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

Court: Indiana Supreme Court
Date filed: 2002-08-27
Citations: 774 N.E.2d 488
Copy Citations
7 Citing Cases



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.”