Is Your “Federal” Project Subject to the Miller Act?

Overview

         Two recent federal district court rulings, upheld on appeal, may shed light on when a construction project may or may not be considered a public building or works project subject to the federal Miller Act bonding requirements.  In Scarborough v. Carotex Construction, et al., Case No. 09 -60156 (2010) and Wesco Distribution, Inc. v. Sunrise V.A. Medical, LLC,Case No. 09 -60686 (2009), the United States District Court for the Southern District of Florida dismissed both cases for lack of subject matter jurisdiction, finding that neither case stated a valid federal Miller Act claim. The dismissal of these cases points out specific legal indicators for federal Miller Act projects.  If there is doubt about the Miller Act status of a project, it may be wise to look for those indicators.

         The project at issue involved construction of the Sunrise VA Medical Clinic in Sunrise, Florida (the “Clinic”), which was situated on property owned by a private entity (“Owner”).  The Owner entered into a construction contract with the general contractor (“Contractor”), and construction of the Clinic was brought about by a long term lease agreement between the Owner and the United States Department of Veterans Affairs (the “VA”).  Upon completion of construction, the VA occupied and operated the Clinic.  The lease agreement between the Owner and the VA, which was incorporated into the construction contract, required that the Owner make the Contractor furnish a performance bond and a labor and material payment bond. 

         The Contractor and an individual surety, Scarborough, executed the bonds for the Clinic construction project.  During construction, the project experienced many difficulties, including substantial design changes and construction delays, and the Contractor experienced significant financial problems which lead to numerous lower tier subcontractors and suppliers being unpaid or underpaid for labor, materials, and supplies furnished to the project.  Many of these subcontractors and suppliers filed claims on the Contractor’s payment bond.  Additionally, the Owner asserted a claim on the Contractor’s performance bond.

         In Scarborough the individual surety (“Surety”) filed suit in federal court against the Owner, the Contractor, and multiple subcontractors and suppliers who had asserted payment bond claims.  The Surety sought a declaration from the court that the Surety owed no obligation to the Owner under the performance bond, or to the multiple unpaid subcontractors and suppliers under the payment bond, issued by the Surety and the Contractor.  The Surety originally claimed that the federal court had jurisdiction over this dispute on grounds of diversity of citizenship; however, during the suit the Surety conceded that diversity was not present but still sought to keep the suit in federal court by arguing that the bonds issued on the project were Miller Act bonds. 

         In Wesco one of the project’s material suppliers separately sued the Owner, the Contractor, and the Surety in Florida state court seeking to recover unpaid amounts.  The Surety removed this case to federal court, again on diversity grounds, seeking to have this affirmative claim tried as part of the main declaratory judgment action.  As in his main case, the Surety again changed his ostensible basis for federal jurisdiction in Wesco by later arguing that his bonds were Miller Act bonds.

         After discovery was complete, the Owner and several of the remaining subcontractor/supplier defendants moved for summary judgment seeing to dismiss the lawsuit on grounds that the federal court lacked jurisdiction.  In short, these defendants argued the bonds were not Miller Act bonds and, therefore, the federal court did not have jurisdiction over the lawsuit.  Similarly, in Wesco, the supplier sought to return (or remand) its case to state court, arguing again (among other things) that there were no Miller Act claims conferring jurisdiction on the federal court.

Why Is a “Miller Act” Bond Important?

         The question of whether the case involved a Miller Act project may be important to the parties for a variety of reasons.  The federal Miller Act (40 U.S.C. § 3131, et seq.) requires bonds on contracts for public buildings or public works, including a payment bond against which subcontractors and suppliers on the bonded project can file claims if they are not timely paid on “any contract of more than $100,000 . . .  awarded for the construction, alteration, or repair of any public building or public work of the Federal Government.”  The Miller Act payment bond is an agreement between the project’s general contractor, and a surety whose solvency is subject to some federal standards.  In theory, federal Miller Act bonds are intended to assure project subcontractors and suppliers of certain tiers working on a Miller Act project that they will be paid for their labor or materials furnished on the project.  Federal district courts have exclusive jurisdiction over actions on Miller Act bonds.  To some parties, litigation in a federal district court may be advantageous as there may be substantive differences in the nature of a party’s remedies such as recovery of legal fees or the number of tiers of subcontractors/suppliers that may assert a claim on the bond. 

Was the Clinic a Miller Act Project?

         The Surety contended that a VA clinic was clearly “a public building or public work of the Federal Government” under the Miller Act.  The Surety pointed out that its bonds bound the Surety and the general contractor to both the Owner and “the United States of America acting through the Secretary of the Department of Veterans Affairs.”  The Surety, citing prior federal court rulings, including a United States Supreme Court ruling in United States ex rel. Noland Co. v. Irwin, 316 U.S.23 (1942) (“Noland”), argued that a building could qualify as a federal public building project, even if the United States leased the building instead of owning it. The Surety further argued the Clinic could be a public building project, even if the federal government did not sign the construction contract.

         The court held that the Clinic was not a federal building project, because the federal government did not sign the construction contract, did not own the property on which the project was built, and did not directly fund the construction by paying the Contractor for work.  The court acknowledged that, in Noland, the construction of a library on a university campus was held to be a federal public building project, even though the university would own the library, but the district court in Scarborough and Wesco noted two important differences with Noland.  First, in Noland, the Secretary of the Interior signed the construction contract for the library, while the Owner alone signed the construction contract for the Clinic. Second, the federal government fully funded the library, while the Clinic would be owned by the Owner, and merely operated by the VA, after completion.  These, and additional factors such as the posting of a Miller Act bond by the general contractor in Noland, argued in favor of finding Noland involved a Miller Act project.

         Still, the district court apparently gave no consideration to (or was unaware of) several facts that may have cut in favor of finding that the Surety’s bonds were Miller Act bonds.  First, the VA, through the lease agreement with the Owner, was funding a significant portion of the construction through its lease payments.  Second, the lease agreement included an option for the VA to purchase the facility at a later time.  Third, the VA’s Resident Engineer had significant input into and involvement during construction of the clinic, including final approval of most of the design and construction items.  Also, the district court did not consider that the lease agreement was expressly incorporated into the construction contract or that the VA required the Owner to insist upon the Contractor furnishing payment and performance bonds.  Although these factors may have cut in favor of finding that the Surety’s bonds were Miller Act bonds, the court appeared to be more persuaded by the simple undisputed facts that the federal government did not own the property, and was not a party to the construction contract.

         The district court’s rulings in Scarborough and Wesco were appealed and recently affirmed in Scarborough v. Carotex Construction, Slip Copy, ____ F.3rd____, 2011 WL 902222 (11th Cir. 2011), in which the court of appeals recited many of the same considerations and cases cited by the district court in reaching its decision that the Surety’s case did not involve a Miller Act project.  Ultimately, the court of appeals held that it was unnecessary to decide any Miller Act issues in the case, because the district court properly dismissed the Surety for failing to properly raise any claims under federal law.

Why Sunrise VA Medical Clinic Was Not a Miller Act Case

         A review of the district court’s reasoning may be instructive for future cases. The district court, like most courts that have decided the issue of what makes construction job a Miller Act public building or works project, looked at several key indicators of a Miller Act project, i.e.: (1) did the United States, or an agency or agent authorized on its behalf, sign the construction contract; (2) was the United States the owner, or would it become the owner, of the public works or the property on which it was built; and, (3) were bonds for the construction contract issued under the Miller Act?

         The trend in court decisions appears to be to look, first, at whether the United States, or an agency or agent authorized on its behalf, signed the construction contract.  Second, the more the United States owns or will own the improved property, or funds or initiates the construction of the improvements directly to or with the contractor, the more likely courts are to find a Miller Act project.  The Surety’s reliance on longstanding precedent in arguing to the district court that the United States did not have to own the Clinic property, may simply have been unpersuasive to the court where the Surety did not initially assert the Miller Act as its basis for federal court jurisdiction, or it may have been that the VA’s leasehold interest in the property and partial funding of construction to the Owner instead of the Contractor was insufficient to connect the federal government to the project for purposes of identifying it as a Miller Act project.  Finally, courts may scrutinize the bonds in a case, to see if they were written pursuant to the Miller Act. This factor seems to come into play in cases where the government has not signed the construction contract, and/or has limited ownership or funding roles in the construction.  InScarborough andWesco, there is no indication that the bonds were required to be Miller Act bonds.  Instead, these bonds, while naming a federal government agency, seemed to be primarily written for a private Owner

Points to Remember

         Scarborough and Wescomay show a trend toward innovative, flexible, and non -traditional approaches for securing federal facilities, e.g., by private construction/leasing arrangements, rather than by direct federal construction contracts.  This trend is likely to produce cases in which the “public building” or “public works” character of a construction project is unclear.  This trend may also occur on local public building or works projects as well, where state or local governments may engage in private/public partnerships, rather than direct public construction contracts.  Contractors, subcontractors, and suppliers should be sensitive if they find a “public” construction contract is not signed, owned, or funded directly by the federal government, but rather involves a private entity in one or all of these roles. 

         Where the involvement of the federal government is limited, such as instances where the owner of the project is identified as a private company rather than the federal government, the contracting parties may do well to ask questions.  First, did the federal government or its agency or authorized agent sign the construction contract?  A Miller Act project is more likely to exist, if the answer to this question is yes. If the federal government’s execution of the construction contract is uncertain, contractors, subcontractors, and suppliers can ask: to what extent does the federal government own or fund this project?  The less the federal role in funding or ownership, the less likely the project is to be a Miller Act project.  Finally, the construction parties should ask about the bond itself: does it state that it is a Miller Act bond, that the federal government is the owner, and does the underlying project show that the bond was given under the Miller Act, rather than some other federal or private bonding reason? The bond form is a secondary consideration, but might be a “tie breaker,” where the other indicators of a Miller Act project are uncertain.