A MILLER ACT ASIDE: WHAT HAPPENS TO A THIRD TIER ENTITY IF A SUBCONTRACTOR FILES FOR BANKRUPTCY

Unknown-1The opinion in J&B Boat Rental, LLC v. Jag Construction Services, Inc., 2015 WL 237604 (E.D.La. 2015) provides interesting analysis as to a third tier supplier’s Miller Act claim.  In this case, a subcontractor entered into an oral contract with a supplier to provide self-propelled vessels (tugs) to move barges.  Of course, because it was an oral contract, a dispute arose as to the rental rate for the vessels.  The supplier served its notice of non-payment and filed a Miller Act payment bond lawsuit against the Miller Act payment bond surety, prime contractor, and asserted a breach of contract action against the subcontractor that hired it.   The supplier was seeking approximately $66,000 in principal.

 

During the course of the lawsuit, the subcontractor filed for bankruptcy and the case was stayed.  The supplier filed a proof of claim in the subcontractor’s bankruptcy that was objected to by the subcontractor.  An evidentiary hearing was held in the bankruptcy court where the supplier was held to have an oral contract with the subcontractor and owed approximately $44,000 in principal. Of this amount, the supplier was only paid approximately $3,000 from the subcontractor’s bankruptcy estate.

 

The supplier then moved to lift the stay in its lawsuit to pursue only its Miller Act payment bond lawsuit against the payment bond surety and prime contractor.  The supplier was seeking the $41,000 balance in rental costs for the vessels it was not paid based on the rental value of the vessels determined by the bankruptcy court.  The supplier moved for summary judgment and the prime contractor and surety moved for a cross-motion for summary judgment. 

 

The surety and prime contractor contended that the supplier should not be able to pursue the Miller Act claim because the supplier’s claim was barred (by the doctrine of claim preclusion) because it received a ruling in the bankruptcy court and was partially paid on the claim.  The trial court dismissed this argument because what the supplier recovered in the bankruptcy proceeding (under a breach of contract theory) had no bearing in the supplier’s Miller Act lawsuit against the surety and prime contractor (other than, perhaps, any amounts the supplier received would offset any recovery against the surety and prime contractor). 

 

The surety and prime contractor further contended that they should not be bound by the bankruptcy court’s holding that an oral contract existed between the supplier and subcontractor and the liquidated $44,000 amount of the contract.  The court agreed because the prime contractor and surety were not parties to the bankruptcy proceeding and did not have the opportunity to litigate these issues. For this reason, the court denied the supplier’s summary judgment.

 

What does this mean?  This means that the supplier is not capped by the $44,000 amount of its contract determined by the bankruptcy court and could proceed in its Miller Act action based on its original $66,000 amount.  So, while the supplier lost the summary judgment, by doing so, it could technically proceed with more damages than it anticipated.  Sounds like a win! As it pertains to the surety and prime contractor, not only did they give the supplier an argument to potentially recover more damages, but how are they going to defend against the supplier’s claim?  The supplier furnished vessels that were utilized by the subcontractor in the subcontractor’s performance of the work.  The supplier clearly has unreimbursed rental costs.  So, without knowing any other defenses the surety and prime contractor may have, it is uncertain the value they get by trying to relitigate certain issues decided by the bankruptcy court.  Again, that could benefit the supplier.

 

ASIDE ON THE MILLER ACT

 

As an aside, the trial court provided a good discussion as to a claimant’s Miller Act payment bond rights, which is definitely worthy of reiteration:

 

Under the Miller Act, a contractor that is awarded a contract of more than $100,000 for the construction, alteration, or repair of any public work of the United States must provide a payment bond to the government for the protection of all persons supplying labor or materials in the prosecution of the contract work. It was enacted to protect parties such as subcontractors or suppliers who work on federal projects as state-law liens cannot be applied against federally-owned property and traditional state-law remedies are unavailable. The Miller Act is highly remedial in nature and is entitled to a liberal construction and application in order properly to effectuate the Congressional intent to protect those whose labor and materials go into public projects.

 

 

***

The elements of a Miller Act claim are: (1) the plaintiff supplied materials in prosecution of the work provided for in the contract; (2) the plaintiff has not been paid; (3) the plaintiff had a good faith belief that the materials were intended for the specified work; and (4) the plaintiff meets the jurisdictional requisites of timely notice and filing.

 

 

***

Under the Miller Act, a subcontractor can sue on the payment bond by bringing a direct action against the surety without joining the contractor as a party defendant.

 

 

***

The Miller act provides a federal cause of action for which the scope of the remedy as well as the substance of the rights created thereby is a matter of federal not state law. The liability of a Miller Act surety is controlled by federal law because determination of the extent of the liability involves the construction of a federal statute, the Miller Act, under which it was created.

J&B Boat Rental, LLC, supra, at *3, 4 (internal quotations and citations omitted).

 

 

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.

 

Spread the love
Posted in Miller Act, payment bond and tagged , , , , .