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Fee Shifting Under Goodrich-Implications for General Contractors and Subcontracts

August 10, 2016adminUncategorized0

Indiana courts must shift attorneys’ fees to prevailing parties in mechanic’s-liens-foreclosure actions.  Prior to the Indiana Supreme Court’s recent decision in Goodrich Quality Theaters, Inc. v. Fostcorp Heating and Cooling, Inc., 29 N.E.3d 124 (Ind. 2015), arguably only those with interests in the property could be liable for attorneys’ fees.  After Goodrich, general contractors with no interest in the property may be required to pay foreclosing plaintiffs’ attorneys’ fees.  Both general contractors and subcontractors must be aware of this decision and its potential consequences.

Goodrich Quality Theaters, Inc. leased property from Spirit Master Funding III, LLC (“Owner”) to construct a movie theater.  Goodrich hired a general contractor (“General Contractor”) to oversee the project.  General Contractor engaged several subcontractors (“Subs”) to provide labor, services, and materials necessary to construct the project.

Problems plagued the project, causing the theater to fall behind schedule.  Owner failed to pay General Contractor the full contract price and, consequently, General Contractor did not pay Subs all payments owed.  Subs timely filed mechanic’s liens against the property and sued Goodrich and Owner to foreclose on their respective liens.  In the same action, Subs sued General Contractor, but only for breach of contract.  The subcontracts did not permit fee shifting, but Subs requested attorneys’ fees by relying solely on Indiana Code section 32-28-3-14.

While the case was pending, General Contractor filed an undertaking and posted a surety bond under Indiana Code section 32-28-3-11.  The bond obligated General Contractor, the bond’s principal, or its surety to pay any judgment recovered in a lien-foreclosure action, “including costs and attorney’s fees allowed by the court.” Approving the bond, the trial court released the mechanic’s liens, with the bond to serve as security in lieu of the property.  Three months later, Owner paid General Contractor in full, and General Contractor and Owner filed a motion to dismiss the claims for attorney’s fees. The trial court denied the motion and ultimately awarded Subs their claimed amounts and attorneys’ fees.  General Contractor appealed, challenging the trial court’s award of attorneys’ fees.

The Court of Appeals agreed with General Contractor, reasoning that Indiana’s mechanic’s lien fee-shifting provision only applies to property owners.  The Supreme Court disagreed, holding that releasing the property in lieu of the bond did not discharge General Contractor’s obligation to pay Subs for their work. Rather, Subs’ liens subsequently attached to General Contractor’s stated obligation in the undertaking to pay the full amount of the judgment plus attorney’s fees and costs.  In other words, the bond released and replaced the property as the liens’ security, and Subs became entitled to foreclose on the bond. This narrow holding makes sense.  If it were otherwise, posting a bond would permit parties to circumvent the mechanic’s lien’s fee-shifting requirements.

But the case contains a potentially broader holding with likely unanticipated consequences. In arriving at its decision, the Court stated “even if [General Contractor] had not posted a bond . . ., the [Subs] still would have been entitled to recover attorney’s fees from [General Contractor] under § 32-28-3-14 . . . .” Id. at 665.  It appears this is a result of the Supreme Court’s adoption of a misstatement of facts from the Court of Appeals’ decision.  The Court of Appeals stated that the Subs named General Contractor in the foreclosure action because General Contractor held an interest in the property.  And the Supreme Court alluded to the same fact in a footnote.  But according to the parties’ briefing the General Contractor held no interest in the property and the Subs’ action against the General Contractor rested on breach of contract rather than mechanic’s lien foreclosure.

The general contractor’s property interest, or lack thereof, is critical because Indiana Code section 32-28-3-1 permits “[a] contractor, a subcontractor . . . [to] have a lien . . . on the interest of the owner of the lot or parcel of land.”  While Indiana courts have interpreted “owner” broadly to include any person or entity holding a legal interest in the property, see Mid America Homes, Inc. v. Horn, 396 N.E.2d 879, 882 (Ind. 1979), General Contractor was not, and could not be, a party to the foreclosure action because it held no interest in the property.  Instead, General Contractor was named in the lawsuit solely for purposes of the breach of contract count.  In the absence of Indiana Code section 32-28-3-11, Subs would be precluded from recovering attorneys’ fees.  Considering the facts of the case as disclosed in the parties’ briefs, the Goodrich decision may indicate that any person or entity can be liable for paying foreclosing plaintiffs’ attorneys’ fees, not just those who hold an interest in the property.

Both subcontractors and general contractors must be mindful of this development when assessing risks, negotiating their contracts, preparing bid packages, and deciding whether to pursue mechanic’s lien foreclosure actions. Goodrich is a win for subcontractors because it provides another potential avenue for fee shifting.  Subcontractors should be mindful of this when reviewing contract remedy provisions.  Though the subcontract may not contain a fee shifting provision, the subcontractor may be able to rely on Goodrich to obtain its fees so long as it names the general contractor in a breach of contract count in its foreclosure action against the property owner.

General contractors must likewise be mindful of Goodrich’s potential reach.  Despite contractual provisions denying fee shifting, general contractors may be obligated to pay subcontractors’ attorneys’ fees when subcontractors file timely mechanic’s liens and name general contractors in the same action for breach of contract.  Perhaps this provides additional motivation for general contractors to ensure that subcontractors are timely paid.  On the other hand, when general contractors have no influence on owners to timely pay the contract price, they will face two choices:  (1) pay subcontractors out of their own pocket to avoid paying attorneys’ fees later; or (2) defend foreclosure actions and seek indemnification from nonpaying owners for exposure to attorneys’ fees.  To best protect themselves, general contractors need to ensure that their contracts with owners include specific indemnification language covering exposure for payment of subcontractors’ attorneys’ fees in foreclosure actions.  Without this protective mechanism in place, general contractors may need to account for the potential for increased exposure to attorneys’ fees in their bid packages.

By: Charles B. Daugherty

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