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January-February Vol. 5, No. 1

Casenotes

Indiana

Mechanic's Liens

Farah, LLC v Architura Corp, 952 NE2d 328 (Ind Ct App, 2011).

Facts: Farah, LLC was a company that operates a jewelry store business under the name Barrington Jewels. In 2003, it purchased a restaurant to renovate into a jewelry store. It hired an architectural firm, Architura Corporation, to prepare designs for the renovation, secure bids for construction, and oversee the construction. The contract stipulated that Farah would pay Architura $40,000 plus $1500 in reimbursable expenses. The contract contained a list of work that was not included in the fee, which included moving an entry sign, interior furniture design, security system design, contactor's permits and major changes to building design after approval of schematic documents.

In April 2003, Architura submitted a renovation plan to Farah but Farah requested several changes to stay within the budget. After the plan was revised, Architura began soliciting bids for construction, but the bids that came in were over Farah's budget. Eventually a deal was worked out with Capitol Construction to complete the project for $747,000. However, to reach this amount, Architura agreed to remove some elements of the design which later had to be added back in at extra cost. Disputes about payment arose between Farah and Architura. In August 2003, Architura filed a mechanic's lien against the property which Farah paid off for $34,000.

In December 2003, Architura filed another lien, which Farah paid off for $50,300. In November 2003, Architura gave Farah a "certificate of substantial completion" which certified that the building was ready for occupancy but there were still issues that needed to be addressed. However, it was discovered by the bank holding funds in escrow for Capitol that Architura had never actually inspected the property before issuing the certificate. The bank conducted its own inspection and released the funds. Subsequently, Architura inspected the premises as well.

In November 2007, Farah sued Architura for breach of contract. Farah alleged that Architura was liable for numerous deficiencies in the renovation project. Architura counterclaimed against Farah seeking to recover an additional $35,300 from fees from the December 2003 mechanics lien, as well as interest and attorney's fees. The trial court held that Architura had breached its contract with Farah and awarded Farah $99,457. But the court also found that Architura was entitled to $26,166 on the mechanics lien as well as $14,129 in interest and $15,000 in attorney's fees. Setting off the amount of the judgment in favor of Architura, Farah ended up winning a net amount of $44,162. Farah then appealed.

Holding: Affirmed in part, reversed in part, remanded. On appeal, Farah alleged that the trial court had awarded excessive damages to Architura on its mechanic's lien, that the court improperly awarded no damages to Farah on its claim that Architura had failed to inspect the renovation project, and that the court had awarded inadequate damages to Farah on its remaining breach of contract claims.

The court of appeals agreed with Farah that the trial court erred in awarding Architura an award of $55,295 (the amount of the lien plus interest and attorneys fees). First, there was a question as to how much could be recovered on the lien. Architura argued that it should be able to collect the "full reasonable amount of the services it provided for the renovation." Farah argued that Architura was only entitled to the amount that the contract provided for. The court held that it is "well-established Indiana law, Architura could seek recovery for a mechanic's lien only to the extent of any balance owed under that contract." Farah had already paid Architura $34,000 of the $41,500 due on the contract. Thus, Architura was only entitled to the remaining $7500. Architura did not attempt to argue that it had done any work outside of the contract that should be compensated for. Therefore, "the trial court erred in awarding Architura anything above $7500 on its mechanic's lien claim." The court also held that Architura was not entitled to attorneys fees. "It is logical," the court stated, "that a contractor whose breaches of contract have resulted in damages that exceed the remaining balance due under the contract should not be allowed to recover attorney fees." The court remanded the case for the trial court to award $7500 on the mechanic's lien, nothing in attorney's fees and to recalculate the interest.

To recover damages for a breach of contract, a plaintiff must show the existence of a contract, that there was a breach of that contract, and that damage was suffered because of the breach. In the present case, the court of appeals found that the last element was missing from Farah's claim that Architura breached the contract by failing to inspect the premises. The bank that was holding funds in escrow and released them to Capitol Construction did not do so because of Architura's "certificate of substantial completion" which was issued without an inspection. Instead, the bank conducted its own inspection and only then released the funds. Thus, Architura's failure to inspect the premises before issuing the certificate did not result in any actual damages. Farah also alleged that Architura breached the contract by failing to regularly inspect the building over the course of the project. The contract, however, clearly stated Architura "will not be required to make exhaustive or continuous on-site inspections to check the quality or quantity of the work." Therefore, it was not a breach for Architura to do regular inspections.

Finally, Farah argued that the amount of damages it was awarded was inadequate. The central dispute over the damages award was over the building's lighting system. Farah brought in an expert witness who said that the entire system needed to be replaced and the ceiling reconfigured. Architura argued that redoing the entire system was unnecessary and repairs could be done to fix the problem for much cheaper. The court of appeals held that the trial court did not err in coming up with the damages because to entirely replace the lighting system would place Farah in a better position than it would have been in if the breach had not occurred. The record showed that the problems with the lighting stemmed from the fact that Farah had made budgetary changes to Architura's original designs. "Architura should not be required," the court said "to replace the entire lighting system with a system that Farah originally was not able to afford." Thus, the original damage award fell within the scope of the evidence and was affirmed.

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