Contractor's Court Judgment against Sub Did Not Resolve or Eliminate Sub-Sub’s Payment Bond Rights

When third-party creditors sought to garnish an electrical sub’s contract balance, the general contractor, McMillan-Pitts, commenced an interpleader action against the electrical sub and its known creditors, and deposited the remaining subcontract balance of $19,445 into court. The GC did not know at the time that there was at least one more sub-sub, JSI, who was owed $36,346 by the electrical sub. After turning the $19,445 over to the court, the GC sought and obtained a judgment saying it had been released from “any claim made by any other claimant made a party to this action for sums due and owing from [the electrical sub] for materials, supplies and/or labor provided to [the electrical sub] on the [project].” When JSI made known its $36,346 receivable, the GC promptly added JSI as a party in the interpleader action, and got the court – that same day! – to amend its judgment to include JSI’s name.

This was a public project, and the GC had provided a payment bond. As a result, JSI pursued Travelers, the surety. In that follow-on lawsuit, Travelers moved to dismiss JSI’s claim, arguing that the state court judgment in the interpleader action had eliminated the GC’s liability to JSI. The surety, it argued, could have no greater liability. The trial court (U.S. District Court in Mississippi) agreed and granted summary judgment in favor of Travelers. But the Fifth Circuit Court of Appeal has reversed the decision, not only finding that Travelers was still liable to JSI, but further entering judgment in favor of JSI for the amount of its bond claim.

The federal Court of Appeal noted that the release from liability in the state court proceeding was only as to the “stake” that was the subject of the state court action. The JSI claim for non-payment was not part of that stake. Travelers had not been made a party to the state court action, nor had any payment bond claims been raised at that time. Also, the state “Little Miller Act,” modeled on the federal Miller Act, was intended to protect unpaid subs and vendors from this very sort of situation. The fact that Travelers would turn around and pursue the GC for any amounts paid to JSI, and effectively conduct an end run on what the GC had tried to accomplish in the state court, did not bother the Court of Appeal: “That McMillan-Pitts might have to indemnify Travelers is irrelevant and has no bearing on our decision regarding Travelers’ bond obligation to JSI under Mississippi’s Little Miller Act.”

The appellate court noted, as well, its concern about the procedural history, in a footnote: “We do not address the troubling concept of amending a judgment to address a party added that day.” Thus, a GC who thought it had cleverly worked its way out from under a troublesome subcontractor default has learned that it could still be exposed to unpaid vendor claims via the payment bond. The case is JSI Communications v. Travelers Cas. & Surety Co. of America, 2015 U.S. App. LEXIS 21080 (Dec. 4, 2015).