Court Opinion

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Opinions of the United
2007 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

11-27-2007

E&H Steel Corp v. C Pyramid Entr Inc
Precedential or Non-Precedential: Precedential

Docket No. 06-4209

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                                    PRECEDENTIAL

     UNITED STATES COURT OF APPEALS
          FOR THE THIRD CIRCUIT

                   No. 06-4209

  UNITED STATES OF AMERICA FOR THE USE
 AND BENEFIT OF E & H STEEL CORPORATION

                       vs.

       C. PYRAMID ENTERPRISES, INC.;
FIDELITY & DEPOSIT COMPANY OF MARYLAND;
and ZURICH AMERICAN INSURANCE COMPANY,

                    E & H Steel Corporation, Appellant
                  ____________

ON APPEAL FROM THE UNITED STATES DISTRICT
  COURT FOR THE DISTRICT OF NEW JERSEY
             (D.C. Civ. No. 04-cv-02519)
    District Judge: Honorable Robert B. Kugler
                    ____________

             Argued September 18, 2007
Before: SLOVITER, SMITH and WEIS, Circuit Judges.
          Filed: November 27, 2007
                   ____________
David W. Mockbee, Esquire (ARGUED)
Mary Elizabeth Hall, Esquire
MOCKBEE HALL & DRAKE, P.A.
Lamar Life Building, Suite 1000
317 E. Capitol Street
Jackson, Mississippi 39201

Sandhya M. Feltes, Esquire
Kaplin, Stewart, Meloff, Reiter & Stein
910 Harvest Drive
P.O. Box 3037
Blue Bell, PA 19422

Attorneys for Appellant

Paul W. Norris, Esquire (ARGUED)
Lewis J. Pepperman, Esquire
STARK & STARK
A Professional Corporation
P.O. Box 5315
Princeton, New Jersey 08543

Attorneys for Appellees

                       ____________

                          OPINION

WEIS, Circuit Judge.

                              2
        In this Miller Act case, we decide that a firm acted as a
subcontractor when it supplied fabricated steel to the prime
contractor that then used the material to construct the framework
for a large Air Force facility. The subcontractor defaulted in
payments due the company that it hired to fabricate the steel and
deliver it to the construction site. The District Court denied
recovery to the steel fabricator in this suit against the prime
contractor and its sureties. We will reverse and remand for
entry of judgment in favor of the steel company.

       In September 2002, C. Pyramid Enterprises, Inc. was
awarded a contract by the United States Army Corps of
Engineers to design and build a large C-17 Maintenance Hangar
and Shops facility at the McGuire Air Force Base in New
Jersey. The original contract price was $24,119,450.00.

        Pyramid issued a standard form “purchase order” to
Havens Design-Build to provide custom fabricated structural
steel for the building’s framework at a cost of $2,230,000.00.
The agreement provided that Havens was also to arrange for the
preparation of shop drawings and erection drawings, design the
connectors for the steel, and perform some “design assist
engineering” that primarily involved material substitution.

       Havens in turn contracted with E & H Steel Company to
fabricate the steel and deliver it to the construction site. E & H
delivered 50 trailers of fabricated steel between November 13,
2003 and April 16, 2004.1 Pyramid erected the steel framework

       1
        E & H asserts that the shipments contained 5,379 major
pieces of structural steel, which included seven long-span jumbo

                                3
for the building and did most of the remaining construction
itself, including the electrical, mechanical, site utilities,
plumbing, and concrete work.

       In accordance with the Miller Act, 40 U.S.C. §
3131(b)(2), Pyramid issued a payment bond in favor of “all
persons having a direct relationship with [Pyramid] or a
subcontractor of [Pyramid] for furnishing labor, material or both
in the prosecution of the work provided for in the contract.”
Defendants Fidelity & Deposit Company of Maryland and
Zurich American Insurance Company acted as sureties on the
bond.

       Although it had been paid by Pyramid during the
construction process, Havens filed for bankruptcy owing E & H
$565,125.40 for the delivered steel. E & H brought suit against
Pyramid and its sureties, asserting entitlement to reimbursement
from the payment bond. After a bench trial, the District Court
found in favor of defendants.

        The Court correctly determined that because of a
statutory limitation E & H’s right to recover on the bond hinged
on whether Havens was a “subcontractor” under § 3133(b)(2) of
the Miller Act. However, case law did not provide a uniform
rule for determining whether a company such as Havens, which
acted as a middleman between a general contractor and a
supplier of materials or services, was a “subcontractor.” In

roof trusses 203 feet in length and five steel members that
weighed between 19,000 and 20,000 pounds. Pyramid does not
dispute this assertion.

                               4
resolving that issue, the Court considered a number of factors,
including the nature of the material or service supplied, the cost
of the material or service in relation to the total contract price,
the payment terms and exchange of information, and the overall
relationship between the contractor and the middleman.

       The District Court concluded that Havens furnished
standard work customarily performed by steel fabricators, a role
similar to that of a supplier of pre-cut wooden beams for
residential construction. Havens supplied material from non-
inventory stock and Pyramid used the steel to erect the
building’s substantial frame. Although Havens’ work on the
project comprised 7.8% of the total contract price, the District
Court noted that Havens did not post a bond or provide
insurance or payroll data to Pyramid. Finally, the District Court
observed that Pyramid and Havens did not have a prior
relationship.

       After evaluating these details, the District Court held that
Havens was a material supplier and not a “subcontractor” under
the Miller Act. Therefore, E & H was not entitled to recover on
the bond.

      E & H timely appealed. We have jurisdiction under 28
U.S.C. § 1291 and under the Miller Act, 40 U.S.C. §
3133(b)(3)(B).

                                I.

       Congress recognized that sovereign immunity left
suppliers of labor or materials for federal construction projects

                                5
without the protection of the mechanics’ liens normally
available in private industry. See Dep’t of Army v. Blue Fox,
Inc., 525 U.S. 255, 264-65 (1999). To provide some protection
for suppliers, Congress enacted the Heard Act2 and later
replaced it with the Miller Act, found in its current version at 40
U.S.C. § 3131, et seq. Id.3

        The Miller Act requires every contractor on a federal
government contract exceeding $100,000 to provide “[a]
payment bond with a surety . . . for the protection of all persons
supplying labor and material in carrying out the work provided
for in the contract.” 40 U.S.C. § 3131(b)(2). In pertinent part,
§ 3133(b)(1) provides that “[e]very person that has furnished
labor or material . . . and that has not been paid in full within 90
days after the day on which the person did or performed the last

       2
        Act of August 13, 1894, ch. 280, 28 Stat. 278, as
amended by Act of February 24, 1905, ch. 778, 33 Stat. 811.
       3
           See also United States ex rel. Daniel H. Hill v.
American Sur. Co., 200 U.S. 197, 202 (1906) (The Heard Act
as amended “shows the consistent purpose of Congress to
protect those who furnish labor or material in the prosecution of
public work.”); Fanderlik-Locke Co. v. United States ex rel.
Morgan, 285 F.2d 939, 942 (10th Cir. 1960) (“The purpose of
the Miller Act is to provide security for those who furnish labor
and material in the performance of government contracts . . . .
The benefits of the Act are not intended for the prime contractor
who is required by the Act to furnish a bond to effectuate its
provisions.” (internal citations omitted)).

                                 6
of the labor or furnished or supplied the material . . . may bring
a civil action on the payment bond.” 40 U.S.C. § 3133(b)(1).

       However, § 3133(b)(2) limits the scope of those
protected. It states:

           “A person having a direct contractual
       relationship with a subcontractor but no
       contractual relationship, express or implied, with
       the contractor furnishing the payment bond may
       bring a civil action on the payment bond on
       giving written notice to the contractor within 90
       days from the date on which the person did or
       performed the last of the labor or furnished or
       supplied the last of the material for which the
       claim is made.”

40 U.S.C. § 3133(b)(2).

       Because the statute does not define the term
“subcontractor,” the Supreme Court has been called upon to
explain the meaning of the term. In Clifford F. MacEvoy Co. v.
United States ex rel. Calvin Tompkins Co., 322 U.S. 102 (1944),
the Court recognized that the Miller Act “is highly remedial in
nature. It is entitled to a liberal construction and application in
order properly to effectuate the Congressional intent to protect
those whose labor and materials go into public projects.” Id. at
107.

        Nevertheless, the Court observed that it must also give
effect to Congress’ intent to limit liability under the Act through

                                7
the restrictions in § 3133(b)(2). Id. at 107-08. In the Court’s
view, Congress used the term “subcontractor” in the technical
sense to apply to “one who performs for and takes from the
prime contractor a specific part of the labor or materials
requirements of the original contract, thus excluding ordinary
laborers and materialmen.” Id. at 109.4

       The Court pointed out that its conclusion was supported
by practical considerations in that it was unlikely that Congress
intended to impose liability on the general contractor for labor
and materials provided by those beyond the “relatively few
subcontractors who perform part of the original contract” and
are well known to the prime contractor. Id. at 110. In a later
case, the Court also made clear that Congress “intended the
scope of protection of a payment bond to extend no further than

       4
          Thus, although a kingdom may be lost for lack of a
nail, a vendor who supplied a box of nails is unlikely to be
protected by the Miller Act.

       “For want of a nail the shoe was lost. For want of
       a shoe the horse was lost. For want of a horse the
       rider was lost. For want of a rider the battle was
       lost. For want of a battle the kingdom was lost.
       And all for the want of a horseshoe nail.”

A version of this rhyme of apparent English origin first appeared
in written form in John Gower’s Confessio Amantis, dated
approximately 1390. Benjamin Franklin included a version in
his Poor Richard’s Almanack.

                               8
to sub-subcontractors.” J.W. Bateson Co. v. United States ex
rel. Bd. of Trustees, 434 U.S. 586, 591 (1978).

        The Supreme Court further explained its definition of a
“subcontractor” under the Miller Act in F. D. Rich Co. v. United
States ex rel. Indus. Lumber Co., 417 U.S. 116 (1974). F. D.
Rich, the prime contractor for a federal housing project, awarded
two contracts to Cerpac Company, one for the installation of
custom mill work and another to provide standard sheets of
plywood. Id. at 119. Cerpac had a close relationship with F. D.
Rich and had worked with it on other projects. Id. at 118.
Cerpac placed an order for the plywood with Industrial Lumber,
a broker, which purchased the plywood from its own suppliers.
Id. at 119. After Cerpac fell behind in its payments for the
wood, Industrial Lumber filed a claim under the Miller Act. Id.
at 120.

        The Court concluded that under MacEvoy the test for
determining whether one is a subcontractor hinges on “the
substantiality and importance of his relationship with the prime
contractor.” Id. at 123. The Court noted that Cerpac, in
addition to its role as a plywood supplier, had a contract “to
select, modify, detail and install all custom millwork . . . [and]
in effect, took over a substantial part of the prime contract
itself.” Id. at 124. Finding that the close relationship and prior
dealings between Cerpac and F. D. Rich was determinative, the
Court concluded that Cerpac acted as a “subcontractor” when it
supplied the plywood and Industrial was entitled to recover. Id.

       The F. D. Rich Court explained that the ability of a prime
contractor to protect itself by requiring a middleman to post a

                                9
bond is an indication that he is a “subcontractor.” Id.
Generally, when a subcontractor is required to provide a bond
the premiums will cause him to increase his bid. See Note,
Mechanics’ Liens and Surety Bonds in the Building Trades, 68
Yale L.J. 138, 171 (1958) (“[W]here bonding is conventional,
premiums constitute a construction expense which is reflected
in every contractor's bid. The owner who accepts a bid may be
expected to pass the premium costs on to the ultimate users of
the particular project.”). Thus, a prime contractor may decide
to forego requiring a bond from a subcontractor to obtain a
lower bid. The Court’s statement appears to recognize that it is
equitable for a prime contractor to bear the risk of loss when he
does not require the subcontractor to secure a bond or make
other arrangements for the security of its suppliers.

       To summarize, MacEvoy and F. D. Rich established
broad criteria under which “subcontractor” status applies to one
who performs a specific part of the original contract and has a
substantial and important relationship with the prime contractor.

       Because of the variety of circumstances that arise in
government construction projects, the general standards of
MacEvoy and F. D. Rich are not always easy to apply. In the
many cases that have applied MacEvoy and F. D. Rich, lower
courts have created inconsistent tests for defining
“subcontractor” status and have compiled laundry lists of
elements to consider. The District Court here cited opinions of
various appellate courts in describing circumstances it
considered relevant:

                               10
      “Some of the factors to consider include: (1) the
      nature of the material or service supplied by the
      alleged subcontractor to the prime contractor, see
      F. D. Rich, 417 U.S. 116 (1974); United States ex
      rel. Consol. Pipe & Supply Co. v.
      Morrison-Knudsen Co., 687 F.2d 129 (6th Cir.
      1982); Miller Equip. Co. v. Colonial Steel & Iron
      Co., 383 F.2d 669 (4th Cir. 1967); United States
      ex rel. Wellman Eng’g Co. v. MSI Corp., 350
F.2d 285 (2d Cir. 1965); (2) the financial
      magnitude of the goods or services provided in
      relation to the total federal contract, see
      Morrison-Knudsen, 687 F.2d 129; Miller, 383
F.2d 669; (3) the payment terms and exchange of
      information between the prime contractor and
      alleged subcontractor, see MSI Corp., 350 F.2d
285; and (4) the overall relationship between the
      prime contractor and the alleged subcontractor,
      see F. D. Rich, 417 U.S. 116; Morrison-Knudsen,
      687 F.2d 129.”

United States ex rel. E & H Steel Corp. v. C. Pyramid
Enterprises, Inc., 2006 WL 2570849, *6 (D.N.J. Sept. 1, 2006)
(some internal citations omitted).

       The District Court also noted that, as part of these
inquiries, courts have also considered

      “(1) whether the goods produced came from
      inventory or whether they had to be
      custom-manufactured, (2) whether they were

                             11
       complex in nature, (3) whether they constituted a
       significant and integral portion of the overall
       project, (4) whether the items provided were
       generally available on the market, (5) whether the
       subcontractor performed work on-site, (6)
       whether the alleged subcontractor had design or
       installation responsibility for the items or services
       it provided, and (7) whether the alleged
       subcontractor had ultimate responsibility for a
       portion of the work under the government
       contract.”

Id. (citations omitted).

       Although a survey of factors can be helpful in applying
the standards in MacEvoy and F. D. Rich, the opinions
interpreting those two cases often evolve into a process of
“color matching” the various precedents rather than focusing on
the purpose of the Act, the relationship between the parties, and
the middleman’s role in the project. See, e.g., United States ex
rel. Conveyor Rental & Sales Co. v. Aetna Cas. & Sur. Co., 981
F.2d 448, 452-55 (9th Cir. 1992).

       Many of the opinions emphasize the nature of the
materials supplied while overlooking the fact that the Supreme
Court held that a firm that provided plywood sheets that were
not unique or customized was a “subcontractor” in F. D. Rich.
See F. D. Rich, 417 U.S. at 119. The Miller Act does not make
distinctions based on characteristics such as whether the
material supplied was customized or unique. Thus, for example,
the oft-cited pre-F. D. Rich case of Aetna Cas. & Sur. Co. v.

                                12
United States ex rel. Gibson Steel Co., 382 F.2d 615 (5th Cir.
1967), inappropriately emphasized the simplicity of the
prefabricated steel supplied to the contractor. Id. at 618
(concluding that “[t]he most important factor is the nature of the
items . . . supplied” and that “the variety and relative simplicity
of the items supplied weigh heavily against finding” that the
supplier was a subcontractor).

        Similarly, in another pre-F. D. Rich case, United States
ex rel. Bryant v. Lembke Constr. Co., 370 F.2d 293 (10th Cir.
1966), the Court was impressed by the simplicity of materials
supplied when denying subcontractor status to a company that
supplied concrete to the prime contractor. Id. at 295-96.

       Although furnishing customized or complex material may
in some cases be a helpful indication of the strength of the
supplier’s relationship with the prime contractor, it does not
follow that the absence of such characteristics in the material
supplied establishes a lack of “subcontractor” status. The
holding in F. D. Rich shows that a person who furnishes very
basic materials can be a “subcontractor,” thus allowing his
suppliers to recover on the payment bond.

       In Morrison-Knudsen, the Court of Appeals correctly
focused more on the substantiality of the relationship between
the prime contractor and alleged subcontractor when it was
presented with circumstances somewhat similar to those before
us. 687 F.2d at 135-36. The Court concluded that a fabricator
that supplied large amounts of pipe, some of which required a
special lining and coating, was a “subcontractor.” Id. at 134.
The Court observed that, although the fabricator did not install

                                13
the pipe or participate in the project design, it supplied 40% of
the pipe for the facility, submitted shop drawings for approval
of the prime contractor, and had representatives at the job site to
help interpret the drawings and check the material for damage
when it arrived. Id. at 135.

       The Court of Appeals also stated that the prime
contractor’s ability to procure a bond from the middlemen was
“a significant and probative consideration.” Id. Considering all
these circumstances, the Court concluded that the evidence
established the substantial relationship necessary to designate
the fabricator as a “subcontractor.” Id. at 136.

        The Morrison-Knudsen Court gave little consideration to
the fact that the contractual instrument was “styled a ‘purchase
order.’” Id. at 134. We agree that the label that the parties apply
to the relationship between the contractor and the middleman is
not determinative of “subcontractor” status. The designation of
the agreement as a “purchase order” rather than a “subcontract,”
therefore, or the failure to designate a supplier as a
“subcontractor,” is entitled to little weight.

       Rather than attempting to reconcile the often inconsistent
case law and laundry lists of factors, we prefer to focus our
analysis on the formulas provided by the Supreme Court, vague
as they are, by following their rationale.

        We begin with the premise that the Miller Act is to be
interpreted liberally to protect persons who supply labor or
materials for government construction projects. That protection
is restricted to parties who are no more distant from the prime

                                14
contractor than sub-subcontractors. J.W. Bateson Co., 434 U.S.
at 591. “Subcontractor” status may extend to those who supply
necessary material, as well as to those who incorporate items
into the structure.

       Neither the Miller Act nor the Supreme Court make a
distinction between those who supply complex or simple
material, nor do they differentiate between projects involving
simple and complicated structures. The Court’s definition of a
“subcontractor” is “one who performs for and takes from the
prime contractor a specific part of the labor or materials required
by the original contract.” MacEvoy, 322 U.S. at 109. A
“subcontractor” must have a substantial and important
relationship with the prime contractor. F. D. Rich, 417 U.S. at
123. The prime contractor’s ability to require the posting of a
bond is also an indication of where the risk of financial loss
should fall. Id. at 123-24; MacEvoy, 322 U.S. at 110.

                                II.

      The issue here is whether Havens qualifies as a
“subcontractor” under this approach. We conclude that it does.

        Havens’ task was to supply a specific and crucial part of
the materials required by the original contract to construct the
steel framework. It arranged for the fabrication and delivery to
the site of a substantial amount of structural steel necessary for
the skeleton of the hangar building. Havens also prepared shop
drawings and erection drawings, designed the connectors, and
performed some “design-assist engineering.”

                                15
       The relationship with the prime contractor was a
substantial and important one. The work and material Havens
supplied for the framework required Pyramid to exercise
substantial attention and oversight. The shop drawings were
submitted to Pyramid for approval and the parties communicated
about the connectors design and design-assist work.

        Although Pyramid did most of the construction work
itself, the steel that Havens supplied had to be carefully
manufactured so that Pyramid could efficiently erect the
framework. Delivery of the steel to the site had to be arranged
to comply with Pyramid’s construction schedule. The
importance of this coordination became clear when, in Havens’
bankruptcy proceeding, Pyramid made a claim against Havens
for costs incurred because of delays in delivery of the steel.

       Further, it does not appear that, for this project, a large
number of subcontracts were awarded and none were as large as
that with Havens. Finally, Pyramid likely could have requested
a bond, although the record does not disclose whether Havens
could have qualified for one.

        The District Court, in denying recovery, analogized the
supplying of pre-fabricated steel beams to providing pre-cut
wood beams for residential construction. As noted above, in F.
D. Rich the Supreme Court decided that a firm that furnished
standard sheets of plywood was a “subcontractor.” A supplier
of pre-cut wooden beams could qualify as well. Moreover, the
fact that Havens’ contract amounted to 7.8% of the total project
costs is not a weighty reason to deny recovery, especially since
Pyramid did most of the construction itself.

                               16
        We conclude, therefore, that Havens was a
“subcontractor.” Because it had a contract with Havens, E & H
is entitled to recover under the Miller Act bond. Accordingly,
the judgment of the District Court will be reversed and the case
will be remanded for entry of a judgment in favor of E & H
Steel Company.

                              17