Contractor and Surety have to pay twice? Not so fast says Judge Hilton

11/11/2011

One of the generally accepted differences between a payment bond claim and a mechanic’s lien claim is that lien claims can be extinguished by payment up the chain, whereas a payment bond principal (usually the prime contractor) or surety cannot rely upon payment as a defense and so can end up having to pay twice for the same debt. They typically occurs when the prime has paid a subcontractor, but the subcontractor did not use the monies to pay someone of lower tier. Virginia law typically cuts off the lower tier’s lien rights, but it has been generally accepted that if there was a payment bond the lower tier could still recover under that.

In his recent “slip” opinion in U.S. ex rel. Capital Building Supply, Inc. v. Clark Realty, LLC, Civil Action No. 1:10-CV06 (E.D.Va., Alexandria Division), 2010 WL 3767853 (Sept. 15, 2010), Judge Hilton concluded differently; finding that neither the payment bond in that case nor equity principles permitted a result of a prime contractor having to pay twice for the same debt. In that case, the prime had paid for materials and obtained lien waivers and releases from its subcontractor in exchange for payent, but the subcontractor never paid its lower tier supplier who then sought recovery under the prime contractor’s payment bond. Judge Hilton reasoned that since the supplier could not have obtained a mechanic’s lien, and the purpose of the payment bond was to substitute for a mechanic’s lien on a public job, the supplier correspondingly had not right to claim under the payment bond.

Whether Judge Hilton’s decision will be followed by other judges/courts remains to be seen, but it’s a real winner for payment bond principals and surety, and a real scare for bond claimants.

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