On public projects, payment and performance bonds are required by either the Miller Act (for federal projects) or a Little Miller Act (for state and local projects). These bonds both insure that a contractor will complete the project as promised and that all parties who subcontract under the general contractor will be paid. Public projects are not subject to mechanics liens, so the opportunity to make a claim on this surety bond provides security that government projects would otherwise lack.
The surety bond market is a growing market, and companies are trying to move into the industry. Because of this increased competition, surety bonds may get cheaper going forward. However, before a contractor issues a bond, it should do its due diligence on the surety provider. Likewise, a subcontractor should stay on its toes. Just because a surety is present doesn’t necessarily mean that a subcontractor’s payment rights are secure. Recently, a Florida man was convicted of surety bond fraud on federal projects.
Surety Bond Fraud
Alexander Xavier was convicted of issuing fraudulent surety bonds insuring federal projects in Florida. Xavier repeatedly issued fraudulent bonds, collecting over $4.3M in fees for fake bonds over a two year period from May 2008 to October 2010. During that span, Xavier’s surety bond fraud extended to contracts with at least 18 federal agencies. As a result of the fraud conviction, Xavier will be spending over 12 years in federal prison. He is also responsible for paying restitution of $4.165M.
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Xavier purported to be an individual surety, having years of experience in the field. He also held himself out as an employee of Quantum Partners, 1st Capital Lending Trust, and Guardian One Capital Corp. Interestingly enough, there’s been another case that alleged surety bond fraud involving the same “companies.” The case was brought in Kansas a few years earlier for providing fake bonds on a project for the Environmental Protection Agency. The Environmental Protection Agency also spearheaded the investigation into Xavier.
For more information, check out this release.
Takeaway
Public projects have some extra allure because of the security the projects provide. On these projects, subcontractors expect a property owner that is unlikely to default on payments and the safety net of a surety bond claim if issues arise. Clearly, that is not always the case. Beyond this recent surety bond fraud, we have seen other issues involving sureties. Not long ago we wrote about a subcontractor going unpaid as a result of an insolvent surety. The problem can cut both ways, too- we’ve also seen an innocent surety take the brunt of a fraud claim.
All of this is to say that a subcontractor should not rest easy just because there are payment bonds at play. In this construction payment climate, a subcontractor or supplier must remain vigilant in preserving their right to payment. That is, until we reach a construction payment utopia.
For more on bond claims nationwide, head over to our Miller Act Frequently Asked Questions. If you’re looking for information on Florida’s Little Miller Act, we’ve got that too: Florida’s Little Miller Act Statute. We also discuss bonds all the time on the blog, so head over to our Payment Bond tag for more on the subject.
