U.S. for Use and Ben. of Morris Const., Inc. v. Aetna Cas. Ins. Co.

• Decision Date: 13 July 1990
• Docket Number: No. 88-5467,88-5467
• Citation: 908 F.2d 375
• Parties: 36 Cont.Cas.Fed. (CCH) 75,988 UNITED STATES of America, for the Use and Benefit of MORRIS CONSTRUCTION, INC., Appellee, v. AETNA CASUALTY INSURANCE COMPANY; Lamro, Inc., and Schultz & Sons Construction Company, Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 375

908 F.2d 375

36 Cont.Cas.Fed. (CCH) 75,988

UNITED STATES of America, for the Use and Benefit of MORRIS CONSTRUCTION, INC., Appellee, v. AETNA CASUALTY INSURANCE COMPANY; Lamro, Inc., and Schultz & Sons Construction Company, Appellants.

No. 88-5467.

United States Court of Appeals Eighth Circuit.

Submitted June 12, 1989.

Decided July 13, 1990.

John O. Holm, Rapid City, S.D., for appellants.

Robert L. Varilek, Rapid City, S.D., for appellee.

Before JOHN R. GIBSON and WOLLMAN, Circuit Judges, and BROWN, ^* Senior Circuit Judge.

JOHN R. GIBSON, Circuit Judge.

Morris Construction, Inc., entered into an oral agreement with Schultz & Sons Construction Company to provide heavy equipment for a road construction project on which Lamro, Inc., was the general contractor. After Schultz failed to pay Morris money that was owed under the oral agreement, Morris brought this claim under the Miller Act, 40 U.S.C. Secs. 270a-d (1982), against Lamro, Schultz, and the issuer of Lamro's payment bond, Aetna Casualty Insurance Company. The principal issue in this appeal is whether Schultz was a subcontractor for the purposes of the Miller Act. The district court ¹ entered a judgment for Morris after concluding that Morris was a subcontractor of Schultz and that Schultz was a subcontractor of Lamro. We affirm the district court judgment.

Lamro contracted with the Bureau of Indian Affairs to work on a twelve mile section of highway south of Scenic, South Dakota, in the Pine Ridge Indian Reservation. Lamro is a construction contracting firm which has no construction capabilities but, as found by the district court, sustains itself by complying with an Oglala Sioux Tribal Ordinance designed to promote the ownership and management of businesses by Native Americans. Lamro first contracted to have Ramsdell Construction perform certain work, but Ramsdell defaulted on the contract. Thereafter, Lamro executed an agreement to lease construction equipment from Schultz. Schultz and Morris then orally agreed that Morris would provide equipment and operators to work on the project. The equipment operators, employees of Morris, were to be under the control and supervision of Lamro, and were to be paid by Lamro. Schultz failed to pay Morris money that was owed under their contract, and Morris filed this claim under the Miller Act.

The case was tried to the district court, which found for Morris. The court recognized that the primary issue before it was whether Schultz was a subcontractor or a mere materialman for the purposes of the Miller Act, because Morris could recover only if Schultz was a subcontractor. To answer that question, the court looked to the Supreme Court's decisions in Clifford F. MacEvoy Co. v. United States ex rel. Calvin Tomkins Co., 322 U.S. 102, 64 S.Ct. 890, 88 L.Ed. 1163 (1944); F.D. Rich Co. v. United States ex rel. Industrial Lumber Co., 417 U.S. 116, 94 S.Ct. 2157, 40 L.Ed.2d 703 (1974); and J.W. Bateson Co. v. United States ex rel. Board of Trustees, 434 U.S. 586, 98 S.Ct. 873, 55 L.Ed.2d 50 (1978). The court focused particularly upon the Supreme Court's declaration that a subcontractor is "one who performs for and takes from the prime contractor a specific part of the labor or material requirements of the original contract." MacEvoy, 322 U.S. at 109, 64 S.Ct. at 894. The court then analyzed the facts before it and found that Schultz was a subcontractor of Lamro, the prime contractor. Even though the contract between Lamro and Schultz was denominated an "equipment lease agreement," the court held that it was actually a subcontract requiring Schultz to perform a major part of the labor and material requirements of the original contract by supplying special heavy equipment and trained operators. The equipment rental agreement required Lamro to supply and pay the equipment operators, but the district court found that part of the agreement to be a sham because Lamro did not employ any heavy equipment operators when the contract was signed. The district court found that there was an implicit understanding between Schultz and Lamro that Schultz would be supplying all of the labor and equipment necessary to complete a specified portion of the road construction project, with Lamro paying the workers directly and paying Schultz separately for the equipment rental. Schultz also contracted with Morris.

On appeal, Lamro and Aetna argue that Schultz was merely a materialman rather than a subcontractor. Therefore, they argue that Morris was not entitled to recover under the Miller Act.

I.

The Miller Act provides, in relevant part, that:

Every person who has furnished labor or material in the prosecution of the work provided for [in a government contract that is covered by the Miller Act] ... shall have the right to sue on [the prime contractor's] payment bond ...: Provided, however, That any person having [a] direct contractual relationship with a subcontractor but no contractual relationship express or implied with the contractor furnishing said payment bond shall have a right of action upon the said payment bond upon giving [the specified notice].

40 U.S.C. Sec. 270b(a).

From the Act's proviso, the Supreme Court has inferred two limitations on the protection afforded by the Act. First, a contractual relationship with either the prime contractor or a subcontractor is a prerequisite to recovery under the Act; plaintiffs who have contracted only with a sub-subcontractor are not entitled to recover under the Miller Act. Bateson, 434 U.S. at 594, 98 S.Ct. at 877. Second, the Act does not protect those who contract with a "materialman," or supplier, rather than with a subcontractor. Rich, 417 U.S. at 121-24, 94 S.Ct. at 2161-63; MacEvoy, 322 U.S. at 107-11, 64 S.Ct. at 893-96. The distinction between a materialman and a subcontractor is the issue in this case.

In MacEvoy, the Court held that, for the purposes of the Miller Act, a subcontractor is "one who performs for and takes from the prime contractor a specific part of the labor or material requirements of the original contract." 322 U.S. at 109, 64 S.Ct. at 894. The Court indicated that the distinction between materialmen and subcontractors was supposed to promote appropriate risk allocation. Id. at 110-11, 64 S.Ct. at 895-96.

In Rich, the Court reemphasized the economic policy that was mentioned in MacEvoy. Thus, while the Court repeated MacEvoy's definition of a subcontractor, the Court also stated that whether an entity is a subcontractor or a supplier depends upon "the substantiality and importance of [its] relationship with the prime contractor." Rich, 417 U.S. at 123, 94 S.Ct. at 2162. Whether a relationship is sufficiently substantial and important to justify treatment as a subcontractor depends upon whether the prime contractor could have easily protected itself from liability by requiring "bond security or other protection." Id. at 123-24, 94 S.Ct. at 2162-63.

When considered together, Bateson, MacEvoy, and Rich stand for the proposition that a company is a subcontractor if: (1) it has contracted to supply labor or material to the prime contractor; and (2) it plays a sufficiently substantial role in the construction project that the general contractor could have negotiated to have the subcontractor assume the risk of the subcontractor's default. The district court in this case followed these standards and concluded that Schultz was a subcontractor.

II.

Lamro and Aetna, in challenging the district court's conclusion that Schultz was a subcontractor for the purposes of the Miller Act, do not discuss whether this is a factual or legal issue, and thus subject to the clearly erroneous standard or de novo review. ² Our independent study of the cases on this question has not been particularly illuminating, but we believe that the ultimate issue of whether Schultz was a subcontractor under this Act is a mixed question of law and fact that should be reviewed de novo. See Besta v. Beneficial Loan Co., 855 F.2d 532, 533 (8th Cir.1988) (stating that "[o]n mixed questions of law and fact, at least concerning federal law, this circuit exercises plenary review of the legal conclusion"). ³ The conclusion at issue was reached by the district court after detailed factual analysis, and we have no doubt that the court's findings of historical fact must be reviewed, insofar as they are attacked, under the clearly erroneous standard. We recognize that some issues in Miller Act cases have been considered factual ones, such as the terms of an oral agreement in Mike Bradford & Co. v. F.A. Chastain Construction, 387 F.2d 942, 943 (5th Cir.1968), and whether an agreement was one for the lease or purchase of equipment in Boyd Callan, Inc. v. United States ex rel. Steves Industries, 328 F.2d 505, 508 (5th Cir.1964). On the other hand, we read the Bateson, MacEvoy, and Rich cases to engage in a legal analysis in reaching a conclusion concerning whether the party was a subcontractor under the Act. ⁴

III.

Lamro and Aetna make a number of arguments directed to the district court's conclusion that Morris was a subcontractor of Schultz, who, in turn, was a subcontractor of Lamro. The district court found that "Lamro hired Schultz for the purpose of performing a specific part of the labor and material requirements of the original road construction contract." (District Court Opinion at 14-15). This finding tracks the Supreme Court's definition of a subcontractor in MacEvoy. See 322 U.S. at 108-09, 64 S.Ct. at 894-95. The court also found that "Lamro could have protected itself since it could have easily required bond security or other protection from Schultz." (District Court Opinion at 15). This finding satisfies the policy concerning risk allocation that the Supreme Court identified in Rich and MacEvoy. See Rich, 417 U.S. at 123-24, 94 S.Ct. at 2162-63; MacEvoy, 322 U.S. at 110, 64 S.Ct. at 895. Finally, the court found that Morris contracted to lease equipment to Schultz. (...