Financing Is Not “Labor or Material” Under Subcontract Payment Bonds; Oklahoma’s Parol‑Evidence Stranger Exception Applies; Prevailing Defendants May Recover Fees Under § 936 Based on the Suit’s Gravamen

Introduction

This Tenth Circuit decision resolves three recurring issues at the intersection of construction suretyship, contract interpretation, and fee-shifting under Oklahoma law:

Whether a financier that purchases a completed asset and leases it back to a subcontractor qualifies as a “claimant” under a subcontract labor-and-material payment bond.
Whether a nonparty surety may introduce extrinsic evidence to contradict the characterization of the parties’ separate transaction (here, a sale-leaseback described as a “lease”).
Whether a prevailing surety may recover attorney fees under Okla. Stat. tit. 12, § 936(A) when the plaintiff’s suit sought to recover for labor or services—even though the court ultimately found the plaintiff had supplied only money.

The court holds: (1) financing—even when structured as a sale‑leaseback—does not constitute “labor or material” and does not trigger payment-bond coverage; (2) Oklahoma’s parol‑evidence rule does not bind a nonparty (the “stranger exception”), so the surety could prove the true nature of the Insight–Icon transaction; and (3) the prevailing surety is entitled to fees under § 936 because fee entitlement turns on the underlying nature (gravamen) of the suit, not on whether the plaintiff ultimately proved that it provided labor or services. Judge Eid concurs in part and dissents in part on the fee issue, reading § 936 more narrowly.

Summary of the Opinion

Parties and project: United Excel (Prime) undertook a federal project to renovate a clinic at Vance Air Force Base. Icon Construction (Sub) designed, manufactured, and installed a temporary modular clinic (the “Module”). Icon purchased a subcontract labor-and-material payment bond from North American Specialty Insurance Company (NASIC).
Insight’s role: After Icon substantially completed the Module, Insight Investments entered a sale‑leaseback with Icon, advancing $410,000 and receiving lease payments and an ownership interest. Insight concededly did not manufacture, deliver, or install the Module; it provided funding.
Claim and denial: Insight sought payment under Icon’s bond with NASIC when Icon did not repay Insight. NASIC denied coverage because Insight had not supplied “labor or material.” Insight sued for breach of the bond and bad faith.
District court: Granted NASIC summary judgment, holding financing is not “labor or material”; denied NASIC prevailing‑party fees under § 936.
Tenth Circuit:
- Affirmed summary judgment for NASIC: Insight is not a “claimant” under the bond; characterizing the transaction as a “lease” could not convert financing into material supply; a modular clinic is not “equipment” used in the work.
- Held the parol‑evidence rule did not bar NASIC’s extrinsic evidence because the surety was a nonparty to Insight’s separate contract (stranger exception).
- Reversed the denial of fees: Applying Oklahoma law, the court concluded § 936(A) authorizes fees to the prevailing party in actions brought “to recover for labor or services rendered,” regardless of whether the plaintiff actually provided labor or services. The court remanded to set the amount.

Analysis

Precedents Cited and Their Influence

1) Financing versus “labor or material” under payment bonds

Rockwell Bros. & Co. v. Keatley, 152 P. 449 (Okla. 1915), and First Nat’l Bank v. Southern Surety Co., 161 P. 539 (Okla. 1916): Classic Oklahoma authority holding that labor-and-material bonds protect those supplying labor or materials—not lenders or financiers advancing money. The Tenth Circuit leans on this longstanding rule to reject Insight’s attempt to claim as a “materialman” via financing.
First Nat’l Bank v. O’Neil, 223 N.W. 298 (Minn. 1929): Widely cited for the proposition that sureties are not liable for funds advanced to contractors, as such liabilities would impermissibly enlarge the surety’s undertaking without consent. The court invokes this broader consensus and risk-allocation rationale.
Barbero v. Equitable Gen. Ins. Co., 607 P.2d 670 (Okla. 1980): Confirms that classic materialmen who actually supply labor/materials can recover under a bond. The court distinguishes Barbero because Insight supplied no materials.
Wasatch Bank of Pleasant Grove v. Surety Ins. Co. of Cal., 703 P.2d 298 (Utah 1985): Persuasive authority emphasizing that expanding coverage to financiers shifts losses to parties that did not assume the risk; lenders can negotiate separate security or surety assent.
Whale v. Rice, 49 P.2d 737 (Okla. 1935): Surety liability cannot be extended beyond the bond’s terms. This principle underpins the court’s refusal to treat financing as covered “material.”

2) What counts as “equipment” and what is “used or reasonably required” for performance

Flintco, LLC v. Total Installation Mgmt. Specialists, Inc., 2025 WL 1513757 (Okla. 2025): Oklahoma Supreme Court emphasizes plain meaning in interpreting private surety bonds. The Tenth Circuit adopts a plain-meaning approach to “equipment,” limiting it to tools and machinery used to perform the work—not the project’s end-product.
Linde Air Prods. Co. v. American Surety Co., 152 So. 292 (Miss. 1934): Defines “equipment” in similar terms as tools and appliances necessary to perform work, reinforcing the narrow reading.
U.S. ex rel. Morgan Buildings & Spas, Inc. v. BKJ Solutions, Inc., 2012 WL 2994717 (W.D. Okla. 2012): Distinguished; the claimant there actually constructed and installed modular buildings on site—providing labor and materials. Insight did not.
U.S. ex rel. Pileco, Inc. v. Slurry Sys., Inc., 804 F.3d 889 (7th Cir. 2015): Distinguished; the claimant lessor was itself a subcontractor providing specialized equipment (a trench cutter) used in performance. Insight was not a subcontractor and supplied no equipment to perform the work.

3) Parol‑evidence rule and the “stranger exception”

Okla. Stat. tit. 15, § 137 and First Nat’l Bank in Durant v. Honey Creek Ent. Corp., 54 P.3d 100 (Okla. 2002): State the parol‑evidence rule that integrated writings supersede prior and contemporaneous negotiations between contracting parties.
In re Assessment of Alleged Omitted Property of Kennedy for Taxation in Osage County for 1917, 58 P.2d 134 (Okla. 1936): The parol‑evidence rule binds parties and their privies, not a “stranger” to the contract. A nonparty may introduce extrinsic evidence to show the “true character” of a transaction when its rights are affected.
Fulton v. L & N Consultants, Inc., 715 F.2d 1413 (10th Cir. 1982) and In re McClain, 447 F.2d 241 (10th Cir. 1971): Applying Oklahoma law, the Tenth Circuit recognizes and applies the stranger exception; nonparties are free to contradict a contract’s terms with extrinsic proof.
Restatement (Second) of Contracts § 213: The parol‑evidence rule is substantive, not evidentiary; the Tenth Circuit notes this in treating choice‑of‑law and substantive application.

4) Attorney fees under Okla. Stat. tit. 12, § 936(A)

ABC Coating Co. v. J. Harris & Sons Ltd., 747 P.2d 271 (Okla. 1987): The “underlying nature” or “gravamen” of the suit determines § 936 applicability; fees are authorized for actions to recover for labor or services rendered.
Kay v. Venezuelan Sun Oil Co., 806 P.2d 648 (Okla. 1991): Clarifies the “gravamen” analysis and rejects fee awards where disputes are only collaterally related to labor/services (there, interpretation of royalty assignments).
Russell v. Flanagan, 544 P.2d 510 (Okla. 1975), and Burrows Constr. Co. v. I.S.D. No. 2, 704 P.2d 1136 (Okla. 1985): No fees where claims are collateral to labor/services (e.g., warranty claims; lost‑profits theories not directly seeking payment for labor/services).
Nayles v. Dodson, 476 P.3d 1245 (Okla. Civ. App. 2020): States that a “labor and services” claim must centrally involve labor/services “actually rendered.” The majority treats this as describing the nature of the claim asserted, not as imposing a proof‑of‑performance predicate for fee entitlement; Judge Eid reads Nayles to require actual provision.
Combs v. Shelter Mut. Ins. Co., 551 F.3d 991 (10th Cir. 2008) and Chieftain Royalty Co. v. Enervest, 888 F.3d 455 (10th Cir. 2017): Federal courts apply state law on outcome‑dependent fee statutes in diversity.

Legal Reasoning

A. Financing is not “labor or material” under a payment bond

The bond defined a “claimant” as one in direct contract with the subcontractor for “labor, material, or both,” also including certain utilities and “rental of equipment” directly applicable to performance. Insight’s own admissions and documentary record showed it provided money in a sale‑leaseback after the Module had been built and installed. Applying century‑old Oklahoma authority and national consensus, the court reiterates: funds advanced to a contractor do not transform a lender into a protected laborer or materialman. Allowing coverage would impermissibly enlarge the surety’s risk—potentially doubling exposure to both unpaid suppliers and financiers—contrary to basic suretyship principles that the surety’s liability cannot be extended beyond the bond’s terms.

The court also rejects Insight’s attempt to recharacterize the completed Module as “equipment.” In ordinary usage, “equipment” means implements used in performing the work (tools, machinery), not the finished facility that is the object of the contract. Even if the Module were “equipment,” it was not “used or reasonably required” to perform the subcontract; it was the end product. By contrast, cases like Morgan Buildings (claimant built and installed modular units) and Pileco (lessor‑subcontractor supplied a trench cutter used in the work) involved bona fide labor/materials or equipment used to perform the contract.

B. The stranger exception enables the surety to pierce labels and prove economic reality

Insight argued the court was bound to accept the sale‑leaseback’s “lease” terminology and could not consider extrinsic evidence because the contract was unambiguous. Oklahoma law squarely forecloses that argument when the dispute involves a nonparty to the contract. The parol‑evidence rule binds only contracting parties and their privies; a stranger—here, the surety—is “at liberty” to show the “true character of the transaction.” The Tenth Circuit therefore reviewed emails, testimony, and course‑of‑dealing materials showing Insight’s product was financing. The court’s approach mirrors “economic realities” tests used elsewhere (e.g., employee classification) and prevents parties from enlarging a surety’s obligations through self‑serving labels in collateral contracts the surety never approved.

C. Fee-shifting under § 936 turns on the suit’s gravamen, not on the plaintiff’s ultimate proof

Section 936(A) awards reasonable fees to the prevailing party “[i]n any civil action to recover for labor or services rendered.” The district court denied NASIC fees because it held Insight had not actually rendered labor or services. The Tenth Circuit reverses: Oklahoma Supreme Court precedent directs courts to look to the underlying nature—the gravamen—of the suit. Insight’s complaint alleged it supplied material to the project and sought bond payment for that alleged supply; had it prevailed, it would have recovered for labor/materials and would have sought fees under § 936. Because the action as pleaded sought recovery for labor/services, NASIC, as the prevailing party in that action, is entitled to fees.

Addressing contrary language in Nayles that a labor/services claim must involve labor/services “actually provided,” the majority reads the phrase in context as distinguishing fee‑bearing labor/services claims from other categories (like “relating to” the sale of goods), not as imposing a merits prerequisite that would deny fees to any prevailing defendant whenever the plaintiff fails to prove performance. The majority underscores the practical consequence of Insight’s view: defendants would never be entitled to fees in losing‑plaintiff cases, effectively turning § 936 into a one‑way benefit for plaintiffs—an outcome neither textually commanded nor contemplated by Oklahoma precedent such as ABC Coating and Kay.

Judge Eid dissents from the fee holding, reading Nayles and other Oklahoma authorities to require a direct contract for labor/services “actually provided,” and to exclude cases where the labor/services contract is collateral to the dispute with the surety. In her view, Insight’s claim against NASIC sounds in indemnity on a bond, not directly against a recipient of labor/services, and should fall outside § 936.

Impact

On construction finance and suretyship

Financiers’ claims curtailed: Lenders and sale‑leaseback financiers cannot use subcontract payment bonds to backstop repayment unless they independently qualify as suppliers of labor or materials (or obtain express surety consent or dedicated security).
Risk allocation reaffirmed: The decision reinforces the classic allocation that lenders bear credit risk of contractor default unless the surety expressly agrees to cover financing obligations. Parties who want bond coverage for financing must negotiate that term with the surety.
Labels will not control: Parties cannot convert financing into bond‑covered “material” by drafting a sale‑leaseback or “rental” label. Courts will look through form to substance, and sureties may prove the true nature of transactions via extrinsic evidence.
End products are not “equipment”: Attempting to recharacterize a finished modular building as “equipment” failed here. Claimants should expect a narrow, ordinary‑meaning interpretation confined to implements used to perform the work.

On litigation strategy and evidence

Stranger exception as a powerful tool: Nonparties may introduce extrinsic evidence to contradict contractual labels and characterize the transaction’s substance. This is particularly consequential for sureties defending bond claims premised on collateral agreements.
Choice‑of‑law vigilance: Insight’s failure to timely press California law resulted in Oklahoma law applying. Litigants should preserve choice‑of‑law positions early; nonetheless, the court noted no meaningful conflict on the parol‑evidence issue.

On attorney-fee exposure under § 936

Defendants can recover fees in failed labor/services suits: Plaintiffs who sue to recover for alleged labor/services but lose on the merits may face fee‑shifting to prevailing defendants. Pleading strategy matters: if the complaint’s gravamen seeks payment for labor/services, § 936 can apply even if the plaintiff ultimately provided none.
Lingering tension with Nayles: The majority and Judge Eid diverge on reading Nayles. Until the Oklahoma Supreme Court speaks directly to this point, parties should anticipate competing arguments about whether “actually rendered” is a claim‑characterization or a proof requirement.

Complex Concepts Simplified

Payment bond: A surety’s promise to pay unpaid claims for labor and materials used in a project if the bonded contractor/subcontractor defaults. Public projects typically require such bonds because mechanics’ liens cannot attach to government property (Miller Act and “Little Miller Acts”).
Claimant (under a payment bond): Typically, someone with a direct contract to supply labor and/or materials for the bonded work. Financiers are not claimants merely by funding the work.
Parol‑evidence rule: A substantive rule that an integrated written contract supersedes prior/contemporaneous negotiations between the contracting parties. The stranger exception means nonparties are not bound by the rule and may use extrinsic evidence to contest what the contract truly reflects.
“Equipment” in bonds: Generally refers to tools and machinery used to perform work, not the finished asset produced by the contract.
Third‑party beneficiary: A nonparty that can enforce a contract only if the contract manifests an intent to benefit them. If a claimant is not within the bond’s coverage, there is no third‑party beneficiary status.
Summary judgment (de novo review): Judgment without trial when there is no genuine dispute of material fact and the movant is entitled to judgment as a matter of law. Appellate courts review such grants anew without deference.
Prevailing‑party fees (§ 936): Oklahoma mandates fees to the prevailing party in actions to recover for labor or services rendered (and several other enumerated categories). The “underlying nature” or “gravamen” of the suit determines applicability.

Conclusion

The Tenth Circuit’s order delivers three clear messages. First, financing—even when artfully structured as a sale‑leaseback—does not morph into “labor or material” protected by a subcontract payment bond. Second, Oklahoma’s parol‑evidence “stranger exception” empowers sureties to prove the real substance of collateral transactions and prevents parties from enlarging surety risk with contractual labels the surety never accepted. Third, prevailing defendants can obtain attorney fees under § 936 when the action’s gravamen is recovery for labor or services—even if the plaintiff ultimately fails to establish that it performed any.

Collectively, these holdings tighten the doctrinal boundaries of bond coverage, fortify sureties’ evidentiary defenses, and recalibrate fee‑exposure analysis in Oklahoma for litigants asserting or resisting claims framed as payment for labor or services. While the decision is an unpublished order and judgment and thus nonbinding, it is meticulously grounded in Oklahoma authority and will likely carry persuasive weight in future disputes presenting similar issues.