Unlicensed Contractors Can Maintain Suit Against Miller Act Payment Bond Despite State Laws to the Contrary

Many jurisdictions, including California, Florida, Virginia, and Arizona, prohibit or limit an unlicensed contractor’s ability to maintain a lawsuit or enforce a contract in relation to a construction project.

Furthermore, the impact of laws barring unlicensed contractors from pursuing enforcement of their contracts will also typically bar unlicensed contractors’ rights to the unique remedies of a mechanic’s lien or payment bond. Contractors performing work on federal projects on federally-owned property, however, are generally exempt from state licensing requirements, and may perform work on federal projects even though they technically carry the status of “unlicensed” under the applicable state statute where the project is located. The question then becomes whether contractors who legally perform work on federal projects without obtaining a license in the state where the property is located are thereafter barred from maintaining a suit against a Miller Act payment bond.

This past April, the U.S. Court of Appeals for the Ninth Circuit considered this question in a case of first impression in Technica, LLC ex rel. United States v. Carolina Casualty Ins. Co., No. 12-56539, 2014 WL 1674108 (9th Cir. April 29, 2014). Technica, LLC (“Technica”) was a sub-subcontractor on a federal construction project, the El Centro ICE Detention Center, located in El Centro, California. Technica did not have a California contractor’s license. Although furnishing almost $900,000 in labor and materials under its sub-subcontract, Technica was paid less than $300,000 before the general contractor terminated the subcontractor with whom Technica had contracted. Technica filed suit in the U.S. District Court for the Southern District of California against, inter alia, the surety that had issued a payment bond pursuant to the Miller Act. The general contractor and surety moved for summary judgment on the grounds that Cal. Bus. & Prof. Code § 7031(a) provided a complete defense to a Miller Act claim, as it “precludes any contractor from maintaining an action for collection of compensation for services if the contractor was not a licensed contractor during the performance of the contract.” After the district court granted summary judgment against Technica, Technica appealed solely as to its claim against the Miller Act payment bond.

On appeal, the Ninth Circuit began its analysis by examining the Miller Act, and noting that it represents a congressional effort to protect persons supplying labor and materials for the construction of federal projects in lieu of the protections they might receive under state statutes for non-federal projects. Here, the Miller Act explicitly permitted Technica the right to prosecute an action against the prime contractor’s payment bond and, as a federal cause of action, the scope of the remedy and substance of rights created thereby is governed by federal law. The Ninth Circuit then turned to decisions from U.S. Supreme Court and the Eighth and Tenth Circuits, which held that the rights under the Miller Act cannot be conditioned by state law. Specifically, in F.D. Rich Co., Inc. v. United States ex rel. Indus. Lumber Co., 417 U.S. 116 (1974), the U.S. Supreme Court held that state law cannot be used to provide an award of attorney’s fees to a Miller Act claimant where such right is not provided by federal law. In Hoeppner Constr. Co. v. United States ex rel. E.L Mangum, 287 F.2d 108 (10th Cir. 1960), the Tenth Circuit held that Colorado’s requirement that a partnership record an affidavit identifying the individual partners in order to maintain an action did not limit a subcontractor’s rights under the Miller Act. In Aetna Casualty & Surety Co. v. United States ex rel. R.J. Studer & Sons, 365 F.2d 997 (8th Cir. 1966), the Eighth Circuit held that an unregistered foreign corporation performing construction work on a federal project in South Dakota could still maintain an action against a Miller Act payment bond despite a South Dakota statute to the contrary. While the Ninth Circuit recognized that state law controls the application of the substantive law of contracts to Miller Act claims, such as the interpretation of subcontracts and the calculation of damages, here, application of Cal. Bus. & Prof. Code § 7031(a) would procedurally, and impermissibly, bar a federal right of action. Furthermore, as federal subcontractors routinely bid on projects throughout the country, requiring compliance with the licensing requirements of every state contravenes the intent of the Miller Act and would “wreak havoc on the uniform application of the Miller Act.” Therefore, the Ninth Circuit reversed the district court and remanded in order to permit Technica to proceed on its Miller Act claim.

The Technica decision provides greater clarity to federal contractors and sureties as to their rights and defenses under the Miller Act. In accordance with prior decisions from the Eight and Tenth Circuits, as well as the U.S. Supreme Court, federal courts will refuse to permit any state law to procedurally bar claims against a Miller Act payment bond. In doing so, the courts seek to accomplish the Miller Act’s congressional purpose – to reduce the hurdles placed upon federal subcontractors, labor providers, and materialmen in seeking payment or wages denied to them.

Categories: Legal Updates