Lead Opinion
In this interlocutory appeal, we must decide whether to extend the implied warranty of workmanlike construction to protect a bank that acquired a mold-infested apartment complex by deed in lieu of foreclosure. The bank sued the builder under that theory, alleging shoddy construction. This implied warranty “is a judicially created doctrine implemented to protect an innocent home buyer by holding the experienced builder accountable for the quality of construction.” Speight v. Walters Dev. Co.,
We hold the bank may not recover under the implied warranty of workmanlike construction. No other court has extended the theory to allow claims by foreclosing lenders. Additionally, a clear majority of courts decline to allow recovery by for-profit owners of apartment buildings. The doctrine’s rationale does not support extending it to the bank. We created the doctrine to redress the disparity in bargaining power and expertise between homeowners and professional builders, and to provide a remedy for consumers living in defectively constructed homes. We see no valid policy reason to extend the implied warranty doctrine to a sophisticated financial institution that can protect itself through other measures. Accordingly, we affirm the summary judgment dismissing the bank’s implied warranty theory.
I. Background Facts and Proceedings.
This litigation arose from the discovery of black mold infesting two apartment buildings in Postville, Iowa. Luana Savings Bank (bank) financed the construction of the buildings. The borrowers, Ronald Wahls and Karen Wahls, acting as officers of RO-KA Acres, Inc. (RO-KA), purchased farmland to develop into the RO-KA Heights First Addition in 2002. The bank financed their purchase through a line of credit secured by an open-ended mortgage. RO-KA subdivided the land into twenty-one lots and sold nine lots to various buyers over the next several years. In May of 2006, the bank filed a foreclosure action against RO-KA for amounts due on promissory notes.
RO-KA and Amereeka entered into a separate management agreement. RO-KA agreed to manage the existing apartment complexes on lots 12 and 13 of RO-KA Heights, as well as any other apartments to be built on the land. At this time, lots 15 and 16 were undeveloped. On July 28, Ronald Wahls entered into a written contract for materials and labor with United Building Centers (UBC), the predecessor of Pro-Build Holdings, Inc. (Pro-Build), to construct two twelve-plex apartment buildings on lots 15 and 16. Wahls signed the contract in his own name instead of as an agent for RO-KA or Amereeka. The plans for construction were based on the floor plans of the existing apartment complexes. Construction began in 2006 and was completed in 2007. RO-KA managed the new buildings under its existing management agreement. Amereeka executed an open-ended mortgage on the property it had purchased from RO-KA in favor of the bank. Amereeka also executed a commercial security agreement securing a com- . mercial real estate loan made by the bаnk to Nevel Properties, Inc., Amereeka’s parent company. The proceeds of that loan were used to pay for the construction of the apartment buildings on lots 15 and 16.
On May 12, 2008, federal immigration and customs enforcement (ICE) agents raided Agriprocessors and arrested nearly 400 undocumented workers who were charged with a variety of immigration-related criminal offenses. United States v. Rubashkin,
In 2009, both RO-KA and Amereeka defaulted on their obligations to the bank. RO-KA quitclaimed its interest in the properties at RO-KA Heights to the bank in February of 2009 in exchange for a release of its remaining obligations to the bank. On June 26, Amereeka gave the bank a “Deed in Lieu of Foreclosure” signed by Rubashkin conveying all of the property it owned in RO-KA Heights to the bank as a release from liability under the mortgage, including lots 15 and 16. After acquiring ownership in the apartment complexes, the bank discovered substantial black mold in the units. Investigation revealed that the mold resulted from improper installation of windows and air-conditioning units, and inadequate attic ventilation.
The bank commenced this action by filing a petition against Pro-Build in Alla-makee County. Count I of the petition alleged negligence in the construction of apartments for Amereeka. Count II alleged that Pro-Build breached the implied warranty of workmanlike construction.
II. Scope of Review.
We review rulings that grant summary judgment for correction of errors at law. Parish v. Jumpking, Inc.,
On further review, we have discretion to choose which issues to address. Hills Bank & Trust Co. v. Converse,
III. Analysis.
We must decide whether to extend the implied warranty of workmanlike construction to a lender that acquires a multiunit residential apartment complex by a deed in lieu of foreclosure. This is a question of first impression in Iowa. We conclude the bank’s implied warranty claim fails for several reasons. First, the bank is not the type of innocent homeowner the implied warranty was adopted in Iowa to protect. Second, Pro-Build is not the type of builder-vendor subject to the implied warranty. Third, the requested extension to a foreclosing lender is not supported by caselaw in other jurisdictions. Finally, the policy reasons underlying the implied warranty do not support its extension to a foreclosing lender.
The implied warranty of workmanlike construction adopted for the protection of homeowners in our state was an extensiоn of Mease v. Fox,
A. The Elements of the Implied Warranty Theory in Iowa. In Kirk, we adopted the following “generally recognized” elements for the implied warranty of workmanlike construction:
(1) That the house was constructed to be occupied by the warrantee as a home;
(2) that the house was purchased from a builder-vendor, who had constructed it for the purpose of sale;
(3) that when sold, the house was not reasonably fit for its intended purpose or had not been constructed in a good and workmanlike manner;
(4) that, at the time of purchase, the buyer was unaware of the defect and had no reasonable means of discovering it; and
(5)that by reason of the defective condition the buyer suffered damagеs.
Kirk,
1. The house was constructed to be occupied by the plaintiff-warrantee as a home. The first element limits the potential class of plaintiffs to innocent home buyers for whose benefit we created the warranty. See Kirk,
2. The defendant must be a builder-vendor constructing homes on land it owns for resale. Just as the first element limits the class of potential plaintiffs, the second element of the Kirk test limits the class of potential defendants to builder-vendors who own the structures they build to sell on land they own. In Kirk, we adopted the following definition for the term “builder-vendor”:
*897 “[A] person who is in the business of building or assembling homes designed for dwelling purposes upon land owned by him, and who then sells the houses, either after they are completed or during the course of their construction, together with the tracts of land upon which they are situated, to members of the buying public.
The term ‘builder’ denotes a general building contractor who controls and directs the construction of a building, has ultimate responsibility for a completion of the whole contract and for putting the structure into permanent form thus, necessarily excluding merchants, material men, artisans, laborers, subcontractors, and employees of a general contractor.”
Kirk,
We reaffirmed Kirk ⅛ definition of builder-vendor in Flom v. Stahly,
The bank argues our extension of the implied warranty to subsequent purchasers in Speight supports a further extension in this case. Although Speight expanded the class of plaintiffs permitted to sue for breach of implied warranty to encompass later home buyers, it did not expand the permissible defendants beyond traditional builder-vendors. As an Illinois appellate court recognized, precedent relaxing the privity requirement to allow a subsequent homeowner to bring the implied warranty claim did not support expanding the types of defendants liable under the doctrine. Wash. Courte Condo. Ass’n-Four v. Wash-Golf Corp.,
Pro-Build argues that it is not a builder-vendor under Kirk and Flom and, therefore, cannot be a defendant in an implied warranty case. We agree. Ronald Wahls approached Pro-Build’s predecessor UBC with a set of plans modeled after the existing apartments on lots 11 and 12. The contract between UBC and Wahls was entitled “Contract Agreement for Materials & Labor” and never referred to UBC as a general contractor. Neither UBC nor Pro-Build owned the land on which the construction took place, nor did either build the multiplexes to sell to the public. Rather, UBC was paid directly for its work by Wahls, who acted as the devel
B. Caselaw from Other Jurisdictions.
In Kirk, we examined the caselaw of other jurisdictions to decide whether to adopt the implied warranty of workmanlike construction in the sale of single-family residences.
The bank cites no decision from any jurisdiction extending the implied warranty of workmanlike construction to a lender acquiring property by deed in lieu of foreclosure. Nor have we found such a decision in our independent research.
Most jurisdictions that have considered the issue have limited the implied warranty remedy to purchasers who actually livе on the premises. See, e.g., Hopkins v. Hartman,
Some jurisdictions have allowed owners of condominiums who reside in the units to bring suit either as an association or individually. See, e.g., Lofts at Fillmore Condo. Ass’n v. Reliance Commercial Constr., Inc.,
The Hopkins court elaborated on the distinction between buying a home to live in and purchasing a multiunit dwelling for profit:
The motivations upon those seeking income-producing property, as well as the pressures upon them, are considerably different from those of the vendee described in Petersen [v. Hubschman Construction Co.,76 Ill.2d 31 ,27 Ill.Dec. 746 ,389 N.E.2d 1154 (1979) ]. The income-seeker, whether he be purchasing common stocks, chattels, real estate, or any other form of investment, has ample opportunity to investigate, study, appraise and assess the relative merits and demerits of the subject matter and then to make a calculated judgment as to how profitable it will be. In contrast, the Petersen vendee is seeking shelter for himself and his family, oftentimes under considerable pressure brought about by job transfer, increase in family, deterioration of his former neighborhood, or other circumstance over which he has no control. If the Petersen warranty is to be extended to an investor in real estate, by extension of logic the Board of Governors of the New York Stock Exchange should warrant that no common stock traded there will ever decrease in value. The relaxation of the rules of caveat emptor and merger by the supreme court was intended to protect а consumer, not an investor.
Several courts have extended the implied warranty of workmanlike construction to buyers of commercial property. See Pollard v. Saxe & Yolles Dev. Co.,
Tusch Enterprises, decided by a divided Idaho Supreme Court, explicitly extended the implied warranty to investors buying apartment buildings for income-producing purposes.
There are several reasons not to extend the implied warranty to lenders. For one thing, as far as the lender is concerned, the property is not the lender’s return on the transaction; it serves only as the collateral securing repayment of a loan. A defective dwelling is not the same problem for the lender that it is for the homeowner living in it so long as the borrower can repay the loan. Moreover, lenders can protect themselves in a variety of ways. For example, in this case, the bank could have stated in the loan documents that, upon default, all claims of Wahls against other parties (such as Pro-Build) would be assigned to the bank. See Red Giant Oil Co. v. Lawlor,
C. The Policy of the Implied Warranty in Iowa. We conclude the policies underlying the implied warranty of workmanlike construction in Iowa do nоt support its extension to a foreclosing lender. We adopted the implied warranty in Kirk and extended it in Speight for the protection of innocent home buyers to address their disparity in expertise and bargaining power with sophisticated builder-vendors. See Speight,
IY. Disposition.
For these reasons, we hold the implied warranty of workmanlike construction does not extend to a lender acquiring apartment buildings by a deed in lieu of foreclosure. We affirm the decision of the court of appeals and affirm the district court judgment dismissing the bank’s implied warranty claim. The district court’s ruling denying summary judgment on the bank’s contract claim is reversed, and this case is remanded for entry of a judgment of dismissal.
DECISION OF COURT OF APPEALS AFFIRMED; DISTRICT COURT JUDGMENT AFFIRMED IN PART, REVERSED IN PART, AND CASE REMANDED.
Notes
. In Rosauer Corp. v. Sapp Development, L.L.C., decided today, we further explore the history and rationales for the implied warranty of workmanlike construction and decline to extend the doctrine to the sale of lots between developers.
. The bank does not challenge the order dismissing count I, its negligence theory. Accordingly, the economic loss doctrine is not at issue in this appeal.
. The common law imрlied warranty of habitability judicially adopted in Mease to protect tenants has been legislatively codified by the Uniform Residential Landlord and Tenant Act, Iowa Code chapter 562A. See Crawford v. Yotty,
. In Amsterdam Savings Bank, FSB v. Marine Midland Bank, N.A., a bank, as mortgagee, acquired an apartment complex by foreclosure and sued the builder under several theories including breach of implied warranty.
. In Speight, we quoted a commentator who in turn quoted Tusch Enterprises for an entirely different proposition, as follows:
Further, the purpose of the implied warranty of workmanlike construction is to ensurе the home " ‘will be fit for habitation,' a matter that ‘depends upon the quality of the dwelling delivered’ not the status of the buyer.” [Mary Dee] Pridgen, [Consumer Protection and the Law,] § 18:19 [(2006)] (quoting Tusch Enters. v. Coffin,113 Idaho 37 ,740 P.2d 1022 (1987)).
Speight,
. In oral argument, counsel for the bank suggested that a lender that inspected construction work or approved plans could open itself up to liability to future purchasers. This concern is overblown. Under Kirk, only a builder-vendor is liable for implied warranty of workmanlike construction.
The bank cannot be said to have warranted the construction because it did not do the construction work. The status of the bank is not changed by the fact that its officers reviewed and approved the original plans and specifications. Such actions by the bank are for the protection of its security and not for the benefit of future buyers.
Smith v. Cont’l Bank,
Courts have recognized lender liability for construction defects only under limited circumstances not presеnt in this case. South Carolina, for example, has allowed claims against a lender if it is also a developer, is aware of defects but conceals them, or "when the lender becomes highly involved with construction in a manner that is not normal commercial practice [because] it is so amalgamated with the developer or builder so as to blur its legal distinction.” Kennedy v. Columbia Lumber & Mfg. Co.,
In both Kirkman [v. Parex, Inc.,369 S.C. 477 ,632 S.E.2d 854 (2006),] and Roundtree [Villas Ass’n, Inc. v. 4701 Kings Corp., 282 S.C. 415,321 S.E.2d 46 (1984),] the lender actually assumed some degree of control of the property, made improvements thereon, and/or was partner in efforts to sell the same. In fact, in Roundtree, even though a duty of care was found, it was expressly limited to the repairs the lender actually performed. Likewise, in Kirkman, whether or not the lender had impliedly warranted the house turned on whether or not it was "substantially involved in completing the house.”
Regions Bank v. Coll. Ave. Dev., LLC, Civil Action No. 8:09-1095-RBH, BHH,
Dissenting Opinion
(dissenting).
The majority rejects Luana Savings Bank’s request for implied warranty protection, concluding only a narrow category of those suffering economic loss resulting
A primary principle of the majority opinion is that purchasers of single-family residences are worthy of protection because of their “innocence” or lack of sophistication in buying residential real estate. Although I concede banks are often populated by persons with greater knowledge about commercial transactions than ordinary consumers, I believe this distinction is wholly inadequate as a justification for denying banks a remedy based on implied warranty for shoddily constructed buildings intended for habitation.
The business of constructing modern residential structures is a complex business that requires expert knowledge in a plethora of areas. See Speight v. Walters Dev. Ca.,
In Speight, we extended the implied warranty of workmanlike construction owed by construction contractor-builders to subsequent purchasers of residential real estate. Speight,
■I also find unpersuasive the majority’s assertion that banks are less worthy of protection offered by the law of implied warranty than consumer-purchasers of residential property because banks possess financial resources enabling them to inspect construction projects, detect workmanship defects, and avoid losses of the type claimed by Luana Savings Bank. Conceding for the sake of discussion that banks often have greater financial resources at their disposal than consumer-purchasers of residential real estate, I find this distinction unsatisfying as a justification for denying Luana Savings Bank a remedy based on the law of implied warranty. The purpose of the implied warranty of good workmanship is to allocate, when possible, the economic losses resulting from poor construction workmanship to parties that provide poor workmanship causing damage to others. See Speight,
Unlike my colleagues in the majority, I believe Tusch Enterprises was correctly decided. In extending the implied warranty of workmanship to provide a remedy for investors who bought apartment buildings for investment purposes (rather than for their own residential use), the court recognized that the compelling reasons for protecting consumer-purchasers of residential property from losses resulting from defective workmanship also justified protection of purchasers who were motivated by a profit motive rather than a need for shelter. See Tusch,
My colleagues in the majority who reject Luana Savings Bank’s claim prefer the reasoning advanced by the dissent in Tusch. The dissent there viewed “investors in real estate” as standing “a far cry” from the ordinary buyer of a new house. Id. at 1038-39 (Shepard, C.J., dissenting). But the difference between investors and ordinary buyers perceived by the Tusch Enterprises dissent is specious for the reason (knowledge and relevant sophistication gap) I have explained above. I simply cannot accept that investors who suffer loss as a consequence of shoddily constructed buildings designed for residential use should be denied the same remedy as ordinary consumers who purchase the same type of property for their own occupancy.
Extending the implied warranty of workmanlike сonstruction to protect commercial interests like Luana Savings Bank from shoddy construction workmanship imposes no new burden on contractor-builders. We addressed this issue head-on in Speight:
Walters contends that allowing the recovery the Speights seek would lead to increased costs for builders, increased claims, and increased home prices. However, builder-vendors are currently required to build a home in a good and workmanlike manner. The implied warranty of workmanlike construction reasonably puts the risk of shoddy construction on the builder-vendor. The builder-vendor’s risk is not increased by allowing subsequent purchasers to re*905 cover for the same latent defects for which an original purchaser could recover.
Speight,
The builder already owes a duty to construct the home in a workmanlike manner .... If we extend pоtential liability of the builder to subsequent purchasers, the builder still is burdened only with the duty to construct the home in a workmanlike manner, etc. In other words, no greater effort will be imposed on the builder to protect himself.
Keyes v. Guy Bailey Homes, Inc.,
My colleagues in the majority suggest the extension of implied warranty I propose will create unlimited liability for builders, stretching indefinitely into the future, and creatе “a morass of controversy and uncertainty through which no clear, reliáble road may be charted.” Hays v. Gilliam,
I also find no reason to believe that, as the majority intimates, extending the implied warranty of workmanlike construction to protect commercial interests like Luana Savings Bank will create unlimited liability for builders stretching indefinitely into the future. The duration of builders’ exposure for breaches of implied warranty is alrеady limited by the applicable statute of repose, as we noted in Speight:
Walters argues that allowing subsequent purchasers to recover for a breach of the implied warranty of workmanlike construction would subject builder-vendors to unlimited liability; however, we are not persuaded. Iowa Code section 614.1(11) provides a safety net — a statute of repose for potential plaintiffs seeking to recover for breach of an implied warranty on an improvement to real property....
... In cases involving the construction of a building, such as this home, that period begins upon completion of the construction of the building. As a result, builder-vendors are not liable on an implied-warranty claim after the statute of repose has run, regardless of who owns the home.
Speight,
For these reasons, I would reverse the summary judgment and remand for trial.
APPEL, J., joins this dissent.
Dissenting Opinion
(dissenting).
When deciding whether to extend the common law, we do not choose a rule merely because a majority of those jurisdictions has or has not decided to extend the common law. Instead, we look at the policy behind the rule and decide if the policy behind the rule is sound.
A few years back, we extended the implied warranty of workmanlike construction to subsequent purchasers of improved property. Speight v. Walters Dev. Co.,
We agreed with the rationale of the Idaho Supreme Court when extending the warranty in Speight. Id. The Idaho case from which we borrowed the rationale used the same rationale to extend the warranty to “residential dwellings purchased for income-producing purposes which have never been occupied by the buyers.” Tusch Enters. v. Coffin,
Here, a genuine issue of material fact exists as to whether the builder breached the implied warranty of workmanlike construction. This breach affected the habitability of the building. This breach occurred no matter who owned or resided in the dwelling units. Therefore, I would find the warranty applies to the bank and let the jury decide the fact issues as to whether the defendant was a builder, and if so, did the builder breach the warranty?
APPEL, J., joins this dissent.