Payment bond rights under your state’s Little Miller Act statute are not easily avoided. Little Miller Act statutes allow subcontractors and lower-tiered parties to make claims against the payment bond that every general contractor must post for public projects. This process guarantees a certain level of protection for subs while ensuring a level of efficiency on public projects. Still, as is the nature in any financial situation, some general contractors and sureties will also look for loopholes and ways around paying subs and lower-tiered parties. Thankfully, courts understand the importance of these rights and will not treat them lightly.
The Background
Mississippi State University was having a new research center built in Stoneville, Mississippi. McMillan-Pitts Construction Company, LLC was selected as the general contractor for the public project. McMillan-Pitts, as required by law, obtained payment and performance bonds from Travelers Casualty & Surety Company of America. The bonds were governed by Mississippi law, and McMillan-Pitts and Travelers agreed to be jointly and severally liable for the covenants in the bonds.
One of McMillan-Pitts’ subcontractors, Tackett Electric Company LLC, ran into some financial trouble. Tackett owed money to a couple of creditors, including their subcontractor, JSI. Tackett owed JSI a total amount of $36,346.09. Along with JSI, another creditor of Tackett unrelated to the Project served a writ of garnishment on McMillan-Pitts, seeking access to any funds owed to Tackett. In response to the writ, McMillan-Pitts initiated a interpleader action, naming Tackett, the unrelated creditor, and two of Tackett’s subcontractors (not JSI) as defendants. Tackett’s two subcontractors had joint check agreements. According to McMillan-Pitts’ complaint, it believed that these four defendants were the only ones with interest to the proceeds or who may assert claims to the proceeds.
McMillan-Pitts tendered $19,445.16 into the court’s registry. This was the amount of money still owed to Tackett for work on the Project. On August 30, 2012, McMillan-Pitts received a judgment releasing it from any further liability pertaining to the four defendants. Around October 2012, JSI notified both McMillan-Pitts and Travelers that it was seeking payment under the Project’s payment bond. Being creative (and sneaky), McMillan-Pitts amended its complaint for interpleader on October 25 to include JSI and “all person or entities supplying materials and/or labor to Tackett” on the Project. That same day, McMillan-Pitts obtained an amended judgment extending the release of liability to “any claim made by any other claimant made a party to this action for sums due and owing from [Tackett] for materials, supplies and/or labor provided to [Tackett] on the [Project].”
Travelers used this amended judgment to deny JSI’s claim on the payment bond, explaining that the amended judgment released McMillan-Pitts of any obligation to Tackett and, in turn, released Travelers as well. JSI then sued Travelers for payment. The district court granted summary judgment in favor of Travelers. JSI appealed.
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The Decision
The Fifth Circuit Court of Appeals, in JSI Communications v. Travelers Cas. & Surety Co. of America, 2015 U.S. App. LEXIS 21080 (Dec. 4, 2015), was not as convinced as the district court that Travelers and McMillan-Pitts were no longer liable to JSI. Travelers stuck to its argument that the liability JSI claims was extinguished by the amended judgment obtained through the interpleader proceedings.
To permit the chancery court to sub silentio nullify Travelers’s bond obligation would be contrary to the very purpose of Mississippi’s Little Miller Act, which is to provide protection to subcontractors in the absence of lien rights. The Court reasoned that this was a violation of JSI’s rights under Mississippi’s Little Miller Act. Under the Act, second-tier contractors can sue on a payment bond, even if no direct contractual relationship exists with the general contractor. Therefore, the Court explained that this right meant that McMillan-Pitts being released from liability for Tackett’s subcontract has no effect on JSI’s ability to recover from the payment bond. Further, the Court stated that Travelers, a non-party to the interpleader, would not be shielded by the release obtained by McMillan-Pitts. The Court reversed the judgement of the district court AND rendered a judgment in favor of JSI for the amount owed.
Thoughts and Advice
This court decision is a great example of how important Little Miller Act statutes are. These statutes afford subcontractors recourse where lien rights do not exist. To allow general contractors and sureties to utilize loopholes and essentially cheat subcontractors out of money owed to them would be an absolute travesty and destroy the very purpose of the Little Miller Act statutes. The Fifth Circuit Court of Appeals recognized this point and handed down a just ruling. Otherwise, the Little Miller Act would have been weakened to a point where other subcontractors may have faced the same fate.
All that aside, the issue in the case arose out of something that was glossed over: visibility in work projects. McMillan-Pitts claimed to have not known of the existence of JSI, and therefore did not originally involve them in the interpleader complaint. Whether true or not, this is a problem that has been faced before by many other general contractors. Because of the complexity of construction projects throughout the country, sometimes parties go unnoticed by contractors higher up on the construction chain. Sometimes this scenario does not result in problems, but when things go belly-up, the unknown parties find themselves in a bit more difficult position than the rest.
One solution to this problem of visibility and clarity on a work project was mentioned in this case: joint check agreements. Joint check agreements are very common in the construction industry and can protect parties from contractors that are not financial savvy or sound. A basic joint check agreement is entered into between a GC, subcontractor, and material supplier. When issuing payment for work done by the material supplier, the GC will write the check out to both the subcontractor and the material supplier. This provides a certain level of protection for the supplier from the subcontractor and the GC from mechanics lien and bond claims. It also creates clarity of which parties are working on the project.
Preliminary notices have a similar effect. These notices alert general contractors and owners of the existence of lower-tiered parties and can even have those parties payments prioritized in order to avoid the risk of having a lien or bond claim. These few practices that are rather common in the construction industry could have saved JSI a huge headache and maybe even some money in attorneys fees.
