U.S. for and on Behalf of Mississippi Road Supply Co. v. H. R. Morgan, Inc.

• Decision Date: 12 November 1976
• Docket Number: No. 74-3761,74-3761
• Citation: 542 F.2d 262
• Parties: UNITED STATES of America for and on Behalf of MISSISSIPPI ROAD SUPPLY CO., Plaintiff-Appellee, v. H. R. MORGAN, INC. and U. S. Fidelity and Guaranty Co., et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 262

542 F.2d 262

UNITED STATES of America for and on Behalf of MISSISSIPPI

ROAD SUPPLY CO., Plaintiff-Appellee, v. H. R. MORGAN, INC. and U. S. Fidelity and Guaranty Co., et

al., Defendants-Appellants.

No. 74-3761.

United States Court of Appeals, Fifth Circuit.

Nov. 12, 1976.

Jere R. Ramsay, Hattiesburg, Miss., for defendants-appellants.

Henderson S. Hall, Jr., Natie P. Caraway, Jackson, Miss., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Mississippi.

Before MORGAN, CLARK and TJOFLAT, Circuit Judges.

CLARK, Circuit Judge:

This use action was brought by Mississippi Road Supply Company (Mississippi Road Supply) against Bobby Gray Young d/b/a Young Construction Company (Young), H. R. Morgan, Inc. (Morgan), and United States Fidelity and Guaranty Company (USF&G). Mississippi Road Supply seeks to recover equipment rental and repair expenses on construction machinery rented to Young and alleged to have been used by him on a construction project as a subcontractor, together with attorneys' fees. Morgan, the prime contractor, furnished the project owner, Chata Development Corporation (Chata), a general contractor's payment and performance bond on which USF&G was surety. Morgan's contract with Chata was to build an industrial development park on land which Chata, a private, nonprofit corporation, held by virtue of a 25-year lease with an option to extend the lease for an additional 25-year term.

JURISDICTION

Title to this land is held by the United States. The lessor in the contract on which Chata depends was the "Mississippi Band of Choctaw Indians," and the execution of the lease was approved by a representative of the Secretary of the Interior as provided by 25 C.F.R., Part 131, et seq. ¹ Section 131.5(c) of these regulations provides:

Unless otherwise provided by the Secretary a satisfactory surety bond will be required in an amount that will reasonably assure performance of the contractual obligations under the lease. Such bond may be for the purpose of guaranteeing:

(1) Not less than one year's rental unless the lease contract provides that the annual rental shall be paid in advance.

(2) The estimated construction cost of any improvement to be placed on the land by the lessee.

(3) An amount estimated to be adequate to insure compliance with any additional contractual obligations.

In compliance with this regulation, the approved lease contract required that Chata, as lessee, provide security which would guarantee completion of the improvements contemplated by the lease and payment in full of all claims of all persons for work performed on or materials furnished in that construction. The pertinent portions of the lease are set out in the margin. ² To meet its lease obligation, Chata required the prime contractor, Morgan, to post the above-described bond.

Mississippi Road Supply rented various machines to Young which it claimed Young used as Morgan's subcontractor for working on the industrial part covered by the lease contract discussed above. Jurisdiction for the action to recover for this indebtedness from both the prime contractor and the surety was initially asserted on the basis of the Miller Act, 40 U.S.C. §§ 270a and 270b. The trial below was conducted on this jurisdictional premise, and all jury instructions were drawn from Miller Act law. However, for reasons later apparent, we pretermit deciding whether jurisdiction exists under the Miller Act.

This, of course, is not a garden variety Miller Act case in which the United States both owns the land and contracts for its improvement. See, e. g., United States ex rel. Jinks Lumber Co. v. Federal Insurance Co., 452 F.2d 485 (5th Cir. 1971); United States ex rel. Friedrich Refrigerators, Inc. v. Forrester, 441 F.2d 779 (5th Cir. 1971); United States ex rel. T/N Plumbing and Heating Co. v. Fryd Construction Corp., 423 F.2d 980 (5th Cir. 1970). Rather, it is contended to be a case governed by the Miller Act because of the extent of involvement of the United States.

One major purpose of the Miller Act is to protect subcontractors and materialmen working on federal projects since normal state lien rights are not available. United States Fidelity & Guaranty Co. v. United States, 475 F.2d 1377 (Ct.Cl.1973) (en banc). It is axiomatic that state law liens may not be asserted against federally owned lands or buildings. United States v. Munsey Trust Co., 332 U.S. 234, 67 S.Ct. 1599, 91 L.Ed. 2022 (1947). In addition, Miller Act bonds are provided in order to protect the United States from suits rested upon its equitable duty to ensure that subcontractors and suppliers of materials receive payment. Kennedy Electric Co. v. United States Postal Service, 508 F.2d 954 (10th Cir. 1974). Recognizing these purposes of the Miller Act, courts have at times extended the Act past its literal wording to accord federal court jurisdiction in situations where some normal Miller Act indicia (government land ownership and contracting) are absent. The foremost example in this circuit is the Capehart Housing situations where the lands on which construction took place were in private hands until construction was completed, then passed immediately to the government. This arrangement was made in order to facilitate the congressional financing scheme for military housing. Autrey v. Williams & Dunlap, 343 F.2d 730 (5th Cir. 1965); Lasley v. United States, 285 F.2d 98 (5th Cir. 1960).

Mississippi Road Supply argues that the Capehart Housing cases indicate Miller Act jurisdiction is available anytime a project is a federal one. It asserts that because the funds here come from the government in the form of grants to Chata from the Economic Development Administration and are paid out through Chata to Morgan, government funding is present. This analysis, however, misses the mark. As succinctly pointed out in United States v. Mattingly Bridge Co., 344 F.Supp. 459 It is unclear whether these two indicia are present here. The parties have stipulated that record title to this land is in the United States. However, Chata holds a 25-year lease from a group acting with government agency approval. Although no liens can be asserted against the government's residual ownership, there appears to be no reason why a lien could not be asserted under state law against the leasehold interest of Chata, a private Mississippi corporation. Allowing such a leasehold lien to be affixed would be a breach of Chata's lease contract. The legal possibility that Chata could breach this obligation is clearly the reason why it was required to bond all improvement and maintenance work.

(W.D.Ky.1972), government funding is not the whole answer. It must be true that either (1) the subcontractors and suppliers of material could assert an action for equitable recovery against the United States or one of its agencies, or (2) normal state labor and material lien remedies are unavailable because of federal ownership of the lands.

Mississippi Road Supply's argument that its position as a materialman of a subcontractor prevents the assertion of any state lien rights under Mississippi law also misses the mark. The question is not whether the state grants lien rights to everyone who has anything to do with the project, but whether the federal government's involvement makes the assertion of a state-granted lien remedy ineffective or impossible.

As in Mattingly, the existence of government funding alone is not enough to allow a suit against the Economic Development Administration to recover payment from funds which may be allocated for this project. See Kennedy Electric Co. v. United States Postal Service, 508 F.2d 954 (10th Cir. 1974). However, the lease contract and 25 C.F.R. § 131.5(g)(1) muddle both of the above conclusions. Each requires that all of the lessee's obligations and the obligations of its sureties go to the United States as well as to the lessor of the land. Depending on its construction, such a clause could indicate either that this case deserves treatment similar to the Capehart Housing cases where the existence of jurisdiction has been recognized, or is controlled by Mattingly where jurisdiction was rejected.

We decline to resolve the issue in order to avoid creating a precedent that would stretch the Miller Act's jurisdictional grant to dimly-lit limits because under the facts in this record another statute contains a clear grant of jurisdiction. ³

28 U.S.C. § 1352 gives district courts original jurisdiction of an action on a bond "executed under any law of the United States." This section is applicable where a regulation requiring a bond has the force of law. United States ex rel. Empire Plastics Corp. v. Western Cas. & Sur. Co.,429 F.2d 905 (10th Cir. 1970); United States ex rel. Victory Electric Corp. v. Maryland Cas. Co., 215 F.Supp. 700 (E.D.N.Y.1963). A regulation promulgated by the head of a department under a statute authorizing him to issue regulations is presumptively valid unless arbitrary, unreasonable, or plainly inconsistent with law. Giancona v. Johnson, 335 F.2d 372 (7th Cir. 1964). Because 25 C.F.R. § 131.5(c) was issued by the Acting Secretary of the Interior, 26 Fed.Reg. 10966 (Nov. 23, 1961), under the authorization of25 U.S.C. § 415 (1963), as amended (Supp.1976), 25 C.F.R. § 131.5(c), it is a valid legislative rule and possesses the force of law. See 1 K. Davis, Administrative Law Treatise (1958) § 5.03. Since 25 U.S.C. § 415 provides that these lands owned by the United States could only have been leased to Chata subject to the provisions of 25 C.F.R. § 131 et seq., Morgan's bond was required by a "law of the United States." Therefore, the district court possessed jurisdiction to entertain this action under § 1352.

COVERAGE OF THE BOND

The district court trial was conducted on the premise that the bond was The federal law under which the bond was required ⁶ suggests no purpose other than the normal good business...