K-W Industries, a Div. of Associates Technologies, Ltd. v. National Sur. Corp.

• Decision Date: 29 August 1988
• Docket Number: No. 86-3778,K-W,86-3778
• Citation: 855 F.2d 640
• Parties: INDUSTRIES, A DIVISION OF ASSOCIATES TECHNOLOGIES, LTD., a corporation, Plaintiff-Appellant, v. NATIONAL SURETY CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 640

855 F.2d 640

57 USLW 2158

K-W INDUSTRIES, A DIVISION OF ASSOCIATES TECHNOLOGIES, LTD. a corporation, Plaintiff-Appellant, v. NATIONAL SURETY CORPORATION, Defendant-Appellee.

No. 86-3778.

United States Court of Appeals Ninth Circuit.

Argued and Submitted May 7, 1987.

Submission Vacated June 8, 1987.

Resubmitted May 20, 1988.

Decided Aug. 29, 1988.

Alexander (Zander) Blewett, III, Hoyt & Blewett, Great Falls, Mont., for plaintiff-appellant.

Robert J. Phillips, Snavely & Phillips, Missoula, Mont., for defendant-appellee.

Appeal from the United States District Court for the District of Montana.

Before FLETCHER and NORRIS, Circuit Judges, and LYNCH ^*, District Judge.

NORRIS, Circuit Judge:

Appellee National Surety Corporation ("National") was the surety on a payment bond executed in compliance with the Miller Act, 40 U.S.C. Sec. 270a, et seq., guaranteeing payment to suppliers of labor and materials for a federal construction project at Fort Peck, Montana. Appellant K-W Industries ("K-W") alleges that after the general contractor refused to pay for materials K-W delivered for use on the Fort Peck project, K-W made a claim against National on the bond for payment. When National allegedly refused to pay the claim, K-W sued National in the United States District Court for the District of Montana.

After K-W and National settled the federal court action, K-W instituted the present action against National in Montana state court. K-W alleges that National acted in bad faith in refusing to pay K-W's claim and in forcing it to bring the federal court action, and seeks compensatory and punitive damages under Montana's unfair insurance claims practices law. Mont.Code Ann. Sec. 33-18-201. After National removed to federal district court on the basis of diversity jurisdiction, see 28 U.S.C. Sec. 1441(a), the district court sua sponte dismissed the action for lack of subject matter jurisdiction. The court reasoned that although K-W pleaded its claim against National as founded upon state law, the claim was properly characterized as a federal claim predicated on the rights conferred upon K-W by the Miller Act. In essence, the district court determined that Congress intended to limit claimants such as K-W to remedies provided by the Miller Act, thereby preempting the application of Montana's unfair insurance claims practices law to sureties of Miller Act bonds. From this premise it followed that, because federal courts are vested with exclusive jurisdiction over Miller Act claims, 40 U.S.C. Sec. 270b, the district court was required to dismiss the action. As the district court correctly noted, a state court's lack of subject matter jurisdiction deprives the federal court of removal jurisdiction, which is derivative. See Franchise Tax Board v. Construction Laborers Vacation Trust, 463 U.S. 1, 17, 103 S.Ct. 2841, 2850, 77 L.Ed.2d 420 (1983). ¹ K-W appealed.

After the case was argued, we certified, pursuant to Mont.R.App.P. 44, two threshold questions of state law to the Montana Supreme Court for decision. The Montana Supreme Court decided these questions as follows: First, the court rejected National's contention that surety insurance was not covered by Montana's unfair insurance claims practices law, Mont.Code Ann. Sec. 33-18-201. K-W Indus. v. National Surety Corp., 754 P.2d 502 (Mont.1988). Second, the Montana Supreme Court rejected National's contention that Mont.Code Ann. Sec. 28-11-411 limits a surety's liability for tortious conduct under section 33-18-201 to the amount of its bond. ² Id.

Now that the Montana Supreme Court has determined that section 33-18-201 subjects sureties to liability beyond the amount of the bond for unfair insurance claims practices, we must decide whether application of section 33-18-201 law to sureties of Miller Act bonds is preempted by the Miller Act.

National argues that state law subjecting sureties to tort liability for bad faith insurance practices conflicts with the purposes of the Miller Act in that it "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." ³ Michigan Canners & Freezers Ass'n, Inc. v. Agricultural Marketing and Bargaining Bd., 467 U.S. 461, 469, 104 S.Ct. 2518, 2523, 81 L.Ed.2d 399 (1984) (quoting Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 404, 85 L.Ed. 581 (1941)). National suggests that the federal purpose that is frustrated is one of protecting sureties of Miller Act bonds from having to "subject[ ] themselves to insurance regulation of the state in which the federal project is located." Appellee's Brief at 9. Noting that "each state has its own insurance regulations," National argues that "the mere fact that a federal project is located within a given state does not subject the Miller Act surety to the full panoply of state regulation." Id. As we construe National's argument, it contends that in enacting the Miller Act Congress intended to immunize sureties from any state law liability for conduct relating to the performance of obligations arising out of Miller Act bonds. We are unpersuaded.

The purpose of the Miller Act "is to protect persons supplying materials and labor for federal projects." ⁴ United States ex rel. Martin Steel Constructors, Inc. v. Avanti Constructors, Inc., 750 F.2d 759, 761 (9th Cir.1984), cert. denied, 474 U.S. 817, 106 S.Ct. 60, 88 L.Ed.2d 49 (1985). National has pointed to nothing in the Miller Act or in its legislative history to suggest that Congress intended the Act to protect sureties from liability for torts or other violations of state laws or regulations that they may commit in connection with payment bonds executed pursuant to the Act. We see no conflict whatsoever between Montana's bad faith insurance practices law and the purpose of the Miller Act. Indeed, the Congressional purpose of protecting suppliers of goods and services for federal projects is advanced if sureties are deterred by state tort law from bad faith practices in responding to claims on Miller Act payment bonds. We agree with the Tenth Circuit's observation that the Miller Act, like the mechanic's lien it replaces, "is not the exclusive remedy in regard to the obligation which such lien secures," but rather, "is 'separate from and independent of any in personam rights ... which the supplier might have against the owner, a contractor, or a subcontractor, by way of a contract or otherwise.' " United States ex rel. Sunworks Division of Sun Collector Corp. v. Insurance Company of North America, 695 F.2d 455, 458 (10th Cir.1982) (quoting In re Scherer Hardware & Supply, Inc., 9 B.R. 125, 130 (N.D.Ill.1981)). ⁵ For the purpose of preemption analysis, we see no reason to distinguish between remedies that a supplier may have against an owner, contractor, or subcontractor as opposed to a surety. The Miller Act simply provides the equivalent of a mechanic's lien; it does not supplant any other remedies the supplier may have against any party involved in a federal construction project.

National's reliance upon F.D. Rich Co. v. United States ex rel. Industrial Lumber Company, 417 U.S. 116, 94 S.Ct. 2157, 40 L.Ed.2d 703 (1974), is misplaced. In F.D. Rich, the Supreme Court held that a successful plaintiff in a Miller Act case could not recover attorney's fees under a state law authorizing fee awards to prevailing plaintiffs. The rationale of F.D. Rich is that remedies available in an action arising under a federal statute such as the Miller Act should be nationally uniform. Id. at 126-131, 94 S.Ct. at 2163-2166. Unlike F.D. Rich, K-W's claim in this action does not arise under the Miller Act or under any other federal statute; it arises under Montana's unfair insurance practices law. The case is in federal court solely on the basis of diversity jurisdiction. Thus the question involved in F.D. Rich --whether a state law remedy for attorney's fees is incorporated into an action for payment on a Miller Act bond--is not involved in this case. K-W's earlier federal court suit against National for payment on the Miller Act bond has long since been settled. Here K-W is not suing on the bond; it is suing in tort for National's alleged bad faith in refusing to pay K-W's claim until after K-W...