Coplay Cement Co., Inc. v. Willis & Paul Group

• Decision Date: 21 January 1993
• Docket Number: 92-1259 and 92-1284,Nos. 92-1145,s. 92-1145
• Citation: 983 F.2d 1435
• Parties: COPLAY CEMENT COMPANY, INC., Plaintiff-Appellee/Cross-Appellant, v. WILLIS & PAUL GROUP, Defendant-Appellant, and Cresswell Roll Forming, Inc., Defendant-Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1435

983 F.2d 1435

COPLAY CEMENT COMPANY, INC., Plaintiff-Appellee/Cross-Appellant, v. WILLIS & PAUL GROUP, Defendant-Appellant and Cresswell Roll Forming, Inc., Defendant-Appellee/Cross-Appellant.

Nos. 92-1145, 92-1259 and 92-1284.

United States Court of Appeals Seventh Circuit.

Argued Sept. 17, 1992.

Decided Jan. 21, 1993.

Ronald R. Fifer, Stites & Harbison, Jeffersonville, IN, J. Scott Greene, Stites & Harbison, Louisville, KY (argued), Cecile A. Blau, Jeffersonville, IN, for Coplay Cement Co., Inc.

Michael Rosiello (argued), James A. Smith, Barnes & Thornburg, Indianapolis, IN, for Cresswell Roll Forming, Inc.

William P. Donelan (argued), H. Thad White, Jr., Columbia, SC, John W. Doehrman, Jeffersonville, IN, for Willis & Paul Group.

Before POSNER and FLAUM, Circuit Judges, and ZAGEL, District Judge. ^*

POSNER, Circuit Judge.

This diversity suit, though based on an esoteric Indiana statute governing the relations between owners and subcontractors, raises fundamental issues, procedural and contractual, concerning the doctrine of setoff and the distinction between a single contract and multiple contracts. The facts are simple enough. Coplay Cement Company decided to rebuild the electrostatic precipitators at two of its Indiana plants--the plants at Speed and at Logansport. It drew up specs, received bids, and on the basis of the bids issued separate purchase orders for the two jobs, both to Southeast Precip, Inc., at a price of almost $500,000 per job. Southeast turned around and subcontracted the provision of labor on both jobs to the Willis & Paul Group and the provision of materials on both jobs to Cresswell Roll Forming, Inc. The work at Logansport was completed without incident and the electrostatic precipitator there is up and running properly. At Speed, however, Willis & Paul made a mistake in welding steel plates furnished by Cresswell, and as a result Coplay had to hire another firm to rebuild the precipitator for another half million dollars.

Coplay filed this suit for breach of contract against Southeast, naming the two subcontractors as additional defendants. They--not having received full payment for their work at either Speed or Logansport, because Coplay had held back from the amount due Southeast the estimated cost of having the precipitator at Speed re-rebuilt--counterclaimed under what is known as the "personal liability" section of Indiana's mechanics' lien law. Ind.Code § 32-8-3-9. This section provides that upon notice to the owner by a subcontractor (mechanic, materialman, etc.) of the subcontractor's claim against the contractor (confusingly termed "employer"), the owner shall be liable to the subcontractor for that claim up to the amount that the owner owes the contractor. Adding further confusion, the personal-liability section appears in the mechanics' lien chapter of the liens article of the Indiana Code yet does not create a lien, that is, a secured interest; the subcontractors are unsecured creditors of the owner. Barker v. Buell, 35 Ind. 297, 302 (1871); Colter v. Frese, 45 Ind. 96, 99 (1873); Lee & Mayfield, Inc. v. Lykowski House Moving Engineers, Inc., 489 N.E.2d 603, 607-08 (Ind.App.1986); In re Hull, 19 B.R. 501, 506-10 (Bankr.N.D.Ind.1982); see generally John A. Grayson, "Mechanics' and Materialmen's Liens," West's Ann.Ind.Code § 32-8-3 at pp. 17-18 (1979).

Southeast Precip, the contractor, being broke and assetless, defaulted, and Coplay, the owner, abandoned its claims against the subcontractors. The remaining issue concerned the statutory rights of the subcontractors against Coplay. After a bench trial, the district judge held that Cresswell could but Willis & Paul could not assert rights under the statute, and he awarded judgment to Cresswell against Coplay for more than $200,000. All three parties appeal--Coplay challenging the award to Cresswell, on the ground that it (Coplay) is entitled to offset the greater amount that it lost as a result of Southeast's default at Logansport, Willis & Paul challenging the denial of any award to it, Cresswell challenging the judge's refusal to award it prejudgment interest.

The personal-liability law is designed to protect the subcontractor against the consequences of the contractor's absconding or going broke or otherwise defaulting. It does this by allowing the subcontractor, upon proper notice, to collect directly from the owner. It thus differs from a mechanics' lien law, which by creating a secured interest gives a subcontractor priority over the owner's unsecured creditors. O.J. Shoemaker, Inc. v. Board of Trustees, 479 N.E.2d 1349, 1351 (Ind.App.1985). Indiana mechanics' lien law, moreover, does not, at least in so many words, limit the subcontractor's lien to the amount that the owner owes the contractor. Ind.Code §§ 32-8-3-1 et seq. Thus Baldwin Locomotive Works v. Edward Hines Lumber Co., 189 Ind. 189, 125 N.E. 400 (1919), describes the law as conferring upon the mechanic or materialman a direct right against the owner's property rather than a right derivative from the contractor's right against the owner. That is an old case, however. A recent one, although from a lower court, interpolates the limitation--but does so without discussion. Clark's Pork Farms v. Sand Livestock Systems, Inc., 563 N.E.2d 1292, 1298-99 (Ind.App.1990).

We need not pursue the issue. However it be resolved when a mechanics' lien is in question, under the personal-liability section the subcontractor's right is limited to the amount that the owner owes the contractor. The statute says as much--"The owner shall be liable for such claims, but not to exceed the amount which may be due ... from him to the" contractor, Ind.Code § 32-8-3-9, as do the cases interpreting it. Colter v. Frese, supra, 45 Ind. at 104; Pioneer Lumber & Supply Co. v. First-Merchants National Bank, 169 Ind.App. 406, 349 N.E.2d 219 (1976); Blade Corp. v. American Drywall, Inc., 400 N.E.2d 1183, 1186 (Ind.App.1980). The right created by the personal-liability section is strictly a derivative one. But not necessarily a less valuable one. Subcontractors cannot always take advantage of the right to file a mechanics' lien. An owner can contract with the general contractor for a "no lien" clause that will be binding upon subcontractors and other mechanics and materialmen, provided the clause is recorded. Ind.Code § 32-8-3-1. The personal-liability section gives a subcontractor an alternative means to a mechanics' lien of shifting from himself to the owner the burden of the general contractor's financial difficulties.

Given the derivative character of the personal-liability section, however, the critical question, as far as the subcontractors' claims are concerned, is what Coplay owed Southeast on the contract, or perhaps the contracts, of which Cresswell and Willis & Paul were subcontractors. The answer may seem to turn on whether there was one contract or two. If the two purchase orders should be treated as a single contract for the rebuilding of the precipitators at the Speed and Logansport plants, then all Coplay owed Southeast was the purchase price minus the portion held back to cover the damages caused by the screw-up at Speed; and that amount, the net amount owed, fell so far short of the subcontractors' claims that, if Coplay is entitled to deduct its damages, the subcontractors can get nothing. If they were two separate contracts, however, it can be argued that Coplay owed Southeast the full purchase price for the Logansport job, which was completed without incident, and that the subcontractors are entitled to collect the money for the services that they rendered on that job, albeit not on the other one. Oddly, in view of his action in rendering judgment for Cresswell, the district judge ruled that there was a single contract. But he held that it would be inequitable to allow Coplay to hold back payment from Cresswell, whose services on both jobs were flawless and whose service at Logansport conferred an unequivocal, undiluted benefit on Coplay.

We can't follow this reasoning. The statute is clear. The owner is liable to subcontractors only up to the amount that he owes the general contractor. If there was one contract, the hold-back for damages at Speed cut down Coplay's obligation to Southeast, and hence its derivative obligation to Cresswell, no matter how worthy the latter's services.

But what if there was more than one contract? We are not at all certain that this should change the result. The statute makes no reference to the number of contracts between the owner and the contractor, and it is unclear why, in light of the purpose of the statute or other pertinent considerations, the number should make a difference; but the parties agree that it may, so we shall soldier on.

Whether there was one contract or two depends in the first instance on the terms of the contract(s), construed with the aid of Indiana's rules of contractual interpretation, such rules being considered substantive under the Erie doctrine, Cooper Laboratories, Inc. v. International Surplus Lines Ins. Co., 802 F.2d 667, 672 (3d Cir.1986), because, like the parol evidence rule and the Statute of Frauds, they are concerned primarily with "the channeling of behavior outside the courtroom," Barron v. Ford Motor Co., 965 F.2d 195, 199 (7th Cir.1992), rather than with the allocation of responsibilities among judicial decision-makers (trial and appellate judges, and jurors). The rule in Indiana as elsewhere is that if the meaning of a written contract can be inferred from its terms, the judicial inquiry stops there; extrinsic evidence (for example, testimony by the negotiators of the contract concerning their intentions) is inadmissible. First Federal Savings Bank v. Key Markets, Inc., 559 N.E.2d 600, 604 (Ind.1990). This is the "four corners" rule, which is related although not identical to the parol evidence rule. Patton v. Mid-Continent Systems, Inc., 841 F.2d 742, 745 (7th Cir.19...