Category: Payment Bonds

In May 2015, I authored a post addressing the Arizona Court of Appeals’ then-recent decision in Cemex Construction Materials South, LLC v. Falcone Bros., Inc., 237 Ariz. 236 (App. 2015).  My post can be found here.   The Cemex decision will, however, cease being good law next Saturday.  The case was legislatively overruled by House Bill 2268, which was signed into law by Governor Ducey on May 12, 2016 and will become effective on August 6, 2016.

As a reminder, Cemex upended the longstanding construction industry practice of mailing preliminary twenty-day notices on Little Miller Act projects via first class mail with a certificate of mailing.   This had been done as a cost saving measure because: (1) Arizona’s mechanic’s lien statute requiring twenty-day notices—A.R.S. § 33-992.01—expressly provides in Subsection (F) that the notices may be provided by “first class mail sent with a certificate of mailing;” and (2)  the Little  Miller Act section requiring 20-day notices in certain instances—A.R.S. § 34-223(A)—incorporated  by reference a significant portion of § 33-992.01.  Nevertheless, Cemex held that this industry practice did not comply with § 34-223(A).  Specifically, the Court found that the mailing provisions of § 33-992.01(F) were excluded from § 34-223(A), such that Little Miller Act 20-day notices were required to “to be served by registered or certified mail,” like Little Miller Act ninety-day post-completion notices.

HB 2268 amends A.R.S. § 34-223(A) to allow Little Miller Act 20-day notices to be served by first class mail with a certificate of mailing, and, in doing so, overrules the Cemex decision.  The Bill accomplishes this by simply adding § 33-992.01(F) to the list of § 33-992.01 subsections that are expressly incorporated into § 34-223(A).  Accordingly, it is now unequivocally clear that the legislature intends for the mailing requirements for mechanic’s lien 20-day notices to apply equally to Little Miller Act twenty-day notices.  Indeed, the “Legislative findings; intent” section of the Bill states that:

The legislature also finds that the construction industry believes the Cemex decision incorrectly applied the legislature’s intent in interpreting this notice requirement. It is the intent of the legislature to clarify that under section 34‑223, Arizona Revised Statutes, as amended by this act, the written preliminary twenty‑day notice may be sent by first class mail with certificate of mailing, certified or registered mail.

In sum, Cemex will cease being good law on August 6, 2016 and would-be Little Miller Act payment bond claimants can resume serving their 20-day notices by first class mail with a certificate of mailing at that time.  But until that time, Little Miller Act 20-day notices should continue to be served by registered or certified mail.

It should also be noted that HB 2268 amends A.R.S. § 34-223(A) to allow ninety-day post-completion notices to be sent “by any means that provides written, third-party verification of delivery,” rather than just “registered or certified mail.”

***UPDATE – 7/15/2016*** 

The Court of Appeals’ decision in  in Cemex Construction Materials South, LLC v. Falcone Bros. & Assoc., Inc., 237 Ariz. 236 (App. 2015), which is the subject of this post from May 2015, will cease being good law on August 6, 2016. The case was legislatively overruled by HB 2268, which was signed into law by Governor Ducey on May 12, 2016 and will become effective on August 6, 2016.  My post on the effects of HB 2268 and its overruling of the Cemex decision can be found here. read more

As matter of first impression, the Ninth Circuit Court of Appeals recently held in Technica LLC ex rel. U.S. v. Carolina Cas. Ins. Co., 749 F.3d 1149 (9th Cir. 2014) that state laws preventing unlicensed contractors from recovering for unpaid work do not apply to actions under the federal Miller Act.

In Technica, a sub-subcontractor on a federal project in California filed suit for payment under the Miller Act against the general contractor and its surety.  The trial court concluded that because the sub-subcontractor was not a licensed contractor as required by California law, it was precluded from pursuing its Miller Act claim for payment.  The particular licensing statute at issue in Technica was California Business and Professions Code § 7031(a), which provides in part that:

[N]o person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was duly licensed contractor at all times during the performance of that act or contract…

The Ninth Circuit, however, reversed the district court’s decision.  Consistent with decisions from the Supreme Court and the Eighth and Tenth Circuits, the Ninth Circuit held that the limitation in Section 7031 on the right of unlicensed contractors to maintain actions for collection of unpaid services does not apply to the Miller Act.  The Court first noted that allowing a state statute to serve as a defense could eliminate the federal rights afforded by the Miller Act.  Specifically, the Court found that application of Section 7031 “to a Miller Act claim would, at best, condition the [federal] rights of a subcontractor on the procedural requirements of state law, and, at worst, result in the nullification of those rights entirely.”

The Court also rejected the application of Section 7031 as contrary to Congress’ intent in enacting the Miller Act.  The Court noted that federal subcontractors routinely work throughout the country and can perform contracts that span multiple states.   Requiring these subcontractors to comply with the licensing statutes in any particular state would, therefore, contradict the Miller Act’s purpose – “to reduce the substantive and procedural hurdles placed on federal subcontractors, labor providers and materialmen in seeking payment or wages denied to them.”

Although Technica addressed the application of a California statute, it is an important decision for Arizona contractors to be aware of.  This is because, like California Business and Professions Code § 7031, Arizona Revised Statute § 32-1153 also conditions a contractor’s right to pursue a civil action on being licensed.  Indeed, Arizona’s statute is substantially similar in form and content to California’s.  Section 32-1153 provides that:

No contractor as defined in section 32-1101 shall act as agent or commence or maintain any action in any court of the state for collection or compensation for the performance of any act for which a license is required by this chapter without alleging and proving that the contracting party whose contract gives rise to the claim was a duly licensed contractor when the contract sued upon was entered into and when the alleged cause of action arose. read more

In Ramona Equipment Rental, Inc. v. Carolina Casualty Ins. Co., et al., Case No. 12-55156 (June 20, 2014), the United States Court of Appeals for the Ninth Circuit recently addressed for the first time the issue of when a 90-day Miller Act notice needs to be served for materials and/or equipment furnished on an open book account.  Consistent with decisions from the First, Fourth, and Fifth Circuits, the Ninth Circuit held “that if all the goods in a series of deliveries by a supplier on an open book account are used on the same government project, the ninety-day notice is timely as to all deliveries if it is given within ninety days from the last delivery.”

Background

In Ramona, a subcontractor on a federal construction project established an open account with a supplier to rent equipment for use on the project. Under the terms of the open account, rentals were documented by rental agreements and invoices.  The subcontractor and supplier entered into 89 rental agreements, and the subcontractor failed to pay for nearly all the equipment rented.  As required by the Miller Act, the supplier served the general contractor with notice of demand for payment within 90 days of the last day on which equipment was furnished before filing suit on the general contractor’s Miller Act payment bond. The general contractor nevertheless argued at trial that the 90-day notice was “untimely as to all rental equipment furnished to the project more than ninety days before service of the notice.”  The general contractor apparently claimed that each of the individual rental agreements required its own 90-day Miller Act notice.  The district court rejected this argument and “concluded that, in light of the open book account, the ninety-day notice covered all rental equipment furnished to the {p]roject.”  The general contractor and its surety appealed.

Discussion

The Ninth Circuit begins its analysis in Ramona by noting that the Miller Act:  (1) “‘represents a congressional effort to protect persons supplying labor and material for construction of federal public buildings in lieu of the protections they might receive under state statutes with respect to the construction of nonfederal buildings;'”  and (2) is entitled “to a liberal interpretation” to accomplish its beneficial purpose of protecting laborers and suppliers.  Next, the Court  specifically identifies the requirements of the Miller Act’s 90-day notice provision – “that labors and materialmen with no direct relationship to the general contractor furnishing the payment bond, ‘giv[e] written notice to the contractor within 90 days from the date on which the person did or performed the last of the labor or furnished or supplied the last of the material for which the claim is made.'” (quoting 40 U.S.C. § 3133(b)(2)).

Finally, the Court cites to and discusses the following “clearly analogous” cases from other Circuits:  (1) United States ex rel. Water Works Supply Corp. v. George Hyman Constr. Co., 131 F.3d 28 (1st Cir. 1997); (2) Noland Co. v. Allied Contractors, Inc., 273 F.2d 917(4th Cir. 1959); and (3) United States ex rel. A&M Petroleum, Inc. v. Sante Fe Engineers Inc., 822 F.2d 547 (5th Cir. 1987).  In these cases, the First, Fourth, and Fifth Circuits, respectively, held that notice within 90 days of the last delivery on projects involving multiple purchase orders and/or goods purchased on an open account was timely under the Miller Act as to all deliveries.  For each of the foregoing reasons, the Ninth Circuit in Ramona ultimately agrees with this “‘preferred interpretation'” among the circuit courts.

Conclusion

The decision in Ramona is significant for material suppliers who furnish materials for federal projects through open accounts.  Rather than now having to worry about providing notice to general contractors within 90 days of each unpaid delivery, these suppliers need only be worried about providing notice within 90 days of the last delivery to the project.