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Are Public Payment Bond Rights Assignable Under North Carolina Law? Maybe.


This article was originally published in North Carolina Construction News magazine's Summer 2018 issue.

Contractors, like other businesses, often find it advantageous to assign their accounts in exchange for some other form of consideration from the assignee. What is different about a contractor’s accounts, as compared to most other businesses, is that the amounts owed might be secured by payment bonds.      

It should not be disputed that a contractor can assign its accounts to a third party so long as the proper procedures are followed. However, if the accounts relate to a project where the contractor would have a valid claim on a public payment bond, can this right be assigned along with the accounts?

Practically, the ability of a third party purchaser to make a bond claim would make the assignment of accounts more lucrative for the assignee and would provide some bargaining power for the contractor who wants to assign the accounts. However, once the accounts are assigned and the third party assignee goes to make a claim on the bond and enforce that claim in court, will a court dismiss the action right off the bat for lack of standing of this new claimant? In North Carolina, maybe.

Under the plain terms of North Carolina’s Little Miller Act, claimants under payment bonds are discussed in terms of those “who ha[ve] performed labor or furnished materials in the prosecution of work required by any contract” without any language expanding this to “or their assigns.” A plain reading of North Carolina’s Little Miller Act would support the argument that only those parties who actually worked on the project would have standing to bring an action on the payment bond.

But not so fast – it does not appear that the North Carolina courts have addressed the issue of assignability of public payment bond claims under the Little Miller Act. If faced with the question, North Carolina courts should look to federal law interpreting the federal Miller Act “on which our corresponding state act is modeled . . . .” HSI NC, LLC v. Diversified Fire Protection of Wilmington, Inc., (2005); McClure Estimating Co. v. H.G. Reynolds Co., Inc. (1999).

And in doing so, the North Carolina courts should see that “assignees of the claims of persons furnishing labor or material c[o]me within the protection of the [federal Miller Act].” U.S. for Benefit and on Behalf of Sherman v. Carter (1957) (rejecting surety’s argument that claimant had not furnished labor or materials to the project); see U.S. ex rel. Constructors, Inc. v. Gulf Ins. Co., 313 F. Supp. 2d 593, 597 (E.D. Va. 2004) (approving of the decisions in Carter and recognizing the ability of a “valid assignee [to] properly claim payment under a Miller Act bond”).[1]

Furthermore, allowing an assignee to make a claim on a payment bond advances the very purposes of North Carolina’s Little Miller Act. A payment bond is intended for the “protection of the persons furnishing materials or performing labor . . . .” N.C.G.S. § 44A-26. Payment bonds “were designed for the protection of laborers and materialmen and are to be construed liberally for their benefit.” Symons Corp. v. Ins. Co. or N. Am.(1989). Under this context, it is beneficial to allow assignability.

For example, without the ability to assign payment bond claims, a contractor in need of cash flow in order to stay on and finish a project is less likely to find funding through factoring agreements. By ensuring that credit will be readily extendable to contractors, contractors may be less likely to walk off of public projects before substantial completion. This, in turn, enhances the public’s interest to prevent avoidable delays in a public construction project and the contractors’ private interests. This is just one way that allowing assignability of payment bond claims may be in both the public’s interest and in contractors’ interests.   

Therefore, while the question has not been conclusively decided in North Carolina, there are arguments supporting the ability of contractors to assign their payment bond claims along with their accounts. Understanding this can be an effective business tool for contractors. 

[1] In Gulf Ins. Co., the court ultimately determined that an actual assignment had not occurred and that there was no viable claim because the subcontractors, who alleged assignee claimed it was subrogated to, were not owed any payments.  313 F. Supp. 2d at 598.

Nexsen Pruet's Construction Group is one of the leading construction practices in the Carolinas. The attorneys in this group have experience in all areas of the industry and have worked throughout North and South Carolina for many years. 

This article also appeared in the August 9, 2018 newsletter for the National Association of Credit Management.

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