Insurance Co. of North America v. Genstar Stone Products Co.

RODOWSKY, Judge. Here, a materials supplier to a subcontractor on a public school construction project sues on the prime contractor’s payment bond required under the Maryland Little Miller Act (the Act), Maryland Code (1985, 1995 RephVol.), §§ 17-101 through 17-110 of the State Finance and Procurement Article. The surety contends that the supplier’s notice to the prime contractor, required by § 17-108(b)(l) of the Act, was untimely. Under the surety’s submission, sales and deliveries to the subcontractor of materials that the subcontractor then used in making repairs to the work must be disregarded in computing ¹⁶⁴ the timeliness of the notice.

The surety’s second defense invokes the statute governing trust relationships in the construction industry, Md.Code (1974, 1988 Repl.Vol., 1994 Cum. Supp.), §§ 9-201 through 9-204 of the Real Property Article. The contention is that duties imposed by that statute were violated by the manner in which the supplier applied payments from the subcontractor on the latter’s running account. For the reasons explained below we shall affirm the circuit court’s rejection of both of these defenses.

In November 1989 Charles J. Frank, Inc. (Frank), as prime contractor, and the Baltimore County Board of Education, as owner, entered into a contract for the design, construction and financing of Hines Elementary School. The appellant, Insurance Company of North America (INA), furnished the payment and performance bonds that are required by § 17-103(a) of the Act. Frank subcontracted the concrete work to Beck Enterprises, Inc. (Beck). Beck, in turn, purchased materials, principally concrete and stone, from the appellee, Genstar Stone Products Company (Genstar).

These purchases were made on an open account. Deliveries by Genstar to Beck at the school site commenced in April 1991. The last four invoices from Genstar to Beck were for the delivery of thirty-two cubic yards of concrete and one cubic yard of grout on September 27, for three cubic yards of concrete on October 4, and for one cubic yard of concrete on November 8, 1991. Beck did not pay Genstar in full, and, on January 23, 1992, Genstar gave Frank written notice of Beck’s non-payment.

In December 1992 Genstar instituted the instant complaint, naming Beck and INA as defendants. Beck’s president filed an answer for it advising that Beck’s assets had been claimed under a lien by the Internal Revenue Service. Beck did not participate further in the proceedings. Frank, appearing by the same counsel who appeared for INA, petitioned the court to intervene.

That petition was granted, and the court ordered that Frank be designated a defendant in the action and that it file an answer. Frank never filed an answer. Thereafter, INA’s counsel, acting solely in INA’s name, conducted the defense. ¹⁶⁵ Genstar filed with its complaint a motion for summary judgment, supported, inter alia, by eighty-nine invoices, the affidavit of Genstar’s bookkeeper, and Genstar’s notice of January 23, 1992 to Frank. The eighty-nine invoices reflect that between April 5 and November 8, Genstar made thirty-eight deliveries of stone, one of grout, and fifty of concrete.

In opposition to summary judgment INA filed an affidavit of Frank’s project manager on the Hines school project. This affidavit is the factual basis for INA’s two legal defenses. The notice defense relies on § 17 — 108(b)(1) of the Act, which reads: “A supplier who has a direct contractual relationship with a subcontractor ... of a contractor who has provided payment security but no contractual relationship with the contractor may sue on the security if the supplier gives written notice to the contractor within 90 days after the labor or materials for which the claim is made were last supplied in prosecution of work covered by the security.” In his affidavit, Frank’s project manager in part states: “The last date upon which ready-mix concrete and/or aggregate was supplied, necessary to complete the work on the contract, was September 27, 1991. However, on October 4, 1991 Beck was required to jack out and repair a doorway that had previously been constructed.

In addition, on November 8, 1991 Beck returned to repair certain sills that had previously been constructed but were beginning to crack. In order to complete these repairs, on October 4, 1991 Beck supplied three cubic yards of its materials and on November 8, 1991 Beck supplied an additional one cubic yard of materials.” Genstar’s November 8, 1991 delivery to Beck is critical to the timeliness of its January 23,1992 notice to Frank. If INA is correct that the deliveries of October 4 and November 8 cannot be considered because the subcontractor used the materials in making repairs, then Genstar’s claim fails. The project manager further affirmed that he had “conducted an investigation into the payment history” between Frank and Beck and between Beck and Genstar pertaining to the ¹⁶⁶ Hines school project.

He said that “[i]t appears that shortly after we [ie., Frank] would pay Beck for its concrete services, Beck would pay Genstar but allocate the money to cover unsecured jobs.” If INA is correct that Genstar had a statutory duty to apply to invoices for Hines school materials payments by Beck utilizing funds paid by Frank, then a remand would be required to recompute the account. The circuit court concluded that there was no genuine issue of material fact, and, by docket entry of May 24, 1993, summary judgment was entered in favor of Genstar against Beck and INA for $100,164.69. Within ten days thereafter, INA moved to alter the judgment on the grounds that the court had erred in rejecting the untimely notice defense and that the court had not ruled on the misapplication of payments defense. By an undocketed letter of May 25 to the court, counsel for Genstar requested amendment of the judgment to add $18,969.50 in finance charges.

In a memorandum opinion dated June 23, 1993 and docketed June 25, 1993, the court explained its reasons for rejecting the notice defense, and the court amended the judgment against Beck and INA to $119,134.19. 1 INA moved to revise the amended judgment. This second post-judgment motion was filed on the eleventh day after entry on the docket of the amended judgment. By a “MEMORANDUM TO THE FILE” dated July 30, signed by the court and with copies to counsel, the court ruled that the INA motion to alter the original judgment of May 24, 1993 was denied, that the motion to revise the amended judgment was denied with respect to the notice defense, but that, “[t]o the extent that the court will consider further doctrine of the misapplication of funds, the judgment is opened for further consideration.” These rulings of July 30, 1993 do not appear on the docket. This memorandum, although included in the ¹⁶⁷ original record transmitted by the clerk, contains no date stamp by the clerk.

By a written “POST JUDGMENT RULING” dated November 16 and docketed November 22, 1998, the court explained its reasons for rejecting INA’s misapplication of funds defense and denied INA’s motion to revise the amended judgment. The court stated that denial of the INA motion made final the amended judgment of June 25, 1993. INA appealed to the Court of Special Appeals. It also petitioned this Court to issue the writ of certiorari prior to consideration of the. matter by the intermediate appellate court.

We granted the writ. I This Court will notice on its own motion problems relating to appealability. Medical Mut. Liab.

Ins. Soc’y v. B. Dixon Evander & Assocs., 331 Md. 301 , 306 n. 6, 628 A.2d 170 , 172 n. 6 (1993); Albert W. Sisk & Son, Inc. v. Friendship Packers, Inc., 326 Md. 152, 158 , 604 A.2d 69, 72 (1992). INA’s motion to revise the amended judgment can only be treated as a motion under Rule 2-535, inasmuch as it was not filed within ten days of the amended judgment. Alitalia Linee Aeree Italiane v. Tomillo, 320 Md. 192, 200 , 577 A.2d 34, 38 (1990).

The motion to revise did not halt the running of the time for appeal. Md.Rule 8-202(c). If INA and Beck were the only defendants, the order for appeal would be too late to bring up for review the amended judgment of June 25. Frank, however, was made a party defendant upon its intervention.

There is no judgment as to Frank, and there has been no certification pursuant to Rule 2-602(b). Accordingly, there is no final judgment in the action. Md.Rule 2-602(a). The appeal is premature.

We exercise our discretion, however, under Md.Rule 8-602(e)(1)(C) to enter as a final judgment the amended judgment in favor of Genstar against INA and Beck. See Adams v. Manown, 328 Md. 463 , 469 n. 1, 615 A.2d 611 , 613-14 n. 1 (1992); Shofer v. Stuart Hack Co., 324 Md. 92, 98 , 595 A.2d ¹⁶⁸ 1078, 1080-81 (1991), cert. denied, 502 U.S. 1096 , 112 S.Ct. 1174 , 117 L.Ed.2d 419 (1992). II A The rule for which INA contends, which we shall call the “repair rule,” is based on federal case law interpreting the notice provisions of the Miller Act, 40 U.S.C. § 270b(a). That section provides in relevant part: “§ 270b.

Rights of persons furnishing labor or material “(a) Every person who has furnished labor or material in the prosecution of the work provided for in such contract, in respect of which a payment bond is furnished under section[ ] 270a ... shall have the right to sue on such payment bond for the amount ... unpaid.... Provided, however, That any person having direct contractual relationship with a subcontractor but no contractual relationship express or implied with the contractor furnishing said payment bond shall have a right of action upon said payment bond upon giving written notice to said contractor within ninety days from the date on which such person did or performed the last of the labor or furnished or supplied the last of the material for which such claim is made....” (First and third emphasis added). The repair rule is stated in its most basic form in 8 J.C. McBride, Government Contracts § 49A.100[15], at 49A-183 (1994), as follows: “Correction by the subcontractor of defects in its work does not operate to extend the notice period; otherwise, the time could be prolonged indefinitely after completion of the work, United States ex rel. McGregor Architectural Iron Co., Inc. v. Merritt-Chapman & Scott Corp., 185 F.Supp. 381 (M.D.Pa.1960).” Some federal courts, however, have applied the repair rule to suppliers as well, as discussed, infra. ¹⁶⁹ Where the claimant against the bond is simply a supplier, it is not at all uncommon for an issue of timeliness of notice to the prime contractor to be an issue under facts similar to those presented here.

Typically, there is no express contract by which the subcontractor agrees to purchase, and the supplier agrees to provide, all of the movables required by the subcontractor to perform the subcontract on the bonded job. Typically, there is simply a course of dealing under which the subcontractor places a series of orders with the supplier. Each order generates a separate invoice by the supplier, and the supplier might even have a record of delivery to the site of the bonded job. Under those facts, when the supplier-claimant gives notice within the statutorily required period after the last sale in the series, sureties have contended that the notice is effective only as to sales made within the required notice period.

For example, if the supplier sold and delivered over a period from day one to day 180, and gave notice on day 200 under a statute requiring notice within ninety days from the last delivery, sureties have contended that the notice is effective only for sales and deliveries made from and on day 111 through day 200. In cases arising under the Miller Act, this argument generally has been rejected by unifying the series of deliveries into one contract. For example, Judge Soper, writing in 1959 for a panel of the United States Court of Appeals for the Fourth Circuit that also included Chief Judge Sobeloff and Judge Haynsworth, said: “The notice provision as to the subcontractor in the Miller Act ... speaks of a contractual relationship between the contractor and the subcontractor, which is broad enough to cover a series of separate contracts or orders relating to the same project. “... Moreover, the Miller Act lends itself to the alternate construction that if all the goods in a series of deliveries by the materialman to a subcontractor are used on the same government project, the notice is in time as to all of the ¹⁷⁰ deliveries if it is given within ninety days from the last delivery.” Noland Co. v. Allied Contractors, Inc., 273 F.2d 917, 920 (4th Cir.1959); see also Apache Powder Co. v. Ashton Co., 264 F.2d 417 , 423-24 (9th Cir.1959); Fourt v. United States ex rel.

Westinghouse Elec. Supply Co., 235 F.2d 433, 434 (10th Cir. 1956); United States ex rel. Chemetron Corp. v. George A. Fuller Co., 250 F.Supp. 649, 658-59 (D.Mont.1966); United States ex rel. J.A. Edwards & Co. v. Bregman Constr.

Corp., 172 F.Supp. 517, 522 (E.D.N.Y.1959). But see Judge Friendly’s opinion for a panel of the Second Circuit that also included Judges Medina and Moore in United States ex rel. J.A. Edwards & Co. v. Peter Reiss Constr. Co., 273 F.2d 880 (2d Cir.1959) (a notice within ninety days of the last delivery does not relate back across a hiatus that is greater than ninety days between deliveries so that it is not effective as to deliveries prior to the hiatus), cert. denied, 362 U.S. 951 , 80 S.Ct. 864 , 4 L.Ed.2d 869 (1960).

One theoretical justification for the repair rule is that it is a corollary to the unitary contract concept applied to a series of supplier’s deliveries for purposes of the supplier’s satisfying the notice condition in the Miller Act. Movables furnished by the supplier that are used by the subcontractor in a performance that conforms to the prime contractor-subcontractor contract are considered to be furnished under the theoretically unitary contract between supplier and subcontractor. These sales enjoy relation back. On the other hand, some courts consider movables furnished to repair, replace, or correct work to be furnished by the supplier under a different or separate contract with the subcontractor.

These sales do not enjoy relation back. In the case before us the circuit court did not rely on Miller Act precedents. It decided the repair rule issue primarily by applying Maryland precedents under the mechanics’ lien statute. Early on in this State the question arose under Md.Code (1860), Art. 81, “Mechanics’ Lien,” § 11 of how to treat for notice purposes a series of deliveries by a supplier.

That statute provided in relevant part: ¹⁷¹ “If the contract for furnishing such work or materials ... shall have been made with any ... person except the owner ..., the person ... doing work or furnishing materials ... shall not be entitled to a lien unless, within sixty days after furnishing the same, [the person] shall give notice in writing. ...” In Trustees of the German Lutheran Evangelical St. Matthew’s Congregation v. Heise, 44 Md. 453 (1876), Judge Alvey, writing for the Court, rejected the argument that a notice was effective only for materials delivered within the preceding sixty days. The claimant need not establish an “express antecedent contract.” Id. at 469 . Rather, “the character of the account, the time within which the work was done or the materials were furnished, and the object of the work or materials, may afford proper grounds for the presumption that the work was done or the materials were furnished with reference to an understanding from the commencement that such work or materials should be done or furnished, if required by the builder.” Id. Under those circumstances the notice is effective if given within sixty days from the last item in the account.

Id. Otherwise, the Court reasoned, every supplier or subcontractor would be required to notice several liens during the progress of a single building. Id. at 469-70 . But, the rule is subject to the following limitation: “[W]here the materials are furnished for separate and distinct purposes, or at different times, and at considerable intervals, or under distinct contracts or orders, though to be used by the contractor or builder in executing one and the same contract "with the owner, no such presumption will arise, and the right to take the lien must date from the time of furnishing the different parcels of material, and not from the last item in the account.” Id. at 470 .

The rule of the German Lutheran Church case is now well established in Maryland mechanics’ lien law. For example, in Mt. Airy Plumbing & Heating, Inc. v. Grey Dawn Dev. Co., ¹⁷² 237 Md. 38 , 205 A.2d 299 (1964), subcontractors stopped work on a house in November and December of 1961, because they had not been paid, and did not resume work until September 1962.

Their notice, given within ninety days of completion in October 1962, was effective to cover the work done in 1961. The work in the fall of 1962 was “necessary for the proper performance of their [respective] contracts.” Id. at 43 , 205 A.2d at 302 . The general rule of the German Lutheran Church case has also been applied in Clark Certified Concrete Co. v. Lindberg, 216 Md. 576 , 141 A.2d 685 (1958); T. Dan Kolker, Inc. v. Shure, 209 Md. 290 , 121 A.2d 223 (1956); District Heights Apartments, Section D-E, Inc. v. Noland Co., 202 Md. 43 , 95 A.2d 90 (1953); Harrison v. Stouffer, 193 Md. 46 , 65 A.2d 895 (1949); and in Back v. Reisterstown Lumber Co., 24 Md.App. 415 , 332 A.2d 30 , cert. denied, 275 Md. 745 (1975). More significant from the standpoint of INA’s argument in the present case is Reisterstown Lumber Co. v. Reeder, 224 Md. 499 , 168 A.2d 385 (1961).

In that case the timeliness of a lumber supplier’s notice of mechanics’ lien depended on measuring the beginning of the notice period by the date of delivery of at least one of three items delivered. The items were a $58.60 door, a $4.20 screen, and an $11.00 roto-lock operator. “All three of these items were replacements of material previously delivered and which the owners or builder desired to be substituted for defective items.” Id. at 506 , 168 A.2d at 388 . This Court, although approving the imposition of a lien, required that the charges for the three replacement items be eliminated from the unpaid balance secured by the lien. Id. at 508 , 168 A.2d at 389-90 .

Despite the fact that the critical deliveries were for “repair” of defects chargeable to the supplier, this Court observed that the mechanics’ lien statute “makes no exception with respect to items delivered for ‘replacement’ or substitution for previously delivered, but defective items.” Id. at 506 , 168 A.2d at 388 . The notice was effective because, inter alia, the lumber supplier was not attempting to do “a trifling amount of work as a mere subterfuge to extend the lien period.” Id. at 507 , 168 A.2d at 389 . ¹⁷³ We held that “such replacements] made in good faith and at the insistence of the owner or his builder are proper items to be considered for the purpose of ascertaining the last furnishing of materials.... ” Id. In drawing on the mechanics’ lien precedents in the instant case, the circuit court concluded that there was no indication that the materials supplied by Genstar “would reasonably be interpreted as being part of more than one contract.” Gens-tar clearly provided “all materials it was requested to provide.” Genstar did not have “any control over or knowledge of whether the materials provided were used in ‘repair work’ or work under the original contract” between Beck and Frank. There was no indication that the critical delivery by Genstar was “solely to extend the date from which the ninety day period runs.” Thus, the circuit court held that the January 23 notice was effective for all unpaid deliveries in the series.

B Against the foregoing background the issue on INA’s notice defense would seem to be whether this Court should apply its mechanics’ lien precedents for determining whether a supplier’s notice relates back to be effective as to all sales in a series or whether this Court should apply federal precedents recognizing a repair rule. Preliminarily we note that the application of mechanics’ lien precedents is not foreclosed by a contrary legislative intent in enacting the Maryland Act. The Miller Act was enacted in 1935. Act of August 24, 1935, ch. 642, 49 Stat. 793 .

The Maryland Act was enacted by the Acts of 1959, ch. 10, effective June 1,1959. 1959 Md.Laws at 15. It is clear that the federal cases up to that time had not applied a repair rule. The seminal case applying a repair rule was decided July 27, 1960. In United States ex rel.

McGregor Architectural Iron Co. v. Merritt-Chapman & Scott Corp., 185 F.Supp. 381 (M.D.Pa.1960), the claimant was at the third tier of subcontractors. It had completed its work in early 1954, but returned to the job site in June 1955 on two occasions to do a ¹⁷⁴ total of five hours work in furnishing missing bolts and closing some holes that had been burned into posts in order to erect them. The omissions had been overlooked when the work was inspected in 1955. The court held that the notice must be given within ninety days after the performance of work “called for by the terms of the prime contract.” Id. at 383 .

The court then reasoned that unlimited extension of the notice period by correcting defects would produce chaos. 2 A choice between federal Miller Act and Maryland mechanics’ lien law precedent was confronted by this Court in Atlantic Sea-Con, Ltd. v. Robert Dann Co., 321 Md. 275 , 582 A.2d 981 (1990). The issue there was whether one who supplies labor or materials to a materialman could be a claimant on the bond under the Maryland Act. Such claimants are not recognized under the federal act. We recognized that “[hjistorically, when interpreting the Maryland Little Miller Act, we have analogized the Act with the Maryland mechanics’ lien statute.” Id. at 283-84 , 582 A.2d at 985 .

We departed from that historic approach in Atlantic Sear-Con and found the federal authority persuasive because, in large measure, “[t]he class of persons protected by the federal Miller Act has been well settled since 1944, long before the Maryland Legislature modeled the Little Miller Act after it.” Id. at 286 , 582 A.2d at 986 . In the matter now before us the federal construction relied on by INA was definitely not well established when the ¹⁷⁵ Maryland Act became effective. Thus, legislative intent does not direct our choice. C Although we have used the term, “repair rule,” as a shorthand description of INA’s notice defense, decisions involving the claims of suppliers under the Miller Act reflect that there are -widely divergent approaches as to the effect of defects in the public work on the running of the notice period.

A condensed survey demonstrates the proposition. At one end of the spectrum is United States ex rel. General Elec. Co. v. Gunnar I. Johnson & Son, Inc., 310 F.2d 899 (8th Cir.1962).

In December 1959 the supplier of electrical parts and equipment shipped two bus duct elbows to the job site, but they did not fit. At no additional charge the supplier altered the ducts, reshipped them, and they were delivered and installed in April 1960. The April date became the critical date for notice purposes. Looking to the literal language of the Miller Act, the court said that “[i]t is obvious that said bus duct elbows are a part of the material ‘for which claim is made.’ ” Id. at 903 .

The court reasoned that “until such time as they were ‘furnished’ in such condition as to meet the engineering requirements and be ready and fit for installation as a part of the system, no enforceable claim did or could arise.” Id. The Eighth Circuit declared that the case before it was “readily distinguishable from those cases involving the performance of labor and supplying of minor items of materials for the purpose of correcting defects, or making repairs following inspection of the project, and not performed or supplied as a part of the original contract.” Id. To us, the attempted distinction is elusive, if not illusory. The rationale seems to be a substitute analysis that eviscerates the repair rule.

If a claim does not arise until work is performed in accordance with the portion of the prime contract embodied in the subcontractor-supplier contract, then all second effort or resupply, designed to achieve contract con ¹⁷⁶ formity, qualifies to trigger the running of the notice period for the entire series of deliveries. Other cases, however, make a distinction between what may be called misfeasance and non-feasance. If the item supplied is defective and must be replaced, replacement is attributed to a new contract so that notice based on the delivery of the replacement relates back only ninety days. On the other hand, rectifying the total failure to deliver an item is considered part of the original contract and full relation