When faced with the prospect of non-payment for labor and materials supplied to an Indiana construction project, most subcontractors know that, generally speaking, they have the right to record a mechanic’s lien on the project to secure payment. In Indiana, the deadlines for recording a lien are relatively short:

• On commercial projects, subcontractors’ liens must be recorded within 90 days from their last date of work onsite.
• On residential projects, subcontractors must record their liens within 60 days of their last date of work onsite. In addition, subcontractors on residential projects must provide notice to the owner that they have commenced work and have mechanic’s lien rights, which must be served within 60 days of beginning work for new construction[1] or within 30 days of beginning work for repair or remodeling of an existing home.

If subcontractors fail to comply with any of those deadlines, they no longer have the right to record a mechanic’s lien.

Subcontractors who miss those deadlines may conclude that, absent a mechanic’s lien on the owner’s real estate, they have no right to compel the owner to pay them. In doing so, they are often unaware of their rights to send the project owner what is called a “personal liability notice” under Indiana Code § 32-28-3-9. The personal liability notice informs the project owner that the subcontractor has not been paid and that the project owner may not release additional payment to the general contractor for any work on the project without first retaining an amount sufficient to pay the subcontractor’s claim in full. If the project owner releases payment to the general contractor without retaining an amount sufficient to pay the subcontractor in full after receiving the notice, the project owner becomes liable to the subcontractor for the amount that the project owner should have retained from the general contractor.

To illustrate, suppose that a subcontractor has not received its $150,000 retainage payment from the general contractor. At the time the project owner receives the subcontractor’s personal liability notice stating that the subcontractor is owed $150,000, the project owner is holding $200,000 for the general contractor and has received no other mechanic’s lien or personal liability notices from any other subcontractor. In that circumstance, the project owner must hold $150,000 from the general contractor until the subcontractor has been paid (either by the project owner or the general contractor).  If the project owner were to hold only $100,000 for the subcontractor and pay the remaining $100,000 to the general contractor, the project owner becomes personally liable to the subcontractor for the $50,000 that the project owner should have retained for the subcontractor but instead paid to the general contractor.

Subcontractors should note that, unlike their mechanic’s lien remedy, there is no statutory deadline for serving a personal liability notice upon a project owner. The personal liability notice is effective so long as, at the time the project owner receives the notice, the project owner is holding proceeds of the prime contract. If the project owner has paid out all prime contract proceeds prior to its receipt of a personal liability notice, the notice is not effective because the project owner has no prime contract proceeds to hold for the subcontractor’s benefit.  For that reason, it behooves a subcontractor to send its personal liability notice to the project owner sooner rather than later, which increases the probability that the project owner will be holding prime contract proceeds when it receives the notice.

Subcontractors who send personal liability notices to project owners should take care to send the notices by certified mail, so that the subcontractors can later prove, in court, the date on which the project owner received the notice. Absent proof of that date, the subcontractor will face difficulty in establishing that, on the date that the project owner received the notice, the project owner was holding prime contract proceeds and in the amount of those proceeds, which is necessary for the subcontractor to hold the project owner personally liable.

If you have any questions or if you need assistance, please contact your construction law attorneys at Riley Bennett Egloff LLP.

[1] This notice may also need to be recorded if the new construction is occurring on land owned by the person(s) who intend to occupy the dwelling once completed.

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Posted on December 12, 2024,  by Kevin N. Tharp