Construction Law Insights

United States, for the Use & Ben. of McKenney’s, Inc. v. Leebcor Servs., LLC, 2022 U.S. Dist. LEXIS 149036, 2022 WL 3337795 (E.D. Va. Feb. 18, 2022);
United States ex rel. McKenney’s, Inc. v. Leebcor Servs., LLC, 2022 U.S. Dist. LEXIS 148633, 2022 WL 3337793 (E.D. Va. Apr. 1, 2022);
United States ex rel. McKenney’s, Inc. v. Leebcor Servs., LLC, 2022 U.S. Dist. LEXIS 148614, 2022 WL 3592170 (E.D. Va. Aug. 18, 2022)

In 2016, the United States Army Corps of Engineers (“USACE”) and Leebcor Service, LLC (“Leebcor”) entered into a design-build contract (the “Prime Contract”) for Leebcor to renovate Army barracks at Fort Benning, Georgia (the “Project”). Per the Miller Act, Leebcor obtained a Payment Bond for the Project from The Cincinnati Insurance Company (“Cincinnati”) in the amount of $36,800,206.00. In June 2017, Leebcor and McKenney’s, Inc. (“McKenney”) executed a $10,197,408.75 firm-fixed-price subcontract (the “Subcontract”), but the Subcontract had an effective date of January 10, 2017. Under the Subcontract, McKenney was to perform the Project’s plumbing and heating, ventilation, and air conditioning (“HVAC”). Per the Subcontract, McKenney obtained a Performance Bond from Hartford Accident and Indemnity Co. (“Hartford”). On May 26, 2020, USACE unilaterally modified the Prime Contract for a 152-day USACE caused delay to the start of construction on the Project (the “Initial Delay”). USACE later modified the Prime Contract to address delays caused by existing structural steel deficiencies.

McKenney’s sued Leebcor and its surety, Cincinnati for amounts due under the subcontract and Leebcor sued McKenney’s and its surety, Hartford, for damages caused by McKenney’s failure to properly perform its subcontract. Both alleged entitlement to damages under the Subcontract for the other’s delays and poor work. McKenney sought $253,787.00 from Leebcor for three unpaid invoices (the “Invoices”). Leebcor received full payment from USACE for the Invoices, but withheld payment to McKenney based on alleged contractual noncompliance. McKenney never stopped performing its Subcontract duties despite Leebcor’s nonpayment.

The Court awarded McKenney $253,786.50 for breach of contract due to Leebcor’s failure to pay the Invoices. The Court found that Leebcor’s concerns with McKenney’s timeliness and work quality were well-founded, but nothing in the Subcontract or applicable regulations gave Leebcor the right to withhold the amounts billed in the Invoices. Leebcor’s payment obligation was contingent upon its acceptance of McKenney’s work and Leebcor could offset its payment obligation by amounts equal to what McKenney owed Leebcor under the Subcontract. Once Leebcor accepted McKenney’s work, however, Leebcor’s obligation to pay accrued absent a right to offset and Leebcor was not allowed to offset its payment obligations where there was contractual and/or regulatory restrictions on offsets or against payment on amounts owed Leebcor that were subject to a reasonable dispute. Leebcor accepted McKenney’s work on April 27, 2019 when USACE acknowledged the Project was complete and, thus, the Invoices became “payments owed” under the Subcontract and Leebcor was not permitted to offset these amounts with amounts it alleged were owed for McKenney’s breaches of the Subcontract, which were the subject of a reasonable dispute.

The Court dismissed McKenney’s $367,005.00 Initial Delay claim as being prudentially unripe. A claim is not ripe for adjudication if it rests upon contingent future events that may not occur as anticipated, or at all. On May 26, 2020, USACE responded by awarding Leebcor only $635,149.50 of its requested $1,943,623.46 (i.e. 32.68%). Leebcor may appeal USACE’s award within 6 years of the accrual of its claim by seeking a contracting officer’s final decision. Leebcor may then appeal that decision to the Armed Services Board of Contract Appeals and, finally, to the Federal Circuit. Thus, the Court concluded that the lack of fitness of the issue for judicial decision outweighed any hardship on the parties of withholding court consideration.

The Court denied McKenney’s $544.493.00 claim for damages caused by Leebcor and its other subcontractors after construction began because McKenney’s own conduct delayed its completion and McKenney failed to distinguish periods of alleged Leebcor-caused delay from delay caused by McKenney’s own conduct. McKenney had to demonstrate that (1) Leebcor’s breach of the Subcontract was the direct and proximate cause of McKenney’s delays, (2) the damages are natural and directly traceable to Leebcor, and (3) the damages are not attributable to some other intervening cause. Based on the record, McKenney failed to satisfy its burden.

The Court denied Leebcor’s claim for 95 days of critical path delay damages and claim for $34,990.00 to remediate McKenney’s deficiencies because Leebcor did not carry its burden to show that any period of delay during the start-up, test and balance (“TAB”), performance and verification testing (“PVT”), and commissioning processes was caused solely by McKenney’s failures.

The Court denied McKenney’s claims for unapproved change orders proposals (“COP”) because McKenney failed to prove that the covered activities fell outside its Subcontract scope of work.

The Court held that McKenney timely filed its action and that Cincinnati was jointly and severally liable under the Miller Act Payment Bond for the amounts owed by Leebcor to McKenney. Miller Act actions must be brought no later than 1 year after the day on which the last of the labor was performed or material was supplied by the person bringing the action. Labor in the Miller Act includes physical toil, but not work by a professional, such as an architect or engineer. The Court concluded that McKenney’s May 29, 2019 training on the operation and use of controls systems it installed qualified as labor under the Miller Act because McKenney’s employees were on site and working on a non-remedial task required to complete the Project, rather than administrative task.

The Court dismissed Leebcor’s claim against Hartford under McKenney’s Performance Bond. The Court already ruled that Leebcor was not entitled to any funds from McKenney, so Leebcor could not pursue a claim for payment from Hartford for any sum. Further, the Court held that Leebcor’s failure to give reasonable notice of McKenney’s default breached the terms of the Performance Bond. Under the Performance Bond, either (1) Hartford could remedy the deficiency without notice to Leebcor or (2) after Leebcor gave Hartford reasonable notice of McKenney’s default, Leebcor could make alternative arrangements for McKenney’s performance and receive payment for the additional costs incurred. Reasonable notice is generally described as notice conveying the requisite information and permitting time for response. Notice to a performance bond surety is reasonable when it provides the insurer time to respond and exercise its options under the bond. Leebcor did not provide Hartford with notice until 2 years after the Project was complete and almost 1 year after McKenney filed its Complaint.

The Court denied McKenney’s claim for attorney’s fees because the Subcontract required each party to bear its own costs and expenses, including attorney’s fees, incurred in connection with an action arising out of the Subcontract and the Court found that there was no bad faith.

PLDR Law Scott Kowalski 1 PLDR Law Mark Burgin 1

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