The Iowa Supreme Court recently issued a decision which requires the Iowa Department of Transportation (DOT) to pay three subcontractors after they completed work on state projects but were never paid by the general contractor, effectively implementing a waiver of sovereign immunity for claims by “Targeted Small Businesses”(TSB).
The case, Star Equipment v. State of Iowa (2014 WL 346521), involved improvements made to highway rest stops. The DOT hired the general contractor, Universal Concrete, which in turn hired some subcontractors. The general contractor was classified by the State of Iowa as a TSB, meaning it is minority-owned and exempted from the requirement of posting a surety bond to secure payments on the project. Thus, there was no surety bond from which the subcontractors could seek payment if the general contractor failed to pay them (Iowa Code Chapter 573 is Iowa’s counterpart to the Federal Miller Act). After the general contractor failed to pay the subcontractors, they sued both the general contractor and the Iowa DOT.
The trial court ruled that state law did not require the DOT to pay on the general contractor’s obligations. The Supreme Court reversed, finding that subcontractors of state-hired TSB general contractors can seek payment from the state if the general contractor fails to pay. In reaching this conclusion, the Supreme Court reasoned that Iowa Code Section 573.2 acts as a waiver of sovereign immunity when the requirement of a bond is waived (such as when a TSB is hired as a general contractor), thereby allowing the subcontractors to recover the balance owing directly from the DOT.
Do you agree with the decision? Are you aware of any other states that have similar statutes to protect targeted small businesses?