Iowa Court of Appeals Addresses Iowa Code Chapter 573 Retainage and Attorney Fee Disputes
On February 7, 2024, the Iowa Court of Appeals issued a decision in Graphite Constr. Group., Inc. v. Des Moines Area Cmty. College, 2024 WL 466118 (Iowa Ct. App. 2024), addressing retainage and attorney fee disputes under Iowa Code Chapter 573 (Iowa’s Little Miller Act). Graphite Construction Group, Inc. was the prime contractor on a public-construction project owned by Des Moines Area Community College (“DMACC”). One of Graphite’s subcontractors, Metro Concrete, Inc., went bankrupt during the COVID pandemic, after which Metro Concrete’s bankruptcy Trustee filed an Iowa Code Chapter 573 claim with DMACC in the amount of $217,221.32. Graphite served a letter upon the Trustee, under Iowa Code Section 573.16(2), demanding that the Trustee file a lawsuit on its Chapter 573 claim within 30 days lest the Chapter 573 claim become void and unenforceable. The Trustee filed a lawsuit, within the 30 day deadline, in which it sued DMACC, Graphite, and Graphite’s surety as required by Iowa Code Chapter 573. Graphite thereafter purchased and furnished to DMACC an Iowa Code Section 573.16(2) bond in double the amount of the Trustee’s claim ($434,442.64) to bond off the claim, after which it demanded that DMACC release and pay retainage to Graphite in the lesser amount of (1) the bond amount of $434,442.64, or (2) the full amount of retainage being held. DMACC refused, arguing that, despite Graphite bonding off the Trustee’s claim, DMACC was entitled to continue to hold retainage in the amount of 200% of the value of remaining work on the project, as provided in Iowa Code Section 573.28. Graphite asked the district court to order DMACC to release retainage to Graphite as demanded, and it also requested the district court award Graphite attorney fees under Iowa Code Section 573.21. The district court rejected Graphite’s requests, stated that DMACC could continue to hold the retainage despite Graphite bonding off the Trustee’s claim, and concluded that Graphite was not entitled to recover attorney fees. Graphite appealed.
On the retainage dispute, the Iowa Court of Appeals reversed the district court and agreed with Graphite. It noted that the “inquiry focused on whether Graphite Construction could receive all of the retained funds after bonding off or if another statute [Section 573.28] allowed DMACC to still keep part of the retainage.” 2024 WL 466118, at *10. The Court discussed Chapter 573’s retainage rules, and explained that Iowa Code “Section 573.14 outlines the process for retention and payment of those funds held by the public corporation and, as here, provides how subcontractors might finish their portion of the project and seek monies upon completion of their contract. . . . But, under section 573.14, the public corporation must hold the retainage for thirty days after completion and acceptance of the project. ‘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.’ But section 573.14(2) specifically provides that ‘this subsection does not abridge any of the rights set forth in section 573.16.’ Section 573.16(2) removes the restrictions required under 573.14 if the process provided in section 573.16 is followed.” Id. at *6. Because DMACC argued that retainage payments under Section 573.16(2) for bonding off a subcontractor’s claim is subject to and limited by Iowa Code Section 573.28, the Court stated, “At the heart of our analysis, we must address the interplay, if any, between sections 573.16 and 573.28.” Id. at *7.
The Court recognized that, “[b]oth [statutory sections] involve means to access retainage funds,” but it rejected DMACC’s argument that “section 573.28(2)(c) comes into play at any time in the construction process when a principal contractor makes an early request for retainage (i.e. there remains work to be done on the project)” which would make Section 573.16(2) subject to and limited by Section 573.28. Id. at *9. The Court concluded that “we cannot apply section 573.28(2)(c) because under these facts there is no interplay between this section and 573.16(2). Id. at *10. In summary, the Court held that, even where the prime contractor has remaining work to perform on the project, when the prime contractor bonds off a subcontractor’s Chapter 573 claim as permitted by Iowa Code Section 573.16(2), the owner must pay to the prime contractor the lesser amount of (1) the bond amount, or (2) the full amount of retainage being held. The owner cannot reduce that retainage payment by the amount of double the value of the remaining work to be performed under Iowa Code Section 573.28 because “there is no interplay between . . . [Section 573.28] and 573.16(2).”
On the attorney fee issue, the Court agreed with the district court and rejected Graphite’s request for attorney fees. Chapter 573’s attorney fee provision at Section 573.21 reads, “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.” Graphite argued that it (and any prime contractor who prevails in a retainage dispute with an owner) qualifies as a “claimant for labor or materials who has, in whole or in part, established a claim” because it prevailed on its retainage dispute with DMACC, thereby allowing it to recover attorney fees under Section 573.21. The Court noted that “throughout chapter 573, the legislature used the term ‘principal contractor’ to describe an entity separate from a ‘claimant,’” id.at *12, and it concluded that Section 573.21’s reference to “claimant” did not include prime contractors, but was limited to claimants described in Iowa Code Section 573.7, namely subcontractors.
The Iowa Court of Appeals’ decision is a mixed bag for prime contractors on public projects. On one hand, the retainage ruling is very beneficial to prime contractors because it allows them to obtain early release of retainage by bonding off subcontractors’ Chapter 573 claims, with the required retainage payment being the lesser amount of (1) the bond amount, or (2) the full amount of retainage being held; it does not allow that required retainage payment to be reduced by 200% of the value of remaining work on the project. On the other hand, the attorney fee ruling denies prime contractors the ability to recover attorney fees under Chapter 573 when they prevail in retainage disputes with owners. The Iowa Court of Appeals’ decision may not be the final say in this case because DMACC has asked the Iowa Supreme Court to hear the appeal. As of the date of this Case Update, the Iowa Supreme Court has not decided if it will hear the appeal or not.
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