STAR EQUIPMENT, LTD., Appellant, v. STATE of Iowa, IOWA DEPARTMENT OF TRANSPORTATION, Appellee, and Manatt‘s, Inc. and Short‘s Concrete Cutting Co., Appellants.
No. 12-1378.
Supreme Court of Iowa.
Jan. 31, 2014.
843 N.W.2d 446
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
For the reasons explained below, we construe
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.
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
IDOT agreed that the subcontractors were entitled to payment from the re
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).
The subcontractors seek payment from IDOT under
This appeal presents our first opportunity to decide whether
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,
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, seeIowa Code § 573.7 (1987) , and serves as a substitute for the protection of a mechanic‘s lien.
Id. at 665.
Chapter 573 provides an additional protection for subcontractors in the form of a retained percentage fund.
Subcontractors owed money on public construction projects may submit their claims to the responsible public corporation. Id.
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
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
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 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
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
The subcontractors argue the second paragraph of
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, 524 (Iowa 2013); see also
The legislature knows how to limit remedies for those working on state projects. See, e.g.,
Our construction of
For these reasons, we conclude the district court erroneously interpreted
C. Constitutionality of Section 573.2.
We must now reach IDOT‘s argument that
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 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
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.
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 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
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 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, 231 N.Y. 465, 132 N.E. 241, 244 (1921).10 To engraft by judicial gloss a vague and open-ended public-purpose exception11 in article VII, section 1 would undermine this 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, any where, mention ‘public purpose.’ In effect, the majority opinion has amended Section
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.
Accordingly, the question we must answer under Grout is whether the second paragraph of
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, e.g., F & M Bldg. P‘ship v. Farmers & Merchs. Bank, 316 Ark. 60, 871 S.W.2d 338, 341 (1994) (holding lessor who mortgaged leased property to secure loan, on condi-
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 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 secure a benefit for the state, a
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 result any assumption of the liability of an employee is unconstitution-
al.” 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.
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
The evils sought to be avoided by
For these reasons, we hold that
IV. Attorney Fees.
The subcontractors have now prevailed on their claims against IDOT.
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 Uni
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 award fees under
“(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
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.
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
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, 131 Mich. App. 479, 345 N.W.2d 717, 718-19 (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
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
Looking further into Grout, where judicial doctrine under
In this case, unlike in Grout, IDOT is not the primary obligor. The primary obligor was the original contractor, Universal Concrete. Yet, 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
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
WIGGINS, J., joins this special concurrence.
Notes
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.
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).
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., 937 N.Y.S.2d 126, 960 N.E.2d at 926 (Pigott, J., dissenting) (citation omitted).