By: Scott P. Fisher
Representative Jerry Torr has again offered a bill that seeks to streamline the discharge of a mechanic’s lien in place of a bond. Currently, to be bonded off, a general contractor or owner (or other party) must file an action in court to get the alternative security (i.e. the bond) approved in form and amount before the owner’s property is essentially released from the lien and that lien is then transferred to (and secured by) the bond. House Bill 1021 permits a person to discharge a mechanic’s lien by filing an indemnification, payment, or cash bond with the recorder’s office of the county in which the real property is located. The bond must be in an amount equal to at least 150% of the lien or $7,500, whichever is greater. If an indemnification bond or payment bond is used, the applicable surety must be authorized to do business in Indiana and be rated at least “A-“ by a nationally recognized rating service. Upon the filing of the bond, the lien and owner’s liability are discharged 30 days thereafter. In short, it happens automatically rather than requiring a court action and intervention/order. The bill does provide a mechanism to allow the adequacy of the bond (and presumably the surety) to be challenged in court.
Whether this is “good” for someone in the construction industry depends on their relative position in construction projects (i.e., owner, general contractor, subcontractor or supplier). For owners and GCs, when a lien gets recorded, it applies a great deal of pressure on the upstream contractor to resolve it because the owner oftentimes will withhold money from the GC/prime until the lien is bonded off or released. The lien also can apply significant pressure on the owner with its lender/financing, which can lead to a quick resolution of the lien. Under HB 1021, by allowing the GC or prime to immediately bond off the lien without court intervention, it effectively keeps the owner/lender at bay and may prevent the owner from choking off the cash flow, which then allows the GC to continue to address the lien claim on its own accord/time.
For the sub/supplier lien claimant, the new system would mean the loss of some very real economic leverage over the GC/prime in terms of timing. However, at the end of the day, the claimant retains its lien rights (including the right to recover attorney fees, etc.) against the bond – but it becomes easier to remove the owner from the equation. In the case of owner insolvency, the bond-off likely puts the claimant in a better position with better security (the bond).
While HB 1021 really just streamlines an existing remedy, a major development with this bill is that the Personal Liability Notice (PLN ) remedy can also be bonded off with the same lien release bond. Under the lien statute, a claimant can issue a PLN to the owner separate and distinct from the lien for the same claim amounts (or for other amounts that they may not have lien rights for due to say timeliness, etc.). The PLN is not recorded and basically tells the owner that if they pay out the contract proceeds to the GC without accounting for the sub’s claim, then the owner may be personally/directly liable to the sub. The PLN remedy effectively locks up the GC’s contract monies to provide economic leverage for addressing the sub’s claim. By allowing the PLN to be bonded off with the lien, based upon just the lien amount (regardless of the fact that they are separate and independent statutory claim rights), gives the GC a 2 for 1 impact and further weakens the subs’ leverage.
HB 1021 was passed out of committee on January 28, 2020 and
is on Second reading in the House.