[Note: This one of a series of six posts regarding mechanics' liens:
Part 1. The basics of credit risk and subcontracting.
Part 2. Reallocating risk in construction projects.
Part 3. Acquiring a lien.
Part 4. Enforcing a lien.
Part 5. Personal liability notices.
Part 6. No-lien agreements.]
We've been examining the role of mechanics' liens in construction contacts, including the way they reallocate credit risk among contractors and the owner of a construction project. The Indiana Mechanics' Lien Statute includes another remedy for subcontractors who do not get paid, entirely apart from a mechanic's lien against the real property where the construction takes place. The statute does not give a name to the remedy, but it's often called a personal liability notice or PLN.
To see how it works, let's go back to the hypothetical example of our last article. Assume you are a subcontractor with a $15,000 claim against the general contractor, a claim the GC disputes. Now let's assume that the deadline for filing a sworn statement and notice of intention to hold a mechanic's lien has already slipped by. Are you out of luck?
Not necessarily. First, remember from our earlier articles that the failure to acquire a mechanic's lien does not affect your breach of contract claim against the GC. All it does is provide collateral to secure that claim, so you still have the right to sue the GC for breach of contract. But that's not all. The PLN gives you a second way to transfer the GC's credit risk to the owner
Who may send a Personal Liability Notice?
The remedy of a PLN is available to subcontractors, lessors leasing construction or other equipment or tools, journeymen, and laborers. That's most, but not all, of the people who would also be entitled to a lien. (Note: Are suppliers of materials entitled to a PLN? That's an interesting question but one that we're not going to answer now. We might take it up someday in another article, but not this time.)
What should the notice say?
To assert a claim of personal liability against the owner, you must send a written notice to the owner that includes:
- The name and mailing address of the owner of the property as shown on the records of the county auditor or assessor
- The location of the property, preferably a legal description but at least the street address.
- The amount of the claim
- The name of the person who owes you money (in our hypothetical example, the general contractor)
- A statement that the named person is indebted to you or owes you money
- A statement that you are holding the owner of the property liable to you for payment of that amount
- A description of the services that you provided for which you are owed payment
(Technically, not all of these items may be strictly required, but a good notice should include them.)
Once the owner receives the notice, the owner is directly liable to you, but only to the extent that the owner owes money to the general contractor, including money that may be currently owed and money that may be owed in the future. In other words, if, at the time the owner receives your notice the owner owes the general contractor $2,000 on an invoice that the owner has already received and the contractor later submits invoices to the owner for another $10,000, the owner will be liable to you for $12,000 of the $15,000 you are owed. If the owner has already paid the general contractor in full for the entire project, the owner has no liability to you.
What if the general contractor has been fully paid for the project that I worked on but holds another contract with the same owner for another project on the same property?
In that case, the owner still has no liability to you. In essence, the PLN gives you a claim to money that the owner has yet to pay to the general contractor under the contract that covered the work you performed, but not to money that the owner may owe the general contractor for other reasons.
How long do I have to send the PLN?
There is no strict deadline equivalent to the one that applies to mechanics' liens. You can send a PLN at any time; however, your claim against the owner is only for the amount that the owner still owes the general contractor. Once the owner has fully paid the general contractor, the owner has no liability to you.
Interestingly, the statute also allows you to send a PLN to the owner even before you do the work. In that case, of course, your notice must include the total amount that you will be owed for all the work you're contracted to perform and a description of that work. Doing so may not make you very popular with either the general contractor or the owner because it creates additional concerns for both of them, but you have the right to do so and, once you do, the owner is liable to you even after the general contractor is fully paid.
Okay, I sent the PLN. Now what?
Most likely, you will enter into discussions with the owner. If you, the GC, and the owner reach an agreement on the amount you are actually owed, a common practice is for the owner to issue a two-party check, payable to you and the GC, in the amount that you are owed, then the GC will endorse the check over to you. If you can't reach an agreement, you can sue both the GC and the owner, making sure you file the lawsuit before the statute of limitations for breach of contract expires.
Continue reading "Mechanics' Liens: Part 5. Personal Liability Notices" »