942 F. 2d 946 - United States Tms Mechanical Contractors Inc v. Millers Mutual Fire Insurance Company of Texas

The facts in this Miller Act case present a question of law: whether the delay and termination components of the subcontractor's Miller Act claim constitute "labor or material [furnished] in the prosecution of the work provided for in [the] contract." 40 U.S.C.A. § 270b(a) (1986).

Plaintiff T.M.S. Mechanical Contractors, Inc., subcontractor on a government construction project, appeals from a judgment denying its delay and termination claims against Miller Act surety Millers Mutual Fire Insurance Company of Texas. Defendant Millers Mutual Fire Insurance Company of Texas cross-appeals from a judgment of $100,104.19 plus interest and costs awarded to the Plaintiff on its contract work claim.

The Craftsmen, Inc. ("Craftsmen") contracted with the Veterans Administration ("Government") on April 5, 1984 to perform fire and safety corrections on the Veterans Administration Medical Center in Waco, Texas ("Contract"). Craftsmen secured a payment bond from Millers Mutual Fire Insurance Company of Texas ("Millers"), as required by 40 U.S.C.A. § 270a(a) (1986)1 ("Bond").

Craftsmen subcontracted all the mechanical work under the Contract to T.M.S. Mechanical Contractors, Inc. ("TMS") on May 4, 1984 ("Subcontract"). The Subcontract incorporated the Contract's plans, specifications, and general conditions of the specifications. TMS based its Subcontract price of $727,000 on a bid that considered the value of the labor and materials necessary to complete the Subcontract work, overhead, profit, tools and equipment, labor burden, insurance costs, food, and shelter.

After discovering asbestos in some of the buildings involved in the performance of the Contract, the Government issued change orders enlarging the scope of the Contract work to include asbestos abatement. The Government partially terminated the Contract on October 10, 1985 pursuant to paragraph 18 of the Contract, entitled "Termination for Convenience of the Government."2

Upon receipt of a Notice of Termination from the Government, Craftsmen in turn terminated the Subcontract. At that time, TMS had provided $387,735.00 worth of labor and materials in the performance of the Subcontract and $485,845.90 in the performance of the change orders. TMS, however, continued to provide labor and materials until March of 1986.

TMS subsequently sued Craftsmen as prime contractor and principal on the Bond and Millers as surety on the Bond,3 and, at trial, claimed $201,580.00 for completed contract and change order work, $467,738.00 for expenses caused by construction delay, and $251,580.00 for expenses caused by the partial termination. Millers paid TMS $101,040.81 of its contract work claim, $48,150.08 of its termination claim, and $27,000.00 in interest. After a bench trial, the district court awarded TMS $100,104.19, roughly the balance of its contract and change order work claim, plus pre- and post-judgment interest against Millers,4 but concluded that TMS could not recover either its delay or termination claim against the Miller Act surety. TMS now appeals from that judgment.5 Based upon our independent appellate review, United States ex rel. Gulf States Enterprises, Inc. v. R.R. Tway, Inc., 938 F.2d 583, 586 (5th Cir.1991) (per curiam), we reverse as to the delay claim and affirm as to the termination claim.6

This is a Miller Act7 case, and, thus, this is a lien case. A mechanic's lien under state law against improved property provides security for suppliers of labor and material to private construction projects, but a mechanic's lien cannot attach to government property. F.D. Rich Co. v. United States ex rel. Industrial Lumber Co., 417 U.S. 116, 122, 94 S.Ct. 2157, 2161, 40 L.Ed.2d 703 (1974) (citation omitted). The Miller Act requires that a contractor on a federal construction project furnish "a payment bond ... for the protection of all persons supplying labor and material in the prosecution of the work provided for in [the] contract."8 40 U.S.C.A. § 270a(a)(2) (1986). The payment bond, "intended ... to protect the rights of these suppliers" who furnish labor or materials to government construction projects, thus provides an alternative to a mechanic's lien, F.D. Rich, 417 U.S. at 122, 94 S.Ct. at 2161, because it permits the supplier to sue the Miller Act surety on the payment bond. Specifically, the Act provides that

[e]very person who ... furnish[es] labor or material in the prosecution of the work provided for in [the] contract ... who has not been paid in full therefor before the expiration of a period of ninety days after the day on which the last of the labor was done ... or material was furnished ... for which such claim is made, shall have the right to sue on such payment bond for the amount ... unpaid at the time of institution of such suit and to prosecute said action to final execution and judgment for the sum or sums justly due him.

40 U.S.C.A. § 270b(a) (1986).

The Supreme Court has instructed us to liberally interpret the Miller Act "to effectuate the purpose of Congress." Illinois Surety Co. v. John Davis Co., 244 U.S. 376, 380, 37 S.Ct. 614, 616, 61 L.Ed. 1206 (1917).9 For example, the Court "has repeatedly refused to limit the application of the act to labor and materials directly incorporated into the public work." Brogan v. National Surety Co., 246 U.S. 257, 261, 263, 38 S.Ct. 250, 251, 252, 62 L.Ed. 703 (1918) (holding that groceries supplied to a contractor who was compelled to provide board and lodging for its laborers "[were] used exclusively in the performance of the work").

Certain limitations, however, stem from the language of the Miller Act. The Act extends the right to sue on the payment bond "to those who ha[ve] a contractual agreement with the prime contractor or with a 'subcontractor.' "10 F.D. Rich, 417 U.S. at 122, 94 S.Ct. at 2161 (citation omitted); see J.W. Bateson Co. v. United States ex rel. Board of Trustees of National Automatic Sprinkler Industry Pension Fund, 434 U.S. 586, 589-90, 98 S.Ct. 873, 875, 55 L.Ed.2d 50 (1978). Moreover, the supplier must sue on the Miller Act payment bond within one year of furnishing labor or material in the prosecution of the contract work.11 United States ex rel. Texas Bitulithic Co. v. Fidelity and Deposit Co., 813 F.2d 697, 699 (5th Cir.1987) (describing one-year limitation period as a "substantive limitation of the rights conferred by the Act").

The central issue here concerns another, still-evolving limitation on the scope of a supplier's recovery against a Miller Act surety: the extent of recoverable "labor or material [furnished] in the prosecution of the work provided for in the [government construction] contract." 40 U.S.C.A. § 270b(a) (1986). TMS contends that the district court erred in denying recovery for amounts expended because of delayed performance and partial termination. We examine each of these claims separately.

TMS claims that delays caused by the asbestos abatement work dramatically increased its direct and indirect project overhead.12 TMS urges this Court to find that the district court erred by concluding that TMS could not recover on the payment bond for the components of its Delay Claim. We reverse the district court's judgment denying recovery on TMS's Delay Claim and remand for further proceedings consistent with this decision.

Many courts have confronted delay claims in cases brought on Miller Act payment bonds; some primarily consider the cause of the delay, e.g. United States ex rel. Superior Insulation Co. v. Robert E. McKee, Inc., 702 F.Supp. 1298 (N.D.Tex.1988), while others focus on the terms of the contract, e.g. Continental Casualty Co. v. Schaefer, 173 F.2d 5 (9th Cir.), cert. denied, 337 U.S. 940, 69 S.Ct. 1517, 93 L.Ed. 1745 and, 338 U.S. 820, 70 S.Ct. 63, 94 L.Ed. 497 (1949). To qualify for a Miller Act lien, however, the claimant must come within the explicit nomenclature of the Miller Act. We thus believe that the language of the statute, interpreted in light of its protective purpose, provides the analytical key to determining whether the supplier can recover under the Miller Act.

We are persuaded by the Court of Appeals for the Eleventh Circuit's recent decision in United States ex rel. Pertun Construction Co. v. Harvesters Group, Inc., 918 F.2d 915, 918 (11th Cir.1990), that a subcontractor can recover increased out-of-pocket costs for labor and materials furnished in the course of performing its subcontract caused by contractor or government delay.13 The Pertun court focused, as we do, on the purpose and language of the Miller Act and found the surety liable for out-of-pocket costs of delay, a holding consistent with both facets of our emphasis. Id. The Eleventh Circuit reasoned that the "purpose of the statute--to afford the subcontractor the financial protection of an action against the surety--[can only] be achieved" by permitting a subcontractor to recover for all costs of labor and material supplied in performing its contractual obligations, "including those portions caused by delay." Id. The inadequacy of the subcontractor's other options, either bearing the costs of delay itself or pursuing a contract action against the contractor, motivated Congress to provide an alternative to "assure full payment for labor and materials actually supplied to a federal project." Pertun, 918 F.2d at 918.

In Pertun the contractor contracted with the Navy to construct improvements at the Reserve Training Center in Miami and secured the requisite Miller Act payment bond from its surety. The contractor subcontracted the concrete work to a subcontractor. Various problems, including the discovery of toxic wastes and the lack of running water and electricity on site, delayed the beginning of work on the project. Once construction started, the contractor's failure to schedule and supervise its subcontractors' work translated into additional delays. The contractor wrongfully terminated the subcontract before the subcontractor completed its work and refused to allow the subcontractor to return to the construction site to finish work or collect its tools and equipment.

The district court granted the subcontractor recovery against the surety for work in place, the value of equipment and material retained by the contractor and incorporated in the project, and increased costs of labor and equipment rentals caused by the delay. Pertun, 918 F.2d at 917. The Eleventh Circuit, affirming the district court's judgment holding the surety liable for extra out-of-pocket expenses, characterized the Subcontractor's actual outlays for labor and material furnished in the performance of the contract, including "additional or increased expenditures caused by delay," not as damages for breach of contract, but as recoverable " 'sums justly due' " the Subcontractor within the meaning of the Miller Act. Pertun, 918 F.2d at 919 (quoting 40 U.S.C.A. § 270b(a) (1986)).

We agree with the reasoning of the Eleventh Circuit and thus hold that the district court erred in concluding that none of the components of TMS's Delay Claim were recoverable against the Miller Act surety. We stress, however, that the subcontractor can only recover from the surety for additional or increased costs actually expended in furnishing the labor or material in the prosecution of the work provided for in the contract and attributable to the delay.14 We limit the surety's liability, in the Eleventh Circuit's words, to the subcontractor's "out-of-pocket costs of delay."15 Pertun, 918 F.2d at 918.

Our decision in United States ex rel. Edward E. Morgan Co. v. Maryland Casualty Co., 147 F.2d 423 (5th Cir.1945), bolsters our conclusion. In Morgan we considered whether the claimed expense attributable to delay, the use value of the subcontractor's own equipment kept idle on the job, constituted "labor or material" within the meaning of the Miller Act and the payment bond. Id. at 425. In that case, a subcontractor appealed from summary judgment dismissing its complaint seeking recovery on a surety bond for the use value of its own equipment, which had remained idle for thirty-one days at the work site. Morgan, 147 F.2d at 424. The prime contractor had subcontracted certain work on a government project to the subcontractor and filed a Miller Act bond with its surety. The subcontracted work involved two stages. When the subcontractor finished work on the first stage, the contractor forbid the subcontractor from moving its "heavy and expensive" equipment to begin work on the second stage, which "left a larger part of the subcontractor's equipment, and all of the larger and heavier pieces, idle." Id. A third party, not the contractor, caused the work stoppage.

We held in Morgan that the use value of the subcontractor's own equipment for the period of delay did not constitute "labor or material" within the meaning of the Miller Act. Morgan, 147 F.2d at 425. Unlike cases allowing subcontractors to recover against Miller Act sureties for costs caused by delay, the use value of the subcontractor's own equipment in Morgan was neither "necessary for the performance of the contract," nor "within the contemplation of the parties" to the contract. Id. Rather, the claim resembled one for damages for breach of contract; we declined to permit recovery against the surety for damages for breach of contract by the government or the contractor. Id. As explained by the Eleventh Circuit, the "use value of its own equipment sought by the Morgan subcontractor is far more analogous to lost profits--for which recovery against the surety is not allowed--than to actual expenditures for labor or materials utilized in the performance of the subcontract--for which [recovery] is allowed." Pertun, 918 F.2d at 919.

Our holding in this case and in Morgan thus necessitates the corresponding conclusion that a subcontractor cannot recover from a Miller Act surety the profits on out-of-pocket expenditures attributable to delay. A claim for profit does not involve actual outlay and thus "falls outside both the letter and the spirit of the [Miller] Act." United States ex rel. Otis Elevator Co. v. Piracci Construction Co., 405 F.Supp. 908, 910 (D.D.C.1975) (holding that although subcontractor could recover out-of-pocket expenditures attributable to delay, subcontractor could not recover from surety for profit of ten percent of direct and indirect additional costs); see Pertun, 918 F.2d at 919. While we hold that additional or increased out-of-pocket expenses attributable to the delay are recoverable against the Miller Act surety, we find that profit on the actual outlay, like the use value of a subcontractor's own equipment, is neither "necessary for the performance of the contract," nor "within the contemplation of the parties."16 Morgan, 147 F.2d at 425.

TMS asserts that the Government's partial termination of the Contract for its convenience and Craftsmen's subsequent termination of the Subcontract resulted in significant costs to TMS.17 TMS contends that the district court erred by concluding that TMS could not recover from the Miller Act surety on the payment bond for its Termination Claim. We hold that the district court correctly denied recovery on TMS's Termination Claim because the components of the claim did not constitute "labor or material [furnished] in the prosecution of the work provided for in [the] contract." 40 U.S.C.A. § 270b(a) (1986). Despite our liberal interpretation of the Miller Act, we remain constrained by the language of the legislation. We agree with the district court's conclusion that the components comprising the Termination Claim are, "by definition ... attributable to elements other than work in furtherance of the Contract as the Contract had already been terminated."

Moreover, the language of the Contract buttresses our holding that a subcontractor cannot recover on a Miller Act payment bond for the cost of labor and materials provided after the termination of work under a government construction project. The Contract provision entitled "Termination for Convenience of the Government" incorporated 48 C.F.R. § 52.249-2 (1984) of the Federal Acquisition Regulations ("FAR"),18 which outlines the duties of the parties upon government termination and includes procedures for making termination claims. Under the FAR, a "subcontractor may have rights against the prime contractor ... with whom it has contracted. Upon termination of a prime contract, the prime contractor and each subcontractor are responsible for the prompt settlement of the settlement proposals of their immediate subcontractors." 48 C.F.R. § 49.108-1 (1984); see also 48 C.F.R. § 49.108-1 to .108-8 (1984) (outlining procedure for settlement of subcontractor settlement proposals).

For the reasons stated in this opinion, we REVERSE in part, AFFIRM in part, and REMAND for further proceedings in accordance with this opinion.