U.S. for Use and Ben. of Balzer Pacific Equipment Co. v. Fidelity and Deposit Co. of Maryland

• Decision Date: 31 January 1990
• Docket Number: No. 88-15464,88-15464
• Citation: 895 F.2d 546
• Parties: 36 Cont.Cas.Fed. (CCH) 75,792 UNITED STATES of America, for the Use and Benefit of BALZER PACIFIC EQUIPMENT COMPANY, Plaintiff-Appellee, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 546

895 F.2d 546

36 Cont.Cas.Fed. (CCH) 75,792

UNITED STATES of America, for the Use and Benefit of BALZER PACIFIC EQUIPMENT COMPANY, Plaintiff-Appellee, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Defendant-Appellant.

No. 88-15464.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Oct. 31, 1989.

Decided Jan. 31, 1990.

James H. Lawhn and Charles J. Keever, Oliver, Lee, Lawhn, Ogawa and Lau, Honolulu, Hawaii, for defendant-appellant.

W. Thomas Fagan and Patricia K. Wall, Reinwald, O'Connor and Marrack, Honolulu, Hawaii, for plaintiff-appellee.

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

Before SNEED, KOZINSKI and THOMPSON, Circuit Judges.

SNEED, Circuit Judge:

Fidelity and Deposit Company of Maryland (F & D) appeals from a jury verdict of $66,082.54 in favor of Balzer Pacific Equipment Company (Balzer). F & D asserts that the trial court erred in denying its motion for a directed verdict, as well as in denying its motion for judgment n.o.v., and, alternatively, for a new trial. We reverse and remand for a new trial.

I. JURISDICTION

Jurisdiction in the district court resides in 28 U.S.C. Sec. 1331 and we have jurisdiction under 28 U.S.C. Sec. 1291.

II. FACTS AND PROCEEDINGS BELOW

Balzer brought this action under the Miller Act, 40 U.S.C. Secs. 270a-270d, against F & D on payment bonds issued by F & D in respect to four contracts between S & S Contracting, Inc. (S & S) and the United States to be performed principally in Guam. These contracts were for construction of (1) an airport, (2) a highway, (3) a park memorial, and (4) work for the Navy in Midway. Balzer furnished material to S & S to be used both in connection with these contracts and for several contracts S & S had with parties other than instrumentalities of the United States. S & S became insolvent and was unable to meet its obligations owed to Balzer. This action ensued.

To perform its federal and non-federal projects, S & S needed to mine and process limestone on Guam as a component of pavement. S & S thereupon moved a rock crusher from Samoa to Guam that it had previously purchased from Balzer. S & S also bought from Balzer an asphalt plant and additional crushing equipment that it placed at a limestone quarry in Guam. S & S's operations also employed a cement mixer and two Bomag rollers which were mobile and taken to the job sites. Balzer furnished material and parts for each of these pieces of equipment in amounts stipulated to by Balzer and F & D.

The difficulty which provides the genesis of this lawsuit is that neither Balzer nor S & S attempted to maintain any records that would enable the apportionment of specific materials and parts to each specific contract as to which F & D issued its payment bonds. Balzer insists that such apportionment is not necessary; it is enough for it to show that it reasonably believed that all the stipulated items were to be used in bonded federal projects. F & D argues that there must be an apportionment of specific materials to each contract before it becomes liable on any payment bond issued as to the four federal projects.

The district court ruled in favor of Balzer and incorporated that ruling in its instructions to the jury. E.g. Instructions No. 4, ¹ 5, ² 6, ³ and 7. ⁴ In its "Memorandum and F & D argues vigorously that apportionment to each bonded contract is required by the language of the Miller Act, the cases interpreting the Act, and the need to preclude "cross-collateralization." Cross-collateralization occurs when the protection afforded by one bond is available to provide protection with respect to supplies in fact furnished on a different contract in excess of the coverage provided by the bond applicable to this latter contract.

Order," the court concluded "that to require Balzer to prove that it had a reasonable belief that the use of each item supplied was for one specific job of the four contracts, or to apportion its claims among the four contracts, would place an insurmountable burden on Balzer in light of the record keeping of S & S Contracting and the nature of the use to which Balzer's equipment or materials were put."

III. STANDARD OF REVIEW

The issues presented by this appeal are questions of law; therefore, our review is de novo. United States v. McConney, 728 F.2d 1195, 1201 (9th Cir.) (en banc), cert. denied, 469 U.S. 824, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984).

IV. DISCUSSION

A. The Miller Act

Quite correctly F & D points out that the Miller Act's language speaks in the singular when using the term "payment bond" and "contract," see 40 U.S.C. Sec. 270a, b, and c, and that no provision exists therein to aggregate the amounts of the bonds applicable to several contracts even when such contracts pertain to related projects. Claims that exceed the penal sum of a particular bond must be paid on a pro rata basis. See generally Pennsylvania Fire Ins. Co. v. American Airlines, Inc., 180 F.Supp. 239 (E.D.N.Y.1960).

Balzer argues to the contrary on the basis of cases that have held that the supplier of materials need not prove that all such materials were actually delivered to the site of the bonded work and incorporated therein so long as it had a good faith and reasonable belief that the material was intended for use in the bonded federal project. See, e.g., 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) (hereinafter "Martin Steel"); United States ex rel. I. Burack, Inc. v. Sovereign Constr. Co., 338 F.Supp. 657, 660 (S.D.N.Y.1972); United States ex rel. Tom P. McDermott, Inc. v. Woods Constr. Co., 224 F.Supp. 406, 409 (N.D.Okla.1963).

The district court was partially correct when it incorporated the "reasonable good faith" standard in its jury charges. See, e.g., United States ex rel. Krupp Steel Prod., Inc. v. Aetna Ins. Co., 831 F.2d 978, 980 (11th Cir.1987) (finding that supplier delivered goods to job site in good-faith belief that they were being used for bonded project). For example, in "Instruction No. 4," the jury was told that Balzer was required to show, among other things, that it "in good faith had reason to believe that the materials were intended for the work specified in the contracts and covered by Fidelity and Deposit's bonds." (Emphasis added.)

The italicized words reveal the heart of this case. The error of Balzer and the trial court consists of expanding the "reasonable good faith" standard to embrace all possibly applicable payment bonds issued by the same surety rather than restricting it to resolve doubts about whether the supplies were used on the specific bonded job, or on a job bonded by another surety, or on an unbonded one. To extend the "reasonable good faith" standard in this manner alters each of the contracts entered into by the surety and converts them into one contract that provides for a penal sum equal to the aggregate sum of the several bonds. This approach also makes that sum available with respect to any defaults by the contractor arising out of any of the work pursuant to any of the contracts with the United States. No such result is envisioned by the Miller Act.

In its Memorandum and Order, the district court justified this remaking of the payment bond contracts between F & D and S & S on the basis that the latter kept no records that would enable S & S or Balzer to allocate "the use of equipment and supplies at the quarry to any one particular job." Under these circumstances the court felt Balzer should be permitted to proceed against the four bonds restricted only to establishing that it had a good faith belief that the materials were furnished to enable the contractor to perform one or more of the jobs for which bonds were issued by F & D. That is, "the balance of equities favored Balzer."

The district court, in our opinion, overlooked Balzer's opportunity to have insisted on better accounting by S & S. It should not have been difficult for S & S to have maintained a record of the time and the amount of pavement that was laid down on each particular contract with the government. Indeed, it very likely estimated the amount that would be required before entering the contract with the United States. Fixing the time would require only rudimentary records. Since the equipment and supplies furnished by Balzer were to process limestone for use as a component of pavement, the amount and time of pavement supplied per contract would have been a means by which supplies could be allocated to specific contracts. Balzer cannot use its failure to insist on a modest amount of cost accounting by S & S to justify its demand that the contracts into which F & D and S & S entered be fused into one for its benefit. ⁵

We are mindful that F & D requested several jury instructions that insist on a greater precision in allocating materials to specific contracts with the United States than does the allocation method just suggested. E.g., Requested Instructions No. 7 ⁶ and 11. ⁷ We do not demand that level of precision under the circumstances of this case. Our quarrel essentially is with the district court's fusion of four contracts into one, rather than insisting on a reasonable allocation method, to solve the difficulties presented by the facts of this case.

B. Case Law Relied on by F & D

F & D relies on our opinion in Martin Steel, 750 F.2d at 761, to fix the elements a claimant on a Miller Act payment bond must establish to recover. These are:

(1) the materials were supplied in prosecution of work provided for in the contract;

(2) claimant has not been paid;

(3) he had a good faith belief that the materials were intended for the specified work; and

(4) the jurisdictional requisites have been met.

It is obvious that Balzer has not been able to establish what specific material was supplied for use on what specific contract. On the other hand, F & D...