United States Ex Rel. E & H Steel Corp. v. C. Pyramid Enterprises, Inc.

Opinions of the United

2007 Decisions States Court of Appeals

for the Third Circuit

11-27-2007

E&H Steel Corp v. C Pyramid Entr Inc

Precedential or Non-Precedential: Precedential

Docket No. 06-4209

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 06-4209

UNITED STATES OF AMERICA FOR THE USE

AND BENEFIT OF E & H STEEL CORPORATION

vs.

C. PYRAMID ENTERPRISES, INC.;

FIDELITY & DEPOSIT COMPANY OF MARYLAND;

and ZURICH AMERICAN INSURANCE COMPANY,

E & H Steel Corporation, Appellant

____________

ON APPEAL FROM THE UNITED STATES DISTRICT

COURT FOR THE DISTRICT OF NEW JERSEY

(D.C. Civ. No. 04-cv-02519)

District Judge: Honorable Robert B. Kugler

____________

Argued September 18, 2007

Before: SLOVITER, SMITH and WEIS, Circuit Judges.

Filed: November 27, 2007

____________

David W. Mockbee, Esquire (ARGUED)

Mary Elizabeth Hall, Esquire

MOCKBEE HALL & DRAKE, P.A.

Lamar Life Building, Suite 1000

317 E. Capitol Street

Jackson, Mississippi 39201

Sandhya M. Feltes, Esquire

Kaplin, Stewart, Meloff, Reiter & Stein

910 Harvest Drive

P.O. Box 3037

Blue Bell, PA 19422

Attorneys for Appellant

Paul W. Norris, Esquire (ARGUED)

Lewis J. Pepperman, Esquire

STARK & STARK

A Professional Corporation

P.O. Box 5315

Princeton, New Jersey 08543

Attorneys for Appellees

____________

OPINION

WEIS, Circuit Judge.

2

In this Miller Act case, we decide that a firm acted as a

subcontractor when it supplied fabricated steel to the prime

contractor that then used the material to construct the framework

for a large Air Force facility. The subcontractor defaulted in

payments due the company that it hired to fabricate the steel and

deliver it to the construction site. The District Court denied

recovery to the steel fabricator in this suit against the prime

contractor and its sureties. We will reverse and remand for

entry of judgment in favor of the steel company.

In September 2002, C. Pyramid Enterprises, Inc. was

awarded a contract by the United States Army Corps of

Engineers to design and build a large C-17 Maintenance Hangar

and Shops facility at the McGuire Air Force Base in New

Jersey. The original contract price was $24,119,450.00.

Pyramid issued a standard form “purchase order” to

Havens Design-Build to provide custom fabricated structural

steel for the building’s framework at a cost of $2,230,000.00.

The agreement provided that Havens was also to arrange for the

preparation of shop drawings and erection drawings, design the

connectors for the steel, and perform some “design assist

engineering” that primarily involved material substitution.

Havens in turn contracted with E & H Steel Company to

fabricate the steel and deliver it to the construction site. E & H

delivered 50 trailers of fabricated steel between November 13,

2003 and April 16, 2004.1 Pyramid erected the steel framework

1

E & H asserts that the shipments contained 5,379 major

pieces of structural steel, which included seven long-span jumbo

3

for the building and did most of the remaining construction

itself, including the electrical, mechanical, site utilities,

plumbing, and concrete work.

In accordance with the Miller Act, 40 U.S.C. §

3131(b)(2), Pyramid issued a payment bond in favor of “all

persons having a direct relationship with [Pyramid] or a

subcontractor of [Pyramid] for furnishing labor, material or both

in the prosecution of the work provided for in the contract.”

Defendants Fidelity & Deposit Company of Maryland and

Zurich American Insurance Company acted as sureties on the

bond.

Although it had been paid by Pyramid during the

construction process, Havens filed for bankruptcy owing E & H

$565,125.40 for the delivered steel. E & H brought suit against

Pyramid and its sureties, asserting entitlement to reimbursement

from the payment bond. After a bench trial, the District Court

found in favor of defendants.

The Court correctly determined that because of a

statutory limitation E & H’s right to recover on the bond hinged

on whether Havens was a “subcontractor” under § 3133(b)(2) of

the Miller Act. However, case law did not provide a uniform

rule for determining whether a company such as Havens, which

acted as a middleman between a general contractor and a

supplier of materials or services, was a “subcontractor.” In

roof trusses 203 feet in length and five steel members that

weighed between 19,000 and 20,000 pounds. Pyramid does not

dispute this assertion.

4

resolving that issue, the Court considered a number of factors,

including the nature of the material or service supplied, the cost

of the material or service in relation to the total contract price,

the payment terms and exchange of information, and the overall

relationship between the contractor and the middleman.

The District Court concluded that Havens furnished

standard work customarily performed by steel fabricators, a role

similar to that of a supplier of pre-cut wooden beams for

residential construction. Havens supplied material from non-

inventory stock and Pyramid used the steel to erect the

building’s substantial frame. Although Havens’ work on the

project comprised 7.8% of the total contract price, the District

Court noted that Havens did not post a bond or provide

insurance or payroll data to Pyramid. Finally, the District Court

observed that Pyramid and Havens did not have a prior

relationship.

After evaluating these details, the District Court held that

Havens was a material supplier and not a “subcontractor” under

the Miller Act. Therefore, E & H was not entitled to recover on

the bond.

E & H timely appealed. We have jurisdiction under 28

U.S.C. § 1291 and under the Miller Act, 40 U.S.C. §

3133(b)(3)(B).

I.

Congress recognized that sovereign immunity left

suppliers of labor or materials for federal construction projects

5

without the protection of the mechanics’ liens normally

available in private industry. See Dep’t of Army v. Blue Fox,

Inc., 525 U.S. 255, 264-65 (1999). To provide some protection

for suppliers, Congress enacted the Heard Act2 and later

replaced it with the Miller Act, found in its current version at 40

U.S.C. § 3131, et seq. Id.3

The Miller Act requires every contractor on a federal

government contract exceeding $100,000 to provide “[a]

payment bond with a surety . . . for the protection of all persons

supplying labor and material in carrying out the work provided

for in the contract.” 40 U.S.C. § 3131(b)(2). In pertinent part,

§ 3133(b)(1) provides that “[e]very person that has furnished

labor or material . . . and that has not been paid in full within 90

days after the day on which the person did or performed the last

2

Act of August 13, 1894, ch. 280, 28 Stat. 278, as

amended by Act of February 24, 1905, ch. 778, 33 Stat. 811.

3

See also United States ex rel. Daniel H. Hill v.

American Sur. Co., 200 U.S. 197, 202 (1906) (The Heard Act

as amended “shows the consistent purpose of Congress to

protect those who furnish labor or material in the prosecution of

public work.”); Fanderlik-Locke Co. v. United States ex rel.

Morgan, 285 F.2d 939, 942 (10th Cir. 1960) (“The purpose of

the Miller Act is to provide security for those who furnish labor

and material in the performance of government contracts . . . .

The benefits of the Act are not intended for the prime contractor

who is required by the Act to furnish a bond to effectuate its

provisions.” (internal citations omitted)).

6

of the labor or furnished or supplied the material . . . may bring

a civil action on the payment bond.” 40 U.S.C. § 3133(b)(1).

However, § 3133(b)(2) limits the scope of those

protected. It states:

“A person having a direct contractual

relationship with a subcontractor but no

contractual relationship, express or implied, with

the contractor furnishing the payment bond may

bring a civil action on the payment bond on

giving 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.”

40 U.S.C. § 3133(b)(2).

Because the statute does not define the term

“subcontractor,” the Supreme Court has been called upon to

explain the meaning of the term. In Clifford F. MacEvoy Co. v.

United States ex rel. Calvin Tompkins Co., 322 U.S. 102 (1944),

the Court recognized that the Miller Act “is highly remedial in

nature. It is entitled to a liberal construction and application in

order properly to effectuate the Congressional intent to protect

those whose labor and materials go into public projects.” Id. at

107.

Nevertheless, the Court observed that it must also give

effect to Congress’ intent to limit liability under the Act through

7

the restrictions in § 3133(b)(2). Id. at 107-08. In the Court’s

view, Congress used the term “subcontractor” in the technical

sense to apply to “one who performs for and takes from the

prime contractor a specific part of the labor or materials

requirements of the original contract, thus excluding ordinary

laborers and materialmen.” Id. at 109.4

The Court pointed out that its conclusion was supported

by practical considerations in that it was unlikely that Congress

intended to impose liability on the general contractor for labor

and materials provided by those beyond the “relatively few

subcontractors who perform part of the original contract” and

are well known to the prime contractor. Id. at 110. In a later

case, the Court also made clear that Congress “intended the

scope of protection of a payment bond to extend no further than

4

Thus, although a kingdom may be lost for lack of a

nail, a vendor who supplied a box of nails is unlikely to be

protected by the Miller Act.

“For want of a nail the shoe was lost. For want of

a shoe the horse was lost. For want of a horse the

rider was lost. For want of a rider the battle was

lost. For want of a battle the kingdom was lost.

And all for the want of a horseshoe nail.”

A version of this rhyme of apparent English origin first appeared

in written form in John Gower’s Confessio Amantis, dated

approximately 1390. Benjamin Franklin included a version in

his Poor Richard’s Almanack.

8

to sub-subcontractors.” J.W. Bateson Co. v. United States ex

rel. Bd. of Trustees, 434 U.S. 586, 591 (1978).

The Supreme Court further explained its definition of a

“subcontractor” under the Miller Act in F. D. Rich Co. v. United

States ex rel. Indus. Lumber Co., 417 U.S. 116 (1974). F. D.

Rich, the prime contractor for a federal housing project, awarded

two contracts to Cerpac Company, one for the installation of

custom mill work and another to provide standard sheets of

plywood. Id. at 119. Cerpac had a close relationship with F. D.

Rich and had worked with it on other projects. Id. at 118.

Cerpac placed an order for the plywood with Industrial Lumber,

a broker, which purchased the plywood from its own suppliers.

Id. at 119. After Cerpac fell behind in its payments for the

wood, Industrial Lumber filed a claim under the Miller Act. Id.

at 120.

The Court concluded that under MacEvoy the test for

determining whether one is a subcontractor hinges on “the

substantiality and importance of his relationship with the prime

contractor.” Id. at 123. The Court noted that Cerpac, in

addition to its role as a plywood supplier, had a contract “to

select, modify, detail and install all custom millwork . . . [and]

in effect, took over a substantial part of the prime contract

itself.” Id. at 124. Finding that the close relationship and prior

dealings between Cerpac and F. D. Rich was determinative, the

Court concluded that Cerpac acted as a “subcontractor” when it

supplied the plywood and Industrial was entitled to recover. Id.

The F. D. Rich Court explained that the ability of a prime

contractor to protect itself by requiring a middleman to post a

9

bond is an indication that he is a “subcontractor.” Id.

Generally, when a subcontractor is required to provide a bond

the premiums will cause him to increase his bid. See Note,

Mechanics’ Liens and Surety Bonds in the Building Trades, 68

Yale L.J. 138, 171 (1958) (“[W]here bonding is conventional,

premiums constitute a construction expense which is reflected

in every contractor's bid. The owner who accepts a bid may be

expected to pass the premium costs on to the ultimate users of

the particular project.”). Thus, a prime contractor may decide

to forego requiring a bond from a subcontractor to obtain a

lower bid. The Court’s statement appears to recognize that it is

equitable for a prime contractor to bear the risk of loss when he

does not require the subcontractor to secure a bond or make

other arrangements for the security of its suppliers.

To summarize, MacEvoy and F. D. Rich established

broad criteria under which “subcontractor” status applies to one

who performs a specific part of the original contract and has a

substantial and important relationship with the prime contractor.

Because of the variety of circumstances that arise in

government construction projects, the general standards of

MacEvoy and F. D. Rich are not always easy to apply. In the

many cases that have applied MacEvoy and F. D. Rich, lower

courts have created inconsistent tests for defining

“subcontractor” status and have compiled laundry lists of

elements to consider. The District Court here cited opinions of

various appellate courts in describing circumstances it

considered relevant:

10

“Some of the factors to consider include: (1) the

nature of the material or service supplied by the

alleged subcontractor to the prime contractor, see

F. D. Rich, 417 U.S. 116 (1974); United States ex

rel. Consol. Pipe & Supply Co. v.

Morrison-Knudsen Co., 687 F.2d 129 (6th Cir.

1982); Miller Equip. Co. v. Colonial Steel & Iron

Co., 383 F.2d 669 (4th Cir. 1967); United States

ex rel. Wellman Eng’g Co. v. MSI Corp., 350

F.2d 285 (2d Cir. 1965); (2) the financial

magnitude of the goods or services provided in

relation to the total federal contract, see

Morrison-Knudsen, 687 F.2d 129; Miller, 383

F.2d 669; (3) the payment terms and exchange of

information between the prime contractor and

alleged subcontractor, see MSI Corp., 350 F.2d

285; and (4) the overall relationship between the

prime contractor and the alleged subcontractor,

see F. D. Rich, 417 U.S. 116; Morrison-Knudsen,

687 F.2d 129.”

United States ex rel. E & H Steel Corp. v. C. Pyramid

Enterprises, Inc., 2006 WL 2570849, *6 (D.N.J. Sept. 1, 2006)

(some internal citations omitted).

The District Court also noted that, as part of these

inquiries, courts have also considered

“(1) whether the goods produced came from

inventory or whether they had to be

custom-manufactured, (2) whether they were

11

complex in nature, (3) whether they constituted a

significant and integral portion of the overall

project, (4) whether the items provided were

generally available on the market, (5) whether the

subcontractor performed work on-site, (6)

whether the alleged subcontractor had design or

installation responsibility for the items or services

it provided, and (7) whether the alleged

subcontractor had ultimate responsibility for a

portion of the work under the government

contract.”

Id. (citations omitted).

Although a survey of factors can be helpful in applying

the standards in MacEvoy and F. D. Rich, the opinions

interpreting those two cases often evolve into a process of

“color matching” the various precedents rather than focusing on

the purpose of the Act, the relationship between the parties, and

the middleman’s role in the project. See, e.g., United States ex

rel. Conveyor Rental & Sales Co. v. Aetna Cas. & Sur. Co., 981

F.2d 448, 452-55 (9th Cir. 1992).

Many of the opinions emphasize the nature of the

materials supplied while overlooking the fact that the Supreme

Court held that a firm that provided plywood sheets that were

not unique or customized was a “subcontractor” in F. D. Rich.

See F. D. Rich, 417 U.S. at 119. The Miller Act does not make

distinctions based on characteristics such as whether the

material supplied was customized or unique. Thus, for example,

the oft-cited pre-F. D. Rich case of Aetna Cas. & Sur. Co. v.

12

United States ex rel. Gibson Steel Co., 382 F.2d 615 (5th Cir.

1967), inappropriately emphasized the simplicity of the

prefabricated steel supplied to the contractor. Id. at 618

(concluding that “[t]he most important factor is the nature of the

items . . . supplied” and that “the variety and relative simplicity

of the items supplied weigh heavily against finding” that the

supplier was a subcontractor).

Similarly, in another pre-F. D. Rich case, United States

ex rel. Bryant v. Lembke Constr. Co., 370 F.2d 293 (10th Cir.

1966), the Court was impressed by the simplicity of materials

supplied when denying subcontractor status to a company that

supplied concrete to the prime contractor. Id. at 295-96.

Although furnishing customized or complex material may

in some cases be a helpful indication of the strength of the

supplier’s relationship with the prime contractor, it does not

follow that the absence of such characteristics in the material

supplied establishes a lack of “subcontractor” status. The

holding in F. D. Rich shows that a person who furnishes very

basic materials can be a “subcontractor,” thus allowing his

suppliers to recover on the payment bond.

In Morrison-Knudsen, the Court of Appeals correctly

focused more on the substantiality of the relationship between

the prime contractor and alleged subcontractor when it was

presented with circumstances somewhat similar to those before

us. 687 F.2d at 135-36. The Court concluded that a fabricator

that supplied large amounts of pipe, some of which required a

special lining and coating, was a “subcontractor.” Id. at 134.

The Court observed that, although the fabricator did not install

13

the pipe or participate in the project design, it supplied 40% of

the pipe for the facility, submitted shop drawings for approval

of the prime contractor, and had representatives at the job site to

help interpret the drawings and check the material for damage

when it arrived. Id. at 135.

The Court of Appeals also stated that the prime

contractor’s ability to procure a bond from the middlemen was

“a significant and probative consideration.” Id. Considering all

these circumstances, the Court concluded that the evidence

established the substantial relationship necessary to designate

the fabricator as a “subcontractor.” Id. at 136.

The Morrison-Knudsen Court gave little consideration to

the fact that the contractual instrument was “styled a ‘purchase

order.’” Id. at 134. We agree that the label that the parties apply

to the relationship between the contractor and the middleman is

not determinative of “subcontractor” status. The designation of

the agreement as a “purchase order” rather than a “subcontract,”

therefore, or the failure to designate a supplier as a

“subcontractor,” is entitled to little weight.

Rather than attempting to reconcile the often inconsistent

case law and laundry lists of factors, we prefer to focus our

analysis on the formulas provided by the Supreme Court, vague

as they are, by following their rationale.

We begin with the premise that the Miller Act is to be

interpreted liberally to protect persons who supply labor or

materials for government construction projects. That protection

is restricted to parties who are no more distant from the prime

14

contractor than sub-subcontractors. J.W. Bateson Co., 434 U.S.

at 591. “Subcontractor” status may extend to those who supply

necessary material, as well as to those who incorporate items

into the structure.

Neither the Miller Act nor the Supreme Court make a

distinction between those who supply complex or simple

material, nor do they differentiate between projects involving

simple and complicated structures. The Court’s definition of a

“subcontractor” is “one who performs for and takes from the

prime contractor a specific part of the labor or materials required

by the original contract.” MacEvoy, 322 U.S. at 109. A

“subcontractor” must have a substantial and important

relationship with the prime contractor. F. D. Rich, 417 U.S. at

123. The prime contractor’s ability to require the posting of a

bond is also an indication of where the risk of financial loss

should fall. Id. at 123-24; MacEvoy, 322 U.S. at 110.

II.

The issue here is whether Havens qualifies as a

“subcontractor” under this approach. We conclude that it does.

Havens’ task was to supply a specific and crucial part of

the materials required by the original contract to construct the

steel framework. It arranged for the fabrication and delivery to

the site of a substantial amount of structural steel necessary for

the skeleton of the hangar building. Havens also prepared shop

drawings and erection drawings, designed the connectors, and

performed some “design-assist engineering.”

15

The relationship with the prime contractor was a

substantial and important one. The work and material Havens

supplied for the framework required Pyramid to exercise

substantial attention and oversight. The shop drawings were

submitted to Pyramid for approval and the parties communicated

about the connectors design and design-assist work.

Although Pyramid did most of the construction work

itself, the steel that Havens supplied had to be carefully

manufactured so that Pyramid could efficiently erect the

framework. Delivery of the steel to the site had to be arranged

to comply with Pyramid’s construction schedule. The

importance of this coordination became clear when, in Havens’

bankruptcy proceeding, Pyramid made a claim against Havens

for costs incurred because of delays in delivery of the steel.

Further, it does not appear that, for this project, a large

number of subcontracts were awarded and none were as large as

that with Havens. Finally, Pyramid likely could have requested

a bond, although the record does not disclose whether Havens

could have qualified for one.

The District Court, in denying recovery, analogized the

supplying of pre-fabricated steel beams to providing pre-cut

wood beams for residential construction. As noted above, in F.

D. Rich the Supreme Court decided that a firm that furnished

standard sheets of plywood was a “subcontractor.” A supplier

of pre-cut wooden beams could qualify as well. Moreover, the

fact that Havens’ contract amounted to 7.8% of the total project

costs is not a weighty reason to deny recovery, especially since

Pyramid did most of the construction itself.

16

We conclude, therefore, that Havens was a

“subcontractor.” Because it had a contract with Havens, E & H

is entitled to recover under the Miller Act bond. Accordingly,

the judgment of the District Court will be reversed and the case

will be remanded for entry of a judgment in favor of E & H

Steel Company.

17