GOOD-TO-KNOW POINTS REGARDING (I) MILLER ACT PAYMENT BONDS AND (II) PAYMENT BOND SURETY COMPELLING ARBITRATION

Every now and then I come across an opinion that addresses good-to-know legal issues as a corollary of strategic litigation decisions that are questionable and/or creative.  An opinion out of the United States District Court of New Mexico, Rock Roofing, LLC v. Travelers Casualty and Surety Company of America, 2019 WL 4418918 (D. New Mexico 2019), is such an opinion.

In Rock Roofing, an owner hired a contractor to construct apartments. The contractor furnished a payment bond.  The contractor, in the performance of its work, hired a roofing subcontractor.  A dispute arose under the subcontract and the roofer recorded a construction lien against the project. The contractor, per New Mexico law, obtained a bond to release the roofer’s construction lien from the project (real property).  The roofer then filed a lawsuit in federal court against the payment bond surety claiming it is entitled to: (1)  collect on the contractor’s Miller Act payment bond (?!?) and (2) foreclose its construction lien against the lien release bond furnished per New Mexico law.

Count I – Miller Act Payment Bond

Claiming the payment bond issued by the contractor is a Miller Act payment bond is a head scratcher. This claim was dismissed with prejudice upon the surety’s motion to dismiss. This was an easy call.

A Miller Act payment bond is a bond a prime contractor gives to the United States (US) for a public project. Here, the contractor entered into a contract with a private developer for a private apartment project. There was nothing to suggest that the private developer was, in fact, the US government or an agent of the US government.  There was also nothing to suggest that the apartment project was, in fact, a public project.  The roofer alleged that it believed the US Department of Housing and Urban Development provided funding for the project. The Court found this allegation as a big so-what: “The Court finds this allegation insufficient to demonstrate either the payment bond was furnished to the [US] Government as required by the [Miller Act], or that the apartment complex was a public building or public work as required by the [Miller Act].” Rock Roofing, LLC, 2019 WL at *3.

Count II – Foreclosure of Construction Lien Against Lien Release Bond

The surety moved to compel the roofer’s foreclosure claim against the lien release bond to arbitration pursuant to the contractor’s subcontract with the roofer.  The roofer countered that arbitration was inappropriate since the surety was not a party to the subcontract.

The Court (relying on a Florida district court opinion I was intimately involved with) found that the doctrine of equitable estoppel applied to compel the roofer to arbitration because the roofer’s claim for payment was based on its subcontract that contains the arbitration provision. “Because [the roofer’s] claim on the payment bond depends on its subcontract with [the contractor], the arbitration clause in the subcontract must precede [the roofer’s] right to bring suit as provided by the payment bond.Rock Roofing LLC at *7.

 

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 WHEN PROJECT IS OUTSIDE OF US

The proper venue for a Miller Act payment bond claim is “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 U.S.C. s. 3133(b)(3)(B).

Well, there are a number of federal construction projects that take place outside of the United States.  For these projects, where is the correct venue to sue a Miller Act payment bond if there is no US District Court where the project is located?  A recent opinion out of the Southern District of Florida answers this question.

In U.S. ex. rel. Salt Energy, LLC v. Lexon Ins. Co., 2019 WL 3842290 (S.D.Fla. 2019), a prime contractor was hired by the government to design and construct a solar power system for the US Embassy’s parking garage in Burkina Faso.  The prime contractor hired a subcontractor to perform a portion of its scope of work.

The subcontractor remained unpaid in excess of $500,000 and instituted a Miller Act payment bond claim against the payment bond surety in the Southern District of Florida, Miami division.  The surety moved to transfer venue to the Eastern District of Virginia arguing that the Southern District of Florida was an improper venue.  The court agreed and transferred venue.  Why?

Initially, because the project is outside of the US, the subcontractor could NOT sue the surety where the project is located.  Under the Miller Act, the venue provision was enacted for the benefit of the prime contractor and surety and, therefore, “the final site of the government project is dispositive of the [venue] matter.”  US ex. rel. Salt Energy, LLC, 2019 WL at *4 (rejecting the subcontractor’s argument that venue for a Miller Act payment bond claim can be at a venue independent of jobsite activities.)

Therefore, to determine the appropriate venue provision (as the venue set forth under the Miller Act would be inapplicable to a project outside of the US), the Court had to look at general venue standards governing federal courts.  The Court adopted the general venue provision in 28 U.S.C. s. 1391 finding that appropriate venue would be “wherever any defendant resides or wherever a substantial part of the events or omissions giving rise to the claim occurred.” U.S. ex. rel. Salt Energy, LLC, 2019 WL at *4.

The surety resided in Tennessee.  However, the surety did not attempt to transfer the case to an applicable District Court in Tennessee, but instead, moved to transfer to the Eastern District of Virginia. The surety argued, and the Court agreed, that the Eastern District of Virginia is appropriate because this is where the government executed the prime contract, where the awarding agency is located, where invoices were sent, and where the prime contractor submitted deliverables.  The subcontractor countered that a substantial portion of its work occurred in the Southern District of Florida where it is located, making the Southern District of Florida an appropriate venue.  Unfortunately for the subcontractor, the Court was not buying this argument because the activities the subcontractor claimed it performed in the Southern District of Florida were in relation to its subcontract, not the prime contract, and were largely administrative or ministerial in nature – substantial performance did not occur in the Southern District of Florida.

The surety would have been able to transfer venue to the appropriate district court in Tennessee (where it resided) or Virginia (where a substantial part of the events giving rise to the claim at issue took place).

The subcontractor’s argument to keep venue in the Southern District of Florida was a worthy argument. However, the Court perceived many of the activities the subcontractor performed in the Southern District (coordinating, billing, phone calls, etc.) were not a substantial part of the events giving rise to the claim.  The Court was more focused on activities in relation to the prime contract, and because the prime contract and awarding agency were in the Eastern District of Virginia, that was a more appropriate venue.

Venue is an important consideration in any dispute, including a Miller Act payment bond dispute when a foreign project is involved and the venue provision in the Miller Act does not apply.

 

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.

QUICK NOTE: 4 ELEMENTS OF MILLER ACT PAYMENT BOND CLAIM

 

 

A subcontractor on a federal construction project must prove the following four elements in a Miller Act payment bond claim:

 

1. The subcontractor supplied labor and/or material per its subcontract;

 

2. The subcontractor is unpaid for the labor and/or material supplied per its subcontract;

 

3. The subcontractor had a good faith belief that the labor and/or material supplied was for purposes of the project (and the prime contractor’s contractual scope of work for the project); and

 

4. The subcontractor satisfied jurisdictional requirements in bringing the Miller Act payment bond lawsuit.

 

Notably, the  subcontractor’s performance will be determined in reference to the subcontract. This includes reference to the scope of work and the payment terms contained in the subcontract. 

 

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.

 

“LABOR” THAT CAN BE PURSUED AGAINST A MILLER ACT PAYMENT BOND

It is important to ensure you consult with counsel when it comes to Miller Act payment bond rights and defenses.  One consideration is the type of “labor” that can be pursued against a Miller Act payment bond.  The opinion in Prime Mechanical Service, Inc. v. Federal Solutions Groups, Inc., 2018 WL 6199930 (N.D.Cal. 2018) contains a relevant and important discussion on this topic.

 

In this case, a prime contractor on a federal construction project hired a subcontractor to prepare and install a new HVAC system.  The subcontractor was not paid and filed a lawsuit against the prime contractor’s Miller Act payment bond.   The prime contractor moved to dismiss the claim, with one argument being that design work the subcontractor was suing for was NOT “labor” that can be pursued against a Miller Act payment bond.  The Court agreed:

 

As used in the Miller Act, the term “labor” primarily encompasses services involving “manual labor,” see United States ex rel. Shannon v. Fed. Ins. Co., 251 Fed. Appx. 269, 272 (5th Cir. 2007), or “physical toil,” see United States ex rel. Barber-Colman Co. v. United States Fid. & Guar. Co., No. 93-1665, 1994 WL 108502, at *3 (4th Cir. 1994). Although “work by a professional, such as an architect or engineer” generally does not constitute “labor” within the meaning of the Miller Act, see United States ex rel. Naberhaus-Burke, Inc. v. Butt & Head, Inc., 535 F. Supp. 1155, 1158 (S.D. Ohio 1982), some courts have found “certain professional supervisory work is covered by the Miller Act, namely, skilled professional work which involves actual superintending, supervision, or inspection at the job site see United States ex rel. Olson v. W.H. Cates Constr. Co., 972 F.2d 987, 990-92 (8th Cir. 1992) (internal quotation and citation omitted) (citing, as examples, “architect … who actually superintends the work as it is being done” and “project manager … [who] did some physical labor at the job site” (internal quotation and citation omitted)).

 

Here, plaintiff alleges it “attended 4 or 5 on-site field meetings … to determine the location and layout of the new equipment, … performed on-site field coordination with the existing equipment, … took on-site field measurements for fabrication of duct work and support hangers, … scheduled the start date and while on-site planned site access and crane locations, prepared product and equipment submittals, and obtained security passes.” (See FAC ¶ 12.) The above-listed services are, however, “clerical or administrative tasks which, even if performed at the job site, do not involve the physical toil or manual work necessary to bring them within the scope of the Miller Act.” See United States ex rel. Constructors, Inc. v. Gulf. Ins. Co., 313 F. Supp. 2d 593, 597 (E.D. Va. 2004) (holding subcontractor did not furnish “ ‘labor’ within the contemplation of the Miller Act” where subcontractor’s duties entailed paying invoices, reviewing subcontractor and vendor proposals, supervising the hiring of site personnel, and providing site coordination services). Although taking “on-site field measurements” (see FAC ¶ 12) may have involved some minor physical activity, it does not amount to the physical “toil” required by the Miller Act.

 

Prime Mechanical Service, 2018 WL 6199930, at *3.

 

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.

 

PROVIDING “LABOR” UNDER THE MILLER ACT

shutterstock_611517449A recent opinion out of the Northern District of California discusses the “labor” required to support a Miller Act payment bond claim on a federal construction project.   It is a good case that discusses the type of labor required  to support a Miller Act payment bond claim.

 

In Prime Mechanical Service, Inc. v. Federal Solutions Group, Inc., 2018 WL 619930 (N.D.Cal. 2018), a prime contractor was awarded a contract to design and install a new HVAC system.  The prime contractor subcontracted the work to a mechanical contractor. The mechanical contractor with its sub-designer prepared and submitted a new HVAC design to the prime contractor and provided 4-5 onsite services to determine the location and layout for the new HVAC equipment, perform field measurements, obtain security passes, and plan site access and crane locations.  The mechanical contractor submitted an invoice to the prime contractor and the invoice remained unpaid for more than 90 days, which the prime contractor refused to pay.  The mechanical contractor than filed a Miller Act payment bond lawsuit.

 

The prime contractor and surety argued that the mechanical contractor had no valid Miller Act payment bond claim because it was seeking professional services and not the labor covered by the Miller Act.   The trial court agreed. 

 

As used in the Miller Act, the term “labor” primarily encompasses services involving “manual labor,” or “physical toil.”  Although “work by a professional, such as an architect or engineer” generally does not constitute “labor” within the meaning of the Miller Act, some courts have found “certain professional supervisory work is covered by the Miller Act, namely, skilled professional work which involves actual superintending, supervision, or inspection at the job site.”

 

Prime Mechanical Service, Inc., 2018 WL at *3 (internal citations omitted). 

 

The mechanical contractor attempted to argue that it was onsite and the onsite services it performed should constitute “labor.”   However, the onsite services the mechanical contractor identified were clerical or administrative-type services which did NOT involve “the physical toil or manual work necessary to bring them within the scope of the Miller Act.”  Prime Contractor Mechanical Service, Inc., 2018 WL at *3.  

 

In this case, the mechanical contractor gave it a worthy go to support a Miller Act payment bond claim. But, because the services it performed did not rise up the type of “labor” covered by the Miller Act, it was out of luck.   Had these services been coupled with actual  manual labor at the site connected to the installation of the new HVAC system, the result would have been much different since the mechanical contractor would have performed “labor” covered by the Miller Act. 

 

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.

REPAIRING ONE’S OWN WORK AND THE ONE YEAR STATUTE OF LIMITATIONS TO SUE A MILLER ACT PAYMENT BOND

shutterstock_516982177When it comes to Miller Act payment bond claims, repairing one’s own work does NOT extend the one year statute of limitations to file suit on a Miler Act payment bondBelonger Corp., Inc. v. BW Contracting Services, Inc., 2018 WL 704379, *3 (E.D. Wisconsin 2018) (“The courts that have considered this question tend to agree that, once a subcontractor completes its work under the subcontract, repairs or corrections to that work do not fall within the meaning of ‘labor’ or ‘materials’ and, as such, do not extend the Miller Act’s one-year statute of limitations.”).

 

Well, what if the subcontractor was repairing its own work due to an issue caused by another subcontractor? 

 

This was the situation in Belonger Corp. where a plumber was asked to unclog a plumbing line that had concrete in the line (caused by another subcontractor)  months after the plumber had completed its contractual scope of work.  Before the subcontractor did this work, it smartly sent an e-mail stating that it needs an e-mail acknowledgement that this additional work is authorized and a change order will be forthcoming.  The contractor responded, “Yes, please proceed with repair work on a T&M [time and materials] basis….”   Sure enough, the subcontractor unclogged the line and a change order was never issued.

 

The subcontractor filed a Miller Act payment bond claim for unpaid contract work plus change order work, such as unclogging the line.  The subcontractor based its last day for purposes of the statute of limitations on the work associated with unclogging the line and not on the day it completed its contractual scope of work.  If it was determined that the subcontractor’s last day / final furnishing date was when it fully completed its contractual scope of work, its Miller Act payment bond lawsuit would be untimely / barred by the one year statute of limitations to sue on a Miller Act payment bond.  

 

The issue was whether the subcontractor’s remedial work to its own plumbing line extended its final furnishing date.  The trial court found this to be a question of fact because this arguably was change order work that amended the subcontract to include this additional work.  The fact that the subcontractor sent an e-mail before doing this work and the fact that the contractor responded helped the subcontractor create a question of fact that its payment bond claim was not untimely because unclogging its own plumbing line due to an issue caused by another trade subcontractor was additional subcontractual work that extended its final furnishing date.

 

If you are in this situation, the best bet is not to bank on this type of argument.  File your Miller Act payment bond claim within one-year of finishing your contractual work.  With that said, if you don’t, the argument raised by the subcontractor here that repairing its own work due to an issue caused by another subcontractor was additional work that modified the terms of the subcontract and extended its final furnishing date is a creative argument helped by the e-mail this subcontractor smartly sent.

 

For more information on the Miller Act, check out this ebook.

 

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.

SUBCONTRACTOR’S MILLER ACT PAYMENT BOND CLAIM

 

shutterstock_426148276Since I wrote my ebook on the application of federal Miller Act payment bonds, I have not discussed a case applying the Miller Act.  Until now!

 

Below is a case that reinforces two important points applicable to Miller Act payment bond claims.  First, the case reinforces what a claimant needs to prove to establish a Miller Act payment bond claim.  Very important.  Second, the case reinforces that a subcontractor is going to be governed by its subcontract. This means that those provisions regarding payment and scope of work are very important.  Not that you did not already know this, but ignoring contractual requirements will not fly.

 

In U.S.A. f/u/b/o Netplanner Systems, Inc. v. GSC Construction, Inc., 2017 WL 3594261 (E.D.N.C. 2017), a prime contractor hired a subcontractor to run cabling and wiring at Fort Bragg.  The subcontractor claimed it was owed a balance and filed a lawsuit against the general contractor the Miller Act payment bond.

 

“A plaintiff must prove four elements to collect under the Miller Act: (1) labor or materials were supplied for work in the contract; (2) the supplier of that labor or materials is unpaid; (3) the supplier had a good faith belief that the labor or materials were for the specified work; and (4) jurisdictional requisites are met.”   U.S.A. f/u/b/o Netplanner Systems, Inc., supra, at *5. 

 

The prime contractor claimed that the subcontractor was not owed any balance since it violated terms of the subcontract regarding its timely performance.  Per the subcontract, the subcontractor agreed that it would perform and complete its work in accordance with the schedule approved by the federal government and that final payment will be made when the subcontractor fully performed in accordance with the requirements of the Contract Documents.

 

In this case, the trial court determined there were questions of fact involving whether the subcontractor complied with the terms of the subcontract.  But, in doing so, the trial court confirmed, again, what we already know — that the subcontractor’s performance will be determined in reference to its underlying subcontract.

 

 

‘Whether a subcontractor has been paid in full for providing labor and materials must be determined by reference to the underlying subcontract as it relates to the scope of the work and the payment terms.’”  U.S.A. f/u/b/o Netplanner Systems, Inc., supra, at *5 quoting U.S. ex rel. Acoustical Concepts, Inc. v. Travelers Cas. and Sur. Co. of Am., 635 F.Supp.2d 434, 438 (E.D. Va. 2009).

 

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.

 

EBOOK: MILLER ACT PAYMENT BOND FUNDAMENTALS

41j9kWWd95L._AC_US436_QL65_I finally did it!  I wrote an ebook on the fundamentals of Miller Act payment bonds.  A nuts and bolts approach focusing on the practical application of Miller Act payment bonds.  It is currently on Amazon, Nook, and iTunes.  If you are interested in Miller Act payment bonds, check it out.  

 

 

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.

MILLER ACT AND “PUBLIC WORK OF THE FEDERAL GOVERNMENT”

UnknownThe Miller Act applies to the “construction, alteration, or repair of any public building or public work of the Federal Government.”  40 U.S.C. s. 3131.   

 

A recent opinion out of the Northern District of Oklahoma sheds light on what the Miller Act means regarding its application to any public work of the Federal Government.    See U.S. v. Bronze Oak, LLC, 2017 WL 190099 (N.D.Ok. 2017).   If the project is not a public works project of the Federal Government, the Miller Act does not apply.

 

In this case, the Department of Transportation entered into an agreement with the Cherokee Nation where the Department would provide lump sum funding and the Nation would use the money to fund transportation projects.   Based on the federal funding, the Nation issued a bid for a transportation project in Mayes County, Oklahoma and the project was awarded to a prime contractor.  The prime contractor provided a payment bond that identified the United States as the obligee (as a Miller Act payment is required to do) and stated that it was issued per the Miller Act.    Thereafter, the Nation and Mayes County, Oklahoma entered into a Memorandum of Understanding where the County would assume responsibility for the construction and maintenance of the project and the Nation would pay the County an agreed amount upon the completion of the project.

 

A subcontractor filed suit claiming the prime contractor owed it money for work performed on the project.  One of the counts asserted was against the payment bond – the subcontractor claimed it was a Miller Act payment bond.  The prime contractor and payment bond surety moved to dismiss the lawsuit arguing that the payment bond is not a Miller Act payment bond, thus, the federal court has no jurisdiction to entertain the lawsuit.  How could this be?  The payment bond itself said it was issued per the Miller Act and identified the United States as the obligee as a Miller Act payment bond is required to do.

 

The underlying issue the Court examined was whether the project was a public works project of the Federal Government.  Again, if it was not, the Miller Act did not apply.  The Court explained:

 

Whether plaintiff may bring a suit under the Miller Act depends on whether the project is a “public work of the Federal Government.” The statute itself gives no guidance in interpreting the phrase. While there is no clear definition or test for classifying a project a “public work of the Federal Government,” courts often look to the following factors: “whether the United States is a contracting party, an obligee to the bond, an initiator or ultimate operator of the project; whether the work is done on property belonging to the United States; or whether the bonds are issued under the Miller Act.” Here, on the one hand, the United States is not a contracting party or an initiator or ultimate operator of the project, and the work was not done on federal land. On the other hand, the United States is obligee of the payment bond, and the bond was issued under the Miller Act. Additionally, the Nation funded the project with money it received from the federal government…and the DOT retained some control over the project by requiring semi-annual reports on, and occasional access to for inspections….

Bronze Oak, LLC, supra, at *2 (internal citations omitted).

 

To the dismay of the subcontractor-claimant, the Court held that the payment bond was NOT a Miller Act payment bond irrespective of what the bond actually said.  This meant that the Court had no jurisdiction to entertain the lawsuit (as there was no other basis that would give the federal court subject matter jurisdiction).  Although the Federal Government had a relationship with the project through its federal funding, that relationship was not strong enough to label the project as a public works project of the Federal Government.

 

The United States is the obligee of the payment bond, but even with federal funding of the project, this is not enough to bring the project under the Miller Act. The project is owned and maintained by the County and is not on federal land. The Nation initiated the project, and the federal government is not a contracting party. Finally, agreements among the contracting parties that federal law will apply does not transform a project that does not fall under the Miller Act into one that does.

Bronze Oak, LLC, supra, at *4. 

  

This was a tough ruling because if the subcontractor filed suit in state court the prime contractor and surety likely would have moved to dismiss that suit at some point in time arguing that the state court had no jurisdiction to entertain a Miller Act payment bond claim.  So, this situation appeared to be a lose-lose to the subcontractor that relied on the terms of the bond in pursuing the bond as a Miller Act payment bond.   

 

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.