The Law of Payment Bonds

Transcription

1 The Law of Payment Bonds Second Edition KEVIN L. LYBECK, WAYNE D. LAMBERT, AND JOHN E. SEBASTIAN, EDITORS Defending Liberty Pursuing Justice

2 The Law of Payment Bonds, 2d Ed. Contents Chapter 1 - Introduction to Payment Bonds en D. Podwill, M. Lanak Introduction 1 I. Payment Bonds and the Contract of Suretyship 1 II. History and Purpose 3 III. Types of Payment Bonds 5 A. Public Bonds 5 Federal Public Works Projects 5 2. State Public Works Projects 6 B. Private Bonds 7 Statutory Private Bonds 7 2. Common Law Bonds 8 C. Alternative Products IV. Rules of Construction and Interpretation 12 A. Public or Private Project? The Miller Act Little Miller Acts 15 B. Construing Payment Bonds 16 Statutory Bonds Common Law Bonds 19 C. Statutory Bond or Common Law Bond? Bond Terms Statutory Terms 24 V. Who is Entitled to Recover? 26 A. Tiers 26 B. Other Potential Claimants 26 VI. What Is Covered 27 A. Labor and Materials 27 B. Nature of Services Provided 29

3 VII. Extent of Coverage 30 A. Multiple Prime Contractors 30 B. Replacement Contractors 31 New Form 2. New Contractor 33 C. Employee Benefits Claims 35 D. Bonds 36 VIII. Period of Coverage 38 A. Retroactive Coverage 38 B. Multiple-Year Coverage 39 C. When Sureties Can Terminate Bonds 40 IX. Notice and Proof Requirements 41 X. Defenses 41 Conclusion 42 Bibliography 42 Chapter 2 - Who Is Entitled to Recover? Brett D. Divers, P. Keith Lichtman, Ira Introduction 45 I. The Miller Act 45 A. Language of Miller Act 45 B. "Remoteness" 46 C. Prime Contractor 48 D. Subcontractor Versus Materialman 48 E. Suppliers Materials Supplier Labor Supplier F. Second-Tier Claimants or Sub-Subcontractors G. Sham 53

4 H. Other Potential Claimants Obligee Assignees Design and Other Professionals Accountants Subcontractors, Suppliers, and Laborers of Replacement Contractors Employment Agencies Parties to Joint Checks Factors Onsite/Offsite Office Maintenance 60 State Public Works Miller Acts" 61 A. Statutory Language and Remoteness 61 B. Prime Contractor 63 C. Subcontractors 63 D. Second-Tier Claimants or Sub-Subcontractors 64 E. Suppliers Materials Suppliers Labor Suppliers 66 F. Direct 67 G. Sham Claimants 67 H. Other Potential Claimants Obligees Assignees Design and Other Professionals Accountants Subcontractors, Suppliers, and Laborers of Replacement Contractors Employment Agencies Factors Parties to Joint Checks 71 III. Common Law Bonds 72 A. Examples of Common Law Bond Language Bond Forms Other Typical Bonds 73 B. Concept of "Remoteness" 74 C. The "Contractor" or "Prime Contractor" 74 D. "Subcontractors" 75

5 E. "Second-Tier Subcontractors" or "Sub-Subcontractors" 75 F. "Suppliers" Materials Suppliers Labor 77 G. Other Potential Claimants Owners Co-Obligee Lenders Design and Other Professionals Subcontractors, Suppliers, and Laborers of Replacement Contractors Factors 79 Conclusion 79 Chapter 3 Types of Claims Covered Mike F. Pipkin, Nina S. McDonald, Jason Stonefeld Introduction 81 I. Miller Act 82 A. Labor Withholding Taxes Employee Benefit Plan Contributions 86 B. Materials In General Specially Fabricated Materials 89 C. Equipment Capital Purchase Rental Damage to or Loss of Equipment Repairs 94 D. Services 96 E. Premiums 98 F. Loans 98 G. Contract Damages Delay Damages Overhead 102 xv

6 3. Lost Profits Termination Damages 103 H. Extra Contractual Damages Quantum Damages Negligence 107 I. Attorneys' Fees 107 J. Interest 110 K. Retainage Little Act and Common Law Payment Bonds 112 A. Labor 1. Withholding Taxes Union Contributions B. Materials In General Specially Fabricated Materials C. Equipment 1. Capital Purchase Rental Repairs 119 D. Services 120 E. Insurance Premiums and Bond Premiums 121 F. Loans 122 G. Contract Damages 123 Delay Damages Lost Profits 123 H. Extra Contractual Damages 124 Quantum Punitive Damages Negligence 125 I. Attorneys' Fees 125 J. Interest 126 K. Retainage 127 Conclusion 128 Chapter 4 - Proof Requirements

7 Keith Langley, J. Blake Wilcox Introduction 129 I. Payment Bond Claims and Evidentiary Issues 129 A. Statutory Bond Claims: The Miller Act and Little Miller Acts 131 Materials and Labor Were Supplied for Use in the Project Payment Has Not Been Made Jurisdictional Requirements 145 B. Common Law Bond Claims Understanding the Terms the Bond Movement Towards a New Form 157 II. The Surety's Pretrial Discovery and Practical Considerations A. Requests for Documents 158 B. Requests for Information 160 C. Practical Considerations Alternative Means for Acquiring Proof Admissibility of Evidence 161 Conclusion 162 Chapter 5 - Notice Requirements For Bond Claims Michael I. Less, J. Wallace John A. McDevitt Introduction 163 I. Public Works Notice Requirements 163 A. Miller Act 163 The Purpose of the Notice Requirement Who Must Give Notice To Whom Notice Must Be Given The Contents and Form of Notice Time Period for Giving Notice 173 B. Little Miller Acts 177

8 1. Types of Notice Requirements Who Must Give Notice To Whom Notice Must Be Given The Contents and Form Notice The Time Period for Giving Notice 186 C. State By State Notice Requirements Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida 193 Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North 206

9 35. North Dakota Ohio Oklahoma Oregon Pennsylvania Island South Carolina South Dakota Tennessee Texas 45. Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming 215 D. Miscellaneous 215 Private Works Notice Requirements 216 III. Typical Payment Bond Notice Provisions 217 A. Bond 217 B. ConsensusDOCS Payment Bond Subcontractor Payment Bond 218 C. Miller Act Payment Bond 218 Conclusion 218 Chapter 6 - Suit Limitations Courtney Turnage Walker, Eric H. Bradford R Carver Introduction 221 I. Suit Limitations under the Miller Act 222 A. The 90 Day Waiting Period 222 B. The One Year Suit Limitation Period 224

10 Computation and Commencement of the Miller Act Suit Limitation Claimant's Actions Affecting the Commencement of the Limitations Period Summary 235 II. Suit Limitations in the Little Miller Acts 235 A. The Little Miller Acts 235 B. Interpretation and Application of Suit Limitation Periods in the Little Miller Acts 245 C. Effect of a Different Suit Limitation Period in the Payment Bond from That Set Forth in the Little Miller Act 252 D. Summary 255 III. Suit Limitations Applicable to Common Law Payment Bonds 256 A. Contractual Limitation Periods in Payment Bonds 256 The Parties to a Payment Bond Can Generally Establish a Contractual Limitation Period Statutory Prohibitions or Mínimums Application of the Contractual Suit Limitation Period 268 B. Statutes of Limitations as Applied to Common Law Payment Bonds 270 IV. Estoppel, Waiver, and Relation Back 275 A. Tolling the Suit Limitation Period 275 B. Estoppel 279 C. Waiver 284 Conclusion 285 Chapter 7 - Jurisdiction, Venue and Forum Selection Clauses XX

11 Denise C. Puente, Marcha Durcan Introduction 287 I. Miller Act Bonds 287 A. Subject Matter Jurisdiction 287 B. Venue 294 Little Miller Act Statutes 297 A. Jurisdiction 297 B. Venue 299 III. Common Law Bonds 301 A. Jurisdiction 301 B. Venue 302 IV. Bankruptcy Venue 302 A. Change of Venue in Bankruptcy Cases 306 B. Actions Removable Generally under U.S.C C. Removal to Bankruptcy Court under 28 U.S.C D. Exceptions to Removal 313 E. Remand 314 V. Forum Selection Clauses 315 Conclusion 319 Chapter 8 - Effect of An Arbitration Provision in The Principal's Contract With the Claimant James D. Ferrucci Introduction 321 I. Arbitration in Brief Overview 323 A. Statutory Framework 323 B. Limited Judicial Review of Arbitration Awards 330 C. The Consensual Nature of Arbitration 338 II. The Surety's Obligation to Arbitrate 343

12 A. Direct Compulsion Incorporation by Reference Equitable Estoppel 355 B. Indirect 358 C. Statutory Compulsion 359 The Claimant's Obligation to Arbitrate with the Principal and Submit to a Stay of Related Court Action against the Surety 362 A. The Nullification Argument 363 B. When the Claimant's Agreement to Arbitrate is Undisputed or Found to Exist 368 C. When the Claimant's Agreement to Arbitrate is Disputed 376 IV. Consolidation of Related Arbitrations 383 A. Under the Federal Arbitration Act Before Green Tree After Green Tree 389 B. Under State Statutes 394 Statutes Which Do Not Address Consolidation The Revised Uniform Arbitration Act 397 Conclusion 400 Chapter 9 - Preclusive Effect on the Surety of Prior Judgment or Arbitration Award Against the Principal James D. Ferrucci Introduction 403 I. Basic Principles of Preclusion 406 A. Res Collateral Estoppel and Privity 408 B. Due Process Limitations on Nonparty Preclusion 410 II. Preclusion in the Suretyship Context 421

13 A. Extent of Preclusive Effects No Preclusive Effect Conclusively Binding Rebuttable Presumption and Prima Facie Evidence 439 B. Conditions Affecting the Imposition of Preclusive Effects..446 Default Judgments or Awards Notice and Opportunity to Defend 453 III. Prescription, the Incorporation Doctrine and Other Issues 472 TV. The Miller Act Jurisdictional Issue 486 V. Suretyship Defenses 492 Conclusion 500 Appendix 501 Selected Suretyship and Guaranty Cases on Preclusion 501 Federal Common Law 501 Alabama 502 Alaska 502 Arkansas 503 Arizona 503 California 503 Colorado 503 Connecticut 503 Delaware 504 District of Columbia 504 Florida 504 Georgia 504 Hawaii 505 Illinois 505 Indiana 505 Kansas 505 Kentucky 505 Louisiana 506 Maryland 506

14 Massachusetts 507 Michigan 507 Minnesota 507 Mississippi 507 Missouri 507 Nebraska 507 Nevada 508 New Hampshire 508 New Jersey 508 New Mexico 508 York 509 North Carolina 510 North Dakota 510 Ohio 510 Oklahoma 510 Oregon 510 Pennsylvania Puerto Rico 511 Rhode Island 511 South Carolina Texas Virginia 512 Washington 512 West Virginia 512 Chapter 10 - Entitlement to Contract Proceeds Edward G. Gallagher Introduction 513 I. The Rights of Persons Who Furnish Labor and Material to Payment Out of Contract Proceeds 514 A. Equitable Rights 514 B. Trust Fund Statutes 517 C. Barriers to Claims by Subcontractors and Suppliers 518 XXIV

15 II. III. rv. Theoretical Bases for the Payment Bond Surety's Rights to Contract Funds 520 A. Subrogation Subrogation to the Rights of Claimants Subrogation to the Rights of the Obligee Subrogation to the Rights of the Principal 526 B. Assignment from the Principal or Claimants Alleged Conditions Precedent to Exercise of the Payment Bond Surety's Rights 533 The Payment Bond Surety Versus Other Claimants to Contract Funds 537 A. The Principal 537 B. An Assignee of the Principal with a Perfected Security Interest 538 C. The Principal's Trustee in Bankruptcy 538 D. The Internal Revenue Service 539 E. The Surety Versus the Obligee's Setoff. 546 F. The Surety Versus Claims of Unpaid Subcontractors and Suppliers 548 V. The Payment Bond Surety's Claim to Contract Funds on Other Jobs 549 A. The Payment Bond Surety Is Subrogated to the Owner's Rights 550 B. The Extent of the Surety's Subrogation Rights C. The Obligee Could Use Contract Funds from One Job to Pay Subcontractors and Suppliers on Another Job 552 Conclusion 554 xxv

16 Chapter 11 - Defenses James A. Knox, Jr., Stacy Hipsak Goetz Introduction 555 I. The Payment Bond Surety's Right to Assert its Principal's Defenses 556 A. In General 556 B. The Effect of Bond Language 559 C. Second-Tier Claims 560 II. The Payment Bond s Right to Assert its Principal's Counterclaims 561 A. Setoff and Recoupment 561 B. First-Tier Claims 562 C. Second-Tier Claims 564 D. Restrictions 566 III. The Claimant's Material Breach as a Defense 568 IV. Payment as a Defense 569 A. Actual Payment 569 B. Misapplication of Payment 571 In General The Minority Rule The Majority Rule Restrictions 575 C. Joint Check Arrangements 576 Introduction The "California Rule" The "Federal Rule" 579 V. Particular Subcontract Conditions 580 A. The Defense 581 Introduction Construed as a Timing Provision Construed as a Condition Precedent Prevention of the Condition Availability of the Defense to the Surety Public Policy 590

17 B. The "Disputes" Clause and Pass-Through Defenses 594 C. The Clause 596 D. Procedures for Extras and Change Orders 597 E. Shop Drawing Responsibilities 599 Waiver, Estoppel and Related Defenses 599 A. Waiver 600 B. Estoppel 603 C. Release 608 D. Compromise and Settlement 610 E. Accord and Satisfaction 612 F. Novation 613 VII. The Defense Comply with Licensing Requirements 614 A. In General 614 B. Lack of License as a Defense to the Surety 616 C. Who Must be Licensed 617 D. The Unjust Enrichment Argument 618 E. The Doctrine of Substantial Compliance 619 F. Federal Projects 621 VIII. The Claimant's Duty of Mitigation 621 IX. The Payment Bond Surety's Impairment Defenses 624 A. Owner Default 624 B. Material Alteration 625 C. Extension of Time 627 D. Overpayment 631 X. The Penal Sum as a Limitation of the Payment Bond Surety's Liability 632 A. In General 632 B. Exhaustion and Proration 633 C. Attorneys' Fees 634 D. Prejudgment Interest 635 E. of the Performance Bond 636 Conclusion 637

18 Chapter 12 - Bankruptcy Chad L. Schexnayder Introduction 639 I. Fundamental Purposes and Principles of Bankruptcy Law 639 A. Forgiveness of Indebtedness 640 B. Sharing 640 C. Breathing Space 641 D. An Important of the Estate" 642 II. The Impact of Bankruptcy on the Liability of the Payment Bond Surety 643 A. Does the Bankruptcy Stay the Assertion of a Payment Bond Claim? Expansion of the Automatic Stay Stay Pursuant to the Bankruptcy Court's Equitable Powers 645 B. Can Bankruptcy Extend the Time for a Claimant to Make Claims against the Bond? 647 Bankruptcy Filing by the Bond Principal Bankruptcy Filing by the Claimant 648 C. The Doctrine of "Preference" and its Potential to Increase the Surety's Payment Bond Losses 650 The Law of Preference The Preference Complaint against a Project Supplier or for Concern to the Surety The Preference Complaint Brought Directly against the Payment Bond Surety Defenses Available to the Payment Bond Surety 655 D. Setoff-Recoupment Rights as a Defense to the Surety Setoff and Recoupment in Bankruptcy Recoupment Setoff 677 E. Aid in Investigation of Claims; Schedules and Rule 2004 Examinations 681

19 III. The Impact of Bankruptcy on the Indemnity and Subrogation Rights of the Payment Bond Surety 683 A. Does the Bankruptcy Stay the Lawsuit by the Surety against Non-debtor Indemnitors? 683 Application of Section 362(A) to Non-debtor Indemnitors Equitable Authority of Bankruptcy Court to Stay Surety Actions 686 B. The Surety's Rights to Contract Proceeds 688 The Surety's Rights Are Superior to Debtor's Interest in Contract Funds Debtor's Limited Use of Bonded Contract Proceeds 696 C. The Actions to Protect Surety's Rights in Bonded Contract Proceeds 698 Surety Notice to the Obligee Investigate First Day Motions and Orders Motion to Sequester Cash Collateral and, Alternatively, for Adequate Protection Motion for Relief from the Automatic Stay Regarding Bonded Contract Proceeds 707 D. Asserting the Surety's Right to Distributions from the Debtor's Bankruptcy Estate The Surety's Proof of Claim 710 Conclusion 716 EXHIBIT 717 Chapter 13 - The Surety's Common Law and Contractual Rights of Indemnity J. Michael Hennigan, Jeffrey S. Price, Jarrod W. Stone Introduction 719 I. The Surety's Common Law Rights 721 A. Exoneration 721 B. Quia Timet 723 C. 726 XX1X

20 D. Contribution 729 Two or More Sureties for the Same Principal Two Different Sureties Providing Bonds for Different Principals 731 II. The Surety's Rights under the Indemnity Agreement 732 A. Indemnity Provision 734 B. Collateral Deposit Provision 739 C. Right-to-Settle Provision Absence of Right-to-Settle Provision Balancing the Surety's Discretion and Standards of Reasonableness and Good Faith Deposit of Collateral Prima Facie or Conclusive Evidence Provision Failure to Mitigate Damages The Bond Versus the Indemnity Agreement Notice to Indemnitors Right to Settle the Principal's Affirmative Claims 759 D. Evidence of Payment Provision 763 E. Recovery of Attorneys' Fees Provision 766 F. Assignment Provisions Bonded Contract Balances The Principal's Claims against Third Parties Assignment of Material and Equipment on Bonded Projects 775 G. Filing Provision 779 H. Provision 781 I. Right to Finance Provision 783 J. Trust Fund Provision Local Law Must Be Observed Courts Finding That a Trust Was Formed Courts Finding That a Trust Was Not Formed 790 K. Duty to Cooperate Provision 793 III. Defenses to the Surety's Rights of Indemnity 794 A. Defenses Based upon the Surety's Action or Inaction 794 Assertion That Surety Paid an Payment Bond Claim Assertion That Surety Made a Payment in Bad Faith 796 XXX

21 3. Assertion That Surety Acted Unreasonably Assertion That Surety Failed to Mitigate Its Damages Assertion That Surety Not Entitled to Recover Damages Arising from Surety's Conduct 804 B. Technical Defenses Asserted by Principals and Indemnitors 809 Lack of Notice to the Principal and Improper Signature on Indemnity Agreement C. "Indemnitor Only" Defenses Failure to Adequately Pursue Principal Sale of Business to Another Principal 813 D. Defenses Based upon Wrongful Interference, Dominion, or Abuse of Rights Wrongful Interference Domination Abuse of Rights 817 E. Defenses Based upon the Surety's Underwriting Procedures 818 Conclusion 820 Chapter 14 - Payment Bond Claims Handling and the Law of Bad Faith Charles W. Bennett J. Lee, Robert C. Niesley Introduction 821 I. Follow the Statutory Claims Settlement Regulations in Effect in the Jurisdiction Where the Claim Arose 822 II. The Law of Bad Faith and the Payment Bond Surety 846 A. The Development of Bad Faith Law 846 B. The Application of Bad Faith Law to a Payment Bond Surety 852 C. Bad Faith and the Miller Act 865

22 D. Bad Faith Damages Punitive Damages Statutory Damages Consequential Damages Effect upon the Penal Sum 876 III. Payment Bond Claims Handling: Four Practical Suggestions A. Step 1: Document Everything of Significance 878 B. Step 2: Independently Investigate 879 C. Step 3: Utilize a Diary System and Communicate 881 D. Step 4: Carefully Assess Whether to Tender the Surety's Defense 882 Conclusion 885 Chapter 15 - Miscellaneous Issues Catherine Squillace, Susan Evans Jones, Michelle Matthew M. Horowitz Introduction 887 I. Apportionment of Liability between Sureties 887 A. Co-Suretyship 888 When There Are Two Sureties on the Same Without a Written Agreement When There Are Two Sureties on the Same With a Written Agreement 889 B. Sub-Suretyship 891 Apportionment Between the Subcontractor's Bond the Prime Contractor's Bond 892 C. Priority among Different Bond Types 893 n. Obligation to Sue Both the Surety and Principal 894 Assignment of Payment Bond Claims 897 IV. Claims in Excess of the Penal Sum and Pro Rata Distributions 900 xxxn

23 V. Will the Surety be Precluded from Later Asserting Any Defense Not Raised in Its Denial of a Payment Bond Claim? 904 VI. Criminal Liability of the Principal for Diverting Contract Proceeds 909 VII. Joint and Several Liability of the Principal and the Surety VUL Delivery 912 Unauthorized Bonds 914 X. Insurance Policies and the Payment Bond Surety 918