Petition for Writ of Certiorari — Arvanis v. Noslo Engineering Consultants, Inc.

$2°640' [om ee ome 0

| FILED

No. : WY 23 1984

— ETSI,

CLERK

In the .

Supreme Court of the Anited States

Ocroser TERM, 1984

JOHN V. ARVANIS, d/b/a INDUSTRIAL CONTRAC-

TORS and BAER ELECTRIC CO., INC.,

Petitioners,

vs.

NOSLO ENGINEERING CONSULTANTS, INC., NOSLO

ENGINEERING CORPORATION, AND THE UNITED

STATES OF AMERICA,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

ONITED STATES COURT OF APPEALS FOR

THE SEVENTH CIRCUIT

SamveL S. McHarp

Stuart R. Lerstern

Donovan S. Rosertson

Katz, McAnprews, DurKEE, BALcH

& Lersrern, P.C.

P. O. Box 66

Rock Island, IL 61204-0066

Ricuarp W. McCarruy

Kiocxau, McCartuy, Evutison & RInpen

P. O. Box 1279

Rock Island, IL 61204-1279

Attorneys for Petitioners, Joun V.

Arvanis, d/b/a InpustriaL ConTRACTORS

and Barer Exectric Co., Inc.

The Scheffer Press, Inc.—(312) 263-6850

ry

QUESTION PRESENTED

Whether the United States of America may be sued

pursuant to the Miller Act, 40 U.S.C. § 270a-270e (1976),

and the Federal Tort Claims Act, 28 U.S.C. § 1346(b)

(1976), for its failure to secure a Miller Act bond prior to

awarding a federal construction contract to a prime con-

tractor who subsequently defaulted without paying the

subcontractors.

INDEX

PAGE

Question BOCNRRE ncnnuiisimnaniiaaen i

Opinions Bebe sccisnnnncsssicicanivbieiaenadeiiieaimmisaiaas 1

SUPIBTCEI —sesisnvisemssssnsenieessiitiinamitivcieocinhgianiaamiaainiiiies 2

Sinton TAVOIVOE esissiissricnnicicsmmmnecsisammnamammins 2

Statement GF TRG scinicimincoumniennemedone 2,3

Reasons for granting the Wit ............ccssccssssssssssecsseees 4,7

COMCIRSEOR §—exenseseserssentecnsnnnaieaieaanapaiemaameaan 16

APpenEK B cesccsssvssissrecsnsenissecesnceeiammaemnnamadaaialadl la

APDOREEE DB ciisicrnssiviniineennndtaneaeeee 7a

ApMeRiK © cccisinisissnnininaiisemgmamaaa ana 21a

Append D .csssssssssicisessnneeeiaaaaaadia 23a

ili

CITATIONS

CasEs PAGE

Arvanis vy. Noslo Engineering Consultants Inc.,

ee ae Be, Be TAOS ceive cceninsssenssendbvbinsacsonne 5,6

Eastern Air Lines, Inc. v. Union Trust Co., 95

U.S. App. DC 189, 221 F.2d 62, aff'd per curiam

sub. nom. United States v. Union Trust Co.,

300 U.S. 907, 100 L.Ed. 796, 76 S.Ct. 192 (1955) 10

Equitable Surety Co. v. McMillan, 234 U.S. 448,

08 L.Ed. 1394, 34 S.Ct. 803 (1913) ........eeeseees 5

Hylin v. United States, 715 F.2d 1206 (7th Cir.

SIIE (o- -iebinaisndiieliathasedstiniainnineeinnbitbseditniibasisiommtanantiosereseen 13

Indian Towing Co. v. U.S., 360 U.S. 61 (1955) .... 7,9

Pippin v. Chicago Housing Authority, 78 ITll.2d

204, 399 N.E.2d 596, 35 Ill.Dec. 121 (1979) ........ 12

United States for the Use of Hill v. American

Surety, 200 U.S. 197, 50 L.Ed. 487, 265 S.Ct.

SI ica it ia inshemientyniesionselhdicvasiabtananbihiantninstinnss 5

United States v. S.A. Empresa de Viacao Aerea

Rio Grandense (VARIG), ........ if eee , 81 L.

I TIES lincacdinssinchetiniaiilillcieicanieisanannsusen 7,10,13

United States of America vy. Yellow Cab Co., 340

ial ical dahaeaecnniiiveniien 7,8

STATUTES:

Miller Act (40 U.S.C.) :

Sa ecsaldumiiinnilnint 4,11

TI a csiec ahr seniasespnlankdabiviesheemnnisenems 23a, 26a

Federal Tort Claims Act (28 U.S.C.):

EERSTE ere ee eee eee 3

In THE

SUPREME COURT OF THE UNITED STATES

Ocroser TERM, 1984

No.

JOHN V. ARVANIS, d/b/a INDUSTRIAL CONTRAC-

TORS and BAER ELECTRIC CoO., INC.,

Petitioners,

vs.

NOSLO ENGINEERING CONSULTANTS, INC., NOSLO

ENGINEERING CORPORATION, AND THE UNITED

STATES OF AMERICA,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE SEVENTH CIRCUIT

John J. Arvanis, d/b/a Industrial Contractors and Baer

Electric Co., Inc., an Lllinois corporation, petition for a

writ of certiorari to review the judgment of the United

States Court of Appeals for the Seventh Circuit in this

case.

OPINIONS BELOW

The opinion of the District Court (App. A. infra, pp.

la-6a) is not officially reported. The opinion of the Court

of Appeals (App. B, infra, pp. 7a-20a) is reported at 739

F.2d 1287.

a

JURISDICTION

The judgment of the Court of Appeals denying peti-

tioners’ Request for a Rehearing was denied on August

27, 1984 (App. C, mfra, pp. 21a-22a). The jurisdiction of

this Court is invoked under 28 U.S.C. 1254(1).

STATUTES INVOLVED

40 U.S.C. Section 270(a) and 270(b) and 28 U.S.C.

Section 1346(b), as set forth in Appendix D, infra,

pp. 23a-26a.

STATEMENT OF FACTS

Respondent, Noslo Engineering Consultants, Inc. (‘‘No-

slo”), was the prime contractor for the construction of a

“noise attenuator” at the Rock Island, Lllinois, United

States Army Arsenal. Petitioners, John V. Arvanis (“Ar-

vanis”) and Baer Electric Company, Ine. (“Baer”) were

subeontractors. Unbeknownst te them, Nosio failed to

obtain a payment bond, as required under the “Miller Act.

Noslo also failed to complete the project or pay the two

subeontractors for the materials and services they had

supplied, and subsequently filed for bankruptey. Arvanis

and Baer then filed essentially identical suits against No-

slo and the United States, each seeking to recover the

full amount of his damages ($105,080.00 for Arvanis and

$30,464.00 for Baer) from each defendant.’ Noslo failed

to answer, and default judgments were entered. The claims

against the government were dismissed on grounds of

sovereign immunity and lack of subject matter jurisdic-

tion.

‘ Although never formally consolidated before the Dis-

trict Court, the two cases were treated jointly. The cases

were consolidated on appeal.

— ae

Arvanis and Baer appealed to the United States Court

of Appeals for the 7th Cireuit the District Court’s deci-

sion dismissing their three-count Amended Complaint

against the United States. Count III was based on the

Federal Tort Claims Act (“FTCA”), 28 U.S.C. § 1346(b),

and aileged that the government was negligent in failing

to require Noslo to post a Miller Act payment bond. Count

IV, premising jurisdiction on the Miller Act, 40 U.S.C.

§ 270a-170e (“Miller Act”), and 28 U.S.C. § 1331 (federal

question jurisdiction), also alleged a failure te require

the puyment bond. Count V again claimed to base juris-

diction on § 1331 and the Miller Act, and alleged both

that the government was negligent in failing to retain

sufficient progress payments and should thus be lable to

the subcontractors and that petitioners should be compen-

sated out of the $50,000.00 retainage which the government

did hold. On appeal, petitioners argued that the suits

were improperly dismissed as the United States had im-

plvitly waived sovereign immunity under the Miller Act

or the FTCA, or both.

On August 27, 1984, the petitioners’ Motion for Rehear-

ing with Suggestions for Rehearing en banc. in the United

States Court of Appeals for the 7th Circuit was denied.

a eon

REASONS FOR GRANTING THE WRIT

SSEEEREeEnIREeiee

I,

THE REFUSAL OF THE UNITED STATES COURT

OF APPEALS FOR THE SEVENTH CIRCUIT TO

FIND THAT THE MILLER ACT WAIVES SOVER.

EIGN IMMUNITY AND PERMITS THE SUIT AT BAR

HAS IMMEDIATE IMPORTANCE BEYOND THE

PARTICULAR FACTS AND PARTIES INVOLVED IN

THIS CASE.

Section 270a of the Miller Act permits suits against

the United States such as those filed by petitioners in

the cases at bar. That section provides in part as follows:

“Before any contract, exceeding $25,000 in amount,

for the construction .. . of any . . . publie work of

the United States is awarded to any person, such

person shail furnish to the United States the follow-

ing bonds, which shall become binding upon the award

of the contract ...:

“(1) A performance bond with a surety or sureties

satisfactory to the officer awarding such contract,...

“(2) A payment bond with a surety or sureties

satisfactory to such officer for the protection of all

persons supplying labor and material in the prosecu-

tion of the work provided for in said contract for

the use of each such person. .. .” (Emphasis added. )

Unlike private construction projects, no mechanic’s or

materialmen’s liens can be attached to the public buildings

or grounds of the United States. This creates two prob-

lems:

(1) “[PJotential subcontractors would be very re-

luctant to participate if they had nothing better than

—_

the status of a general creditor of the prime contrac-

tor to secure payment,” Arvanis v. Noslo Engineering

Consultants, Inc., 739 F.2d 1287, 1289 (1984), and

would thus be subject to great losses at the hands of

insolvent or dishonest contractors; and

(2) The insecurity resulting from the absence of

a lien to secure payment has a substantial tendency

to drive up the prices at which labor and materials

would be furnished on public projects. Equitable

Surety Co. v. McMillan, 234 U.S 448, 58 L.Ed. 1394,

34 S.Ct. 803 (1913).

As the Court of Appeals recognized, “[T]he answer to

the[se] problem[s] was the Miller Act.” Arvanis v. Noslo

Engineering Consultants, Inc., 739 F.2d 1287, 1289 (1984).

The Congressional intent was clearly to substitute the

obligation of a payment bond for the security which might

c horwise be obtained by attaching a lien to the property

of an individual thus ensuring that subcontractors on fed-

eral projects are protected to the same extent as they

would be if constructing the improvement for a private

individual under like circumstances. The purpose of the

law is further em,’ >sized in its title, which declares that

it is:

“For the protection of persons furnishing materials

and labor for the construction of public works.”

Despite this clear legislative intent, despite recognition

of the problems which this Act was clearly intended to

answer, and despite the liberal construction of the Act

applied by this Court, (See, e.g., United States for the

Use of Hill v. American Surety, 200 U.S. 197, 50 L.Ed.

437, 265 S.Ct. 168 (1905)), the Court below strained the

words and clear meaning of the Act to provide not only

—

=—

that the Act does not answer the very problems which

it seeks to redress but also to hold that there exists a

“cap in the statute” between the rights given to subcon-

tractors and the remedy provided.

The Court below interpreted the Miller Act to “place

no affirmative obligation on the government, and says ab-

solutely nothing about what happens when the contractor

fails to furnish the bond.” Arvanis v. Noslo Engineering

Consultants, Inc., 739 F.2d 1287, 1290 (1984). Appellants

respectfully disagree and direct this Court’s attention to

the plain words of the statute and their ofdinary mean-

ing. “Before any contract is awarded to any person, such

person shall furnish to the United States ... a payment

bond .. .”

Congress was clearly dictating simple, non-discretionary

instructions to government employees acquiring goods or

services for a public works project:

“Unless and until you receive a bond to secure pay-

ment to subcontractors, do not award any contract to

a contractor!”

The statute clearly places the obligation on the govern-

ment to award a contract only after a payment bond has

been furnished. Furthermore, only the government,

through its contracting officers, has the power to “award

a contract for the construction of any public work.” To

state that “there is no provision for the contingency that

both the contractor and the government contracting of-

ficer will ignore the bonding requirement” begs the ques-

tion, strains the clear language of the Act and under-

mines the entire purpose of the statute. There is no

digeretionary function involved but rather a simple and

direct duty owed.

—

=

The obvious and natural remedy for the right created

is to permit suit under the Miller Act by the laborers

and materialmen to the same extent as if the government’s

contracting officer had required the bond prior to award-

ing the contract. To state that laborers and materialmen

who have relied on the bonding requirements imposed by

the Act are “hapless” and either intended by Congress

(or carelessly permitted) to be “left holding the bag”

on a federal construction project is to turn the principals

of judicial construction on their ear. 739 F.2d at 1288.

Faced with two possible constructions of the statute,

one which reaches a just result in accord with the ex-

press purpose of the Act and the other which reaches a

universally conceded unjust result at odds with the intent

of the law, the court should opt for the just result. “A sub-

contractor who fulfills his part of the bargain should not

suffer either because the prime contractor defaulted” or

because the government contracting officer improperly

awarded a contract without obtaining the payment bond

required by the Miller Act. Jd. at 1293.

II,

THE DECISION OF THE COURT BELOW IS IN

DIRECT CONFLICT WITH ESTABLISHED PRINCI-

PLES OF FEDERAL LAW, AS ELUCIDATED IN

THIS COURT’S DECISIONS IN /NDIAN TOWING CO.

v. U.S., 360 US. 61 (1955), UNITED STATES OF

AMERICA v. YELLOW CAB CO., 340 U.S. 543 (1950),

AND UNITED STATES vy. S.A. EMPRESA DE VIA-

CAO AEREA RIO GRANDESE (VARIG), ....++ US.

osenees , 81 L, Ed.2d 660 (1984).

The Seventh Cireuit Court of Appeals rejected appel-

lants’ arguments supporting the imposition of liability on

the United States under the FTCA for failure to require

pom Sens

a Miller Act bond before awarding and proceeding on the

public works construction project. In doing so, the Court

premised its decision on the following three reasons:

1. “The absence of any persuasive analogy with

private conduct.” Id. at 1292.

2. “It would allow appellants to achieve by indi-

rection a result which they could not reach directly

under the Miller Act.” Jd.

3. The “good Samaritan” rule, as set forth in Sec-

tion 324A of the Restatement of Torts (Second) was

not applicable because “it isn’t even clear that the

United States undertook any duty,” Id. at 1291, be-

cause the reliance by appellants was not justified and

because Section 324A was “primarily applicable to

situations in which defendant has undertaken to pro-

vide services that are necessary for a third party’s

physical safety.” Id.

Petitioners respectfully contend that these reasons are

incorrect and misguided.

The lower Court’s application of the “analogy with

private conduct” rationale is artificial and strained. As

the lower Court recognized, the FTCA was designed pri-

marily to remove the sovereign immunity of the U.S.

from suits in tort and, with certain specific exceptions,

to render the U.S. liable in the same way a private indi-

vidual would be under like circumstances. Indian Towing

Co. v. U.S., 350 U.S. 61 (1955). The Supreme Court has

often recognized that the FTCA waives the government’s

immunity from suit in sweeping language in favor of an

injured party. See, e.g., United States of America v. Yel-

low Cab Co., 340 U.S. 543 (1950). Based on this under-

ty i a

= a

standing, the Court of Appeals in the instant case initially

proceeded with a thoughtful analysis and rejected the

“simple syllogistic analysis” adopted by three other cir-

cuits because that analysis merely assumes the answer.

739 F.2d at 1290. The Seventh Circuit further correctly

rejected the “uniquely governmental function” argument

likewise rejected by the Supreme Court in Indian Towing

Company v. United States, 350 U.S. 61 (1955), and cor-

rectly adopted the Indian Towing approach of “focus(ing)

on the behavior involved, not the legal labels applied, and

then look(ing) for analogies with private conduct.” 739

F.2d at 1290. The Court, however, became myopic in ap-

plying that test.

Indian Towing, 350 U.S. 61 (1955), involved a claim

under the FTCA for damages to cargo aboard a ship

that ran aground due to the alleged negligent operation

of a lighthouse by the Coast Guard. The government ar-

gued that the Act contained an implied exception from

liability for “uniquely governmental functions.” In re-

jecting that argument, the Supreme Court held.

“The government reads the statute as if it im-

posed liability to the same extent as would be im-

posed on a private individual ‘under the same cir-

cumstances.’ But the statutory language is ‘under

like circumstances.’” Id. at 64.

The Court of Appeals in the case at bar concedes that

the government’s argement herein “bears some similarity

to that rejected in Indian Towing Co. v. United

States .. .” 739 F.2d at 1290, n3. Clearly, the compar-

able conduct on which to focus in the case at bar is con-

struction of improvements on real estate. Private indi-

viduals do it. If they carelessly fail to require their

prime contractor to post a bond as part of the contract

—_

prior to commencing construction, private individuals are

subject to mechanic’s and materialmen’s liens. Similarly,

the government is liable if it fails to secure a Miller Act

bond from its prime contractor because those bonds were

intended by Congress to ensure that subcontractors on

federal projects are protected to the same extent as they

would be im constructing the improvement for a private

individual under like circumstances.

Despite this avowed focus and analysis, the Court in

the case at bar erred in application and reverted to the

application of the rejected uniquely governmental func-

tion approach as follows:

“Similarly, there is nothing uniquely governmental

about construction contracts, but it is true that fed-

eral contracts are unique, and that the Miller Act

with its bonding requirement applies only to fed-

eral contractors. Thus, it is true that no Miller

Act question could arise under state law.” 793 F.2d

at 1290, n.3.

Additionally, in the case of Eastern Air Lines, Inc. v.

Union Trust Co., 95 U.S. App. DC 189, 221 F.2d 62, aff'd

per curiam sub. nom. United States v. Union Trust Co.,

350 U.S. 907, 100 L.Ed, 796, 76 S.Ct. 192 (1955), and in

the very recent decision in United States v. S.A. Em-

presa de Viacao Aerea Rio Grandense (VARIG), ........

ite sana 81 L.Ed.2d 660 (1984), the Supreme Court re-

lied on Indian Towing and rejected the “uniquely gov-

ernmental function” approach applied herein. In Lastern,

supra, two planes suffered a mid-air collision while at-

tempting to land, allegedly as a result of the negligence

of air traffic controllers, The Supreme Court summarily

affirmed the decision to permit suit against the govern-

ment, rejecting the uniquely governmental function ap-

J

—

proach and holding that the nature of the air traffic con-

trollers’ function was such that liability under the law

of the state where the accident occurred would be im-

posed on the government under like circumstances. This

reasoning was cited with approval in VARIG, supra,

which is distinguished from the case at bar because

VARIG deals with the “discretionary function exception

which was never raised in this case because the govern-

ment, by the terms of the Miller Act, is not permitted

the discretion to award a contract to a contractor who

fails to secure a payment bond;? rather, the award of

the contract is predicated on the contractor having a

bond. Once again, under the Miller Act there is no dis-

cretionary function involved but rather a simple and

direct duty owed. Therefore, proper application of the

Indian Towing rationale which is on all fours with the

case at bar results in reversal of the lower Court’s deci-

sion.

Secondly, the rationale that to permit the suit at bar

under the FTCA allows appellants to achieve by indirec-

tion a result which they could not reach under the Miller

Act simply assumes the answer to the question posed

by the Seventh Cireuit. Analysis of the language and

intent of both the FTCA and the Miller Act indicates

they are proper vehicles to redress the very result which

the Court of Appeals and the District Court repeatedly,

and apologetically, refer to as “unjust.” 739 F.2d 1293.

Once again this Court should be guided by the beacon

of Indian Towing, where this Court held:

*“Before any contract, exceeding $25,000 in amount,

for the construction ... of any ... public work of the

United States is awarded to any person, such per-

son shall furnish to the United States the following

bonds .. .” 40 U.S.C. §270(a).

= =

“The broad and just purpose which the statute was

designed to effect was to compensate the victims of

negligence in the conduct of governmental activities

in circumstances like unto those in which a private

person would be liable and not to leave just treat-

ment to the czprice and legislative burden of indi-

vidual private laws.” Indian Towing, 350 U.S. at

68-69.

In sum, had the United States performed the duty

delegated to it by the Miller Act by the simple expedient

of insuring that the required bonds had been obtained,

this litigation would be unnecessary and the injustice

referred to by the two lower courts would not have been

done. In balancing the burden to the government in ex-

ercising its duty to require statutory bonds against the

burden upon hapless subcontractors who are left “hold-

ing the bag”, this Court must tip the scale in favor of

the subcontractors.

Third, the rejection of the “good Samaritan” rule’ is

unfounded as to the duty owed to subcontractors by the

government.* The Miller Act clearly imposes an affirma-

*The “good Samaritan” rule is found in the Restate-

ment of Torts (Second) § 324A and is adopted as a rule

of substantive law in Illinois. See, e.g., Pippin v. Chica-

g0 Housing Authority, 78 Ill.2d 204, 399 N.E.2d 596, 35

Ill.Dee. 121 (1979). Under this theory, the United States,

knowing that a third party (the subcontractor) would

be affected by its direct dealings with the prime contrac-

tor, had gratuitously undertaken a duty of care towards

the subcontractor, and can be held liable for a breach

of that duty.

*In another decision of the Seventh Cireuit Court of

Appeals regarding the “good Samaritan” doctrine, the

Court held, in a divided decision, that a cause of action

existed under the FTCA when a regulatory agency’s

ion

tive duty on government contractors to secure payment

bonds for subcontractors before awarding contracts, as

explained in the first section of this Petition. Failure

to do so subjects the government to the same liability

as would be imposed under state law on private indi-

viduals in like circumstances.

Further, the lower Court improperly rejected the “good

Samaritan” doctrine based on a fact-finding of unjusti-

fied reliance. At this stage no facts have been deter-

mined. Thus, this conclusion is not justified by the rec-

ord. Furthermore, the Court’s characterization of appel-'

lants’ conduct as “passive reliance” is grossly unfair and!

inaccurate. Contrary to the Court’s assumption, assist-

ing in construction of a complex government project such

as the noise-attenuator on the Rock Island Arsenal is

strikingly similar to navigating around submerged rocks.

Obviously, the captain could have weighed anchor and

* (Continued)

negligent enforcement of safety regulations increased the

risk of harm to third persons and proximately caused an

injury. Hylin v. United States, 715 F.2d 1206 (7th Cir.

of action stated in the complaint should be held to prop-

erly state a cause of action against the government.

a om

waited out the storm or radioed to determine if the

lighthouse was working in the Indian Towing case. In

the case at bar, the Court suggests that the appellants

could have inquired of the contracting officer whether a

payment bond had been posted. However, the subcon-

tractors are familiar with the requirement that before

they can enter into a sensitive government defense in-

stallation to work on a substantial construction contract,

the government must award a contract, Furthermore,

subcontractors know that as a prerequisite to the award,

the government must have obtained the Miller Act pay-

ment bond to secure payment of subcontractors. Until

those two steps have been completed, no mechanic or ma-

terialman should be allowed onto the installation to com-

mence construction under the contract.

The Court of Appeals in the case at bar improperly

rejected the “good Samaritan” doctrine because Section

324a was primarily applicable to provide services that

are necessary for a third party’s physical safety. How-

ever, the case cited as the “classic example” of the fed-

eral government’s liability for damages caused by the

misfeasance of government employees’ conduct is Indian

Towing, which involved a claim for damaged cargo, not

personal safety. Additionally, it should be emphasized

that a finding of the applicability of that doctrine to

the case at bar is not indispensable. Here, the duty im-

posed arises expressly from the Miller Act or by fair

implication from the combination of the Miller Act, the

FTCA and the Illinois Mechanics Lien Act.

Furthermore, the lower Court attempts to distinguish

Indian Towing, supra, from VARIG, supra, by noting

that the Supreme Court in VARIG emphasized that

—

FAA rules, regulations, certifications and spot checks

were, by Congressional emphasis, intended only “to pro-

mote safety in air transportation, not to insure it.”

VARIG, supra, 81 L.Ed.2d at 679; 739 F.2d at 1291, n.4.

To openly suggest as the Court of Appeals does that,

“perhaps the Miller Act likewise does no more than en-

courage government contracting officers to insist that con-

tractors obtain Miller Act bonds” (739 F.2d 1291, n.4)

flies directly in the face of the express Congressional

purpose of insiring that subeontractors on federal pro-

jects are protected to the same extent as they would be

if constructing the improvement for a private individual

under like circumstances, a purpose strikingly analogous

to the FTCA. As further proof of the insurance feature,

the Miller Act bond requirement, which also requires a

performance bond, is designed to insure that the project

will be properly completed so that the taxpayers’ money

will not be wasted as it was in the case at bar.

inst I ciate

CONCLUSION

For the reasons stated, the Petition for a Writ of

Certiorari should be granted.

November 1984

Respectfully submitted.

Samus. S. McHarp

Stuart R. Lerstern

Donovan 8S. Rospertson

Katz, McAnprews, Durker, BALcH

& Lerstern, P.C.

P. O. Box 66

Rock Island, IL 61204-0066

Ricnarp W. McCartruy

Kiockau, McCartuy, Exviison & RINDEN

P. O. Box 1279

Rock Island, IL, 61204-1279

Attorneys for Petitioners, Jonn V.

Arvanis, d/b/a InpustriAL Con TRACTORS

and Barr Execrric Co., Inc.

== 1a —

APPENDIX A

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF ILLINOIS

No. 82-4025

Joun V. Arvanis, d/b/a InpustriaL ConTRACTORS,

Plaintiff,

v.

Nosto ENGINEERING ConsuLTANTS, Inc., NosLo ENGINEER-

inc Corporation and the Unirep States Or AMERICA,

Defendants,

and

No. 82-4026

Barer Exectric Co. Inc., an Illinois Corporation,

Plaintiff,

v.

Nosto ENGINEERING ConsuLTaNts, Inc., Nosto ENGINEER-

inc Corporation and the Unirep States Or AMEriIcA,

Defendants.

ORDER

(FILED MAR 22 1983)

This case is once again before the Court, now on the

United States’ motion to dismiss Count V of the amended

complaints of Plaintiffs Arvanis and Baer. Initially, it

should be noted that Defendant, United States of Ameri-

ca, in its Motion for Relief from Order, claims that it was

not served with a motion to amend or an amended com-

plaint by Plaintiff Baer. The docket sheet to the Baer

case indicates that both the motion and the amended

complaint were filed. Since the issues in both cases are

=

identical and the Court can see no prejudice to the Defen-

dant, the Motion for Relief from Order is denied and this

Order will apply to both cases.

Previously, Counts Ili and IV of the amended com-

plaints were dismissed by this Court (see docket entry

dated Jan. 19, 1983) and, for the following reasons, Count

V is now dismissed. Count V seeks recovery on the same

basis as Counts III and IV but alleges in addition, that

the United States is holding a retainage fund to which

Plaintiffs are entitled and the United States failed to

retain as much money under their contract with Noslo

as they should have considering the circumstances of the

case.

The United States has moved to dismiss Count V based

on alternative arguments. First, if Count V is treated as

a tort claim, Defendants argue that Plaintiff has failed

to meet the jurisdiction requirements of the Federal

Torts Claim Act and, even if these requirements have

been met, the Court has rejected this theory of recovery

in its prior order. Alternatively, if Count V is considered

a contract claim, as Defendant believes it should, the

Count must be dismissed based on several Court of

Claims rulings to that effect.

Plaintiff argues that the tort-contract issue need not

be resolved because this case is based on federal question

jurisdiction and the implicit waiver of soverign immunity

contained within the Miller Act. Furthermore, Count V

ean be distinguished from those Counts simply alleging

negligence against the United States for failure to re-

quire a bond, but not alleging the existence of a retainage

fund. y

4

The Court finds that the motion to dismiss should

be granted based on its previous ruling (see Order

dated Dec. 6, 1982). Jurisdiction for Count V is based

on the Miller Act (40 U.S.C. §270) and on federal

question jurisdiction (28 U.S.C. $1331). In the previ-

a a ean Goeth ak Albina

—_ “on

ous ruling, it was held that neither of these statutes

expressly waived the sovereign immunity of the United

States from suits filed against it. The fact that a re-

tainage is alleged to have been held by the government

does not act to waive that immunity. A ruling to the

contrary would create a distinction between those situ-

ations where a retainage is held and those where it is

not, a distinction that is not to be found in any of the

cited statutes.

A case that is closely analogous to the present situ-

ation was United States Fidelity and Guarantee Com-

pany, et al. v. United States, 201 Ct. Cl. 1, 475, F.2d

1377 (1973) (USFG). There the subcontractors were

attempting to recover for nonpayment of bills by the

prime contractor. The fund provided by the surety’s

payment bond, as required by the Miller Act, was in-

sufficient to pay all the subcontractors. Thus, those that

had not been paid instituted a suit against a retainage

fund held by the United States. The Court examined

the standing of the subcontractors to bring suit against

the United States and, in so doing, reviewed the two

most important Supreme Court opinions on this issue.

In the first of these cases, United States v. Munsey

Trust Company, 332 U.S. 234 (1947), the Court decided

whether the United States or a payment bond surety

had superior right to a retained fund held by the gov-

ernment. The Court held that while the surety did have

a right to the fund, the United States could offset from

the fund amounts owed to the government from the prime

contractor for work previously done. In the course of its

opinion, the Court held “laborers and materialmen do not

have enforceable rights against the United States for

their compensation”. Munsey, 332 U.S. at 241.

The later case of Pearlman v. Reliance Insurance Com-

pany, 371 U.S. 132 (1962), diseussed the issue of whether

the contractors trustee in bankruptcy or a Miller Act

surety had superior rights in a retainage fund held by

pe eae

the government. The Court held that the surety, having

paid the laborers and materialmen, was entitled to the

benefit of all the rights necessary to reimburse it for its

payment. The Court stated:

“, . . the Government had a right to use the retained

fund to pay laborers and materialmen; that the

laborers and materialmen had a right to be paid out

of the fund; that the contractor, had he completed

his job and paid his laborers and materialmen, would

have become entitled to the fund; and that the surety,

having paid the laborers. and materialmen, is entitled

to the benefit of all these rights to the extent neces-

sary to reimburse it.”

In comparing these two cases, the Court in USF'G made

the following observation:

“It is a short step from Pearlman to infer that if

the subcontractors have rights to which the surety

may be subrogated, then the subcontractors should

be able to assert their rights directly, which is in

complete conflict with the language in Munsey, as

recognized by Justice Clark’s concurring opinion in

Pearlman.

The dilemma may be resolved in a number of ways,

but the most apparent might be by noting that the

Court in Pearlman stated that the surety was en-

titled to the benefit of all the rights of the laborers

and materialmen whose claims it paid and those of

the contractor whose debts it paid. The surety then

is subrogated to the rights of the contractor who

could sne the Government since it was in privity of

contract with the United States. The surety is like-

wise subrogated to the rights of the laborers and

materialmen who might have superior equitable

rights to the retainage but no right to sue the Defen-

dant. If this interpretation of Pearlman is adopted

then Munsey is in complete harmony with it and the

ee

—

Pearlman decision is of no aid to these subcontrac-

tors.”

The Court finds that this is a proper interpretation

of the holdings of these two cases. In this way the sub-

contractor would have equitable rights which would be

superior to those of other claimants to a fund. Yet, as

noted by the Munsey Court, the subcontractor could not

take action directly against the United States to recover

on such funds. There has been no case in which a sub-

contractor has recovered directly against the United

States based on a retainage fund. The only Supreme

Court cases dealing with this issue have weighed the

competing claims of private parties to the fund.

The holding of USFG was examined and upheld by the

Court of Claims in United Electric Corp. v. United States,

647 F.2d 1082 (Ct. Cl 1981), cert. denied 454 U.S. 863.

The Court in United Electric felt compelled to review

the USFG decision in light of Kennedy Electric Co. Inc.

v. United States Postal Service, 508 F.2d 954 (10th Cir.

1975).

In Kennedy, the Plaintiff was a subcontractor on a

federal postal facility project. As with this case, there

had been no Miller Act bonds furnished, the prime con-

tractor subsequently went bankrupt, and the Postal Ser-

vice held funds retained during the life of the contract.

The Court held that Kennedy had an equitable right to

the retainage and could enforce its rights directly against

the Postal Service. The Tenth Circuit distinguished USFG

by stating: ;

“We do not have a standing question. Our suit is

against an independent establishment having the

power to sue and be sued.”

Consequently, while many of the facts in Kennedy

are identical to those presented in this Cour*, the critical

cil cis

issue of standing to sue was not addressed. However,

this was precisely the issue in United Electric and the

Court, affirming USFG, ruled that a subcontractor had

no standing to sue the United States for compensation

due.

Accordingly, the Court must dismiss the case based

on the present law on this issue, even though the Court

does not believe this to be a totally equitable result. A

subcontractor should be able to rely on the Miller Act

and be assured that a bond will be furnished.

Notwithstanding, IT IS ORDERED that the motion to

dismiss is GRANTED and the complaint is DISMISSED.

ENTERED: March 22nd, 1983.

/s/ Michael M. Mihm

Michael M. Mihm

United States District Judge

aan FQ a

APPENDIX B

Joun V. Arvanis, d/b/a InpusrriaL ConTRACTOors,

Plaintiff-Appellant,

v.

Nosto Encineertna Consuitants, Inc., Nosto ENGINEER-

inc Corporation, and the Unrrep Srates Or America,

Defendants-Appellees.

Barer Execrric Co. Ixc., an [llinois Corporation,

Plaintiff-Appellant,

v.

Nosto Enotxeerinc Consvuxitants, Ixc., Nosto ENGINEER-

inc Corporation and the Unrrep States Or America,

Defendants-Appellees.

Nos. 83-1670, 83-1766

Jnited States Court of Appeals,

Seventh Circuit.

Submitted July 2, 1984.*

Decided July 31, 1984.

Rehearing and Rehearing En Banc

Denied Aug. 27, 1984.

* After preliminary examination of the briefs, the

court notified the parties that it had tentatively concluded

that oral argument would not be helpful to the court in

this case. The notice provided that any party might file

_-” a “Statement as to Need of Oral Argument.” See Rule

34(a), Fed.R.App.P.; Cireuit Rule 14(f). No such state-

ment having been filed, the appeal has been submitted

on the briefs and record.

—

Subcontractor brought action against government to

recover payment on federal construction project after

prime contractor had defaulted without paying and with-

out obtaining payment bond. The United States District

Court for the Central District of Illinois, Michael M.

Mihm, J., dismissed the claims, and subcontractor ap-

pealed. The Court of Appeals held that: (1) requirement

of Miller Act for public contractors to obtain perform-

ance and payment bonds placed no affirmative obligation

on the government and thus could not provide basis for

s*’yeontractor’s claim, and (2) government was not liable

under Federal Tort Claims Act for failing to ensure that

the payment bond was posted.

Affirmed.

1. United States — 67(1), 74%

Requirement of Miller Act that public contractors ob-

tain performance and payment bonds places no affirmative

obligation on the government to ensure that the bonds

have been obtained and thus provides no basis upon

which subcontractor may bring suit against the govern-

ment for payment when prime contractor has failed to

obtain bonds and has defaulted without paying the sub-

contractor. Miller Act, § 2(b), 40 U.S.C.A. § 270b(b);

28 U.S.C.A. § 1331.

2. United States — 78(8)

Government was not liable under Federal Tort Claims

Act to subcontractor on federal construction project for

negligently failing to ensure that prime contractor had

obtained payment bond where subcontractor could have

inquired of contracting officer whether payment bond had

been posted and thus could not be said to have reason-

ably relied on government’s ensuring that the bond had

been posted and where there was no persuasive analogy

with private conduct upon which government’s liability

could be based. 28 U.S.C.A. § 1346(b).

7

:

3

4

|

:

7

4

4

;

4

|

4

a

3. United States — 74144

Subcontractor could not bring action against govern-

ment against retainage fund to recover payment on

federal construction project on which prime contractor

had defaulted without obtaining payment bond and with-

out paying subcontractor where there was no evidence

that the retainage fund had not been expended to com-

plete the project.

Samuel S. MeHard, Katz, McAndrews, Durkee, Balch

& Lefstein, Rock Island, Ill, Richard W. McCarthy,

Koleckau, McCarthy, Ellison, Rinden & Hartsock, Rock

Island, Ill., for plaintiffs-appellants.

Gerald D. Fines, U.S. Atty., Springfield, Ill., L. Lee

Smith, Asst. U.S. Atty., Peoria, Ill, Major Thomas G.

Bowe, Headquarters Dept. of Army, DAJA-Ltd., Wash-

ington, D.C., for defendants-appellees.

Before BAUER, CUDAHY and ESCHBACH, Circuit

Judges.

PER CURIAM.

The ultimate question we are asked to decide is who

is left holding the bag when a prime contractor on a

federal construction project fails to obtain a Miller Act

payment bond and then defaults without paying his sub-

contractors. We conclude that the answer is the hapless

subcontractor, not the United States.

.

On a private construction project, mechanic’s and

materialmen’s liens secure payment of the subcontractors.

Such devices are obviously unavailable on a government

project; sovereign immunity bars lens against govern-

ment property. Equally obvious, potential subcontractors

would be very reluctant to participate if they had nothing

better than the status of a general creditor of the prime

oe

contractor to secure payment. The answer to this problem

was the Miller Act, 40 U.S.C. §§ 270a-270d, 49 Stat. 793

(1935) (as amended). Section 270a provides that the

prime contractor must post a payment bond to guarantee

payment of the subcontractors. Section 270b provides

that if not paid, the subcontractor may sue on the bond

in federal district court.

Defendant Noslo Engineering Consultants, Inc. was

the prime contractor for the installation of a “noise

attenuator” at the Rock Island, [Illinois United States

Army arsenal. Plaintiffs-appellants John V. Arvanis and

Baer Electric Co., Inc. were subcontractors. Unbeknownst

to them, Noslo failed to obtain a payment bond. Noslo

also failed to complete the project or pay the two sab-

contractors for the materials and services they had sup-

plied, and subsequently filed for bankruptcy. Arvanis

and Baer then filed essentially identical suits against

Noslo and the United States, each seeking to recover the

full amount of his damages ($105,080 for Arvanis and

$30,464 for Baer) from each defendant.’ Noslo failed to

answer, and default judgments were entered. The claims

against the government were dismissed on grounds of

sovereign immunity and lack of subject matter juris-

diction.

Arvanis and Baer appeal from the district court deci-

sion dismissing their three-count amended complaint

against the United States. Count III was based on the

Federal Tort Claims Act (FTCA), 28 U.S.C. § 2671

et seq., and 28 U.S.C. § 1346(b), and alleged that the

government was negligent in failing te require Noslo

to post a Miller Act payment bond. Count IV, premising

jurisdiction on the Miller Act and 28 U.S.C. § 1331 (fed-

eral question jurisdiction), also alleged a failure to re-

quire the payment bond. Count V again claimed to base

? Although never formally consolidated before the dis-

trict court, the two cases were treated jointly. The cases

have been consolidated on appeal.

a

—lla—

jurisdiction on § 1331 and the Miller Act, and alleged

both that the government was negligent in failing to

retain sufficient progress payments and should thus be

liable to the subcontractors, and that plaintiffs should

be compensated out of the $50,000 retainage which the

government did hold.? On appeal, plaintiffs continue to

argue that the suits were improperly dismissed as the

United States had implicitly waived sovereign immunity

under the Miller Act or the Tort Claims Act, or both.

* The original identical five-count complaints were filed

April 14, 1982. Counts I and II alleged fraud and breach

of contract against Noslo Engineering, and were premised

on diversity jurisdiction. Noslo never appeared, and a

default judgment for the full amount of the claim (pre-

sumably uncollectible) was entered early in the proceed-

ings; Noslo is not involved in this appeal. Counts III,

IV, and V were directed at the United States, and the

only jurisdictional basis cited was the Miller Act. Count

III alleged negligence on the part of the federal con-

tracting officer who failed to insist on the posting of a

Miller Act payment bond. Count IV alleged an ora! con-

tract between the United States and the subcontractors;

this count was voluntarily dismissed. Count V argued

unjust enrichment. The government argued that the Miller

Act did not waive sovereign immunity, and that any

recovery would have to be based on the Federal Tort

Claims Act. The case proceeded on both Miller Act and

FTCA theories, and was dismissed on December 7, 1982

for lack of jurisdiction under either the Miller Act or

the FTCA. On December 17, 1982, plaintiffs requested

leave to amend the complaints to conform to the issues

actually heard and decided. Leave to amend to substitute

the three new counts was granted on January 31, 1983,

and new Counts III and IV were simultaneously dis-

missed. After briefing on the new Count V (the retainage

issue), it too was dismissed on March 22, 1983. Plaintiffs

then filed the present timely appeal.

—i

II.

Count IV: Negligence Under the Miller Act

[1] Appellants argue that the Miller Act requires the

government to insist that its contractors furnish Miller

Act payment bonds. This is incorrect. The statute re-

quires only that contractors obtain performance and pay-

ment bonds. The statute places no affirmative obligation

on the government, and says absolutely, nothing about

what happens when tle contractor fails to furnish the

bond. The Act grants a very narrow and specific right

to those in appellants’ position: the right to sue on the

bond (if there happens to be one) “in the name of the

United States for the use of the person suing.” 40 U.S.C.

§ 270b(b). (The United States is thus aligned on the

plaintiff’s rather than the defendants’ side by the equa-

tion, providing an additional reason for concluding that

the United States cannot prfperly be a defendant in a

Miller Act suit.) There is clgarly no waiver of sovereign

immunity here. There does’ seem to be a gap in the

statute; there is no provision for the contingency that

both the contractor and the government contracting

officer will ignore the bonding requirement. However, this

is not a ga, that we can fill with a remedy—especially

in view of the very narrow remedy actually granted by

the statute. No citation is needed to reject appellants’

suggestion that 28 U.S.C. § 1331 waives sovereign im-

munity. It merely gives the district court jurisdiction to

hear federal claims that are not otherwise barred.

Count IIT: Negligence Under the Tort Claims Act

[2] Three other circuits presented with a Tort Claims

Act suit against the United States for failure to require

a Miller Act bond have given the argument short shrift,

deciding it on the basis of a simple syllogism. The

FTCA provides that the government may be sued in

tort only in “circumstances where the United States, if a

private person, would be liable to the claimant in accor-

Aelia OE ae ode oe

— 13a —

dance with the law of the place where the act or omission

occurred.” 28 U.S.C. § 1346(b) (1976). Because the Miller

Act deals with federal contracts, a private party could

never be in a position to require a Miller Act bond, and

thus of course could never be liable for failure to require

the bond. In the absence of such lability, the analogy

required for governmental liability under the FTCA

never comes into play.’ McMann v. Northern Pueblos En-

terprises, Inc., 594 F.2d 784 (10th Cir. 1979); Devlin

Lumber and Supply Corp. v. United States, 488 F.2d 88

(4th Cir. 1973); United States v. Smith, 324 F.2d 622

(Sth Cir. 1963). This Circuit has not previously been

faced with the question.

We think the syllogistic analysis assumes the answer

to the question at issue. It should be possible to define

governmental action in almost any situation narrowly

enough to render it “uniquely governmental” (e.g., no

private party could negligently drive a truck carrying the

U.S. mail). The better approach is to focus on the be-

havior involved, not the legal labels applied, and then

*The argument bears some similarity to that rejected

in Indian Towing Company v. United States, 350 U.S.

61, 76 S.Ct. 122, 100 L.Ed. 48 (1955). The Coast Guard

voluntarily undertook to operate a _ lighthouse on

Chandeleur Island. The light was out, and a barge owned

by plaintiff ran aground and was wrecked. The Supreme

Court held that plaintiff could maintain a negligence

suit under the Tort Claims Act. While lighthouse opera-

tion was done only by the Coast Guard, there is nothing

uniquely governmental about this service. At other times

and places (e.g., England) lighthouses have been privately

maintained, financed by fees from shipping companies

desiring the service. Similarly, there is nothing uniquely

governmental about construction contracts, but it is true

that federal contracts are unique, and that the Miller

Act with its bonding requirement applies only to federal

contractors. Thus it is true that no Miller Act question

could arise under state law.

=

look for analogies with private conduct. For example,

private parties in many situations are required by con-

tract or by state law to obtain bonds—and often fail to

do so.

Appellants argue that Illinois has adopted the “good

Samaritan” rule as set forth in Section 324A of the

Restatement of Torts (Second). Under this theory, the

United States, knowing that a third party (the subcon-

tractor) would be affected by its direct dealings with the

prime contractor, had gratuitously undertaken a duty of

care towards the subcontractor, and can be held liable for

a breach of that duty. Appellants specifically argue that

this case is analogous to United Scottish Ins. Co. v.

United States, 692 F.2d 1209 (9th Cir. 1982), in which

the United States was held liable under the FTCA for

injuries resulting from an airplane crash; Federal Avia-

tion Administration (FAA) inspectors were negligent

in certifying that the aircraft met fire safety standards.

The government argued that there was no private activity

analogous to an FAA inspection. The Ninth Circuit,

applying the good Samaritan (Section 324A) doctrine,

found liability for a voluntarily assumed, negligently

performed duty to third parties (passengers) who were

in no position to do anything other than rely on FAA

safety inspections. The Supreme Court, however, unani-

mously reversed in this and a companion case, S.A.

Empresa de Viacao Aerea Rio Grandense (Varig Airlines)

v. United States, 692 F.2d 1205 (9th Cir. 1982). United

States v. S.A. Empresa de Viacao Aerea Rio Grandense

(Varig Airlimes), ........ abe vsinis , 104 8.Ct. 2755, 81 L.Ed.

2d 660 (1984).*

*The case was decided on the “discretionary function”

exception to the FTCA. The Court explicitly did not

reach the argument that the FAA inspections were

purely governmental activity having no counterpart in

private conduct. Indian Towing was distinguished in that :

the government there had expressly disavowed any “dis- .

eretionary function” argument. While Varig Airlines

nevertheless casts some doubt on the reasoning of Indian

ee

— l5a —

Even without the Varig reversal, we would find appel-

lants’ good Samaritan argument foreclosed. In Jones Vv.

United States, 703 F.2d 246 (7th Cir. 1983), this Cireuit

had an opportunity to explore the ramifications of See-

tion 324A, and it is not necessary to repeat the analysis

here. Suffice it to say that we concluded that 324A was

primarily applicable to situations in which defendant

has undertaken to provide services (e.g. inspection or

repair services) that are necessary for a third party’s

physical safety, and which the third party is unable to

undertake for himself—due either to lack of expertise

or an inability to discern or discover hidden hazards.

Reliance by the third party is usually required.’ In Jones,

* (Continued)

Towing, the situations are factually distinguishable. The

Coast Guard had publicly opted to operate the lighthouse

and published its location on navigation charts and “light

lists,” and it is customary to keep such lights in continu-

ous rather than intermittent working order. According

tc the Supreme Court in Varig Airlines, FAA safety in-

spections are made on a spot check basis, most inspections

are delegated to industry personnel, and the goal is

“promoting safety”, not insuring it.” The FAA inspection

statute is thus largeiy hortatory. Perhaps the Miller Act

likewise does no more than encourage government con-

tracting officers to insist that contractors obtain Miller

Act bonds.

The Varig Airlines decision is also arguably limited

to the regulatory context. However in another part of

the opinion, the Court contrasts the situation presented

with the “common law torts” that the legislative history

indicates the Tort Claims Act was designed to encompass.

See Dalehite v. United States, 346 U.S. 15, 73 S.Ct. 956,

97 L.Ed. 1427 (1953). While failure to require a Miller

Act bond is not an omission made in the course of regula-

tion, neither is it a garden variety tort.

‘Indiana Towing provides the classic example of this

paradigm. See Jones, supra, n. 10 at 251, for a furthed

discussion of this case in the context of Sections 323 and

524A of the Restatement.

— léa —

we concluded that the United States was not liable for a

slip and fall accident on a sidewalk adjacent to a United

States Post Office. While postal employees routinely

swept the walk clear of gravel, this gratuitous under-

taking—although public-spirited—was not “necessary” for

anyone’s safety (and in no way worsened the situation),

and plaintiff was in as good a position as anyone else

to determine the safety of the walk. For similar reasons,

we reject appellants’ arguments under § 324A. First, it

isn’t even clear that the United States undertook any

duty. It merely executed a contract (in retrospect, ill-

advised) with Noslo. Even assuming that the subsequent

effect of that contract on the subcontractors amounts

to the sort of affirmative assumption of duty contem-

plated by § 324A (the real problem here being non-

feasance or a lack of supervision by the government,

while the good Samaritan doctrine refers to misfeasance

—by one who needn’t have acted at all), appellants need

not have passively relied on the government to protect

their rights. Unlike the barge captain in Jndian Towing,

plaintiffs were not forced to navigate around submerged

rocks. They could have inquired of the contracting officer

whether a payment bond had been posted. Any subcon-

tractor is now certainly well-advised to do so.

In the absence of ary persuasive analogy with private

conduct, we conclude that appellants cannot maintain a

Tort Claims action against the United States. We also

note an additional reason for rejecting the Tort Claims

approach: it would allow appellants to achieve by in-

direction a result that they could not reach directly under

the Miller Act.®

©The government also argues that Count III could be

dismissed for failure to exhaust (or invoke) administra-

tive remedies. Section 2675(a) of Title 28 provides that

a tort claim against the United States shall not be in-

stituted unless the claimant has first presented his claim

to the appropriate federal agency and the claim has been

a a a

ash thar Ke BP Rives ht

— 17a —

Count V: The Retainage

{3] The argument that the United States is liable

because it “should have” paid closer attention to the

prime contractor’s problems and withheld more of the

progress payments is easily dismissed. Appellant argues

only Miller Act and federal question jurisdiction for this

* (Continued)

finally denied by the agency. The claimant may construe

a failure to rule on the administrative claim within six

months as a final denial. Section 2401(b) of Title 28

provides that a tort claim is barred unless plaintiff pre-

sents his claim to the agency within two years after the

claim accrues, or unless suit is commenced within six

months after the final agency denial.

Plaintiff Arvanis filed a complaint with the agency on

December 29, 1982. While we don’t know exactly when

the claim accrued, Noslo did not become the prime con-

tractor until January 8, 1981, less than two years earlier.

The filing of the administrative claim was thus timely,

but it was not filed until after the district court had

already dismissed the original complaint dealing with

the same claims. While there is an apparent reversal

of the proper order for filing administrative claims and

civil actions, there is an interesting twist here in that

the complaint was not instituted as a tort claim. The

tort claims procedures of 28 U.S.C. § 2671 et seq. are thus

arguably inapplicable. Plaintiff Arvanis thought he was

filing suit under the Miller Act, which contains no refer-

ence to tort claims procedures; the only problem is that

the Miller Act provides no basis for jurisdiction over

the United States. It was the district court that con-

ceptualized the case as a tort claim, and decided it on

that basis. By the time plaintiff did file a complaint

under the FTCA (the amended complaint of January

31, 1983), the administrative claim had been filed, but

there was no final denial and six months had not yet

passed. The ciaim was thus premature—but then, having

been granted leave to amend his complaint, plaintiff

could not very well have delayed an additional five

months waiting for either a denial or inaction. As it

happened, the claim was denied March 21, 1983, the day

— 18a —

claim, and we have already concluded that neither statute

waives sovereign immunity. It might be possible to frame

the claim in a manner that would fall within the FTCA;

under state law, a party that negligently failed to super-

vise some activity under its control might well be liable

to another party injured thereby. However, such an ex-

pansive reading of the Tort Claims Act would swallow

up sovereign immunity; in almost any situation, the

government “might have” done a better job of keeping

track of its affairs. In any event, a successful claim for

monies not retained would be just the sort of direct raid

ov the treasury that provides the classic argument for

sovereign immunity. Land v. Dollar, 330 U.S. 731, 67

S.Ct. 1009, 91 L.Ed. 1209 (1947). A narrow exception to

sovereign immunity is made for suits seeking injunctive

relief for the very reason that no claim on the treasury

is involved. See Larson vy. Domestic and Foreiqn Com-

merce Corp., 337 U.S. 682, 69 S. Ct. 1457, 93 L.Ed. 1628

(1948); Clark vy. United States, 691 F.2d 837 (7th Cir.

1982).

* (Continued)

before the entire case was finaily dismissed, and Arvanis

filed the denial with the district court on April 7, 1983,

the same ed he filed his notice of " «r

Fortunately we do not need to decide whether the

district judge was without jurisdiction to decide the case

on the basis of what he recognized to be a tort claim

incorrectly denominated a Miller Act claim, or whether

plaintiff should (or could) have stalled on amending

his complaint. The case is adequately disposed of on

review of the grounds actually reached by the district

court. (Besides, plaintiff is now time-barred from filing

a new suit if this one is dismissed on procedural grounds,

and plaintiff should be assured that the outcome would

not have been different had the procedural history been

less ambiguous.)

There is no indication in the record that plaintiff Baer

ever filed an administrative complaint. Again, given the

jurisdictional confusion, we will decide the case on the

grounds reached by the district court.

—

The argument for allowing a claim against the retain

age is thus superficially more attractive. By hypothesis

there is a separate fund—aside from the general treasury

—to which plaintiff can look for payment. That was part

of this court’s rationale in allowing suit in Schlafly v.

Volpe, 495 F.2d 273 (7th Cir. 1974) (suit brought to com-

pel the expenditure of authorized, yet frozen, federal

highway funds). In this situation, the separate fund

argument evaporates upon closer inspection. Presumably

the progress payments are still retained because of the

lack of progress on the project. The record indicates

that the noise attenuator was unsatisfactory upon in-

stailation, and Noslo failed to fix it within the additional

90 days allowed. It seems likely that any retainage would

be (has been?) expended in an effort to obtain a func-

tioning noise attenuator, and this brings us back to a

direct claim against the treasury. Perhaps this is why

plaintiffs cite no cases in which a subcontractor has suc-

cessfully laid claim to the retainage.’

‘In United Electric Corp. v. United States, 647 F.2d

1082 (Ct.CL), cert. denied, 454 U.S. 863 (1981), the sub-

contractor sued the government (after the surety refused

to pay on the Miller Act bond, which was allegedly in-

adequate anyway), alleging that the government had

negligently failed to comply with the Miller Act, thus

creating an equitable lien against the retainage, which was

more t equate to cover the subcontractor’s claim.

The court concluded that the subcontractor lacked stand-

ing to pursue the claim in the Court of Claims (there

was no privity of contract with the government), but

described this outcome “not a happy result,” and stressed

that the government might voluntarily make payment

and had a moral obligation to do so if funds remained

after the contract was completed.

— Ha —

OL

The result is, as the district court put it, unjust. A

subcontractor who fulfills his part of the bargain should

not suffer because the prime contractor defaulted, and

the government contracting officer had not insisted on

compliance with the Miller Act. We agree that there is a

practical problem (how widespread we do not know) that

is not addressed by the Miller Act, but that is a problem

that can only be addressed, and redressed, by Congress.

The judgment of the district court dismissing the

amended complaint is

AFFIRMED.

le

— "oo

APPENDIX C

UNITED STATES COURT OF APPEALS

For the Seventh Circuit

Chicago, Illinois 60604

August 27, 1984.

Before

Hon. WILLIAM J. BAUER, Circuit Judge

Hon. RICHARD D. CUDAHY, Circuit Judge

Hon. JESSE E. ESCHBACH, Circuit Judge

JOHN V. ARVANIS,

d/b/a, INDUSTRIAL CONTRACTORS,

Plaintiff-A ppellant,

No. 83-1670 v.

NOSLO ENGINEERING CONSULTANTS, INC.,

NOSLO ENGINEERING CORPORATION,

and the UNITED STATES OF AMERICA,

Defendants- A ppellees.

BAER ELECTRIC CO., INC.,

an Illinois Corporation, °

Plaintiff-Appellant,

No. 83-1766 v.

NOSLO ENGINEERING CONSULTANTS, INC.,

NOSLO ENGINEERING CORPORATION,

& THE UNITED STATES OF AMERICA,

Defendants-A ppellees.

Appeals from the United States District Court for

the Central District of Illinois,

Rock Island Division.

Nos. 82 C 4025, 82 C 4026

Michael M. Mihm, Judge.

és

ORDER

(Received—Aug 30 1984)

On consideration of the petition for rehearing and sug-

gestion for rehearing en banc filed in the above-entitled

cause by appellants, no judge in active service has re-

quested a vote thereon, and all of the judges on the orig-

inal panel have voted to deny a rehearing. Accordingly,

IT IS ORDERED that the aforesaid petition for re-

hearing be, and the same is hereby, DENIED.

See on

ea is

— Ba —

APPENDIX D

Miller Act (40 U.S.C.):

Section 270a. BONDS OF CONTRACTORS FOR

PUBLIC BUILDINGS OR WORKS;

WAIVER OF BONDS COVERING

CONTRACT PERFORMED IN

FOREIGN COUNTRY.

(a) Before any contract, exceeding $25,000 in amount,

for the construction, alteration, or repair of any public

building or public work of the United States is awarded

to any person, such person shall furnish to the United

States the following bonds, which shall become binding

upon the award of the contract to such person, who is

hereinafter designated as “contractor”:

(1) A performance bond with a surety or sureties

satisfactory to the officer awarding such contract, and

in such amount as he shall deem adequate, for the

protection of the United States.

(2) A payment bond with a surety or sureties

satisfactory to such officer for the protection of all

persons supplying labor and material in the prose-

eution of the work provided for in said contract for

the use of each such person. Whenever the total

amount payable by the terms of the contract shall

be not more than $1,000,000 the said payment bond

shall be in a sum of one-half the total amount payable

by the terms of the contract. Whenever the total

amount payable by the terms of the contract shall

be more than $1,000,000 and not more than $5,000,000,

the said payment bond shall be in a sum of 40 per

centum of the total amount payable by the terms of

the contract. Whenever the total amount payable by

the terms of the contract shall be more than $5,000,000

the said payment shall be in the sum of $2,500,000.

—_—

(b) The contracting officer in respect of any contract

is authorized to waive the requirement of a performance

bond and payment bond for so much of the work under

such contract as is to be performed in a foreign country

if he finds that it is impracticable for the contractor to

furnish such bonds.

(c) Nothing in this section shall be construed to limit

the authority of any contracting officer to require a per-

formance bond or other security in addition to those, or

in eases other than the cases specified in subsection (a)

of this action.

(d) Every performance bond required under this sec-

tion shall specifically provide coverage for taxes imposed

by the United States which are collected, deducted, or

withheld from wages paid by the contractor in carrying

out the contract with respect to which such bond is fur-

nished. However, the United States shall give the surety

or sureties on such bond written notice, with respect to

any such unpaid taxes attributable to any period, within

ninety days after the date when such contractor files a

return for such period, except that no such notice shall

be given more than one hundred and eighty days from

the date when a return for the period was required to

be filed under the Internal Revenue Code of 1954. No suit

on such bond for such taxes shall be commenced by the

United States unless notice is given as provided in the

preceding sentence, and no such suit shall be commenced

after the expiration of one year after the day on which

such notice is given.

Section 270b. SAME; RIGHTS OF PERSONS

FURNISHING LABOR OR ©

MATERIAL.

(a) Every person who has furnished labor or ma-

terial in the prosecution of the work provided for in such

contract, in respect of which a payment bond is furnished

under section 270a of this title and who has not been paid

a | a ee

— 25a —

in full therefor before the expiration of a period of ninety

days after the day on which the last of the labor was

done or performed by him or material was furnished or

supplied by him for which such claim is made, shall have

the right to sue en such payment bond for the amount,

or the balance thereof, unpaid at the time of institution

of such suit and to prosecute said action to final execu-

tion and judgment for the sum or sums justly due him;

Provided, however, That any person having direct con-

tractual relationship with a subcontractor but no contrac-

tual relationship express or implied with the contractor

furnishing said payment bond shall have a right of action

upon the said payment vond upon giving written notice to

said contractor within ninety days from the date on which

such person did or performed the last of the labor or

furnished or supplied the last of the material for which

such claim is made, stating with substantial accuracy the

amount claimed and the name of the party to whom the

material was furnished or supplied or for whom the labor

was done or performed. Such notice shall be served by

mailing the same by registered mail, postage prepaid, in

an envelope addressed to the contractor at any place he

maintains an office or conducts his business, or his resi-

dence, or in any manner in which the United States

marshal of the district in which the public improvement is

situated is authorized by law to serve summons.

(b) Every suit instituted under this section shall be

brought in the name of the United States for the use of

the person suing, in the United States District Court for

any district in which the contract was to be performed

and executed and not elsewhere, irrespective of the

amount in controversy in such suit, but no such suit

shall be commenced after the expiration of one year after

the day on which the last of the labor was performed or

material was supplied by him. The United States shall

not be liable for the payment of any costs or expenses

of any such suit.

satin

Federal Tort Claims Act (28 U.S.C.):

Section 1346. UNITED STATES AS DEFENDANT.

(b) Subject to the provisions of chapter 171 of this

title, the district courts, together with the United States

District Court for the District of the Canal Zone and the

District Court of the Virgin Islands, shall have exclusive

jurisdiction of civil actions on claims against the United

States, for money damages, accruing on and after Janua-

ry 1, 1945, for injury or loss of property, or personal

injury or death caused by the negligent or wrongful act

or omission of any employee of the Government while

acting within the scope of his office or employment, under

circumstances where the United States, if a private per-

son, would be liable to the claimant in accordance with

the law of the place where the act or omission occurred.