Hoida, Inc. v. M & I MIDSTATE BANK
2006 WI 69, 291 Wis. 2d 283, 717 N.W.2d 17 (2006)
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Rule of Law:
A construction lender's duty of ordinary care does not, as a matter of law, require it to protect a subcontractor from losses resulting from fraud by the owner and general contractor by identifying all subcontractors, verifying construction progress, or securing lien waivers, particularly when the loan agreement disclaims such responsibilities and legislative policy gives the lender's mortgage priority over subcontractor liens.
Facts:
- The Villager at Nashotah, L.L.C. (Villager) entered into a $1.32 million construction loan agreement with M&I Midstate Bank (M&I) to build apartment buildings.
- The loan agreement explicitly stated that M&I was not responsible for the procurement of lien waivers and would have no obligation or liability to subcontractors or materialmen.
- M&I orally contracted with McDonald Title Company, Inc. (McDonald Title) to act as its agent for disbursing loan funds, which required a signed 'Application and Certification for Payment' from the general contractor (Packard), the project architect, and the owner (Villager).
- Packard subcontracted with Hoida, Inc. (Hoida) for prefabricated wooden sections and trusses.
- Hoida delivered materials and sent 51 invoices to Packard, but was paid only $25,000 of the total $316,582.81 owed.
- The owner of Villager, Mike Imperl, and the owner of Packard, John Christianson, colluded to misappropriate approximately $650,000 of the construction funds, in part by forging the architect's signature on draw requests.
- Hoida was ultimately left with unpaid invoices totaling $291,582.81 after the fraud was discovered and the project failed.
Procedural Posture:
- Hoida, Inc. sued M&I Midstate Bank and McDonald Title Company, Inc. in the circuit court, asserting claims for negligence and as a third-party beneficiary.
- All parties filed motions for summary judgment.
- The circuit court granted summary judgment in favor of M&I and McDonald Title, dismissing all of Hoida's claims.
- Hoida, as appellant, appealed the decision to the Wisconsin Court of Appeals.
- The Court of Appeals affirmed the circuit court's dismissal, concluding that while Hoida had stated a claim for negligence, public policy considerations precluded recovery.
- The Wisconsin Supreme Court granted Hoida's petition for review.
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Issue:
Does a construction lender's duty of ordinary care to an unpaid subcontractor include identifying all subcontractors, verifying construction progress, and collecting lien waivers before disbursing loan funds, when the lender has no contractual relationship with the subcontractor and the loan agreement disclaims such responsibilities?
Opinions:
Majority - Patience Drake Roggensack, J.
No. A construction lender and its agent's duty of ordinary care, under these circumstances, did not require them to identify subcontractors, verify construction progress, or secure lien waivers for the subcontractor's benefit. The business context, shaped by contractual agreements and foreseeability, defines the scope of the duty. Here, the M&I-Villager contract explicitly disclaimed responsibility for lien waivers and liability to subcontractors, shaping what was reasonable for M&I to do. Furthermore, it was not reasonably foreseeable that the owner and general contractor would conspire to commit fraud by forging signatures and converting loan proceeds. Finally, establishing such a duty would contravene the legislative public policy set forth in Wis. Stat. §§ 779.01(4) and 706.11, which give construction mortgage lenders lien priority over subcontractors. Creating a common law claim for subcontractors against lenders would improperly reverse this legislative choice.
Dissenting - Ann Walsh Bradley, J.
This case should be decided by a jury, not dismissed on summary judgment. The majority incorrectly limits liability by concluding the defendants owed no specific duties to Hoida, which contradicts established Wisconsin negligence law. In Wisconsin, everyone has a duty of ordinary care, and liability is limited by public policy factors, not by negating the existence of a duty. There are genuine issues of material fact as to whether the defendants were negligent, as evidence showed that obtaining lien waivers was both M&I's own policy and the industry standard. The court should not have applied public policy factors to preclude liability before a full trial, as the facts are complex and not fully developed.
Analysis:
This decision significantly limits the ability of subcontractors to hold construction lenders liable in tort for losses incurred due to fraud by other parties on a project. It establishes that a lender's duty of ordinary care is primarily defined by its own contracts and does not automatically create a duty to police a project for the benefit of third-party subcontractors. The ruling reinforces the principle that courts should not create common law remedies that conflict with or circumvent established legislative public policy, such as statutory lien priority schemes. This precedent makes it more difficult for unpaid subcontractors to recover from lenders and emphasizes the need for subcontractors to rely on their own contractual and statutory lien rights for protection.
