Indiana Mechanic Liens

1. What is a lien, and what does it do?

• ANSWER: A lien is a right that attaches to the property of another individual or entity. Once a lien is created the lien holder generally has the right to restrict the transfer of title to the property, whether that property is an automobile or a parcel of real estate.

2. How do Indiana mechanic liens differ from other types of liens?

• ANSWER: Mechanic liens are generally created the minute a contractor provides services in the building, remodeling, or repair of a structure that is or will be permanently affixed to real estate. Other liens arise from other types of activity, such as a warehouseman’s lien for unpaid storage, a mortgage lien when a home buyer borrows money from a lender, or a judgment lien, when someone loses their case in court.

3. How is a Mechanic Lien created?

• ANSWER: Generally, the minute a contractor, subcontractor, material supplier, or equipment rental company provides services, materials, or equipment for the construction, remodeling or repair of any type of structure, such as a home, commercial building, or a bridge, a lien against the structure being built, modified or repaired is automatically created as a matter of law. However, the mere creation of the lien does not make it enforceable.

4. When and how does a mechanic lien become enforceable?

• ANSWER: In order for Indiana mechanic liens to become enforceable, it must first be “perfected”. In order to perfect a mechanic lien, the lien holder must follow the statutory requirements for recording the lien and observe the time limitations for recording the notice with the county recorder’s office. Mechanic liens on “type 2” structures, which are essentially all single or double unit residential homes, must be recorded within 60 days of the last date work, material or services were provided, or the mechanic lien is void. For all other structures, including commercial buildings, the lien holder has up to 90 days from the last date work, materials or services were provided on the project. Indiana requires a pre-lien notice be recorded in the office of the recorder 60 days from the first day work is performed on a residential type 2 structure and 90 days for new residential construction.

5. What can a property owner do to remove the lien from the real estate?

• ANSWER: If the lien is valid and there is no dispute over the amount owed, then paying the lien holder in exchange for a release of lien or satisfaction of lien document may be the easiest way of removing it. If the amount demanded by the lien holder is unacceptable to the property owner, then the property owner may wish to challenge the lien. Indiana mechanic liens might be defeated for a number of reasons, including the failure to “perfect the lien” properly, or the failure to respond to a properly worded written demand to the lien holder to foreclose within 30 days or lose its lien rights, or through litigation that places the issues in dispute in the hands of a judge for resolution. A bond may also be secured to insure the payment of the lien, if the dispute can’t be resolved quickly, and the property owner needs to free up the property for the purpose of resale or refinancing.

6. How long does a mechanic lien last?

• ANSWER: Indiana mechanic liens are good for one year from the date the notice of intention to hold a mechanic lien is recorded with the county recorder’s office. If the lien holder fails to file a lawsuit within that one-year period, the lien becomes void automatically by operation of law.

7. Who is responsible for paying attorney fees, when a mechanic lien is recorded?

• ANSWER: Indiana courts, like most other states, follow the American Rule when it comes to awarding attorney fees. Under the American Rule each party is responsible for paying their own attorney fees, unless there is a provision written into a contract which is at the heart of the dispute, or there is a statute that gives the right to recover attorney fees to one party or another. Indiana’s mechanic lien statute just happens to be one of those statutes. In other words, if the contractor who properly records his lien notice has properly perfected his lien, and the contractor becomes the prevailing party in a lawsuit to enforce or foreclose on the lien, then it would be entitled to recover attorney fees. There is one exception, however, and that exception is created when the property owner has paid the general contractor the full amount of the contract prior to a subcontractor filing its lien notice. The subcontractor in that situation would still be entitled to recover the amount of his lien, but would not be entitled to recover attorney fees from the property owner.

8. What can be done if the contractor overstates the lien amount?

• ANSWER: There are very few Indiana cases (common law) that discuss the ramifications of a mechanic lien that overstates the amount that is actually due. There is at least one Indiana case that appears to say the intentional act of grossly overstating the amount due on a mechanic lien may void the lien, while good faith and inadvertent mistakes will not void the lien. However, it also appears that the intentional act of grossly overstating the lien amount must also have either defrauded the property owner or caused some other type of harm. As of 3/26/2016 this issue has precious few appellate cases from which to turn for guidance. The door is open, however, and it is likely more appellate cases will develop to help clarify this issue.

9. Can real estate be sold with a mechanic lien filed against it?

• ANSWER: Legally, the property can be sold by the owner, but the lien goes with it, so the new buyer will inherit the lien. The practical effect of this is to essentially bar the property owner from selling or refinancing the real estate. However, there are a number of ways to sell the property with a lien on it and they include the posting of a bond to remove the lien and/or escrowing funds from the sale of the property to insure payment of the lien pending the outcome of litigation.

10. What does it mean to foreclose on a mechanic lien?

• ANSWER: Once Indiana mechanic liens are recorded and perfected, the lien holder may file a lawsuit to have its mechanic lien reduced to a judgment. The judgment then becomes a lien on the real estate. Although there may be other liens on the real estate that come before the mechanic’s lien and therefore have a priority status, the real estate can be sent to a Sheriff’s Sale after the lien holder secures a judgment. At the Sheriff’s Sale, the property will be sold to the highest bidder, subject to any other liens that have not been reduced to judgment as part of the litigation. The lien holder who becomes the judgment holder may bid some or all of its judgment at the Sheriff’s Sale, and if it is successful, the Sheriff will issue the successful bidder a new deed (a Sheriff’s Deed) to the real estate. For this reason most mortgage companies will call the loan and join in the foreclosure proceedings, when a mechanic lien foreclosure lawsuit is filed.

Rob McNevin is partner in the law firm of Kreider McNevin Schiff, LLP and an Indiana trial lawyer whose practice is primarily focused on issues pertaining to real estate and construction law. If you have questions about this article or the law to which it relates, contact him by e-mail at Rob@indyadvocate.com or by phone at 317-939-3000.