United States of America, for the Use and Benefit of Balzer Pacific Equipment Company v. Fidelity and Deposit Company of Maryland

895 F.2d 546, 36 Cont. Cas. Fed. 75,792, 1990 U.S. App. LEXIS 1073, 1990 WL 6377

• Court: Court of Appeals for the Ninth Circuit
• Decided: January 31, 1990
• Docket: 88-15464
• Status: Published

Opinions

SNEED, Circuit Judge:

Fidelity and Deposit Company of Maryland (F & D) appeals from a jury verdict of $66,082.54 in favor of Balzer Pacific Equipment Company (Balzer). F & D asserts that the trial court erred in denying its motion for a directed verdict, as well as in denying its motion for judgment n.o.v., and, alternatively, for a new trial. We reverse and remand for a new trial.

I.

JURISDICTION

Jurisdiction in the district court resides in 28 U.S.C. § 1331 and we have jurisdiction under 28 U.S.C. § 1291.

II.

FACTS AND PROCEEDINGS BELOW

Balzer brought this action under the Miller Act, 40 U.S.C. §§ 270a-270d, against F & D on payment bonds issued by F & D in respect to four contracts between S & S Contracting, Inc. (S & S) and the United States to be performed principally in Guam. These contracts were for construction of (1) an airport, (2) a highway, (3) a park memorial, and (4) work for the Navy in Midway. Balzer furnished material to S & S to be used both in connection with these contracts and for several contracts S & S had with parties other than instrumentalities of the United States. S & S became insolvent and was unable to meet its obligations owed to Balzer. This action ensued.

To perform its federal and non-federal projects, S & S needed to mine and process limestone on Guam as a component of pavement. S & S thereupon moved a rock crusher from Samoa to Guam that it had previously purchased from Balzer. S & S also bought from Balzer an asphalt plant and additional crushing equipment that it placed at a limestone quarry in Guam. S & S’s operations also employed a cement mixer and two Bomag rollers which were mobile and taken to the job sites. Balzer furnished material and parts for each of these pieces of equipment in amounts stipulated to by Balzer and F & D.

The difficulty which provides the genesis of this lawsuit is that neither Balzer nor S & S attempted to maintain any records that would enable the apportionment of specific materials and parts to each specific contract as to which F & D issued its payment bonds. Balzer insists that such apportionment is not necessary; it is enough for it to show that it reasonably believed that all the stipulated items were to be used in bonded federal projects. F & D argues that there must be an apportionment of specific materials to each contract before it becomes liable on any payment bond issued as to the four federal projects.

The district court ruled in favor of Balzer and incorporated that ruling in its instructions to the jury. E.g. Instructions No. 4,¹ 5,² 6,³ and 7.⁴ In its “Memorandum and Order,” the court concluded “that to require Balzer to prove that it had a reasonable belief that the use of each item supplied was for one specific job of the four contracts, or to apportion its claims among the four contracts, would place an insurmountable burden on Balzer in light of the record keeping of S & S Contracting and the nature of the use to which Balzer’s equipment or materials were put.”

F & D argues vigorously that apportionment to each bonded contract is required by the language of the Miller Act, the cases interpreting the Act, and the need to preclude “cross-collateralization.” Cross-collateralization occurs when the protection afforded by one bond is available to provide protection with respect to supplies in fact furnished on a different contract in excess of the coverage provided by the bond applicable to this latter contract.

III.

STANDARD OF REVIEW

The issues presented by this appeal are questions of law; therefore, our review is de novo. United States v. McConney, 728 F.2d 1195, 1201 (9th Cir.) (en banc), cert. denied, 469 U.S. 824, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984).

IV.

DISCUSSION

A. The Miller Act

Quite correctly F & D points out that the Miller Act’s language speaks in the singular when using the term “payment bond” and “contract,” see 40 U.S.C. § 270a, b, and c, and that no provision exists therein to aggregate the amounts of the bonds applicable to several contracts even when such contracts pertain to related projects. Claims that exceed the penal sum of a particular bond must be paid on a pro rata basis. See generally Pennsylvania Fire Ins. Co. v. American Airlines, Inc., 180 F.Supp. 239 (E.D.N.Y.1960).

Balzer argues to the contrary on the basis of cases that have held that the supplier of materials need not prove that all such materials were actually delivered to the site of the bonded work and incorporated therein so long as it had a good faith and reasonable belief that the material was intended for use in the bonded federal project. See, e.g., United States ex rel. Martin Steel Constructors, Inc. v. Avanti Constructors, Inc., 750 F.2d 759, 761 (9th Cir.1984), cert. denied, 474 U.S. 817, 106 S.Ct. 60, 88 L.Ed.2d 49 (1985) (hereinafter “Martin Steel”)', United States ex rel. I. Burack, Inc. v. Sovereign Constr. Co., 338 F.Supp. 657, 660 (S.D.N.Y.1972); United States ex rel. Tom P. McDermott, Inc. v. Woods Constr. Co., 224 F.Supp. 406, 409 (N.D.Okla.1963).

The district court was partially correct when it incorporated the “reasonable good faith” standard in its jury charges. See, e.g., United States ex rel. Krupp Steel Prod., Inc. v. Aetna Ins. Co., 831 F.2d 978, 980 (11th Cir.1987) (finding that supplier delivered goods to job site in good-faith belief that they were being used for bonded project). For example, in “Instruction No. 4,” the jury was told that Balzer was required to show, among other things, that it “in good faith had reason to believe that the materials were intended for the work specified in the contracts and covered by Fidelity and Deposit’s bonds.” (Emphasis added.)

The italicized words reveal the heart of this case. The error of Balzer and the trial court consists of expanding the “reasonable good faith” standard to embrace all possibly applicable payment bonds issued by the same surety rather than restricting it to resolve doubts about whether the supplies were used on the specific bonded job, or on a job bonded by another surety, or on an unbonded one. To extend the “reasonable good faith” standard in this manner alters each of the contracts entered into by the surety and converts them into one contract that provides for a penal sum equal to the aggregate sum of the several bonds. This approach also makes that sum available with respect to any defaults by the contractor arising out of any of the work pursuant to any of the contracts with the United States. No such result is envisioned by the Miller Act.

In its Memorandum and Order, the district court justified this remaking of the payment bond contracts between F & D and S & S on the basis that the latter kept no records that would enable S & S or Balzer to allocate “the use of equipment and supplies at the quarry to any one particular job.” Under these circumstances the court felt Balzer should be permitted to proceed against the four bonds restricted only to establishing that it had a good faith belief that the materials were furnished to enable the contractor to perform one or more of the jobs for which bonds were issued by F & D. That is, “the balance of equities favored Balzer.”

The district court, in our opinion, overlooked Balzer’s opportunity to have insisted on better accounting by S & S. It should not have been difficult for S & S to have maintained a record of the time and the amount of pavement that was laid down on each particular contract with the government. Indeed, it very likely estimated the amount that would be required before entering the contract with the United States. Fixing the time would require only rudimentary records. Since the equipment and supplies furnished by Balzer were to process limestone for use as a component of pavement, the amount and time of pavement supplied per contract would have been a means by which supplies could be allocated to specific contracts. Balzer cannot use its failure to insist on a modest amount of cost accounting by S & S to justify its demand that the contracts into which F & D and S & S entered be fused into one for its benefit.⁵

We are mindful that F & D requested several jury instructions that insist on a greater precision in allocating materials to specific contracts with the United States than does the allocation method just suggested. E.g., Requested Instructions No. 7⁶ and 11.⁷ We do not demand that level of precision under the circumstances of this case. Our quarrel essentially is with the district court’s fusion of four contracts into one, rather than insisting on a reasonable allocation method, to solve the difficulties presented by the facts of this case.

B. Case Law Relied on by F & D

F & D relies on our opinion in Martin Steel, 750 F.2d at 761, to fix the elements a claimant on a Miller Act payment bond must establish to recover. These are:

(1) the materials were supplied in prosecution of work provided for in the contract;

(2) claimant has not been paid;

(3) he had a good faith belief that the materials were intended for the specified work; and

(4) the jurisdictional requisites have been met.

It is obvious that Balzer has not been able to establish what specific material was supplied for use on what specific contract. On the other hand, F & D overstates the demands of the initial requirement when it argues that any supplies that are intended to be used on two or more jobs constitute, ipso facto, an irrecoverable “capital expense” and not recoverable “material.” As previously indicated, we only require (1) a reasonable belief on the part of the materialman that the supplies for which he seeks payment will have been consumed on the work of the bonded contracts as a group and (2) a reasonable belief that the amount allocated by him to each contract is a proper amount. We believe this is consistent with the fundamental distinction between “materials” and “capital expense” as marked out by United States ex rel. Sunbelt Pipe Corp. v. United States Fidelity and Guar. Co., 785 F.2d 468, 470-71 (4th Cir.1986), on which F & D relies. Moreover, it will enable the materi-alman to establish that he has not been paid and that he had a good faith belief that the materials were intended for “specific work.” ⁸

Compliance with the jurisdictional requirement also is facilitated by the approach we adopt. The Miller Act, 40 U.S.C. § 270b(b), requires that suit under the Act be brought within one year “after the day on which the last of the labor was performed or material was supplied by him.” The last day on which material was supplied under the facts of this case would be the last day on which Balzer delivered to S & S limestone, or furnished S & S supplies attributable to maintaining the cement mixer and the Bomag rollers, and as of which date Balzer could establish a reasonable belief that a portion of the limestone and supplies would be used in one of the four jobs. For example, if one of the jobs had been completed on a given date that Balzer furnished limestone or supplies to S & S, it could not establish a reasonable belief that as of that date the items it delivered would be used in the completed job. For jurisdictional purposes pertaining to such a completed job, Balzer would have to pull back the starting date of the one-year limitations period to a time when it could establish a reasonable belief that a portion of what it delivered to S & S was to be used at that job.

This avoids permitting the last day material furnished with respect to bonded Job B from being used to fix the jurisdictional limit for material furnished on an earlier Job A, a result condemned in United States ex rel. Grotnes Machine Works, Inc. v. Henry B. Byors & Son, Inc., 454 F.Supp. 203, 205-06 (D.N.H.1978), on which F & D heavily relies in its insistence on its specific-material-specific-contract approach.

It may be that Balzer can no more make its case under the principles we propound than it could under F & D’s approach. We believe, however, that it is entitled on remand to attempt to do so. The Miller Act is “highly remedial” and entitled to a “liberal” construction, J.W. Bateson Co. v. United States ex rel. Board of Trustees, 434 U.S. 586, 594, 98 S.Ct. 873, 877, 55 L.Ed.2d 50 (1978), and it is in furtherance of those principles that we remand this case for a new trial.

REVERSED AND REMANDED.

1 . Instruction No. 4 stated:

To recover from Fidelity and Deposit Company under the Miller Act, Balzer must show the following by a preponderance of the evidence:

1) That Balzer supplied materials in prosecution of the work provided for in the contracts bonded by Fidelity and Deposit;

2) That Balzer has not been paid for those materials; and

3) That Balzer in good faith had reason to believe that the materials were intended for the work specified in the contracts and covered by Fidelity and Deposit’s bonds.

2 . Instruction No. 5 stated:

The Miller Act allows recovery only for those items which constitute materials. The

Miller Act does not protect the vendor of capital equipment.

For purpose of the Miller Act, the concept of "materials” includes things which will be incorporated into the project itself. The concept of materials also includes things that are expendable, or reasonably expected to be consumed, or substantially consumed, in the performance of the work covered by the bonded contract. The concept of "capital equipment” includes things which may reasonably be expected to be removed by the contractor and used in subsequent jobs, but something which is reasonably expected to have no utility or economic value to the contractor after the completion of the work may be classified as material.

The extent of expected consumption of supplies is to be viewed from Balzer’s point of view. If Balzer reasonably expected that supplies furnished would be substantially consumed, or used up, in the four contracts bonded by Fidelity and Deposit, then Balzer is entitled to recover. It does not matter whether or not the materials were actually consumed or used up. Balzer must show that it had a reasonable expectation by a preponderance of the evidence and it must therefore produce some reliable evidence from which it would have been reasonable for a supplier in Balzer’s position to expect that the particular item would have been substantially consumed in the bonded contracts.

3 . Instruction No. 6 stated:

Balzer may recover the cost of supplies furnished to S & S which become part of S & S’s capital equipment only if the supplies were reasonably expected by Balzer to be substantially used up or worn out in the work to be performed under the bonded contracts and would not add substantially to the value of the equipment and be usable on other jobs. Balzer does not, however, have to trace items after they left its control and show that they were actually consumed on the jobs; it need only show that it reasonably expected the supplies furnished to S & S to be substantially used or consumed on the jobs bonded by Fidelity and Deposit Company.

Repair parts, appliances, accessories or other maintenance items which add materially to the value of the equipment and render it available for other work are not within the coverage of the payment bond provided for in the Miller Act. However, repair parts, appliances, accessories, or other maintenance items which are necessary to, and are substantially consumed in, the performance of work under a bonded contract, and current repairs which do not add substantially to the value of the equipment and compensate only for ordinary wear and tear, are within the coverage of the Miller Act bond.

4 . Instruction No. 7 stated:

I have mentioned that Balzer can recover on the Miller Act bond only if it shows that it had a reasonable, good faith belief that labor and materials it provided S & S were intended for the work specified in the federal contracts covered by Fidelity and Deposit’s bonds. Bal-zer must show this by a preponderance of the evidence, and it must therefore produce some reliable evidence from which it would have been reasonable for a supplier in Balzer’s position to expect that the particular services or supplies claimed were furnished in the prosecution of the work specified in the bonded contracts.

5 . Judge Kozinski’s dissent, which would deny recovery to Balzer, ignores the unique circumstances that gave rise to this litigation. Because of these unusual facts, we do not anticipate that the apocalyptic consequences he forecasts will occur.

6 .F & D unsuccessfully requested the following instruction as No. 7: "The most important factor in distinguishing materials from capital equipment has been substantial consumption— the degree of expected consumption of the items on the particular job for which they were furnished." (Citing United States ex rel. J.P. Byrne & Co. v. Fire Assoc. of Philadelphia, 260 F.2d 541, 544-45 (2d Cir.1958)).

7 . F & D unsuccessfully requested the following instruction as No. 11: "It is not sufficient for Balzer to believe that the materials were intended for bonded work in general. In order to recover, Balzer must prove the specific project which each invoice was believed to be for.” (Citing St. Paul-Mercury Indem. Co. v. United States ex rel. H.C. Jones, 238 F.2d 917, 924-25 (10th Cir.1956)).

8 . In his dissent, Judge Kozinski contends that this rule will promote uncertainty by sureties. We view his approach as creating just as great a possibility of uncertainty. He suggests that under a "single project" approach, a surety will have a "rational basis for determining whether supplies are material." Dissent Op., at 553. But given his definition of capital equipment as anything retaining value at the end of a project, a surety will be equally "hard-pressed to figure out exactly what it is insuring,” id., if in the ordinary course of business, certain materials may be but are not necessarily always used up in a single project.

Moreover, Judge Kozinski overlooks the fact that by accepting part two of the above rule, the danger of confusing a capital expenditure with an ordinary expense is substantially eliminated. A contractor’s purchase of sufficient widgets to supply the needs of two jobs, one bonded and one not, should not deprive the seller of the protection provided by the bond on the one job because the remainder of the widgets are used on the unbonded job. Obviously the above rule does not extend to items that accountants customarily regard as capital expenditures such as buildings, land, heavy construction equipment, etc.