Mercantile National Bank of Indiana v. First Builders of Indiana, Inc.

Attorney for Appellant

David S. Gladish
Highland, IN

Attorneys for Appellee
Thomas L. Kirsch
Indianapolis, IN

Fred M. Cuppy
Kathryn D. Schmidt
Kevin E. Steele
Merrillville, IN

IN THE
INDIANA SUPREME COURT

MERCANTILE NATIONAL BANK OF INDIANA, as Trustee for Trust #5840 and Horst
and Marianne Thompson
Appellants (Defendants below),

v.

FIRST BUILDERS OF INDIANA, INC. and Schilling Brothers Lumber and Hardware,
Inc.,
Appellees (Plaintiffs below).

)
) Supreme Court No.
) 45S03-0102-CV-100
)
) Court of Appeals No.
) 45A03-9904-CV-132
)
)
)

APPEAL FROM THE LAKE SUPERIOR COURT
The Honorable Lorenzo Arredondo
Cause No. 45D01-9504-CP-389

ON PETITION TO TRANSFER

August 27, 2002

SULLIVAN, Justice.

When the general contractor on a construction project fails to pay
its subcontractor, the subcontractor may seek payment from the project
owner under Indiana’s “personal liability” statute. A personal liability
claim is limited by the “amount due” the contractor and we hold that limit
is calculated by placing the subcontractor in the same position that the
general contractor would occupy in a lawsuit with the owner. In this case,
the owner has no personal liability because the subcontractor failed to
plead a personal liability claim and the owner did not consent to the issue
being litigated at trial.

Background

Horst and Marianne Thompson (“Owner”) entered into a construction
contract with First Builders of Indiana, Inc. (“Contractor”), under which
Contractor was to build a house for Owner. Contractor opened an account
with Schilling Brothers Lumber and Hardware, Inc. (“Subcontractor”), from
which Contractor obtained construction materials for the project. After
construction had proceeded for a period of time without incident, Owner
discovered that Contractor was not following the blueprints and also
discovered certain construction defects. Owner refused to pay Contractor
any further amounts under the contract and subsequently finished the
construction of the house without Contractor. Not surprisingly, Contractor
sued Owner and Owner filed a counter-claim against Contractor.

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 Contractor. 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 requirements of the
Mechanics’ Lien Statute.[1] 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 because of Contractor’s breach of contract. However, the
trial court found that Owner was liable to Subcontractor because
Subcontractor held a valid and enforceable mechanic’s lien on Owner’s
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 a “mechanic’s lien,” the Court of
Appeals held that the trial court’s 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 Nat’l Bank of Indiana v. First Builders of
Indiana, Inc., 732 N.E.2d 1287, 1290 (Ind. Ct. App. 2000).

Discussion

I

Under Background, supra, we briefly discussed the two statutory
mechanisms Indiana law provides to permit a subcontractor that has not been
paid by its general contractor to seek recovery from the owner of the
construction project. It is worth spending a little more time
distinguishing those mechanisms.

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 employed 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 owner’s 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 owner’s unsecured creditors. Indiana mechanics’ lien law, moreover,
does not, at least in so many words, limit the subcontractor’s 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 court’s judgment in
favor of Subcontractor 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).)[2]. But Owner
contends that “amount due” means “the subcontractor’s 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 Owner’s “costs to repair and replace the
defective work done by [Contractor] far exceed[ed] the amounts” Owner owed
Contractor.

The Court of Appeals rejected Owner’s argument. It looked to its
opinion in 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 owner’s
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 Contractor’s 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”[3] or be entitled to
certain retainage.[4] 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 Posner’s approach to a somewhat more involved
question about the purpose and operation of the statute’s limit on the
amount of personal liability in Coplay.[5] In the case before us, Owner
sued Contractor for damages it incurred as a result of Contractor’s breach
of their contract and Contractor counterclaimed for the money that Owner
owed it. The “amount due,” both for purposes of Owner’s 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 contractor’s 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 subcontractor’s rights under the
Personal Liability Statute are in addition to a subcontractor’s rights
under the Mechanic’s Lien Statute and to any remedies that it may have
against its contractor.

If we take at face value the trial court’s finding that Owner’s 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 Liability 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.

II

In Background, supra, we noted that the trial court granted summary
judgment in Owner’s favor on the mechanics’ lien issue, only to turn around
at the end of trial and hold that Subcontractor held a mechanics’ lien
after all. Arguing that it was awarded summary judgment on Subcontractor’s
mechanics’ lien claim and that Subcontractor did not include a personal
liability claim in its complaint, Owner contends that there was simply no
cause of action between Owner and Subcontractor on which the trial court
could make an award. As to why Subcontractor was present throughout trial
if it had no claim against Owner, Owner says it was only to litigate
Subcontractor’s claims against Contractor.

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 at trial.[6]

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. Wampler v. 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. See id.

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
Owner’s liability. Mercantile, 732 N.E.2d at 1291.

The analysis of the Court of Appeals ends at this point. But as
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 Subcontractor’s
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].” Owner’s final objection was in the
form of a question to the court, “If there’s no claim against [us] then why
are we putting this in evidence?” Notwithstanding Owner’s objection, the
trial court allowed the exhibit to be admitted.

Subcontractor argues Owner waived the right to utilize this objection
by later cross-examining Subcontractor’s 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 litigated. 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).

Conclusion

We grant transfer pursuant to Indiana Appellate Rule 58, thereby
vacating the opinion of the Court of Appeals, and reverse the judgment of
the trial court in favor of Subcontractor.

SHEPARD, C.J., and DICKSON, BOEHM, and RUCKER, JJ., concur.

-----------------------
[1] Ind. Code §32-8-3-1 (1998). Subcontractor does not appeal this
finding. The law regarding mechanics’ liens has since been amended. For a
discussion of these amendments, see Lloyd T. Wilson, Jr., Property Law:
Reconstructing Property Law in Indiana: Altering Familiar Landscapes, 33
Ind. L. Rev. 1405 (2000).
[2] In doing so, the Court of Appeals relied on its opinion in McCorry
v. G. Cowser Construction, Inc., 636 N.E.2d 1273 (Ind. Ct. App. 1994). Our
opinion on transfer in that case affirmed the decision of the Court of
Appeals on the narrow question of whether attorney fees are recoverable
under Indiana Code §32-8-3-9, McCorry v. G. Cowser Constr., Inc., 644
N.E.2d 550, 551 (Ind. 1994), but did not address the scope of personal
liability under that section of the code. See id. (Sullivan, J.,
concurring).
[3] E.g., Town & Country Homecenter of Crawfordsville, Indiana, Inc.
v. Woods, 725 N.E.2d 1006, 1008 (Ind. Ct. App. 2000).
[4] E.g., Templeton v. Sam Klain & Son, Inc., 425 N.E.2d 89, 91 (Ind.
1981).
[5] Coplay involved an owner whose defense to a subcontractor’s
assertion of personal liability was more attenuated. The owner there had
signed two separate contracts with the same contractor for work at two
separate facilities. The contractor hired the same subcontractor to work
on both jobs. The first job was completed as planned; a breach by the
contractor on the second required the owner to incur substantial additional
expense to complete it. The subcontractor claimed payment under the
Personal Liability Statute for at least its work on the first job. The
Seventh Circuit was faced with the question of whether the owner could
offset the damages it incurred because of the contractor’s breach on the
second job against what it would otherwise owe the subcontractor for the
first. The court held that setoff was available on these facts. Pointing
out that in a lawsuit by the contractor against the owner for payment on
the first job, the court noted that the owner would have a permissive
counterclaim for damages incurred because of contractor’s breach on the
second job. If setoff would have been proper in litigation between the
owner and the contractor, the court said, then the subcontractor loses.
Because setoff meant that the owner did not owe the contractor the full
price of the contract on the first job, it did not owe the subcontractor,
“be [the subcontractor] pure as the driven snow.” Coplay, 983 F.2d at
1436; 1441.
[6] Trial Rule 15(B) states, in relevant part, “When issues not raised
by the pleadings are tried by express or implied consent of the parties,
they shall be treated in all respects as if they had been raised in the
pleadings.”