QUICK NOTE: SUIT AGAINST MILLER ACT PAYMENT BOND MAY NOT BE BROUGHT UNTIL 90 DAYS AFTER FINAL FURNISHING

 

imagesIf you have a claim against a Miller act payment bond, a lawsuit cannot be brought until 90 days after your final furnishing date.  This is set forth in 40 USC s. 3133(b)(1) that provides if you “have not been paid in full within 90 days after the day on which…[you]…performed the last of the labor or furnished or supplied the material for which the claim is made [you] may bring a civil action on the payment bond.”   In other words, your claim is ripe 90 days after your final furnishing date.  With that said, even if you prematurely filed suit before this 90-day period, there is authority that the lawsuit should not be dismissed, but rather, you can cure this by filing a supplemental pleading (relating back to the original pleading).  Otherwise, if the lawsuit was dismissed, you could potentially be facing a statute of limitations argument barring your right to seek a Miller Act 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.

 

DO NOT EXECUTE A WAIVER AND RELEASE IN CONSIDERATION OF PAYMENT THAT RELEASES CLAIMS YOU ARE NOT PREPARED TO RELEASE

imagesAbsolutely do NOT execute a waiver and release in consideration of a progress payment that waives and releases claims (such as change order requests, lost productivity, or delay) that you are not prepared to release through the date of the release.  Carve out such exceptions from the release—identify those claims or rights you are not prepared to release.  Otherwise, when you go to pursue such claims, the waiver and release you previously executed will come back to haunt you!

 

For example, in U.S. f/u/b/o Chasney and Company, Inc. v. Hartford Accident & Indemnity Co., 2016 WL 852730 D.Md. 2016), a prime contractor on a federal project subcontracted with a mechanical and plumbing subcontractor.  The subcontractor’s last partial waiver and release it executed in consideration of a progress payment was in November 2013 for payment through October 31, 2013. The waiver and release provided that the subcontractor waived and released all liens, claims, and demands against the prime contractor or its surety in connection with the project through the period covered by the payment (through October 31, 2013).  The waiver and release included space for the subcontractor to identify exceptions. No such exceptions were identified.  In fact, prior to November 2013, the subcontractor executed a total of 24 progress waivers and releases and never excepted a single item or claim from the release. 

 

Notwithstanding, the subcontractor encountered design defects that caused it to incur additional costs and delayed its performance.  The subcontractor asserted pass-through claims that the prime contractor submitted to the federal government.  However, when the prime contractor and government settled their issues and a global settlement was reached, no amounts were assigned to respective items such as the subcontractor’s pass-through claims. The subcontractor then asserted the Miller Act payment bond lawsuit against the prime contractor’s Miller Act payment bond surety.

 

Applicable here, the surety and prime moved for summary judgment that any damages, including delay-related damages, that the subcontractor sought through October 31, 2013 were waived and released through the subcontractor’s November 2013 progress waiver and release.  The District Court of Maryland agreed since all it had to look to was the last waiver and release the subcontractor executed where it waived and released such rights:

 

By executing the October 31 Partial Release without exempting its claim, Chasney [subcontractor] relinquished its right to pursue the claim should it ever ripen. In hindsight, Chasney may regret its decision to sign such a release—but the Court’s task is to examine the agreement the parties did sign, not the agreement that one or the other now wishes they had negotiated instead….

***

In summary, the Court’s analysis begins and ends—as it must—with the unambiguous language of the Partial Releases. By signing each release, Chasney waived all claims relating to work performed through the covered period: no reasonable factfinder could conclude otherwise. While Chasney’s opposition brief teems with subtle linguistic maneuvers (and more than a few red herrings), Chasney cannot avoid the plain consequences of its contracting through artful argument….”

 

U.S. f/u/b/o Chasney & Company, 2016 WL at *7, 9 (internal quotations omitted).

 

Do NOT let this happen to you.  Preserve your rights and claims and do NOT waive and release claims you are NOT prepared to release!

 

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.

 

 

TIMELY FILE YOUR MILLER ACT PAYMENT BOND LAWSUIT

imagesIf 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 (11th 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 (5th 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.

 

WHAT TO DO IF THE PAYMENT BOND IS NOT RECORDED WITH THE NOTICE OF COMMENCEMENT

UnknownThere is an unconditional payment bond for the project but it was not recorded with the Notice of Commencement.  Now there are subcontractor construction liens recorded against the property.  What do I do?  I thought the point of the payment bond was to exempt the real property from subcontractor and supplier liens.

 

No need to worry!  Liens can be transferred to the payment bond even though the payment bond was not recorded with the Notice of Commencement.

 

The payment bond operates to “secure every lien under the direct contract accruing subsequent to its execution and delivery.”  Fla.Stat. s. 713.23(2).  Even though the payment bond was not recorded with the Notice of Commencement as required, the owner or contractor can record a Notice of Bond with a copy of the payment bond that will operate to transfer the lien to the security of the payment bond. 

 

To this point, Florida Statute s. 713.13(1)(e) states in relevant part:

 

[I]f a payment bond under s. 713.23 exists but was not attached at the time of recordation of the notice of commencement, the bond may be used to transfer any recorded lien of a lienor except that of the contractor by the recordation and service of a notice of bond pursuant to s. 713.23(2). The notice requirements of s. 713.23 apply to any claim against the bond; however, the time limits for serving any required notices shall, at the option of the lienor, be calculated from the dates specified in s. 713.23 or the date the notice of bond is served on the lienor.

 

Stated differently, just because the payment bond was not recorded with the Notice of Commencement does not mean the payment bond is worthless.  Rather, it can still be used to transfer construction liens to the security of the bond. 

 

Further, if discovered early enough, and within the effective period of the Notice of Commencement,  an Amended Notice of Commencement can be recorded which attaches a copy of the payment bond.  The Amended Notice of Commencement needs to be served by the owner “upon the contractor and each lienor who serves notice before or within 30 days after the date the amended notice is recorded.”  Fla.Stat. s. 713.13(5)(b). But, the Amended Notice of Commencement can be used to clarify the omission of the payment bond in the original Notice of Commencement.

 

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.

 

CONDITIONAL PAYMENT BONDS AND TRANSFERRING A LIEN TO THAT BOND

imagesThere are two types of statutory payment bonds that can be furnished on private construction projects in Florida: (1) unconditional payment bonds issued pursuant to Florida Statute s. 713.23 and (2) conditional payment bonds issued pursuant to Florida Statute s. 713.245.

 

With an unconditional payment bond, an owner’s real property is exempt from construction liens from subcontractors and suppliers.

 

However, with a conditional payment bond, an owner’s real property is not exempt from construction liens from subcontractors and suppliers.  The conditional payment bond operates to condition claims against the bond to the extent the general contractor (principal of the bond) received payment from the owner.  If the general contractor did not receive payment from the owner, then the conditional payment bond does not apply.  If the general contractor did receive payment from the owner, then the conditional payment bond can operate to transfer the lien to the security of the conditional payment bond.

 

Because a lienor realistically has no way of knowing whether the general contractor was paid for their work, they are required to timely perfect their lien rights under Florida law.  This means serving a Notice to Owner and recording a construction lien within 90 days of final furnishing. 

 

Conditional payment bonds are fairly confusing so let’s use hypotheticals to explain.

 

Hypothetical #1:   Owner pays contractor for painting scope of work.  Painter timely served a Notice to Owner and recorded its lien for $75,000. 

 

The objective here would be to transfer the painter’s lien to the conditional payment bond since the contractor has been paid for this work. Under this scenario, the owner or the contractor can record within 90 days from the recording of the lien a Certificate of Payment to the Contractor certifying that the contractor has been paid $75,000 (full lien amount) for the work described in the lien.   The Certificate of Payment to the Contractor would be recorded with a Notice of Bond attaching a copy of the conditional payment bond.

 

If the contractor records the Certificate of Payment to the Contractor (together with the Notice of Bond), then the lien will be transferred to the conditional payment bond to the extent of the payment identified. 

 

If the owner records the Certificate of Payment to the Contractor (together with the Notice of Bond), the contractor can do three things: (1) record a Joinder in Certificate of Payment agreeing with the Certificate of Payment to the Contractor recorded by the owner, (2) record a Notice of Contest of Payment stating that the contractor has only been paid “x” amount of the lien; or (3) do nothing.   If the contractor does nothing or records a joinder in the Certificate of Payment, the lien will be transferred to the bond.  If the contractor records a Notice of Contest of Payment, the “contested” portion will remain a lien against the real property and any uncontested amount will be transferred to the conditional payment bond.

 

Hypothetical #2:  Owner paid contractor $50,000 but painter’s lien is $75,000.  Owner records Certificate of Payment to the Contractor for $75,000.

 

Under this scenario, the contractor may want to record a Notice of Contest of Payment within 90 days from the lien certifying it has only been paid $50,000.  If the contractor does this, the painter will have a $25,000 lien claim (the contested amount) and a $50,000 claim transferred to the conditional payment bond (the uncontested amount) since this amount would be transferred to the bond.

 

Hypothetical #3: Owner paid contractor for the painter’s scope and the painter liened.  Neither the contractor nor the owner recorded a Certificate of Payment to the Contractor together with a Notice of Bond within 90 days from the lien.

 

Under this scenario, the painter’s lien has not been transferred to the conditional payment bond even though the owner paid the contractor for the painting scope of work.   But, the lien can still be transferred to the security of the conditional payment bond even after 90 days and even after the painter files a lien foreclosure lawsuit.  The same procedure will still need to be followed with the recording of a Certificate of Payment to the Contractor together with the Notice of Bond. The difference is that the Notice of Bond must be jointly signed by the owner, the contractor, and the surety for the lien to be transferred to the bond.  See Fla.Stat. 713.245(4) (“Any notice of bond recorded more than 90 days after the recording of the claim of lien shall have no force or effect as to that lien unless the owner, the contractor and the surety all sign the notice of bond.”).

 

As you can see, conditional payment bonds can be procedurally confusing.  The key for a lienor is that it still must perfect its lien rights and record and pursue its construction lien.  The key for the owner and the contractor is that there are steps in place to transfer the lien or a portion of that lien (based on what the contractor has been paid) to the security of the conditional 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.

 

 

 

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

imagesThe 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.

 

 

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.

 

CHARTS AND GRAPHICS SUMMARIZING PAYMENT BOND AND CONSTRUCTION LIEN RIGHTS

 

imagesAs 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.

 

 

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 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.

 

ATTORNEY’S FEES AGAINST COMMON LAW PAYMENT BONDS

imagesOn sophisticated construction projects (federal, Florida public, or Florida private projects), it is not uncommon for a prime (general) contractor to require that certain subcontractors furnish the prime contractor a payment bond.  When the subcontractor furnishes the prime contractor a payment bond, this bond is a common law bond because it is not a bond furnished in accordance with a statutory requirement.  Unlike a statutory payment bond (whether furnished per the Miller Act, Florida Statute s. 255.05, Florida Statute s. 713.23, or Florida Statute s. 337.18) there are no statutory prerequisites in order for a claimant to preserve rights under the common law payment bond.

 

For instance, if the subcontractor that furnished a payment bond has an unpaid subcontractor or supplier, these entities can pursue claims directly against the subcontractor’s payment bond instead of the prime contractor’s (statutory) payment bond. Thus, if the subcontractor’s unpaid subcontractors or suppliers failed to preserve their rights against the prime contractor’s (statutory) payment bond, they can still pursue rights against the subcontractor’s common law payment bond.

 

In USA f/u/b/o Vulcan Materials v. Volpe Const., 622 F.2d 880 (5th Cir. 1980), an earthwork subcontractor furnished a payment bond on a federal project (where the prime contractor would have furnished a Miller Act payment bond).  The subcontractor had an unpaid supplier of fill.  Amongst other claims, the supplier sued the earthworks subcontractor’s payment bond.  The Fifth Circuit found that not only was this payment bond a common law bond, but the supplier (bond claimant) was entitled to attorney’s fees pursuant to Florida Statute s. 627.756.

 

Florida Statute s. 627.756 provides:

 

(1) Section 627.428 (entitlement to attorney’s fees) applies to suits brought by owners, subcontractors, laborers, and materialmen against a surety insurer under payment or performance bonds written by the insurer under the laws of this state to indemnify against pecuniary loss by breach of a building or construction contract. Owners, subcontractors, laborers, and materialmen shall be deemed to be insureds or beneficiaries for the purposes of this section.

 

Thus, even if the bond is a common law payment bond, an unpaid claimant can still recover their attorney’s fees.  Thus, the unpaid claimant gets the benefit of not having to comply with statutory prerequisites to preserve rights under the prime contractor’s payment bond and the recovery of attorney’s fees against a common law 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.

 

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

Unknown-1The 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).

 

UnknownHow 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.

 

 

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.