United States v. Intl Fidelity Ins

RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 ELECTRONIC CITATION: 2000 FED App. 0024P (6th Cir.) File Name: 00a0024p.06

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT _________________

;  UNITED STATES OF AMERICA,  for the use and benefit of  Interstate Mechanical  No. 96-6013 Contractors, Inc.,  > Plaintiff-Appellant,    v.

  INTERNATIONAL FIDELITY  INSURANCE COMPANY, Defendant-Appellee.  1

Appeal from the United States District Court for the Eastern District of Tennessee at Knoxville. No. 95-00585—Thomas W. Phillips, Magistrate Judge. Submitted: August 4, 1999 Decided and Filed: January 14, 2000 Before: NELSON and MOORE, Circuit Judges; McKEAGUE, District Judge.*

* The Honorable David W. McKeague, United States District Judge for the Western District of Michigan, sitting by designation.

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_________________ COUNSEL ON BRIEF: John M. Neal, THE NEAL LAW FIRM, Knoxville, Tennessee, for Appellant. David R. Duggan, NICHOLSON, GARNER & DUGGAN, Maryville, Tennessee, for Appellee. _________________ OPINION _________________ McKEAGUE, D. J., delivered the opinion of the court, in which NELSON, J., joined. MOORE, J. (pp. 11-17), delivered a separate dissenting opinion. DAVID W. McKEAGUE, District Judge. Plaintiff Interstate Mechanical Contractors, Inc. (“Interstate”), a subcontractor, commenced this action under the Miller Act, 40 U.S.C. § 270a et seq. Interstate seeks to recover against a payment bond issued by the defendant International Fidelity Insurance Co. (“Fidelity”), as surety for the prime contractor, Parmeco, Inc. (“Parmeco”). On cross-motions for summary judgment, the magistrate judge held that Interstate’s complaint was not filed within the Miller Act’s one-year statute of limitations period and granted summary judgment in favor of Fidelity. This appeal followed, and, for the reasons set forth below, we AFFIRM the judgment of the magistrate judge. I In November 1993 Interstate contracted with Parmeco to provide and install heating, ventilating, and air-conditioning systems at a U.S. Department of Commerce facility located in Morristown, Tennessee. Pursuant to § 270a of the Miller Act, Parmeco, as principal, posted a bond to guarantee payment under the contract with Fidelity as surety.

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Under part 3.2 of the contract, Interstate agreed to install electric duct heaters, to coordinate the heaters’ installation with other work, and to “[test] operate installed duct heaters to demonstrate compliance with requirements.” Interstate further agreed to have substantially completed its work on the construction project by January 21, 1994, and to have finally completed all work by February 8, 1994. In fact, Interstate completed its construction in early June 1994, having installed two electric duct heaters as part of the heating, ventilating, and air-conditioning system. On June 17, 1994, after having been notified that construction was complete, the government took beneficial occupancy of the facility. In late September or early October 1994, Sam Neeley, the subcontractor hired by Interstate to conduct testing of the system, noticed a discrepancy as he prepared his final reports. The numbers reported to him by his employees when they performed initial tests of the system did not satisfy the contract’s requirements. Assuming that his employees had inaccurately performed the tests, Neeley went to the facility to inspect the system. He discovered that the two electric heaters installed into the ducts did not meet the contract’s specifications. Although the heaters were the right size, fit properly into the ducts, and bore labels from the manufacturer indicating the correct wattage, in fact the heaters’ electrical output did not conform to the contract’s specifications. Interstate then replaced the heaters in early October, necessitating a third round of testing. Consequently, on October 18, 1994, Neeley returned to the facility and tested the heaters to confirm that they had been properly installed and that they were functioning as specified. Exactly one year after this last test of the heaters, on October 18, 1996, Interstate filed suit in the Eastern District of Tennessee to recover the alleged $30, 967.00 that it claimed it was owed under the contract. Jurisdiction over the subject matter of the action was provided by 40 U.S.C. § 270b(b) and 28 U.S.C. § 1352.

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The Miller Act requires that suits to recover against a purposes of § 270b(b). Rather, a court should determine payment bond be filed no more than “one year after the day whether the work was performed prior to contract completion, on which the last of the labor was performed . . . .” 40 U.S.C. as in the case of a punch list, or was performed after the § 270b(b). A magistrate judge heard the case by consent of project was completed under a warranty. the parties, and found that Neeley’s inspection and testing of the heaters on October 18, 1994 was properly characterized as The record before us is incomplete. Based upon what is a correction or repair to work previously performed by before the court, however, I see no evidence that the work Interstate. Ruling that testing did not constitute “labor” under performed by Interstate and its subcontractor in October 1994 the Miller Act, the magistrate judge found that the statute of was performed after the contract was completed. Thus, I limitations barred Interstate’s claim and awarded summary would remand the case for further consideration in light of the judgment to Fidelity. Interstate filed a timely notice of foregoing analysis. appeal, and this Court has jurisdiction to hear the appeal pursuant to 28 U.S.C. § 636(c)(3). II This court reviews a district court’s grant of summary judgment de novo. See Terry Barr Sales Agency, Inc. v. All- Lock Co., Inc., 96 F.3d 174, 178 (6th Cir. 1996). A motion for summary judgment should be granted “if the pleadings, deposition, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c). We view the facts and all inferences drawn therefrom in the light most favorable to the nonmoving party. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). The Miller Act, 40 U.S.C. § 270a et seq., requires a prime contractor on a federal construction project to post both a performance bond and a payment bond. The payment bond provides security to persons who supply labor or materials for the project. Such suppliers are precluded from filing liens on government facilities, and instead are granted a federal cause of action to satisfy any deficiency in payment by the prime contractor. Because of the remedial nature of the Act, its provisions are to be liberally construed. However, recovery under the Act requires a plaintiff to bring a claim within the Act’s one-year statute of limitations period. See United States

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Furthermore, the circumstances in which the heaters were ex rel. Consol. Pipe & Supply Co. v. Morrison-Knudsen Co., reinstalled suggest ongoing contract work rather than 687 F.2d 129, 131 (6th Cir. 1982); United States ex rel. warranty work. Apparently, the original heaters were Martin Steel Constructors Inc. v. Avanti Constructors, Inc., installed in April, May, or June 1994. Neeley stated in his 750 F.2d 759, 761 (9th Cir. 1984); Canion v. Randall & deposition that “[w]e were there probably six or seven times Blake, 817 F.2d 1188, 1191 (5th Cir. 1987). off and on from then until October the 18th.” J.A. at 42. Apparently, Neeley discovered the heater installation error in The Act provides a supplier of labor or material who has early October. From what can be gleaned from the record not been paid in full a right of action to sue on the payment before the court, it appears that Neeley was on site during this bond. See 40 U.S.C. § 270b(a). In order to provide repose, period performing the balancing and testing required under however, the Act specifies that “no such suit shall be Interstate’s contract. Interstate’s contract specified that “[t]est commenced after the expiration of one year after the day on runs shall be made over the full design load range where which the last of the labor was performed or material was possible and shall continue for as long as necessary to supplied . . . ” § 270b(b). The meaning of the words “labor” demonstrate that systems will operate as designed.” J.A. at and “material” is not self-evident from an examination of the 37. The contract also specified that “[a]ny piece of equipment text alone. Unfortunately, turning to the Miller Act’s or any item not meeting the system requirements shall be legislative history provides no more insight in interpreting repaired or replaced and the systems rebalanced until the § 270b(b). Prior to a 1959 amendment, the limitations period performance is confirmed.” Id. (emphasis added). under the Act commenced on the “date of final settlement” of Apparently, the installation error was discovered in the course the contract. See S. Rep. No 86-551 (1959), reprinted in of these tests and the corrections followed in accordance with 1959 U.S.C.C.A.N. 1995. In amending the provision, the contract. If this is so, this work should be held to Congress sought to relieve the government of the burden of constitute § 270b(b) labor, unless it is shown clearly that the establishing final settlement dates and to provide “those project was accepted as complete prior to October 1994 entitled to sue . . . a simple, fixed, and certain method for despite Interstate’s failure to comply with the testing determining the period within which the suit must be filed.” requirements of the contract. Id., at 1996. Despite Congress’ stated intention, the courts that have been called upon to interpret § 270b(b) have not Often the final labor performed under a construction found the task of establishing the limitations period under the subcontract will be in response to a punch list. The punch list revised statute to be simple, fixed, or certain. may include items omitted by the subcontractor or work that inspection indicates must be repaired or replaced. In either This Court has not previously considered in a published case, the completion of the punch list work constitutes labor opinion exactly when “the last of the labor was performed or performed under the contract, and this is well understood material was supplied” for purposes of § 270b(b). As a within the construction industry. To hold that corrective work question of statutory interpretation, we consider the issue de performed pursuant to such a punch list does not constitute novo. See Vergos v. Gregg’s Enters., Inc., 159 F.3d 989, 990 labor performed within the meaning of § 270b(b) would be (6th Cir. 1998). We agree with the majority of courts that inappropriate and, because contrary to everyday have interpreted the phrase and have concluded it connotes understanding, would create a trap for the unwary and more than mere substantial completion or substantial undermine the protective effect of the Miller Act. performance of the plaintiff’s obligations under its contract. Accordingly, I believe that the corrective or remedial nature See United States ex rel. Austin v. Western Elec. Co., 337 of the work performed should not be dispositive for the F.2d 568, 572 (9th Cir. 1964). Furthermore, we agree that

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work done at the request of the government and pursuant to inquiry, but not an unbounded one. Normally, the inspection a warranty, subsequent to final inspection and acceptance of and unconditional acceptance of a project by the government the project, falls outside the meaning of labor performed as will indicate project completion. However, acceptance set forth in § 270b(b). If post-completion work performed conditioned on the completion of a punch list does not pursuant to a warranty could toll the Miller Act’s statute of constitute completion until the punch list work is limitations, then the surety would have no repose until all accomplished. Of course the completion date specified in the such warranties expired. The challenge before the Court is to contract is not dispositive. assess whether tests of replacement components fall between substantial completion of the project and its final completion, Applying my proposed analysis to the instant case, I would and are thus included as labor under the Act, or whether such hold that a material issue of fact exists that precludes the grant tests are more properly analogized to warranty work and of summary judgment in favor of the defendant. Although the excluded. labor performed in replacing the duct heaters undoubtedly was corrective, the magistrate judge did not determine The majority of circuits that have addressed this issue have whether this corrective action took place before the contract held that remedial or corrective work or materials, or was complete or afterwards as warranty work. I believe that inspection of work already completed, falls outside the the dispositive question is whether the reinstallation of the meaning of “labor” or materials” under § 270b(b). Hence, duct heaters at some time before October 18, 1994, occurred performing such work or supplying such materials will not before the contract was complete. If it did, the work of toll the Miller Act’s one-year statute of limitations. See, e.g., Interstate’s contractor, Neeley, on October 18, 1994, was United States for the use of Billows Elec. Supply Co. v. E.J.T. § 270b(b) labor. The contract contained detailed air balancing Constr. Co., Inc., 517 F.Supp. 1178, 1181 (E.D. Pa.1981), and testing requirements, and the performance of this work aff’d 688 F.2d 827 (3rd Cir.), cert. denied, 459 U.S. 856 constitutes labor as the term is used in § 270b(b). (1982); United States for the use of Magna Masonry, Inc., v. R.T. Woodfield, Inc., 709 F.2d 249, 250 (4th Cir. 1983); It is not at all clear that Interstate’s contract was complete United States ex rel. Austin v. Western Elec. Co., 337 F.2d when the duct heaters were reinstalled in October 1994. In 568, 572 (9th Cir. 1964); United States for the use of State his deposition, Terry Self, an Interstate official, stated that to Elec. Supply Co. v. Hesselden Constr. Co., 404 F.2d 774, 776 his knowledge the company had never received notice that (10th Cir. 1968). The majority rule requires the trier of fact Interstate’s work or the building had been accepted. Self did to distinguish “whether the work was performed . . . as a ‘part state in an August 1994 letter that “[t]o our knowledge, of the original contract’ or for the ‘purpose of correcting Interstate finished all work on this project in early June, defects, or making repairs following inspection of the 1994,” but he did so in response to a letter from Parmeco that project.’” Austin, 337 F.2d at 572-73 (quoting United States apparently asserted that Interstate had not completed its work. ex rel. Gen. Elec. Co. v. Gunnar I. Johnson & Son, Inc., 310 J.A. at 100. Self went on to note that “[i]f any work is F.2d 899, 903 (8th Cir. 1962)). unfinished, it would have to be in the nature of punch list work. This is the first project on which we have had Although this line of inquiry has received criticism, this difficulty finding out what work remains unfinished.” Id. Court concludes the correction-or-repair versus original- contract test presents a useful framework to determine when the Miller Act’s statute of limitations begins to run. As set forth in Austin, the correction-or-repair versus original- limitations period.

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government with recognition that deficiencies remain. contract test provides a bright-line rule from which each Correction of the deficiencies constitutes original contract interested party--the government, contractor, subcontractor, work and § 270b(b) labor, however, because payment for the and surety--can gain a clear understanding of what work remaining work has been withheld pending completion. In constitutes labor under § 270b(b). Furthermore, the majority speaking of deficiencies, the Comptroller General did not rule induces the parties to structure their contractual distinguish between omitted work and unacceptable work, nor obligations to account for the statute of limitations. Although should he have so distinguished, as correction of either the liberal purposes of the Miller Act may not be effectuated deficiency in this circumstance should constitute § 270b(b) in each and every case, the benefits of certainty and labor. administrability afforded by a bright-line rule here outweigh the inherent risk of over or under inclusive results presented Citing this legislative history, the court in Trinity Universal by bright-line rules. See generally Antonin Scalia, The Rule Insurance Co. v. Girdner, 379 F.2d 317, 318 (5th Cir. 1967), of Law as a Law of Rules, 56 U.Chi.L.Rev. 1175 (1989). held “that the ‘last labor or materials’ language [of § 270b(b)] Hence, for the foregoing reasons, we adopt the majority rule is broad enough to include work performed upon the demand for our Circuit. of the government to correct defects in the work as originally completed.” As “[t]here [was] no contention that this work III was a sham to extend the period of limitation,” the court held that replacement of defective insulation and a seal constituted Having adopted the correction-or-repair versus original- the last labor performed. Id. contract test, we turn to address Interstate’s particular contentions. Interstate claims a threshold question exists as Following the implication of the legislative history and to whether the inspection and testing that Neeley performed agreeing with the Trinity court’s interpretation of the Act and on October 18, 1995, qualifies as “labor” under the Miller the history, I would hold that in ascertaining the § 270b(b) Act. Interstate’s phrasing of the issue, however, begs the limitations period the dispositive question is whether the ultimate question before this Court: whether the work work at issue was performed or materials were supplied performed by Neeley was pursuant to the original contract, or before the project was complete or after completion in performed as a correction or repair. accordance with a warranty.1 This test yields a fact-intensive Interstate argues the inspection and testing of the heaters by Neeley is “labor” because it was required under the contract, 1 not performed in response to a government demand for repair. Referring back to the widget example, one may ask whether there Fidelity argues in response that the case law clearly is a qualitative difference between the performance of corrective work at distinguishes between repair or remedial work and work the end of the project pursuant to a punch list and the performance of performed under the contract; thus, inspection, testing and corrective work after project completion pursuant to a warranty. For the purposes of the Miller Act, I believe that the difference is significant. The measurement are by their nature remedial and not “labor.” obligation to make the final payment under a construction contract Applying the correction-or-repair versus original contract test normally commences with the completion of the work, including the to the facts, we hold that the inspection and testing that completion of punch list work. Thus, under a more logical approach, i.e., Neeley performed on his second trip to the facility on October one that is based on contract completion, the commencement of the 18, 1995, were remedial in nature. While the contract limitations period for suing to recover on the bond for nonpayment will coincide with the accrual of the obligation to pay. Remedial work required Interstate to test the heaters it installed, such testing performed pursuant to a warranty, on the other hand, should have no was performed at least once by Neeley’s employees prior to bearing on either the obligation to make final payment or on the

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the discovery of the defect in the heaters’ manufacture and the The Miller Act simply refers to labor performed, and, as government’s beneficial occupancy of the facility. A second noted above, the language is to be construed liberally. round of testing occurred in early October. Neeley himself Although work performed under a warranty subsequent to went to the facility and tested the heaters, and discovered they project completion has no impact on the running of the were not manufactured to the contract’s specifications. limitations period of § 270b(b), I believe that a court must be Interstate then replaced the heaters. Subsequently, Neeley careful to avoid excluding other labor from the protection of returned to the facility on October 18, 1995, and tested the the Act. I would therefore conclude that the proper approach replacement heaters. These last tests were of corrective work to the problem is to determine whether the work at issue is performed by Interstate, and were not tests required by the warranty work or work conducted prior to contract original contract. Hence, while we do not decide whether completion. See Johnson Servs. Co. v. Transamerica Ins. inspection, testing, and measurement are by their nature Co., 349 F. Supp. 1220, 1225 (S.D. Tex. 1972) (stating test as remedial, we hold that tests of remedial or corrective work do whether the work “was a part of the original contract or was not qualify as “labor” for purposes of the Miller Act. for the purpose of what is sometimes called warranty work, that is, correcting defects or making repairs after the job was Interstate further contends, however, that the tests Neeley complete”), aff’d, 485 F.2d 164 (5th Cir. 1973). performed on October 18, 1995, logically qualify as “labor” because the failure to perform such testing would have Although determining when the contract has been constituted a breach of its contractual obligations. Fidelity completed and the warranty period has begun may be more responds that an analogous argument was made and rejected difficult than determining whether work is new or repair, the by the Fifth Circuit in General Insurance Company of former approach finds strong support in the legislative America v. United States for the Use of Audley Moore & Son, history. In his letter proposing the 1959 amendment that 409 F.2d 1326 (5th Cir. 1969). In Audley Moore & Son, the replaced the “final settlement” language, the Comptroller Fifth Circuit held that “[l]abor furnished in the prosecution of General noted that an additional purpose to the amendment the work is not coterminous with the outer limits of all duties was to extend the protection of the Act beyond the settlement provided by the contract.” United States for the Use of date of the contract in some instances: Audley Moore & Son, 409 F.2d at 1327. Although we agree with the holding in Audley Moore & Son, we are concerned It sometimes happens, also, that a supplier will be called that its ponderous language obscures its reasoning. A upon to furnish labor or materials after ‘final settlement,’ contractor’s duties under a contract may extend, by virtue of or even after the limitation has run, in connection with warranty or other obligation, to a point in time far beyond that the correction of deficiencies after substantial completion date when the project has been completed and the “last of the and acceptance of the contract work and ‘final labor was performed or material was supplied” for purposes settlement’ (based upon withholding the value of the of the Miller Act. Interstate’s argument would have this deficiencies). Under the proposed amendment, such Court interpret the Miller Act to equate the term “labor” to the suppliers will not have lost most or all of the protection term “contractual duties.” As a result, the statute of intended by the Miller Act but will receive full protection limitations period would commence only after the end of the for 1 year after furnishing labor or material. warranty period, perhaps many years after the project’s completion. To interpret the Miller Act as Interstate suggests S. REP. NO. 86-551, 1959 U.S.C.C.A.N. at 1999. would frustrate the policy of repose that the limitations period serves, and we find no support for such a construction in the The Comptroller General describes a situation in which a project has been substantially completed and accepted by the

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the project had been billed as complete before the Miller Act’s text, legislative history, or in the applicable case replacements were delivered, and the court rejected the law. We thus reject Interstate’s proposed construction as plaintiff’s argument that the government would not accept the contrary to the Act’s language and underlying policy. project as finished until the replacement equipment had been installed. See id. at 776. Lastly, Interstate argues that a distinction should be made between corrective work caused by the contractor’s own error, The foregoing cases, like the approach taken by the and that necessitated by the error of a third party. Interstate majority in the present case, could be read as suggesting that suggests that corrective work caused by third party error whether remedial work performed constitutes labor performed should constitute labor under the Miller Act, because a for the purposes of the Miller Act limitations period turns on contractor who repairs the defective work of others is less whether the same work has been done incorrectly in the past culpable than a contractor who repairs its own defective work. or whether the work has not been done at all. See also Austin, Fidelity replies that because defective materials are, in most 337 F.2d at 573 & n.15 (“punch list” work comprising sixty cases, defective when they are supplied by the manufacturer, items including painting, “finish plumbing,” and “paving adopting a rule that includes the correction of such defects as access road” was required for project completion and labor performed would create an exception to the correction- constituted original contract work). I believe, however, that or-repair versus original contract test that would swallow the this approach, which focuses literally upon the distinction rule. We fail to see the significance of the proposed between repair or replacement and the performance of omitted distinction. Compared with the surety, the contractor who work, imports a false dichotomy into the analysis. See, e.g., replaces defective material supplied by a third party is no Johnson Serv. Co. v. Transamerica Ins. Co., 485 F.2d 164, more worthy of recovery than a contractor who corrects work 173 (5th Cir. 1973) (“[S]weeping rules about ‘repairs’ offer that was initially improperly performed. In either case, the little help in the necessary analysis.”). contractor, and not the surety, should bear the cost of correcting the defective labor or material. Contractors choose Indeed, a contract is deficient whether a certain widget the manufacturers from whom they purchase their materials, specified is missing or is defective; after the contract has been and can seek to recover against such a supplier in the event accepted and the warranty period has begun, the contract is no that a manufacturer provides a defective product. more incomplete because of a missing widget than because of a defective one. Moreover, if a contractor discovers an error IV and, as required by its contract, corrects the work at an early stage of the project, it could not be reasonably maintained that Because the correction-or-repair versus original contract such corrective work was not performed under the contract. test first enunciated in United States ex rel. Austin v. Western The work may or may not be reimbursable under the contract, Elec. Co. offers predictability and administrability when but it is not warranty work. If such corrective work applying the Miller Act’s statute of limitations, we adopt it for constitutes contract work early in the project and midway our Circuit. Under this majority rule, tests of remedial work, through the project, it surely would be anomalous to conclude or tests performed of replacement materials do not constitute that such corrective work is of a different nature simply labor under § 270b(b) for purposes of the Miller Act. The because the contractor discovered and corrected the Act’s inquiry focuses on the nature of the work performed, deficiency at the conclusion of its labors. not its cause. Hence, under § 270b(b), neither repairs necessitated by work improperly performed by the contractor nor repairs necessitated by defective material supplied by a

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manufacturer qualify as “labor performed” or “material ____________________ supplied.” For those reasons stated above, we AFFIRM the order of the district court granting summary judgment to DISSENT Fidelity. ____________________ KAREN NELSON MOORE, Circuit Judge, dissenting. I respectfully dissent from the majority’s decision to adopt the approach articulated in United States ex rel. Austin v. Western Electric Co., 337 F.2d 568, 572 (9th Cir. 1964), which directs a court to ask “whether [certain] work was performed . . . as a ‘part of the original contract’ or for the ‘purpose of correcting defects, or making repairs following inspection of the project’” in those cases that involve a dispute over the statute of limitations contained in the Miller Act. Id. at 572- 73 (quoting United States ex rel. Gen. Elec. Co. v. Gunnar I. Johnson & Son, Inc., 310 F.2d 899, 903 (8th Cir. 1962)). I am concerned that this test, as it has been applied, has caused courts to focus excessively on the question of whether certain work constitutes a correction or repair and to lose sight of the more important question – was the project complete at the time the work in question was performed? Two cases illustrate my concerns with the majority’s approach. First, in United States ex rel. Noland Co. v. Andrews, 406 F.2d 790 (4th Cir. 1969), it was discovered, after the government had inspected and accepted a construction project, that two valves that had been required under the contract had never been furnished or installed. “It seems plain to us,” the court stated, “that the installation of the two missing valves cannot be characterized as a mere correction of a defect.” Id. at 792. Accordingly, the court held that provision of the missing valves constituted material supplied for the purposes of 40 U.S.C. § 270b(b). Second, in United States ex rel. State Electric Supply Co. v. Hesselden Construction Co., 404 F.2d 774, 777 (10th Cir. 1968), the court held that equipment delivered by the plaintiff to replace lost or damaged equipment “concerned materials used for repair or correction and not for the accomplishment of the original contract.” The court found it significant that