which it is connected to
the extent of the value of the work performed and material furnished.
The Personal Liability Statute provides a procedure for subcontractors, workers e
mployed by others,
and persons who lease materials or machinery for construction projects to establish liability
on the part of the owner of the project for the amount owed
to such subcontractors, workers, and persons by their respective contractors, employers, and lessees.
A key difference between the Mechanics Lien Statute and the Personal Liability Statute
is that under the Personal Liability Statute, the amount of the owners liability
shall not exceed the amount which may be due, and may thereafter become
due, from [the owner] to [such contractor,] employer or lessee. Ind. Code
§ 32-8-3-9. The Indiana Personal Liability Statute, as Judge Posner has pointed
out, thus differs from a mechanics lien law, which by creating a secured
interest gives a subcontractor priority over the owners unsecured creditors. Indiana mechanics
lien law, moreover, does not, at least in so many words, limit the
subcontractors lien to the amount that the owner owes the contractor. See
Coplay Cement Co., Inc. v. Willis & Paul Group, 983 F.2d 1435, 1437
(7th Cir. 1993) (citations and subsequent discussion on possible limitation on amount recoverable
under mechanics lien law omitted).
When the Court of Appeals found that the trial courts judgment in favor
ntractor could be affirmed under the Personal Liability Statute, it was required
to confront this limitation on recovery. That is, unless there were amounts
still owed by Owner to Contractor, this limitation would preclude recovery by Subcontractor.
Subcontractor contends, and the Court of Appeals agreed, that amount due under Indiana
Code §32-8-3-9 means the amount unpaid on the original contract, which amount would
have been available for payment of subcontractors had the contractor not defaulted.
Mercantile, 732 N.E.2d at 1292 (citing McCorry v. G. Cowser Constr., Inc., 636
N.E.2d 1273, 1279 (Ind. Ct. App.1994), aff'd, 644 N.E.2d 550 (Ind.1994).)
Owner contends that amount due means the subcontractors right is limited to the
amount that the owner owes the contractor. Coplay Cement Co., 983 F.2d
at 1437. There is no amount due Subcontractor, Owner argues, because the
trial court found that Owners costs to repair and replace the defective work
done by [Contractor] far exceed[ed] the amounts Owner owed Contractor.
The Court of Appeals rejected Owners argument. It looked to its opinion
McCorry where a subcontractor asserted personal responsibility after the contractor breached with
$108,000 of the $170,000 contract amount paid. Mercantile, 732 N.E.2d at 1291.
We noted that under the owners interpretation of the statute, no subcontractor
could ever recover after a contractor defaulted and the purpose of the statute
would be defeated. Id. at 1291-92. Using this approach, the Court
of Appeals in both McCorry and this case looked to the amount of
the total contract amount not yet paid by Owner to Contractor at the
time of Contractors breach. Id.; McCorry, 636 N.E.2d at 1279.
We disagree with this analysis. As a preliminary matter, we note that the balance of a total contract amount not yet paid at any particular time does not necessarily reflect the amount due on the contract. There are a number of possible reasons for this. Under the terms of the contract, the owner may have made a down payment See footnote or be entitled to certain retainage. See footnote Payment may be delinquent or conforming work may have been performed subsequent to the last-made payment but before the breach.
We borrow from Judge Posners approach to a somewhat more involved question about
the purpose and operation of the statutes limit on the amount of personal
In the case before us, Owner sued Contractor for
damages it incurred as a result of Contractors breach of their contract and
Contractor counterclaimed for the money that Owner owed it. The amount due,
both for purposes of Owners dispute with Contractor and for purposes of the
Personal Liability Statute, is determined by establishing the amounts of and then netting
out the opposing claims. As Judge Posner says:
[I]t is not the purpose of the personal-liability law to shift the burden of the general contractors bankruptcy from the subcontractors to the owner, but merely to place the subcontractor in the place that the general contractor would have occupied in a lawsuit with the owner.
Coplay, 983 F.2d at 1441-2. While this result may appear harsh to an innocent subcontractor, we note that a subcontractors rights under the Personal Liability Statute are in addition to a subcontractors rights under the Mechanics Lien Statute and to any remedies that it may have against its contractor.
If we take at face value the trial courts finding that Owners cost
to repair and replace the defective work done by [Contractor] far exceed the
amounts [Owner owes Contractor], it would appear that there are no amounts due
Contractor by Owner. If that be so, Subcontractor is not entitled to
recovery under the Personal L
iability Statute. But there is one aspect of
the Court of Appeals opinion that gives us pause. [T]here was also
evidence that much of the amount [Owner] ultimately paid was for items
for which [Owner was] credited by [Contractor], and for upgrades not provided in
the contract, the Court of Appeals said. Mercantile, 732 N.E.2d at 1292.
This suggests that the trial court did not in fact find that
there were no amounts due Contractor by Owner. Resolution of this (fact-bound)
question is rendered unnecessary by Part II of this opinion.
The Court of Appeals agreed with Owner that it was error to find
Owner liable to Subcontractor on the mechanics lien theory. But, as discussed
in Part I,
supra, that court did find that Owner was liable to
Subcontractor under the Personal Liability Statute. In reaching this conclusion, the Court
of Appeals relied on Trial Rule 15(B) which allows an issue not pleaded
by either party to be litigated at trial if the parties impliedly consent
There are generally two factors to be considered when addressing whether a party
has impliedly consented to a non-pleaded issue at trial. The first is
whether the opposing party had notice of the issue; the second, whether the
opposing party objected to the issue being litigated at trial.
Tusing, 711 N.E.2d 533, 536 (Ind. Ct. App. 1999), trans. denied. If
the opposing party both had notice and failed to object at trial, then
that party will have impliedly consented to the non-pleaded issue at trial.
The Court of Appeals detailed four ways that Owner had notice: (1) Subcontractor named Owner as a defendant; (2) Subcontractor notified Owner that Subcontractor was going to attempt to hold Owner personally liable; (3) Subcontractor notified the trial court of its claim and intention to recover from Owner; and (4) Subcontractor presented evidence at trial of Owners liability. Mercantile, 732 N.E.2d at 1291.
The analysis of the Court of Appeals ends at this point. But
Wampler points out, a second step is required: whether there was any
objection by Owner to the issue Subcontractor was attempting to litigate. We
find such an objection by Owner in the record. During Subcontractors direct
examination of a witness to prove the existence of the obligations between Contractor
and Subcontractor, Subcontractor attempted to introduce into evidence the notice of intent to
hold Owner personally liable that it sent to Owner. Owner objected to
the introduction of this notice as irrelevant on the grounds that the trial
court had previously dismissed any claim Subcontractor had directly against Owner. Subcontractor
replied, All it is is [sic] a claim against any funds that are
ultimately found to be due by [Owner] to [Contractor]. Owners final objection
was in the form of a question to the court, If theres no
claim against [us] then why are we putting this in evidence? Notwithstanding
Owners objection, the trial court allowed the exhibit to be admitted.
Subcontractor argues Owner waived the right to utilize this objection by later cross-examining
Subcontractors witness on the issues raised in the direct examination. We do
not find that the cross-examination constituted consent to the personal liability issue being
igated. To hold the objection waived would create an unnecessary difficulty for
a party that wishes to preserve an issue for appeal, once its objection
has been overruled at trial. We find that Owner validly objected to
the personal liability issue being litigated, and although Owner had notice of this
issue, Owner did not impliedly consent to it being litigated within the meaning
of Trial Rule 15(B).
SHEPARD, C.J., and DICKSON, BOEHM, and RUCKER, JJ., concur.