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Star Equipment, Ltd. v. State, Iowa Dept. of Transp.

Supreme Court of Iowa

January 31, 2014

STATE of Iowa, IOWA DEPARTMENT OF TRANSPORTATION, Appellee, and Manatt's, Inc. and Short's Concrete Cutting Co., Appellants.

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Stephen D. Marso of Whitfield & Eddy, P.L.C., Des Moines, for appellant Manatt's, Inc.

Steven P. DeVolder of The DeVolder Law Firm, Norwalk, for appellant Short's Concrete Cutting Co.

Timothy J. Van Vliet and David L. Wetsch of Wetsch, Abbott & Osborn, P.L.C., Des Moines, for appellant Star Equipment, Ltd.

Thomas J. Miller, Attorney General, and Noel C. Hindt, Assistant Attorney General, for appellee.

WATERMAN, Justice.

This appeal presents questions of first impression on the meaning and constitutionality of Iowa Code section 573.2 (2011). That statute governs subcontractors' remedies for unpaid work on public improvements when the state waives the performance bond for a general contractor that is a " Targeted Small Business" (TSB). Three subcontractors obtained default judgments against a TSB, which remain unsatisfied. The district court ruled that, in the absence of a bond, the subcontractors' remedy against the state is limited to the funds the Iowa Department of Transportation (IDOT) retained on its contract with the TSB. The subcontractors argue section 573.2 allows broader recovery rights, requiring IDOT to step into the TSB's shoes to pay the balances owed them for work on the public project. IDOT argues the district court's ruling correctly interpreted the statute to limit its obligation to the retained funds. IDOT

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alternatively argues that the subcontractors' interpretation would violate a constitutional prohibition on extending state credit to private entities. See Iowa Const. art. VII, § 1.

For the reasons explained below, we construe section 573.2 as a waiver of sovereign immunity that allows subcontractors to recover from IDOT the unpaid balances TSBs owe for work on public improvements. Our interpretation effectuates the legislature's intent to encourage the use of TSBs on state projects and expand the remedies available to subcontractors upon a TSB's default. We reject IDOT's constitutional challenge because article VII, section 1 of the Iowa Constitution does not prohibit state reimbursement for subcontractors' work on public improvements owned by the state. Accordingly, we reverse the district court's ruling and remand this case for further proceedings on the subcontractors' claims against IDOT for unpaid work and attorney fees.

I. Background Facts and Proceedings.

In 2010, IDOT hired Universal Concrete, Ltd. as the general contractor for two public construction contracts. The purpose of these projects was to improve the rest areas along Interstate 80 in Adair County. Universal Concrete was a TSB, which is defined as a small business that is located in Iowa; operated for profit; has an annual gross income below $4 million; and is at least fifty-one percent owned, operated, and actively managed by minorities, women, or persons with disabilities. Iowa Code § 15.102. Because Universal Concrete qualified as a TSB, IDOT waived the requirement of a construction surety bond to guarantee the company's performance on the contract. See Iowa Code § 12.44 (setting forth when bond can be waived for TSB).

Universal Concrete subcontracted with Star Equipment, Manatt's, and Short's Concrete. Star Equipment supplied rental equipment, Manatt's furnished ready-mix concrete, and Short's Concrete provided cement cutting services. No direct contractual relationship existed between IDOT and the subcontractors. The contract between Universal Concrete and IDOT expressly stated there were no third-party beneficiaries. IDOT paid Universal Concrete under the terms of their contract, and it was Universal Concrete's responsibility in turn to pay its subcontractors.

The rest stop improvements were completed in 2011, and IDOT gave its final acceptance of the projects on September 1 of that year. Universal Concrete, however, failed to pay in full the three subcontractors for the work they performed. There was no surety bond against which the subcontractors could seek compensation, but IDOT had retained $3436.75 that it owed Universal Concrete. Star Equipment, Manatt's, and Short's Concrete filed claims with IDOT seeking reimbursement for their outstanding balances, claiming $10,851.44, $15,685.55, and $5775, respectively.

On October 13, 2011, Star Equipment filed this civil action against Universal Concrete and IDOT, as well as against Manatt's and Short's Concrete to adjudicate their competing interests in the funds retained by IDOT. Manatt's and Short's Concrete filed answers, counterclaims, and cross-claims. The subcontractors each contended Iowa Code section 573.2 imposes liability on IDOT for the amount that their claims exceeded the retained funds. They also sought attorney fees and interest. Universal Concrete failed to respond and was found in default.

IDOT agreed that the subcontractors were entitled to payment from the retained

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funds, but filed a motion to dismiss or strike the subcontractors' claims against it for amounts that exceeded the retainage. IDOT argued its obligation to reimburse the subcontractors without a bond was limited to the retainage. IDOT further argued that interpreting Iowa Code section 573.2 to require IDOT to pay the overage on such claims would compel the state to act as a surety for the TSB, in violation of article VII, section 1 of the Iowa Constitution.

On January 20, 2012, the district court granted IDOT's motion to dismiss the subcontractors' claims to the extent they exceeded the retained funds. The district court explained that

[u]nder the scheme established in chapter 573, a subcontractor or supplier generally has a claim against the principal and the surety on the performance bond and against the public corporation to the extent of the amount retained from the payments to the contractor.

(Footnote omitted.) The district court concluded:

This court finds nothing in section 573.2 that creates or expands the liability of the public corporations under the statutory scheme of chapter 573 and accordingly finds no basis on which these claimants can recover against the DOT for any amounts in excess of the retainage.

Because the court concluded the statute did not require IDOT to pay claims in excess of the retainage, the court did not reach the constitutional issue. Manatt's sought an interlocutory appeal of this order, which our court denied.

Subsequently, the district court ruled on the subcontractors' respective motions for summary judgment against Universal Concrete. Universal Concrete did not participate in the proceedings. The district court entered unresisted summary judgments in favor of each subcontractor and noted Universal Concrete was in default. First, on July 3, the district court awarded all of the retained funds to Manatt's because it had filed its IDOT claim first. This left a balance of $12,248.80. The district court entered judgment against Universal Concrete for this amount, with interest, costs, and later, attorney fees of $11,936. On July 20, the district court granted Short's Concrete's motion for summary judgment against Universal Concrete, awarding $5775 in damages and $5500 in attorney fees with interest. Finally, on September 24, the court granted Star Equipment's motion for summary judgment against Universal Concrete, awarding $10,851.44 in damages and $2560 in attorney fees plus interest.

Manatt's and Short's Concrete filed a joint appeal and Star Equipment filed a separate appeal. We consolidated and retained the appeals. The subcontractors seek reversal of the district court's ruling on IDOT's motion to dismiss. The subcontractors argue the court erred in ruling IDOT is not liable for claims exceeding the retainage amount when IDOT has waived the bond requirement. They also request that IDOT be required to pay the attorney fees they incurred in district court and on appeal. Universal Concrete is not a party to this appeal.

II. Scope of Review.

We review rulings on motions to dismiss for correction of errors at law. Rees v. City of Shenandoah, 682 N.W.2d 77, 78 (Iowa 2004). We review the district court's interpretation of a statute for correction of errors at law. L.F. Noll Inc. v. Eviglo, 816 N.W.2d 391, 393 (Iowa 2012). " We review constitutional claims de novo." Ames Rental Prop. Ass'n v. City of Ames, 736 N.W.2d 255, 258 (Iowa 2007).

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III. Analysis.

The subcontractors seek payment from IDOT under Iowa Code chapter 573 for their unpaid work improving state-owned rest stops on Interstate 80. The subcontractors' default judgments against Universal Concrete, the TSB general contractor hired and paid by IDOT, remain unsatisfied. Because mechanic's liens do not attach to government-owned facilities, chapter 573 was enacted to provide other protections to secure payment for those working on public improvements. See Farmers Coop. Co. v. DeCoster, 528 N.W.2d 536, 537 (Iowa 1995) (stating chapter 573 " secure[s] or protect[s] the persons performing work or providing materials" on public improvements); Lennox Indus., Inc. v. City of Davenport, 320 N.W.2d 575, 577 (Iowa 1982) (noting chapter 573 " protect[s] contributors to public work projects because normally it is impossible to obtain a lien on public property" ). Subcontractors on public improvements left unpaid by the general contractor ordinarily would collect from funds retained by the state or through claims against a surety bond. Iowa Code §§ 573.16, .18, .22. The retained funds in this case were insufficient, and IDOT had waived the bond.

This appeal presents our first opportunity to decide whether Iowa Code section 573.2, as amended in 1988, requires IDOT to pay more than the retained funds to subcontractors shortchanged by a TSB general contractor. We hold section 573.2 requires IDOT to step into the shoes of the TSB general contractor to pay subcontractor claims for unpaid work on public improvements when retained funds are insufficient and the bond had been waived. We reach this conclusion based on the text of the statute, its legislative history, and its purpose. We further hold this interpretation does not require the state to act as a surety, and therefore, we reject IDOT's constitutional challenge under article VII, section 1. To give context to the parties' statutory and constitutional arguments, we first examine the structure and purposes of chapter 573.

A. An Overview of Chapter 573.

Entitled " Labor and Material on Public Improvements," chapter 573 is Iowa's counterpart to the Federal Miller Act. Lennox Indus., 320 N.W.2d at 577 (citing Miller Act, 40 U.S.C. §§ 270a-d (1979 & Supp. IV 1980)). Chapter 573 protects subcontractors and materialmen through retainage procedures and by requiring general contractors to obtain surety bonds for state government construction projects. See Iowa Supply Co. v. Grooms & Co. Constr., Inc., 428 N.W.2d 662, 665-66 (Iowa 1988).

Bonds on public projects serve as a substitute for the protection of mechanics' liens, which are unavailable when the landowner is the government:

To provide protection in public works projects for contractors, subcontractors and materialmen unable to utilize a mechanic's lien, chapter 573 requires that the general contractor execute and deliver a bond running to the public corporation sufficient to insure the fulfillment of the conditions of the contract. See Iowa Code §§ 573.2, .5 (1987). This bond can be the object of a subcontractor's or materialman's claim, see Iowa Code § 573.7 (1987), and serves as a substitute for the protection of a mechanic's lien.

Id. at 665.Iowa Code section 573.5 (2011) states that the amount of the bond must be " sufficient to comply with all requirements of [the] contract and to insure the fulfillment of every condition, expressly or impliedly embraced in [the] bond." Bonds are typically required on all projects when the contract price equals or exceeds ...

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