Payment Bond: Missed Notice, a Second-Tier Supplier, and an Oversubscribed Penal Sum
Trellis Unified School District awarded a $12,000,000 gymnasium project to Kestrel Builders. Kestrel furnished a payment bond with a $12,000,000 penal sum. Arbor Steel contracted directly with Kestrel to furnish and install structural steel for $1,800,000. Arbor bought $340,000 of plate steel from Vulcan Supply, which delivered the last shipment on April 3. Vulcan also rented a crane to Arbor's erector, a second-tier subcontractor, for $60,000. Kestrel stopped paying in May. Vulcan sent its first written notice of claim to Kestrel and the surety on July 25 - 113 days after its last delivery. Arbor, unpaid $700,000, submitted a claim on June 1. The project is public, and the state's little Miller Act mirrors the federal 90-day notice requirement. The surety has received $14,000,000 in total claims against the $12,000,000 bond.
1. Is Vulcan's plate-steel claim timely and within the bond's protected class?
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No on both counts.
Timeliness. The 90-day notice runs from the last date of furnishing, April 3. Day 90 is July 2. Vulcan's first written notice to Kestrel and the surety was July 25, 113 days after last delivery. Under the federal Miller Act and the state's mirror statute, the notice requirement is strict and generally jurisdictional; late notice bars the claim even though the steel was incorporated and unpaid. A bond provision cannot extend the statutory period.
Protected class. The crane rental is separately barred. Vulcan rented to Arbor's erector, a second-tier subcontractor. Vulcan therefore had no direct contract with Kestrel or a first-tier subcontractor and falls outside the protected class. Equipment rental can be a covered item, but the tier defeats coverage.
The result is the same whether analyzed as a tier problem or a timeliness problem. Vulcan's remedy is against the erector, not the bond.
2. How should the surety handle Arbor's $700,000 claim given $14,000,000 in total claims?
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Arbor dealt directly with Kestrel, so it is not required to give the 90-day notice; it is a claimant with a direct contract with the prime. Its June 1 claim is timely and, subject to proof, valid for $700,000.
The problem is the $12,000,000 penal sum against $14,000,000 in asserted claims. The surety's liability is capped at the penal sum. It should not pay early claims in full and leave later valid claimants short. The proper course is to require all claimants to establish their claims, then interplead the fund or distribute pro rata.
Arbor's pro rata share, assuming every asserted claim is valid, is:
($700,000 / $14,000,000) x $12,000,000 = $600,000
Invalid or time-barred claims are excluded before the ratio is struck, which would increase Arbor's share. Arbor should preserve its one-year suit deadline and monitor the surety's handling of the fund.
3. Does Vulcan have a payment bond claim for the $60,000 crane rental? Explain.
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Probably not. Miller Act protection extends to those with a direct contract with the prime or with a first-tier subcontractor, and to suppliers to those parties. Vulcan rented the crane to the erector, which was a subcontractor to Arbor, not to Kestrel. Vulcan therefore stands two tiers from the prime and has no direct contractual relationship with a first-tier subcontractor.
The result does not change because equipment rental can be a covered 'material' item; the tier defeats coverage. It also does not matter that the rental benefitted the project. The surety's payment to the erector would not necessarily satisfy Vulcan, and Vulcan is not a beneficiary of that payment.
Vulcan's remedy is a contract or lien claim against the erector. The surety should deny the rental claim in writing and cite both the tier and the late-notice grounds.