Star Equipment, Ltd. v. State of Iowa, Iowa Department of Transportation , 843 N.W.2d 446 ( 2014 )

IN THE SUPREME COURT OF IOWA
No. 12–1378
Filed January 31, 2014
STAR EQUIPMENT, LTD.,
Appellant,
vs.
STATE OF IOWA, IOWA DEPARTMENT OF TRANSPORTATION,
Appellee,
and
MANATT’S, INC. and SHORT’S CONCRETE CUTTING CO.,
Appellants.
Appeal from the Iowa District Court for Adair County, John D.
Lloyd, Judge.
Subcontractors appeal ruling on scope of remedies under Iowa
Code section 573.2 for unpaid work on state project. REVERSED AND
REMANDED WITH INSTRUCTIONS.
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.
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Thomas J. Miller, Attorney General, and Noel C. Hindt, Assistant
Attorney General, for appellee.
3
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 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.
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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
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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 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
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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
7
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).
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.
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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
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(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 $25,000 and may also be
required for contracts below that threshold. Id. § 573.2.
A performance bond underwriter assesses “the unique
characteristics of a given principal and only issues a bond if claims are
not expected.” Thomas J. Vollbrecht & Jacqueline Lewis, Creation of the
Relationship, in The Law of Performance Bonds 6–7 (Lawrence R.
Moelmann, et al. eds., 2d ed. 2009) [hereinafter Vollbrecht] (emphasis
omitted) (contrasting bond underwriters against insurance underwriters,
who issue insurance based on the risk assessment of a generalized pool,
and noting that bond principals are expected to indemnify the surety).
The capital of the principal is an important consideration in bond
underwriting, and a surety will likely refuse to issue a bond if the
principal does not have adequate financing, cash flow, and financial
reporting. Id. at 7. Bonds can represent a significant cost: Premiums for
construction bonds often fall in a range of one to three percent of the
amount of the bonded contract. William Schwartzkopf, Practical Guide to
Construction Contract Surety Claims § 2.04 (current through 2014
Cumulative Supp.), http://www.westlaw.com (last visited Jan. 17, 2014).
“The bond premium is effectively an administrative fee based upon the
surety’s assessment that its underwriting is sufficiently rigorous that
there will be few or no defaults under its bonded contracts.” Vollbrecht
at 7.
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Chapter 573 provides an additional protection for subcontractors
in the form of a retained percentage fund. Section 573.12(1) requires the
state entity, or “public corporation,” in charge of the project to pay the
general contractor monthly. Iowa Code § 573.12(1). From the amount
payable to the general contractor, the public corporation is allowed—but
not required—to retain up to five percent of the amount owed.1 See id.
Section 573.13 specifies that the retained amount “constitutes a fund for
the payment of claims for materials furnished and labor performed.” Id.
§ 573.15 (providing under what circumstances the retained amounts
may be used to pay those who have furnished materials).
Subcontractors owed money on public construction projects may
submit their claims to the responsible public corporation. Id. § 573.16.
If necessary, the court is tasked with adjudicating these claims and is
directed to award a claimant the costs of the action. Id. § 573.18. The
court may tax reasonable attorney fees as costs. Id. § 573.21. If the
retained percentage is sufficient, the public corporation pays the
claimants from that fund. Id. § 573.18. If no claims are submitted
against the retained funds, or if excess funds remain after all claims have
been satisfied, the balance is released to the general contractor. Id.
§ 573.14.
B. Statutory Construction. This appeal arises due to the
exception to the bond requirement for TSBs and the parties’
disagreement regarding the meaning of a 1988 amendment to section
573.2. Iowa Code section 12.44, enacted in 1987, requires state
agencies to waive the bond requirement for TSBs that “are able to
1The general contractor is also authorized by section 573.12(1) to retain five
percent from the amount it owes its subcontractors. Iowa Code § 573.12(1).
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demonstrate the inability of securing such a bond because of a lack of
experience, lack of net worth, or lack of capital.”2
We now turn to the operative statutory language at issue. See
State v. DeCamp, 622 N.W.2d 290, 294 (Iowa 2001) (“[O]ur first task is to
look to the language of the statute to determine the legislative intent.”).
The second paragraph of Iowa Code section 573.2 refers to the TSB bond
waiver and states:
If the requirement for a bond is waived pursuant to
section 12.44, a person, firm, or corporation, having a
contract with the targeted small business or with
subcontractors of the targeted small business, for labor
performed or materials furnished, in the performance of the
contract on account of which the bond was waived, is
entitled to any remedy provided under this chapter. When a
bond has been waived pursuant to section 12.44, the
2Section 12.44 was adopted as a part of a larger bill that also established a
targeted small business linked deposit program. 1987 Acts ch. 233, §§ 128, 129
(codified at Iowa Code §§ 12.43–.44 (Supp. 1987)). In its current form, section 12.44
states in full:
Agencies of state government shall be required to waive the
requirement of satisfaction, performance, surety, or bid bonds for
targeted small businesses which are able to demonstrate the inability of
securing such a bond because of a lack of experience, lack of net worth,
or lack of capital. This waiver shall not apply to businesses with a record
of repeated failure of substantial performance or material breach of
contract in prior circumstances. The waiver shall be applied only to a
project or individual transaction amounting to fifty thousand dollars or
less, notwithstanding section 573.2. In order to qualify, the targeted
small business shall provide written evidence to the department of
inspections and appeals that the bond would otherwise be denied the
business. The granting of the waiver shall in no way relieve the business
from its contractual obligations and shall not preclude the state agency
from pursuing any remedies under law upon default or breach of
contract.
The department of inspections and appeals shall certify targeted
small businesses for eligibility and participation in this program and
shall make this information available to other state agencies.
Subdivisions of state government may also grant such a waiver
under similar circumstances.
Iowa Code § 12.44 (2011).
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remedies provided for under this paragraph are available in
an action against the public corporation.
(Emphasis added.)
The 1988 Senate File that added this second paragraph to section
573.2 begins by stating the bill is “[a]n Act relating to claims against
public corporations for nonpayment of moneys due on public
improvements.” S.F. 2271, 72d G.A., 2d Sess. (Iowa 1988). The final
version of the Senate File also included an explanation stating:
This bill extends the remedies afforded a person contracting
with a bond-paying public contractor to a person, firm, or
corporation contracting with a targeted small business when
a bond requirement has been waived pursuant to section
12.44.
Id. (emphasis added). “ ‘[W]e give weight to explanations attached to bills
as indications of legislative intent.’ ” Root v. Toney, 841 N.W.2d 83, 88
(Iowa 2013) (quoting City of Cedar Rapids v. James Props., Inc., 701
N.W.2d 673, 677 (Iowa 2005)).3 We have not had occasion to interpret
section 573.2 as amended in 1988.
“The goal of statutory construction is to determine legislative
intent.” Auen v. Alcoholic Beverages Div., 679 N.W.2d 586, 590 (Iowa
3The legislature enacts the bill—not the accompanying explanation. But, the
internal rules governing the general assembly require the title and explanation to be
accurate. See Iowa Senate Rule 28 (“The subject of every bill shall be expressed in its
title.”); id. r. 29 (“No bill . . . shall be introduced unless a concise and accurate
explanation is attached.”); Iowa House Rule 27 (“All bills . . . introduced shall be
prepared by the legislative services agency with title, enacting clause, text and
explanation as directed by the chief clerk of the house.”); Iowa Legislative Services
Agency, Iowa Bill Drafting Guide and Style Manual (2013 Iowa Law CD-ROM, partially
updated Aug. 2012) (“House and Senate bills . . . must have explanations of their
contents, which explanations follow the body of the document. . . . An explanation of a
bill written by a bill drafter must be concise and accurate, explaining exactly what the
bill does, without attempting to comment upon its merits or editorializing.”). An
explanation or title included when a bill is introduced may become irrelevant when the
text of the bill is materially changed by subsequent amendments. But, when the
explanation accompanies the text of the bill enacted without a relevant substantive
change, the explanation is part of the legislative history that can be examined in our
efforts to determine the meaning of the text.
13
2004). We construe chapter 573 “ ‘liberally with a view to promoting its
objects and assisting the parties in obtaining justice.’ ” Lennox Indus.,
320 N.W.2d at 578 (quoting Dobbs v. Knudson, Inc., 292 N.W.2d 692,
694 (Iowa 1980)). “We derive legislative intent not only from the
language used but also from the statute’s subject matter, the object
sought to be accomplished, the purpose to be served, underlying policies,
remedies provided, and the consequences of the various interpretations.”
Postell v. Am. Family Mut. Ins. Co., 823 N.W.2d 35, 49 (Iowa 2012)
(internal quotation marks omitted). The purpose of chapter 573 is to
protect subcontractors and materialmen against nonpayment. See
DeCoster, 528 N.W.2d at 537–38.
The subcontractors argue the second paragraph of section 573.2
entitles them to collect from IDOT the amounts owed by the TSB when
the bond has been waived and the retained funds are insufficient. Their
interpretation fits with the plain text of the statute and with the
legislative explanation accompanying the statutory amendment adding
this provision. IDOT counters that the provision merely confirms that
subcontractors are entitled to seek compensation from the retained
percentage when the bond requirement has been waived. IDOT candidly
concedes that under its interpretation section 573.2 provides the same
remedies with or without the second paragraph. Under IDOT’s
interpretation, the second paragraph is surplusage, and the amendment
adding that provision left the statute unchanged.
Our problem with IDOT’s interpretation is that it flies in the face of
our rules of statutory construction. “[W]hen the legislature amends a
statute, it raises a presumption that the legislature intended a change in
the law.” Postell, 823 N.W.2d at 49. Moreover, “we do not interpret
statutes so they contain surplusage.” Thomas v. Gavin, 838 N.W.2d 518,
14
524 (Iowa 2013); see also Iowa Code § 4.4(2) (“In enacting a statute, it is
presumed that . . . [t]he entire statute is intended to be effective.”); State
v. Keutla, 798 N.W.2d 731, 734 (Iowa 2011) (“We seek an interpretation
that does not render portions of [a statute] redundant or irrelevant.”).
We therefore reject IDOT’s argument that the second paragraph of
section 573.2 merely confirms the retainage remedy. To the contrary, we
conclude the legislature intended the second paragraph of section 573.2
to provide additional remedies for subcontractors of a TSB owed money
for their work on public improvements.
The legislature knows how to limit remedies for those working on
state projects. See, e.g., Iowa Code § 573.7 (“A person furnishing only
materials to a subcontractor who is furnishing only materials is not
entitled to a claim against the retainage or bond under this chapter
. . . .”). If the legislature had intended to limit the remedy of
subcontractors of TSBs to the retainage, it could have said exactly that.
Cf. Oyens Feed & Supply, Inc. v. Primebank, 808 N.W.2d 186, 194 (Iowa
2011) (“If the legislature had intended to subordinate a dealer’s priority
under section 570A.5(3), it would have expressly said so as it did in
subsection (2).”).
We agree with the subcontractors that the plain language of
section 573.2 requires IDOT to step into the shoes of the TSB. The first
sentence of its second paragraph states that when the bond is waived,
the TSB’s subcontractor “is entitled to any remedy provided under this
chapter.” Iowa Code § 573.2. Those remedies include obtaining a
judgment against the general contractor for unpaid work. See id.
§ 573.6(1) (requiring principal to pay subcontractor for work performed);
15
id. § 573.22 (allowing judgment against “principal” for unpaid sums).4
Section 573.2 provides in its final sentence that when a bond is waived
for a TSB, “the remedies provided for under this paragraph are available
in an action against the public corporation.” Id. § 573.2 (emphasis
added). This plainly means the subcontractors are entitled to pursue
such remedies against the public corporation, IDOT in this case.
Reading the first and second sentences together, the remedies available
against IDOT are the same remedies available to subcontractors against
general contractors and sureties under chapter 573 as a whole, including
a deficiency judgment for unpaid work, as well as interest, costs, and
reasonable attorney fees. Id. § 573.18 (allowing for claims for unpaid
labor and materials, plus costs of the action, and interest); id. § 573.21
(allowing reasonable attorney fees); id. § 573.22 (allowing judgment
against principal or surety for unpaid amounts).
Our construction of section 573.2 effectuates the legislature’s
purpose in enacting sections 12.44 and 573.2. See Hook v. Trevino, 839
N.W.2d 434, 444 (Iowa 2013) (“ ‘We seek a reasonable interpretation that
will best effect the purpose of the statute . . . .’ ” (quoting Harden v. State,
434 N.W.2d 881, 884 (Iowa 1989)). The purpose of chapter 573 as a
whole is to protect subcontractors and materialmen against the risk of
nonpayment on public projects. See Iowa Supply, 428 N.W.2d at 665.
The specific purpose of the 1988 amendment to section 573.2 is to
extend protections for subcontractors when the bond is waived for a TSB.
4Chapter 573 makes clear that the general contractor is the principal on the
bond. The first paragraph of section 573.2 states, “Contracts for the construction of a
public improvement shall . . . be accompanied by a bond.” Iowa Code § 573.2. Section
573.3 requires the “contractor to execute and deliver said bond . . . .” Id. § 573.3.
Section 573.6(1) refers to the obligation of the “principal and sureties” to pay those
“having contracts directly with the principal or subcontractors, all just claims due them
for labor performed or materials furnished.” Id. § 573.6(1).
 16
The TSB program in turn is “designed to help women, minorities and the
disabled overcome some of the major hurdles to starting or growing a
small business in Iowa.” Iowa Economic Development, Targeted Small
Business, http://www.iowaeconomicdevelopment.com/Entrepreneurial/
TSB (last visited Jan. 24, 2014). Waiving construction bonds for TSBs
who would be unable to obtain a bond allows them to compete for
government contracts.5 We presume the legislature amended section
573.2 to encourage persons to do business with TSBs by replacing the
security provided by a bond with the financial backing of the state to
ensure payment in full despite a TSB’s default. Our interpretation
furthers the legislative goals of promoting TSBs while protecting their
subcontractors and materialmen from defaults.
By contrast, IDOT’s interpretation would undermine both goals.
The bond waiver allows businesses owned by women, minorities, and the
disabled to better compete for government projects despite their “inability
[to secure] a bond because of a lack of experience, lack of net worth, or
lack of capital.” Iowa Code § 12.44. A business unable to secure a bond
is likely less financially stable than one that is bondable. As such, the
bond waiver removes the protection of a bond in circumstances in which
there is increased risk. The legislature made the policy choice that the
benefit of encouraging TSBs outweighs the increased financial risk of
awarding a project to an unbondable business and that the state should
bear the risk of default.6 IDOT would have this increased risk of
5This is only one of the ways in which the state seeks to foster TSBs. See Iowa
Code § 73.16 (requiring government entities to procure goods and services from TSBs);
id. § 15.108(7), (10) (instructing the Economic Development Authority to provide
assistance to TSBs and requiring reports regarding TSB activity); id. § 714.8(13)
(criminalizing fraudulently claiming to be a TSB).
6The public corporation retains the right to pursue remedies against the general
contractor. See Iowa Code § 12.44 (“The granting of the [bond] waiver shall in no way
17
nonpayment fall on the subcontractors. The practical consequence of
such an interpretation would be that fewer subcontractors would be
willing to work for TSBs. This would limit the business opportunities
available to TSBs bidding on state projects.
For these reasons, we conclude the district court erroneously
interpreted section 573.2. Section 573.2 permits the subcontractors to
recover from IDOT amounts they could have recovered from the surety if
IDOT had not waived the bond. We reject IDOT’s sovereign immunity
argument because section 573.2, so interpreted, constitutes the state’s
express consent to be sued. See Anthony v. State, 632 N.W.2d 897, 902
(Iowa 2001) (holding Iowa Code chapter 91A, which allows employees to
sue the state for wages owed, is an express waiver of sovereign
immunity).
C. Constitutionality of Section 573.2. We must now reach
IDOT’s argument that section 573.2, so interpreted, is unconstitutional
under article VII, section 1 of the Iowa Constitution.7 Our review of the
text, history, and purpose of that provision persuades us that IDOT’s
constitutional challenge fails.
We begin with the well-established principles governing our review
of constitutional challenges:
“We review constitutional challenges to a statute
de novo. In doing so, we must remember that statutes are
______________________
relieve the business from its contractual obligations and shall not preclude the state
agency from pursuing any remedies under law upon default or breach of contract.”).
7Manatt’s and Star Equipment argue we lack subject matter jurisdiction to reach
the constitutional issue because it was not decided by the district court and we are a
court of appellate, not original, jurisdiction under article V, section 4 of the Iowa
Constitution. We disagree. We are exercising appellate review of the district court’s
ruling. IDOT raised the constitutional challenge in district court and on appeal as an
alternative ground for affirming the dismissal. We may decide an issue presented to,
but not decided by, the district court when it is urged on appeal by the appellee as an
alternative ground for affirmance. DeVoss v. State, 648 N.W.2d 56, 62 (Iowa 2002).
18
cloaked with a presumption of constitutionality. The
challenger bears a heavy burden, because it must prove the
unconstitutionality beyond a reasonable doubt. Moreover,
the challenger must refute every reasonable basis upon
which the statute could be found to be constitutional.”
State v. Thompson, 836 N.W.2d 470, 483 (Iowa 2013) (citations omitted)
(quoting State v. Seering, 701 N.W.2d 655, 661 (Iowa 2005)) (internal
quotation marks omitted).
First and foremost, we give the words used by the framers
their natural and commonly-understood meaning. However,
we may also examine the constitutional history and consider
the object to be attained or the evil to be remedied as
disclosed by the circumstances at the time of adoption.
State v. Briggs, 666 N.W.2d 573, 578 (Iowa 2003) (citation and internal
quotation marks omitted).
Article VII of the Iowa Constitution pertains to state debts and
section 1 of that article is entitled “Credit not to be loaned.” It provides:
The credit of the state shall not, in any manner, be given or
loaned to, or in aid of, any individual, association, or
corporation; and the state shall never assume, or become
responsible for, the debts or liabilities of any individual,
association, or corporation, unless incurred in time of war
for the benefit of the state.
Iowa Const. art. VII, § 1.8 We discussed the historical underpinnings of
article VII, section 1 in Grout v. Kendall:
This particular section of our Constitution was taken bodily
from the Constitution of New York. As a part of the
Constitution of New York, it was the result of past experience
in the history not only of New York, but of other states as
well, whereby aspiring new states had loaned their credit
freely and extravagantly to corporate enterprises which had
in them much seductive promise of public good. These
enterprises included railways, canals, water powers, etc.
The corporate body in each case was the primary debtor; the
8Thirty-eight other states have adopted a similar constitutional provision.
Ralph L. Finlayson, State Constitutional Prohibitions Against Use of Public Financial
Resources in Aid of Private Enterprises, 1 Emerging Issues St. Const. L. 177, 181 & n.9
(1988).
19
state became the underwriter; it loaned its credit always with
the assurance and belief that the primary debtor would pay.
Pursuant to these secondary liabilities, the state became
overwhelmed with millions of dollars of indebtedness which
never would have been undertaken as a primary
indebtedness, and which never would have been permitted
by public sentiment, if it had been known or believed that
the secondary liability would become a primary one through
the universal failure of the primary debtor.
195 Iowa 467, 472–73, 192 N.W. 529, 531 (1923).9 As we stated in
Grout, “The ultimate cry of the surety is: I would not have become surety
if I had known or believed that I should have to pay the debt.” Id. at 473,
192 N.W. at 531. Thus, Iowa adopted article VII, section 1 to protect
against the “delusion of suretyship with its snare of temptation.” Id.
We held in Grout, “[n]o public purpose can be meritorious enough,
and no obligation of equity appealing enough, to override [article VII,
section 1].” Id. at 472, 192 N.W. at 531. Unlike Iowa, other states have
interpreted their constitutional provisions to allow the lending of state
9“Governor Wright of New York in 1845 reported that more than three-fifths of
the debt chargeable on the general fund had been incurred by loans of the state’s credit
to railroad corporations which subsequently failed.” Utah Tech. Fin. Corp. v. Wilkinson,
723 P.2d 406, 410 (Utah 1986) (citing Grout in its discussion of the historical context of
Utah’s credit clause).
A historian has explained why many state-financed canals failed due to
competition from railroads:
Most canals were financed by the States, hoping to enhance their
economic development.
In the 1850s, it was an even contest between the canals and
railroads for dominance. But, soon, the interior canals were operating in
the shadow of the railroads. Many canals were eventually abandoned.
....
Compared to canals, railroad construction was not as seriously
challenged by topography. Moreover, many canals were frozen and
inoperable during winter months. As a result, railroads were found to be
a more economical, reliable, and expeditious means of transport, and
many canals soon fell into decline and disuse.
Paul Stephen Dempsey, Transportation: A Legal History, 30 Transp. L.J. 235, 246–47
(2003) (footnote omitted).
20
credit to private parties or the state assumption of private debt if a
“public purpose” is served. See Ralph L. Finlayson, State Constitutional
Prohibitions Against Use of Public Financial Resources in Aid of Private
Enterprises, 1 Emerging Issues St. Const. L. 177, 190–93 (1988)
(collecting cases). We agree with the criticism of the public-purpose test:
It will not do to say that the character of the act is to be
judged by its main object; that, because the purpose is
public, the means adopted cannot be called a gift or a loan.
To do so would be to make meaningless the provision
adopted by the convention of 1846. Gifts of credit to
railroads served an important public purpose. That purpose
was distinctly before the Legislatures that made them. Yet
they were still gifts and so were prohibited.
People v. Westchester Cnty. Nat’l Bank of Peekskill, 132 N.E. 241, 244
(N.Y. 1921).10 To engraft by judicial gloss a vague and open-ended public
purpose exception11 in article VII, section 1 would undermine this
10We note that New York has moved away from this strict construction of their
constitutional provision. Over two dissents, the New York Court of Appeals recently
held that “appropriations to the State Department of Agriculture and Markets to fund
agreements with not-for-profit organizations for the promotion of agricultural products
grown or produced in New York” were valid because the appropriations had “a
predominant public purpose and any private benefit [was] merely incidental.”
Bordeleau v. State, 960 N.E.2d 917, 923 (N.Y. 2011). One dissenter commented:
Either overruling Westchester County Nat[ional] Bank or shrinking it
beyond recognition, the majority seemingly decides that any gift or loan
of money to private recipients is valid as long as it has “a predominantly
public purpose.” It is hard to see what is left of the constitutional
prohibition.
Id. at 926 (Pigott, J., dissenting) (citation omitted).
11Courts often interpret public purpose tests expansively. See, e.g., Empress
Casino Joliet Corp. v. Giannoulias, 896 N.E.2d 277, 295 (Ill. 2008) (“If the purpose
sought to be achieved by the legislation is a public one and it contains elements of
public benefit, then the question of how much benefit the public derives is for the
legislature, not the courts.”); Jackson v. Benson, 578 N.W.2d 602, 628 (Wis. 1998)
(“Under the public purpose doctrine, ‘[w]e are not concerned with the “wisdom, merits
or practicability of the legislature’s enactment.” Rather we are to determine whether a
“public purpose can be conceived which might reasonably be deemed to justify or serve
as a basis for the expenditure.” ’ ” (quoting Miller’s Nat’l Ins. Co. v. City of Milwaukee,
516 N.W.2d 376, 383 (Wis. 1994))); cf. Kelo v. City of New London, 545 U.S. 469, 497,
125 S. Ct. 2655, 2673, 162 L. Ed. 2d 439, 462–63 (2005) (O’Connor, J., dissenting)
(Four dissenters noted in the context of the Federal Takings Clause: “We give
21
constitutional prohibition. Cf. Hayes v. State Prop. & Bldgs. Comm’n,
731 S.W.2d 797, 815 (Ky. 1987) (Stephenson, J., dissenting) (“Section
177 [the Kentucky provision] does not, anywhere, mention ‘public
purpose.’ In effect, the majority opinion has amended Section 177 by
adding ‘except for a valid public purpose.’ ”). This would open the door to
the crony capitalism the framers of our state constitution sought to
avoid. See Westchester Cnty. Nat’l Bank, 132 N.E. at 244 (noting the
prohibition represents “the triumph of efforts to . . . make useless any
pressure from special interests”). Accordingly, we decline to revisit our
conclusion in Grout that a public purpose alone does not permit the state
to assume the debts of private entities.
Yet, article VII, section 1 is a narrow prohibition. Grout recognized
that the state “loans its credit” when it acts as a surety for another. Id.
at 472, 192 N.W. at 531. We therefore held article VII, section 1 does not
prohibit “the creation of a primary indebtedness for any purpose
whatever.” Id. at 473, 192 N.W. at 531. Rather, the provision only
“forbade the incurring of obligations by the indirect method of secondary
liability.” Id. Applying this distinction, Grout rejected a challenge to the
constitutionality of the Soldiers’ Bonus Act of 1921, under which the
state sold bonds to pay for bonuses to Iowa veterans of World War I,
because the state’s liability was primary.12 Id. at 468–69, 484, 192 N.W.
at 529, 536.
______________________
considerable deference to legislatures’ determinations about what governmental
activities will advantage the public. But were the political branches the sole arbiters of
the public-private distinction, the Public Use Clause would amount to little more than
hortatory fluff.”).
12Wehave repeatedly rejected constitutional challenges to state statutes creating
financing programs that allowed private corporations to develop projects. In each of
these cases, we held that the state assumed primary liability. See, e.g., Train Unlimited
Corp. v. Iowa Ry. Fin. Auth., 362 N.W.2d 489, 491–92, 495 (Iowa 1985) (allowing Iowa
Railway Finance Authority to pay for rail facilities by issuing bonds and pledging tax
22
Accordingly, the question we must answer under Grout is whether
the second paragraph of section 573.2 makes IDOT a surety for the TSB
or rather imposes primary liability on IDOT to unpaid subcontractors.
The key to this inquiry is whether the state benefits from the
subcontractors’ work. IDOT already paid Universal Concrete the
contract price for the public project. To the extent IDOT must pay a
second time for work performed by the subcontractors, it is paying an
obligation of a private party, Universal Concrete. In that regard, IDOT is
a co-obligor with the TSB. But, we conclude IDOT is not a surety as
defined by our precedent because Iowa Code section 573.2 obligates
IDOT to pay subcontractors for work improving state-owned facilities—a
benefit to the state.
As we recognized in Grout, “[t]he liability of the surety is always
secondary and not primary.” Id. at 472, 192 N.W. at 531. Whether a
public corporation’s liability is considered primary or secondary depends
upon the nature of its interest. A party is not considered a surety if it
has a direct personal relationship in the debt and receives a benefit from
the debt. 72 C.J.S. Principal and Surety § 12, at 187 (2005). Our court
has stated, “A principal, as distinguished from a surety, . . . means the
person primarily liable under the obligation and who receives the benefit
for which the obligation was given.” Ft. Dodge Culvert & Steel Co. v.
Miller, 200 Iowa 1169, 1172, 206 N.W. 141, 142 (1925) (emphasis
added). This is a long-standing and widely recognized principle. See,
______________________
receipts as security for the bonds); John R. Grubb, Inc. v. Iowa Hous. Fin. Auth., 255
N.W.2d 89, 98 (Iowa 1977) (permitting state to make loans to housing sponsors to
finance housing purchases); Richards v. City of Muscatine, 237 N.W.2d 48, 62 (Iowa
1975) (upholding city pledge to pay tax increment bonds from city taxes); Edge v. Brice,
253 Iowa 710, 716, 113 N.W.2d 755, 758 (1962) (finding constitutional a statute
authorizing the state to reimburse utilities for their costs of relocation caused by federal
highway programs).
23
e.g., F & M Bldg. P’ship v. Farmers & Merchs. Bank, 871 S.W.2d 338,
341 (Ark. 1994) (holding lessor who mortgaged leased property to secure
loan, on condition that it receive the majority of loan proceeds, was a
coprincipal rather than a surety); Johnson v. Jouchert, 24 N.E. 580, 581
(Ind. 1890) (“One who has received and who retains the consideration or
benefit of a contract cannot, in equity, occupy the attitude of a surety.”);
Guar. Mortg. Co. of Nashville v. Ryan Supply Co., 363 So. 2d 739, 745
(Miss. 1978) (concluding appellants’ interest was primary when
appellants entered into a direct contractual relationship for their own
financial benefit); State of Wis. Inv. Bd. v. Hurst, 410 N.W.2d 560, 563
(S.D. 1987) (“[A] person who makes a contract for the purpose of
securing to himself a benefit rather than for securing to another a
benefit, may be classified as a principal.”); Honey v. Davis, 930 P.2d 908,
911 (Wash. 1997) (“[E]vidence of consideration for an obligation flowing
to both obligors belies a contention that either is a surety.”).
Guidance as to what constitutes primary liability is provided in our
caselaw applying the statute of frauds. Under the statute of frauds,
evidence of a secondary obligor’s oral promise to pay the debt of another
is inadmissible unless the secondary obligor made the promise for its
own benefit. See Maresh Sheet Metal Works v. N.R.G., Ltd., 304 N.W.2d
436, 439 (Iowa 1981). The cases differentiate between “original” and
“collateral” promises. See id. If a promise was made for the secondary
obligor’s personal benefit, the promise is considered “original,” and
evidence of the promise is not barred by the statute of frauds. Id. If the
promise is not made for the secondary obligor’s personal benefit, it is a
“collateral” promise, and evidence of the oral promise is inadmissible.
The Restatement (Third) of Suretyship & Guaranty also reflects this rule.
It notes that a secondary obligor’s promise to satisfy a primary obligor’s
24
duty “is not within the Statute of Frauds as a promise to answer for the
duty of another if the consideration for the promise is in fact or
apparently desired by the secondary obligor mainly for its own economic
benefit.” Restatement (Third) of Suretyship & Guaranty § 11(3)(c), at 42
(1996).
In Maresh, a defendant orally guaranteed a corporation’s debts,
and we were asked to decide if this promise was original or collateral.
304 N.W.2d at 438–39. The district court determined the defendant, who
owned substantial stock in the corporation, was pursuing his own
interests when he agreed to pay the corporation’s debt. Id. We therefore
concluded the defendant’s promise was original and created a primary
obligation. Id. at 439.
The court of appeals applied these principles in Gallagher, Langlas
& Gallagher v. Burco, stating:
Collateral promises are made when a promise is made
in addition to an already existing contract and the surety has
no personal concern in the debtor’s obligation and gains no
benefit from the debtor’s obligation. The “main purpose” of
the promise must not be the benefit of the surety.
587 N.W.2d 615, 618 (Iowa Ct. App. 1998) (emphasis added). The
defendant in Burco was a father who orally guaranteed his daughter’s
debt for legal fees related to her child custody trial. Id. at 616–17. The
court of appeals held the father would, at most, gain the indirect benefit
of visiting his granddaughter more if his daughter won custody. Id. at
619. Therefore, the court of appeals concluded that the father’s promise
to pay his daughter’s debt was not an original promise, and the statute of
frauds applied to exclude evidence of his oral promise. Id.
We conclude that because the legislature’s main purpose in
obligating the state to pay subcontractors’ unsatisfied claims was to
25
secure a benefit for the state, a primary obligation exists. IDOT has
assumed primary liability as a co-obligor under section 573.2 in order to
secure a state benefit—the improvement of state-owned highway rest
stops.13 IDOT owns the public improvements completed under chapter
573.14 Thus, this case is a far cry from the privately owned canals and
railroads whose financial collapse saddled prior state governments with
financial burdens.15
IDOT argues its liability to subcontractors is secondary to the
TSB’s liability as general contractor. We rejected a similar argument in a
constitutional challenge to the Iowa Tort Claims Act. In Graham v.
Worthington, 259 Iowa 845, 865, 146 N.W.2d 626, 639 (1966), the
appellant raised an article VII, section 1 challenge to the state’s
assumption of respondeat superior liability for the torts of state
employees, arguing when “an employee of the state commits a tort, the
employee is primarily liable, the state’s obligation secondary, and as a
13An ancillary benefit to the state is that the bond waiver promotes TSBs by
enabling them to bid on public projects.
14We also recognize that the state has the ability to limit its exposure to
subcontractors’ claims because it is the owner of these public projects. Cf. State v.
Exec. Council of State of Iowa, 207 Iowa 923, 937, 223 N.W. 737, 743 (1929) (holding
state did not violate article VII, section 1 by assuming responsibility for county road
fund debts and finding no apparent reason “why the state may not at any time exert its
power over the construction and maintenance of the highways”). For instance, the state
could issue checks payable jointly to the contractor and subcontractor. See, e.g., Iowa
Supply Co., 428 N.W.2d at 664–66 (recognizing that joint-payee checks are used “as a
method of insuring” payment to a materialman or subcontractor and holding the joint-
payee check rule applies to public improvement projects). Moreover, section 12.44
limits the state’s exposure by restricting the bond waiver to projects in which the
contract value is less than $50,000. See Iowa Code § 12.44.
15Even when the state did have security for its debts, such security was
sometimes later found to have little or no value. The first mortgage lien
on the New York and Erie Railroad Company’s assets securing [a] $3
million loan . . . covered only the track and roadbed, and not the much
more valuable rolling stock, stations, or yards.
Peter J. Galie & Christopher Bopst, Anything Goes: A History of New York’s Gift and
Loan Clauses, 75 Alb. L. Rev. 2005, 2011–12 (2012).
26
result any assumption of the liability of an employee is unconstitutional.”
We disagreed. We acknowledged the common law rule that an employer
has a right of recourse against an employee if the employee is negligent,
but emphasized that although “liability as between master and servant
may be primary and secondary [a]s to them, the right of a damaged or
injured third party to sue and hold the employer liable is, in effect, a
direct or primary right.” Id. at 867, 146 N.W.2d at 640. Similarly, here,
both the TSB general contractor and IDOT are liable to subcontractors
for unpaid work on public improvements. Article VII, section 1 is not
violated merely because IDOT steps in to pay for work left unpaid by the
TSB.
IDOT has the “heavy burden” to establish the statute is
unconstitutional. Seering, 701 N.W.2d at 661 (internal quotation marks
omitted). It has not cited a case from any jurisdiction applying a
constitutional prohibition on extension of credit to private parties to
strike down a statute equivalent to section 573.2, nor have we found
such a case.16 Indeed, we have never held any statute unconstitutional
under article VII, section 1.
16We found one case holding a state constitutional prohibition like Iowa’s was
violated in a dispute between a subcontractor, general contractor, and the state. In
that case, the State of Michigan retained contractual liquidated damages from
payments due a general contractor in order to cover losses that resulted from a
subcontractor’s delays. Solomon v. Dep’t of State Highways & Transp., 345 N.W.2d 717,
718 (Mich. Ct. App. 1984). The general contractor sued to force payment. Id. In a
conclusory opinion, the Michigan Court of Appeals held that requiring the state—rather
than a general contractor—to bear the losses would violate Michigan’s lending-of-credit
provision. Id. at 718 (citing article 9, section 18 of the Michigan Constitution); see also
Mich. Const. of 1963 art. 9, § 18 (“The credit of the state shall not be granted to, nor in
aid of any person, association or corporation, public or private, except as authorized in
this constitution.”). This case did not involve the constitutionality of a statute. We do
not find Solomon persuasive because it is factually distinguishable, devoid of analysis,
and at odds with our precedent. See Graham, 259 Iowa at 867, 146 N.W.2d at 640;
Grout, 195 Iowa at 472, 192 N.W. at 531.
27
The evils sought to be avoided by article VII, section 1 are not
present here. IDOT has assumed liability for its own benefit—
improvements to state-owned facilities. This is quite unlike the costly
state government bailouts of investors in privately owned canals and
railroads that prompted the adoption of the New York provision used by
the Iowa framers as the model for article VII, section 1. See Grout, 195
Iowa at 472–73, 192 N.W. at 531; see also Johns Hopkins Univ. v.
Williams, 86 A.2d 892, 900 (Md. 1952) (“The unquestionable historical
reason for the proposal of the constitutional section . . . was to curb the
reckless and improvident investment of public funds in aid of railroads
and canals, promoted by private corporations, organized primarily for
profit to their stockholders.”). We conclude the framers of the Iowa
Constitution did not intend to “foreclose[] something which . . . had no
relation whatever to the problems they were facing.” Johns Hopkins
Univ., 86 A.2d at 900.
For these reasons, we hold that section 573.2, as interpreted
today, is constitutional. Article VII, section 1 does not prohibit the state
from paying the subcontractors after the TSB’s default. That statute
puts IDOT in the position of a coprincipal, not a surety, with its TSB,
Universal Concrete. We therefore decline to affirm the district court on
the alternative ground raised by IDOT.
IV. Attorney Fees.
The subcontractors have now prevailed on their claims against
IDOT. Section 573.21 states, “The court may tax, as costs, a reasonable
attorney fee in favor of any claimant for labor or materials who has, in
whole or in part, established a claim.” Fee awards under this section are
discretionary. Sheer Constr., Inc. v. W. Hodgman & Sons, Inc., 326
N.W.2d 328, 334 (Iowa 1982); see also Grady v. S.E. Gustafson Constr.
28
Co., 251 Iowa 1242, 1252, 103 N.W.2d 737, 743 (1960) (affirming fee
award under section 573.21 to party who prevailed in part). Reasonable
attorney fees include those incurred on appeal. See Schaffer v. Frank
Moyer Constr., Inc., 628 N.W.2d 11, 23 (Iowa 2001) (holding mechanic’s
lien statute, Iowa Code section 572.32, allowed award of appellate fees to
be calculated by district court on remand); see also City of Riverdale v.
Diercks, 806 N.W.2d 643, 659–60 (Iowa 2011) (reviewing factors for
determining reasonable attorneys fees and remanding case for district
court to award reasonable appellate fees). “An applicant for attorney fees
has the burden to prove that the services were reasonably necessary and
that the charges were reasonable in amount.” Schaffer, 628 N.W.2d at
23.
The district court did not reach the subcontractors’ claims for
attorney fees against IDOT because it erroneously ruled IDOT was not
liable beyond the retainage. The district court did award each
subcontractor attorney fees in the uncontested summary judgments
entered against Universal Concrete, which was already in default. The
fee awards, however, were made after the district court had granted
IDOT’s motion to dismiss. Accordingly, IDOT had no opportunity to be
heard on the reasonableness of the fees sought at that stage of the
proceedings. Meanwhile, the subcontractors have incurred additional
fees litigating against IDOT through this appeal, with ultimate success.
We hold the subcontractors, as prevailing parties, are eligible, in
the district court’s discretion, to recover their reasonable attorney fees
from IDOT, including fees incurred obtaining the default judgments
against Universal Concrete and the additional fees incurred litigating
against IDOT in district court and on appeal. In determining whether to
29
award fees under section 573.21, the court may consider nonexclusive
factors used in other discretionary fee-shifting statutes, such as
“(a) [the] reasonableness of the parties’ claims, contentions,
or defenses; (b) [whether a party] unnecessarily prolong[s]
litigation; (c) [the parties’] relative ability to bear the financial
burden; (d) [the] result obtained by the litigation and
prevailing party concepts; and (e) whether a party has acted
in bad faith, vexatiously, wantonly, or for oppressive reasons
in the bringing or conduct of the litigation.”
In re Trust No. T-1 of Trimble, 826 N.W.2d 474, 491 (Iowa 2013) (quoting
Atwood v. Atwood, 25 P.3d 936, 947 (Okla. Civ. App. 2001)) (applying
Iowa Code § 633A.4507 (2009)).
On remand, the district court shall determine whether to award
the subcontractors attorney fees to be paid by IDOT and, if so, shall
calculate the amount of fees to be awarded each subcontractor.
V. Disposition.
We reverse the district court’s ruling that granted IDOT’s motion to
dismiss the subcontractors’ claims in excess of the retained funds. We
remand this case to allow the subcontractors’ claims to proceed against
IDOT for unpaid work on the projects, interest, costs, and reasonable
attorney fees incurred in district court and on appeal.
REVERSED AND REMANDED WITH INSTRUCTIONS.
All justices concur except Appel and Wiggins, JJ., who concur
specially.
30
#12–1378, Star Equip. v. State
APPEL, Justice (concurring specially).
The majority notes that this is a case of first impression and then
chides the Iowa Department of Transportation (IDOT) for not citing a case
striking down a statute equivalent to Iowa Code section 573.2. Of
course, the subcontractors did not cite a case supporting the opposite
proposition. The lack of cited authority is thus not dispositive or even
indicative of the proper result. We often face a lack of authority, one way
or another, when considering questions of first impression. In these
cases, we may be called upon to think on our own.
The court’s independent research has uncovered one case from
another jurisdiction, however, that is close to the present case. In
Solomon v. Department of State Highways & Transportation, 345 N.W.2d
717, 718–19 (Mich. Ct. App. 1984), the appellate court held that
requiring the state to pay for losses incurred by a contractor on a state
construction project would violate Michigan’s lending of credit provision
in its state constitution. The majority dismisses Solomon as factually
distinguishable because it did not involve a statute and notes it is devoid
of analysis. Yet, the Michigan court’s approach seems loyal to the
language of the Michigan constitutional provision, which I do not find
distinguishable from article VII, section 1 of the Iowa Constitution. See
Mich. Const. of 1963 art. 9, § 18 (“The credit of the state shall not be
granted to, nor in aid of any person, association or corporation, public or
private, except as authorized in this constitution.”).
If there had been no Iowa caselaw on the question, I would
perhaps be inclined to follow the approach in Solomon. Certainly, there
is nothing in the history of article VII, section 1 that helps us. Nothing in
the text suggests a contrary result. The somewhat open-ended
31
provisions of article VII, section 1, however, have been subject to a
judicial gloss. Specifically, in Grout v. Kendall, 195 Iowa 467, 473–74,
192 N.W. 529, 531 (1923), we narrowly interpreted the credit provision of
article VII, section 1 to apply only to prohibit the state from acting as a
surety and incurring secondary liability. Thus, by judicial doctrine, we
narrowed the scope of the credit provision of article VII, section 1.
Looking further into Grout, where judicial doctrine under article
VII, section 1 begins, this court held the strong prohibitions in article VII,
section 1 did not prohibit the state from incurring indebtedness by
borrowing money to directly pay for obligations with a public purpose,
namely, the payment of bonuses to veterans of World War I. Id. at 468,
473, 192 N.W. at 529, 531. This court contrasted the borrowing scheme
at issue in Grout with historic disasters where state governments, with
the often mistaken belief the primary obligor would pay, guaranteed the
obligations of private corporations in massive undertakings, such as
railroad and canal projects, undertaken for private benefit. See id. at
472–73, 192 N.W. at 531. When the private corporations failed to pay,
the states became overwhelmed with indebtedness the states would
never have agreed to incur as a primary obligor. Id. Accordingly, we
held article VII, section 1 prohibited the state from incurring secondary
liability, but was silent as to the creation of primary indebtedness, such
as that at issue in the case. Id. at 473, 192 N.W. at 531. We cited
Grout’s emphasis that article VII, section 1 covers surety relationships in
a number of subsequent cases. See, e.g., Richards v. City of Muscatine,
237 N.W.2d 48, 62 (Iowa 1975); Green v. City of Mt. Pleasant, 256 Iowa
1184, 1197–98, 131 N.W.2d 5, 14–15 (1964).
In this case, unlike in Grout, IDOT is not the primary obligor. The
primary obligor was the original contractor, Universal Concrete. Yet,
32
although IDOT will pay twice for most of the concrete services if the
subcontractors prevail in this case, and although IDOT will pay what was
once a primary obligation of the subcontractor, IDOT will arguably still
receive a benefit: it will be more likely that minority subcontractors will
feel secure in providing services related to state-owned highways.
I think it is a closer question than does the majority whether these
kinds of relationships are outside the scope of article VII, section 1. The
relationships are similar to surety relationships in the sense that the
primary obligation is not one of IDOT. I am not at all convinced that the
formal niceties of the law of suretyship with its fine slicing and dicing
provides a sound basis for the interpretation of a constitutional provision
in all cases. When dealing with open-textured constitutional provisions,
I would look more to the underlying constitutional values and spirit
rather than legal arcana.
On balance, however, and consistent with the evolving
constitutional doctrine, I conclude that because IDOT in its proprietary
capacity is the beneficiary of all of the work of all of the contractors, be
they the general contractor or a subcontractor, IDOT may enter into
financial arrangement to provide a class of subcontractors with security
beyond the promise of the general contractor to pay without running
afoul of article VII, section 1. I would hold nothing more, and nothing
less. As a result, I concur in the result in this case.
Wiggins, J., joins this special concurrence.