Tri-State Employment Services v. Mountbatten Sur.

• Decision Date: 09 July 2002
• Docket Number: Docket No. 01-7676.
• Parties: TRI-STATE EMPLOYMENT SERVICES, INC., Plaintiff-Appellant, v. The MOUNTBATTEN SURETY COMPANY, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

295 F.3d 256

TRI-STATE EMPLOYMENT SERVICES, INC., Plaintiff-Appellant, v. The MOUNTBATTEN SURETY COMPANY, INC., Defendant-Appellee.

Docket No. 01-7676.

United States Court of Appeals, Second Circuit.

Argued: March 6, 2002.

Decided: July 09, 2002.

William J. Turkish, Law Office of William J. Turkish, PLLC, Jericho, NY, for Plaintiff-Appellant.

James M. Mulvaney, McElroy, Deutsch & Mulvaney LLP, New York, NY, for Defendant-Appellee.

Before: CALABRESI and CABRANES, Circuit Judges, and AMON,^* District Judge.

CALABRESI, Circuit Judge.

Plaintiff-Appellant Tri-State Employment Services, Inc. ("Tri-State"), a New York corporation, appeals from a memorandum and order of the United States District Court for the Southern District of New York (Knapp, J.) granting summary judgment in favor of defendant-appellee The Mountbatten Surety Company, Inc. ("Mountbatten"), a Pennsylvania corporation. Tri-State Employment Servs. v. Mount Batten Sur. Co., No. 99 Civ. 9684, 2001 WL 487423 (S.D.N.Y. May 7, 2001). Mountbatten is a licensed surety company engaged in the business of issuing bonds in connection with construction contracts. At issue in this case is whether Tri-State, a Professional Employer Organization ("PEO") or employee leasing company, is a proper bond claimant under a surety bond issued by Mountbatten to Team Star Contractors, Inc. ("Team Star") in connection with a construction project in Quincy, Massachusetts. The district court held that Tri-State was not a proper bond claimant because, as a PEO, Tri-State "certainly does not provide `labor and materials' as the terms are used in the language of the Bonds." Id. at * 3. Moreover, the district court noted that Tri-State's "efforts to characterize itself as a joint employer of the laborers on the project to which the Bonds apply does not make it the provider of labor and material itself." Id. Tri-State argues on appeal that the district court erred in concluding that Tri-State was merely a provider of payroll services rather than the employer or joint employer of the workers who provided labor at the construction project.

As the district court correctly acknowledged, "[n]either party cites any case, and... independent research reveals none, dealing with the narrow issue of whether a PEO is a proper claimant under a labor and materials surety bond." Id. In the absence of any applicable case law in New York that would conclusively determine Tri-State's status and hence its claim under the surety bond, we have concluded that we should certify the following question to the New York Court of Appeals:

In the circumstances presented, is a PEO, under New York law, a proper claimant under a labor and materials surety bond?

BACKGROUND

Team Star Contractors, Inc., a New York-based construction company, entered into an agreement with O'Ahlborg & Sons, Inc. ("O'Ahlborg") to perform construction work at a site in Quincy, Massachusetts (the "Quincy project"). Mountbatten, as surety, issued two Labor and Material Bonds to Team Star as principal and O'Ahlborg as obligee, one on March 6, 1998 in the penal sum of $5,000,000, and another on March 12, 1998 in the penal sum of $1,309,600. The bonds, which are identical in form, provide in pertinent part:

NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION is such that, if Principal shall promptly make payment to all claimants as hereinafter defined, for all labor and material used or reasonably required for use in the performance of the Contract, then this obligation shall be void; otherwise it shall remain in full force and effect, subject, however, to the following conditions:

1. A claimant is defined as one having a direct contract with the Principal or with a Subcontractor of the Principal for labor, material, or both, used or reasonably required for use in the performance of the Contract, labor and material being construed to include that part of water, gas, power, light, heat, oil, gasoline, telephone service or rental of equipment directly applicable to the Contract.

2. The ... Principal and Surety hereby jointly and severally agree with [O'Ahlborg] that every claimant ... who has not been paid in full before the expiration of a period of ninety (90) days after the date on which the last of such claimant's work or labor was done or performed, or materials were furnished by such claimant, may sue on this bond....

(emphasis added).

In its complaint, Tri-State alleges that, in or around March 1998, it entered into an oral agreement with Team Star to provide employee leasing services. According to Tri-State, the agreement was for "TRI-STATE [to] hire Team Star's employees, lease them back to Team Star, while paying all of the former employees' payroll, wages, federal, state and municipal taxes, workmen's compensation insurance premiums, disability insurance premiums and union benefits, if applicable, and any and all incidental payments customarily required to be paid by an employer to and on behalf of its employees." Compl. at ¶ 8, Tri-State Employment Servs., Inc. v. Mountbatten Sur. Co., 2001 WL 487423 (S.D.N.Y. May 7, 2001) (No. 99 Civ. 9684). Tri-State alleges that Team Star made timely payments on Tri-State's invoices until November or December 1998, at which time Team Star owed approximately $400,000 to $600,000. Tri-State initially agreed to give Team Star more time to pay the outstanding invoices. This arrangement perdured until Team Star owed approximately $1.2 million.

On January 8, 1999, Tri-State and Team Star executed a Memorandum of Understanding (the "Memorandum") as a pre-condition to Tri-State's agreement to continue to provide "labor and payroll services" to Team Star for the Quincy project and the "payment of all wages, taxes and insurances in connection therewith." The Memorandum stated that Tri-State had provided "labor and payroll services" to Team Star, had "paid, on behalf of Team Star, wages, Federal, State and local employment taxes," and had "provided disability insurance and workman's compensation insurance" in connection with the O'Ahlborg subcontract agreement. Team Star acknowledged in the Memorandum that it was indebted to Tri-State in the amount of $1,113,251.90 for the provision of such services.¹

When Team Star subsequently failed to make payments on the outstanding invoices, plaintiff filed a proof of claim on March 9, 1999 with Mountbatten, seeking payment in the amount of $1,113,251.90 under the March 6, 1998 bond. According to Tri-State, Mountbatten refused payment and plaintiff brought this suit. In its response, Mountbatten asserted several affirmative defenses, inter alia, that Tri-State is not — as a matter of law — a proper claimant under the surety bond. On that basis, the district court granted Mountbatten's motion for summary judgment.

In doing so, the district court noted that "[n]either party [had] cite[d] any case, and ... independent research reveals none, dealing with the narrow issue of whether a PEO is a proper claimant under a labor and materials surety bond." Tri-State Employment Servs., 2001 WL 487423, at *3. The district court pointed out that "those who can generally recover on a payment bond are subcontractors or persons supplying labor or material to subcontractors or the general contractors." Id. at *2. Conversely, creditors, such as banks and other financial institutions, which lend money to the principal, including for the purpose of meeting payroll obligations, are not proper claimants under labor and materials surety bonds. See id. at *3 (citing United States for Use and Benefit of Dorfman v. Standard Sur. & Cas. Co. of New York, 37 F.Supp. 323, 326 (S.D.N.Y.1941)). The district court then stated:

While a PEO might serve more administrative functions than a creditor, it basically provides credit in the form of payroll services. A PEO certainly does not provide "labor and materials" as the terms are used in the language of the Bonds. The Bonds themselves define labor and materials to include "that part of water, gas, power, light, heat, oil, gasoline, telephone service or rental of equipment applicable to the contract." The Bonds' definition of ["labor and materials"] cannot be reasonably interpreted to include payroll and human resource services.

Tri-State Employment Servs., 2001 WL 487423, at *3.

The district court also found unavailing plaintiff's argument that, as a joint employer, it was a proper claimant under the bond. The district court wrote:

Plaintiff's efforts to characterize itself as a joint employer of the laborers on the project to which the Bonds apply does not make it the provider of labor and material itself. The fact that plaintiff paid taxes on these employees and were [sic] financially liable for them in certain instances does not change the fact that it did not furnish labor.

Id.

In concluding, the district court declared: "Regardless of the arrangement plaintiff had with Team Star, it did not provide labor and material under the Bonds' definition." Id. This appeal followed.

DISCUSSION

I. Standard of Review

We review a district court's grant of summary judgment de novo, drawing all factual inferences and resolving all ambiguities in favor of the nonmoving party. See McCarthy v. Am. Int'l Group, Inc., 283 F.3d 121, 123 (2d Cir.2002). Summary judgment is appropriate if there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). "A dispute regarding a material fact is genuine `if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.'" Lazard Frères & Co. v. Protective Life Ins. Co., 108 F.3d 1531, 1535 (2d Cir.1997) (quoting Anderson v. Liberty Lobby, 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). Hence, "`if, as to the issue on which summary judgment is sought, there is any evidence in the record from which a reasonable inference could be drawn in favor of the opposing party, summary judgment is improper.'" Id. (...