The extent of lien rights down the chain of subcontractors and suppliers is a perennial question. It can mean big dollars at risk for the potential lien claimant as well as for the owner and general contractor. Which raises the question, who is simply too remote at the margins to have the right to claim a lien? And what happens to the rights of a fabricator when the apparent “subcontractor” ordering that spec material is basically a pass-through?
Mechanic lien rights are purely a creation of statute, but the given state statute may not clearly answer the question. It is a timely question considering the proliferation of pre-fabricated and modular building components.
The Minnesota statute says:
“Whoever . . .. contributes to the improvement of real estate by performing labor, or furnishing skill, material or machinery for any of the purposes hereinafter stated, whether under contract with the owner of such real estate or at the instance of any agent, trustee, contractor or subcontractor of such owner, shall have a lien upon the improvement . . ., Minn. Stat 514.01 [emphasis added]..”
The statute leaves open the question of just who might qualify as the “Whoever.” Clearly, there must be a limitation, or the list of potential claimants would go on indefinitely. Owners and contractors would lose the ability to anticipate and protect themselves against lien claims. This is especially true where early Notice to Owner or to the general contractor is not required. Since the statute does not fully answer the question, we need to look to the case law.
There is a longstanding proposition that a supplier to a supplier of standard materials is too remote. Minnesota has an early example in Ryan Drug C v Rowe, 69 N.W. 468, (Minn. 1896)). But that still leaves a substantial gap in the definition of who might have rights. Not all suppliers of material and equipment are created equal. Not all “subcontractors” have or make the materials they need, and not all perform their work on the project site. In today’s construction environment very substantial sums of money can hang in the balance.
Our examination of the lower limits of lien rights would seem to turn on the definition of a “subcontractor.” The statute gives rights to the one who furnishes materials to a “subcontractor.” That supplier would then be at the bottom of the list with lien rights, but only if its customer is actually judged to be a “subcontractor.”
To define who might qualify as a “subcontractor’ there are two main lines of authority in the cases. The minority rule would require that the subcontractor do work on site. The majority position does not require the work or furnishing to be provided on-site. Minnesota has followed the majority position although there are not many reported cases. An early example is Emery v Hertig 61 N. W. 83,(Minn. 1895)) involving granite columns polished off-site.
The Minnesota statute does not say one way or the other anything about the contribution being on-site so the court would still require something more to distinguish between subcontractors and material suppliers at the margins of the supplier to supplier limitation. For the states which do not require on-site labor, the common focus is whether the potential lien claimant performed some definite and substantial portion of the work or materials called for by the owner’s contract.
A recent decision from the Indiana Court of Appeals gives an example of this issue in application. Service Steel Warehouse Co v United States Steel Corp, Court of Appeals No. 20A-CC-1643, May 3, 2021. General contractor Carbonyx needed a quantity of custom fabricated structural steel trusses and columns for an industrial building. Carbonyx ordered the fabricated steel from Troll. The work required cutting, bending, welding, and riveting of large structures. Troll contracted to provide the fabricated steel but lacked the capacity to fabricate such large structures itself. Troll ordered the necessary steel from supplier Service Steel with direction to ship the steel to Texas Steel for the actual fabrication. Texas Steel then shipped the products back to Carbonyx for installation.
Troll failed to pay Service Steel. Service Steel filed a large lien on the project. Service Steel was clearly a “supplier,” but what is Troll if it outsourced the work? If Troll is just a material supplier to Carbonyx because it outsourced the material and fabrication, then Service Steel is a supplier to a supplier and has no lien. If Troll is a subcontractor because its contract required both material and special fabrication, then Service Steel is a supplier to a subcontractor and does have a lien right. The Indiana Court of Appeals adopted the majority position and decided in favor of Service Steel’s right to a lien.
The Indiana court acknowledged that off-site work is a growing part of the construction industry. That off-site work might involve multiple players as in Steel Service Warehouse. The central inquiry becomes whether the “subcontractor”, of whatever tier, performs a “definite” and “substantial” portion of the work required under the owner’s contract citing the New Mexico case of Vulcraft v Midtown Bus. Park, Ltd, 800 P2d 195, (N.M. 1990):
“To qualify as a subcontractor, the party must perform some portion of the work for which the owner originally contracted. It is not necessary that the work be done at the construction site, but work must be performed to the contractor’s plans and specifications. The work can be performed on material supplied to another subcontractor of the contractor, but the material cannot be generic, stock off-the-shelf items or items generally available without modification—it must be fabricated uniquely or specially by the contractor for the requirements of the particular project.” Vulcraft v Midtown Bus. Park, Ltd, at 200-01.
This analysis is consistent with our Minnesota cases in Illinois Steel Warehouse Co v Hennepin Lumber Co, 182 N.W. 994 (Minn 1921), and Weyerhauser v Twin City Millwork 191 N.W. 2d 401 (Minn 1971) in the context of public work.
As the chain of intermediate “subcontractors” becomes attenuated, the cases become heavily fact-dependent but the “definite and substantial portion” guidance coupled with the remedial purposes of the lien should lead to reasonably predictable results.