IS A MILLER ACT PAYMENT BOND SURETY BOUND BY A DEFAULT OR DEFAULT JUDGMENT AGAINST ITS PRINCIPAL?

Maguire-O’Hara Construction, Inc. v. Cool Roofing Systems, Inc., 2020 WL 6532852 (W.D. Oklahoma 2020) is an interesting case dealing with suretyship law and the subject of whether a Miller Act payment bond surety is bound by a default or default judgment against its prime contractor (bond principal).

In this case, a subcontractor sued a prime contractor for breach of contract and the contractor’s Miller Act payment bond surety for a breach of the payment bond.  The prime contractor did not respond to the lawsuit and the subcontractor obtained a default against the contractor.  The Miller Act payment bond surety did engage counsel to defend itself in the dispute.  Prior to trial, the subcontractor moved in limine to preclude the surety from raising defenses at trial under the subcontract because a default was entered against the prime contractor.  The subcontractor argued that the surety should be bound by the default and, therefore, precluded from raising liability defenses under the subcontract.  Such a ruling would leave the surety no defenses disputing liability at trial.

[A] suretys’ liability under the Miller Act coincides with that of the general contractor, its principal.  Accordingly, a surety [can] plead any defenses available to its principal but [can]not make a defense that could not be made by its principal.

Maguire-O’Hara Construction, supra, at *2 (internal citations and quotations omitted).

Here, the trial court held that a default against the prime contractor does not preclude its payment bond surety from raising the liability defenses of the prime contractor (the principal of the bond).  In reaching this decision, though, the trial court indicated this ruling may have likely been different if a judgment, such as a default final judgment, had been entered against the prime contractor.   The trial court cited the Eleventh Circuit Court of Appeals ruling in Drill South, Inc. v. International Fidelity Ins. Co., 234 F.3d 1232 (11th Cir. 2020) where the appellate court affirmed a judgment against the surety because the surety was bound by the default judgment against the prime contractor.

To the extent that [the Miller Act payment bond surety] argues that it had no obligation to defend the action against [the prime contractor], we are not persuaded. We believe the issue is not whether the Agreement of Indemnity imposed an obligation on [the surety] to defend [the prime contractor], but whether it conferred a right to defend. The law requires only that a surety have notice and an opportunity to defend before it is bound by a judgment against its principal. We believe [the surety] had this right and opportunity, and simply chose, for whatever reason, not to exercise its right.

[The surety] argues, however, that when a surety and principal are sued in the same action, and the surety answers  and defends on its own behalf, the surety is not bound by a default judgment entered against the surety’s principal. Although we recognize the existence of authority supporting [the surety’s] position, those cases are not binding on this Court; nor do we find their reasoning persuasive.

We believe that the general rule that a surety is bound by a judgment entered against its principal when the surety had both notice and opportunity to defend applies whether the principal and surety are sued in the same action or in separate actions.

Drill South, 234 F.3d at 1237-1237.

 

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.

 

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