Opinion
99 Civ. 9684 (WK).
May 7, 2001.
MEMORANDUM ORDER
This is a diversity jurisdiction case alleging breach of a payment bond. Before us is defendant Mountbatten Surety Company's ("defendant") motion for summary judgment. It seeks to dismiss plaintiff's complaint in its entirety on the grounds that plaintiff Tri-State Employment Services, Inc. ("plaintiff") is not a proper claimant under the surety bond issued by defendant. On April 19, 2001 we heard oral argument on this motion. For the following reasons we grant defendant's motion for summary judgment and dismiss the complaint in its entirety.
BACKGROUND
I. The Labor and Material Payment Bonds .
Defendant is a licensed surety company engaged in the business of issuing surety bonds in connection with construction contracts. On or about March 6, 1998, defendant issued a Labor and Material Payment Bond to Team Star Contractors, Inc. ("Team Star"), a construction company, as principal, in favor of O'Ahlborg Sons, Inc. ("O'Ahlborg") as obligee, in the penal sum of $5,000,000. On March 12, 1998, defendant issued another Labor and Material Payment Bond to Team Star as principal and O'Ahlborg as obligee, in the penal sum of $1,309,600 (collectively "the Bonds"). The Bonds were issued in connection with a certain contract executed between Team Star and O'Ahlborg for construction work to be done at a site in Quincy, Massachusetts ("Quincy Fore Shipyard job"). The Bonds, which are identical in form provide in pertinent part:
NOW THERFORE, THE CONDITION OF THIS OBLIGATION is such that, if Principal shall promptly make payment to all claimants as hereinafter defined, for all labor or material used or reasonably required for use in the performance of the contract, than this obligation shall be void; otherwise it shall remain in full force and effect, subject however to the following conditions.
A claimant is defined in the Bonds as:
[O]ne having a direct contract with the Principal or with a Subcontractor of the Principal for labor, material or both, used or reasonably required for use in the performance of the contract, labor and materials being construed to include that part of water, gas, power, light, heat, oil, gasoline, telephone service or rental of equipment directly applicable to the contract.II. Plaintiff's Relationship With Team Star .
Plaintiff, a New York corporation, is a Profession Employment Organization or employee leasing company ("PEO"), which, among other services, provides payroll financing and human resource management. According to the complaint, in March 1998 plaintiff entered into an agreement with Team Star whereby it agreed to hire Team Star's employees and lease them back to Team Star while paying payroll, wages and taxes in connection with Team Star's subcontract on the Quincy Fore Shipyard job. In exchange plaintiff would charge an additional 19% over Team Star's payroll costs, which amount would be comprised of taxes, insurance and a fee for services. Plaintiff also agreed that it would "float" Team Star's payroll for three to four weeks. Such an agreement was never reduced to writing.
Plaintiff does not claim that it was ever personally present at the job site on a daily or weekly basis, or that it decided which workers went to the job each week or that it validated that the time sheets were correct. Team Star prepared the weekly time reports and forwarded them to plaintiff.
Team Star made timely payments on plaintiff's invoices until sometime during November or December 1998 when it fell behind in payments of its invoices in the amount of $400,000 to $600,000. Plaintiff initially agreed to give Team Star more time to pay the outstanding receivables until it owed approximately $1,200,000. At all times the Team Star workers were timely paid for the labor and materials they provided to the job.
On January 8, 1999, plaintiff and Team Star executed a Memorandum of Understanding as a pre-condition to plaintiff's continuing to finance Team Star's payroll. The Memorandum of Understanding acknowledged, subject to verification, that Team Star was indebted to plaintiff in the amount of $1,113,251.90. In consideration of plaintiff continuing to provide labor and payroll services, Team Star agreed to execute Confessions of Judgment for the full amount due and owing.
Shortly thereafter, when Team Star failed to pay those outstanding invoices, plaintiff stopped providing Team Star with payroll financing and human resource management.
III. The Claim Against the Bonds .
By letter dated March 17, 1999, plaintiff made a formal claim against the Bonds seeking payment in the amount of $1,113,251.90 for labor and material allegedly provided to Team Star in connection with the Quincy Fore Shipyard job. Defendant denied plaintiff's claim principally on the ground that plaintiff was not a proper bond claimant under the terms of the Bonds. On or about September 2, 1999, plaintiff commenced this action.
DISCUSSION
The question before us is whether plaintiff is a proper claimant under the Bonds issued by defendant to Team Star in connection with the Quincy Fore Shipyard job. According to the above quoted language of the Bonds, to be a proper claimant plaintiff must be "one having a direct contract with the Principal . . . for labor, material or both, used or reasonably required for use in the performance of the contract."
Although the language of a surety bond determines its beneficiaries, those who can generally recover on a payment bond are subcontractors or persons supplying labor or material to subcontractors or the general contractors. Davis Wallbridge, Inc. v. Aetna Casualty and Surety Company (N.Y.App.Div. 1984) 478 N.Y.S.2d 389, 390. While a surety bond must be narrowly construed, the court must consider the purpose for which it was procured. Am-Haul Carting, Inc. v. Contractors Casualty and Surety Company (S.D.N.Y 1998) 33 F. Supp.2d 235, 255 (citing McClare v. Massachusetts Bonding Insurance Company (1935) 266 N.Y. 371, 377).
The Bonds in question are undisputably for labor and materials in connection with the Quincy Fore Shipyard job. Plaintiff argues that by providing payroll services, which included paying various taxes on Team Star's employees, it furnished "labor and materials" and therefore is a proper claimant.
Neither party cites any case, and our independent research reveals none, dealing with the narrow issue of whether a PEO is a proper claimant under a labor and materials surety bond. Defendant cites cases holding that banks and other financial institutions that lend money to the principal are not proper claimants under such bonds. See e.g., United States for Use and Benefit of Dorfman v. Standard Surety Casualty Co. of New York (S.D.N.Y. 1941) 37 F. Supp. 323 (fact that creditor's money is used to meet pay roll does not make creditor proper claimant under surety bond). Other cases hold that such bonds impose unconditional obligations on the general contractor's surety to pay subcontractors who have supplied labor and material. See e.g., Blandford Land Clearing Corp. v. National Union Fire Insurance Company of Pittsburgh (N.Y.App. Div. 1999) 698 N.Y.S.2d 237.
While a PEO might serve more administrative functions than a creditor, it basically provides credit in the form of payroll services. A PEO certainly does not provide "labor and materials" as the terms are used in the language of the Bonds. The Bonds themselves define labor and materials to include "that part of water, gas, power, light, heat, oil, gasoline, telephone service or rental of equipment applicable to the contract." The Bonds' definition of cannot be reasonably interpreted to include payroll and human resource services.
Plaintiff's efforts to characterize itself as a joint employer of the laborers on the project to which the Bonds apply does not make it the provider of labor and material itself. The fact that plaintiff paid taxes on these employees and were financially liable for them in certain instances does not change the fact that it did not furnish labor. Regardless of the arrangement plaintiff had with Team Star, it did not provide labor and material under the Bonds' definition.
CONCLUSION
Plaintiff simply did not provide labor and material to the Quincy Fore Shipyard job and thus is not a proper claimant. Since there is no general issue of material fact upon which relief can be granted, defendant's motion for summary judgment is granted.
SO ORDERED.