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Kentucky and Indiana Mechanic's Liens Article 9 of Uniform Commercial Code
“Tips, Tricks & Traps” Kentucky Collection Law Review |
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KENTUCKY AND INDIANA MECHANIC'S LIENS**This information is designed to provide general information prepared by
professionals in regard to the subject matter covered. Although prepared by
professionals, this publication should not be utilized as a substitute for
professional services in specific situations. If legal advice or other
expert assistance is required, the service of a professional should be
sought.
MECHANIC'S AND MATERIALMAN'S LIENS IN KENTUCKY
I. GENERAL PROVISIONS Mechanic's liens represent a claim made by a construction creditor against land which the creditor, directly or indirectly, has enhanced or otherwise improved through the incorporation of materials or services furnished by the creditor. The class of creditors who may maintain such a claim includes general contractors, subcontractors, and materialmen. The underlying policy of the mechanic's lien statutes is to promote fair dealings among parties to a construction contract and in essence to prevent unjust enrichment to property owners for material improvements to their property at the expense of parties who have performed work or furnished materials.
B. Statutory Lien Rights As A Remedy A mechanic's lien is a creature of statute. As such, the statutory provisions must be followed with absolute accuracy. Substantial compliance is insufficient and failure to satisfy the requirements of the statute will bar any lien rights. If properly observed, the remedy allows a party who has performed labor or furnished materials for the improvement of real property to acquire a security interest in the owner's property to which the improvements have been made. An understanding of the roles of the various parties is critical. The key players are as follows: 1. The Owner 2. General Contractor 3. Subcontractors 4. Materialmen 5. Sureties
C. Important Determinations When determining the existence of lien rights, the claimant or the claimant's counsel should determine as early as possible the following:
II. PRIVATE PROJECTS (KENTUCKY) A. Parties Entitled To Protection K.R.S. 376.010 provides in pertinent part: Any person who performs labor or furnishes materials for the erection, altering or repairing of a house or other structure or for any fixture or machinery therein, ... or for the improvement in any manner of real property ... by contract with, or by the written consent of, the owner, contractor, subcontractor, architect or authorized agent, shall have a lien thereon, and upon the land upon which the improvements were made or on any interest the owner has therein, to secure the amount thereof with interest as provided in K.R.S. 360.040 and cost. ... KRS 376.010 also allows for a lien for rental equipment up to 6 months of rent, the aggregate not to exceed 60% of the value of the equipment. Although K.R.S. 376.010(1) states that the lien on the land or improvements shall be superior to any mortgage or encumbrance created subsequent to the beginning of the labor or the furnishing of materials, and that the lien shall in effect relate back to the time of commencement of the labor or the furnishing of the materials, K.R.S. 376.010(2) states that: The lien shall not take precedence over a mortgage or other contract lien or bona fide conveyance for value without notice, duly recorded or lodged for record according to law, and unless the person claiming the prior lien shall, before the recording of the mortgage or other contract lien or conveyance, file in the office of the county clerk of the county where he has furnished or expects to furnish labor or materials, a statement showing that he has furnished or expects to furnish labor or materials in the amount in full thereof. Therefore, although the lien shall in effect relate back to the time of commencement of the labor or the furnishing of materials, it is obvious from the statute that unless the potential claimant has filed the statement of intent as provided for in K.R.S. 376.010(2) that the lien is going to be subject to any other contract lien, mortgage or bona fide conveyance for value and without notice which is recorded or lodged of record prior to the perfection of the lien claim.
B. Property Subject To Lien Privately owned real property is subject to a lienable claim. Publicly owned property or buildings thereon are lienable only to the extent of the unpaid contract price of labor, materials and supplies furnished as set forth at K.R.S. 376.210. The protection of the lien statute applies only to the labor actually performed and/or materials incorporated onto the project. Subparagraph (5) of K.R.S. 376.010 states as follows: For purposes of this section, "labor" includes but is not limited to, all work done by teams, trucks, machinery, and mechanical equipment, whether the owner furnishes a driver or operator or not. The protection afforded by K.R.S. 376.010 extends to the materialman who furnishes material to a "remote" subcontractor, away from the job site, so long as the material is ultimately used to improve the property involved. See, Woodson Bend, Inc. v. Master's Supply, Inc., 571 S.W.2d 95 (Ky. 1978). Although it is well established in the law that a materialman who furnishes materials to another materialman under contract is not entitled to a lien pursuant to K.R.S. 376.010. See, Hightower v. Bailey, 56 S.W.2d 147 (Ky. 1900).
C. Notice Requirements K.R.S. 376.010(3) provides that persons who have not contracted directly with the owner or his agent shall notify the owner of the property to be held liable in writing, or his authorized agent, within 75 days on claims of less than $1,000.00 and within 120 days on claims in excess of $1,000.00 The notice period begins after the last item of materials or labor is furnished. The notice serves as notice to the owner of the claimant's intention to hold the property liable for the amount of the lien and therefore must include an indication as to the amount due. It is recommended to send notice to all parties who may have an incentive to have your claim paid including the general contractor, the party with whom you contracted, and any bond company. To stress the importance of the lien notice and verify receipt, it is recommended, although not required, to send the notice certified mail. Persons who contract directly with the owner are not bound by the notice provisions of the statute. When required the notice should be mailed to the last known address of the owner of the property upon which the lien is claimed, or the his duly authorized agent within the county in which the property to be held liable is located. Mere presentation of an account or statement to the owner does not constitute notice that would enable a materialman or a subcontractor to acquire a lien. See, Wright v. Monroe Lumber Co., 160 S.W. 788 (Ky. 1913). Furthermore, should the notice fail to state the amount of the claim, the notice is invalid and no lien is created as there is no duty on the property owner to ascertain in the amount of the lien claimed. See, Jackson v. Rechtin, 269 S.W. 714 (Ky. 1925). Although it is not absolutely required, it is strongly suggested to attach a property description from the most recent deed to the notice to adequately describe the property and ensure that there is no confusion as to which property is being liened. The court has upheld a description such as “the food court located in the Jefferson Mall on the Outer Loop.” We recommend sending out the pre-lien notice and the lien at separate times. The statute and the legislative history seem to require the pre-lien notice as an opportunity for the parties to settle the matter prior to filing the lien. Consequently, we normally file the lien at least seven (7) days after the notice was mailed out. If the lien filing is urgent, we will file the lien only two (2) days after sending out the notice. Just as presentation of an account or statement to an owner does not constitute the notice required by the statute, filing a lawsuit against the contractor and the owner of the property within 120 days and serving the notice within said time period does not serve as a substitute for the notice required by K.R.S. 376.010(3). See, Lafferty v. Wickes Lumber Co., Ky. App. 708 S.W.2d 107 (1986). Also important to note is that sending a copy of the filed lien statement to the owner as required by K.R.S. 376.080(1) will not substitute for the notice required by K.R.S. 376.010(3), even if provided within the applicable pre-lien notice period. The Supreme Court of Kentucky has recognized that there are two types of notices required to perfect the mechanic's lien interest. This includes the pre-lien notice to the owner as well as a copy of the mechanic's lien statement to the owner, which are treated in the law as separate and distinct. See, Middletown Engineering Co. v. Main Street Realty, Inc., Ky. 839 S.W.2d 274 (1992). Since absolute compliance with the statute is mandatory the time for giving notice is critical. Failure to comply with the notice provisions of the statute, where required, bars the right to a lien. Performing minor repairs or the shipment of incidental materials is not sufficient to extend the time for providing notice. This is commonly referred to as "tacking." Where there has been additional work or repairs, or additional deliveries, it must be shown that the work performed or supplies furnished were not trivial in nature but rather were necessary for completion of the contract. See, Drummy v. Stern, 269 S.W.2d 198 (Ky. 1954); Curtsinger v. King, 240 S.W.2d 608 (Ky. 1951); and Henry Koehler & Co. v. Hines, 214 S.W. 906 (Ky. 1919).
D. Special Notice Provisions For Residential Properties Although the normal statutory time frames for providing notice to the owner of property are either 75 days or 120 days depending upon the amount of the claim, there are special provisions on projects involving improvements to owner-occupied single or double family dwellings. K.R.S. 376.010(4) provides as follows: No person who has not contracted directly with the owner or his authorized agent shall acquire a lien under this section on an owner-occupied single or double family dwelling unless he notifies in writing the owner of the property to be held liable or his authorized agent not more than seventy-five (75) days after the last item of material or labor is furnished, of the delivery of the material or performance of labor and of his intention to hold the property liable and the amount for which he will claim a lien. Notwithstanding the foregoing provisions of this subsection, the lien provided for under this section shall not be applicable to the extent that an owner-occupant of a single or double family dwelling or owner of other property as described in this subsection has, prior to receipt of the notice provided for in this subsection, paid the contractor, subcontractor, architect, or authorized agent for work performed or materials furnished prior to such payment. The contractor or subcontractor cannot be the authorized agent under this subsection. This subsection shall apply to the construction of single or double family homes constructed pursuant to a construction contract with the property owner and intended for use as the property owner's dwelling. The ramification of the last sentence of the statute would seem to require determination of whether or not legal title to the property is vested in the person who ultimately intends to use the property as their own dwelling rather than relying upon whether the property is inhabited. In other words, it is incumbent upon a subcontractor or materialman to determine who actually owns the property at the time the services are performed or the materials supplied and further determine as to whether or not the owner ultimately intends to utilize the premises as their own dwelling. If so, the claimant must give the prescribed notice within 75 days from the last date that materials or labor were furnished. This subsection of the statute also provides that the lien provided for in that section is not applicable to the extent that the owner-occupant of the single or double family dwelling has, prior to receipt of the notice provided in the section, paid the contractor, subcontractor, or architect or authorized agent for work performed or materials furnished. The Kentucky Supreme Court recently determined this protection is afforded to the owner of a single or double family dwelling includes only the primary residence and does not extend to any other "dwelling," such as vacation property. Once again, it should be noted that persons who have a direct contractual relationship with the owner need not be concerned with the notice provisions of the statute. Once it has been determined whether the party claiming a lien is subject to, or exempt from the notice provisions of the statute, there remain certain recording requirements to perfect the lien claim.
E. Perfection Of The Lien Claim Once a lien right has been established and the proper notice given, it is incumbent upon the claimant or the claimant's counsel to ensure that the lien is properly perfected as is set forth at K.R.S. 376.080. K.R.S. 376.010 provides that the lien of the claimant relates back and takes effect from the time of the commencement of the labor or the furnishing of materials. In pertinent part, K.R.S. 376.080(1) provides as follows: Any lien provided for in K.R.S. 376.010 shall be dissolved unless the claimant, within six months after he ceases to labor or furnish materials, files in the office of the county clerk of the county in which the building or improvement is situated a statement of the amount due him, with all just credits and set-offs known to him, together with a description of the property intended to be covered by the lien sufficiently accurate to identify it, the name of the owner, if known, and whether the materials were furnished or the labor performed by contract with the owner or with the contractor or subcontractor. This statement shall be subscribed and sworn to by the person claiming the lien or by someone in his behalf. The claimant shall send by regular mail a copy of the statement to the property owner at his last known address within seven (7) days of filing the statement with the county clerk. Any lien provided for in K.R.S. 376.010 shall be dissolved if a copy of the statement is not sent to the property owner as provided in this subsection. The format of the lien statement is very important. In essence, the statement must include:
The annotations for the various cases interpreting the statute reflect that the description of the property provided in the statement should be specific enough to identify the property to the exclusion of any other property and enable a party familiar with the locality to identify such premises. Should the statement be insufficient to identify the property or include errors in the identification of the property the lien is dissolved. There has even been one case that provided where the statement indicated that materials had been contracted for by the owner but proof later showed that they were actually provided under contract with the general contractor that the lien asserted was not a valid lien upon the property. See, Headrick v. Waterbury, 126 S.W.2d 411 (Ky. 1939); Hellman Lumber Co. v. Landrum, 639 S.W.2d 379 (Ky. App. 1982). Failure to follow up the lien filing with a first class mailing to the owner will invalidate the lien. See, Middletown Engineering Co. v. Main Street Reality, Inc., 839 S.W.2d 274 (Ky. 1992).
F. Release of the lien The additional mailing requirement has also been written into K.R.S. 382.365 regarding release of liens. That statute requires a lien to be released within 30 days from the date of satisfaction and further provides that violation of that requirement obligates the lienholder to damages of $50.00 as well as any actual expenses, including a reasonable attorney's fee incurred by the owner in securing release of the lien. Lienholder's are required to send a copy of the release to the property owner within 7 days of the release by first class mail. Once again, failure to do so obligates the claimant to damages of $50.00 as well as any actual expenses incurred by the owner in obtaining documentation of the lien release.
G. Enforcement Of The Lien Claim Once a lien claim has been perfected through recording, the lien claimant must also be wary of K.R.S. 376.090 which provides, in essence, that any lien provided for in K.R.S. 376.010 shall be deemed dissolved unless an action is brought to enforce the lien within 12 months from the day of the filing of the statement in the clerk's office. Enforcement of the lien requires foreclosure upon the property on which the lien is claimed. A variety of factors will determine whether foreclosure is a feasible alternative. Included among other considerations are the aggregate value of superior encumbrances, the fair market value of the property, the amount of the lien claimed as well as the feasibility of direct collection efforts against the "debtor" with whom the claimant contracted. All valid mechanic’s lien claimants enjoy equal priority and will share from the available sales proceeds on a pro rata basis. Consequently, the subcontractors who poured the foundation will have the same lien priority as the finished carpenter. It is possible to file a foreclosure action and not request an Order of Sale, but simply obtain a judgment against the subcontractor. This may be advisable if a foreclosure and sale of the property would only result in paying off prior liens such as a construction mortgage holder. You can collect interest at 12% per annum from the date the mechanic’s lien is filed. In most cases you will not be permitted to include additional late charges and penalties in the claim amount.
EXHIBITS ATTACHED A. Kentucky Mechanic’s Lien Statute
MECHANIC'S LIENS IN INDIANA A. Parties Entitled to Protection I.C. 32-8-3-1 provides in pertinent part: That contractors, subcontractors, mechanics, lessors leasing construction and other equipment and tools, whether or not an operator is also provided by the lessor, journeymen, laborers and all other persons performing labor or furnishing materials or machinery, including the leasing of equipment or tools used, for the erection, altering, repairing or removing any house, mill, manufactory, or other building, bridge, reservoir, systems of waterworks, or other structures ... may have a lien ... which they may have erected, altered, repaired, moved or removed or for which they may have furnished materials or machinery ... to the extent of the value of any labor done, materials furnished, or either, including any use of such leased equipment and tools. ... While Kentucky grants priority to any mortgage or encumbrance created and properly recorded prior to the perfected mechanic's lien interest, Indiana rather peculiarly recognizes a rule of parody in certain instances between construction lenders and mechanic's lienholders. While it would certainly seem that any prior recorded and perfected mortgage and encumbrance, obtained prior to, and without contemplation of, any work being performed, should enjoy priority, the same cannot be said of a construction mortgage. Indiana law recognizes that if funds derived from a properly executed and recorded mortgage are used in construction of or improvement of property, and mechanic's lienholders have knowledge of the purpose of said loan when they perform their labor and/or services, that the mortgage lien and mechanic's lienholders shall share equal priority. See, In re Venture Properties, Inc., 139 B.R. 890 (1990). If, on the other hand, the mortgage loan is for purposes other than construction or if lienholders perform their labor and/or services without knowledge of the purpose and effect of the loan, then the mortgage will be superior to the mechanic's liens for labor and/or services performed after execution of the mortgage.
B. Property Subject to Lien Just as is the case with Kentucky, privately owned real estate is subject to a lienable claim in Indiana. Publicly owned property or buildings are lienable only to the extent of the unpaid contract price. For state and locally owned properties, see I.C. 5-16-5-1 et seq. The protection of the Indiana lien statutes applies to persons who perform labor, provide materials as well as lessors of equipment and tools, whether or not an operator is also provided. As is the case with Kentucky, I.C. 32-8-3-1 extends to materialmen who furnish materials to a subcontractor or contractor and do not extend to a mere supplier to a materialman.
C. Special Pre-Lien Notice Provisions for Residential Properties Pre-lien notices in Indiana are required for residential property only in instances where labor, material or machinery are provided to any contractor, subcontractor, mechanic or anyone other than the occupying owner or his legal representative. In instances where labor, material or machinery is provided for the alteration or repair of any such property, any would-be lienholder shall provide a written notice of the delivery of materials or work performed, or machinery provided and the existence of any lien rights, within 30 days from the date of first delivery or labor performed. The furnishing of such notice shall be a condition precedent to the right of acquiring a lien upon any improvement. See I.C. 32-8-3-1. In instances of original construction of a single or double family dwelling for the intended occupancy of the owner, the statute would require any would-be lienholder to provide written notice of the existence of any lien rights within 60 days from the date of the first delivery or labor performed. Furthermore, a copy of the written notice shall be filed in the recorder's office of the county within 60 days from the date of the first delivery or labor performed. Again, the furnishing of such notice and filing of same shall be a condition precedent to the right to acquire a lien upon such real estate. Indiana, just as Kentucky, recognizes that any claim of a lienholder is subject to real estate purchased by an innocent purchaser for value without notice. Indiana limits the bona fide purchaser exception to instances of where the purchaser of a single or double family dwelling for occupancy by the purchaser.
D. Perfection of the Lien Claim for Commercial Property Once a lien right has been established under Indiana law, the lienholder must perfect that interest as is set forth at I.C. 32-8-3-3. The statute provides as follows: Any person who wishes to acquire a lien upon any property, whether the claim is due or not, shall file in the recorder's office of the county at any time within ninety (90) days [prior to July 1, 1999 this read only sixty [60] days] after performing labor or furnishing materials or machinery described in section 1 of this chapter, a sworn statement in duplicate of the person's intention to hold a lien upon the property for the amount of the claim. The statement must specifically set forth:
The name of the owner and the legal description are sufficient if they are substantially as is set forth in the latest entry in the transfer books of the county auditor, or township assessor. The recorder, pursuant to statute, shall mail by first class mail one of the duplicates filed to the owner named in the notice within three business days after recordation.
E. Perfection of Lien Claims for Residential Property Presuming that the claimant has followed the pre-lien notice requirements, the claimant has sixty (60) days following the last date of performing labor or furnishing materials or machinery to file its lien on the property.
F. Enforcement of the Lien Claim Once a lien claim has been perfected through recording, the lien must be enforced as is the case in Kentucky by the filing of an action to foreclose said lien within one year from the date the lien notice was recorded in the county recorder's office. See I.C. 32-8-3-6. Unlike Kentucky, Indiana recognizes that the one year statute of limitations can be shortened or extended. The one year period can be extended upon filing of an agreement signed by all record title owners and the lienholder, which shall be recorded in the office of the county recorder within the one year period of time from which the original lien was obtained. The one year period can be shortened to the extent that an owner or other interested person, such as a mortgagee, may notify, in writing, the owner or holder of the lien to commence suit thereon, and if said person fails to commence said suit within thirty (30) days after receiving such notice, the lien shall be null and void. See I.C. 32-8-3-10. It is required that any person who gives such notice do so by registered or certified mail to the holder of the lien at the address given in the notice of lien originally recorded in the recorder's office.
G. No Lien Contracts Are No Longer Enforceable for Commercial Property Indiana, unlike Kentucky, still recognizes the concept of a no lien contract for residential property. The effect of such a properly executed and recorded contract prevented the filing of a mechanic's lien interest against the property improved. Following the recent law change, effective July 1, 1999, no lien contracts are not enforceable in Indiana for privately owned commercial property. Please note that no lien contracts are still enforceable in public utility projects. In order for a residential property owner or a public utility to avail itself of this type of protection, the owner must comply as follows:
Any such contract shall be without effect upon any labor, material or machinery supplied prior to the time of the filing with the recorder of said contract.
H. Personal Owner Liability Indiana enables any person who would otherwise be entitled to a lien including a laborer, materialman or lessor to establish personal liability against an owner of the property in certain instances, even if the laborer, materialman or lessor has not dealt directly with the owner. This remedy provided by I.C. 32-8-3-9 would apply even if lien rights are already expired or even in instances where lien rights are not available, such as where a proper no lien contract has been properly recorded. To avail itself of this protection, the laborer, materialman or lessor must provide written notice to the owner of the following:
The net effect of this statute is to provide additional protection to one who has improved the real estate of the owner. It is important to note that the protection extends only to any amounts due which remain unpaid by the owner to the contractor or subcontractor. Although not required by the statute, it is certainly recommended that any such notices be sent registered or certified mail so that there will be some proof as to the date of receipt by the owner of the property.
OTHER REMEDIES IN LIEU OF MECHANIC’S LIEN I. Equitable Remedies II. Public Improvement Liens III. Miller Act Claim IV. Surety Bond Claim
INDIANA MECHANIC’S LIENS
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