Posted on April 14, 2016
This blog has talked on a number of occasions about how mechanic’s liens and bond are some of the most important, and effective, tools that contractors, subcontractors, and materialmen have at their disposal to protect their right to payment for work performed or materials provided on a construction project. It has not, however, addressed the connection which sometimes exists between a mechanic’s lien and a bond, and how that relationship affects a contractor’s ability to get paid.
A recent case decided by the Indiana Supreme Court highlights the importance of understanding the interplay between mechanic’s liens and bonds. In Goodrich v. Quality Theaters, Inc. v. Fostcorp Heating and Cooling, Inc., 39 N.E.3d 660 (Ind. 2015), general contract, Roncelli, Inc. hired a number of subcontractors to perform work on the construction of an IMAX movie theater in Portage, Indiana. After a payment dispute arose, each subcontractor filed a mechanics lien against the property, and later filed suit against the owner and Roncelli to foreclose the liens. The subcontractors also sought recovery of their attorneys’ fees incurred in bringing the lawsuit.
Roncelli posted a bond to discharges the mechanic’s liens. Under Indiana law (and Ohio and most other states), an owner of a property, or the general contractor, can file a surety bond that takes the place of the lien. If a lien is “bonded off” then the lienholder now has a claim against the bond for the money owed, rather than against the property. A lien bond guarantees that the lienholder will be paid by the surety in the event the lienholder is able to prove the validity of the lien.
After the filing of the lawsuit, the owner paid Roncelli the outstanding balance on its contract, but Roncelli did not pay the subcontractors. Following a lengthy trial, the court entered a judgment in favor of the subcontractors for a total of $539,139.11, plus each subcontractors’ attorneys fees. Roncelli appealed the court’s award of attorneys’ fees.
Indiana’s Mechanic’s Lien Statute, §32-28-3-14, provides:
Except as provided in subsection (b), in an action to enforce a lien under this chapter, a plaintiff or lienholder who recovers a judgment in any sum is entitled to recover reasonable attorney’s fees. The court shall enter the attorney’s fees as part of the judgment.
A plaintiff may not recover attorney’s fees as part of the judgment against a property owner in an action in which the contract consideration for the labor, material or machinery has been paid by the property owner or party for whom the improvement has been constructed.
The Indiana Court of Appeals reversed, holding that an attorneys’ fees claim based on a lien could not be enforced against Roncelli, because it was not the owner of the property. The Indiana Supreme Court vacated the Court of Appeals decision, noting that the statute mandates an award of attorneys’ fees against anyone who a judgment is entered against, except of an owner who has paid contract consideration for the labor, material or machinery.
The Supreme Court held that Roncelli’s obligation to pay the subcontractors did not terminate with the discharge of the lien, rather the liens attached to Roncelli’s obligation to pay the judgment. The Supreme Court concluded, “it would be an unfair and certainly unintended result if, as the subcontractors question, a general contractor could post a surety bond and avoid paying the attorney’s fees that it would otherwise have to pay if a subcontractor foreclosed on a lien…” The Supreme Court noted that, if that were the case, the subcontractor would be left in a worse position than if it had foreclosed—especially when the subcontractor cannot object to the posting of a surety bond.”
Under Ohio law, specifically R.C. 1311.16, the prevailing party on a mechanic’s lien action to recover, in the discretion of the trial court, is permitted to recover reasonable attorney fees to be paid out of the fund realized for lien claimants. Further, Ohio courts have held that the law permits “reasonable attorney fees to be paid out of the fund realized for lien claimants,” which includes a bond posted to discharge a lien. Midwest Curtainwalls, Inc. v. Pinnacle 701, L.L.C., 2009-Ohio-3740, ¶ 69 (citing Lockland Lumber Co. v. Robinson (1927), 116 Ohio St. 725, 157 N.E. 376).
The provisions of Ohio’s construction mechanic’s lien and bond law, can be incredibly complicated and difficult to follow. Ensuring compliance with mechanic’s lien filing and bond claim requirements is an undertaking that can, and should, be discussed with experienced legal counsel. For questions regarding mechanic’s liens or bond claims, or any other aspect of Ohio construction law, please contact Nick Horrigan or any of the other construction lawyers at Harpst Ross, Ltd. – Business Lawyers for the Construction Industry®, at (330) 983-9971.
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