TIMELY FILE YOUR MILLER ACT PAYMENT BOND LAWSUIT

Posted on January 15, 2016January 15, 2016 by Edward Garber

If you are a subcontractor, sub-subcontractor, or supplier on a federal construction project, please make sure to preserve your Miller Act payment bond rights. This includes filing suit in a federal district court against the payment bond surety. The Eleventh Circuit’s ruling in Thomas v. Burkhardt, 2016 WL 143351 (11^th Cir. 2016) illustrates what can happen if you do not properly pursue your Miller Act payment bond rights.

In Thomas, a subcontractor sued a contractor in state court and recovered a judgment against the contractor. When the subcontractor could not collect on its judgment, it sued the contractor’s Miller Act payment bond surety. The problem was the subcontractor filed its lawsuit many years after the statute of limitations expired on the Miller Act. The subcontractor argued the contractor’s surety should be bound by the state court judgment against the contractor (the principal of the payment bond). The Eleventh Circuit said “No!” The surety was not bound by the state court judgment. Indeed, even if the surety had notice of the subcontractor’s state court suit against the contractor, the Eleventh Circuit still maintained that the surety would not be bound by the state court judgment and would not be estopped from raising the statute of limitations as a defense:

[T]he doctrine of estoppel against the surety rests on the principle that a surety with knowledge of a suit against the principal has a “full opportunity to defend” the suit and to protect its rights. But there is no such equitable principle at work here. The surety cannot protect its rights by joining in the defense of the suit. It cannot intervene as defendant any more than it could be named as defendant in the first place.

Thomas, supra, at *3 quoting U.S. Fid. & Guar. Co. v. Hendry Corp., 391 F.2d 13, 17 (5^th Cir. 1968).

The morale is to timely file your Miller Act payment bond claim against the payment bond surety. There is no reason not to!

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.

A FORUM SELECTION PROVISION IN A SUBCONTRACT CAN BENEFIT A MILLER ACT PAYMENT BOND SURETY

Posted on October 10, 2015October 10, 2015 by Edward Garber

The recent opinion in U.S. ex rel. Galvin Bros., Inc. v. Fidelity and Deposit Co. of Maryland, 2015 WL 5793346 (E.D.N.Y. 2015) illustrates when a forum selection provision in a subcontract can benefit a Miller Act payment bond surety.

The subcontract in this case contained the following forum selection provision:

6.4 Notwithstanding the foregoing, and in consideration of $100 paid to the Subcontractor, the receipt whereof is acknowledged as part of the Subcontract Sum, at the sole option of the Contractor, any controversy, dispute or claim between the Contractor and the Subcontractor related in any way to this Agreement or the Project may be determined by a separate action in court or by a separate arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then pertaining, whichever the Contractor may elect in its sole discretion. The parties expressly agree that the venue of any such court action or arbitration shall be Boston, Massachusetts. Any award rendered by the arbitrator or arbitrators shall be final and judgment may be entered upon it in accordance with the applicable law in any court having jurisdiction.

6.8 The Subcontractor, on behalf of itself and its assignees, sureties and agents, if any, agrees that the dispute resolution procedure in this Article shall inure to the benefit of, and be enforceable by, the Contractor and its sureties or assignees, and that such terms shall be deemed incorporated into any payment, labor and material or other similar bond issued by or for the Subcontractor regarding the Project.

Galvin Bros., supra, at *1.

The bolded language is key as this language is designed to allow the Miller Act payment bond surety to reap the benefit of the forum selection provision in the subcontract. This makes sense since the prime contractor routinely defends and indemnifies its surety.

The subcontractor in this case sued the prime contractor’s Miller Act payment bond surety where the project was located. The Miller Act requires a claimant to sue the surety in the federal district court where the contract is performed. Notwithstanding, the surety moved to dismiss the action or transfer venue to Boston, Massachusetts in accordance with the forum selection provision in the subcontract.

The federal district court dismissed the lawsuit for numerous reasons.

First, the court held that even though the Miller Act requires the lawsuit to be brought in the federal district court where the contract was to be performed, such “venue” can be modified by contract and, particularly, by a forum selection provision.

Second, the language bolded above in the forum selection provision allows the surety to enforce the forum selection provision in the subcontract.

Third, although all witnesses are located outside of Boston and are instead located where the project is located (and it would be more expensive to litigate in Boston), this alone is not enough to render meaningless a forum selection provision in a negotiated subcontract. In other words, the subcontractor cannot demonstrate that it would be deprived of a fair opportunity to litigate its Miller Act payment bond claim in Boston.

And, fourth, because the forum selection provision allows the parties to arbitrate at the sole option of the contractor, transferring venue would not be appropriate since the contractor / surety may elect to arbitrate this dispute. For this reason, the court dismissed the lawsuit. (To me, dismissing this action makes no sense other than to potentially create a statute of limitations argument when the subcontractor elects to re-file the lawsuit in a federal district court in Boston. And, to the extent the surety or prime contractor want to compel arbitration, they can certainly file a motion to compel arbitration pursuant to the forum selection provision once the action is transferred.)

If you are a prime contractor, the bolded language is language that you may consider incorporating into your subcontracts so that your surety can enforce a forum selection provision in the subcontract. And, if you are a subcontractor, be mindful of such a provision when electing where to file a lawsuit such as a Miller Act payment bond lawsuit.

CHARTS AND GRAPHICS SUMMARIZING PAYMENT BOND AND CONSTRUCTION LIEN RIGHTS

Posted on July 1, 2015July 1, 2015 by Edward Garber

As they say, a picture is worth a 1,000 words. How about charts and graphics?

Check out this chart that summarizes preserving and enforcing construction lien and payment bond rights in Florida.

Check out this chart that summarizes Miller Act payment bond rights in comparison to Florida private and public payment bond rights.

Check out this graphic that depicts Miller Act payment bond claimants.

And, finally, check out this graphic that depicts those entities entitled to construction liens and payment bond rights under Florida law.

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

Posted on June 13, 2015June 13, 2015 by Edward Garber

The 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).

CONFLICT BETWEEN A SUBCONTRACTOR’S MILLER ACT PAYMENT BOND CLAIM AND A PRIME CONTRACTOR’S CONTRACT DISPUTES ACT CLAIM

Posted on March 21, 2015March 21, 2015 by Edward Garber

The recent opinion in U.S. f/u/b/o Marenalley Construction, LLC v. Zurich American Insurance Co., 2015 WL 1137053 (E.D.Pa. 2015) is a great example as to what could happen when a prime contractor submits a Contract Disputes Act claim to the federal government that includes subcontractor amounts and then a subcontractor simultaneously pursues the same amounts from the prime contractor’s Miller Act payment bond surety. The question becomes should the subcontractor’s lawsuit against the Miller Act payment surety be dismissed or stayed pending the outcome of the resolution of the prime contractor’s Contract Disputes Act claim. The ruling in this case held that the subcontractor’s Miller Act claim could proceed, and would not be dismissed or stayed, pending the outcome of the prime contractor’s Contract Disputes Act claim. This was a great ruling for the subcontractor and obviously puts the prime contractor in an uncomfortable position, to say the least, since it becomes hard to dispute a subcontractor’s claim when the merits of that claim have been packaged (or passed through) to the federal government in a certified Contract Disputes Act claim.

In this case, both the prime contractor and subcontractor agreed that the United States Department of Veterans Affairs (VA) caused additional work that increased the cost of the work. As a result, the prime contractor submitted a Contract Disputes Act claim to the VA that included claims and amounts from subcontractors. While the prime contractor’s claim was pending with the VA, a subcontractor sued the prime contractor’s Miller Act payment bond surety. This was a subcontractor that also had its claims and amounts packaged (or passed through) to the VA in the prime contractor’s Contract Disputes Act claim.

The prime contractor argued that the subcontractor’s Miller Act payment bond claim should be dismissed or stayed pending the resolution of the Contract Disputes Act claim. In particular, the prime contractor argued that because the subcontract incorporated a dispute resolution clause (that incorporated the requirements of the Contract Disputes Act), the subcontractor was required to exhaust this administrative process before proceeding with a Miller Act payment bond claim.

Dismissal of Miller Act Payment Bond Claim?

The ruling to deny the prime contractor and surety’s motion to dismiss the Miller Act payment bond claim was an easy decision. To begin with, a Miller Act payment bond claim needs to be instituted within a year from the subcontractor’s last furnishing so if the court dismissed the claim it would potentially be depriving the subcontractor of its rights under the law without any certainty as to if the subcontractor re-filed the lawsuit it would be within the statute of limitations or the statute of limitations would otherwise be tolled. And, pursuant to the Miller Act, a subcontractor cannot contractually agree to waive its Miller Act rights before the subcontractor performed any work. A waiver of Miller Act payment bond rights is only enforceable if the waiver is: 1) in writing, 2) signed by the party waiving its payment bond rights, and 3) “executed after the person whose right is waived has furnished labor or material for use in the performance of the contract.” See 40 U.S.C. s. 3133.

Stay of Miller Act Payment Bond Claim?

The real determination was whether the subcontractor’s Miller Act payment bond lawsuit should be stayed until the completion of the prime contractor’s dispute resolution with the VA. The court held No!:

“The Miller Act entitles Marenalley [subcontractor] to bring suit ninety days after the completion of its work…not when and if Nason [prime contractor] recovers from the VA. Conditioning Marenalley’s right to recover from the [Miller Act] Payment Bond on the completion of Nason’s CDA [Contract Disputes Act] process would be inconsistent with the terms of the Miller Act.

***

Nason and Zurich [surety] protest that they will be prejudiced in the absence of a stay due to the costs of dual litigation and the risk of inconsistent decisions. The Court is not overly troubled by these arguments. Ordinarily the fact that a prime contractor has a claim for the same amount pending under the disputes clause of the [incorporated] prime contract, does not affect Miller Act cases.

***

The CDA process will determine the VA’s liability to Nason. The VA, however, has no jurisdiction over the amount that Nason must pay Marenalley and no interest in how that amount is determined. Thus, a stay would subject Marenalley to a substantial, indefinite delay as Nason’s claim passes through the administrative process and court review, only to be left at the end of that process to begin again here to litigate its rights against Nason.”

Marenalley, supra, at *6 (internal citations and quotations omitted).

How Does a Prime Contractor Account for this Risk?

So, based on this ruling, how does a prime contractor account for this business risk? And, this is a business risk because there may be value to a subcontractor to pursue the Miller Act payment bond claim rather than wait an indefinite period of time for the Contract Disputes Act process to resolve itself and then hope that the prime contractor pays the subcontractor the portion of the subcontractor’s claim that was passed through to the federal government.

Well, there is authority that would entitle the prime contractor to a stay of a subcontractor’s Miller Act payment bond lawsuit. But, this authority is predicated on language in the subcontract that any action filed by the subcontractor will be stayed pending the exhaustion of administrative remedies.

For example, in U.S. f/u/b/o Trans Coastal Roofing Co. v. David Boland, Inc., 922 F.Supp. 597, 598 (S.D.Fla. 1996), the subcontract contained the following language:

“[s]ubcontractor shall first pursue and fully exhaust [the procedures set forth in the standard disputes clause of the primary contract] before commencing any other action against Contractor for any claims it may have arising out of its performance of the Work herein.”

***

“[Contractor shall] prosecute all claims submitted by Subcontractor under the contractual remedial procedure of the Prime Contract on behalf of and to the extent required by the Subcontractor.”

***

“[Subcontractor] agree[d] to stay an action or claim against [the prime contractor’s Miller Act bond] pending the complete and final resolution of the Prime Contract’s contractual remedial procedure.”

Because the subcontractor failed to exhaust its administrative remedies, the court dismissed the subcontractor’s Miller Act payment bond claim. Importantly, this case was decided before there were amendments to the Miller Act that now prevents a subcontractor from waiving a Miller Act payment bond claim prior to performing work. Thus, if this case were decided today, the court likely would have stayed the Miller Act payment bond claim instead of dismissing it unless, of course, it was clear that the statute of limitations for pursuing a Miller Act payment bond claim would be tolled pending the exhaustion of the administrative remedies.

Similarly, in U.S. v. Dick/Morganti, 2007 WL 3231717 (N.D.Cal. 2007), the prime contractor and surety moved to stay a subcontractor’s payment bond claim based on the following subcontract language:

“If the Owner [GSA] and the Contractor [Dick/Morganti], pursuant to the General Contract or by agreement, submit any dispute, controversy, or claim between them to arbitration or some other dispute resolution procedure specified in the General Contract and such a matter involves or relates to a dispute, controversy, or claim between the Contractor and the Subcontractor, Subcontractor agrees …to stay any action filed by the Subcontractor until the dispute resolution and appeals process between the Contractor and the Owner is exhausted.”

The prime contractor argued it “intended” to submit a claim to the federal government [GSA] that will include the subcontractor’s amounts and, as such, the provision should operate to stay the subcontractor’s Miller Act payment bond claim. The court agreed provided that the prime contractor did actually submit the claim.

Thus, a prime contractor should absolutely incorporate language in a subcontract consistent with the language in these decisions that reflects that any action filed by the subcontractor, including an action against the prime contractor’s Miller Act payment bond surety, will be stayed pending the complete resolution of any dispute resolution between the prime contractor and federal government that involves or includes the claims and amounts sought by the subcontractor.

And a subcontractor, even if this language is included in the subcontract, should still move forward and timely file any Miller Act payment bond lawsuit.

STAYING MILLER ACT PAYMENT BOND LAWSUIT PENDING ARBITRATION

Posted on March 6, 2015March 6, 2015 by Edward Garber

In a prior posting, I discussed how federal courts have discretion to stay a subcontractor’s lawsuit against a payment bond surety pending an arbitration between the subcontractor and general contractor. This posting did not pertain to a Miller Act payment bond. However, low and behold, this same rationale would apply to a subcontractor’s lawsuit against a Miller Act payment bond.

In U.S. f/u/b/o John Jamar Construction Services v. Travelers Casualty and Surety Co. of America, 2015 WL 757858 (S.D.Tex. 2015), a subcontractor sued the prime contractor’s Miller Act payment bond. The prime contractor countered that the subcontractor materially breached the subcontract causing it to terminate the subcontractor for default.

The subcontract contained an arbitration provision and the prime contractor served an arbitration demand on the prime contractor. The surety was not bound by the arbitration provision (as it was not a party to the subcontract) but moved to stay the Miller Act lawsuit pending the outcome of the arbitration between the prime contrator and subcontractor. The federal district court agreed with the surety and stayed the litigation because the factual and legal issues between the prime contractor and subcontractor substantially overlapped with the subcontractor’s claims against the Miller Act payment bond surety.

Accordingly, if you are a prime contractor and involved in a dispute with a subcontractor where your subcontract contains an arbitration provision–such as in this case where the prime contractor terminated the subcontractor for default–there is little downside in demanding arbitration pursuant to the subcontract. If the subcontractor initiates a Miller Act lawsuit, there is authority that the lawsuit will be stayed pending the outcome of the arbitration.

Conversely, if you are a subcontractor and involved in a dispute with a prime contractor where your subcontract contains an arbitration provision, there is upside in moving forward with the Miller Act lawsuit to ensure the lawsuit is filed within the one-year limitations period. However, if there is concern the prime contractor will move to demand arbitration under the subcontract (as a means to stay the Miller Act litigation), you may want to consider simultaneously moving to demand arbitration against the prime contractor to preserve your status as the claimant (plaintiff) in the arbitration.

THE DIFFICULTY IN RAISING EQUITABLE TOLLING TO JUSTIFY AN UNTIMELY MILLER ACT PAYMENT BOND LAWSUIT

Posted on December 23, 2014December 23, 2014 by Edward Garber

Previously, I discussed the statute of limitations for a Miller Act payment bond claim and the equitable tolling of the limitations based on a claimant’s late filing of a Miller Act payment bond lawsuit.

Another decision came out in U.S. ex rel. Walter Toebe Construction Co. v. The Guarantee Co. of North America, 2014 WL 7211294 (E.D. Mich. 2014), dealing with the exact same subject matter of a claimant raising equitable tolling to overcome filing a Miller Act payment bond lawsuit outside of the statute of limitations. Understanding the statute of limitations for a Miller Act payment bond claim is vital to a claimant’s rights on a federal construction project because the doctrine of equitable tolling (of the statute of limitations) is not designed to simply allow a careless claimant to untimely file a lawsuit.

In this case, a sub-subcontractor was hired to install drilled shafts on a federal project. The sub-subcontractor was owed approximately $500,000 and demanded arbitration with the subcontractor that hired it and the Miller Act payment bond surety. The surety apparently participated in the arbitration hearing and on the last day of the hearing the arbitrators dismissed the surety from the arbitration pursuant to the surety’s motion to dismiss for lack of jurisdiction. The arbitrators then issued an award in favor of the sub-subcontractor against the subcontractor that was confirmed by a Michigan circuit court. The subcontractor failed to pay the judgment and the sub-subcontractor demanded that the Miller Act payment bond surety pay the judgment. The surety (properly) refused stating that the sub-subcontractor failed to file a lawsuit within the one year limitations period set forth in the Miller Act.

The sub-subcontractor then filed a Miller Act payment bond lawsuit in federal court and argued that the statute of limitations to file a Miller Act payment bond lawsuit should be equitably tolled in light of the arbitration proceeding and the surety’s participation in the arbitration (until it was dismissed because there was no jurisdiction to bind the surety to an arbitration award).

A Miller Act payment bond lawsuit must be brought no later than one year after a claimant’s final / last furnishing of labor or materials. Here, it was clear that the lawsuit was filed well outside of the one-year statute of limitations. Appreciating this, the sub-subcontractor argued the statute of limitations should be equitably tolled.

“Equitable tolling allows a federal court to toll a statute of limitations when a litigant’s failure to meet a legally-mandated deadline unavoidably arose from circumstances beyond that litigant’s control.

***

To determine whether equitable tolling is available to a plaintiff, a court considers five factors: (1) the plaintiff’s lack of notice of the filing requirement; (2) the plaintiff’s lack of constructive knowledge of the filing requirement; (3) the plaintiff’s diligence in pursuing her rights; (4) an absence of prejudice to the defendant; and (5) the plaintiff’s reasonableness in remaining ignorant of the particular legal requirement.”

United States ex. rel. Walter Toebe Construction Company, supra, at *3-4 (internal citations and quotations omitted).

Unfortunately for the sub-subcontractor, its failure to file a lawsuit within the one-year limitations period did not fit into any of the equitable tolling factors. The sub-subcontractor did not suggest, nor could it really, that it did not have notice of the statute of limitations to file a Miller Act claim. The sub-subcontractor could not argue that it actively took steps to timely file the lawsuit, because it did not. And, the sub-subcontractor could rely on no law to support its argument that the statute of limitations should be tolled pending an arbitration; and, in fact, there is law that states otherwise.

This case has important considerations:

It is important for a potential Miller Act payment bond claimant on a federal project to know what it needs to do to preserve payment bond rights including the timely filing of a lawsuit no later than one year from its last furnishing of labor or materials.

It is important for a potential Miller Act payment bond claimant to timely file its lawsuit in federal district court to ensure its lawsuit is timely filed. Even if a claimant wants to arbitrate with the party that hired it, it is still imperative that the claimant timely files the lawsuit to preserve its payment bond rights and avoid any argument that the lawsuit was not timely filed.

Equitable tolling is a challenging doctrine, especially in the Miller Act context where claimants have statutory notice of their rights. Claimants certainly do NOT want to be in a position where they are trying to rely on this doctrine to overcome the late filing of a Miller Act payment bond claim because it is more often than not a losing argument.

MILLER ACT AND TIMELY SERVING NOTICE OF NON-PAYMENT WITHIN 90 DAYS OF LAST FURNISHING

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

Federal district courts interpreting the Miller Act provide value to those prime contractors, subcontractors, suppliers, and sub-subcontractors that work on federal construction projects, even if the decisions and projects are outside of Florida.

Remember, the Miller Act requires sub-subcontractors and suppliers in direct contract with a subcontractor but that have no contractual relationship with the prime contractor to serve a notice of non-payment to the prime contractor within 90 days from their last furnishing of labor or materials to the subcontractor. Failure to provide this notice will result in a very strong defense from the prime contractor and surety that the supplier or sub-subcontractor has NO Miller Act payment bond rights. Do not…let me repeat, do not…put yourself in this position if you are a supplier or sub-subcontractor on a federal project. And, if you are a prime contractor or surety defending a Miller Act payment bond claim from a sub-subcontractor or supplier, analyze whether the claimant timely served its notice of non-payment within 90 days from its last furnishing to the subcontractor.

For example, in U.S. ex rel. Sun Coast Contracting Services, LLC v. DQSI, LLC, 2014 WL 5431373 (M.D.La. 2014), a sub-subcontractor initiated a Miller Act payment bond claim. But–and this is a big but–the sub-subcontractor could not dispute the fact that it independently failed to serve a notice of non-payment within 90 days from its last furnishing to the subcontractor that hired it. Instead, the sub-subcontractor argued that a notice of non-payment from the subcontractor to the prime contractor served as its notice since it included amounts the subcontractor owed to it. Yet, the letter that the sub-subcontractor relied on never mentioned the sub-subcontractor or the amount the subcontractor owed to the sub-subcontractor. Therefore, it was easy for the federal district court to conclude that the sub-subcontractor had NO Miller Act payment bond rights:

Beyond SCCS’s [subcontractors] letter, whose content did not even allude to the existence of a claim by Plaintiff [sub-subcontractor], Plaintiff has not put forth any assertion that it communicated its claim to DQSI [prime contractor] within ninety days after the date of Plaintiffs last performance on the project. By failing to provide proper notice according to statutory requirements, Plaintiff has no right to sue Defendants DQSI or Western Surety under the Miller Act.

Sun Coast Contracting Services, LLC, supra, at *4.

While federal courts liberally construe the method of service of the notice of non-payment from the supplier or sub-subcontractor to the prime contractor, it really should never get to this point as it simply gives the prime contractor and surety a legitimate defense to a Miller Act claim. If you are a supplier or sub-subcontractor, do NOT deal with this unnecessary headache. Properly preserve your Miller Act payment bond rights. On the other hand, if you are a prime contractor or surety, you should absolutely explore whether the Miller Act payment bond claimant properly preserved its payment bond rights and, if not, defend the claim based on this failure.

MILLER ACT TIME

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

If you are a subcontractor or a sub-subcontractor / supplier in direct privity of contract with a subcontractor on a federal project, you NEED to know your Miller Act payment bond rights. Why? Because the payment bond is designed to protect YOUR interests as a mechanism to insure non-payment.

Sub-subcontractors and suppliers in direct privity of contract with a subcontractor MUST serve the prime contractor within 90 days of their final furnishing date a notice of non-payment stating “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 [e.g., the subcontractor].” 40 USC 3133(b)(2). Please do not neglect this all-important initial step in preserving a Miller Act payment bond claim. The notice should be served from the final furnishing of labor or materials exclusive of punchlist or warranty / corrective work. (Notably, subcontractors in direct privity of contract with the prime contractor do not need to serve this notice of non-payment on the prime contractor.)

In U.S. f/u/b/o Butler Supply, Inc. v. Power & Data, LLC, 2014 WL 4913421 (E.D.Miss. 2014), a supplier furnished electrical materials to an electrical subcontractor working on a federal project. Due to non-payment, the supplier sued the prime contractor’s Miller Act payment bond. The prime contractor argued that the supplier is not a valid Miller Act payment bond claimant because it did not have a direct contract with the supplier. The federal district court dismissed this argument because the electrical subcontractor signed a credit application and corresponding personal guaranty that served as the basis of a direct contract between the supplier and subcontractor. To this point, the federal district court expressed, “[S]eparate order of materials under an open account or credit basis, typically represented in purchase orders or invoices, satisfy the [Miller] Act’s underlying contract requirement.” Butler Supply, supra, at *3.

Next, the prime contractor argued that the supplier did not timely serve its written notice of non-payment within 90-days of final furnishing because the supplier could not prove that the materials were delivered to the job. The federal district court dismissed this argument too since actual delivery or incorporation of materials into a federal project is immaterial with respect to a supplier’s Miller Act rights. What is material is the “supplier’s good faith belief that the materials were intended for the specified work [project].” Butler Supply, supra, at *4 (internal quotation and citation omitted). In this instance, the supplier submitted invoices showing the material furnished, the price of the material, the name and location of the project, and delivery tickets showing the materials were signed by the subcontractor.

In Butler Supply, the federal district court granted summary judgment in favor of the supplier’s Miller Act claims dismissing the prime contractor’s arguments. Although this ruling it outside of Florida, the same result should be achieved in a Miller Act suit in Florida. The key is to (a) establish a direct contractual relationship with a subcontractor and (b) establish your final furnishing date with documentary evidence (since you can expect the prime contractor to challenge the timeliness of the written notice of non-payment). In Butler Supply, the supplier relied on a credit application (and subsequently submitted invoices), which is a routine document required by suppliers, especially suppliers that furnish material on credit or through an open account. And, the supplier relied on invoices and delivery tickets reflecting its final furnishing date and that it had a good faith belief the materials furnished would be utilized on the project.

MILLER ACT REQUIREMENT FOR SUPPLIER ON AN ONGOING OR OPEN ACCOUNT

Posted on July 1, 2014July 1, 2014 by Edward Garber

Suppliers oftentimes rent or furnish supplies or equipment on credit to a customer (such as a subcontractor) on an ongoing or open account. Under this scenario, the supplier typically has its customer enter into a credit application (ideally, where there is a personal guarantor) and then there may be a sales or rental agreement (or purchase order) documenting the costs of the supplies bought or rented in accordance with the account.

The case of Romona Equipment Rental, Inc. ex rel. U.S. v. Carolina Casualty Ins. Co., 2014 WL 2782200 (9^th Cir. 2014), illustrates an argument raised against a supplier of rental equipment in a federal Miller Act payment bond action when the supplier rented equipment to a subcontractor on an open account. In this case, the subcontractor entered into a credit application with the supplier that established the open account for the subcontractor to rent equipment on a federal construction project. The rental equipment that the subcontractor would utilize would be documented by rental agreements and corresponding invoices. The subcontractor entered into 89 rental agreements with the supplier where the supplier furnished the rental equipment on credit. Around this time, the prime contractor terminated the subcontractor from the project leaving the subcontractor owing the supplier substantial sums of money for the rental equipment.

The supplier served the prime contractor with its notice of nonpayment within 90 days of the last day it furnished rental equipment (as it was required to do under the Miller Act since the supplier was not in privity of contract with the prime contractor). The supplier then filed suit against the prime contractor’s Miller Act payment bond for the unpaid rental charges. The prime contractor and surety argued that the supplier’s notice of nonpayment was untimely as to ALL the rental equipment furnished to the construction project more than 90 days before service of the notice. The prime contractor and surety further argued that the supplier failed to mitigate its damages by continuing to supply equipment despite nonpayment. At trial, the district court held that the supplier’s notice of nonpayment covered ALL rental equipment the supplier furnished to the subcontractor for the project in light of the open book account. The district court further held that the supplier’s duty to mitigate damages occurred 4 days after the subcontractor was terminated and, therefore, the supplier was not entitled to recover for rental equipment after this date.

The main issue on appeal to the Ninth Circuit Court of Appeals was whether the supplier’s notice of nonpayment was timely as to ALL rental equipment furnished on an open book account more than 90 days before the notice. Stated differently, the issue was whether each rental agreement created, in essence, a separate contract with a separate requirement to serve a notice of nonpayment within 90 days from the last date the specific equipment was furnished pursuant to each rental agreement. The Ninth Circuit, relying on precedent from the First, Fourth, and Fifth Circuits, affirmed that: “if all the goods in a series of deliveries by a supplier on an open book account are used on the same government project, the ninety-day notice is timely as to all of the deliveries if it is given within ninety days from the last delivery.” Romona Equipment Rental, supra, at *3. This is a good ruling for suppliers!

Interestingly, while the Ninth Circuit agreed with the district court as to the date when the supplier’s duty to mitigate occurred (4 days after the subcontractor was terminated), there was discussion on this issue. It turned out that the subcontractor originally paid its supplier the first 9 invoices for rental equipment, but then only paid 2 of the remaining invoices. The supplier ceased renting equipment to the subcontractor when it learned that the subcontractor was terminated from the project. Yet, before the subcontractor was actually terminated, the subcontractor and prime contractor were trying to resolve the issues that led to the subcontractor’s termination (not uncommon). Thus, the supplier had a good faith belief that the issues would get resolved and it would get paid. Also, the subcontractor and supplier had a longstanding relationship and the supplier was currently furnishing equipment on another federal project and was being paid by the subcontractor. For these reasons, the Ninth Circuit explained that, “Although Ramona [supplier] failed to alert Candelaria [prime contractor] to Otay’s [subcontractor] delinquency until the seventy-eight invoices from Otay were overdue, this does not render the district court’s conclusion-that Romona had commercially reasonable justifications for choosing not to mitigate its damages prior to June 10, 2008 [4 days after the termination]—illogical.” Romona Equipment Rental, supra, at *4.

This dialogue raises an interesting issue regarding the mitigation of damages defense (or duty to mitigate losses/damages) raised by a prime contractor or surety when a supplier goes unpaid for an extended period of time but continues to furnish supplies or equipment. The point of termination raised an easy line of demarcation as to when the credit for rental equipment needed to be cut off. But, what if the subcontractor was not terminated and the supplier continued to rent equipment despite nonpayment? Even though the supplier typically expects payment net 30 days and does not have a pay-when-paid provision in its rental agreements or purchase orders, it still many times will give its customer (e.g., subcontractor) the appropriate slack while its customer is awaiting payment, especially a longstanding customer, a good customer, or when it has a good faith belief that it will ultimately get paid. Also, as it relates to rental equipment, while the supplier can stop furnishing new rental equipment, it is not that easy simply showing up to a project (let alone a federal project) unannounced and removing equipment being rented on a monthly or daily rate. So, there are definitely commercially reasonable justifications where a supplier will continue to let an account grow when it is not getting timely paid. The key for the supplier to establish that it tried to mitigate its losses is to lay the foundation that it sent communications to its customer and its customer’s customer (such as the prime contractor) regarding the delinquent account and its expectation that the equipment be returned when it becomes apparent (or the supplier is concerned) that it may not get paid (or when it no longer has the good faith belief that it will get paid). In Romona Equipment Rental, although the prime contractor likely knew the subcontractor was renting construction equipment (and was not in a position to pay unless the subcontractor received payment), the prime contractor still argued that the supplier should have notified the prime contractor of the subcontractor’s delinquent account as a means to mitigate damages.

For more information on a supplier’s burden of proof in a Miller Act action, please see: https://floridaconstru.wpengine.com/suppliers-burden-of-proof-in-a-miller-act-payment-bond-claim/.