U.S. District Court in Pennsylvania Stays Miller Act Suit Against Sureties Pending Arbitration Where Sureties Stipulate to Be Bound By Decision in Arbitration Between Contractor and Subcontractor

A.A. Bellucci Constr. Co. v. United States Surety Co.
2010 U.S. Dist. LEXIS 8369 (M.D. Pa., Feb. 2, 2010)

CSI Engineering, DC, P.C. (“CSI”) entered into a contract with a division of the U.S. Department of Labor to act as the general contractor for one of its construction projects. In turn, CSI subcontracted a portion of the work to A.A. Bellucci (“Bellucci”). The contract between CSI and Bellucci required mediation and arbitration to resolve disputes between them. To secure payment to all of its subcontractors, including Bellucci, CSI furnished Miller Act payment bonds from United States Surety Company (“Surety”) and U.S. Specialty Insurance Company (“Speciality”).

In August 2009, Bellucci initiated mediation proceedings with CSI in an attempt to recover $128,422 allegedly owed to it for work performed on the project. Before the scheduled date of the mediation, Bellucci also filed suit against Surety and Specialty in the United States District Court for the Middle District of Pennsylvania. In the lawsuit, Bellucci sought recovery on the payment bonds for the amounts allegedly owed to it by CSI.

Surety and Specialty filed a motion to stay the litigation pending the outcome of the contractually mandated mediation/arbitration proceedings between Bellucci and CSI. Surety and Specialty admitted that they would be bound by the outcome of any arbitration between CSI and Bellucci, and accordingly argued that postponing the litigation until such outcome would avoid the time and expense of potentially litigating the same issue twice.

The Court relied on a similar case out of the Western District of Pennsylvania for guidance. There, the subcontractor had likewise sued the surety under the Miller Act for payment on a bond issued to the general contractor. In that case, however, the sureties had not stipulated that they would be bound by the outcome of the arbitration. Accordingly, the subcontractor there was concerned that later the surety would argue it was not bound by the arbitration decision, and accordingly be required to litigate the same issues twice. Nevertheless, the Court for the Western District granted the stay pending outcome of the arbitration between the general contractor and subcontractor. The Western District held that although there was no controlling case law, the majority view among other circuits and the direction of the Third Circuit, was that an arbitrator’s decision is generally binding against a surety in a Miller Act case under certain circumstances.

Relying on that case, the Court for the Middle District granted the stay. The Court reasoned that staying the litigation would avoid unnecessary expense in litigating the same issue twice and would avoid inconsistent results. Moreover, here, unlike the Western District case, there was no concern that the sureties would later argue that they were not bound by the outcome of the arbitration. Finally, although the sureties had not stipulated to be bound by the outcome of mediation, the Court reasoned that there was no concern that mediation would unduly delay the litigation, since mediation was already under way.

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