RECOVERING SHARED SAVINGS (PROFIT) FROM A MILLER ACT SURETY

Posted on April 30, 2014April 30, 2014 by Edward Garber

Can a Miller Act payment bond claimant (e.g., subcontractor) recover shared savings from the payment bond surety? The opinion in Fisk Electric Company v. Fidelity and Deposit Company of Maryland, 2013 WL 592907 (E.D.La. 2013), answered this question in the affirmative.

In this case, a prime contractor on a federal pump station project entered into a purchase order agreement where its electrical subcontractor would supply a diesel generator for $2,644,005 which was later increased to $2,710,792. The prime contractor did not pay the subcontractor and the Miller Act payment bond surety tendered $2 Million but refused to pay the $710,792 delta. As a result, the subcontractor instituted an action against the payment bond. The surety contended that there was an issue of fact regarding the delta because it included an excessive amount (profit) over and above the actual cost of the generator that was in the form of shared savings. In other words, there was a shared savings incentive if the subcontractor was able to purchase the generator on the open market below a certain amount that was previously quoted to the prime contractor from another entity. The subcontractor was able to do so and this shared savings (profit) was built into the agreed price of the purchase order.

The Eastern District of Louisiana granted the subcontractor’s motion for summary judgment ruling that the subcontractor could recover the shared savings (profit) since “the amount properly recoverable under the Miller Act by a subcontractor is the agreed contract amount without regard to whether the amount may or may not include profits.” Fisk Electric Company, supra, at *4 quoting Price v. H.L. Coble Const. Co., 317 F.2d 312, 318 (5^th Cir. 1963). Indeed, the Ninth Circuit previously found that a subcontractor could recover from a Miller Act surety shared savings pursuant to a shared savings provision in the subcontract that required savings to be divided evenly. Taylor Constr., Inc. v. ABT Serv. Corp., 163 F.3d 1119 (9^th Cir. 1998).

Although the surety argued that summary judgment should not be granted because the subcontractor may have perpetrated a fraud based on its large markup which could have absolved the surety of obligations under the bond, the surety did not have any evidence to support its defense. As the court explained: “The mere fact that the negotiated price included an incentive in the form of shared savings is not, in and of itself, suggestive of anything improper.” Fisk Electric Company, supra, at *6.

Knowing what is recoverable under a Miller Act payment bond will allow a claimant to best present their damages and allow a surety or prime contractor defending the surety to evaluate their defenses to the payment bond claim.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

VENUE FOR MILLER ACT PAYMENT BOND DISPUTE

Posted on April 29, 2014April 29, 2014 by Edward Garber

The venue (or locale of the forum) in which to initiate or transfer a Miller Act (40 USC s. 3131-3134) payment bond dispute is an important consideration. The Miller Act provides that the venue must be “in the United States District Court for any district in which the contract was to be performed and executed, regardless of the amount in controversy.” 40 USC s. 3133(3)(B). However, this venue requirement will not prevent a party from initiating the Miller Act payment bond lawsuit or transferring the lawsuit to a venue governed by a mandatory forum selection provision (one in which provides an exclusive venue for disputes) in the subcontract. See, e.g., U.S. f/u/b/o Pittsburgh Tank & Tower, Inc. v. G&C Enterprises, Inc., 62 F.3d 35 (1^st Cir. 1995) (finding that Miller Act payment bond lawsuit was subject to venue provision in subcontract).

For instance, in U.S. f/u/b/o MDI Services, LLC v. Federal Insurance Company, 2014 WL 1576975 (N.D.Ala. 2014), a subcontractor on a federal project initiated a Miller Act payment bond lawsuit against the surety and the prime contractor in the Northern District of Alabama because that is where the project was located. The surety and prime contractor moved to transfer the venue of the lawsuit to the Middle District of Florida pursuant to a venue provision in the subcontract. The district court explained that “a valid forum-selection clause can trump the Miller Act’s venue provision.” MDI Services, supra, at *2 citing In re Fireman’s Fund Ins. Cos., 588 F.2d 93, 95 (5^th Cir. 1979) (finding that Miller Act venue clause is subject to variation pursuant to the parties’ forum selection clause). The district court, therefore, granted the motion to transfer venue.

If you are a prime contractor, it is a safe idea to include language in the forum selection provision that reflects that it governs any claim against the contractor’s payment bond surety. This way, if the dispute is asserted only against the payment bond surety, the surety (routinely being defended by the prime contractor) can transfer the venue to the mandatory venue per the forum selection provision in the subcontract. On the other hand, if you are a subcontractor and the venue is silent as it relates to claims regarding the payment bond surety, perhaps you only want to assert the payment bond claim against the surety (and not the prime contractor) to, at a minimum, create the argument that the surety should not be able to transfer the venue based on a forum selection provision that should not govern the surety.

AVOID SPOLIATION OF EVIDENCE – THE IMPORTANCE OF STRONG DOCUMENT MANAGEMENT FOR ELECTRONIC INFORMATION

Posted on April 20, 2014April 20, 2014 by Edward Garber

Lawyers that handle construction disputes understand the importance of project documentation and document management in prosecuting or defending a claim. Although there is still project documentation that is maintained in hard copy, the way entities now do business and transmit documentation is electronically. This includes sending e-mails including e-mails with attachments, uploading documentation on web-based sharing platforms, generating documentation electronically, and organizing and storing that documentation on a server in an organized paperless format. This is how many entities, especially those on fairly sophisticated construction projects, conduct business because it increases the speed in which information is shared and the efficiency in generating, storing, and transmitting information. Yet, although it increases the efficiency of that entity during construction, it becomes a source of consternation when a dispute arises and a party needs to preserve and produce that electronically stored documentation.

When a party learns of a potential dispute that party has a duty to preserve its documentation. Not doing so can lead to the imposition of discovery sanctions associated with what is known as the “spoliation of evidence.” The types of sanctions can cumulatively range from monetary sanctions; the striking of a party’s claim or defenses; the prevention of that party from introducing certain evidence that was not produced; or, importantly, an adverse inference jury instruction. This jury instruction basically allows the jury (for purposes of jury trials) to infer that the spoiled evidence would have been unfavorable to the spoiler which is why that party spoiled the evidence. Spoliation sanctions are imposed by courts to prevent the spoiler from reaping an unfair advantage in the dispute and to deter this type of conduct from taking place. See In re Electric Machinery Enterprises, Inc. v. Hunt Construction Group, Inc., 416 B.R. 801, 873 (M.D.Bkrtcy.Fla. 2009) (discussing spoliation of evidence under Florida law).

The Fourth District Court of Appeal in Florida explained spoliation as follows:

Spoliation is ‘[t]he intentional destruction, mutilation, alteration, or concealment of evidence [.]’ Black’s Law Dictionary 1437 (8th ed.2004). In cases involving negligent spoliation, courts prefer to utilize adverse evidentiary inferences and adverse presumptions during trial to address the lack of evidence. In cases involving intentional spoliation, courts more often strike pleadings or enter default judgments . Golden Yachts, Inc. v. Hall, 920 So.2d 777, 780 (Fla. 4^th DCA 2006) (trial court could give adverse inference jury instruction due to spoliation of a boat cradle). See also American Hospitality Management Co. of Minnesota v. Hettiger, 904 So.2d 547, 550-51 (Fla. 4^th DCA 2005) (“In circumstances where the lost evidence was under the sole control of the party against whom the evidence might have been used to effect, and where the lost evidence is in fact critical to prove the other party’s claim, an adverse inference instruction may be necessary to achieve justice in the jury’s determination of the case.”); Simon Property Group, Inc. v. Lauria, 2012 WL 6859404,*8 (M.D.Fla. 2012) (“Under Florida law, the remedy for a party failing to produce crucial but unfavorable evidence that it destroyed is an adverse inference or discovery sanctions up to and including entry of a default judgment.”)

Now, before a Florida court issues any sanction for spoliation of evidence, it needs to answer three fundamental questions: (1) whether the evidence ever existed, (2) whether there was a duty to preserve that evidence, and (3) whether the evidence was critical to the opposing party providing its affirmative claim or a defense. Golden Yachts, 920 So.2d at 781. While the first question is easy to establish and answer, the second and third questions are not. An entity should have a duty to preserve evidence where that party could reasonably have foreseen a claim. See American Hospitality Management Co., 904 So.2d 547; accord Osmulski v. Oldsmar Fine Wine, Inc., 93 So.3d 389 (Fla. 2d DCA 2012). However, there is strong caselaw in Florida that supports that the lawsuit (and discovery request) triggers the duty to preserve evidence (unless that duty specifically arose prior to the lawsuit from a statute or a contract). See Royal & Sunalliance v. Lauderdale Marine Center, 877 So.2d 843 (Fla. 4^th DCA 2004).

The Middle District’s opinion in In re Electric Machinery Enterprises contains an insightful discussion about spoliation of evidence in a construction dispute. In this matter, it was undisputed that the general contractor destroyed relevant documentation prior to its electrical subcontractor filing suit and that the Court found this destruction intentional. The subcontractor argued that the general contractor had a duty to preserve evidence when it had notice of impending litigation. The subcontractor wanted an adverse inference jury instruction. The Court, however, found that even though the destruction of relevant documentation was intentional, there was nothing to establish that the documentation was critical to the subcontractor’s claims considering the subcontractor produced substantial evidence to support its claim that general contractor breached the subcontract. Hence, irrespective of whether there was any duty to preserve the documentation, the spoiled documentation was not critical or material to the subcontractor’s burden of proof to support its claim. If this documentation was deemed critical, the Court likely would have treated the spoliation of evidence differently.

It is imperative that parties involved in a dispute, or are aware of impending litigation, take active efforts to preserve relevant documentation, specifically documentation stored electronically. Not doing so could lead to cumulative discovery sanctions including the harsh sanctions of an adverse inference jury instruction or the striking of claims or defenses, especially if the documentation is destroyed or lost after litigation commenced. Spoliation of evidence is still an evolving aspect of the law that is being more defined as electronic discovery and disputes involving electronic discovery become the norm. Strong document management protocols are a vital aspect of construction to ensure not only projects are running efficiently, but also that claims and defenses to claims are likewise being handled efficiently.

For more information on document management, please see: https://floridaconstru.wpengine.com/consultants-corner-five-tips-for-better-construction-project-documentation/.

MILLER ACT PAYMENT BOND AND THIRD TIER SUBS OR SUPPLIERS

Posted on April 18, 2014April 18, 2014 by Edward Garber

Subcontractors and suppliers working on federal projects need to understand their recourse in the event they remain unpaid–the Miller Act payment bond (40 USC s. 3131 – 3134). Prime contractors, likewise, need to know how far down stream their Miller Act payment bond applies. In other words, if a subcontractor hires a sub-subcontractor or supplier, does the Miller Act payment secure nonpayment to the sub-subcontractor or supplier? YES! What about a sub-sub-subcontractor or supplier (third tier entities) to a sub-subcontractor? NO!

Simply put, the Miller Act payment bond is not designed to protect third tier or more remote entities. The Miller Act provides in relevant part:

(2) Person having direct contractual relationship with a subcontractor.–A person having a direct contractual relationship with a subcontractor but no contractual relationship, express or implied, with the contractor furnishing the payment bond may bring a civil action on the payment bond on giving written notice to the contractor within 90 days from the date on which the person did or performed the last of the labor or furnished or supplied the last of the material for which the claim is made. The action must state with substantial accuracy the amount claimed and the name of the party to whom the material was furnished or supplied or for whom the labor was done or performed. 40 USC s. 3133(b)(2).

A third tier subcontractor, by way of example, that does not have a direct relationship with a subcontractor (engaged by the prime contractor) does not have recourse against the Miller Act payment bond. See J.W. Bateson Co. v. United States ex rel. Board of Trustees of National Automatic Sprinkler Industry Pension Fund, 434 U.S. 586 (1978) (explaining that congress knew the difference between subcontractor and sub-subcontractor when drafting statute so those remote parties not in privity with the subcontractor have no recourse against the bond).

The recent decision in U.S. f/u/b/o M&M Insulation, Inc. v. International Fidelity Ins. Co., 2014 WL 1386452 (W.D.Okla. 2014), illustrates that the Miller Act payment bond does not provide protection to a sub-sub-subcontractor (third tier subcontractor).

In this case, the following contractual relationship is important:

Owner = United States

Prime = Nationview/Bhate Joint Venture III (joint venture entity)

Subcontractor = Bhate Environmental Associates (entity that was part of joint venture prime)

Sub-subcontractor =Jennings Service Company

Sub-sub-subcontractor = M&M Insulation (claimant- third tier subcontractor)

The claimant, M&M Insulation, argued that it is really a second tier subcontractor (sub-subcontractor) that has rights under the Miller Act bond because the prime contractor and subcontractor Bhate Environmental Associates (“Bhate”) were in reality one-in-the-same and should be treated as a single entity. To support this, the claimant argued that (i) there was not a written subcontract between the prime contractor and Bhate; (ii) Bhate identified itself as the prime contractor in its subcontract with Jennings Service Company (second tier subcontractor); (iii) Bhate shared the same office as the prime contractor; and (iv) Bhate was not listed as a subcontractor in the government’s records (probably because the joint venture never identified Bhate as a subcontractor in its proposal/bid). In other words, the claimant argued that the prime contractor was a sham entity controlled by Bhate and, thus, they should be regarded as a unitary contractor which would make Jennings Service Company the subcontractor and M&M a sub-subcontractor protected under the Miller Act.

Unfortunately for the claimant, the Western District of Oklahoma did not buy the argument. The Court was not going to simply disregard corporate formalities because the joint venture subcontracted a portion of the work to one of the entities that made up the joint venture. The joint venture was the prime contractor and there is nothing in the record that was sham about the fact that the joint venture hired Bhate as a subcontractor even though there was not a written agreement memorializing the subcontract. Although the Court was willing to give the claimant an opportunity to provide additional documentation to support its theory that the prime contractor was a sham entity, the Court’s ruling reflects the unlikely scenario of the claimant actually proving this relationship.

Based on the Court’s ruling, the claimant’s recourse was against the sub-subcontractor that engaged it in a breach of contract action. If the sub-subcontractor had pay-if-paid language in the subcontract, then this could pose an issue for the claimant. The key is to know the recourse for nonpayment before undertaking work. For instance, if you know you are a third tier entity that does not have recourse against the Miller Act payment bond, perhaps you need to negotiate the contract with that in mind (removing pay-if-paid language or negotiate other language and accept certain risks).

APPLICATION OF CLAIMS MADE PROFESSIONAL LIABILITY POLICIES

Posted on April 12, 2014April 12, 2014 by Edward Garber

General liability policies (CGL) are occurrence based policies meaning an “occurrence” within the policy period triggers insurance coverage even if the claim is reported outside the policy period. (For more information on an occurrence within a CGL policy, please see https://floridaconstru.wpengine.com/insurance-risk-assessment-occurrence-duties-to-defendindemnify-coblentz-agreement/).

Professional liability policies (also known as errors and omissions policies), on the other hand, are routinely “claims made” policies, not occurrence based policies, meaning a “claim” for a wrongful act must be reported to the insurer within the policy period to trigger coverage.

There are claims made policies that have extended reporting (referred to as tail coverage) periods that allow the policy to still be triggered even if the claim is reported outside the policy’s period but within the extended reporting period. The insured may have to purchase this feature for additional premium in its claims made policy, but it is an important feature to protect the insured from gaps in coverage when a policy is not renewed, replaced with another policy, and/or cancelled. The reason is that if a policy is not renewed and replaced, the new carrier often advances the retroactive date to the start date of the new policy. Well, without an extended reporting period from the prior carrier, this means the insured may not have coverage for claims that are submitted to the new carrier due to a wrongful act prior to the retroactive date.

Claims made policies oftentimes contain a “retroactive date,” as mentioned above, that negates coverage for claims (wrongful acts) that took place prior to a specified date. Again, the retroactive date is often the start of the policy period. For instance, let’s say a professional liability claims made policy was written from April 1, 2014 through April 1, 2015 (the policy period). It may contain the April 1, 2014 as the retroactive date meaning that claims brought within the policy period but are the result of a wrongful act pre-April 1, 2014 would not be covered under the policy. This is why the extended reporting period / tail coverage becomes important!

Professional liability policies need to be reviewed because there are variations in policies and it is important to know what triggers a claim and when notice of a claim / potential wrongful act should be reported to the insurer.

An example of a professional liability claims made policy and its complicated application is discussed in Gidney v. Axis Surplus Insurance Co., 39 Fla. L. Weekly D741a (Fla. 3d DCA 2014). In this case, a mortgage brokerage firm arranged for privately funded mortgages through private investors. The firm was sued by a sole investor that claimed the firm negligently brokered and serviced the mortgages. The firm notified its professional liability carrier of the complaint (claim) within the policy period. Subsequently, a class action on behalf of all investors was filed against the firm. The professional liability insurer, in response to the complaint, filed a declaratory judgment action asking the court to declare there was no coverage under the policy for the class action since it was reported outside the policy period. The trial court issued the declaration in favor of the professional liability insurer and the investors appealed.

Of importance to understanding claims made policies, the Third District Court of Appeal analyzed importation provisions in the professional liability policy that are common to claims made policies although the language in the policies may be different. The Court first looked at the “claims first made” provision which discusses when the insurance will apply:

This insurance applies when a written Claim is first made against any Insured during the Policy Period. To be covered, the Claim must also arise from a Wrongful Act committed during the Policy Period.

The Company will consider a Claim to be first made against an Insured when a written Claim is first received by any Insured.

Next, the Court looked at the “related claims” provision that allowed related claims to relate back to the original notice of the claim (so that related claims reported outside the policy period would still be covered since they relate back to the timely reported claim). The related claims provision in the subject policy was to:

(a) to allow insurers to confine related wrongful acts to a single policy period and, thereby, a single liability limit, and

(b) to allow an insured to buy a new policy, despite facing additional liability exposure from its past acts, by having future related claims covered by the prior policy.

The Court then looked at the “reported wrongful acts” provision that allowed coverage if a written claim was submitted after the policy period but related to a wrongful act committed between the policy’s retroactive date and end of policy period and the insurer had notice during the policy period from the insured of the wrongful act. This provision is why providing the insurer notice of a potential wrongful act / claim that took place within the policy period is important. The reported wrongful acts provision provided:

This policy will apply to a written Claim first made against any Insured after the end of the Policy Period, but only if all of the following conditions are met:

(1) The Wrongful Act giving rise to the Claim is committed between the Retroactive Date and the end of the Policy Period;

(2) The Company receives written notice from the Insured during the Policy Period of the Wrongful Act. The notice must include all of the following information:

(a) The names of those persons or organizations involved in the Wrongful Act;

(b) The specific person or organization likely to make the Claim;

(c) A description of the time, place and nature of the Wrongful Act; and

1. A description of the potential Damages[.]

Lastly, the Court looked at the “multiple claims” provision that read:

All Claims arising from the same Wrongful Act will be deemed to have been made on the earlier of the following times:

(1) The date the first of those Claims is made against any Insured; or

(2) The first date the Company receives the Insured’s written notice of the Wrongful Act.

In reviewing this multiple claims provision, the Third District expressed: “[T]he Multiple Claims provision does not require that the insured anticipate the subsequent related claim or provide a description of the estimated damages that might result from any subsequent claim. Instead, in language crucial to this case, the policy states that all wrongful acts ‘related by common facts, circumstances, transactions, events and/or decisions . . . will be treated as one Wrongful Act.’” Based on this language, the Third District held that the class claim related back to the original investor’s claim which was within the policy period since it related to common circumstances, facts, events, and transactions; hence, there was coverage under the claims made policy.

As you can see, insurance policies are complicated and understanding all of the provisions is not an easy feat. It is important to work with your insurance broker and counsel, whether dealing with a claims made professional liability policy or occurrence based general liability policy, to preserve rights under policies and properly notify carriers of potential claims.

OH NO! A LIEN IS RECORDED! WHAT ARE SOME OF MY OPTIONS?

Posted on April 11, 2014April 11, 2014 by Edward Garber

You are an owner and a construction lien is recorded on your property. Or, you are a general contractor required to indemnify the owner for construction liens and a subcontractor you are in a dispute with records a construction lien (or one of the subcontractor’s suppliers or subcontractors records a lien). What are your options (other than paying the lienor in consideration of a satisfaction of lien) to extinguish the lien or transfer that lien to another form of security other than the real property?

(1) Notice of Contest of Lien – This is an efficient, cost effective strategy that I oftentimes prefer to use to truly determine whether a lienor (entity that recorded lien) actually intends on foreclosing on the lien. Recording a Notice of Contest of Lien pursuant to Florida Statute s. 713.22 shortens the statute of limitations to foreclose on the lien to 60 days after service of the Notice; if the lienor neglects to do so, the lien is extinguished. (A construction lien is otherwise good for one year from its recording.) Section 713.22 provides that an owner or an owner’s attorney can record a Notice of Contest of Lien in the official records (same official records where the lien is recorded). The Notice is a statutory form (see form below). Once it is recorded, the clerk serves it on the lienor at the address in the lien putting the lienor on notice that it must foreclose within 60 days. Notably, because the statute says an owner or owner’s attorney should record this, if representing the general contractor, I typically suggest that the general contractor get the owner to sign the Notice (or, get the owner’s permission that it is acceptable for the general contractor to sign as a representative for purposes of the Notice).

(2) Filing a Lawsuit to Show Cause – Another approach to shorten a lienor’s statute of limitation to foreclose on the lien is to file a complaint pursuant to Florida Statute s. 713.21 where the clerk issues a special summons “to the lienor to show cause within 20 days why his or her lien should not be enforced by action or vacated and canceled of record.” Fla. Stat. s. 713.21. Any interested party can file this lawsuit and the lawsuit is typically accompanied with a fraudulent lien claim against the lienor. When a lienor receives this lawsuit, it MUST foreclose on its lien within 20 days from service or else its lien should be discharged by the court. However, this requires drafting of the lawsuit and the special show cause summons, filing the lawsuit, and serving the lawsuit, so it certainly is not as cost effective as the first option. Also, sometimes, by the time the lawsuit is drafted, filed, and served, the 20 day show cause period would be pretty close to the expiration of the 60 days if the Notice of Contest of Lien was recorded. Every situation is different and there are circumstances where filing this lawsuit is a more attractive option than recording the Notice of Contest of Lien.

(3) Transferring the Lien to Alternative Security such as a Lien Transfer Bond – Sometimes, an owner needs the lien off of its property immediately and wants the lien transferred from the real property to alternative security such as a lien transfer bond. This is done pursuant to Florida Statute s. 713.24 where cash or a surety bond is posted with the court “in an amount equal to the amount demanded in such claim of lien, plus interest thereon at the legal rate for 3 years, plus $1,000 or 25 percent of the amount demanded in the claim of lien, whichever is greater, to apply on any attorney’s fees and court costs that may be taxed in any proceeding to enforce said lien.” Fla.Stat. s. 713.24. Typically, no one wants to post and tie up cash in the amount of the lien, plus 3 years of interest, plus another 25% of that lien amount to cover potential fees/costs. And, obtaining a surety bond is not always easy without posting collateral or cash to the surety, etc., so that the surety’s risk in posting the bond in the event the lienor prevails is mitigated. Now, a lien can be transferred to a lien transfer bond at any time including during the pendency of a lawsuit. For example, let’s say you elect option (1) or (2) above and the lienor does timely foreclose on the lien; the option of transferring the lien is still available. The major difference is that if a lien foreclosure lawsuit is underway and the lien transferred to a bond (or cash), the lienor has one year from the date of the transfer to amend its lawsuit to assert a claim against the bond. If the lien is transferred before the lien foreclosure lawsuit, then the one year to foreclose on the lien from the date the lien is recorded still applies.

An attorney should be consulted to assist you to determine the best option and strategy for you if a lien is recorded based on your circumstances.

NOTICE OF CONTEST OF LIEN

To: (Name and address of lienor)

You are notified that the undersigned contests the claim of lien filed by you on ___, (year) , and recorded in ___ Book ___, Page ___, of the public records of ___ County, Florida, and that the time within which you may file suit to enforce your lien is limited to 60 days from the date of service of this notice. This ___ day of ___, (year) .

Signed: (Owner or Attorney)