Mechanics lien rights are the most powerful tool in the construction industry to recover payment. One notable exclusion from lien protection in a fair amount of states is the supplier to a supplier. Indiana has long been one such state that prohibits supplier-to-supplier lien rights. However, a recent Indiana Supreme Court case has reversed this long-held prohibition.
Limits of Indiana supplier lien rights
“(a) 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:
(1) the erection, alteration, repair, or removal of:
(A) a house, mill, manufactory, or other building; or
(B) a bridge, reservoir, system of waterworks, or other structure.”
This is seemingly pretty clear — and broad, to say the least. Yet, for the past 100 years or so, the Indiana courts have limited this broad protection to exclude suppliers-to-suppliers. But no longer! Well, for now. The Indiana Supreme Court recently published an opinion that reverses this long-standing prohibition on supplier-to-supplier lien rights.
Learn more: Do Suppliers To Suppliers Have Lien Rights?
Indiana Supreme Court seizes an opportunity to clarify the scope of mechanics lien rights
The case in question is Serv. Steel Warehouse Co. v. United States Steel Corp.
We initially covered this case when it was decided at the appellate level (see: Indiana Clarifies Legal Distinction Between Subcontractors and Suppliers). But this case made its way to the Indiana Supreme Court — and yielded an interesting result.
- Owner: United States Steel Corp. (US Steel)
- Represented by: Kevin E. Steele of Burke Costanza & Carberry LLP
- Supplier: Service Steel Warehouse Co., L.P. (Serv. Steel)
- Represented by: Joshua W. Casselman of Rubin & Levin, PC
Without rehashing too much of the story again, the basic gist is this: Service Steel was hired to provide materials to Troll Supply, Co. who performed offsite fabrication work on the steel, such as cutting, welding, drilling, connecting, etc., and provided the fabricated steel to the GC on the project (Carbonyx, Inc.).
When Serv. Steel went unpaid for around $500,000 worth of materials, a mechanics lien was filed and a foreclosure action was initiated.
At the trial level, the court granted US Steel’s motion for summary judgment on the basis that suppliers to suppliers do not have lien rights in Indiana. On appeal, the court reinstated the lien claim — not because they reversed the supplier-to-supplier prohibition, but rather on the basis that they classified Troll Supply, Co. as a subcontractor, which they defined as “one who performs a definite, substantial portion of the prime contract,” regardless if the work was performed onsite or not.
US Steel petitioned the Supreme Court to review the decision, which they did.
Indiana reverses ban on supplier-to-supplier lien rights
The IN Supreme Court opinion began with a bit of a history lesson. When mechanics lien laws were first enacted, the statutes granted lien rights to a broad spectrum of claimants, including suppliers to suppliers. Many early cases had held that “all persons performing labor, or furnishing materials for the construction…of any building” have lien rights, and that it was unnecessary for a supplier to furnish materials to the owner or a contractor to have a lien.
However, as early as the 1890s, things got muddied. Courts had begun to formulate a new rule requiring suppliers to furnish materials to someone who worked on the project site.
The rationale for the prohibition against supplier-to-supplier lien rights was simple and fairly practical: “If one material man furnishing materials to another material man had a right to lien, then any material man, not matter how far removed, had the same right.”
This prohibition has been followed in subsequent cases since. Now that the issue has reached the Indiana Supreme Court, it appears that they are taking this opportunity to right the ship: “We now disapprove of that demonstrably erroneous, though longstanding, rule.”
The decision is based on the plain language interpretation of the statute, and the early cases interpreting the broad application of the lien statutes. It reads:
“The mechanics lien statute unambiguously confers broad lien rights on suppliers and does not require them to furnish materials to one who performs on-site work… Barker, Colter, and Smith affirmed that suppliers did not have to furnish materials to a specific party to have a lien. Today, we follow those decisions and again affirm that, under the statute, a supplier’s lien rights do not depend on whom it supplies. While there may be valid reasons to prohibit supplier-to-supplier-based liens, that decision rests with the legislature, not the courts.”
This decision is a major reversal of how lien rights have been treated in Indiana for the past century! As of now, any supplier that furnished materials for the construction or improvement of a building can file a lien. This has some fairly significant implications for most parties to a construction project.
Starting at the top, property owners and general contractors will need to be extra diligent when requesting and tracking lien waivers on a project moving forward. As for suppliers-to-suppliers, be sure to familiarize yourselves with the lien process in Indiana if you end up going unpaid. Sending a request for information with each order is great way to identify where the materials will ultimately be used and where — this is particularly important on certain owner-occupied, residential projects where a preliminary notice will be required.
One last thing to note: As the court’s opinion alluded to, this can be a slippery slope. How remote of a supplier can file a lien for nonpayment? This will need to be hashed out in future litigation, or it may be a point of emphasis for the Indiana 2023 Legislative Session. But as of now, Indiana’s mechanics lien protection extends as broadly as the statute provides by including suppliers-to-suppliers.
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