|
(A revised version of this article appears in The Construction
Lawyer, Volume 23, No. 1, Winter 2003, published by
the American Bar Association's Forum on the Construction
Industry.)
By John W. Ralls
A
couple hired a contractor to build a house. A dispute rose
during construction, and the owners took over the project.
The contractor sued the owners, and the owners counterclaimed
against the contractor. An unpaid subcontractor notified
the owners that it was owed money and sought to hold the
owners personally liable under the Indiana's Personal Liability
Statute, Indiana Code §32-8-3-9. This statute imposes
personal liability on project owners in favor of subcontractors
that have not been paid by their prime contractors, as follows:
Any
subcontractor… may give to the owner… notice
in writing particularly setting forth the amount of his
claim and services rendered, for which his employer…
is indebted to him, and that he holds the owner responsible
for the same; and the owner shall be liable for such claim,
but not to exceed the amount which may be due, and may
thereafter become due, from him to the employer…
which may be recovered in an action whenever an amount
equal to such claim… shall be due from such owner
to the employer….
The
subcontractor filed a complaint against the owners to enforce
a mechanic's lien. Although the subcontractor had notified
the owners of its intent to hold them personally liable,
the subcontractor's complaint did not assert a claim based
on the Personal Liability Statute. The subcontractor's complaint
was joined with the owner-contractor lawsuit.
The
owners obtained summary judgment on the subcontractor's
mechanic's lien claim based on the subcontractor's failure
to comply with the strict notice requirements of the Indiana
lien law. After a bench trial, the trial court entered judgment
in favor of the owner on the prime contractor's claim.
However,
the trial court entered judgment in favor of the subcontractor
on the mechanic's lien claim (that is, on the very same
claim on which the trial court had previously granted summary
judgment in favor of owners). The owners appealed the judgment
in favor of the subcontractor. The Court of Appeals affirmed,
not on the ground of the mechanic's lien but rather on an
alternate legal theory -- the Personal Liability Statute.
The owners sought review again, and this time the Indiana
Supreme Court reversed. Mercantile National Bank of Indiana
v. First Builders of Indiana, Inc., 774 N.E.2d 488 (Ind.
2002).
The
Indiana Supreme Court found that the Court of Appeals erred
in permitting the subcontractor to recover based on the
Personal Liability Statute. The court reasoned that the
subcontractor had failed to plead recovery under the statute
and that the owner had not consented to litigating the theory
at trial.
The
court also indicated that the subcontractor would not have
been able to recover under the personal liability statute
even if the theory had been pleaded because there was evidence
that any "amount due" the prime contractor was
offset by the cost of repairing the prime contractor's defective
work.
The
court examined the language of the Personal Liability Statute,
which provides that the owner's liability shall not "exceed
the amount which may be due, and may thereafter become due,
from [the owner] to [the subcontractor's] employer…."
The
owners and subcontractor advanced different interpretations
of this language. The subcontractor contended that "amount
due" means the amount unpaid on the original prime
contract, which would have been available for payment of
subcontractors had the contractor not defaulted. The owner
contended, on the other hand, that "amount due"
means the subcontractor's right is limited to the amount
the owner owes the contractor after taking into account
costs to repair and replace defective work.
The
Indiana Supreme Court agreed with the owner's reading. "[T]he
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' or be entitled to certain retainage. Payment
may be delinquent or conforming work may have been performed
subsequent to the last-made payment but before the breach."
Under the court's reading of the statute, a subcontractor's
recovery under the Personal Liability Statute would be reduced
by payments previously made by the owner to the prime contractor
as well as by any offsets to which the owner is entitled
for failures of performance by the prime contractor.
The
court's analysis in this regard drew on the 7th U.S. Circuit
Court of Appeals' decision in Coplay Cement Co., Inc.
v. Willis & Paul Group, 983 F.2d 1435, 1437 (7th
Cir. 1993). The Coplay court held that an owner faced
with potential personal liability under the statute could
offset the damages it incurred because of the prime contractor's
breach on another project, reasoning, "[I]t
is not the purpose of the personal liability law to shift
the burden of the general contractor's bankruptcy from the
subcontractor 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." 983 F.2d at 1441-42.
If you would like to receive legal reports and updates
more quickly, by e-mail, click here and fill out the mailing list form. If you would like to subscribe to our RSS feeds or learn more about RSS, click here.
©2003 ConstructionWebLinks, Inc.
|
