*1 28698. In Bank. Dec. A. No. [L. 1968.] al., Plaintiffs, RAYMOND E. CONNOR et Cross-defendants Appellants, GREAT v. WESTERN SAVINGS AND ASSOCIATION, Defendant, LOAN Cross-defendant and Respondent; al., Defendants, MEYER PRITKIN et Cross-complainants Appellants. 12, 1968.] 28699. In Bank. Dec. No.
[L.A. Plaintiffs, al., et Cross-defendants and JAMES L. BURGESS Appellants, GREAT WESTERN SAVINGS AND v. Defendant, ASSOCIATION, Cross-defendant LOAN al., Defendants, Respondent; MEYER PRITKIN et Appellants. Cross-complainants and (Consolidated Appeals.) *5 Lyle, Lascher, Lyle Giuseppe L. & Harris K. Edward Di Giuseppe Plaintiffs, Di James for Cross-defendants Appellants. Phyllis Lyman Prince, Johnson, E. Overton, & Ernest M. Lynn Defendants,
BEix, McClure and 0. Poulson John Cross-complainants Appellants. Schneider, Gaines, Cherie Mark Pike, L. Thomas A. Thomas Padem, Peery, Kanner, & Jerrold D. Ernest L. Padem C. Graves and Gideon *6 Kanner as Amici Curiae on behalf of Plaintiffs, Appellants Defendants, Cross-defendants Appellants. Cross-complainants and Irving Shimer, A.
Swerdlow, Glikbarg Shimer, & Michael Shapiro Defendant, William D. Moore for Cross- H. Respondent. defendant Attorney General, Wenig, Lynch, Herbert E. C. Thomas Anthony Joseph, Attorney General, Deputy C. Assistant Goodwin, Attorney General, Kaplan, Livingston, Berkowitz & Jones, Landels, Selvin, Ripley, Charles E. P. Sélvin, Herman Diamond, Landels, Morrison, Poerster, D. Edward & Gregory Homrighausen Paul Clark, & E. and Melvin Holloway, Clinton Defendant, on Curiae behalf of Cross- Amici R. as Goldman Respondent. defendant appeals These consolidated are from a TRAYNOR, C. J. in favor of defendant Great judgment of nonsuit in two actions consolidated for Association Savings and Loan trial. purchased single-family action homes in each Plaintiffs development known Weathersfield, tract a residential County. 1159, and 1160 in Ventura 1158, tracts on located Thereafter damage suffered serious from crack- their homes ill-designed foundations could not with- ing by caused and contraction of adobe soil. Plaintiffs expansion stand the accordingly damages from the various sought rescission development. in the tract parties involved promissory notes secured second deeds of Holders cross-complaints, alleging that filed their homes trust on the impaired damage to the security homes. had been any recovery plaintiffs might impose on sought liens They defendants. from other obtain defendant Val- evidence that abundant There was Company, built and sold Development homes, which ley regard to soil condi- them without negligently constructed Specifically, it laid site. slab founda- prevalent at the tions taking precautions proper soil without on adobe tions engineers. to it soil recommended When adobe soil expanded during years later, rainstorms two the foundations generated damage. cracked and their movement further seeking In damages Conejo, plaintiffs addition to sought liable, ground to hold Great Western either on the participation development brought that its a in the tract it into joint joint enterprise Conejo, or a venture vicariously liable, ground served to make it or on the that it independent duty breached an plaintiffs. of care to A negotiations leading brief review of the to Great West development ern’s role of the Weathersfield tract perspective essential ato clear issues. Since the appeals judgment from a nonsuit, are such a review must give plaintiffs' legally evidence all the value which it is recognize entitled, every legitimate must that may inference evidence, be drawn from disregard conflicting and must (Raber (1951) evidence. v. Tumin 654, 656 Cal.2d [226 ; Blumberg T., (1949) P.2d v. M. & Inc. 34 Cal.2d 574] 1].) P.2d If there is support evidence that would recovery against grounds Great Western on either of the set by plaintiffs, judgment forth must nonsuit be reversed. *7 project originated The Weathersfield in December Goldberg, president when Harris Development of South Gate Company, negotiations purchase undertook to for South Gate ranch, parcel 547 acres the approximately of McRea a of 1,600 undeveloped of property acres in real the Val- ley, undergoing beginnings which was large-scale then the of development. Goldberg together and Keith Brown owned and Development Company. They planned controlled Gate South develop property goal creating with the of a commu- nity approximately 2,000 of homes. Goldberg significant nor had experi- Neither Brown large-scale ence in housing. of Goldberg construction tract apparel had begin in 1955 to left the men’s business a career subsequently in real estate. He established a number of com- panies engaged principally subdividing acreage. in raw In develop- 1958 he undertook a 20 the construction of 31-home Waverly Manor; ment 15 called when homes had been partially completed supervision under the of a South Gate employee, job. engaged supervise completion he Brown to of the experience This first task Brown’s with tract con- struction, although general he had been as a licensed contrac- approximately in tor 1950 and had built 50 single-family dwellings on an individual custom basis 1958. before
858 pur- signed agreement January In an South Gate $340,000 100 acres of the McBea ranch for within
chase agreement purchase days, a sales conditional $2,500 per 10-year period. adjoining acre acres for over Goldberg nor had the financial resources Neither Gate South Goldberg perform agreements, and March these pur- necessary approached funds to Western Great was to parcel on which Weathersfield be chase the 100-aere constructed. processed 9,000 loans 8,000 between Great Western $100,000,000,but had not year, amounting each to more than County. expressed an loans in Ventura It previously made Goldberg developing a volume new construc- interest to financing in providing long-term and in tion loan business the form first trust deeds buyers to the to be homes agree- By April, general of an end of outlines built. ment with recorded developed, they Goldberg had been Loan Committee. the minutes Great Western’s parties law- During ensuing four months their yers whereby details a transaction Great worked out the necessary supply the funds to enable Gold- would parcel purchase and construct homes berg to the 100-aere given right return, Western was thereon. In built and the loans on the homes be construction make buyers long-term loans right refusal to make to the of first provide money pur- agreeing to for the Before homes. land, Western also demanded and chase have the “gentleman’s agreement” that would received loans on homes right refusal to make construction of first parcel.1 adjoining 447-acre on the built employed geologist to determine whether Great Western quality adequate quantity and of water would be avail- an report geologist’s and its a result of the able the area. As further demanded and investigations, Great Western own Gate, Goldberg, and Mr. guarantee from South received a 100- Great Western held title to the Brown that if and Mrs. adequate September 1960, water service lines parcel in aere public utility existing would be available at from a new or *8 property for consumer use. the line provided necessary funds for July, Western In Great Goldberg depos- had purchase of the Weathersfield tract. $340,000purchase price of with the escrow $190,000 ited rejected Although Goldberg he Great West testified at the trial refusal, testimony right first was to the for such a of his ern’s demand contrary deposition introduced. in a 1965 that was also apparently agent of He obtained the on behalf South Gate. leaving by draining corporations, from a money assets his enterprises $36,000 July as those of of combined net worth 31. instructions, by Goldberg’, amended escrow substituted place pur- Conejo Development Company in of as South Gate McReas, deposited from and all funds chaser the land Conejo. Conejo by credited to theretofore had only $15,000capital South Gate earlier, incorporated though months several been development. to handle the tract deposited remaining $150,000 purchase price opened in a second escrow between as buyer, Western as title to seller and Great took the land option granted one-year repur- Conejo, and South Gate a parcels $180,000. chase the land in three Gate, Goldberg, for a total of South agreed repur- andMr. Mrs. Brown property chase $200,000 from Great Western on demand for option adequate if the were not exercised and water by September facilities were not 1960. available arrangement purchase by for the of the land early example Western was an has what come be known warehousing.” “land arrangement, Under such an land developer financial institution holds he for until ready personal to use it. Unlike a normal property, bailee of however, the institution property retains title as well right possession. as the At problem the outset Great Western confronted the $150,000 could not lend Goldberg outright and still retain the land as security, for section 7155 of the Financial Code prohibited lending percent it from more than 33% appraised unimproved property.2 value It therefore sought to specific prohibition statutory circumvent disguising what was admittedly substance loan as the kind of property investment in real that was sanctioned section 6705of the Financial Code.3 agreed necessary Great Western to make the construction Conejo only
loans assuring after itself that the homes savings 2In 1961 the statute was amended to allow loan associa up percent unimproved appraised tions to lend value property. part; may 3In 1959 section 6705 read "An association invest property may subdividing real develop and such investment include ing property building buildings prop real homes and other on such erty principally property. for residential use veterans on such An may own, rent, lease, manage, operate income, association such sell property.” *9 successfully During negotiations and sold. the could built be contemplated loans to of construction on terms the the buyers Conejo long-term the of and the loans be offered development, investi- proposed Western the Great homes and that gated Goldberg’s condition learned was financial received, without comment or Moreover, weak. Great Western Conejo August statement from inquiry, an 1959 financial $320,000 capital $325,000, of that forth of set profits from sales of homes accounted for as estimated the completed. transactions, escrow, when then the sales generally the entry an was far outside bounds of Such repre- principles. profits, estimated accepted accounting not purported capital, were senting of the total 64/65 hypothesized on basis of houses hypothetical, the but were yet that had not been constructed. deeper proposed into founda- the Great Western delved no conjectural of the bases tions of the houses than into Conejo require plans Conejo’s capital. It did submit and built, specifications the models of homes cost various type breakdowns, proposed and the a list of subcontractors prices. proposed perform, and a was to schedule of work each purchased employed architect, at no an Conejo, which time Majors specifications he had plans from a Mr. L. that and C. developments, prepared for submitted them to other and Great Western. procedure its departed normal from Great specifications plans reviewing approving before mak- It did ing provide funds. not a commitment construction plans any did not make recom- examine the foundation design or construction the houses. It mendations as to selling prices suggested and sales. preoccupied with It was increases proposed selling Goldberg’s prices, which he of funds to accepted. formal commitment It also refused specified pre-sold, Conejo number of houses were until they namely, sold were constructed. before inspecting buyers lots after Prospective reserved three standing homes on 1.6 acres landscaped and furnished model homesites as as barren tract. The model well otherwise granted by had the McBeas a 60-foot wide access road been an Conejo accom- directly to “without consideration land-purchase close weeks modation” two before escrows.4 $111,000 supplied not 4The record does disclose source permanent Conejo landscape loan cover homes. A to build and model eventually
ing Western. received cost of construction lots, agents When sold its sales informed the buyers willing Western was make long-term approved loans persons, secured first trust deeds to obtained credit information for later submission to Great procedure right Western. This refusal was dictated of first Conejo agreed give Great Western to obtain *10 approved buyer the construction loans. If an wished to obtain long-term elsewhere, days a loan Great had 10 Western to proposed financing; meet the terms of the if it met the terms placed Western, the loan was not with required Goldberg, Great Brown, pay were to South Gate Great Western by the fees and interest obtained the other in lender connec- buyers tion with the Most of homes in the loan. applied Weathersfield They tract Western for Great loans. percent approximately 80 purchase price obtained of the in 24-year form of loans from percent the interest secured Great Western at 6.6 first trust charged deeds. Great Western Conejo percent 1 qualified a fee for loans made to buyers, percent Conejo and a fee for loans made to on behalf of 1% buyers who, opinion, poor in Western’s Great were risks. By specified September, the number of houses had been by buyers, accordingly reserved and Great Western made $3,000,000 in approximately Conejo. construction loans to Conejo agreed pay percent 5 Great Western a construction percent loan on fee and 6.6 interest the construction loans as six disbursed for months and thereafter on the entire originally percent amount. Great Western had demanded 6.6 regard interest on the entire amount without to the disburse- funds, percent 5 higher ment of the and its loan fee than involving normal it assessed the loan because as one a sub- stantial risk. When the loans recorded, construction were Conejo became entitled to advances on the loans and to lump draws,” percentage “land sums calculated a Conejo value of the land. advances on the received construc- $148,200. tion loans and land in sum of It draws turned together $31,800 this Gate, sum South over to paid $180,000 turn total back to Great Western in the repurchase option exercise of its the 100-aere tract from simultaneously Great Western. South transferred Gate Conejo. land to Conejo accepted notes secured second trust deeds from buyers purchase price for homes the balance provided by Goldberg planned was not Great Western. that percent at to discount the notes 50 of their face value and to
862 proceeds pay the interest and fees to Great West-
use the Conejo. profit provide indicates, a The evidence ern and develop first however, in his enthusiasm acres that pared profits Goldberg estimated projected community, of his margin per house, dangerously thin that $500 to the expertise and a depth finances, with result- he his exceeded position in his financial as construction ing deterioration ultimately security Conejo pledged the notes as progressed. percent $300,000loan, value, forfeiting their face of liquid capital. for loan profits urgent need for This cross-complainants Meyer al. Pritkin et seven obtained suggestion Goldberg at his acquaintances of who business purchase organized joint venture 1959 to December Conejo Valley. land in the acres of began employed grading A subcontractor property made final commitment to before Western Great provide funds, and construction loan while Great nominally During the of con- still struction, the land. course owned inspectors property visited the Western’s verify pre-packaged plans being fol- weekly to money com- was disbursed work lowed did agreement, if construction work pleted. the loan Under plans specifications, Western had not conform *11 the of funds until work right the withhold disbursement performed; a satisfactorily failure to correct nonconform- Representatives days ity 15 constituted default. within in with constant communication remained Great Western all the tract until houses developers of the Weathersfield completed in mid-1960. and sold conflict that there without was no evidence establishes creating joint agreement or oral ven- express either written enterprise relationship joint between Western ture or exception testimony Conejo Goldberg. Without and or specific all discloses disclaimers of principal witnesses relationship exist, should and such that intention option pur- provided only typical and documents written security and transactions. Plain- agreements loan chase however, evidence of the conduct of the contend, that the tiffs that neither the documents nor the tes- parties demonstrates timony as to the accurately parties’ their intentions reflect relationship. They that such evidence of assert conduct legal joint joint enterprise that a venture or supports an inference relationship existed. (See Code, §1621; Universal Sales Civ. Mfg. 751, 20 764- Corp. (1942) Press Co. Cal.2d v. California 29 (1947) Nelson Abraham Cal.2d 665],- P.2d v. 765 [128 863 ; Plumbing Holtz United & 745, 749-750 P.2d 931] v. [177 Heating 501, 617].) 49 Cal.2d 506-507 P.2d (1957) Co. [319 joint agreement A venture exists when there is “an they parties community under which between the have a is, joint interest, in interest, that a common under business understanding profits as taking, sharing an to the joint right losses, (Holtz and a v. control.” United Plumbing Heating Co., supra, & 49 501, Cal.2d 506-507. See Abraham, supra, Spier also Nelson v. 29 745, 749; Cal.2d v. Lang 711, Quinn (1935) 138]; 4 Cal.2d 716 P.2d v. Rec [53 reation (1935) Park Assn. 3 Cal.2d 728 725, 144].) P.2d [46 Although the evidence establishes Conejo property, skill, combined their knowledge carry development, out the tract each shared the con development, anticipated trol receiving that each sub profits therefrom, cooperated stantial they and that each development, other there no of a evidence commu nity joint undertaking. par or interest in the Great Western ticipated buyer as a and seller of land and funds, lender of participated as a builder and seller homes. Although profits dependent of each were on the overall development, success of profits neither was to share might Although the losses that the other realize or suffer. each payments substantial seller, lender, received or bor rower, had neither an payments interest received .5 circumstances, other joint Under these no venture (See Ry. existed. v. (1930) Wallace 105 Elec. Co. Pacific Cal.App. 664, 834]; Ajax 667 P. Martin v. Co. Constr. [288 (1954) Cal.App.2d 124 425, Enos v. 132]; 433 P.2d [269 Picacho Gold (1943) Cal.App.2d 765, Min. 56 Co. 770-772 663]; (1935) P.2d United Farmers v. Sakiota 7 [133 Assn. Cal.App.2d 559, 770]; (1962) 560 P.2d Elkins Sedia v. [46 Cal.App.2d 201 Cal.Rptr. 451 440, Nichols, Joint 278]; [20 (1950) Venturers 425, 36 Martter v. Va.L.Rev. 438-439. Cf. Byers Cal.App.2d Lasry 75 (1946) 375, ; 384 P.2d 101] [171 v. Cal.App.2d Lederman (1957) 663]; P.2d [305 Cal.App.2d 614, Stilwell v. Trutanich (1960) 178 Cal. Rptr. 285].)6 *12 ’ testimony 5We need not consider contention that some of Judge Gitelson, Goldberg’s property real Alfred former counsel matters, record; improperly was struck from the consideration of testimony would not is a alter conclusion that the there no evidence community joint undertaking. or interest reasons, support 6For same evidence is insufficient to an infer joint “joint enterprise. enterprise” ence that there was The term 864 vicariously Western is not liable though Great Even Conejo, negligence of re joint for the there as a venturer liability negligence. for its own question of its mains the voluntarily relation undertook business develop and the Weath ships Gate South with develop a the tract houses in and market for ersfield tract buyers prospective be directed to Great Western would undertaking relationships, financing. In these
for their than a lender content to lend much more Western became security property. of real It became money at interest on the enterprise. It construction participant in a home an active enterprise. extensive control of the right had exercise enterprise possible, took on financing, which made the Its money lender. beyond of the usual the domain ramifications loans, its construction but interest on It received not them, percent capital making a 20 for also fees substantial protection land, from loss “warehousing” the gain for buyers sought per profits home individual event financing manent elsewhere. security for the construction loans value of the Since the security permanent financing loans for the thereafter homes, Great Western depended of sound the construction on to its shareholders exer clearly under a of care enterprise prevent the powers cise its of control over Judged by the standards homes. construction of defective discharge that negligently failed to governing nonsuits, it developers duty. known that the should have It knew or operating on dan undercapitalized, inexperienced, or should have capitalization. It knew gerously therefore thin attempts to cut corners construc damage from known that (See & reasonably Lefcoe a risk to be foreseen. tion Developers (1966) 75 Savings Land Dobson, Associations as .)7 It or should have known 1271, Yale L.J. knew 1293 interchangeably “joint sometimes venture” sometimes used pleasure nonprofit undertaking or the mutual benefit describe 963, (1950) Cal.App.2d (See parties. 967-968 [217 Beals 96 Shook v. (3d 1959) 318, Williston, 56, 919]; § ed. 2 Contracts P.2d pp. 554-555.) taking, however, 18 A.L.R.2d under a business commercial When used to describe significant distinctions draw no California decisions Boyd (See, e.g., joint enterprises. joint v. White between ventures 641, 92]; Cal.App.2d Larson (1954) P.2d v. Lewis-Simas- 657 [276 128 296]; Cal.App.2d 83, (1938) P.2d Ambrose v. Jones Co. 502].) (1944) Cal.App.2d P.2d 366 [150 Alioto engi Goldberg suggestion example, follow the soil 7For refused to grading requiring Conejo comply with PHA standards all neers street, $200 the cost would an extra to the because homes drain per lot.
865 expansive yet require problem,8 tests, it failed soil soil plans, changes to examine foundation to recommend in the plans specifications, pre-packaged to recommend changes during in the foundations It construction. made no attempt gross to discover structural defects that it could have by inspection discovered reasonable it would have remedy. required Conejo protection solely It relied upon inspectors building experience it had with whom had no building provisions enforce code with the of it which was ignorant. question crucial The remains whether West- duty buyers ern also owed to the home in the Weathersfield negligent tract and was therefore also toward them. privity The fact that in of was not except of contract with as a lender not does liability negligence creating absolve it for its in own an “Privity risk of harm
unreasonable to them. of con necessary duty tract is not to establish the existence of a ordinary injure duty exercise another, care not to but such may voluntarily pub arise of a relationship out assumed if policy (Merrill lic dictates the duty.” existence of such a v. Buck (1962) 552, Cal.Rptr. 58 Cal.2d 456, 561-562 375 [25 304], Biakanja See, e.g., Irving P.2d v. (1958) 647, 49 Cal.2d v. supra, 49 345].) 56 whether involves the such a a third 650 degree closeness of the connection and the harm.” defendant’s [1] Cox Cal.2d the extent to which the transaction plaintiff, [320 (1961) duty injury in a person P.2d certainty 583, Cal.2d conduct, balancing specific [2] The basic tests for are 16, 588 suffered, not Cal.2d 65 647, 650, clearly [15 that the A.L.R.2d case the defendant will be held liable to in foreseeability Cal.Rptr. privity 857, [5] [6] set forth various between the as follows: “The determination plaintiff the moral 1358]; 821, is a matter of determining policy factors, among of harm to in suffered 364 P.2d Cal.Rptr. Lucas v. Hamm blame Biakanja defendant’s preventing intended the existence of injury, attached 685]; 521, him, policy v. 362 P.2d to affect Stewart conduct [3] [4] Irving, (1961) future are by 8Adobe soil is common in southern California. Tests conducted Conejo’s engineers presence soil indicated the the soil. Such adobe soil distinguished easily eye dry naked weather areas where the ground sparse; contracts, cover is when dries and the surface cracks plates, frequently hexagonal shape into eter. Several the investigate and 10 or 12 inches diam Conejo employees during noticed the characteristic cracks geologist did the summer hired Great Western to supply problems. water light foregoing In the tests Great Western clearly buyers of to exer under a to the the homes protect damages caused cise care them from reasonable major structural defects. affect the [1] plaintiffs significantly. Great Western’s transactions were intended to transactions South success of Great Western’s *14 ability Conejo depended entirely upon of the the Gate parties plaintiffs buy to homes the Weathersfield to induce by purchases supplied finance funds tract and to the with supply agreement to funds Great Western. Western’s Great Conejo percent 5 construc- build in return for a homes percent interest, was on condition that a tion loan fee and 6.6 sufficient number of buy persons first made commitments Conejo land for agreed to warehouse homes. Western Great understanding the land would be used for a on the that stipulated Western that Great also residential subdivision. by loans would be used from its construction advances thereby repurchase options, affording Conejo to exercise $30,000 capital gain. opportunity for a Great Western Conejo steps channel took to have Finally, Great extracting percent 1 buyers loans, a of homes to its doors Conejo process. loan fee from the risk Goldberg Great Western of harm to [2] nor Brown Great knew or should have known plaintiffs. Western could had ever developed a tract of similar reasonably have that neither foreseen have known that Western knew should magnitude. Great dangerously capitalization, thin operating on a was driven risk it be creating readily a foreseeable that would enlarged That risk still cutting in construction. corners Conejo ensuing pressures on from additional further Western. as borrower its onerous burdens [3] It is certain that plaintiffs suffered injury. homeowners, if plaintiff stipulated that each of the Counsel respective homes sustained called, testify that their would degrees the character of which we damage varying “of ’’ Sufficient evidence was concerned in this action. have been damage example way the existence presented to show injury plaintiffs. Under to the homes and therefore plaintiff’s order, extent of pretrial each terms of the proceedings litigated ques- in further after injury liability is determined. tion of Western’s nected with Great Western’s conduct. [4] injury suffered closely con only development Great Western not financed the of the tract the course Weathersfield but controlled it would take. control, Had care in the exercise its it exercised reasonable pre-packaged plans pur- it would have discovered - by Conejo required chased correction and would have with- financing plans held until were corrected.9 ern’s conduct. [5] Substantial moral blame attaches to Great West security The value for Great Western’s construction projected security long-term loans as well as the for its loans plantiffs depended on the soundness of construction. Great obligation Western failed of its to its own shareholders when major preclude failed to exercise reasonable care to struc tural in the defects homes whose construction it financed and obligation controlled. It also failed buyers, of its to the more buyer so because it was well aware the usual aof ill-equipped experience home is or financial means to Schipper (Cf. discern such structural defects. v. & Levitt N,J. Sons, (1965) Inc. A.2d 314,-325-326].) More major is not over home investment for usual *15 buyer but also the he shelter has. Hence becomes protect doubly important against him structural defects prove beyond capacity remedy. that could his for the are industry. duct in this ease. Rules that particularly appropriate imposition [6] admonitory policy of liability when tend on Great to discourage applied of the law of Western for to an established misconduct torts calls its con By foregoing tests, all the duty Western had a prevent exercise reasonable care the construction and seriously sale of plaintiffs. defective homes The countervail ing considerations invoked and amici curiae imposition duty question are that the of upon in a lender housing will business, costs, marginal increase drive builders out of housing great and decrease total at a time of need. conjectural any event, These are claims. In there is no endur- vice-president charge develop 9The of Great Western’s tract loan ment that activities testified had Great Western known of con soil required plans dition it would have soil tests and the correction of before approving another lender Although Conejo right a construction loan. had the to seek project, at time to continue as financier of the there is no assume reason to that such lender would not have exercised reason imposed requirements. able care and similar seriously fostering the construction of
ing
utility
social
norm,
reliable
is the
homes. If
construction
defective
part
recognition
tract' financiers to home
of a
on the
housing
cost of
or
buyers
materially
not
increase the
should
existing sanctions
If
small
out of business.10
drive
builders
point
imposition
duty at
of effective
inadequate,
are
of a
building
responsible
control of tract
will insure
financial
practices.11
building
Moreover, in either
the losses of
event
seriously
family savings
defective homes would
invested
devastating
if
economic blows no redress were available.
contend,
question
however, that the
of their lia
Defendants
only by
bility
policy, and hence should be resolved
is one of
and
Legislature
marshalling
after a
of relevant economic
Legisla
however,
assurance,
is no
that
data. There
social
financing
task,
though
even
tract
undertake such
ture will
prospective
grows apace.
In the absence of actual or
policy,
it,
the court is free to resolve the case before
legislative
in terms
common
resolve it
law.
and indeed must
lending
contends that
institutions
Great Western
assumption
nonliability and
that a
on an
hence
have relied
only.
operate
imposing liability
prospectively
In
rule
should
judicial
prospective
past,
decisions have
limited to
been
they
upon
operation
parties
decisions
when
overruled earlier
of fair
reasonably
had
relied
when considerations
public policy precluded
(Forster
effect.
ness and
retroactive
County
Shipbuilding
Angeles (1960)
Co. v.
Los
54 Cal.2d
Cal.Rptr. 24,
Conceivably
450,
736].)
353 P.2d
458-459 [6
legislative
10In 1965
state
found that hundreds of homes
committee
upon expansive
built
an extent as
soil
California had cracked
such
unsafe,
the existence
to make continued habitation uncomfortable
easily
identified,
engi
cheaply
the cost of
of such
could be
soil
neering
homebuyer,
easily financed
builder and
was minimal and
solutions
analysis
requiring
prior
that “local ordinances
soil
’’
nonexistent,
virtually
leaving
potential
home construction are
home-
buyer
purchase
minimium
that his
will be a safe
No.
“without
assurance
(6 Assembly
Report
21,
home.”
Interim Com.
Munic
and habitable
County
(1965) p. 9,
ipal
Upon
Government
“Problems
Construction
Expansive Soil.”)
analysis
precautionary
In
soil
meas
required
(Health
Code,
§§
&
ures
state statute.
Saf.
17954.)
industry
composed principally
11The residential
construction
*16
they
builders,
equity
small
most of whom
little
have so
must borrow
money
production
(See
in order to finance the
of new homes.
Gillies and
Mittelbach, Management
Light
Industry
(1962)
in Construction
15-16, 19, 21;
Curtis,
pp.
Lending
Mortgage
Gillies &
Institutional Residential
County
Angeles
41-42.) Savings
(1956) pp.
in Los
and loan
legal
major
associations are bound
supplier
market forces and
restraints
abe
(Lefcoe
Dobson, supra,
such
funds to
small builders.
...
L,J.
1284-1286.)
1271,
Yale
might
justified
such limitation
appeared
also be
when there
general
abe
consensus that there would be no extension of
liability. Such is not
At
the case here.
least since MacPherson
(1916)
1050,
v. Buick Motor Co.
870 argument plans, inspection, both, defective or and its that by superseding “is there was a cause of the harm answered separate negligence may settled that be the rule two acts proximate concurring injury. (Fennessey v. of an causes 51]; Co., 141, Gas & 20 145 P.2d Elec. Cal.2d [124 Pacific Lacy Co., v. & 98 P.2d Gas Elec. 220 Cal. [29 Pacific (Merrill 552, 563.) 781];...)” Buck, supra, v. 58 Cal.2d question granting The a nonsuit remains whether against cross-complainants also favor of Great Western pledgees promissory by second As notes secured erroneous. cross-complainants Western trust, deeds of seek to hold Great impairment security the dam for the to their liable caused recovery plain age impose to the homes liens on By may tiffs other defendants. Western or obtain from Great stipulation parties agreed that the issue pretrial order liability first should determined Western’s Great rights parties of the other and liabilities thereafter the question among The whether be determined. themselves should any recoveries cross-complainants are entitled to liens on has not plaintiffs may from Western therefore obtain Great litigated. Loan v. Leeds yet (Cf. American Sav. & Assn. been Cal.Rptr. 933].) 453, 440 P.2d (1968) 68 Cal.2d against grant nonsuit cross- Accordingly, error to a it was against pro plaintiffs, for in further complainants as aswell may ceedings cross-complainants be able establish some ’ sharing in recoveries. basis proceedings, however, we purposes of such For the independent duty of owed no also hold that set cross-complainants. The factors balance care significantly an Biakcmja different when forth ease deeds of pledgee of notes secured second investor in or home-buying public as for a member of the trust is substituted part duty of the tract claiming of care on the party Although indicate no may difference some factors financier. cross-complainants insofar plaintiffs and between duty concerned, point others toward duties are Western’s plaintiffs cross-complainants. not but toward cross-complainants as a result foreseeability of harm substantially than in the less of defective construction cross-complainants had notes security As plaintiffs. case deeds of trust. Fur- well as second owners as the home margin of substantial they themselves of a assured thermore, paid the notes would not be against risk that safety purchase price less than the worth the homes would be they percent when Plaintiffs, lent of the face value of the notes. powerless on hand, protect the other their equities in their homes from reduction or extinction dimi- nution property of the value of the as a result of defective construction. Likewise, negligence closely Great Western’s was more con- plaintiffs’ injuries cross-complainants’ nected with injuries. than *18 injured by
Plaintiffs were the diminution of value of their homes as a result of defective construction. Cross- complainants injured plaintiffs on will if default their notes and the in diminution value of the homes leaves insuffi- security protect cient the second trust deeds.
Finally, substantially less moral blame attached to Great cross-complainants respect Western’s conduct with than respect plaintiffs. attached to its conduct with The roles played by cross-complainants plaintiffs in the transaction crucially were Western itself, different. Like Great cross- complainants enterprise were investors in a business and dealt Conejo creditors, purchasers as not as of the homes it built. As Conejo, cross-complainants substantial creditors of voluntary co-participants were with Great Western and enterprise in the building selling homes to the general public. Cross-complainants did not have Great West- power prevent ern’s of through defective construction control but, construction loan unlike payments; plaintiffs, had who practical no accepting Conejo’s qualifications alternative to and responsibility faith, cross-complainants on as substantial position protect investors themselves.12Under these circumstances, we do not that either believe cross-complainants duty were under a to exercise protect negligence reasonable care to the other from on the part Conejo. Accordingly, Great Western’s exer- prevent Conejo constructing cise reasonable care to defective homes was limited to the members of the public who bought those homes. parties stipulated The plaintiffs that the homes of Elwood Evelyn Guest John and Whitaker Grace 2-Goldberg’s 1 cross-complainants accountant is one of four who are co-partners doing Company. business Frithm-Pinke! Investment He partnership testified that the made investments on the advice of account ing previous investigation, approximately clients without that it had made years totalling dozen investments several a million last less than dollars, and that the deals in which it had involved total invested dollar approximately Goldberg’s amounts of million dollars. one hundred former property cross-complainants counsel real is of two matters one who are doing co-partners Company. K. & business as G. them, As to 1159, or 1160. not in tract
are nonsuit is affirmed. located judgment respects the is In all other reversed.
Peters, Tobriner, Sullivan, J., concurred. J., J., and MOSK, J.I dissent. concede, overwhelming, majority is and the The evidence developer funds and the tract that as between the lender of joint enterprise. joint venture, It no agency, there no no relationship. Nev- merely a is clear there lender-borrower ertheless, majority of funds hold the lender vicari- here negligence parties third for the ously liable to prece- unsupported by statute or (a) This result borrower. law; tort accepted principles of dent; (b) inconsistent with consequences. likely productive (c) of untoward social to be helpful to review some ele- threshold, it would be At relationships appear to be mentary economic factors proceeding. involved in this market is to entrepreneur in free function of the and to apparent demand goods or services are discern what sup- production in arrange order gather and the factors goods and services ply consumer, profit, at a to the entrepreneur a number doing, so undertakes desired. In *19 of the costs may calculated; than he demand be less risks. The losing danger only of may greater. He is not in
production obligations to the capital incurs investment he his own suppliers but materials, capital, he stands labor and and land, of principles and loss now-accepted of law for harm liable under injured persons products to those in his by defects caused thereby. risks in the entrepreneur these calculated undertakes The resulting monetary reward
hope substantial of an ultimate costs, which include not and his from return over above the charges in incurred and the only land, materials labor but commonly Indeed, “profit” has been obtaining capital. expenses to or above innovators the return to be understood and enter for their innovation entrepreneurs as the reward Francisco Sav. Union (People rel. Farnum v. San prise. ex upper 498].) The limit of 202-203 P. (1887) 72 Cal. in the his success profit is determined entrepreneur’s the market, assessing the demand his skill in from and this results through minimizing losses skillful his product for Ms production.
Conejo Valley Development Company and associated parties entrepreneurs. supplier capital The role of entirely the of is different. lender, supplier capital, as a is receive contract price
fixed return right or for his investment. He owns no participate profits enterprise in the of the no matter how great they may On hand, be. the other he is insulated from the capital risk of making loss and interest return for money available, his nonpayment other than the risk of obligations. contract Indeed, elementary is it that the owner money entrepreneur lends it to an and receives a fixed return, obtaining gain using rather than money the the entrepreneur, himself as an on the condition that he be basic, underlying mortgage relieved of risk. The risk in lend- ing might get is that the lender not back is him what owed to principal and interest. abundantly It clear, legally logically, seems both that if opportunity profits the lender no has gains share beyond supplying the fixed return for his capital, if i.e., he reaping has entrepreneur’s no chance of reward and exer- entrepreneur’s cises no control over the business, elementary requires subjected fairness that he should not be to the entre- preneur’s risks. Savings Great Western and LoamAssociation a lender, capital. supplier By imposing entrepreneur’s upon supplier risks capital, though bargained away even oppor- latter has tunity of participating entrepreneurial gain cap- on his by lending fee, majority ital aat fixed have effected a restructuring relationships. drastic The state, of traditional economic may throughout economy results reverberate of our seriously may money affect investment market, industry, regulatory the construction schemes of financial institutions, all without the hint in faintest either stautory authority or case such draconian result compelled. fact, authority points contrary In all available to a result. negligence “The obvious drawback of the solution this [to legal problem] precedent imposing is the lack of such a *20 duty upon Housing lending Liability institution.” Lender for (1968) 739, 35 U.Chi.L.Rev. 758. As Justice Defects Quinn (1942) in Routh v. 488, Carter wrote 20 Cal.2d 491 1, elementary principle an P.2d 149 A.L.R. : “It 215] [127 is indispensable upon negli- liability that an factor to founded
874 alleged genee duty by the of care owed is the existence of a is a injured, of he wrongdoer person or to class which to the ’' 214 (1932) Co. v. Elevator member. And Dahms General to “elemen 733, 1013], it also said P.2d was Cal. 737 [7 imposed on a liability can be tary, course, that no of tortious negligent, defendant though it unless defendant even was added.) (Italics Without duty plaintiff.” care owed a of to defendant damnum duty, injury is as to this such a Summary (1960) injuria. (2 Within, Cal. Law absque of negli against the be, Torts, remedy is, as should §4.) The gent builder. duty imposition of a that the never doubted It has been significant agency of harm. The issue implies control over ascription very right goes heart of the of control to the negli- alleged responsibility, particularly where tortious the conduct a failure to control gent is asserted to be conduct party. independent third an relationship duty special party has In the no absence of prevent him person, third of a so as to v. to the conduct control (Richards Stanley (1954) 43 causing harm another. Stations, 23]; Fuller v. Inc. 65 P.2d Standard Cal.2d [271 authority Cal.Rptr. 792].) (1967) Cal.App.2d No 687 [58 type relationship is the contem- lender-borrower holds that duty the conduct of another so as of control over plating the injury parties. third prevent statutory California Code, contains The Financial lenders, operations of institutional creates governing the rules any parties than institutions to other of care those duty no govern- and, depositors, course, to their shareholders majority point regulatory agencies. Indeed, the out mental duty clearly under a of care its Western “Great powers its of control over the enter- exercise shareholders to Judged prevent of defective homes. prise the construction negligently governing nonsuits, it failed to standards added.) duty.” (Italics duty, That discharge that majority opinion, was its care to share- duty delineated negligence Assuming arguendo that is shareholders holders. evidence, no cause action these in the reflected they were not the obvious reason Great- stated shareholders, thus no to them. In owed Cal.App.2d (1965) Assn. & Loan Mission Sav. Gill v. savings 456], held that a Cal.Rptr. the court loan promissory duty of care to holders of no owed association supervision respect deeds with trust subordinated notes and *21 There, management here, funds. it of construction loan proved agreed alleged or “that the defendant with not was anyone manage supervise or distribution the loaned to so, or funds, required by actually such, assumed to do undertook was statutory regulation manage law or so supervise. any showing voluntarily of a Ñor is there assumed relationship plaintiffs such between defendant might (Pp. 756-757.) obligation an arise.” The is of indicia that the defendants main- evidence barren any enterprise tained element control over the involved conflict here. The record establishes without that Great West- right ern and no mutual to direct had each other’s required by The fact that Great Western activities. was law (Pin. Code, 7156) to limit its rate disbursements the § import duty to purchaser borrower cannot the ultimate equivalent right progress is not the to control the development participate management or to the of the bor- enterprise. By regulating rower’s disbursements the lender may borrower, extent affect the some but is this far from control removed over the borrower’s business and from duty prevent an affirmative the borrower’s negligence parties. toward third implied agreement Actual an control or to control construc- question, tion is a factual against decided the here by the trier of fact. Before the written loan contract between the developer signed lender and the plans before the approved, were the lender could have exercised “control” project building only by over the insisting changes on in plans foundation aas condition of making the loan. In this respect, position the lender here is in no different any than other greater lender and exercised no “control” over the building project than other lender if can, who wishes, he funds if withhold he believes funds will be used in a harmful manner. Whether lender duty should be under a to conduct an
independent investigation to discover plans defects in the is entirely an majority different matter. The conclude that this imposed should on be the lender here because it had control of enterprise. Upon construction analysis, how- ever, it clear that this control was it mythical; consisted merely power money refuse lend project. for the respect In this may all lenders held to “control” projects they finance. Therein lies the vice of majority opinion. n con- As Great Western after to the “control” exercised right it began, had under the contract struction plans. did if work not conform to the to withhold funds performed pur- for this inspections conducted statutory pose comply requirements concern- plans Thus, if foundation ing disbursement of funds. right appeared the lender had under the contract defective, no
. *22 upon their revision. to insist . position, above, no as indicated was differ- Great Western’s - any no or ent from of other had contractual lender: operations of the statutory right conduct the builder- to to borrower. Even if it were be established .. by extending negligent duty in its to its own shareholders in this did not set competence, loans to a of dubious builder relationship the third subsequent motion the of builder the superseding negligence parties, insulates and the builder’s liability negligence resulted Great Western from for whatever hap- merely .money. lending “If the accident would have negligent not, pened anyway, whether the or defendant fact, of negligence not a cause in and course then his was or . (2 responsible Witkin, legal the cause.” Sum- cannot be mary 284, p. 1484.) (1960) Torts, of Cal. Law § short, identity of the lender nor the terms of In neither the upon had whatever the builder’s ultimate the loan effect money negligence. lending The of cannot be said to have ' parties. producing possibility of harm to third The created institution, builder, risk, here the created the controlled the duty harm, agency of and thus was the actor under minimize The in home construction were not the risk. defects by lending money; they the physical of were an incident of the caused process of construction. majority known assert the lender knew or should have The developers inexperienced undercapitalized and and were problems. so, the Assuming that there were this to soil be shareholders, may have in its lender been remiss its negligence in but that conduct is unrelated to the builder’s creating plain- injury to which resulted in structural defects if the loans were made tiffs. The have occurred defects would they by defendant, if they if not made defendant, were institution, or the builders lending made if were another relationship, exclusively. how- No used their own resources tenuous, between loans can be established ever . negligence of .the builder. upon appraisals rely inspections also The defendant, performed compliance These, however, were in hy verifying intended to a means with law were of for loans made, existence construction had been determining progress construction order to regulate appraisals inspec- rate. the disbursement The only tions were intended for benefit of defendant and - commu regulatory They state authorities. never fact outsiders, public nicated to neither general pros- nor the pective They encourage homeowners. were not used anyone purchase adapted induce homes, solely but were management. tools of internal Plaintiffs strain logic in attempting operations to convert these internal of the defend- representations them, ant negligent into or otherwise. imposed upon A duty parties creating care a risk lender, foreseeable harm. To find that an institutional merely by providing capital, a risk creates of foreseeable harm place of or in addition to the borrower who constructs or agency sets the motion, concept harmful is a novel of tort By parity reason, company law. would, by finance lend- ing money purchase automobile, an be liable for injuries parties to third negligent caused the owner’s operation of the vehicle. majority attempt adapt “balancing of various Biakanja Irving (1958) factors” in 647, v. 49 Cal.2d 1358], P.2d 65 A.L.R.2d to the *23 factual circumstances clearly misplaced here. That their reliance is is demonstrated by analysis Biakanja an of the six tests of to establish liabil- ity privity: in of the absence 1. The extent which the transaction was intended to plaintiff. conduct, including Defendant's appraisals, its affect cursory inspections, making and loans, the of was intended purposes for its exclusively, own for i.e. the benefit of its depositors. shareholders and representations No were made to any prospective and testimony homeowner there was no what- any indicating prospective ever actual or homeowners relied any representations. on question There can be no the transaction was intended to affect the lender and the borrow- er, plaintiffs. not for benefit direct or indirect of Foreseeability 2. harm. phase The this issue under of of foreseeability test is the resulting of harm from the lender’s distinguished actions as from the conduct of the is builder. It scarcely by foreseeable the lender, simply pro- as a result of viding construction, gross funds for structural defects in ultimately would exist the homes constructed builder, particularly in a situation in which construction was agencies approved by governmental Ven- of overseen experts reports in County, submitted on construc- tura county problems builder and to the tion both to the majority opinion, contrary in the
which, to the inferences experienced highly recommended another builder came any potential is of structural defects There risk lender. impossible particular to find foreseeabil- construction, but it is merely the act a financial ity harm of of construction money lending institution to builder. plaintiffs degree certainty that 3. The suffered discussion, injury. can, purposes this concede that for We liability injury. is suffered The issue whether bystander injury imposed on nearest solvent is to be that or produced the upon party negligent whose conduct injury. injury connection between 4. Closeness suffered homes, no no drew conduct. The lender here built defendant’s single function was plans in a nail. Its and did not drive experience The of the institu- not
finance and to construct. building money, In lending not in homes. is in tional lender short, connection”; enterprises no have “closeness the two any is There no evidence that they significantly remote. are of the defendant in its role the existence purchasers knew of they upon funds, much less that relied of construction lender development. regard to the activity lender with of the implies responsibility. The Blameworthiness Moral blame. 5. responsibility here to its shareholders and only lender’s assessed, it must be any moral blame If depositors. plaintiff. and not the them preventing harm. Rules of law or policy The 6. future minimize the risk future harm to deter or intended conduct creating upon controlling risk those imposed are of harm. policy apply this could only manner which may be the ultimate result this in the future—and lenders by compelling majority opinion—is lenders to become entrepreneurs. This, as hereto- indicated joint venturers previously alteration in a substantial fore, will result entrepre- relationship lenders and accepted between economic borrowers. neurial *24 adequate and in appear remedies both law to be There pur- negligent if home builders. But for equity chasers are victims today protected sufficiently their available not legislative bodies defects, latent constructional remedies for revamp building codes, give appropriate action to can take
879 agencies, power regulatory licensing require- make more compel provide strict, bonding builders, of home ments more industry-wide insurance. answer does not lie for compel lending created of action judicially cause that will supervisory to assume a role in institutions home construction. requirement will raise interest rates and the Such cost money and thus increase the cost construction. More home place supervisory significantly, responsibility it will on insti- financing operations tutions which are limited law to ill-equipped therefore with the skilled scientific, mechanical personnel necessary engineering perform supervisory effectively. function foregoing reasons, For all I judg- would affirm the ment. BURKE, J. agree I dissent. with I the Chief Justice that despite the extensive activities Great Western here the evi dence, lishing favorably plaintiffs, viewed most falls short of estab joint the existence of a venture between Great West ern Goldberg. or However, joint I would hold a relationship venture to be the basis imposing for liability upon position plaintiffs Great Western. Its vis-a-vis differs materially relationships from the between upon defendants in four cases majority which the opinion (Merrill
relies.
v. Buck (1962)
struetion predicate appears failure and on pronouncement asserted such protect plaintiff obligation home of an defects, (ante, buyers p. 867.) Even assum- from structural employees Western were ing certain or officers and its toward their duties care derelict corpora- employees are not the or shareholders, those officers tion-, more is the logically, in such a context it shareholders corporate en- might said to constitute the be themselves who tity. by corporate my performance officers negligent In view corporation and duty toward the employees of their of care upon provides cor- imposing no for basis its shareholders poration (and upon shareholders, must bear its who therefore fallacy plaintiffs). duty (here, others loss) toward substituting readily perceived by an indi- approach an such In could it that situation vidual financier Great Western. prudence and individual’s failure exercise that the be said care to gives rise to protecting care himself appear Similarly it as sound think not. would I others? princi- obligations to his agent’s of his that an violation rule principal render liable to others pal in and itself would has not transaction, up such injured in same now the law. been judgment. affirm the I would
McComb,J., concurred. January rehearing was denied petition for Respondent’s J., J., Burke, J., Mosk, McComb, 8, 1969. petition granted. opinion should