Free Reply to Response to Motion - District Court of Arizona - Arizona

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William F. Haug (000843) Chad L. Schexnayder (009832) James L. Csontos (010823) JENNINGS, HAUG & CUNNINGHAM, LLP 2800 N. Central Avenue, Suite 1800 Phoenix, Arizona 85004-1049 602-234-7800 Attorneys for Travelers Casualty and Surety Company of America

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

The United States of America for the benefit and use of EPC CORPORATION, an Arizona corporation, Plaintiff, vs. TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA, a Connecticut corporation, Defendant.

Consolidated Case No.: 02-CV-2313 PHX ROS REPLY IN SUPPORT OF MOTION FOR PARTIAL SUMMARY JUDGMENT

And All Related Proceedings

Travelers Casualty and Surety Company of America ("Travelers"), replied to EPCs Response as follows: I. Introduction: Travelers cited at page 3 of its Motion the written promises and agreements contained in EPCs subcontract, payment certificate and release. In its Response, EPC claims the Court (1) should not follow EPCs written agreement describing how payment is to be calculated, (2) should not follow EPCs choice of law clause on how this subcontract for work performed on
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federal property should be interpreted, and (3) should ignore EPCs statements as contained in its certifications and releases. However, EPC is without legal authority compelling such a result. Instead, the applicable legal authority requires EPC honor the terms of its written agreement, certifications and releases. II LEGAL ANALYSIS. A. Choice of Law.

One of the issues that EPC misconstrues is the provision found at page 1, paragraph 2 of the agreement, stating The Contract Documents shall be construed in accordance with the laws of the State of Utah. There are some important differences, and the Court must determine what law controls. Under Utah and Arizona law, the parties are permitted to select which states law they will follow. Swanson v. Image Bank, Inc., 206 Ariz. 264, 77 P.3d 439 (2003) (holding choice of law provision effectively waived employees right under Arizona law to recover treble damages for failure to pay wages); Jacobsen Const. Co., Inc. v. Teton Builders, 106 P.3d 719 (Utah 2005) (Court enforces choice of law provision contained in subcontract, requiring subcontractor on project performed in Wyoming to sue in Utah). At footnote 1 of its Response, EPC describes without analysis the strong public policy Arizona has with regard to activities occurring on a Federal construction project. EPC cited Cardon v. Cotton Lane Holdings, 173 Ariz. 203, 841 P.2d 198 (1992) in support of its argument. However, in Cardon, the Arizona Supreme Court held there was no public policy reason to ignore the parties choice of California law to govern their dispute regarding a deficiency judgment. Id., 173 Ariz. at 207-08, 841 P.2d at 202-03 (We therefore hold, without hesitation, that the parties intended that California law govern their contractual rights and duties.)

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Arizona has no public policy interests in what happens on a Federal construction project. For example, in spite of Arizonas strong public policy for regulating contractors and subcontractors, Arizonas licensing statutes do not apply on federal projects. Electric Const. Co. v. Flickinger, 107 Ariz. 222, 224, 485 P.2d 547, 549 (Ariz. 1971) (We hold Arizonas contractors licensing act [A.R.S. §§ 32-1101 et seq.] has no application to subcontractors engaged in the performance of duties for the benefit of the United States.) This Court should honor EPCs agreement and apply Utah law where Federal law does not otherwise control this Miller Act litigation. B. The Court must honor EPCs Certifications and Releases 1. EPCs affirmative certifications are binding.

In its Response, EPC claims the Court must ignore its releases. EPCs Response describes how it may have asserted certain claims for extras under its subcontract, but its Response is silent as to what effect the Court should give to EPCs subsequent and affirmative representations to the contrary. Specifically, in its applications for payment, EPC certified on November 2, 2001 and again on December 10, 2001, that (1) it has performed no additional work not covered by the Subcontract Price, and (2) that it has no claim for additional compensation[.] See Travelers Statement of Facts, paragraph 13. Certifications such as these are enforceable. U.S. ex rel. Noland Co. v. Maryland Cas. Co., 38 F.Supp. 479, 483 (D.C. Md. 1941) (I have concluded that the only legal effect of the erroneous certificate of July 5, 1939 is to hold the Noland Company to the truth of the statement as made, that is to say, to eliminate from its claim, recovery for any items of material furnished during May 1939[.]). EPC should also be held to the truth of the statements made.

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2.

EPCs releases are valid and in accordance with Federal law.

EPC claims there is no consideration for the release, and EPC claims there was a preexisting legal duty for Beneco to pay EPC. See Response, p. 5-6. This is not true, because EPCs subcontract expressly states that Beneco was not obligated to pay EPC unless EPC provided the release. The contract provision EPC fails to disclose or discuss provides: Regardless of the time of performance under this Agreement SUBCONTRACTOR [EPC] shall provide the following to BENECO prior to any payment made under this Agreement. * * * (f) A completed Progress Payment Certification Release, or Final Payment Certification and Release, as the case may be, by which SUBCONTRACTOR certified that the Work for which payment his requested has been performed, that [EPC] will use such payment for payment of obligations under this Agreement, and that [EPC] and its lower tiered subcontractors and suppliers release all mechanics lien, bond and contract claims, based on materials provided and Work performed prior to the date of the Release. EPCs Response, Exhibit A (subcontract), page 2, paragraph 4. Beneco did not have a preexisting duty to pay EPC. EPC contractually agreed to provide its Certification and Release as a condition precedent to Benecos obligation to pay. For this reason, the Court must follow U.S. ex rel Youngstown Welding & Engineering v. Travelers Indemnity Co., 802 F.2d 1164 (9th Cir. 1986) and conclude that EPCs releases release dispelled any doubt regarding either the amount purported to be released or by whom the release was executed. Id. at 1167. EPC also claims (without citation to the record) that Beneco never made the payment required for the releases to become effective. See Response, p. 7, lines 8-9. However, EPCs president, Dennis Shaw, specifically states that the checks attached to his affidavit were received in connection to the releases attached to his affidavit, and the checks and amounts stated in the releases are exactly the same. See Travelers Statement of Facts, Exhibit 3.

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EPC alternatively claims that Arizonas mechanics lien statutes require the Court determine the plain, clear language of EPCs release is unenforceable. In fact, Arizona law does not govern the parties contract, and Arizona mechanics lien law has no application to a federal project. Federal law controls. The applicable provision of the Federal Miller Act in place at the time EPC performed its contract describes the requirements of a valid release at 40 U.S.C. 270b(c) as follows: (c) Any waiver of the right to sue on the payment bond required by section 270a to 270d of this title shall be void unless it is in writing, signed by the person whose right is waived, and executed after such person has first furnished labor or material for use in the performance of the contract. EPCs Release is in writing, was executed by EPC and was executed after EPC first performed work. As such, the Release complies with the provisions of 40 U.S.C. 270b(c). Rather than discuss the applicable portion of the Miller Act, EPC relies on A.R.S. § 33-1008. This statute is entitled Waiver of Lien, and is found in Article 6, entitle Mechanics and Materialmens Liens. Article 6 is found in Chapter 7, entitled Liens, which is found in Title 33, entitled Property. One problem with EPCs argument is that mechanics lien statutes do not apply on federal projects. U.S. v. Pace, 201 F.3d 1116, 1117 -1118 (9th Cir. 2000) (applying Arizona law and holding . . . generally in government construction, the mechanics lien laws do not apply.); U.S. for Use and Benefit of Consol. Elec. Distributing, Inc. v. J.D. Grainger Co., Inc., 945 F.2d 259, 263 (9th Cir. 1991) (The purpose of the Miller Act is to provide a remedy for subcontractors on federal projects where ordinary mechanics liens on federal property are banned[.]) EPC cites only two opinions in support of its claim that A.R.S. § 33-1008 governs releases given on Federal Miller Act projects. One is In re JWJ

Contracting Co. v. Marco Crane & Rigging Co., 287 B.R. 501 (9th Cir. 2002). The

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JWJ opinion does not involve a Federal project or a Miller Act claim. Instead, the JWJ opinion involves application of bankruptcy law, and a waiver given on an Arizona project. The court in JWJ did not address what type of release is

enforceable on a federal project governed by the Miller Act. The other authority cited by EPC is United Metro Materials, Inc. v. Pena Blanca Properties, 197 Ariz. 479, 4 P.3d 1022 (App. 2000). United Metro involves United Metros mechanics lien claim on a private project performed in Arizona. Clearly, Arizonas mechanics lien statutes would apply to this private project performed in Arizona, and the lien claims that followed. However, the United Metro court did not state or imply that mechanics lien waivers under Arizona law were the exclusive method of releasing a Federal Miller Act claim. If Arizonas mechanics lien waiver statute was the exclusive method of releasing a Miller Act claim, the releases EPC provided substantially comply with Arizonas statutes. In its Response, EPC claims that Arizona law requires certain warnings in its release forms, but A.R.S. § 33-1008(D)(1) does not require any mandatory warning for a progress payment release. EPC also argues that its release does not identify the jobsite, the name of the party with whom EPC contracted. However, the release identified the job by contract number, government project number, project description, contractors job number and contract date. The release also states that it is effective for any claims EPC has against the Owner, Beneco Enterprises, Inc., its surety . . . . This is clear enough indication of the name of the party with whom EPC contracted (i.e., Beneco Enterprises). EPCs release also has a place where EPC is to insert any claim for additional compensation not covered by the Release. Thus, the Release EPC was providing to Beneco substantially complies with Arizonas mechanics lien law.

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This all presumes Arizona law applies, and the lien waiver statute governs a Federal Miller Act project. If the Court believes it should look to state mechanics lien waiver law to review a release given in compliance with 40 U.S.C. 270b(c) and U.S. ex rel Youngstown Welding & Engineering v. Travelers Indemnity Co, the Court must look at Utah law. Utah has no statute similar to A.R.S. § 33-1008. As stated above, even under Arizona law, EPCs choice of Utah law is controlling. Swanson v. Image Bank, Inc., 206 Ariz. 264, 77 P.3d 439 (2003) (holding choice of law provision effectively waived employees right under Arizona law to recover treble damages for failure to pay wages). This was a Federal project upon which no mechanics liens can be recorded. To the extent any state law controls, EPC chose Utah law. The Court should honor EPCs affirmative statements made in its Release, applying Utah law where Federal law does not otherwise control this Miller Act litigation. C. EPCs Agreement on Termination for Convenience Controls. 1. EPCs Interpretation Prior to Litigation

The express terms of EPCs subcontract states that for work actually performed EPC is owed an amount proportionate to the sum payable under this Agreement and Beneco shall not be liable to [EPC] for any other costs nor prospective profits. EPC offers no interpretation what this language means. At page 8 of its Response, EPC claims that Travelers interpretation of the termination for convenience clause is incorrect. See Response, p. 8, lines 3-4. However, EPC interpreted the contract just as Travelers. EPC provided Beneco with its invoice, showing how it calculated the percentage of completion claimed for each of the 45 line items of work, and applied the percentage against the stated price for each line item. See Travelers Statement of Facts, p. 4, paragraph 16. This is an invoice for the amount proportionate to the sum payable under this Agreement, exactly as the subcontract requires.

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This is the interpretation the Court must follow. Payne v. Pennzoil Corp., 138 Ariz. 52, 56, 672 P.2d 1322, 1326 (App. 1983) (The construction that the parties themselves place on an agreement is indicative of its meaning.); Hardinge Co. v. Eimco Corp., 1 Utah 2d 320, 266 P.2d 494 (1954) (Court applies interpretation used by parties as expressed on invoices); Hodges Irrigation Co. v. Swan Creek Canal Co., 111 Utah 405, 181 P.2d 217 (1947). Although there remains a dispute over the percentage of completion of each of the 45 line items, there is no dispute that all parties have interpreted the termination for convenience clause to require such an invoice as was twice submitted by EPC. 2. The FARs do not supercede the terms of the subcontract.

EPC claims the Court can ignore its express, written promise because Travelers had admitted that the FARs supercede the terms of EPCs subcontract. See Response, page 11, lines 15-19. Nothing supports EPCs desperate claim that Travelers made such an admission. Instead, Travelers describes how the FARs recommend, but do not mandate, that prime contractors insert a termination for convenience clause in their subcontracts. See Travelers Response, p. 5, lines 1126. If prime contractors accept this recommendation, they are to do so for their own protection. Id., p. 6, lines 3-4. The clause agreed to between EPC and

Beneco satisfies the FARs directive that the clause exist for Benecos protection. The FARs, to the extent they apply, have therefore been satisfied. At page 7 of its Response, Travelers describes how the FARs, if applicable, never allow a party to recover more than the difference between the total contract price reduced by the amount previously paid and the amount of work not yet performed. See Section 49.502 refers to §52.249-2, subpart (f). If the FARs apply, EPC must calculate the percentage of work not done (easy to do by calculating the percentage of work done, and subtracting that amount from

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100%) add the value of work already paid, and then subtract these two amounts from the total owed. This is the same result reached by EPC as described in its two invoices. However, the terms of EPCs subcontract are what govern here. EPC did not cite any decision of any court or tribunal where the express terms of a subcontractors termination for convenience clause was ignored. To overcome this lack of legal authority, EPC states without citation to the record or to controlling authorities that the contract between Beneco is a part of the subcontract, and the owner-Beneco contract is governed by the FARs, therefore any provision of the FARs supercede the express terms of the subcontract. See Response, p. 9, lines 8-13. In fact, the EPCs subcontract states that EPC accepts the concept and procedures of BENECOs contract between BENECO and the OWNER and that EPC is bound to BENECO by the Contract Documents and shall assume toward BENECO, with respect to [EPCs] performance, the obligations and

responsibilities which BENECO assumes toward OWNER. This type of clause has frequently been held to bind the subcontractor only to provisions relating to the scope, quality, character and manner of the work to be performed. Bussanich v. 310 East 55th Street Tenants, 282 A.D.2d 243, 243-244, 723 N.Y.S.2d 444, (N.Y.A.D. 1st Dept.2001); see also, S. Leo Harmonay Inc. v. Binks Mfg. Co., 597 F.Supp. 1014, 1023-1024, affd.2d Cir., 762 F.2d 990, citing Guerinl Stone Co. v. P.J. Carlin Constr. Co., 240 U.S. 264, 277; U.S. Steel Corp. v. Turner Const. Co., 560 F.Supp. 871, 874 (S.D.N.Y.1983) ("Prime contract provisions unrelated to the work of the subcontractor, such as a "dispute" clause governing the resolution of monetary claims between the project owner and general contractor, are not incorporated by reference into a subcontract.").

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No authorities support EPCs claim that the FARs supercede the subcontract. Therefore, the Court should hold EPC is entitled to payment for work actually performed in an amount proportionate to the sum payable under this Agreement. Finally, if the Court concludes that the FARs are incorporated into the subcontract, the Court can give effect to the FARs and to the subcontract termination for convenience clause. The FARs, to the extent they apply, apply when the government terminates the prime contract, and the prime contractor thereby terminates the subcontract. If the FARs govern this situation, the same type of termination procedures would apply, and the result reached between the owner and Beneco and between Beneco and EPC would be consistent. Here, the owner did not terminate the project for convenience. Beneco elected to follow the terms of its subcontract, and terminate only the EPC subcontract. There is no consistency required or desired, therefore the terms of the subcontract govern a termination by Beneco of a subcontractor where the owner has not otherwise terminated the entire project for convenience. By

holding the termination for convenience clause written into the subcontract governs where there is no owner-made termination for convenience, the Court can give effect to the subcontract and to the FARs, without either rendering the other superfluous. D. A.R.S. § 12-341.01 Does not Apply

In its Complaint and Amended Complaint, EPC alleged its claims arise out of contract within the meaning of A.R.S. § 12-341.01. In its Motion, Travelers explained how EPCs claims against Travelers do not arise out of contract within the meaning of A.R.S. § 12-341.01. EPC does not disagree. The Court should now rule that EPCs claims against Travelers do not arise out of contract within the meaning of A.R.S. § 12-341.01. No doubt, EPCs claim

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for attorney fees would exceed by 200% - 500% or more the amount of any other line item of work described in its invoices. Because this is the largest single component of EPCs claim, and because it may be dealt with as a matter of law, Travelers request the Court follow the authorities cited in the Motion, and dismiss that portion of EPCs complaint and amended complaint seeking attorney fees against Travelers under A.R.S. § 12-341.01. III CONCLUSION All Travelers requests is that EPC honor the terms of its written promises, certifications and releases. If the Court requires EPC to live up to its written agreements, certifications and releases, then EPCs claim will be reduced as follows. First, the Court will dismiss EPCs complaint for all claims for extra compensation for work done prior to the November 2, 2001 and December 10, 2001 certifications that EPC has performed no additional work not covered by the Subcontract Price and has no claim for additional compensation, expect as follows [left blank by EPC]. Second, the Court will dismiss all claims on bonds or any and all causes of action whatsoever against the Owner, Beneco Enterprises, Inc., its surety[.] as EPC expressly released in its November 2, 2001 and December 10, 2001 releases. Third, the Court will dismiss any claim by EPC for cost plus and limit EPC to the same claim calculation it made shortly after the termination for convenience, when it submitted its invoices calculated based on an amount proportionate to the sum payable under this Agreement. All that will be left is a dispute over the percentage of completion EPC reaches as to each of its line items. Travelers requests the Court reach this result, and grant its Motion for Partial Summary Judgment.

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RESPECTFULLY SUBMITTED this 8th day of August, 2005. JENNINGS, HAUG & CUNNINGHAM, LLP

By /s/ James L. Csontos William F. Haug Chad L. Schexnayder James L. Csontos Attorneys for Defendant Travelers

CERTIFICATE OF SERVICE I hereby certify that on August 8, 2005, I electronically transmitted the attached document to the Clerks Office using the CM/ECF System for filing and transmittal of a Notice of Electronic Filing to the following CM/ECF registrants: Troy J Aramburu Steven D Jerome David E Leta Jay Max Mann Hank E Pearson Robert J Berens David F Gaona [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

I hereby certify that on _____________, I served the attached document by (insert service method: mail, courier service, in-person delivery, e-mail) on the following, who are not registered participants of the CM/ECF System:

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