Iowa Supreme Court Rules Against Contractor in Iowa Code Chapter 573 Retainage Dispute
On November 22, 2024, in Rochon Corp. of Iowa, Inc. v. Des Moines Area Cmty. College, 14 N.W.3d 111 (Iowa 2024), the Iowa Supreme Court ruled against a contractor in its Iowa Code Chapter 573 retainage dispute with an owner. Rochon Corporation of Iowa, Inc., n/k/a Graphite Construction Group, Inc., was the prime contractor on a public-construction project owned by Des Moines Area Community College (“DMACC”). One of Rochon’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. Rochon 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, Rochon, and Rochon’s surety as required by Iowa Code Chapter 573. Rochon 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 Rochon 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 Rochon 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. Rochon asked the district court to order DMACC to release retainage to Rochon as demanded, and it also requested the district court award Rochon attorney fees under Iowa Code Section 573.21. The district court rejected Rochon’s requests, stated that DMACC could continue to hold the retainage despite Rochon bonding off the Trustee’s claim, and concluded that Rochon was not entitled to recover attorney fees. Rochon appealed.
Initially, the appeal was heard by the Iowa Court of Appeals, who rejected DMACC’s Iowa Code Section 573.28 retainage argument and ruled in favor of Rochon on the retainage dispute. The Court of Appeals ruled against Rochon on the attorney-fee dispute. The Iowa Supreme Court then agreed to hear the appeal. Although the Supreme Court rejected DMACC’s Section 573.28 retainage argument in a footnote, it reversed the Iowa Court of Appeals on the retainage dispute through an argument no party raised in the case. It stated, “Reading 573.16 as a whole means that neither a lawsuit over distribution of the retainage—nor the contractor’s post-lawsuit bonding off—can occur until after the project is complete, the project is finally accepted, and the subcontractors have a thirty-day post-acceptance opportunity to submit claims,” and explained that a “lawsuit over distribution of the retainage” includes one filed by a subcontractor claimant in response to a 30-day demand served under Section 573.16(2). Therefore, it concluded, “[R]etainage cannot be released before the project has been completed, the project has been finally accepted, and then an additional thirty days have passed.” The Court reached its conclusion by stating that Iowa Code Section 573.16’s two separately numbered paragraphs must be read as a whole, thereby requiring that all retainage disputes (even those generated by a subcontractor filing a lawsuit in response to a 30-day demand served by a contractor) must be resolved in a “single action.” Because it ruled against Rochon on the retainage dispute, it did not address the issue of whether Iowa Code Section 573.21 allows a prevailing prime contractor to recover attorney fees against a public owner in a retainage dispute, “sav[ing] that question for another day.”
The practical effect of this decision eviscerates the 30-day-demand and bonding-off provisions in Iowa Code Section 573.16(2), thereby preventing a contractor from using Section 573.16 to access its retainage earlier than final completion of the overall project. This is a questionable ruling, especially because it effectively excises the 30-day-demand and bonding-off provisions from the statute. Furthermore, Iowa Code Chapter 573’s sister statute governing private construction projects (at Iowa Code Chapter 572) also contains 30-day-demand and bonding off provisions, and the Iowa Supreme Court has held that a property owner can utilize those provisions at any time so that the property owner, “by the simple expedient of written demand, . . . [can] compel the lienholder to commence foreclosure within 30 days or lose the lien. . . . [thereby] giving the owner power at any time to require a plenary suit within 30 days. . . .”). Keith Young & Sons Constr. Co. v. Victor Senior Citizens Housing, Inc., 262 N.W.2d 554, 556 (Iowa 1978) (emphasis added). Unless the legislature amends Chapter 573 to require a different result, prime contractors on Iowa public projects effectively will not have early access to their retainage under Iowa Code Section 573.16.
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Contact attorney Steve Marso at 515-288-6041.