Lenders
owe no duty to subcontractors
By
David Ziemer
Wisconsin Law Journal
June
21, 2006
| What
the court held Case:
Hoida, Inc., v. M&I Midstate Bank, No. 2003AP2108. Issue:
Is a lender to a general contractor liable to subcontractors and materialmen who
were not paid? Holding:
No. Public policy precludes liability in these circumstances. Counsel:
Halloin, Scott R., Milwaukee, for Appellant; Golla, Russell T., Stevens Point;
Dreier, Gary L., Stevens Point; Ewald, William J., Green Bay, for Respondent. |
A title
lender is not liable to a subcontractor for paying out loan proceeds to a general
contractor, without ensuring that the subcontractors were being paid.
The
Wisconsin Supreme Court’s holding on June 13, affirming a published decision
of the court of appeals, Hoida, Inc. v. M&I Midstate Bank, 2004 WI App 191,
276 Wis.2d 705, 688 N.W.2d 691, drew criticism from two dissenters, arguing that
the decision confused Wisconsin case law concerning the duty to use ordinary care.
In
1996, The Villager at Nashotah, L.L.C., entered into a construction loan agreement
with M&I Midstate Bank, to borrow $1,320,000 to build four eight-unit apartment
buildings in Plover.
M&I
made arrangements, without a written agreement, with McDonald Title Company, to
make some of the disbursements of the loan.
The
loan agreement between M&I and Villager stated that M&I shall not be responsible
for any aspect of the construction or the procurement of lien waivers, and that
M&I would have no obligation or liability to contractors, subcontractors,
laborers, or materialmen.
Under
the oral agreement between M&I and McDonald Title, McDonald Title was to disburse
funds to the general contractor, Packard Construction, Inc., upon receipt of requests
for payment.
An
officer of Packard, and an officer of Villager, misappropriated $650,000 to $700,000
of the funds by forging the signature of the project’s architect to obtain
draw requests from McDonald Title.
Hoida,
Inc., was a subcontractor, with unpaid invoices of almost $300,000.
Hoida
brought suit against M&I and McDonald Title, alleging negligence, but Portage
County Circuit Court Judge Lewis Murach granted summary judgment in favor of the
defendants. Hoida appealed, but the court of appeals affirmed.
The
Supreme Court granted review, but also affirmed, in a decision by Justice Patience
Drake Roggensack. Justice Ann Walsh Bradley, dissented, in an opinion joined by
justice Louis B. Butler, Jr., and Chief Justice Shirley S. Abrahamson did not
participate.
Negligence
The
court rejected Hoida’s argument that, by failing to collect lien waivers
before disbursing funds, McDonald Title and M&I breached its duty of ordinary
care (breach of fiduciary duty was not claimed).
Stating,
“the duty of ordinary care under the circumstances is determined by what
would be reasonable given the facts and circumstances of the particular claim
at hand,” the court concluded that M&I and McDonald Title did not act
unreasonably.
The
court explained, “Neither M&I nor McDonald Title reasonably could have
foreseen that the general contractor and the owner would act together to forge
the architect’s signature on Application and Certification for Payment forms
and to convert the loan proceeds for the project to their own use.”
Public
Policy
The
court continued, and held that, even assuming that McDonald Title was negligent,
public policy precludes Hoida’s claims, because recovery would place too
unreasonable a burden on McDonald Title.
The
court found, “Tracking who purchased what and when would be a never-ending
task, if we were to require McDonald Title to perform it. Additionally, we find
nothing in the record that would permit us to conclude that McDonald Title has
any special expertise in evaluating whether the progress in the construction of
a building is equivalent to the dollar amount of any given draw request.”
Finally,
the court concluded that Chapter 779 provides an additional policy reason for
precluding liability.
Sections
779.01(4) and 706.11 provide protection to subcontractors and material suppliers
on construction projects, but give priority status to lenders.
The
court therefore concluded that imposing liability on lenders to subcontractors
would contravene this legislative policy choice.
The
Dissent
Justice
Bradley dissented, beginning, “I am perplexed by the majority’s approach
here. It is as though the majority initially wrote the opinion limiting liability
based on duty. Then, recognizing that such an approach is inconsistent with Wisconsin
law, it reworded some things and tagged on an ending that limits liability based
on public policy, without deleting the initial duty analysis.”
Emphasizing
that, “In Wisconsin, everyone has a duty to act with reasonable care,”
the dissent asked, “Is the majority saying that Gritzner was wrong when it
said that to limit liability based on duty is ‘incorrect’?” and
answered itself, “I doubt it, but it is hard to know for sure.”
The
dissent also took issue with the following statement in the majority opinion:
“In the future, when attempting to plead lender liability based on negligently
failing to undertake certain tasks, a plaintiff must allege why the duty of ordinary
care of the lender or disbursing agent includes the obligation to affirmatively
undertake the tasks that plaintiff claims the lender or disbursing agent reasonably
failed to perform under the circumstances.”
The
dissent wrote, “I am not sure what will be deemed sufficient under the majority’s
new mandate. It seems to me that this new requirement is nothing more than a trap
for the unwary.”
Finally,
the dissent took issue with the majority’s conclusion that public policy
considerations bar liability, concluding, “there was evidence that both M&I’s
policies and industry standards required the collection of lien waivers. Thus,
the record hardly justifies a conclusion that requiring the collection of lien
waivers places too unreasonable a burden on either McDonald Title or M&I.”
Click
here for Case Analysis.
David
Ziemer can be reached by email.
