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    Fourth Circuit Court of Appeals Rules on Miller Act's coverage of Attorney Fees

         In a recent case before the Fourth Circuit Court of Appeals, the Miller Act was held to cover interest and attorney's fees where a suppliers or sub-subcontractors contract contains a provision for the payment of the same. The case is United States ex rel. Maddox Supply Co. v. St. Paul Fire & Marine Ins. Co., 86 F.3d 332 (4th Cir. 1996).

         The claim was asserted by a supplier to a subcontractor on a federal project. The subcontractor failed to make payments and the supplier made a Miller Act claim on the general contractor's labor and material payment bond. The supplier's credit agreement with the subcontractor permitted it to recover interest and attorney's fees in the event that collection was necessary. In the supplier's suit against the general contractor and the bonding company on the payment bond, the trial court awarded the supplier attorney's fees and interest as part of its claim.

         The general contractor and the bonding company appealed, arguing that the Miller act did not cover the attorney's fees and interest incurred by the supplier on its claim. The Fourth Circuit disagreed, and held that the attorney's fees and interest were "sums justly due" the supplier under its contract with the subcontractor and therefore were covered by the Miller Act. In addition, because it was the general contractor and bonding company that contested the supplier's right to recover, and thereby caused the supplier to incur the attorney's fees and interest, the court did not allow the general contractor and the bonding company indemnification against the subcontractor for the attorney's fees and interest portion of the judgment.

         The Maddux case is also important because it demonstrates the application of payment doctrine. Generally a party making payment to a creditor can designate which invoices its payment is to be applied. In the absence of direction, the creditor can decide to apply payment to whichever accounts it chooses. In the Maddux case this general rule was specifically stated in the credit agreement between the supplier and subcontractor, which authorized the supplier to apply payments for materials at the supplier's discretion, unless the subcontractor directed payment in writing at the time payment was made. The subcontractor apparently did not designate its payments. The result is that the supplier was permitted to apply the payments received on another account that may not have been covered by a bond or mechanic's lien, and may not have been collectible from the subcontractor. It could then bring suit for unpaid amounts against the general contractor's payment bond.

    Copyright 2007 by Cowles, Rinaldi, Judkins & Korjus, Ltd.