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LEZZER CASH & CARRY v. AETNA INSURANCE COMPANY (02/17/88)

filed: February 17, 1988.

LEZZER CASH & CARRY, INC., APPELLEE,
v.
AETNA INSURANCE COMPANY, APPELLANT



Appeal from Order of the Court of Common Pleas, Civil Division, of Delaware County, No. 84-10833.

COUNSEL

Joan A. Yue, Philadelphia, for appellant.

Joseph P. Green, Bellefonte, for appellee.

Rowley, Wieand and Olszewski, JJ.

Author: Wieand

[ 371 Pa. Super. Page 139]

Shaffer Gordon Associates (SGA) contracted with Pennsylvania Housing Partners (PHP) to act as the general contractor to construct the Daniel Scott Commons, a housing project in Chester, Delaware County. The project was being financed in major part by the Department of Housing and Urban Development (HUD) pursuant to a loan agreement which required the contractor to obtain a payment bond. This bond was purchased from Aetna Insurance Company on September 22, 1982. It named SGA as principal, Aetna as surety, and PHP as obligee. Prior to the start of construction, SGA obtained approval from HUD to name Oreland Housing, Inc. (Oreland) as subcontractor. Oreland entered a purchase order with Independence Homes, Inc. (Independence) for the materials necessary to the framing of the building. Independence, in turn, contracted with Lezzer Cash & Carry, Inc. (Lezzer) for the purchase of certain building materials required by Independence in performing its contract with Oreland. At the same time as this contract was in effect, Lezzer was supplying materials to Independence on five other projects for which SGA was the general contractor. Lezzer completed all deliveries to the Scott project by February 8, 1983. In late February or March, 1983, Lezzer's sales manager called representatives of SGA and Aetna by telephone on several occasions to tell them that Lezzer had not received payment from Independence.*fn1 In April, 1983, Independence sent to Lezzer a check which purported to be in payment for all materials supplied to the Scott project. When deposited, however, the check was returned for insufficient funds. On May 16, 1983, Lezzer for the first time sent written notice to Aetna that it was looking to Aetna to pay the invoices for materials which it had supplied to the Scott project.

When payment was not forthcoming, Lezzer filed a civil action against Aetna to recover the cost of such materials, and, following trial without jury and the determination

[ 371 Pa. Super. Page 140]

    of post-trial motions, recovered a judgment in the amount of $51,834.09 plus interest. On appeal, Aetna contends that the trial court erred by (1) determining that Lezzer was within the class of claimants protected by the bond, and (2) holding that oral notice was adequate compliance with the condition precedent of the bond which required written notice within ninety (90) days after the last of the materials had been furnished.*fn2

The bond defines a claimant whose claim will be honored as

     one 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 material 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.

On the basis of this definition, Aetna argues that Lezzer was not a claimant who is within the class of persons protected by the payment bond. Because Lezzer did not have a contract with SGA or with a subcontractor of SGA, Aetna argues, payment of Lezzer's claim is not guaranteed by the bond.

[ 371 Pa. Super. Page 141]

Section 2(a) of the Miller Act, 40 U.S.C.A. § 270b(a), contains the same limitation on the right to recover as that specified in the Aetna bond. Therefore, we look to and find instructive those federal court decisions which have interpreted the Miller Act. In United States ex rel. K & M Corp. v. A & M Gregos, Inc., 607 F.2d 44, 46-47 (3d Cir.1979), the Court of Appeals for the Third Circuit defined the significance of section 270b(a) as follows:

On any construction contract with the United States exceeding $25,000 in amount, the Miller Act requires the prime contractor to execute a bond "for the protection of all persons supplying labor and materials." 40 U.S.C. § 270a(a)(2) (1976). Any protected supplier of materials or labor may sue on the bond for amounts due him. Id. § 270b(a). But the Act imposes limitations on this right. A person "having a direct contractual relationship with a subcontractor" but no privity of contract with the prime contractor may sue only if he gives the prime contractor notice of his claim within ninety days of the completion of his work. Id.

The Supreme Court, and prior to its decision a majority of the federal circuits, read this last provision as limiting the right to sue on a payment bond to persons with a direct contractual relationship with either the prime contractor or a subcontractor, and it read the term "subcontractor" as meaning first-tier subcontractor. J.W. Bateson Co. v. United States ex rel. Board of the Trustees of National Automatic Sprinkler Industry Pension Fund, 434 U.S. 586, 98 S.Ct. 873, 55 L.Ed.2d 50 (1978). See also In re Garden State Erectors, Inc. v. A. Leo Nash Steel Corp., 599 F.2d 1279 (3d Cir.1979).

We agree that Bateson rules out a holding that the court may look to the functions carried out by contracting parties, rather than to the position they occupy in the contractual structure, to identify the first-tier subcontractor. In Bateson, the court of appeals had ...


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