Please ensure Javascript is enabled for purposes of website accessibility

Lenders owe no duty to subcontractors

By: dmc-admin//June 21, 2006//

Lenders owe no duty to subcontractors

By: dmc-admin//June 21, 2006//

Listen to this article

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.”

Related Links

Wisconsin Court System

Related Article

Case 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.

Polls

Should Steven Avery be granted a new evidentiary hearing?

View Results

Loading ... Loading ...

Legal News

See All Legal News

WLJ People

Sea all WLJ People

Opinion Digests