Imagine this Scenario when Supplier Files Miller Act Payment Bond Lawsuit

Imagine this scenario.

A supplier enters into an oral agreement with a subcontractor to furnish materials for a particular federal job. (Yes, oral agreements or the handshake deal still do exist!) The supplier furnishes $61,000 worth of materials, the subcontractor utilizes the materials, but then does not pay for the materials (for whatever reason, perhaps it was not paid by the prime contractor).   As a result, the supplier serves a notice of nonpayment and sues the prime contractor’s Miller Act payment bond and the subcontractor.

But, the subcontractor files for bankruptcy during the lawsuit and the lawsuit is stayed.   The supplier preserves rights in the subcontractor’s bankruptcy by filing a proof of claim.   The subcontractor objects to the proof of claim and an evidentiary hearing is held to determine (a) whether a contract exists between the subcontractor and supplier and, if so, (b) the amount of unpaid materials. The bankruptcy judge rules there was a contract and that the subcontractor is only owed $41,000 instead of the $61,000 the supplier sought. Of course, the supplier is not paid by the bankruptcy estate.

The supplier then moves to lift the stay to continue to pursue the Miller Act payment bond for its unpaid amounts. The Miller Act payment bond surety, however, does not want to be bound by the ruling in the bankruptcy court and the federal court agrees since the surety was not a party to that proceeding.

The question is why would the Miller Act suety take this route? In other words, they have an argument from the bankruptcy court that the supplier is owed $20,000 less than it was seeking. The supplier was able to establish materials were furnished that the subcontractor utilized. So, what benefit does the prime contractor really have in trying to re-litigate these points that may cost it more money in the long run? In my opinion, all this does is give the supplier the argument that it is entitled to recover the full $61,000 of its original claim instead of accepting the lesser amount determined in the bankruptcy court.

Remember, when it comes to a supplier (or claimant) proving a Miller Act claim, it just needs to prove: “(1) the plaintiff supplied materials in prosecution of the work provided for in the contract; (2) the plaintiff has not been paid; (3) the plaintiff had a good faith belief that the materials were intended for the specified work; and (4) the plaintiff meets the jurisdictional requisites of timely notice and filing.” This should hopefully not be an overly challenging standard for a supplier.

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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