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Vogan v. Hayes Appraisal Associates, Inc.

Supreme Court of Iowa
588 N.W.2d 420 (1999)
ELI5:

Rule of Law:

A third party is an intended beneficiary of a contract, with enforceable rights, if the circumstances indicate the promisee intended to confer a benefit on the third party, and the promisor had reason to know that this benefit was a motivating cause for the contract.


Facts:

  • Susan J. Vogan and Rollin G. Vogan hired contractor Gary Markley to build a home for $169,633.59.
  • The Vogans secured a $170,000 construction loan from MidAmerica Savings Bank.
  • MidAmerica orally contracted with Hayes Appraisal Associates, Inc. to perform an initial appraisal and periodic progress inspections to guide the disbursement of loan funds to the contractor.
  • During construction, cost overruns occurred, and the Vogans provided the bank with an additional $42,050 from a second mortgage, plus personal funds, to continue progress payments.
  • On March 20, 1990, Hayes Appraisal certified the home was 60% complete.
  • Just eight days later, on March 28, 1990, Hayes Appraisal issued another report inaccurately stating the home was 90% complete.
  • Relying on these reports, the bank paid out nearly all of the original loan and the additional funds supplied by the Vogans.
  • The contractor, Markley, subsequently defaulted on the job, leaving the home substantially unfinished and requiring an estimated $60,000 to complete.

Procedural Posture:

  • The Vogans filed a petition against Hayes Appraisal in the Iowa district court (trial court).
  • Hayes Appraisal's motion for summary judgment was denied by the district court.
  • The case was tried before a jury, which returned a verdict in favor of the Vogans.
  • The district court denied Hayes Appraisal's motions for a directed verdict and for judgment notwithstanding the verdict.
  • Hayes Appraisal, as appellant, appealed the judgment to the Iowa Court of Appeals (intermediate appellate court).
  • The Court of Appeals reversed the district court's judgment, finding Hayes Appraisal's reports did not cause the Vogans' damages.
  • The Vogans then sought further review of the Court of Appeals' decision from the Supreme Court of Iowa (highest court).

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Issue:

Does a homeowner become an intended third-party beneficiary of a contract between their lender and an appraisal company hired to monitor construction progress, giving the homeowner the right to sue the appraiser for negligence?


Opinions:

Majority - Carter, Justice

Yes, a homeowner becomes an intended third-party beneficiary under these circumstances. The court, applying the Restatement (Second) of Contracts § 302, held that the primary question is whether the contract manifests an intent to benefit a third party. Here, the circumstances indicate that the promisee (MidAmerica bank) intended to give the beneficiaries (the Vogans) the benefit of the promised performance (the inspections). The promisor (Hayes Appraisal) had reason to know of this intent because its reports and invoices named the Vogans as the home purchasers, making it clear that a motivating cause for the contract was to protect the Vogans' financial investment. The court also rejected the argument that the faulty reports caused no damage, finding that a jury could conclude the reports led to the wrongful disbursement of the additional funds the Vogans had deposited with the bank, even if the original loan was already exhausted.



Analysis:

This decision clarifies the application of the intended third-party beneficiary doctrine in the context of construction financing. It establishes that professionals, like appraisers, who contract with a lender can be held directly liable to the borrower if the service was intended for the borrower's protection. The ruling broadens the scope of an appraiser's duty beyond their direct client (the bank), emphasizing that liability turns on whether the appraiser had reason to know the lender's purpose was to benefit the homeowner. This precedent strengthens protections for homeowners and increases the potential liability for third-party service providers in real estate and construction transactions.

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