Generally, most parties who provide labor and/or materials to a construction project are entitled to lien rights. However, the classes of protected parties are limited in a majority of states depending on how far removed the claimant is from the property owner on the payment chain. Another limitation that most states follow is the prohibition of lien rights for suppliers to suppliers.
But sometimes that distinction isn’t always as clear as it seems: A recent Indiana court of appeals decision provided some new clarity concerning how to properly identify whether a project participant is a subcontractor or a supplier.
Who has mechanics lien rights in Indiana?
“A contractor, a subcontractor, a mechanic, a lessor leasing construction and other equipment and tools, whether or not an operator is also provided by the lessor, a journeyman, a laborer, or any other person performing labor or furnishing materials or machinery, including the leasing of equipment or tools, for… the erection, alteration, repair, or removal of… a house, mill, manufactory, or other building…”
Clearly, material suppliers are protected as a “furnished of materials” — but this isn’t limitless.
Many states, including Indiana, have a prohibition against granting lien rights to suppliers-to-suppliers. The reasoning being: If suppliers-to-suppliers can file a lien, then it potentially opens the floodgates for all sorts of claimants, no matter how far removed.
Defining roles on a construction project can be somewhat challenging. However, a recent Indiana appeals case has defined how these roles will be defined moving forward.
When is a subcontractor a supplier in Indiana?
The case in question is Service Steel Warehouse, Co., L.P., v. United States Steel Corp
- Owner: United States Steel Corp. (US Steel)
- General Contractor: Carbonyx, Inc. (Carbonyx)
- Subcontractor/Supplier?: Steven Pounds d/b/a Troll Supply (Troll Supply)
- Supplier: Service Steel Warehouse, Co., L.P. (Service Steel)
US Steel hired Carbonyx to design and build two carbon allow synthesis facilities in Gary, Indiana. Troll Supply was brought onto the project by Carbonyx to fabricate a majority of the steel components required for the project. The scope of work involved cutting, bending, welding, and/or riveting thousands of structural steel components needed for the project.
The structural steel pieces used in the fabrication process were almost exclusively (90%) purchased from Service Steel. Once the components were fabricated, they were either shipped directly to the job site, or to Carbonyx’s staging facility in Oklahoma for further assembly.
At some point during the project, a payment dispute arose between Troll Supply and Service Steel, resulting in a lien claim for over $560,000 worth of steel supplied for fabrication. Service Steel eventually filed a foreclosure action.
At trial, US Steel filed a motion for partial summary judgment to dismiss the claim because Service Steel was a supplier to a supplier, and therefore was not a protected party under Indiana’s lien laws. The trial court granted the motion, and Service Steel appealed the decision.
Appeals court develops a test to determine ‘subcontractor status’
The main issue on appeal: What exactly was Troll Supply’s role on the project, and are they entitled to lien rights under Indiana’s lien laws?
Or, more specifically, what type of work makes a party a subcontractor, as opposed to a supplier?
- Service Steel argued that they aren’t barred by the supplier-to-supplier prohibition because Troll Supply was a subcontractor, not a materialman — therefore they are a protected supplier.
- US Steel argued the opposite: Troll Supply was a supplier, because they didn’t perform “on-site work.” Thus Service Steel was a supplier to a supplier — which is outside the scope of Indiana’s lien protection.
The court tackled this question step-by-step.
On-site work shouldn’t be a determining factor
The court began by reviewing the statute granting lien rights, and noted that it focuses upon the nature of the services and materials provided rather than the identity of the provider. Additionally, it contains no language indicating that “on-site labor” was an actual requirement — merely that the claimant performs labor “for the erection of a building,” which only requires some “physical act of labor in connection with the creation of a structure or improvement on land.”
The court acknowledged the growing popularity of off-site construction as a way to increase efficiency and reduce costs, and stated that “[g]iven this changing landscape, the remedial purpose of Indiana’s mechanic’s lien statute is better realized by not limiting subcontractor status based on the location of the work performed.”
Subs must contribute a definite and substantial portion of the work
Now that the court settled the issue of on-site versus off-site work, they still needed a means of distinguishing the two roles. Taking guidance from other jurisdictions that don’t require on-site work, they adopted the rule that in order to be classified as a subcontractor, the party must perform a “definite” and “substantial” portion of the physical labor called for by the contract. They then proceeded to define each of these terms:
Definite: “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.”
Substantial: “’A relatively small expenditure of labor in relation to a contract mainly for material,’ is not sufficient… Substantiality is determined based on evaluating the amount of labor and skill provided in relation to the material supplied and the importance of the contribution to the project.”
Application of the test
With a proper test in place, the court proceeded to apply the test to the case at hand. Troll Supply clearly performed a definite and substantial portion of the work under the prime contract. It was “definite” in the sense that the steel components needed to be fabricated to the unique specifications set out by Carbonyx (which required thousands of hours to fabricate).
Similarly, the work was also deemed “substantial.” Troll Supply had fabricated the majority of the components needed for the project, and the carbon alloy synthesis process couldn’t have functioned without it.
Therefore, the court ruled that Troll Supply was indeed a subcontractor — making Service Steel a supplier to a subcontractor, and thus entitled to lien rights.
Know your lien rights
The decision, in this case, is fairly substantial and is presumably an issue that had yet to be hashed out by Indiana courts. But now, material suppliers in Indiana have a clear test to determine whether they have been hired by a subcontractor or a supplier.
Knowing whether or not you have lien rights on a given project is key to evaluating the amount of risk and credit your company is willing to take on. The prohibition against supplier-to-supplier lien rights is quite prevalent throughout the US, and many courts have formulated different tests to determine “subcontractor status” for this exact purpose. Indiana now joins the ranks of states with a concrete way to address this issue.