Surety Case Law Note – What is A Miller Act Bond
January 24, 2023
In this Surety Today Blog post we provide a Case Law Note to explore the old adage that things may not always be what they seem. Ancient wisdom holds that if it walks like a duck and quacks like a duck, then, it is a duck. But, beware of wolfs in sheep’s clothing (I know mixing metaphors). In this case the court dealt with a bond that was issued on a project located on a U.S. Military base by the general contractor, and the question was – was it a Miller Act bond?
U.S. EX REL. ROC CARTER CO., LLC v. FREEDOM DEMOLITION, INC.,
5:09-CV-101, 2009 WL 3418196 (M.D. GA. OCT. 14, 2009)
Plaintiff filed suit under the Miller Act, 40 U.S.C. § 3131 et seq. to obtain payment for the work, material, and labor it provided as a sub-subcontractor in the construction project for building military housing units (“housing project”) at Robins Air Force Base in Georgia. The housing units were to be built on land owned by the United States. Plaintiff sought payment in excess of $200,000 from Hunt Building Company, the general contractor on the housing project, Freedom Demolition, a subcontractor, and from Fidelity and Deposit Company of Maryland and Federal Insurance Company, the sureties for Hunt.
In 2006, the United States Air Force (“Air Force”) issued Solicitation AFCEEFY-06-0003 for the housing project. A proposal for the housing project was submitted by Robins Air Force Base Properties II, L.L.C (“Robins Properties”). The Air Force ultimately accepted Robins Properties’ proposal and entered into a 50 year lease of real property located on the base with Robins Properties for the purpose of constructing, operating, and maintaining the housing project. The lease was conditioned upon Robins Properties constructing and completing the housing project. The lease limited the Government’s liability “to that of lessor of the Leased Premises.” Moreover, it stated that “it is specifically understood that the demolition, design, construction, renovation, and operation, and maintenance of the Leased Premises Improvements is a private undertaking.” The improvements to the leased premises were to be held in fee simple by Robins Properties. The lease required that Robins Properties provide the Air Force payment and performance bonds.
Robins Properties as leasee then entered into a design build construction contract with Hunt. The contract required hunt to issue payment and performance bonds listing the Secretary of the Air Force as a co-obligee. F&D and Fidelity issued the bonds. Hunt subcontracted the demolition work to Freedom, who in turn sub-subcontracted a portion of the demolition work to plaintiff, Roc Carter.
F&D and Fidelity moved to dismiss the case on the grounds of lack of subject matter jurisdiction contending that the bonds issued for the housing project were not Miller Act bonds. The Miller Act provides that all persons contracting “for the construction, alteration, or repair of any public building or public work of the United States” at a cost exceeding $100,000.00 shall provide a payment bond “for the protection of all persons supplying labor and material.” 40 U.S.C. § 3131(b). The Act allows any person who has furnished labor or material for the construction of a “public building or public work” and who has not been paid in full to bring a civil action on the payment bond in federal district court. The purpose of the Miller Act is to protect subcontractors, materialmen and laborers working on federal projects. United States ex rel. Blumenthal-Kahn Elec. Ltd. v. American Home Assurance Co., 219 F. Supp.2d 710, 714 (E.D. Va. 2002).
The sureties contended that the Miller Act did not apply because the Plaintiff’s claims do not involve a “public building or public work of the United States.” The Miller Act does not define “public building or public work of the United States,” however federal courts interpreting the phrase have provided guidance. The court in this case held that the case law shows that there are three elements that must be present in order to have a contract for the construction of a “public work or public building” such that the Miller Act would apply: (1) there must be a construction contract; (2) the United States must be a party to the construction contract; and (3) the contract must require that bonds be secured that run in favor of the United States. With respect to the lease between Robins Properties and the Air Force, the court held that it was not a construction contract, rather it was solely a contract for the transfer of an interest in real property i.e. a lease. Paragraph 17.1 of the lease stated that the “Government’s sole and exclusive interest in and liability under this Lease are limited to that of lessor of the Leased Premises.” It also stated that “it is specifically understood that (I) the demolition, design, construction, renovation, operation, and maintenance of the Leased Premises Improvements is a private undertaking.” The plaintiff argued that the proposal was a construction contract and that it was incorporated into the lease, but plaintiff failed to include the document in evidence and the court could not consider it. Another important factor for the Court was that the lease expressly stated that in the event of any inconsistency or conflict between any provision of the proposal and any provision of the lease, the lease provision shall control. Thus, the Court held that the lease provisions limiting the lease to a lease contract controlled.
With respect to the design-build contract, while the contract is a construction contract and it did require issuance of bonds in favor of the United States, the United States was not a party to the agreement. The contract was expressly between Robins and Hunt. The proposal that Robins submitted was not incorporated by reference into the design-build contract. In addition, the court noted that in this case the United States did not fund the construction project nor did it own the housing units after they were completed. Accordingly, the contract was not for a public work.
The court granted the sureties’ motion to dismiss because there was no Miller Act jurisdiction. In cases where the United States is not a party to the relevant contract, courts have nearly uniformly held that the Miller Act will not apply. See e.g., Blumenthal–Kahn Elec. Ltd. Partnership, supra. (contracting authority for airport tunnel project was a political subdivision independent of federal government; Miller Act did not apply even though federal government retained ownership of land); United States ex rel. Mississippi Road Supply Co. v. H.R. Morgan, Inc., 542 F.2d 262 (5th Cir. 1976) (no jurisdiction under Miller Act for federally-funded industrial park built on land owned by government and leased to private organization); United States ex rel. Gen. Elec. Distrib. Corp. v. Centerline Gardens, Inc., 253 F.2d 133, 134–35 (6th Cir. 1958) (where United States leased land to private party for development of military housing project, parties to subsequent construction contract could not file suit under Miller Act); U.S. ex rel. Integrated Prot. Servs., Inc. v. TK Elec. Servs., LLC, No. 1:09-CV-41, 2010 WL 5691669, at *4 (S.D. Ohio Dec. 20, 2010).
With the advent of Public Private Partnerships (P3’s) and the use of private parties to construct what historically would have been considered public projects under lease arrangements, one must be careful to consider what the relationship of the parties truly is and whether the requirements of satisfying Miller Act jurisdiction exist.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.