By Kurt Faux & Willi Siepmann

Among the most difficult contractor’s license bond claims to handle and evaluate in Nevada are the ones by union trust funds. These trust funds typically administer the benefits which the union negotiates with the contractor pursuant to a collective bargaining agreement, and may include such benefits as health care, vacations, and pension plans. Among the most prominent Nevada trust funds are the following:

Northern and Southern Nevada Laborers Health and Welfare Trust Fund

Carpenters Southwest Administrative Corporation

Plumbers and Pipefitters Union Health and Welfare Trust Fund

Bond claims by these trusts generally arise when the union contractor fails to submit the required benefit payments, or fails to provide the proper wage and time documents, but there are also claims that the union contractor used a related non-union contractor to do work which should have been done by the union contractor, or where claims are made against a general contractor’s bond, where the general contractor had hired the delinquent union contractor. This article will discuss typical issues and problems which arise in handling and evaluating these claims, which typically are among the most difficult ones we face, as the Nevada statutes favor these trust funds and as their claims often far exceed the penal sum of the license bond. Additionally, the trust funds’ complaints are almost always filed in federal courts, and the cost of litigation tends to be prohibitive.

1. Are Trust Funds Proper Bond Claimants?

At first sight, trust funds are not listed as proper bond claimants in NRS 624.273, the Nevada statute, which defines who can make license bond claims. On this issue, the statute reads:

1.  Each bond or deposit required by NRS 624.270 must be in favor of the State of Nevada for the benefit of any person who:

      (a) As owner of the property to be improved entered into a construction contract with the contractor and is damaged by failure of the contractor to perform the contract or to remove liens filed against the property;

      (b) As an employee of the contractor performed labor on or about the site of the construction covered by the contract;

      (c) As a supplier or materialman furnished materials or equipment for the construction covered by the contract; or

      (d) Is injured by any unlawful act or omission of the contractor in the performance of a contract.

While trust funds are not specifically listed, the Nevada Supreme Court has held that they qualify as bond claimants under subsection (b), the “employee” provision. Genix Supply Co. v. Board of Trustees, 84 Nev. 246 (1968). The same case extended the priority provision of NRS 624.273.6, which gives priority to employees of the contractor over other bond claims, to union trust funds. They are therefore ‘preferred’ claimants.

2. Statute of Limitation Issues

The statute of limitation (“SOL”) for license bond claims in Nevada is two years “after the commission of the act on which the action is based.” NRS 624.273.2. The act here is the failure of the contractor to pay the required union benefits, and thus the SOL would start when that failure occurred.

Similarly, the SOL for actions against original contractors for wages or benefits is two years after the date of the indebtedness for labor should have been made of paid by the subcontractor.  NRS 11.209(1) (“No action against an original contractor for the recovery of wages due an employee of a subcontractor or other contractor acting under, by or for the original contractor, or contributions, premiums or benefits required to be made or paid on account of the employee, or any other indebtedness for labor performed by the employee owed to an employee may be commenced more than 2 years after the date the indebtedness for labor should have been made or paid by the subcontractor.”).

In many cases, however, the trust funds will claim unpaid benefits for periods of more than two years before their complaint was filed based on the so-called “discovery rule” and “equitable tolling”, justifying that position by arguing that they did not find out about the unpaid benefits until their auditor did an audit of the bond principal’s records and found the deficiency. They rely upon an unpublished Nevada federal district court opinion in the case of Trustees of the Plumbers and Pipefitters Natl. Pension Fund v. All Seasons Interior and Exterior Maintenance, 215 WL 430708. 

In All Seasons, the court held in the trust funds ERISA claim that the state SOL applied and that the SOL commenced under federal law when the plaintiff knew or had reason to know of the injury that is the basis of the action.  The court did not address the equitable tolling doctrine but instead held that issues of fact existed as to when the trust funds “knew or should have known” which precluded summary judgment.  The court noted that the trust funds at a minimum likely knew about the unpaid benefits before the audit was concluded such as when a decision was made to conduct an audit or when contributions reported month to month were reduced.  Drawing all facts in favor of the trust funds as required by summary judgment standard, the Court found that there were factual issues when the trust funds knew or should have known of the deficiencies and denied the summary judgment motion filed by a general contractor and its surety. However, the court made it clear that the results of an audit do not establish the commencement of the limitation period.

In summary, the surety should insist on a literal application of the 2-year statute of limitation. If the ‘discovery rule’ or ‘equitable tolling’ defenses are raised, some discovery should be done on when the trust funds should have known about the deficiencies had they done a reasonable investigation.

3.  Recovery of Interest, Penalties, Audit Fees and Attorney’s Fees

A typical trust fund demand will include interest, penalties (liquidated damages), audit fees, attorney’s fees and costs in addition to the unpaid benefits, which in turn will multiply the amount they are potentially entitled to recover. The surety should reject any such demand beyond the principal amount owed for the following reasons:

1. NRS 624.273 contains the phrases “is damaged” and “is injured”, and the actual damages of the trust fund are the unpaid benefits.
2. Attorney’s fees are only recoverable by statute or by contract, and NRS 624.273 does not provide for the recovery of attorney’s fees. However, if a surety engages in litigation with the trust fund and loses, the court may award the trust fund its attorney’s fees, even in excess of the penal sum of the bond as it could against any other litigant if there is an applicable rule or statute authorizing attorney fees. Trustees of Plumbers and Pipefitters v. Developers Sur. and Indem. Co, 84 P.3d 59 (Nev., 2009).
3. Penalties or punitive damages are not recoverable from a bond. The New Hampshire Insur. Co. v. Gruhn, 670 P.2d 941 (Nev., 1983).

The Gruhn case has this useful discussion concerning the purpose of a license bond:

Apart from the wording of the statute, a bond is required in order to provide a minimum source of funds for those who have suffered compensable losses. We have already noted that where claims against a bond are asserted by more than one party, and that bond is insufficient to satisfy all claims in full, each claimant is entitled to a pro rata share of the bond proceeds. See Transamerica v. C.B. Concrete, 100 Nev. –––, 669 P.2d 246 (1983); Homewood Investment Company, Inc. v. Moses, 96 Nev. 326, 608 P.2d 503 (1980). It is doubtful that the legislature intended for this pool to be diluted.

In order to support their claim, the trust funds may cite to the Nevada federal district court’s ruling in Trustees v. Summit Landscape, 309 Fed. Supp. 2d 1228 (D.Nev., 2004), which allowed for the recovery of interest, liquidated damages, attorney’s fees and cost. However, there the surety had issued both a payment bond and a license bond to the general contractor, and the award was ultimately against the payment bond, not the license bond.

4. The “Alter Ego” Allegations

In many cases, the trust funds will also sue contractors, who are not a party to a Collective Bargaining Agreement (“CBA”), and their sureties on “alter ego” or “single employer” allegations, namely that the union contractor used the related non-union contractor to do work, which should have been done by the union contractor and its union workers. Therefore, union benefits should have been paid but were not paid. The standard allegation is that the union contractor set up the non-union contractor just for that purpose, to avoid the requirements of the CBA.

The alter ego doctrine applies if two entities function as a single employer and the non-union entity is “being used in a sham effort to avoid collective bargaining obligations, … rather than for the pursuit of legitimate business objectives untainted by ‘union animus.’ ” Nor–Cal Plumbing, Inc., 48 F.3d at 1470 (internal quotation marks and citation omitted). The plaintiff has the burden of proving a “disguised continuation,” technical change, or sham undertaken for the purpose of shifting union work to a non-union company. A. Dariano & Sons, Inc., 869 F.2d at 519; Brick Masons Pension Trust, 839 F.2d at 1337. South. Calif. Painters & Allied Trades v. Rodin & Co., 558 F.3d 1028 (9^th Cir., 2009).

The criteria for the “single employer” allegation (and also for the alter ego one) are “the degree of common ownership, management, operations, and labor relations.” Nor–Cal Plumbing, Inc., 48 F.3d at 1470.

If the trust funds prove their ‘alter ego’ case, can it then recover from the respective license bonds of both the union contractor and of the ‘alter ego’ contractor? The surety should reject such a ‘double recovery’, though it is foreseeable that a judge could find that the trust funds are ‘in the shoes’ of the employees of both contractors, and that therefore both bonds are at stake.

5.     The NRS 608.150 Dilemma

The trust funds may also assert claims against a general contractor’s license bond, where a subcontractor to the general contractor failed to make the required benefit contributions for work performed on the project covered by the subcontract. Such a claim is indirectly authorized by NRS 608.150, which reads in relevant parts:

Except as otherwise provided in subsections 2 and 3, every original contractor entering into any contract in this State for the erection, construction, alteration, maintenance or repair, including, without limitation, repairs made under a warranty, of any building or structure, including, without limitation, any equipment or fixtures related thereto, or other work of improvement, shall assume and is liable for the indebtedness for labor incurred by any subcontractor or any contractors acting under, by or for the original contractor in performing any labor, construction or other work included in the subject of the original contract, for labor, and for the requirements imposed by chapters 616A to 617, inclusive, of NRS.

The surety practitioner should be aware that an original contractor does not assume liability in “in excess of the indebtedness for labor incurred by a subcontractor or any other contractor acting under, by or for the original contractor if such indebtedness for labor had been paid when originally due.”  NRS 608.150.  Also, the original contractor is not liable if proper “written notice” is not received in accordance with NRS 608.152 (which will be the subject of a separate article). 

Trust funds often sue not just the delinquent subcontractor and its surety, but also the general contractors, for which the subcontractor worked during relevant time frames, and their sureties. Such bond claims are made based on the legal fiction that the general contractor “stands in the shoes” of the subcontractor for purposes of the bond claim. While there are several state and federal cases dealing with such bond claims in the payment bond context, there has been only one federal ruling in the license bond area, the above-cited unpublished All Seasons Interior and Exterior case, which dealt with the SOL issue. Because the statute imposes liability for the debts of the subcontractor on the general contractor, a handling federal or state judge may impose liability on the general contractor’s surety also if the conditions of the statute are met and proper proof provided. The prevailing party is entitled to its reasonable attorneys’ fees and costs.  NRS 608.150(6).

6. Premature Lawsuits

Some Trust funds commence a lawsuit against a surety before knowing whether there are unpaid benefits.  The reason for this is to avoid an attempt to avoid the lapse of the statute of limitations in the event unpaid benefits are eventually discovered.  Such a tactic contravenes the pleading requirements of Federal Rule of Civil Procedure 8, Bell Atl. Corp. v. Twombly 550 U.S. 544 (2007), and Ashcroft v. Iqbal 556 U.S. 662 (2009).  Under Federal Rule of Civil Procedure 8(a)(2) a complaint must give the defendant fair notice of what the claim is and the grounds upon which it rests.   As stated by Twombly, “Without some factual allegation in the complaint, it is hard to see how a claimant could satisfy the requirement of providing ‘fair notice’ of the nature of the complaint, but also of the ‘grounds’ on which the claim rests.” Twombly at 555 n.3. These factual allegations, Twombly states, must be enough to raise a right to relief above the speculative level. Id. at 555.

In Iqbal, the Court held that to survive a motion attacking a complaint under Rule 8, a complaint must contain sufficient factual data to state a claim for relief that is plausible on its face. A complaint has facial plausibility when the plaintiff pleads factual content that allows the court to draw a reasonable inference that the defendant is liable for the misconduct alleged. Iqbal at 678. It requires more than a mere possibility that the defendant is liable for the misconduct alleged. Id. at 679.  The Court concluded that that the claim should be dismissed because “plaintiff has not nudged his claims across the line from conceivable to plausible.” Id. at 680.  The well-pleaded facts must permit the court to infer more than the mere possibility of misconduct.  Id. at 678.

Those Trust funds suing sureties for something that has not occurred appears to be improper and subject to dismissal.  Using litigation as a place holder without any facts to assert a bond claim, let alone sue, is not supported by FRCP 8, Twombly, or Iqbal. 

Summary:

The surety should assess whether its bond principal has defenses to the claim and whether there are any independent surety defenses. Depending on the penal sum of the bond, the potential for extended litigation, and the strength of the defenses, these claims should be carefully examined for prompt resolution, but should also be fully litigated at times, if the economics and defenses warrant such litigation.