PUBLISHED OPINION
Case No.: 96‑0176
For Complete
Title Petition
to review Filed
of Case, see
attached opinion
Petition to review filed
by Plaintiff‑Appellant
Submitted on
Briefs August 06, 1996
JUDGES: Cane, P.J., LaRocque Myse, JJ.
Concurred:
Dissented:
Appellant
ATTORNEYSOn
behalf of plaintiff-appellant, the cause was submitted on the briefs of Alexander
E. Brown and O'Brien, Anderson, Burgy & Garbowicz of Eagle
River.
Respondent
ATTORNEYSOn
behalf of defendants-respondents, the cause was submitted on the brief of William
J. Joost and Nielsen & Nielsen of Eagle River.
COURT OF APPEALS DECISION DATED AND RELEASED SEPTEMBER 4, 1996 |
NOTICE |
A party may file with the
Supreme Court a petition to review an adverse decision by the Court of
Appeals. See § 808.10 and
Rule 809.62(1), Stats. |
This opinion is subject to
further editing. If published, the
official version will appear in the bound volume of the Official Reports. |
No. 96-0176
STATE
OF WISCONSIN IN
COURT OF APPEALS
FIRST NATIONAL BANK,†
Plaintiff-Appellant,
v.
MANFRED WERNHART
AND BETH WERNHART,
Defendants-Respondents,
LAMPERT YARDS, INC.,
Defendant,
RICHARD INGRAM, D/B/A
INGRAM CONSTRUCTION,
Third-Party
Defendant.
APPEAL from a judgment
of the circuit court for Vilas County:
ROBERT A. KENNEDY, Judge. Affirmed.
Before Cane, P.J.,
LaRocque and Myse, JJ.
LaROCQUE, J. First National Bank, the mortgagee, appeals
a judgment on a counterclaim in favor of Manfred and Beth Wernhart, mortgagors,
for negligent distribution of construction loan funds to a residential contractor. The trial court first granted the bank a
money judgment against the Wernharts based upon a foreclosure action but
granted the Wernharts a partial offset based upon their counterclaim. The court concluded the bank breached its
duty for payments made to the building contractor when it failed to inspect the
project to determine the work was actually done and by failing to obtain lien
waivers from subcontractors. The court
found the bank 70% causally negligent and the Wernharts 30% causally negligent,
and reduced the Wernharts' damages accordingly. The bank claims the court erred by imposing a duty of care
relating to the disbursement of the Wernharts' loan proceeds and their other
funds in the bank's possession, and by failing to precisely state the standard
of care applied. We conclude that a
mortgage lender who consents to disburse the loan proceeds and personal funds
of the borrower, without further participation by the borrower, is an agent of
the borrower and therefore owes a duty of due care to assure the funds are paid
for work actually done and to assure that the contractor has obtained lien
waivers from subcontractors. Because
there was no attempt to perform these duties, we therefore reject the bank's
arguments and affirm.[1]
The Wernharts selected
Richard Ingram as their general contractor to build their single family
dwelling in Vilas County. They
negotiated a construction contract for a price of $110,000, specifying payments
"as construction moves along, balance on completion." The Wernharts contacted the bank and
arranged a mortgage loan. The Wernharts
also deposited an additional $15,000 with the bank to supplement the loan
proceeds used to pay for construction.
In response to the Wernharts' statement that a different bank made
payouts through a title company, the bank informed them that it made those
payments directly to the builder. The
discussions and the parties' loan agreement were silent as to inspection to
determine progress of construction.
Payouts, however, were to be made in accord with the contract between
the Wernharts and the builder.
At trial, the bank
offered testimony that it was the bank's standard procedure to contact its
construction loan borrowers when draws were made, but that Beth Wernhart had
expressly told the bank that it would not be necessary to contact them prior to
paying the builder. Beth testified that
she recalled no such discussion.
As
construction progressed, the bank disbursed the Wernharts' loan funds whenever
Ingram presented invoices. The bank
made a first payment of $15,000 in July of 1992 and a second payment of the
same amount in August of 1992. In
September, Ingram submitted an invoice for $25,000, which the bank paid. Thus, as of this last payment, the bank had
paid out a total of $55,000, of which $40,000 consisted of mortgage funds and
$15,000 consisted of the Wernharts' funds deposited with the bank.
Shortly after receiving
notice of this last payment to Ingram, the Wernharts contacted the bank and
instructed it not to make any additional payments without their
permission. The Wernharts were
concerned that Ingram had not performed sufficient work on the project to
justify the amount of money he had been paid.
The bank to this point did not undertake any inspections of the work
site. The bank's first inspection
occurred in October of 1992 in response to the Wernharts' concerns. One of the suppliers filed a lien when it
was not paid, and the Wernharts paid the claim from their own funds.
Concerns about the
quality of Ingram's work caused the Wernharts to dismiss him as general
contractor and to hire a third party to complete the construction. The Wernharts eventually filed a lawsuit
against Ingram to attempt to recover monies paid to him for uncompleted work
and for poor quality construction.
However, Ingram filed for bankruptcy, and the Wernharts recovered only
$3,500 from the bankruptcy court.
In May of 1993 the bank
initiated this foreclosure action against the Wernharts. The Wernharts counterclaimed for negligent
distribution of loan proceeds. At a
bench trial, the bank presented testimony from its expert that there was no
standard construction loan disbursement procedure recognized by Wisconsin
lending institutions. He was of the
opinion that lending institutions were not required to ensure the work claimed
by contractors had in fact been performed.
The Wernharts' two experts indicated their own standard practice was to
inspect the work site before making disbursements.
The trial court granted
the bank a money judgment on its foreclosure action but found for the Wernharts
on their counterclaim. The trial court
ordered the amount recovered by the Wernharts offset against the amount owed
the bank as the result of the foreclosure.
The court concluded that the bank owed a duty to the Wernharts to
inspect prior to payout and that it breached that duty. The bank now appeals the judgment on the
counterclaim, arguing that it owed no duty to the Wernharts and that it did not
breach its duty in any event.
The bank concedes that
the Wernharts' counterclaim is grounded in negligence. To sustain a cause of action for negligence,
the complaining party must prove a duty of care on the part of the other, a
breach of that duty, a causal connection between the conduct and the injury and
actual loss or damage as a result of the injury. Nieuwendorp v. American Family Ins. Co., 191 Wis.2d
463, 475, 529 N.W.2d 594, 599 (1995).
The bank challenges the trial court's conclusion that it owed the
Wernharts a duty and its conclusion that it breached that duty. We begin our discussion with the question
whether the bank owed the Wernharts a duty.
Whether a duty exists in
a particular case is a question of law the appellate court decides de
novo. State Bank v. Arndt,
129 Wis.2d 411, 416, 385 N.W.2d 219, 222 (Ct. App. 1986). A defendant's duty is established
when
it can be said that it was foreseeable that his act or omission to act may
cause harm to someone. A party is
negligent when he commits an act when some harm to someone is foreseeable. Once negligence is established, the
defendant is liable for unforeseeable consequences as well as foreseeable
ones.
Westphal
v. E.I. du Pont de Nemours & Co., 192 Wis.2d 347, 364-65,
531 N.W.2d 386, 391-92 (Ct. App. 1995) (quoting A.E. Inv. Corp. v. Link
Bldrs., Inc., 62 Wis.2d 479, 483-84, 214 N.W.2d 764, 766 (1974)). In order to prove negligence, a party
complainant must first prove that the defendant owes him a duty. Swatek v. County of Dane, 192
Wis.2d 47, 57, 531 N.W.2d 45, 49 (1995).
Where the facts that lead to the alleged duty are in dispute, it is the
function of the fact finder to resolve the factual disputes. Schicker v. Leick, 40 Wis.2d
295, 300 n.1, 162 N.W.2d 66, 69 n.1 (1968).
In actions tried to the court without a jury, findings of fact shall not
be set aside unless they are clearly erroneous. Section 805.17(2), Stats. When reviewing a case where the trial court
acted as fact finder, this court must accept the reasonable inferences drawn by
the trial court and may not redraw the inferences on appeal. In re Estate of Koenigsmark,
119 Wis.2d 394, 399 n.1, 351 N.W.2d 169, 172 n.1 (Ct. App. 1984).
Although the parties
discuss at some length the significance of the testimony regarding the custom
in the banking industry regarding inspection before payout, as noted hereafter,
the trial court failed to make factual findings regarding conflicting
inferences from that testimony, and we do not consider the matter of industry
custom dispositive of the question of duty.[2]
The bank's expert opined
that there was no custom in this state to inspect the construction site before
payout. Two experts on behalf of the
Wernharts advised the court that they customarily inspected before payout. The trial court indicated that it was unsure
whether a custom of inspection existed in Wisconsin. The court was not bound by the opinion of the bank's expert. The trier of fact is not required to accept
opinion testimony, including expert testimony.
See Pautz v. State, 64 Wis.2d 469, 476, 219 N.W.2d
327, 330-31 (1974). On the other hand,
while the court may have drawn an inference that the practice of inspection by
other lenders demonstrates the practice in fact does exist, it did not so
find. Because the court made no
finding, we cannot accept as a fact that the Wernharts established that the
lenders in the area adopted a custom of inspection.
Apart from whether a
custom in the industry creates a duty, other jurisdictions have imposed a duty
upon a mortgagee who undertakes to disburse funds for a construction mortgagor
under an agency theory. See M.
S. M. Corp. v. Knutson Co., 167 N.W.2d 66 (Minn. 1969). Knutson holds that when a
mortgagee undertakes to disburse loan funds for a mortgagor under a
construction contract, a fiduciary relationship between the parties
arises. The court found such a
relationship even in the absence of an express statement by the mortgagee that
it alone would control the disbursement of funds.
We note that there is a
split of authority among other jurisdictions on this issue, as well as upon the
particular theory upon which a duty is imposed. See cases gathered by Douglas C. Franck, Construction
Lending: The Mortgagee's Right to
Inspect the Construction Project and Duty to Ensure Proper Disbursement of
Construction Loan Proceeds, 81 Ky.
L.J. 511 (1992-93).[3] Courts have also adopted a similar standard
of reasonable care where the issue is whether the lender assured that lien
waivers were available so that the homeowner need not pay twice for the same
work. Kalbes v. California Fed.
S&L Ass'n, 497 So. 2d 1256 (Fla. Dist. Ct. App. 1986).
An agency relationship
results from the manifestation of control by one person to another that the
other shall act on his behalf and subject to his control, and consent by the
other so to act. Restatement (Second) of the Law of Agency
§ 1 at 7 (1958). Here, in addition
to the parties' agreement to allow the bank to pay out the mortgage proceeds,
the bank also consented to act on their behalf in the disbursement of the
Wernharts' personal funds to the contractor.
We think these facts mean that the bank assumed the role of the
Wernharts' agent, and assumed the accompanying duties as well. All agents owe their principal a fiduciary
duty with respect to matters within the scope of their agency. Bank of California v. Hoffmann,
255 Wis. 165, 171, 38 N.W.2d 506, 509 (1949).
The scope of the fiduciary duty here was to disburse funds in the bank's
possession in a reasonable fashion.
That duty mandated that the bank inspect the property or take other reasonable
measures to assure compliance with the construction contract before disbursing
funds.
We summarily reject the
bank's argument that, even if a duty exists, it did not breach that duty. The evidence is undisputed that the bank did
not undertake any inspections of the property until after it disbursed $40,000
in mortgage proceeds and $15,000 of the Wernharts' personal funds to
Ingram. The bank took no other
precautions when distributing the funds to assure reasonable compliance with
the construction contract. These facts
mandate the conclusion that the bank breached the fiduciary duty it owed the
Wernharts.[4]
We also need not linger
upon the bank's contention that the trial court failed to specify the bank's
duty with precision. In light of the
absence of any inspection or inquiry concerning liens, it is sufficient to say
that the duty is to use reasonable care, a standard the bank breached beyond
question.[5]
By the Court.—Judgment
affirmed.
[1] We do not address the circumstance where the payout is made to both the borrower and the contractor.
[2] The parties also presented testimony
concerning whether the Wernharts waived any right to notice before payments by
the bank were made. The bank does not
suggest that this alleged waiver negated the bank's duty to inspect or the duty
to assure the general contractor had obtained lien waivers. In any case, based upon the trial testimony,
the trial court implicitly found that the Wernharts did not waive the bank's
customary notice.
The bank indicated that it normally obtained approval from a borrower before payout, but that Beth orally expressly waived the practice. Beth, on the other hand, had no recollection of such a conversation. The testimony therefore presented conflicting factual inferences. The bank may have obtained an oral waiver, and Beth was mistaken. On the other hand, her inability to recall may imply that the alleged conversation never occurred, and that the bank's witness was mistaken. The trial court found Beth to be a "very very" good witness. We conclude that the trial court implicitly found that Beth did not waive the customary notice.
[3] As the writer notes, liability is alternatively imposed upon theories of agency, trust, implied contract or other considerations.
[4] The bank does not take issue with the remaining two elements of a claim of negligence, causation and damages.
[5] Because we conclude that a tort claim was established, we do not address the question whether there was a breach of contract. The bank agreed with the Wernharts to pay the builder according to the terms of the contract with the builder. That contract in turn provided that the payments were due the contractor "as construction moves along, balance on completion." Our supreme court has held that a breach of contract is not a tort, but that a contract may "create the state of things which furnishes the occasion of a tort." Colton v. Foulkes, 259 Wis. 142, 146, 47 N.W.2d 901, 903 (1951). Because we conclude a tort arises here, we need not determine whether the bank's agreement to abide by the building contract was breached under the circumstances.