On June 20, 2014, the Ninth Circuit Court of Appeals held that the measuring date for the 90-day notice requirement for a Miller Act claim in an open book account is the date when the last materials or equipment were furnished. As discussed below, this decision could have significant impacts on contractors’ exposure to huge, unforeseeable Miller Act claims.
In Ramona Equip. Rental, Inc. ex rel. U.S. v. Carolina Cas. Ins. Co., the U.S. Immigration and Customs Enforcement Agency (“ICE”) contracted with Candelaria Corporation to act as the prime contractor on the El Centro SPC-Perimeter Fence Replacement Project (“Project”). 2014 WL 2782200 (9th Cir. June 20, 2014). Candelaria contracted with Otay Group, Inc. (“Otay”) to perform a portion of the work. Otay then established an open account with Ramona Equipment Rentals, Inc. (“Ramona”).
Between December 2007 and June 2008, Otay and Ramona entered into eighty-nine rental agreements on credit, totaling $235,446.84. The Project, however, did not turn out as planned, spurring a series of lawsuits and appeals. Read more here. On June 6, 2008, Candelaria terminated Otay’s subcontract for cause. At that time, Otay had paid Ramona only $17,658.57 on the outstanding rental agreements.
On June 25, 2008, Ramona served a 90-day notice of its claim for payment on Candelaria’s Miller Act bond pursuant to 40 U.S.C. 3133(b)(2), which requires that:
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.
Failure to comply with the 90-day notice requirement is fatal to a Miller Act claim.
Following service of the notice, Ramona filed a lawsuit under the Miller Act to recover $393,567.09. At trial, Candelaria and its surety argued that Ramona’s notice was untimely as to all rental equipment furnished to the Project more than 90 days before service of the notice on June 25, 2008. The trial court disagreed, concluding that, in light of the open book account, the 90-day notice covered all rental equipment furnished to the Project.
On appeal, the Ninth Circuit Court of Appeals affirmed, finding that the measuring date for a 90-day notice requirement of the Miller Act in an open book account is the date when the last materials or equipment were furnished. In so ruling, the Court agreed with the First, Fourth, and Fifth Circuit Court of Appeals’ holdings under similar circumstances. As a result, the Court held that “all amounts due for all the rental equipment furnished to Otay for construction of the project were properly included in the ninety-day notice.”
In dissent, the Chief District Judge argued that the 90-day notice requirement in the Miller Act is intended to protect the general contractor from “unforeseen and possibly staggering obligations.” He was concerned that a subcontractor might delay providing notice of outstanding debts in order to obtain a greater profit through accumulating interest. Instead, the dissent argued that a subcontractor should provide notice at 90-day intervals, which it found was not overly burdensome. Here, because Ramona’s notice was issued on July 25, 2008, the dissent argued that it should only be entitled to a Miller Act claim against the invoices issued after April 26, 2008.
Comment: This decision could have significant impacts on contractors’ exposure to unknown claims. Under the Miller Act, there is no requirement that the claimant provide the upstream parties with a pre-claim notice. Thus, a contractor may be unaware that its subcontractors are renting equipment or purchasing materials for the project without paying its suppliers on an “open account.” The suppliers, in turn, can continue to supply equipment or materials, and accumulate interest for years, so long as it provides notice 90-days after it stops.