Hard Hat Case Notes

Gose v. Native American Services Corp. involves allegations raised in a qui tam suit under the False Claims Act (FCA) filed by the relators against their former surety Great American Insurance Group, Inc. (GAIC) and former partner Native American Services Corporation (NASCO). The relators had owned an architectural and construction firm, DWG & Associates, Inc. (DWG). DWG qualified for the 8(a) program because it was 51 percent owned and controlled by an individual (Mr. Gose) who qualified as “disadvantaged” under the SBA regulations. DWG won several 8(a) set-aside contracts, including indefinite-delivery, indefinite-quantity (IDIQ) contracts. DWG initially experienced success, growing to the point where it “graduated” from the 8(a) program and was no longer eligible for new 8(a) set-aside contracts. However, as long as Mr. Gose continued to control and had 51 percent unconditional ownership of DWG, it could continue to bid and perform work under the set-aside IDIQ contracts it had won prior to graduation.

Unfortunately for DWG, it suffered financial difficulties after graduating from the 8(a) program. As a result of these financial difficulties, GAIC and NASCO allegedly took control of DWG and continued to bid and perform new work under the 8(a) set-aside IDIQs despite Mr. Gose no longer having control or majority ownership of DWG. Moreover, GAIC and NASCO did not notify the SBA of the change in ownership and control as required by SBA regulations, nor did they seek or receive a waiver from SBA. In response, the qui tam relators filed suit in the Middle District of Florida alleging false presentment, false statement, and conspiracy under the FCA arguing that GAIC and NASCO fraudulently induced the award of set-aside contracts for which DWG was no longer qualified.

The Middle District of Florida dismissed the qui tam action, determining that, among other things, GAIC and NASCO were not required to seek a waiver because DWG had already graduated from the 8(a) program at the time they took control of DWG and that fraudulent inducement to enter a contract cannot be a basis for false presentment or false statement claims under the FCA. The relators appealed.

The Eleventh Circuit reversed and remanded, finding that the relator’s complaint plausibly alleged false presentment, false statement, and conspiracy claims under the FCA. First, after parsing the applicable SBA regulations and the Federal Acquistion Regulation, the Eleventh Circuit held that a company that had graduated from the 8(a) program but that was still eligible to bid and perform under set-aside IDIQ contracts it had won prior to graduating remained a “participant” subject to SBA regulations requiring disclosure of change of ownership or control. Since a company that has graduated from the 8(a) program but continues to bid on and perform work under pre-existing 8(a) contracts is still a participant in the 8(a) program, it must still comply with 8(a) ownership and control requirements.

Second, the Eleventh Circuit held that the relator’s fraudulent inducement theory could provide the basis for bringing claims under the FCA. While cautioning that the FCA is not an all-purpose antifraud statute, the Eleventh Circuit found that GAIC and NASCO’s actions as alleged would constitute fraudulent conduct that caused the government to award multiple task orders and pay millions of dollars under 8(a) set-aside contracts to an ineligible DWG instead of an eligible 8(a) contractor. The Eleventh Circuit concluded that this type of alleged action fell within the purview of the FCA.

Authors’ Note: This case underscores that a company’s graduation from the 8(a) program does not mean that the company is free from SBA regulations if the company is still performing already-awarded set-aside contracts. Compliance with the SBA’s ownership and control requirements in such situation remains mandatory. The decision serves as a warning to companies and their partners about the potential for FCA liability if they attempt to circumvent these requirements. It also highlights the need for transparency and diligent notification to the SBA when there are changes in ownership or control that could affect a company’s eligibility for 8(a) contracts.

Gose v. Native American Services Corp., 109 F.4th 1297 (11th Cir. 2024)

Eighth Circuit Opinion Highlights Remedial Nature of the Miller Act

In Five Rivers Carpenters District Council Health & Welfare Fund v. Covenant Construction Services, LLC, the Eighth Circuit upheld summary judgment in favor of labor unions on a Miller Act payment bond claim, rejecting arguments that would limit the application of the Miller Act.

The Miller Act claim arose from a project involving the construction of a Veterans Affairs facility in Iowa. The prime contractor, Covenant Construction Services, LLC (Covenant), hired subcontractor Calacci Construction Company (Calacci) to provide labor and materials for carpentry for the project. The Miller Act applied to this federal construction project, so Covenant posted the required payment bond with North American Specialty Insurance Company (Surety).

Calacci entered into a collective bargaining agreement (CBA) with two unions representing the laborers. As part of the CBA, Calacci agreed to pay fringe-benefit contributions based on the hours the union laborers worked. Calacci agreed in the CBA to make payments directly to the Five Rivers Carpenters Health and Welfare Fund and Education Trust Fund (collectively the Funds). Under both the CBA and trust agreements with the unions, the Funds had the express authority to receive, collect, and demand payment of any delinquent contributions. Calacci further agreed that if it failed to pay the benefit contributions owed, it would be required to pay for all attorney fees and costs the Funds incurred in collecting the contributions, as well as a liquidated amount representing accounting costs the Funds would incur in the collections process.

Calacci did not remit certain contributions to the Funds during performance of the project, despite multiple demands from the Funds. The unions completed their work on the project as of June 18, 2021. On September 10, 2021, counsel for the Funds emailed an employee of Covenant to request a copy of the payment bond and alert it that the Funds intended to submit notice of nonpayment under the Miller Act. In response, Covenant’s attorney contacted the Funds and informed them that he represented Covenant on the matter and that all future correspondence should be directed to him. On September 16, 2021, the Funds delivered the Miller Act notice to Covenant’s attorney as directed. The attorney responded by email in which he confirmed receipt of the Funds’ notice and requested additional documentation supporting the claim. The Funds delivered the requested supporting documentation to him.

Neither Covenant nor Surety paid the amount claimed to the Funds, so the Funds brought a Miller Act suit against them in the Southern District of Iowa. The district court ruled in favor of the Funds on summary judgment, awarding the unpaid contributions along with liquidated damages, attorney fees, and other damages.

Covenant and Surety argued three grounds for overturning the district court’s award, alleging that (1) the Funds did not properly serve notice as required by the Miller Act at 40 U.S.C. § 3133(b)(2); (2) the notice was not timely for all 21 laborers on the project; and (3) the award of attorney fees and liquidated damages was improper under the Miller Act. The Eighth Circuit rejected all three arguments.

First, Covenant and Surety argued that the Funds did not provide any Miller Act notice because the Funds sent the notice to Covenant’s attorney and not directly to Covenant. They argued that the attorney did not have authority to accept the notice on Covenant’s behalf, though conceding that Covenant did receive the notice. Given that actual notice and the attorney’s representation and instruction that the Funds should only communicate with him, the Eighth Circuit held that the Funds had satisfied the notice requirement of 40 U.S.C. § 3133(b)(2).

Second, Covenant and Surety argued that the Funds’ notice was late under the Miller Act’s 90-day notice requirement for second-tier subcontractors. The Funds submitted the 90-day notice on September 16, 2021, which was within 90 days of the last day union labor was performed on-site (June 18, 2021). However, only three laborers had performed work within that 90-day period, while the rest had completed their work on the project more than 90 days before September 16, 2021. Covenant and Surety argued that the Funds’ 90-day notice was therefore untimely for all but those three laborers and any recovery by the Funds should be limited only to those three laborers. The Eighth Circuit rejected this argument, holding that the Funds’ claim against the payment bond was made on damages “common to the entire membership” of the Fund participants because the claim was for the payment of collective fringe-benefit fund contributions for the benefit of the laborers as a group rather than for individual wages. The Funds had provided notice within 90 days of the last performance of the collective labor on the project so it was therefore timely for all participants. The Eighth Circuit also confirmed in a footnote that the Funds had standing to bring the suit on behalf of the union labor for the project, citing precedent and the Employee Retirement Income Security Act.

Third, Covenant and Surety argued that liquidated damages and attorney fees were outside the scope of recovery under a Miller Act payment bond action. The Eighth Circuit disagreed, finding that those damages were made recoverable through the CBA between Calacci and the Funds. The Eighth Circuit reasoned that payment of those damages would compensate the Funds for the “amount due” for the union work on the project and would therefore be consistent with the purpose of the Miller Act, noting the Miller Act’s “highly remedial” nature.

Authors’ Note: As a general matter, this opinion underscores the broad protective scope of the Miller Act, which is designed to ensure that those who supply labor or materials for federal projects receive payment. While courts will insist that a party bringing a Miller Act payment bond claim action satisfy statutory requirements and conditions precedent, this decision suggests that the highly remedial nature of the Miller Act weighs against applying an overly formalistic approach to the notice requirement when the prime contractor has timely, actual notice. This decision also shows that the nature of the damages claimed can be relevant for determining when the period for providing notice under the Miller Act begins and ends. Finally, the decision reinforces the principle that the particular terms of second-tier subcontracts or CBAs to which a prime contractor and its payment bond sureties are not signatories can nevertheless define and broaden the scope of damages for which the prime contract and surety can be held liable under the Miller Act.

Five Rivers Carpenters District Council Health & Welfare Fund v. Covenant Construction Services, LLC, 114 F.4th 957 (8th Cir. 2024)

Supreme Court of Minnesota Recognizes Tort of Negligent Selection of Independent Contractor

In a recent decision, the Supreme Court of Minnesota recognized the tort concept of negligent selection of an independent contractor under Minnesota law.

Alonzo v. Menholt involved a personal injury lawsuit by Pedro Alonzo and his wife, Aida Alonzo, brought against Richard Menholt, Menholt Farms, Inc., and Menholt Farms, LLC (collectively Menholt Farms), following an accident wherein Mr. Alonzo was injured. Mr. Alonzo’s vehicle was struck by a truck driven by Alberto Lopez, who was hauling sugar beets for Menholt Farms at the time of the crash. Mr. Lopez was employed by a different company, Braaten Farms, which provided Mr. Lopez to drive for Menholt Farms as an independent contractor. Mr. Lopez had a suspended license, an active felony arrest warrant, multiple driving-while-impaired convictions, and recent speeding infractions. Menholt Farms did not perform any background investigation or other screening of Mr. Lopez before allowing him to drive, nor did Menholt Farms inquire with Braaten Farms as to whether and how Braaten Farms had screened Mr. Lopez. The Alonzos therefore contended that Menholt Farms was negligent in selecting Braaten Farms as an independent contractor.

Menholt Farms moved for summary judgment, arguing, inter alia, that Minnesota law did not recognize a claim for negligent selection of an independent contractor. The trial court held that such a cause of action exists under Minnesota law but granted summary judgment in favor of Menholt Farms on the grounds that the Alonzos could not satisfy the elements of the tort. The intermediate appellate court affirmed summary judgment but held that the tort of negligent selection of an independent contractor does not exist under Minnesota law. The Alonzos appealed the issue to the Supreme Court of Minnesota.

The Supreme Court of Minnesota, in a decision of first impression, affirmed the existence of the tort of negligent selection of an independent contractor under the law of Minnesota. The court reviewed and adopted the principles outlined in the Restatement (Second) of Torts, section 411, which requires a principal to exercise reasonable care in selecting a competent and careful contractor. The level of care required to satisfy the “reasonable” standard would depend on both the level of skill and competence required to perform the work and the amount of danger the work could pose to others if not properly performed. If the work at issue is “highly dangerous unless properly done” and “requires peculiar competence and skill for its successful accomplishment,” then the person hiring the contractor may be required to “go to considerable pains to investigate the reputation of the contractor.” The court further explained that a heightened duty to inquire into a contractor’s “reputation or actual competence” may exist in a professional setting, when the professional hiring the contractor has a greater capacity to understand the work at issue and the risks involved. However, the court explained that it believed most professionals already use procedures designed to protect against hiring incompetent contractors that would satisfy the duty of care, so the court expects that the tort will not impose much of an additional burden on them. The court also emphasized that a plaintiff must establish that the negligent hiring was the proximate cause of the harm to recover for the tort, further limiting its potential scope. In further support of its decision, the court surveyed law from other jurisdictions and found that most states recognize the tort. Although the court recognized the tort of negligent selection of an independent contractor, the court was evenly divided on whether summary judgment was proper based on the facts in the dispute and therefore upheld summary judgment in favor of Menholt Farms.

Authors’ Note: While not a construction case, this decision has significant implications for the construction industry in Minnesota. Notably, the court did not address whether or to what extent a person can rely on a contractor’s state-issued professional license as evidence of the contractor’s competency in defense against allegations of negligent selection of an independent contractor. The decision underscores the importance of performing sufficient due diligence when selecting contractors and subcontractors, particularly where the job requires dangerous and specialized work. Owners and higher-tier contractors selecting contractors for construction contracts should ensure they perform sufficient investigations into the qualifications and reputations of their contractors and subcontractors. Failure to exercise appropriate due diligence could lead to increased litigation risk for parties hiring contractors and subcontractors. In light of this decision, those conducting business in Minnesota might consider reviewing their procedures and contracts to ensure that they are sufficiently diligent in their vetting of contractors.