Mechanic’s lien priority case reminds us: “equity follows the law”

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LAW under CONSTRUCTION is back to its regularly scheduled programming.  Some interesting cases have been decided over the last few months, including a recent decision from the Indiana Court of Appeals on mechanic’s lien priority.  You may recall a similar post here.

In City Savings Bank n/k/a LaPorte Savings Bank v. Eby Construction, LLC, a construction company sought to foreclose a mechanic’s lien related to costs and materials it provided during the construction of buildings and other facilities on some commercial real estate.   The bank had previously loaned money to the owner of the property to fund the construction, loans which were secured by mortgages on the real estate.  The construction company asserted that its mechanic’s lien had priority over the liens held by the bank.

The trial court held that although Indiana statutory and case law provides that the mortgages should have priority over the later-recorded mechanic’s lien, the mechanic’s lien has priority over the mortgages pursuant to principles of equity and on public policy grounds.  Thus, the court ruled in favor of the construction company.

On appeal, the decision of the trial court was reversed.   The Court of Appeals first noted that it has previously held “[w]ith regard to commercial property, where the funds from the loan secured by the mortgage are for the specific project that gave rise to the mechanic’s lien, the mortgage lien has priority over the mechanic’s lien recorded after the mortgage.”  Citing Harold McComb & Son v. JP Morgan Chase Bank, 892 N.E.2d 1255 (Ind. Ct. App. 2008).  Since it was undisputed that the mortgages were recorded before the mechanic’s lien, the Court of Appeals held that the mortgages were superior.

The court went on to say “[t]he trial court, although attempting to use its equitable powers to achieve what it believed to be a more fair and balanced result, failed to appreciate the importance of the doctrine ‘equity follows the law.’ While equity has the power, where necessary, to pierce rigid statutory rules to prevent injustice, where substantial justice can be accomplished by following the law, and the parties’ actions are clearly governed by rules of law, equity follows the law.  Because there is nothing in the designated evidentiary material to indicate that substantial justice cannot be accomplished by following the law, and the parties‟ actions are clearly governed by our priority statutes, equity must follow the law.”

The full text is available .

www.????.com – Protecting Your Digital Presence

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I wanted to take a break from my usual posts about more traditional construction issues and address a problem that contractors (and businesses in general) are increasingly facing: how to properly secure your long-term digital presence.

As a personal intro, my father, the owner of a mechanical construction company, recently discovered the wonders of the internet, including “the Google” and YouTube (solely for guitar videos).  Since pigs are officially flying, I figure it is only a matter of time before all contractors bring their presence online.  

As a professional intro, I was recently involved with a matter that addressed many of these issues.  Thus, hopefully this post will help organizations deal with these issues before they turn into litigation.

First Issue: Domain names

Securing the proper domain name (www.????.com) for your organization is often the first place to start when creating a website.  Getting a domain name involves registering the name you want with an organization called ICANN (Internet Corporation for Assigned Names and Numbers, a non-profit company that contracts with the government) through a domain name registrar (like GoDaddy.com).

For instance, if you choose a name like “example.com”, you will have to go to a registrar, pay a registration fee that costs between $10-$35.  That will then give you the right to the name for a year, and you will have to renew it annually for the same amount (generally).

If a domain name is available, it is yours.  Basically, think of it as a digital version of the Oklahoma land rush.  Domain names have been disappearing extremely fast.  Thus, if you want a domain name for your site (or future site), act now, or face the agony of having someone else scoop it up first.  After all, $10 for a year’s ownership of the domain name is minimal compared with losing the perfect name for your website.  And, if the domain is already taken, you can always try to buy it from the current owner (but this is often cost prohibitive).

Now what if a domain name that clearly represents the trademark of your company, such as www.uniquecompanyname.com, is already taken.  There are options to gain control if you think someone has registered your trademark with only the intent to profit by selling it to you (often referred to as “cybersquatting”).  Note: generally, a trademark is a distinctive sign or indicator used to identify a company’s products or services to consumers, and to distinguish its products or services from those of other entities.

First, all registrars must follow the Uniform Domain-Name Dispute-Resolution Policy (“UDRP”). Under the policy, most types of trademark-based domain-name disputes must be resolved by agreement, court action, or arbitration before a registrar will cancel, suspend, or transfer a domain name.  However, disputes alleged to arise from abusive registrations of domain names (i.e., cybersquatting) may be addressed by expedited administrative proceedings that the holder of trademark rights initiates by filing a complaint with an approved dispute-resolution service provider.    

Second, you can also file a lawsuit in federal court under the Anticybersquatting Consumer Protection Act (“ACPA”).  The purpose of the law is to thwart cybersquatters who register domain names containing trademarks with no intention of creating a legitimate web site, but instead plan to sell the domain name to the trademark owner or a third-party.

Generally, a UDRP proceeding can be faster and cheaper for trademark owners than an ACPA lawsuit 

Second Issue: Dealings with information technology (“IT”) vendors

In creating and maintaining a website, organizations often rely heavily on internet consultants or vendors, as this is specialized knowledge and is generally better in the hands of professionals.  However, there are risks to such relationships, which can be minimized.  For example, when registering a domain name with a registrar (see above), you have to provide the name of the “registrant.”  The registrant is generally presumed to be the owner, so if your vendor registers as the registrant, it may lead to issues later if you transfer vendors and want to take your domain name with you.

Also, vendors often contract with other third parties for hosting services or to acquire licenses and software on behalf of the client.  These contracts could provide that ownership of the licenses or software is with the vendor.

Overall, any organization that outsources its IT work should have a clear contract that lays out the rights and liabilities of the parties, which may include: specifying what is being purchased, identifying the owner of all relevant items, providing for a smooth unwinding of the relationship at the end of the term, and requiring the vendor to help in a transition.

The irony of a post on an internet blog about helping companies get an online presence is not lost on me.  However, my hope is that anyone with access to “the Google” can find this post and gain some helpful information.

Where art thou documents (perils of document collection)

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As I am digging out from a trial (which explains my recent absence from the blogosphere) and digging out from the icepocolypse here in Indianapolis, I wanted to take a break and share some insight regarding document collection issues. 

As is often the case in most lawsuits, parties are requested to search for and collect documents relevant or related to the issues in the lawsuit.  Such requests are often called requests for production, document requests, or subpoenas (if you are not a party to the lawsuit). 

Under Indiana law, a party has a responsibility to perform a reasonably diligent search to locate the requested documents.  Now, what constitutes a reasonably diligent search is a very fact intensive inquiry depending on the specific situation, such as whether the documents are maintained in electronic or hard copy form, whether there is a document retention policy, and whether litigation is anticipated, to name a few.

Nowadays, with the emergence of smartphones, tablet PCs, on site wi-fi, etc., all of which are creating a paperless process for most contractors, the paper chase that has long been synonymous with construction is steadily decreasing.  Thus, performing a reasonably diligent search for electronically stored information has becoming an even more challenging process. 

While I strongly recommend consulting with a qualified attorney regarding the specifics of any document collection you may be facing, I wanted to share a few of the sanctions that can be imposed if a party fails to meet its diligence requirements.  These aren’t meant to scare anyone, but rather to provide the possible sanctions, depending on the degree of disobedience.  While these generally apply when a party refuses to produce requested documents pursuant to a court order, they can also apply when a party represents that they cannot locate documents, the documents were destroyed, or the documents do not exist, when, in actuality, the party failed to search for them. 

Under Indiana law, if a party fails to make or cooperate in discovery it can be subject to the following sanctions:

  • Certain designated facts can be taken as established without evidence;
  • Refusing to allow the disobedient party to support or oppose designated claims or defenses;
  • Prohibiting a party from introducing designated matters in evidence;
  • Striking out pleadings or parts thereof;
  • Staying further proceedings until the documents are produced;
  • Dismissing the action or proceeding or any part thereof;
  • Rendering a judgment by default against the disobedient party;
  • Contempt of court;
  • Requiring the disobedient party or the attorney advising him or both to pay the reasonable expenses, including attorney’s fees, caused by the failure.

On an additional note, absent exceptional circumstances, a court may not impose sanctions on a party for failing to provide electronically stored information lost as a result of the routine, good faith operation of an electronic information system.

Hopefully this post will help you avoid such perils.  Now if only I can avoid the perils of my outdoor ice rink, a/k/a my driveway…

Oh Those Pesky Deadlines: Indiana Payment Bond Claims

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Happy 2011!!  Now that the ball has dropped, the champagne is drunk, and the glitter is gone, it is time to commit to your New Year’s resolutions.  One of my ongoing resolutions is stay on top of all deadlines.  So, with my outlook calendar in hand and reminders popping up faster than popcorn, I wanted to remind all of our Indiana contractors of the deadlines for submitting payment bond claims and the suit limitations period for filing suit against sureties on various Indiana public projects.  Again, it’s always a good idea to consult with an attorney to make sure that you have complied with all notice and suit requirements as well as any deadlines. 

Indiana does not require payment bonds to be posted on private projects.  If a bond is posted the deadlines for filing a claim and filing suit will be outlined in the bond. It is also essential that regardless of the statutory deadlines, you should always read the bond.  If the bond enlarges these time periods, the deadlines in the bond will control. 

There are four different types of public projects in Indiana.  It’s important to know which type of project you are working on so that you are aware of your statutory rights and obligations. The four types of projects are:

Title 4 State Projects – Indiana Code §4-13.6-1-1 et seq.

Title 4 projects are Indiana state public works projects solicited by the Indiana Department of Administration, the Public Works Division.  Unless the bond provides for a greater period of time, a claimant must file a claim with the Public Works Division and the surety within 60 days from the last date labor was performed, material furnished or service rendered.  If you have submitted your notice of claim and have not yet been paid, you must wait at least 30 days before filing suit against the surety to recover under the Bond.  However, any suit must be brought against the surety within 1 year after final settlement of the contract with the contractor.   

Title 5 State Projects – Indiana Code §5-16-1-1 et seq.

Any Indiana state public works project not covered under Title 4 or Title 8 are Title 5 projects.  In order to make a claim against the bond on a Title 5 project, the claimant must file a verified claim with the state agency that commissioned the project within 60 days after completing labor or furnishing materials.  The state agency will furnish a copy of the claim to the surety.  The claimant must then wait at least 30 days.  If payment has not been received a suit may be filed against the surety.  Any suit against the surety must be brought within 60 days from the date of the final completion and acceptance of the project.    

Title 8 Indiana Department of Transportation Projects – Indiana Code §8-23-9-1 et. seq.

Title 8 covers any project for the Indiana Department of Transportation.  In order to make a claim on a bond posted for a Title 8 project, a claimant must within 1 year after acceptance of the labor, material, or services by the Commissioner furnish the surety a statement of the amount due.  The claimant must wait at least 60 days after furnishing the statement to file suit against the surety.  The claimant must bring any action within 18 months from the date of final acceptance of the project by the Commissioner. 

Title 36 Local Government Projects – Indiana Code §36-1-12-1 et. seq.

Title 36 projects are projects for local governments, political subdivisions or their agencies.  A claimant must within 60 days of last performing labor or furnishing material file with the local government board a signed statement of the amount due.  The board will forward the statement to the surety.  The claimant must then wait 30 days.  If payment has not been received, a suit may be filed against the surety.  Any suit against the surety must be brought within 60 days after the date of the final completion and acceptance of the project.   

Dizzy yet?  It can be difficult to keep track of things.  So here is a quick reference guide.  LAW under CONSTRUCTION wishes you Happy and Profitable New Year!

Project Type Notice of Bond Claim Deadline Grace period before filing suit Suit Against the Surety Deadline
Title 4 60 days from the last date of labor performed, material furnished or services rendered 30 days after filing notice to file suit against the surety 1 year from final settlement with the contractor
Title 5 60 days after completion of labor or service or within 60 days after last item of material was furnished 30 days after filing notice to file suit against the surety 60 days from the date of final completion and acceptance of the project
Title 8 1 year after acceptance of the labor, material, or services by the Commissioner furnish the surety a statement of the amount due 60 days after furnishing the statement to file suit against the surety 18 months from the date of final acceptance of the project by the Commissioner
Title 36          60 days from the date of last performing labor or furnishing materials 30 days after filing the notice of claim 60 days after the date of final completion and acceptance of the project

Tis the season … for mechanic’s lien priority cases

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I hope everyone is having a nice holiday season.  After digging out from a pile of work, and dusting the Christmas cookie crumbs off my keyboard, I was able to catch up on a few recent decisions from the Indiana Court of Appeals.  And wouldn’t you know, the court left two decisions addressing the priority of mechanic’s liens under my tree.  So I wanted to take a moment to update you on these two decisions before returning to the last of my Christmas cookies (if I can find where my wife hid them!).

On December 22, 2010, the court handed down

The facts:  Grand Innovations borrowed money to construct a single family residence pursuant to a mortgage that was properly recorded.  Neises was hired to help construct, and, yadda, yadda, yadda, filed a mechanic’s lien against the real estate and a complaint to foreclose the lien.  The bank then filed to foreclose the mortgage.

Issue 1:  The bank asserted that Neises “left the property in jeopardy of being destroyed or subject to significant damage due to the weather,” including a lack of roof and wrapping the exposed framing.  The bank paid another contractor to install a roof and otherwise protect the structure.  The bank sought priority over the mechanic’s lien for the expenses to protect the partially-constructed house.  Neises opposed, citing the lack of any provision in the statute for such “super prioritization.”

The court noted that an action to foreclose on a mortgage is essentially equitable in nature and that the bank’s actions were for the “benefit of all” the lienholders and not unreasonable or ill-advised.  Thus, because all parties were engaged in a “common enterprise” and each benefited from the measures, the preservation expenses properly received priority over Neises’ mechanic’s lien. 

Issue 2:  Neises also argued that its mechanic’s lien, filed in July, should have a higher priority than the mortgage lien because it began construction in April, which it argued should be the effective date of the lien.  The court rejected because “the plain language of the statute provides that the lien is created when the statement and notice to intention to hold a lien is recorded.”  Further, the “relation back” provisions of the mechanic’s lien statute apply to obtaining compensation for work done since the project began, not lien priority.   Regardless, the court also found that it is well-settled that a mortgage lien for the construction of a house has the same priority as all mechanic’s liens.  Thus, pro-rata distribution was appropriate.

On December 27, 2010, the court handed down    

The facts:  The Hendersons owned commercial property in Indiana that was destroyed by a fire.  McIntyre has hired to clean up the debris and construct a new building on the property, and, yadda, yadda, yadda, filed a mechanic’s lien against the property.  Subsequently, a bank loaned money to the Hendersons to pay off two mortgages that pre-dated the filing of the mechanic’s lien.  The bank, however, failed to discover the mechanic’s lien held by McIntyre.  In subsequent foreclosure proceedings, lien priority was disputed.

The issue:  The bank claimed that the doctrine of equitable subrogation (lawyerese for “step in the shoes” of the mortgagee refinanced) granted priority to its mortgage lien, to the extent the funds were used to pay off one of the pre-existing mortgages.  McIntyre countered that the bank was not entitled to equitable subrogation because of its culpable negligence in not discovering the lien when refinancing.  The court, relying on Bank of New York v. Nally, found that the proper inquiry was not whether the bank had notice, but whether the intervening lienholder was prejudiced, (although “culpable negligence” on behalf of the bank was still relevant, although none existed in the case).  Thus, since the mortgage existed prior to McIntyre’s work and McIntyre would have expected it to be superior, there was no prejudice and equitable subrogation applied.

Happy New Year from Law under Construction!  Now… where are those cookies….

Contractors and Bankruptcy: Getting the Piper Paid

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This , which provides an overview of basic strategies for contractors, subcontractors and suppliers who are faced with non-payment from a bankrupt entity on a project, can be found on , Christopher Hill’s excellent construction law blog (our second guest posting honor) (click ).  I hope you won’t have a construction project affected by a bankruptcy any time soon, especially as we emerge from the recession.  But just in case you do, check out my post and be prepared for getting paid for work you performed or materials you supplied.

I’m no expert, but this is a game-changer

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Well . . . a game-changer if you are a player in the expert-witness-in-federal-court game.  So, for such experts out there, construction, design or otherwise, or anyone who regularly retains an expert, read on.  Effective December 1, 2010, the Federal Rules of Civil Procedure were amended, and Rule 26 received several significant changes concerning experts.

The backdrop:  Since 1993, Rule 26 has been interpreted to permit discovery of all communications between an attorney and expert witnesses, as well as all draft expert reports.  As a result, some attorneys went to great (and often costly) lengths to avoid creating a discoverable record.

Two significant changes to the game:

First, draft expert reports are now protected under the work-product doctrine, which prevents most documents created in preparation of litigation from being discovered by opposing counsel.  Rule 26(a) now expressly protects “drafts of any report or disclosure required under Rule 26(a), regardless of the form in which the draft is recorded.”

Second, the revised rule now limits the discoverability of communications between experts and attorneys who retain them.  Most communications are now protected.  As with most legal rules, there are exceptions: (1) communications related to an expert’s compensation; (2) communications regarding facts or data provided to the expert and the expert considering in forming the expert’s opinion; and (3) assumptions provided to the expert and the expert considering in forming the expert’s opinion.

These changes may enable attorneys to avoid engaging multiple experts (i.e., consulting, testifying) to avoid creating discoverable material.  Also, they may open the door to qualified experts that were unwilling to serve as experts under the old rules.  And more drafts could promote better final reports.  Finally, these changes may help reduce costs for parties engaged in litigation involving experts, such as many construction disputes.  Always a good thing.

Remember that these are amendments to the Federal Rules of Civil Procedure, and only apply in federal courts.  It remains to be seen if states will adopt the same principles to govern experts in state courts.  Indiana has generally modeled its rules after the Federal Rules, and perhaps will follow suit.  We will keep you undated here at LAW under CONSTRUCTION if there are any further developments. 

There are, of course, other changes to the Rules, so please consult a qualified attorney regarding all of the amendments to the Federal Rules.  Also, the amendments to Rule 26 are not retroactive and, therefore, absent an agreement, communications and draft reports prepared before December 1, 2010, may still be discoverable, so again, consult with a qualified attorney. 

Finally, these amendments are new and their bounds untested, so counsel and clients must still be careful when communicating with experts in connection with litigation.

All-in-all, the game has improved.

Guards? Moats? Indiana court addresses jobsite protection

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And I quote: “Lee could have protected himself from liability only by stationing a guard upon the premises to insure that neither Rider, nor anyone else entered upon the inherently dangerous worksite.”  A guard?  Complete with a shack and taser?  Is that the rule?  Let me explain.

The facts…

On December 6, 2010, in , the Indiana Court of Appeals addressed the duties owed by both a general contractor and an independent subcontractor to the purchaser of a home when she visited the construction site, without permission, and suffered serious injuries.

The purchaser, Rider, entered into a contract to buy a house from a general contractor.  The general was also the landowner, as possession would be transferred at closing.  The general hired Lee, a sub, to perform most of the labor.  Importantly, the contract required that any visitor needed permission from the general or the real estate agent to enter the premises. 

Although Rider obtained permission once, she visited 30-35 other times without anyone’s permission.  On the ill-fated visit in question, Lee and his crew were working on the deck.  When rain set in, they split from the site for an early lunch, leaving an unfinished deck.  Rider subsequently arrived, leaned on the unattached railing, fell, and suffered severe injuries.  Lee and his crew returned, discovered the incident, and nonetheless, finished the deck.

The majority’s view…

Rider filed a complaint for negligence against the general and sub.  The court first addressed the liability of the general.  As a threshold issue, the court noted that since the general still owned the property and was in possession, its duties are judged based on its status as the landowner.  The court ultimately relied on the fact that the general/landowner was neither in actual possession or control of the deck when the accident occurred nor was in control of the premises because he did not perform any actual work.  Since the sub did all of the immediate work, Rider’s negligence claim against the general failed.

The court next addressed the sub’s liability.  Since the independent contractor had worked on the deck right before the incident and a short time after, the court first held that it was in control for purposes of establishing a duty to Rider.  The court then held that the sub’s liability was dependant on whether Rider was rightfully on the premises or whether it was foreseeable that she would visit and be harmed.  Although there were unanswered questions of fact, foreseeability was the key issue. 

The dissent…

One judge disagreed with the majority’s analysis of the sub’s liability.  The judge noted that the construction process is fraught with peril and involves many inherent dangers.  To him, the key fact was that the contract required permission to enter.  End of story.  She didn’t follow the protocol and the sub was not present when the injury occurred.   Therefore, it was not foreseeable that she would be there.   The dissent felt the issue is more properly the risk incurred by Rider in entering a dangerous site, rather than the duty owed.  The dissent stated that the majority’s view “places an impossible burden on contractors” and added the statement I initially quoted. 

The moral…

  • Don’t wander around dangerous construction sites.  Everyone loves watching their dream house as it’s built.  However, I think everyone also loves actually moving into that dream home.  Take the time to follow the procedure specified in the contract when you want to visit.   
  • Despite the dissent’s strong rhetoric, the majority is the law.  Thus, if you are in control of the construction, and it is foreseeable that a homeowner (or similar party) will come on the site, take the necessary precautions.  (consult a qualified attorney for such precautions). 
  • Kudos to the sub for finishing the deck.

Contactors and Green Building: I feel the need … the need for LEED!

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This , which discusses whether contractors and subs should get LEED accredited (or pursue a working knowledge), can be found on , Christopher Hill’s terrific construction law blog, where I have the honor of guest posting (click ).  So travel on over to Musings to read more, but don’t forget to write!  Seriously, your comments are appreciated, either there or below.

Green Building Cites: Green Litigation

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In honor of the conference being held this week in Chicago*, we are pleased to bring you “Green Building Cites,” a periodic post bringing you news concerning green building issues and the law.  If you are like me, it may seem like the green building landscape changes daily and keeping up with it can be overwhelming…  Green Building Cites is designed to summarize the key developments in an orderly fashion. 

For our first installment, we bring you a basic overview of green litigation.

Green litigation or LEEDigation (as coined by construction attorney/consultant ) can encompass the following situations, among others: the failure of a building to achieve LEED certification when specified by contract; improperly designed or constructed LEED projects; or the decertification of a previously LEED certified building.  The latter may become even more prominent with the coming 2012 rating system, as the USGBC has recently indicated it may be decertifying buildings that are not performing as anticipated (see ).

Essentially, the key issue is who bears the liability, if any, for the owner’s losses (tax credits, financing, property value) for failure to achieve certification of later loss of certification – the design professional?  The contractor?  The LEED consultant?  No one?

I recently read an commenting on how remarkable it is that green building has spawned little litigation to date.  A review of the landscape confirms that there are very few such cases.  However, there are a handful of cases that provide an indication of (possible) things to come.    

For example, in Shaw Development v. Southern Builders, the owner desired LEED Silver certification in order to receive certain tax credits related to a project in Maryland.  The building did not achieve certification and a lawsuit followed.  It appears that there was no clear allocation in the contract of who was responsible for certification.  Thus, the case would have squarely addressed LEED certification and related liabilities.  Unfortunately, the case settled out of court before any such guidance was provided by the court.

In another matter that did not even reach the ligation stage, a group of “concerned members of the community” challenged the award of LEED Gold certification to Northland Pines High School in Eagle River, Wisconsin.  Five community members and two professional engineers alleged non-compliance with two prerequisites and filed the challenge over a year after the school was certified.  The USGBC hired two professional consultants to conduct investigations that yielded two reports, both of which concluded that the Gold certification was proper.  Thus, the USGBC upheld the certification. 

Finally, an individual recently brought a class action against the U.S. Green Building Council, alleging, in essence, that LEED promises outcomes it can’t deliver.  Excellent coverage and .     

Although there have been few lawsuits to date, given our ever-litigious country and the growing presence of green building and LEED, more green litigation is likely coming.  Green professionals should plan carefully and seek qualified legal assistance.  We will continue to bring you news of any new green lawsuits on the horizon.

* as a former Chicagoan, for anyone attending GreenBuild and looking for local fare, I highly recommend (deep dish), (hot dogs), and (steak).  You won’t be disappointed.

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