Fraud: Performance & Payment Bonds on Public Projects

by Francisco R. Garcia-Soroeta

Federal and state statutes require most public works projects to be covered by payment bond and performance bonds.  Performance bonds, essentially, guarantee that the project will be successfully completed, and payment bonds, essentially, guarantee that subcontractors and suppliers will received payment for the labor, services and materials.  The statutory scheme for requiring these bonds can be seen as a “substitution” for lien rights. Thus, if a subcontractor is not paid for its work, then, in addition to any contractual rights or common law rights it may have, the subcontractor may seek payment from the bonding company or surety.

It is also important to note that the Federal statutes requiring Payment Bond and Performance Bonds on Federal public works projects are commonly referred to as the Federal Miller Act; most states have enacted similar requirements on state and municipal projects are generally referred to at “Little Miller Acts.”

When a claim is filed against a performance bond, a surety, or insurance company, agrees to pay another contractor to complete the work that the original contractor failed to perform. With a payment bond there would be a guarantee that subcontractors and suppliers will be will be paid what they are owed from the principal. On public projects, albeit at the federal or state level, payment bonds may be required by statute; but they are essentially a contract between a principal and a surety for the benefit of third parties and as such can be susceptible to fraud. Contractors and sub-contractors must perform their due diligence to ensure that their performance or payment bond is backed up by sufficient assets or a reliable organization; an area where an experienced Georgia construction law attorney is able to provide assistance. An example of which can be found on the following case recently decided by the Unites States Court of Appeals for the Eleventh Circuit, United States v. Xavier, No. 16-17570, 2018 U.S. App. (11th Cir. May 30, 2018).

Background & Facts:

In this case, a personal guarantor received a substantial amount of money for signing as surety on performance and payment bonds for federal government construction contracts; four of which are in dispute, among these one with the Department of Labor and three other with the Department of the Army. The guarantor swore under oath that the funds existed and were committed solely to the bond. This individual signed a surety bond in for a seven-figure amount between a contractor and the Department of Labor; however, when the contractor filed a claim to ensure payment the guarantor refused. The same situation arose with the three contracts with the Department of the Army.

It turns out the Guarantor was shuffling between financial companies. One representative of one of these companies testified in court that their respective company never had the amount of money required to back the bonds. Another testified that they had never held assets. The individual in question, Mr. Xavier, testified that the forms to which he had signed his name were false, he also testified that he merely believed that the business he represented had the assets in their holdings. They jury found Mr. Xavier guilty on all counts of fraud, he later appeals on the grounds of a jury instruction error; the jury had convicted him on the grounds of reckless indifference.

Court of Appeals Agrees with the Lower Court’s Decision:

The United States Court of Appeals for the Eleventh Circuit agreed with the Lower Court’s decision and affirmed that the jury made no error in the district court.  As a part of its review, the Court of Appeals reviewed a jury instruction given to the jury prior to its deliberations finding that:

“The district court’s instruction stated that to find deliberate ignorance, the jury had to find “beyond a reasonable doubt” that Xavier “had every reason to know” that the statements in the bond documents were false and that Xavier “deliberately closed his [ ] eyes” to that fact. That instruction was not a “plainly incorrect statement of the law.””

United States v. Xavier, No. 16-17570, 2018 U.S. App. LEXIS 14494, at *8 (11th Cir. May 30, 2018)

“The government showed that Xavier made around $400,000 in a span of a few years by signing his name to pledge millions of dollars in assets that did not exist. He swore that those nonexistent assets were held at banks which had no record of them or at banks which did not exist. And Xavier admitted that certain statements in the bond documents were false, but testified that he did not know they were false when he swore to them.”

United States v. Xavier, No. 16-17570, 2018 U.S. App. LEXIS 14494, at *10 (11th Cir. May 30, 2018)

The court of appeals affirmed that the defendant committed fraud and profited of said fraud. There was no money behind they surety which means that it was a very uphill battle for the contractors and sub-contractors affected by this instance of blatant fraud to collect their money.