Compelling Contract Payments from a Public Entity: What Happens When It Spends Your Money Elsewhere?
All too often contractors encounter disputes with public owners regarding the release of progress payments and final payments. But what happens when it is determined that payment is due to the contractor and the owner replies “too bad” or “we already spent our budgeted money elsewhere”? As a general rule, the state, a state agency, or a political subdivision cannot be compelled to pay a judgment rendered against it unless funds have been appropriated for that purpose. Additionally, no public property shall be subject to seizure. See Louisiana Constitution Article XII, Section 10(C); La. R.S. 13:5109. Consequently, a person or entity may obtain a valid judgment against a public entity yet have no available method to collect on the judgment.
Such was the case in Holly & Smith Architects, Inc. v. St. Helena Congregate Facility, Inc., 2008-2451 (La. App. 1 Cir. 6/19/09). In that case, after being awarded a judgment against St. Helena Parish Hospital, a political subdivision, Holly & Smith Architects, Inc. filed a petition seeking a writ of mandamus to force payment of the judgment by St. Helena Hospital. (A writ of mandamus is considered an extraordinary remedy which may be directed to a public officer to compel the performance of a ministerial duty required by law, i.e. where it contains no element of discretion.) The trial court denied Holly & Smith’s mandamus petition and the case ultimately went to the Louisiana Supreme Court resulting in an unenforceable judgment against the political subdivision. Subsequently, Holly & Smith attempted to seize funds from the hospital primarily arguing that the constitutional and statutory requirements that funds be “appropriated” by the political subdivision to satisfy a judgment had been met because the political subdivision signed an agreement with the architect, earmarked architectural fees for the project, and continuously approved of the work performed by the architect. However, the Louisiana First Circuit Court of Appeal rejected Holly & Smith’s argument stating that La. R.S. 13:1509 requires a specific appropriation or disbursement of funds to pay a particular judgment before disbursement may be compelled by a court. In other words, the Court held that the political subdivision was not required to pay the judgment unless the political subdivision chose to appropriate funds for the purpose of paying that judgment.
However, the results of payment disputes between contractors and owners of public projects are not always so harsh. In 2011, the Louisiana Legislature added paragraph D to La. R.S. 38:2191 which provides that “[a]ny public entity failing to make any progressive stage payments arbitrarily or without reasonable cause, or any final payment when due as provided in this Section, shall be subject to mandamus to compel the payment of the sums due under the contract up to the amount of the appropriation made for the award and execution of the contract.” Thus, the legislature expressly provided that on a public works project, a contractor could utilize a writ of mandamus to collect against a public entity for unpaid contract funds up to the amount which had already been appropriated for the contract. As such, it is not necessary for public entities to additionally appropriate money in response to litigation in order for the contractor to be paid because of the fact that funds have previously been appropriated to pay the contractor. Accordingly, the ability to proceed as contemplated in La. 38:2191 can avoid the predicament encountered in Holly & Smith.
Recently, in March 2014, the Louisiana First Circuit Court of Appeal addressed whether a public entity could be compelled to pay a money judgment pursuant to La. R.S. 38:2191(D) when the public entity had already expended the funds appropriated for the project to pay other contractors for remedial work. In Quality Design and Construction, Inc. v. City of Gonzales, 2013-0752 (La. App. 1 Cir. 3/11/14), the City of Gonzales, a political subdivision, budgeted and appropriated a sum of money for improvements to a public recreational facility. The City advertised for bids and awarded the contract to Quality Design and Construction, Inc. (”QDC”). Subsequent to the execution and recordation of the certificate of substantial competition, the City refused to issue full payment to QDC based on outstanding warranty and defect claims. Consequently, litigation followed resulting in a judgment in favor of QDC. However, the judgment did not account for the City’s claim to recover amounts it had yet to expend for remediation of warranty work, and the City’s right to pursue such claims were reserved.
Similar to the factual situation presented in Holly & Smith, several years after QDC obtained its judgment, it had received no payment from the City in satisfaction of the judgment. In an attempt to compel the City to pay the judgment, QDC filed a writ of mandamus relying on La. R.S. 38:2191(D). In opposition, the City argued that it was not required to pay the judgment because the majority of the remaining funds budgeted for the project had been exhausted through payments to subsequent contractors hired to correct and/or complete QDC’s work. The Court of Appeal rejected the City’s argument holding that La. R.S. 38:2191(D) applies to funds appropriated for the “contract” rather than funds appropriated for the “project.” In other words, the amount paid to other contractors could not have the effect of diminishing the total amount which was appropriated to be used for the City’s contract with QDC. The result was that the writ of mandamus was affirmed on appeal, compelling the City to pay the judgment.
This recent decision is significant for contractors performing public works projects for two reasons. First, while not directly addressed by the Court, the opinion confirms that contractors may obtain the contract balance owed up to the amount appropriated for the contract without the public entity having the option to deny payment on the basis of that public entity’s decision to not appropriate additional funds. Second, the opinion holds that the funds appropriated are designated for the contract (i.e. designated to pay a specific contractor) rather than appropriated for the project as a whole. Thus, the public entity cannot respond that it already spent the money elsewhere. In short, contractors should be aware of both of these principles as they are significant and beneficial in providing a heightened level of protection when faced with a payment dispute against a public owner.