Generally, the bank’s mortgage has a higher priority than the later-recorded mechanic’s lien, in such an instance.  However, here the contractor argued that the bank had “unclean hands” because funds from the bank’s loan had been used to pay other contractors who performed work after this contractor.  In other words, the owner used its shrinking financial resources to pay other contractors first.  Because of the bank’s “unclean hands,” the contractor argued that its mechanic’s liens should be given first priority. 

The Indiana Court of Appeals disagreed.  The Court concluded that the bank did not have “unclean hands” because the bank did not control the disbursement of the loan proceeds.  The owner made the decision as to which contractor to pay first, and not the bank.

This case highlights the tension that frequently occurs on construction projects between contractors with mechanic’s lien rights and construction lenders when owners are unable or unwilling to pay what is owed.  If you’re wondering about the “unclean hands” doctrine, I’m pretty sure we have our British friends to thank for its name.  If you have any questions about this case, please contact a member of the Bamberger Construction Team or Banking Team.

In order to properly utilize the mechanic’s lien, the contractor must be aware of the very specific requirements prescribed by statute, including but not limited to notice and filing deadlines that are both short and unforgiving.  The required notice and filing deadlines differ depending upon the type of construction project, depending primarily whether the project is commercial or residential.

As a general rule, a mechanic’s lien is perfected by filing a Sworn Statement and Notice of Intention to File Mechanic’s Lien in duplicate in the office of the County Recorder in the county where the real estate is located. On commercial projects, this notice must be filed no later than the day that is ninety (90) days after the last day work is performed or materials are provided for the project.  On some residential construction projects, the time period for filing the Sworn Statement is shortened to sixty (60) days.  After the Sworn Statement is filed, the County Recorder is responsible for mailing a copy of the Sworn Statement to the property owner at the address set forth in this Sworn Statement.

On commercial projects, there are no other filing or notice requirements.  However, if the contractor is doing work on a project involving an owner-occupied dwelling, and the contractor is not dealing directly with the owner, the contractor must furnish a written Pre-Lien Notice to the property owner in order to preserve its mechanic’s lien rights.  If the work is for the remodeling of the owner-occupied dwelling, the Pre-Lien Notice must be furnished to the property owner within thirty (30) days after the day work is first performed.  If the work is for new construction of an owner-occupied dwelling, the Pre-Lien Notice must be furnished to the property owner and recorded in the office of the County Recorder within sixty (60) days after the day of first work.  Note that the Pre-Lien Notice for remodeling of an owner-occupied dwelling is not required to be recorded with the County Recorder.  These Pre-Lien Notices, if required, are conditions precedent to the mechanic’s lien rights of the contractor, and failure to furnish and record (if necessary) the Pre-Lien Notice within the prescribed time frame voids any further attempts to perfect the lien. 

This blog post is limited in its focus to Indiana law.  Other states have similar but distinctly different statutory requirements for the attachment and perfection of Mechanic’s Liens, and the appropriate State’s statutes must be consulted. 

If you would like assistance with regard to the filing of Mechanic’s Liens, please contact a member of the firm’s Construction Law Team.

Author: Christopher C. Wischer (bio)
Phone: 812.452.3595
email: cwischer@bamberger.com