Payment bonds can provide property owners with important protection against the possibility of mechanics liens being filed on their property. They replace a lien’s interest in the property with a claim against the surety bond itself. Most construction project participants have the right to make a claim against the bond. But what about property owners? Can they seek indemnification from the payment bond surety? In Louisiana, a court declared that property owners can’t make claims against a payment bond.
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Payment bond claims in Louisiana
The Louisiana Private Works Act (PWA) governs mechanics lien claims (privileges) on private construction projects within the state. In addition to lien rights, the Act also provides owners with the option of requiring the general contractor to post a payment bond on the project. This is codified under La Rev. Stat. §9:4802(C); which states:
The owner is relieved of the claims against him under this section and the privileges securing them when the claims arise from the performance of a contract by a general contractor for whom a bond is given and maintained as required by R.S. 9:4812.
When this occurs, the bond acts as security for the property owner, by allowing parties to assert claims against the bond as opposed to the property itself. But can property owners seek recovery against the bond? That’s what a recent Louisiana Court of Appeals case had to address.
Property owner requires GC to hold payment bond
The case in question is Roy Anderson Corp. v. 225 Baronne Complex, LLC
- Owner: 225 Baronne Complex, LLC (Baronne)
- Sureties: Travelers Casualty & Surety Company of America, Liberty Mutual Insurance Company, Fidelity & Deposit Insurance Co. of MD, Federal Insurance Co. (Sureties)
- General Contractor: Roy Anderson Corporation (Roy)
Baronne entered into a construction contract with Roy to act as general contractor in converting an office building into a hotel, apartment building, and parking garage. Roy furnished a payment bond with the Sureties.
Upon substantial completion of the project, Roy was still waiting for over $15K in unpaid labor, materials, and equipment provided to the project. As a result, they filed a mechanics lien against the property. Shortly thereafter, Roy filed an action to enforce the lien claim and recover damages.
Property owner makes a claim against the bond
Baronne, in response to the lien enforcement action, filed a third-party demand against Sureties, seeking to recover from them under the payment bond issued on the project.
They argued that, since the lien claim included money allegedly owed to subcontractors on the project, the Sureties were required to pay or indemnify them from any claims by subs. Furthermore, they relied on the language of the payment bond itself, which read:
When the Owner has satisfied the conditions of Section 3, the Surety shall promptly and at the Surety’s expense defend, indemnify and hold harmless the Owner against a duly tendered claim, demand, lien, or suit.
The Sureties argued that Baronne had no right of action since, as the property owner, they weren’t a proper claimant under the payment bond.
The trial court agreed with Sureties, declared that Baronne had no right of action, and dismissed the case. Baronne appealed.
Court: Owners have no right of action against a payment bond
The Court of Appeals focused on the fact that the payment bond is a statutory bond. The provisions of the Private Works Act (PWA) are incorporated into the payment bond itself under La. Rev. Stat. §9:4812(D). The purpose of the PWA is to protect subs and other project participants who don’t have contractual privity with the property owner. The way the PWA achieves this is by allowing certain specified claimants an avenue of recovery while protecting owners against liability.
Furthermore, although Baronne relied on the payment bond language of indemnification, the Court also pointed out the language in the payment bond. This section stated that “any provision of this Bond conflicting with said statutory or legal requirement shall be deemed deleted herefrom.” Given all this, property owners have no cause of action to assert a claim against a statutory payment bond. Therefore, Baronne’s claim was dismissed.
Louisiana law overrules conflicting bond language
Under the PWA, the payment bond act as owner security to respond to claims from parties specified in the statute: Subs, laborers, equipment lessors, etc. However, payment bonds in Louisiana must incorporate the provisions of the Private Works Act, which specifically identifies who can make a claim against the payment bond. Property owners are not included as a protected class.
The court refused to expand the liability of the surety beyond what is provided by statute, regardless of what the language of the payment bond provides.