Iowa Contract Bonds

Iowa case law summary by Attorney Richard Clem: Targeted Small Businesses, state contract, Iowa Code 573.2, Iowa contract bonds.

Star Equipment, Ltd. v. State of Iowa, Department of Transportation. Targeted Small Businesses, state contract, default, Iowa Code 573.2, Iowa contract bonds.

Under Iowa Code section 573.2, if a general contractor for a public works project is a "Targeted Small Business" (TSB), then unpaid subcontractors have certain remedies. This case called upon the Iowa Supreme Court to construe that provision. Three subcontractors had obtained default judgments against a TSB, and those judgments remained unpaid. Therefore, the subcontractors went to court in Adair County to collect the money from the State, a procedure they read the statute to authorize.

The Adair County court, Judge John D. Lloyd, didn't read the statute the same way. He held that the subcontractors could go after the state only for funds that the Iowa Department of Transportation (IDOT) had retained on its contract with the general contractor.


Dissatisfied with this ruling, the subcontractors appealed the case to the Iowa Supreme Court, which agreed with their interpretation. It held that the statute did two things. First of all, it waived sovereign immunity. In other words, the legislature had specifically authorized a claim against the State of Iowa in cases where no contract bond was required under the statute. And the Supreme Court held that it allowed the subs to collect the unpaid balances from IDOT.

The dispute arose out of IDOT's 2010 contract to improve the rest areas along Interstate 80 in Adair County. This contract went to Universal Concrete, Ltd. Universal Concrete qualified as a TSB because it was located in Iowa, had gross income below $4 million per year, and was at least 51% owned by women, minorities, or persons with disabilities. Because it was a TSB, no surety bond was required.

Universal Concrete subcontracted with the three plaintiffs, who supplied rental equipment, ready-mix concrete, and cement cutting services. The materials were supplied, the work was done, and IDOT paid the contract price to Universal Concrete.

Unfortunately, however, the subcontractors never got paid. The outstanding claims of the three subs totalled over $30,000, but the state had retained only about $3400. Universal Concrete never bothered showing up in court when they were sued, and the three subs got a default judgment. But of course, that default judgment was never paid. That left the State of Iowa as the only defendant, and all of the plaintiff's eyes turned toward it.

The trial judge ruled that only the $3400 could be touched. It awarded all of this money to the party who had filed the claim first, leaving that subcontractor paid only in part. The other subcontractors received nothing.

Sorely disappointed by having received nothing (or only a portion, in the case of the lucky first claimant) for their labors and materials, all three plaintiffs brought their case to the Iowa Supreme Court.

The Supreme Court agreed with the subcontractors. It read the statute carefully, and determined that when a TSB defaults, then IDOT steps into that contractor's shoes, and must satisfy the delinquent obligations.

The statute stated that if a TSB defaulted, then the normal remedies available to a contractor would be available against the public corporation, in this case, IDOT. IDOT argued that the statute should be construed to avoid this result, but the Supreme Court stated that this would fly in the face of the normal rules of statutory construction.

The Supreme Court also looked at the legislative history and purpose of the statute, and concluded that these reinforced its interpretation that the subs should have recourse against the state.

Finally, IDOT argued that the statute, as construed by the high court, was unconstitutional, since the Iowa Constitutional wisely states that the credit of the state shall not be loaned to a private entity, nor should the state ever assume the debts of a private entity. The Court noted that Iowa wisely guards the state credit more than other states. It criticized, for example, the practice of many states in coming up with an alleged "public purpose" for risking the public treasury, and then turning a blind eye when the state's credit is extended in such a way.

The court made clear that this would be improper, since it would open the door "to the crony capitalism the framers of our state constitution sought to avoid." Therefore, the mere recitation of a public purpose is not enough to open the public treasury to private interests: The State of Iowa is not permitted to assume the debts of private entities.

But that's not what happened here, the Court went on. In this case, the defaulting contractor was certainly liable. But that liability was secondary. The state was primarily liable for this public construction project. It was not a "costly state government bailout of private investors." The constitutional provision was designed to stop those bailouts, and should not be extended to a public works project.

For these reasons, the Supreme Court held that the subcontractors should be paid by IDOT. Therefore, it reversed the case and remanded it back to Adair County district court.

Iowa contract bonds.

No. 12-1378 (Iowa Jan. 31, 2014).

Please see the original opinion for the court's exact language.


Richard P. Clem is an attorney and continuing legal education (CLE) provider in Minnesota. He has been in private practice in the Twin Cities for 25 years. He has a J.D., cum laude, from Hamline University School of Law in St. Paul and a B.A. in History from the University of Minnesota. His reported cases include: Asociacion Nacional de Pescadores a Pequena Escala o Artesanales de Colombia v. Dow Quimica de Colombia, 988 F.2d 559, rehearing denied, 5 F.3d 530 (5th Cir. 1993), cert. denied, 510 U.S. 1041 (1994); LaMott v. Apple Valley Health Care Center, 465 N.W.2d 585 (Minn. Ct. App. 1991); Abo el Ela v. State, 468 N.W.2d 580 (Minn. Ct. App. 1991).

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