Category Archives: payment bond

SERVING PRELIMINARY LIEN / PAYMENT BOND NOTICES ON PRIVATE PROJECTS

Posted on by

Subcontractors and suppliers need to know the preliminary notices (such as a Notice to Owner for liens or Notice to Contractor for payment bonds) that need to be served to preserve their lien or payment bond rights on private projects.

 

 A.    Obtaining a Copy of the Notice of Commencement

 


The first thing a potential lienor should do is obtain the Notice of Commencement for the project (or any Amended Notice of Commencement).  The Notice of Commencement will be recorded in the official records where the project is located and will provide a potential lienor with a description of the real property, the owner’s information, the contractor’s information, the construction lender’s information, whether the contractor has a payment bond (which should be recorded with the Notice of Commencement), and persons other than the owner that the Notice to Owner needs to be served on.

 

 B.    Preliminary Notices for Liens- the Notice to Owner

 

If there is no payment bond recorded with the Notice of Commencement, then the potential lienor knows it wants to preserve its lien rights.  Entities not in privity of contract with the owner will need to serve a Notice to Owner. The Notice to Owner must set “forth the lienor’s name and address, a description sufficient for identification of the real property, and the nature of the services or materials furnished or to be furnished.” Fla. Stat. s. 713.06(2).  A statutory form is included in Florida’s Lien Law (Florida States Chapter 713) and set forth at the bottom of this posting.  Importantly, the Notice to Owner must be served by the potential lienor “before commencing, or not later than 45 days after commencing, to furnish his or her labor, services, or materials.”  Fla. Stat. s. 713.06(2).  The key is that the Notice to Owner must be served within 45 days of the entity’s initial furnishing.  For instance, a supplier’s initial furnishing is when the materials arrive on site.  However, a supplier of specially fabricated material’s initial furnishing is when the supplier started fabrication irrespective of when the materials arrived on site.  A company supplying construction rental equipment’s initial furnishing is when the rental equipment arrived on site.  And, a subcontractor’s initial furnishing is when it first starts to furnish labor, services, or materials for the project.  Again, there is no reason to delay serving the Notice to Owner – it should be served immediately as a matter of course.

 

A copy of the Notice to Owner should be served on the contractor if the potential lienor was not hired by the contractor in addition to the potential lienor’s customer’s customer.  In other words: “A sub-subcontractor or a materialman to a subcontractor must serve a copy of the notice on the contractor as a prerequisite to perfecting a lien under this chapter and recording a claim of lien. A materialman to a sub-subcontractor must serve a copy of the notice to owner on the contractor as a prerequisite to perfecting a lien under this chapter and recording a claim of lien. A materialman to a sub-subcontractor shall serve the notice to owner on the subcontractor [potential lienor’s customer’s customer] if the materialman knows the name and address of the subcontractor.” Fla. Stat. 713.06(2). (Lien rights, however, are not automatic in that the further removed an entity is from the owner may impact whether or not that entity has lien rights.  For example, a sub-sub-subcontractor does not have lien rights and a supplier to a supplier is not going to have lien rights.  On the other hand, sub-subcontractors will have lien rights and a supplier to a sub-subcontractor should also have lien rights.)

 

 C.    Preliminary Notices for Payment Bonds-the Notice to Contractor and  the Notice of Nonpayment

 

Now, if there is a payment bond in place, the owner’s property is exempt from liens and the entities should look to the payment bond for payment.  In this case, entities not in privity of contract with the general / prime contractor “before beginning or within 45 days after beginning to furnish labor, materials, or supplies…shall serve the contractor with notice in writing that the lienor will look to the contractor’s bond for protection on the work.” Fla. Stat. s. 713.23(1)(c).  Similar to the Notice to Owner, this Notice to Contractor of the potential lienor’s intent to look to the bond must be served within 45 days of initial furnishing.  A statutory form for this notice is also included in Florida’s Lien Law and further set forth at the bottom of this posting.  Importantly, if a lienor is unsure and/or wants to preserve both lien and payment bond rights the lienor can combine the Notice to Owner form with the Notice to Contractor form by calling the Notice to Owner form “NOTICE TO OWNER/NOTICE TO CONTRACTOR.”  This is actually common as it kills two birds with one stone in the event the lienor is unsure and wants to preserve both lien and bond rights.

 

 

However, unlike perfecting a lien claim, potential lienors looking to recover under a payment bond for a private project must serve a Notice of Nonpayment to the contractor and payment bond surety within 90 days of finial furnishing at the project.  (As it relates primarily to subcontractors, “The failure of a lienor to receive retainage sums not in excess of 10 percent of the value of labor, services, or materials furnished by the lienor is not considered a nonpayment requiring the service of the notice provided under this paragraph. Fla. Stat. s. 713.23(1)(d).)  This Notice of Nonpayment even needs to be served by the subcontractor/supplier in privity of contract with the general contractor (even though the preliminary Notice to Contractor does not need to be served by the subcontractor/supplier in privity of contract with the general contractor).  Final furnishing refers to the last date the lienor furnished labor, services or materials (excluding warranty or punchlist work).  With respect to companies that furnish rental equipment, this final furnishing date is measured from the last date the rental equipment was on the project site and available for use.

 

Understanding the specific preliminary notices that need to be served and the timing of these notices is important to ensure that a subcontractor, supplier, etc. is properly preserving their lien or bond rights.

 

 D.    Preliminary Notice Companies

 


There are numerous companies that cost effectively assist subcontractors and suppliers with serving preliminary notices as a matter of course based on the information provided by the subcontractor and supplier.  This is important to ensure the company preserves lien and bond rights!

 

One such emerging company that can assist with the generation, preparation and service of preliminary notices is FileMyPrelim (www.filemyprelim.com) with its cool, innovative web-based platform called PrelimTracker (www.prelimtracker.com).  FileMyPrelim and PrelimTracker have developed a preliminary notice service and tracking platform that adapts to a construction industry that is evolving with the generation and transmission of electronic documentation.  What is really cool is that by using FileMyPrelim, the lienor’s data is stored and tracked with PrelimTracker.  Because these preliminary notices (whether it is a Notice to Owner, Notice to Contractor, etc.) are linked to PrelimTracker, the general contractor, the owner, and even the owner’s construction lender can universally track those entities that served the preliminary notices jointly on this web-based platform.  By doing this, the general contractor, owner, and lender are all on the same page to ensure that those entities that preserved lien rights are properly transmitting releases of lien in consideration of progress payments (so that their lien rights are released through a specified date) and that a final release of lien is given in consideration of final payment to that lienor.  In fact, PrelimTracker can generate the lienor’s release of lien based on the information provided by the lienor and transmit it electronically with a secure electronic signature.  This allows all of the lienor’s releases to be stored and tracked in a platform accessible to the project team.  Even if a lien could not be recorded against the owner’s project because the general contractor furnished a payment bond, PrelimTracker could track the preliminary notices from lienors served through FileMyPrelim preserving payment bond rights to ensure the general contractor is obtaining releases of lien from those entities.  (Keep in mind, PrelimTracker provides value as it pulls data compiled in FileMyPrelim to report critical lien related documents.)  Check out the website links to learn more about this emerging technology that can serve as a beneficial tool to the entire project team.

 

 E.    Preliminary Notice Forms

 

 

Preliminary Notice for Liens

 

 

WARNING! FLORIDA’S CONSTRUCTION LIEN LAW ALLOWS SOME UNPAID CONTRACTORS, SUBCONTRACTORS, AND MATERIAL SUPPLIERS TO FILE LIENS AGAINST YOUR PROPERTY EVEN IF YOU HAVE MADE PAYMENT IN FULL.

 

UNDER FLORIDA LAW, YOUR FAILURE TO MAKE SURE THAT WE ARE PAID MAY RESULT IN A LIEN AGAINST YOUR PROPERTY AND YOUR PAYING TWICE.

 

TO AVOID A LIEN AND PAYING TWICE, YOU MUST OBTAIN A WRITTEN RELEASE FROM US EVERY TIME YOU PAY YOUR CONTRACTOR.

 

NOTICE TO OWNER

 

To (Owner’s name and address)

 

The undersigned hereby informs you that he or she has furnished or is furnishing services or materials as follows:

 

(General description of services or materials) for the improvement of the real property identified as (property description) under an order given by____________.

 

Florida law prescribes the serving of this notice and restricts your right to make payments under your contract in accordance with Section 713.06, Florida Statutes.

 

IMPORTANT INFORMATION FOR

 

YOUR PROTECTION

 

Under Florida’s laws, those who work on your property or provide materials and are not paid have a right to enforce their claim for payment against your property. This claim is known as a construction lien.

 

If your contractor fails to pay subcontractors or material suppliers or neglects to make other legally required payments, the people who are owed money may look to your property for payment, EVEN IF YOU HAVE PAID YOUR CONTRACTOR IN FULL.

 

PROTECT YOURSELF:

 

–RECOGNIZE that this Notice to Owner may result in a lien against your property unless all those supplying a Notice to Owner have been paid.

 

–LEARN more about the Construction Lien Law, Chapter 713, Part I, Florida Statutes, and the meaning of this notice by contacting an attorney or the Florida Department of Business and Professional Regulation.

 

(Lienor’s Signature)

(Lienor’s Name)

(Lienor’s Address)

 

Copies to: (Those persons listed in Section 713.06(2)(a) and (b), Florida Statutes)

 

 

Preliminary Notices for Payment Bonds

 

 

NOTICE TO CONTRACTOR

 

To (name and address of contractor)

 

The undersigned hereby informs you that he or she has furnished or is furnishing services or materials as follows:

 

(general description of services or materials) for the improvement of the real property identified as (property description) under an order given by (lienor’s customer) .

 

This notice is to inform you that the undersigned intends to look to the contractor’s bond to secure payment for the furnishing of materials or services for the improvement of the real property.

 

(name of lienor)

 

(signature of lienor or lienor’s representative)

 

(date)

 

(lienor’s address)

 

 

NOTICE OF NONPAYMENT

 

To (name of contractor and address)

 

(name of surety and address)

 

The undersigned notifies you that he or she has furnished (describe labor, services, or materials) for the improvement of the real property identified as (property description) The amount now due and unpaid is $___.

 

(signature and address of lienor)

 

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 SUPPLIER AND SUBCONTRACTOR’S PURSUIT OF ATTORNEY’S FEES IN MILLER ACT PAYMENT BOND ACTION

Posted on by


While the Miller Act does not provide a statutory basis for the recovery of attorney’s fees, this does not mean that attorney’s fees cannot be recovered in a Miller Act payment bond action against the surety and prime contractor.  If the underlying contract between the claimant and its customer provides for the recovery of attorney’s fees, this can support a basis to recover attorney’s fees against the surety and prime contractor in a Miller Act payment bond action.

 

The Eleventh Circuit in U.S. f/u/b/o Southeastern Municipal Supply Co., Inc. v. National Union Fire Ins. Co. of Pittsburg, 876 F.2d 92 (11th Cir. 1989), held that a subcontractor’s supplier could recover attorney’s fees against the Miller Act surety based on a contractual provision between the supplier and the subcontractor. Other federal circuits have found similarly.  See GE Supply v. C&G Enterprises, Inc., 212 F.3d 14 (1st Cir. 2000) (supplier to prime contractor entitled to recover attorney’s fees based on attorney’s fees provision included in invoices sent to contractor with each delivery); U.S. f/u/b/o Maddux Supply Co. v. St. Paul Fire & Marine Ins. Co., 86 F.3d 332 (4th Cir. 1996) (surety liable to supplier for attorney’s fees and interest based on subcontractor’s credit application with supplier); U.S. f/u/b/o Carter Equipment Co., Inc. v. H.R. Morgan, Inc., 554 F.2d 164 (5th Cir. 1977) (finding that equipment rental supplier to subcontractor could recover attorney’s fees against surety based on contractual provision between supplier and subcontractor).

 

In pursuing a Miller Act action, it is good practice to look at the underlying contract, purchase order, or documentation forming the agreement to determine if there is a contractual basis to recover attorney’s fees.  If there is, this basis should be specifically pled in the complaint against the Miller Act surety (as well as the prime contractor as the principal of the bond) to support a basis to recover attorney’s fees.  This contractual basis should not be overlooked.  In addition, suppliers and subcontractors on federal projects may want to ensure that such a contractual basis is included in their respective agreements in the event that a Miller Act action needs to be pursued.  While suppliers will typically have a contractual provision in their agreement with their customer that allows them to recover attorney’s fees in collection efforts, there are circumstances where a prime contractor may not want to include an attorney’s fees provision in its subcontract.  One reason for this may be because the prime contractor does not want to give the subcontractor a basis to recover attorney’s fees in a Miller Act action.  Although this may not help the prime contractor in a lawsuit initiated by the subcontractor’s supplier (where there is a contractual provision for attorney’s fees between the supplier and subcontractor), the lack of a contractual basis could force a subcontractor to consider how it wants to proceed knowing it does not have a basis to recover attorney’s fees in its Miller Act action.

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.

SUPPLIER’S BURDEN OF PROOF IN A MILLER ACT PAYMENT BOND CLAIM

Posted on by

What does a supplier need to do to prove a Miller Act payment bond claim?  A supplier must prove the following elements:

 

“(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 [of the Miller Act].”  Jems Fabrication, Inc., USA v. Fidelity & Deposit Co. of Maryland, 2014 WL 1689249 (5th Cir. 2014).

 

As you can see, the burden of proof for a supplier in a Miller Act claim is not overly challenging, especially if the supplier has delivery or shipping tickets establishing that it delivered materials to the specific project and/or that its customer ordered the materials for the specific project.  If there is a purchase order with the supplier and its customer for the project that would also help support that the materials were supplied for purposes of that project.  And, if the supplier’s customer’s contract / subcontract requires the customer to supply those same materials for the project, that also helps to support that the materials were intended for the prosecution of the work.  But, importantly, it is irrelevant whether the supplier actually delivered the materials to the project or that the materials were incorporated into the project. See U.S. f/u/b/o Carlson v. Continental Cas. Co., 414 F.2d 431, 433 (5th Cir. 1969) (affirming summary judgment in favor of supplier where supplier showed it had good faith that the materials were supplied for specific project although supplier did not establish that materials were actually incorporated into project).

 

But, even though the materials do not necessarily have to be incorporated into the project, the supplier’s claim will still be subject to the standard that the materials were supplied for the prosecution of the work provided for in the contract and that the supplier had a good faith belief that the materials were intended for the specified work.  For example, in Erb Lumber Co. v. Gregory Industries, Ltd., 769 F.Supp. 221 (E.D.Mich. 1991), the supplier’s customer opened an account with the supplier for multiple projects.  However the supplier’s claim for unpaid materials for the specific federal project at-issue included materials supplied AFTER the project was certified as complete and were likely used for one of its customer’s other projects.  For this reason, the court expressed, “Indeed, given that contract work was certified as complete prior to any delivery materials by Erb [supplier], it is impossible for any of the materials to have been provided in prosecution of the contract work….Good faith delivery is not a substitute for supplying materials in prosecution of work provided for in the contract.”   Erb Lumber, 769 F.Supp. at 225.

 

If you are a supplier, it is important to understand your burden of proof and the elements you need to prove in a Miller Act payment bond claim.  If you are a surety or prime contractor defending the surety, it is also important to understand the supplier’s burden of proof to appropriately defend the claim and evaluate a potential resolution to the claim if it appears clear the materials supplied were used in the prosecution of the work.

 

 

For more information on the preservation of a Miller Act payment bond claim, please see:  https://floridaconstru.wpengine.com/miller-act-payment-bond-and-third-tier-subs-or-suppliers/.

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.

 

CAN A JOINT VENTURER / PARTNER OF PRIME CONTRACTOR RECOVER UNDER THE MILLER ACT PAYMENT BOND

Posted on by


Forming joint ventures / partnerships for a specific public construction project  is common.  Sometimes, a joint venture relationship arises between entities by virtue of agreements and the conduct of the parties demonstrating they are, in actuality, operating as a partnership for a specific project.  Well, what happens if a payment dispute arises on a federal project between the partners — can one of the partners assert a Miller Act bond claim?  Typically, the answer is no, as the Ninth Circuit in U.S. f/u/b/o Briggs v. Grubb, 358 F.2d 508, 512 (9th Cir. 1996), explained:

 

“While a Miller Act payment bond does make the surety liable for labor and materials furnished by a subcontractor when the contractor under the bond defaults, such a bond does not make the surety liable for monies expended on the contract by a partner or joint venturer of the contractor under the bond.”

 

In this case, the government awarded the prime contract for a project in California to an Oregon-based contractor.  The contractor provided Miller Act performance and payment bonds.  The contractor, however, had never undertaken a project in California.  As the project commenced, the contractor sought assistance and entered into an agreement with a California-based contractor (that was also a bidder on the same project).  Due to a payment dispute, the California-based contractor filed suit against the Oregon-based contractor (prime contractor) and its Miller Act payment bond surety.  The agreement that was entered into and evidence of the conduct of the parties established that the California-based contractor did not serve as a subcontractor, but as a partner or joint venturer for purposes of the project.  For this reason, the California-based contractor could not recover under the payment bond.

 

Recently, the Middle District of Florida in U.S. Surety Company v. Edgar, 2014 WL 1664818 (M.D.Fla. 2014), ruled on a motion to dismiss where the prime contractor argued that the Miller Act payment bond claim should be dismissed because it was a claim from its joint venturer.  While the facts of this case are complex, a completion prime contractor on a federal project entered into an agreement with a subcontractor to perform, among other things, dredging and providing the necessary equipment.  The completion contractor contended that this agreement reflected that the subcontractor was actually a joint venturer of the completion contractor for purposes of the project.  As a result of a lack of progress, the government threatened to terminate the completion contractor. The subcontractor further claimed that it was not getting paid which resulted in it not paying its equipment suppliers.  The completion contractor’s surety, in an effort to avoid the government terminating the prime contractor, entered into a settlement agreement with the subcontractor whereby the surety would pay the subcontractor’s equipment vendor and would tender payment to the subcontractor.  The government, nevertheless, terminated the completion contractor and a complicated dispute arose  whereby the completion contractor and its surety sued the subcontractor.  The subcontractor countersued asserting a Miller Act payment bond claim.  The prime contractor and its surety moved to dismiss the payment bond claim arguing that the subcontractor was actually a joint venturer pursuant to its agreement with the completion contractor and, thus, could not assert a payment bond claim.  The court, although it had access to the agreement and the settlement agreement with the surety, denied the motion to dismiss (a very early stage in the proceeding) without considering all of the relevant evidence including the conduct of the parties that would exemplify the joint venture / partner relationship between the entities.  Clearly, if the evidence establishes that the subcontractor is elevated to a joint venturer, then it will not be able to recover against the bond.

If parties are operating as joint venturers for a specific project (even if a true partnership has not been formed and the prime contract was not awarded to the joint venture), an agreement between the parties should unambiguously reflect this purpose, especially if a joint venture relationship is the intent of the prime contractor.  The other party needs to appreciate that such an agreement in conjunction with conduct during the course of construction demonstrating it is operating as a partner could hinder its right to recover against a Miller Act payment bond if a payment dispute arises.  Perhaps this is alright if there is a good agreement in place between the parties that explains how risks are allocated, how payment is to be made, and with a dispute resolution provision, provided there is no real concern over the solvency of the prime contractor.

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.

RECOVERING SHARED SAVINGS (PROFIT) FROM A MILLER ACT SURETY

Posted on by


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

 

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

 

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

 

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

 

 

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

 

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

VENUE FOR MILLER ACT PAYMENT BOND DISPUTE

Posted on by


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

 

 

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

 

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

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 PAYMENT BOND AND THIRD TIER SUBS OR SUPPLIERS

Posted on by


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

 

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

 

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

 

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

 

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

 

In this case, the following contractual relationship is important:

 

Owner = United States

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

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

Sub-subcontractor =Jennings Service Company

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

 

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

 

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

 

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

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.

SUPPLIER / SUB-SUBCONTRACTOR NOTICE REQUIREMENTS UNDER THE MILLER ACT

Posted on by


Sub-subcontractors and suppliers to subcontractors working on federal projects NEED to know what they need to do to preserve Miller Act payment bond rights. Prime contractors need to know too so that they know what defenses to raise against the unwary sub-subcontractor/supplier that asserts a claim against their Miller Act payment bond. The Miller Act requires:

 

“A person having a direct contractual relationship with a subcontractor but no contractual relationship, express or implied, with the [prime] contractor furnishing the payment bond may bring a civil action on the payment bond on giving written notice to the contractor within 90 days from the date on which the person did or performed the last of the labor or furnished or supplied the last of the material for which the claim is made. The action must state with substantial accuracy the amount claimed and the name of the party to whom the material was furnished or supplied or for whom the labor was done or performed. The notice shall be served–
(A) by any means that provides written, third-party verification of delivery to the contractor at any place the contractor maintains an office or conducts business or at the contractor’s residence; or
(B) in any manner in which the United States marshal of the district in which the public improvement is situated by law may serve summons.
40 U.S.C. s. 3133 (b)(2)

 

In U.S. f/u/b/o Columbus Fire & Safety Equipment Co., Inc. v. Anderson Electric Co., Inc., 2014 WL 931262 (M.D. GA 2014), a supplier to a subcontractor was not paid on a federal project. The supplier notified the Miller Act surety and prime contractor of the non-payment. However, the supplier appeared to only notify the surety of the specific amount it claimed it was due which the surety communicated to the prime contractor. When the supplier remained unpaid, it instituted a Miller Act lawsuit. The surety and prime contractor moved for summary judgment arguing that the supplier failed to provide proper notice to the prime contractor pursuant to the Miller Act. Specifically, the surety and prime contractor argued that the supplier failed to notify the prime contractor of the amount the supplier claimed to be due as required by the Miller Act.

 

Under the Miller Act, “If a subcontractor fails to pay a supplier of materials on such a project, that supplier can sue on the bond by giving written notice to the general contractor within ninety days of last supplying the material for which the claim is made.” Anderson Electric, supra, at *2 citing 40 USC s. 31333(b)(2).

 

The question in this case was whether the prime contractor was on sufficient notice of the supplier’s claim since it was not provided with direct notice from the supplier of the amount the supplier claimed it was owed. The Middle District of Georgia noted that courts typically allow flexibility concerning the method notice is given. However, the notice must be sufficiently specific to place the prime contractor on notice of the claim that the supplier is asserting. “The purpose of the notice requirement of the Miller Act is to alert a general contractor that payment will be expected directly from him, rather than from the subcontractor with whom the materialman [supplier] dealt directly.” Anderson Electric, supra, at *3 quoting United States ex rel. Jinks Lumber Co. v. Fed. Ins. Co., 452 F.2d 485, 487 (5th Cir.1971). Regarding the notice requirement, the Middle District of Georgia stated:

 

“That notice does not, however, have to be entirely in one writing for it to comply with the Miller Act. Written notice may be considered in conjunction with other writings or even oral statements to determine whether the general contractor was adequately informed, expressly or impliedly, that the supplier is looking to the general contractor for payment so that it plainly appears that the nature and state of the indebtedness was brought home to the general contractor.” Anderson Electric, supra, at *3 (internal quotations omitted and citation omitted).

 

Here, there was no evidence that the supplier notified the prime contractor of the amount it claimed it was owed. However, there was evidence that the supplier notified the surety of the amount it claimed it was due and the surety notified the prime contractor of this amount within the 90-day deadline. For this reason, the Middle District of Georgia denied the summary judgment and found that “communication between the…claimant, the contractor’s surety, and the general contractor can be considered by the jury in its determination of whether the general contractor received sufficient notice, that the supplier is looking to the general contractor for payment of some specific amount of a specific subcontractor’s indebtedness.” Anderson Electric, supra, at *4.

 

This opinion illustrates the importance of a supplier or sub-subcontractor giving the prime contractor on a federal project proper notice of its claim for non-payment within 90 days of their final furnishing date. Not doing so can be fatal to their Miller Act claim. A prime contractor that is aware of this will raise this as a defense and move for summary judgment on this point. In this case, it appeared that the surety assisted the supplier by notifying the prime contractor of the supplier’s claimed amount within the supplier’s 90 day deadline. Also, due to the flexibility of the notice requirements, the supplier/sub-subcontractor may have arguments to survive a summary judgment, especially if it notified the surety and the surety notified its principal-prime contractor within 90 days of the supplier/sub-subcontractor’s final furnishing date. But, it should not even get to this point as the notice requirements of the Miller Act should absolutely be met to ensure Miller Act payment bond rights are timely preserved.

 

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.

THE STATUTE OF LIMITATIONS ON A MILLER ACT PAYMENT BOND CLAIM AND THE DOCTRINE OF EQUITABLE TOLLING

Posted on by


Complying with the one-year statute of limitations to assert a Miller Act (40 USC s. 3133) payment bond claim is an absolute must! Not complying will likely deprive the claimant of its payment bond rights. A claimant should never want this scenario as, in most instances, it is always better to file a lawsuit and preserve the rights to the payment bond. In a recent non-Florida federal case, U.S.A ex rel. Liberty Mechanical Services, Inc. v. North American Specialty Ins., 2014 WL 695106 (E.D.Pa. 2014), the Court discussed whether the doctrine known as equitable tolling could toll the statute of limitations to file a Miller Act payment bond action so that a late filed payment bond lawsuit was deemed timely filed.

 

In Liberty Mechanical Services, the Department of Veteran Affairs hired a contractor to preform renovation work. The prime contractor hired a mechanical and plumbing subcontractor. The subcontractor completed its work in January 2012 and was owed approximately $53,000. As a result of nonpayment, it obtained a copy of the prime contractor’s payment bond from the Department of Veteran Affairs in September 2012 (nine months from completing its work–there were allegations that it had difficulty obtaining a copy of the bond from the government). The subcontractor then sent a letter to the surety advising that it would not provide close out documents until it was paid in full and that its lawyer will be filing a claim against the bond. The surety responded that it would get the ball rolling regarding the claim while reserving all of its rights. Subsequently, the prime contractor reached out to the subcontractor and advised that it would pay and, therefore, an action against the bond would not be necessary. However, in February 2013, more than a year after the subcontractor completed its work, it still had not received payment from the prime contractor. Then, the surety told the subcontractor that it would not pay because the subcontractor’s claim was now time-barred by the one-year statute of limitations to sue on a Miller Act bond. Accordingly, in June 2013, approximately fifteen months from the subcontractor’s completion date, it filed a Miller Act lawsuit.

 

The Miller Act mandates:

 

“[E]very contractor on a federal government contract exceeding $100,000 to provide ‘[a] payment bond with a surety … for the protection of all persons supplying labor and material in carrying out the work provided for in the contract. Any supplier or sub-contractor who has not been paid in full within 90 days for labor performed or supplies furnished may bring a civil action on the payment bond for the amount unpaid at the time the civil action is brought and may prosecute the action to final execution and judgment for the amount due… The Act requires that suit must be brought no later than one year after the day on which the last of the labor was performed or material was supplied by the person bringing the action.” Liberty Mechanical Services, supra, *3 (internal citations and quotations omitted).

 

Here, the Miller Act lawsuit was admittedly outside the one-year statute of limitations (more than one year from the subcontractor’s final furnishing date in January 2012); however, the subcontractor argued that the limitations period should be equitably tolled to allow it to move forward with the lawsuit and excuse its late filing.

 

The Third Circuit has explained that the doctrine of equitable tolling can apply to excuse a late filing after the expiration of the statute of limitations under the following circumstances:

 

“(1) where the defendant has actively misled the plaintiff respecting the plaintiff’s cause of action; (2) where the plaintiff in some extraordinary way has been prevented from asserting his or her rights; or (3) where the plaintiff has timely asserted his or her rights mistakenly in the wrong forum.” Liberty Mechanical Services, supra, at *8 quoting Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1387 (3d Cir. 1991).

 

The plaintiff, or late-filer, in applying the circumstances, must show it exercised reasonable diligence in investigating its claim and filing suit on its claim.

 

Notably, Florida district courts have applied equitable tolling under analogous circumstances:

 

“(1) the late filing plaintiff has been misled by defendant’s misconduct into allowing the statutory period to expire; (2) the plaintiff was unaware that his/her rights had been violated and therefore of the need to seek redress; or (3) the plaintiff actively pursued his/her judicial remedies but filed a defective pleading during the limitations period, timely filed in an improper forum and has exercised due diligence in all other respects in preserving his legal rights.” Booth v. Carnival Corp., 510 F.Supp.2d 985, 988 (S.D.Fla. 2007) citing Justice v. U.S., 6 F.3d 1474, 1479 (11th Cir. 1993).

 

The subcontractor in Liberty Mechanical Services alleged random facts to support its late filing. It first argued that it took roughly nine months from its final furnishing date to receive a copy of the payment bond from the Department of Veteran Affairs. Yet, this argument failed because the subcontractor still had three months left under the statute of limitations to timely pursue an action on the bond. The subcontractor argued that the prime contractor indicated it would pay so there was no need for the subcontractor to file a bond claim. Yet, this argument failed because nothing prevented the subcontractor from timely preserving its rights and filing a claim. In other words, the prime contractor indicating its intent to pay did not deprive the subcontractor of timely pursuing its rights. And, the subcontractor argued that the surety indicated that it would “get the ball rolling” once it was notified of the claim while reserving all rights. Yet, this argument failed because the surety never represented that it would pay, but, in essence, simply responded that it received and would investigate the claimant’s claim–a common response from a surety.

 

While equitable tolling could possibly work to support the basis for a late filed Miller Act payment bond claim, the plaintiff / claimant must plead and prove: 1) it used due diligence to timely file its claim and 2) the circumstances fit into one of the three limited categories identified above as to why the plaintiff could not have timely filed the lawsuit even exercising due diligence. However, the facts to support equitable tolling should be severe such that equity would require the tolling of the limitations so that a late filed Miller Act lawsuit is excused and deemed timely filed. Otherwise, claimants would simply conjure up excuses to support the late filing and completely water down the intent of the statute of limitations. The key for a claimant is to: 1) know the statute of limitations for a Miller Act payment bond claim, 2) know the final furnishing date, and 3) timely file the payment bond claim – no excuses!

 

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.

STAYING LITIGATION AGAINST A PAYMENT BOND SURETY PENDING THE OUTCOME OF ARBITRATION INVOLVING THE GC AND SUB

Posted on by


The all-too-common dilemma: If the subcontract includes an arbitration provision, but the payment bond does not, can the subcontractor pursue a simultaneous lawsuit against the payment bond surety while there is an arbitration proceeding involving the general contractor? And, can the general contractor or the payment bond surety stay the litigation pending the outcome of the arbitration involving the subcontractor?

 

Hofer, Inc. v. Fidelity and Deposit Co. of Maryland, 2014 WL 644598 (N.D. Fla. 2014), is an interesting opinion that involves this very dilemma. In this case, a payment dispute arose where the subcontractor claimed it was owed money for work it performed for an apartment project and the general contractor claimed the subcontractor was not owed money for deficient work. A familiar fact pattern! The subcontract contained an arbitration provision. Before arbitration came into play, the subcontractor filed a lawsuit against the payment bond. (The payment bond was not an unconditional payment, but rather, a conditional payment bond meaning that if the owner did not pay the general contractor, the subcontractor would have lien rights, not payment bond rights.) After the lawsuit was filed, the general contractor demanded arbitration with its subcontractor pursuant to the subcontract. The payment bond did not contain an arbitration provision nor did it incorporate by reference the subcontract’s arbitration provision. Thus, there was no way the surety could be compelled to arbitration. After the arbitration proceeding commenced, the payment bond surety moved to stay the lawsuit pending the outcome of the arbitration proceeding involving the subcontractor and general contractor. Naturally, the subcontractor contested this motion–it was the party that initiated the dispute first.

 

The Northern District maintained that it is has discretion whether to stay the litigation pending the outcome of the arbitration. It explained that there is a heavy presumption that litigation can proceed at the same time as arbitration when the litigation involves a nonarbitrable claim (a claim not subject to arbitration such as the payment bond claim), but “if the arbitrable issues are crucial for the determination of nonarbitrable claims, a court has discretion to stay the litigation.” Hofer, supra, at *1. In other words, if the arbitration is going to resolve issues that are important to the litigation, a court has the discretion to stay the litigation pending the outcome of arbitration.

 

A payment bond surety is entitled to most of the contractual defenses of its bond-principal general contractor. Therefore, it would be entitled to the same defenses / arguments that the general contractor was raising against the subcontractor pertaining to deficient work. So, if the general contractor prevails in its arbitration, the subcontractor’s claim against the payment bond surety could become moot. Because the payment bond was a conditional bond, the surety and general contractor could argue that the subcontractor does not have a payment bond claim because the owner never paid the general contractor for the subcontractor’s work and the subcontract contained a pay-if-paid provision. However, it does not appear this argument was asserted so perhaps the owner did pay the general contractor and the general contractor simply withheld the amount of the back-charge. To this point, the Northern District maintained, “Nothing in the record suggests that whether Apex [general contractor] has been paid for Hofer’s [subcontractor] work will be an issue in the arbitration process.” Hofer, supra, at *2. Indeed, the only issue in arbitration was whether the general contractor paid the subcontractor the proper amounts due under the subcontract. This means that the fact that the payment bond was a conditional bond instead of an unconditional payment bond was of no true significance in this dispute. This is important because since most payment bonds are unconditional payment bonds (that are not conditioned on the payment of the owner and where pay-if-paid is not a defense), the rationale in this case would apply to unconditional payment bonds.

 

The Northern District found that even though the subcontractor was not bound to arbitrate its dispute with the payment bond surety, the litigation should nonetheless be stayed because i) the subcontractor agreed to resolve its disputes with the general contractor through arbitration and ii) the predominant issue in the dispute, that being whether the general contractor owed the subcontractor money, was being decided by the arbitration proceeding.

 

Although the actual facts of the dispute were not discussed, it seems apparent that once the subcontractor filed the lawsuit against the payment bond, the general contractor affirmatively demanded arbitration pursuant to the subcontract in furtherance of having the dispositive facts of the dispute decided by an arbitrator instead of through litigation. This was a good strategy because the general contractor and subcontractor agreed to have such disputes decided by arbitration. Even though the payment bond surety was not bound by the arbitration provision, the surety is typically defended by the general contractor and is raising most of the same defenses the general contractor would raise such as deficient work. Now, because the court had discretion as to whether to stay the litigation or allow it to proceed simultaneously with the arbitration, this is a risk the general contractor took by virtue of the subcontract. It is a risk because if the Northern District denied the surety’s motion to stay, the general contractor could have likely had the facts of this dispute determined by litigation instead of arbitration (depending on which case was tried first) which could have made portions of the arbitration moot.

 

So, what could have been done to prevent this scenario? A couple of thoughts to create the argument to avoid a simultaneous litigation and arbitration:

 

  1. In drafting the arbitration provision in the subcontract, ensure that it includes the general contractor’s surety. The provision could state something to the effect that if the subcontractor initiates a claim against the general contractor’s surety, the surety, at its option, can invoke and demand arbitration pursuant to this arbitration provision as the surety is an intended third party beneficiary of the right to demand arbitration in this provision. The key is that if the subcontractor files suit and the general contractor/surety prefer arbitration, they have a contractual provision that would make it compelling to dismiss the litigation or, more likely, stay it pending the outcome of arbitration.
  2. The other option, although far, far less common, is to include in the bond that the dispute resolution procedure is the same as in the subcontract of the claimant. There may be arguments around such a provision and the surety may not want its fate determined in an arbitration where there are not any appellate rights (and, perhaps, it may have concerns over the indemnification it is receiving from the general contractor).

 

For more information on arbitration provisions, please see: https://floridaconstru.wpengine.com/deference-given-to-arbitration-agreements/ and https://floridaconstru.wpengine.com/appreciating-the-risks-or-frustrations-of-arbitration/.

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.