# FILED May 22, 1997 Cecil Crowson, Jr . App ellate C ou rt Clerk IN THE COURT OF AP PEALS OF

TENNESSEE, WESTE RN SECTION AT JACKS ON

_______________________________________________________ ) WILLIE LOMAX and wife, ) Shelby Equity No. 104517-1 BOBBIE LOMAX , ) ) Plaintiff

s/Appella nts. )

) VS. ) C. A. NO. 02A01-9607-CH-00163 ) HEADLEY HOMES, a Tennessee ) General Partnership com posed of ) Dennis Headley and Betty Headley , ) ) Defend ants ) 0 AND ) ) LEADER F EDERAL BAN K FOR ) SAVINGS a

nd GEORGE

E. BURTON , )

) Defend ants/Appe

llees. )

______________________________________________________________________________ From the Chancer y Court of Shelby

County at Memphis
. Honorable Neal Small, Chancellor

J. Alan Hanover , Jeffrey S. R

osenblum , HANOVER, WALSH, JALENAK & BLAI R, PLLC, Memphis, Tennessee Attorney for Plain tiffs/App ellants.
Robert E. Craddock, Jr. , O. John Norr

is, III , WYATT, TARRANT & COMBS, Memphis, Tennessee Attorney for D efendants/Appellees Union Planters National Bank and G eorge E. Burton.

OPINI ON FIL

ED: AFFI RMED IN P

ART, REVERSED IN PA RT AND REM ANDED FARMER, J.
CRAWFORD, P.J., W.S. : (Concur s) LILLARD, J. : (Concur s)1 After this litigation began, L eader Federal was a

cquired by Union Planter s National Bank. Accordingly , this Court recent ly e ntered a n order g ranting Lea der Fe deral’ s motion to substitute Union Planters National Bank as Defendant/Appellee.

2 In deciding t

his appea l, we expre ss no opinio n on the ad missibility

of the sta tements allegedly made by Ms. Hay

es to the Lomaxes prior to their execution of the Construction L oan Agree ment. Plaintiffs Willie and Bobbie Lomax appeal the trial court’s order entering summary judgment in favor o f Defen dants /Appe llees Leader Fed eral Ban k for S avings 1 and George E. Burton. The tri al court

appare ntly granted the Def

endants’ motion for

summary judgmen t based up on th e provisions of the Construction Loan Agr eemen t entered into between the Lomaxes and L eader Federal. We affir

m the tria

l court’sorder a s to Defe ndant Ge orge E . Burton . With reg ard to Defend ant Leader F

ederal , howeve

r, we re verse a nd remand for fur

ther pro ceeding s.

I. Facts

For purposesof the De

fendant s’ summary judgme nt motion, the following facts were undisputed. In April 1993, the L omaxes approached Lea

der Federal

to obtain a construction loan for a home the Lomaxes planned to build in southeast Memphis. At the ban k, the Lom axe s first spoke wi th Ch er yl Hayes. Ms. Ha yes informed

the Lomaxes tha

t their co ntracto

r, Head ley Homes,
was on Leader F

ederal’s approved list of

builders; that Leader F

ederal had an inspector in its employ who would

make sure Headley

Homes was paid only for

work that was actually

completed; and that Leader Federal would make disbursements to Headley Homes only for wor

k that wa s act ually completed.

In relianc e on Ms. Ha ye s’ repr esentat ions, 2 the Lomaxes executed a Construction Loan Agreement with L

eader Federal. Reg arding Lea der Federal’s obligation to disburse funds thereunder, the

Agree ment prov

ided that :

Lender [Leader Fede

ral] agrees to advance and disburse the loan, . . . in install ments as w ork prog resses in accord ance with schedule attached, or if no schedule attache d, then the

Lend er is authorized to disburse funds und

er its con trol in sai d constru ction loa n account only in proporti on to its insp ector’ s reportof progress or by architect’s certificate accompanied by a proper affidavit from the contractor
.3 Although this provision authorized Leader F ederal to disburse funds directly to the Borrower, the languag e of this and other provisions of the Agreement sug gested that this option ap pl ie d t o s it ua ti on s w he re th e B or ro we r a nd th e C on tr ac to r w er e t he sa me en ti ty. The Agreement also contained the f ollowing provision:

Lend er has no liability in connection with

said improvements or the construction or completion thereof or work performed ther eon and has no obligation except to advance the loan as herein a gre ed. The Borrower [t he L omaxes] ack

nowledg es and he

reby accept s the sole respo nsibility

for the s election

of his own

contractor, mate

rials, supplies and equipment to be used in the construction, and the Lender as sume s no respon sibility for the c ompletion o f the impr ovements according to the plans and specific ations and for the

contract price, all inspections by L

ender or its representative for its b enefit, and the Borrower should not rely on such inspections or ac ceptance by Lender to be for

his prote ction r egard

less of the

circumst ances, repres entation s or appe arance as may hereina fter exist
.

The Construct

ion Lo an Agr

eement a uthorized Lea der Fe deral t o disburse loan proceeds to the “Borrower or to the Contractor or a ny other per sons furnishing labor, suppli es or services for or in connection with the construction or completion of sai d impr ovements.” 3 After executing th e Agreement , the Lomaxes authorized Le ader Federal to disburse the loan proc eeds directly to their contractor, Headley Homes. Mrs. Lomax thought that Leader F ederal would ask for the Loma xes’ permi ssion eac h time it issued a check to Headley Homes. Mrs. Lomax later discovered

that Leader F

ederal was issuing checks directly to Headley Homes withoutfirst

seeking permission from the Lomaxes. When Mrs. Lomax questioned someone at Leader

Federal about the payments, she wa s told that “that was the procedure.”

Leader Federal’s construction inspector was De fenda nt Geo rge E. B urt on. In conducting h is final in spection of the Lomaxes’ home in March 1994, B urton authorized disburse ments to Headley H omes for work that was never

completed. Burton later admitted that he missed some items in the final inspection and that he “did a really bad job inspecting the Lomax home.” As a result, the Lomaxes obtained a home wh ich, contra ry to Burton’ s final inspection report, wa s n ot su bs ta nt ia ll y co mp le te . A dd it io na ll y, someof the construction work that had been complete d contained blata nt and obvious defects.

The Lomaxes subseque

ntly filed thisaction a

gainst Headley

Homes, L

eader F ederal ,4 In their complaint, the L omaxes also asserted a claim for violation of the Tennessee Consumer Protection Act of 1977. See T.C.A. §§ 47-18-101 to -5002 (1995 & Supp. 1996). On appeal, however , no issue h as been r aised re garding the tr

ial cour t’s dismissa

l of this cl aim. and Burton for the faulty

construction of

the Lomaxes’ house. The L omaxes’ amendedcomplaint sought to ho ld Leader Federal liabl e for i ts bre ach of t he dut y of good fai th and fair d ealin g, negligence, and misrepresentation. 4 The comp laint soug ht to hold B urton indi vidually liable for his negligent inspection of the home.

Leader Federal and

Burton filed

a motion for summary judgment and attached a copy of the Construction Loan Agree ment. The trial court granted the motion and directed the e ntry of
a fina l judgment in favor of Le ader Federal and Bur ton. See T.R.C.P. 54.02. On appeal, the Lomaxes present the following issue for r eview:

Whether an exc u lpatory clause

in a construction loan agreement

can rel ieve a le nder who neglig en tl y d isburses loan proceeds to abuilder for work that has not been completed from any and all liability associated with construction of a home, in cluding blatant misrepresentations made by such lender.

Ac co rd in gl y, this appeal requires us to determine whether the “exculpatory ” provision contained in the Construct

ion Lo an Agr

eement is e nforceable against the L omaxes so as to bar their present action against Lea

der Federal. Whether the provision is an exculpatory clause is addressed later.
II. Leader Federal’s Duty to Disburse Construction Loan Proceeds

As a prelimin ary matter , however, we must determine what duty , if any, L eader Federalowed to the Lomaxes with respect to inspection of the L omaxes’ home and di sburse ment of the lo an proceeds. If

Leader F ederal owed no duty

to the Lomaxes, then the Loma xes hav e n o
cause of actio n again st

Lea der Fe deral a

nd we need not deci de the iss ue of the enforc eability

of the exculpato ry provision

contained in Le ader F

ederal ’s contr

act.

In the abse

nce of a contrar y a greem ent betwe en the pa rties, the gener al rule in Tennessee is that a le

nder owe s no duty

to a borr ower to d isburse loan proceeds for the borrower’ s5 Cf. Forest Inc. v. Guaranty Mortgage Co. , 534 S.W.2d 853, 856-59 (Tenn. App. 1975)

(addressing lender’s duty to subordinate creditors when lender disburses construction loan proceeds). benefit
. In disbursing loan proc eeds, therefore, a lender has no af firmative duty to protect the borrower’s interests. Goodner v. Lawson , 232 S.W.2d 5 87, 589-9 0 (Tenn. App. 1950 ) (in absence of agreement, loan association had no duty to pay mechani c’s liensout of loa n proceeds prior to disbursing loan proc eeds to c ontract or); s ee also Forest Inc. v. Guaranty Mortgage Co. , 534 S.W.2d 853, 856-59 (Tenn. App. 1975) (in absence of express contra ctual provision o r indus try custom, lender had no dut

y to subordina

te creditors, such as suppliers, materialmen, and developer, to inspect construction and advance funds to contractor only in proportion to percentage of construction completed).

An exception to the gener

al rule a rises, ho wever, where a

lender a ssumes suc

h a duty by express or implied agreement. Goodner v. Lawson , 232 S.W.2d at 589-90. For example, where
a lender retains the loan

proceeds and assumes the responsibility of discha rging prior liens, the lender may be liable for its negligent failure to perfor m this duty. Prater v. Fidelity Trust Co. , 34 S.W.2d 205, 207 (Ten

n. 1930); see also Crum v . AVC O Fin. Servs . , 552 N.E.2d 823, 827 (Ind. Ct. App. 1990) (lender who agrees to disburse loan pr oceeds for certain purpose must exercise d ue car e in performance

of obligation); 59 C.J.S. Mortgages § 297 (1949) (“If . . . the mor tgagee agree s to apply the proceeds for a certain purpose he is liable for a failure to do so.”).

Alth ough a lender’s duty

to a borrower when

disbursing constructionloan proceeds appare ntly has not be en consid

ered by Tenness ee c ourts, 5 courts in other jurisdictions have recognized

that a lender’s duty

in this situation is governedby the provisions of the construction loan agreement

betwee n the lend er and th e borrow er. Thus , in Henry v. First Federal Savings & Loan Ass’n , 459 A.2d 772, 775 (Pa. Super. Ct. 1983), a Pennsy lvania c ourt held

that, in the absence of a contractually

assumed du ty, a loan association owed no duty to borrowers to inspect construction of the borrowers’ home prior to making prog ress payments to the borr

owers’ contractor. Although the construction loan agreement’s terms ga ve the association the right to enter the construction premises and to conduct inspections, the agreement did not require the a ssociation to do so . Similarly , in Daniels v. Army Natio nal Bank , 822 P.2d 39, 42 (Kan. 1991), the Kans as court held that, in the6 As previously indicated, the Construction Loan Agree ment also gave Le ader Federal the option, in disbursing the loan proceeds, of rely ing on an architect’s certifica te, accompanied by the contractor’s affidavit. I nasmuch as Leader

Federal chose to rely

on its own inspector’s report of progress, we need not addre ss the question of Leader F ederal’s liability had it instead c hosen to rely on the ar

chitect and contractor.
7 Moreover, in Tennessee the common law imposes upon L eader Federal a duty

of good faith in performing this contractual obligation. Wallace v. National Bank of Commerce , 938 S.W.2d 684, 6 86 (Tenn . 1996); accord Crum v. AVCO Fin. Servs. , 552 N.E.2d 823, 827 (Ind. Ct. App. 1990) (reaching same conclusion under I ndiana law). absence of a contractual provision to the contrary , the bank had no duty to inspect the construction site for the protection of the borrowers prior to disbursing loa n proceeds. There, the contract authorized, but did not r

equire, the bank t

o inspect the prog ress of the work and the quality of the workmanship. See also Meyers v. Guarantee Sav. & Loan Ass’n , 144 Cal. Rptr. 616, 619-20 (C t. App. 1978) (holding that, in abs ence of contr actual provi sion impo sing s uch du ty, savin gs and loan association had no duty to inspect construction to determine that work had been done acc ording to specifications prior to making pay ments to contractor from loan proceeds).

In contrast, the Construction Loan Ag reement at issue in the present case did impose
a duty, albeit a limited one, on L eader Federal rela

tive to its disbursement of the loan p

roceed s. The Agreement

authorized Lea

der Fe deral “ to disburs e funds under its co ntrol in said construction loan account only in proportion to its inspector’s report of progress.” By

its express terms, this provision imposed a two-fold duty on L

eader Federal: (1) Leader F ederal, through its inspector, was obligate d to make a report of progress of the construction; 6 and (2) Lea der Fe deral wa s obliga

ted to disburse loan proceeds only in proportion to the inspector’s re port of progress. I

nasmuch as Leader

Federal retained the loan proceeds and expressly assumed the duty to disburse the proc eed s subject t o the provisions of the pa

rties’ Agreement, Leader F ederal may

be held liable for its negligent perfor mance of this duty. Prater v. Fidelity Trust Co. , 34 S.W.2d a t 207; Goodner v. Lawson , 232 S.W.2d a t 589-90; 59 C.J.S. Mortgages § 297 (1949). 7

Although we conclude that L eader Federal did owe a

duty to the L

omaxes, we find it necessary

to explain why we have de scribed the duty a s a limited o ne. By the expre ss terms of the Construction Loan Agreement, Leader F ederal only a ssumed a duty to inspect the prog ress of the work and to make loan disbursements in proportion to such progress. L eader Fed eral di d not undertake to inspect the construction fo r d ef ec ti ve , a s o pp os ed to in co mp le te , w or k. Ac co rd in gl y,8 We recog nize that, u

nder some

circumst ances, a finder o f fact mi ght hav e difficulty ascert aining w hat const itutes def ective c onstruct

ion, as opp osed to me

rely incomple te construction. At this point in the proceedings, however, we need not address such a hy pothetical issue.
9 In Davis v. Nevada N ational Bank , the Nevada court limited the circumstances under which a borrower could sue for defe ctive construction to cases where: (1) the lende

r assume s the res ponsibility or the rig ht to distribute loan proceeds to parties other than its borrower during the course of construction; (2) the lender is apprised by its borrower of substantial deficiencies in construction that affect the structura l integrity of the buil ding; (3) the borrower requests that the lender withhold further distributions of loan proceeds pending the satisfactory resolution of th e c on st ru ct io n d ef

ic ie nc y; (4) the lende

r continu es to distr

ibute loa n proceeds in compl ete disregard of its borrower’s complaints and without any bona fide attempt to ascertain the truth of said complaints; and (5) the borrower ultimately is damaged because the substance of the bor rower’ s complain

ts was ac curate

and the bo

rrower is unable to recove r damag es aga

inst the co ntracto

r or othe r party directly responsi ble for th e constr uction deficienc ies. Davis v. Nevada N

at’l Bank , 737 P.2d at 506. On appeal, the Lomaxes sugg est that their action against Lea

der Federal falls within this exception because, during construction of their home, Mrs. Lomax compla

ined abou t Headle y H omes’ wor

k to Le ader F

ederal employ ees. Eve n if this Court were to adopt the exception set forth in Davis v. Nevada N ational Bank , we conclude that the facts of this case do not fall within such exception. Here, L eader Federal was not appr ised by the Lomaxes “of substantial deficiencies in construction that affect[ed] the structural integrity of the building.” Id. At most, the evidence reveals that Mrs. L omax complained that Headley Homes “w as slow ab out doing the work ” and tha t the “wor k wasn’t g oing rig

ht.” Fur ther, Mr s. Lomax admitted that she never requested L eader Federal to withhold further disburse ments of the loan proc eeds pending the satisfactory

resolutio n of Mrs. L

omax’s comp laints. F

inally , at this point in the proceedings, there is no showing that the L omaxes will be unable to recover damages to the extent that the Lomaxes’ complaint seeks to recover a gainst Leade

r Federal for any defect s in the construction of their home, we concludethat the trial court properly granted summary

judgment in favor of

Lea der Fe deral. 8 See Dani els v. A rmy Nat’l Bank , 822 P.2d at 42 (absent contractual provision imposing

such a du

ty, bank had

no duty to inspec t constru cti on site for quality of workma nship prior to d

isbursing loan proc eeds to c ontract or); Henry v. First Fed. Sav. & Loan Ass’n , 459 A.2d at 775 (absent provision in construction loan agreement imposing such duty, loan association had no duty to inspect construction wor k for quality of

workmanship as well as quantity of work before disbursing construction loan funds); see also Davis v. Neva da Nat’l Ba

nk , 737 P.2d 503, 505 (Nev. 1987) (no rmally , lender

“has no d uty to exercis e care

to identify unworkmanlike or deficient construction”). 9agains t the cont ractor , Headle

y H omes. III. The Construction Loan Agreement’s Exculpatory Provision
Having defined

the duty owed by Lea der Fe deral t

o the L oma xes, we ne

xt must determine the validity of the Construction Loan Agree ment’s exculpatory provision. As an initial matter, we must de

termine w

hether t he provis i o n at issue even qualifies as an exculpatory clause. An exculpatory clause is one w hich deprives one party

to the agreement of the rig ht to recover damages for harm

caused by the

other party’ s negligence. Crawford v. Buckner , 839 S.W.2d 754, 755-56 (Tenn. 1 992). The clausestyp ically

contain s uch lang

uage a s “landlo

rd . . . sha ll not be lia

ble to tenant . . . for any

injury to the person or loss of or damage to property for any c ause,” Id. at 755,
an d “I com

pletely relea se [the doctor] and his staff from any present or future responsibility .” Olson v. Molzen , 558 S.W.2d 429, 430 (Tenn. 1977). It is not necessary

that the word “negligence ” appear in the exculpatory clause. Empress Health & Beauty Spa v. Turner , 503 S.W.2d 188, 190 (Tenn. 1973).
Upon reflection, we believe that the provision at issue in this case meets the above definition of an exculpatory c lause because the provision seeks to relieve Leader Federal of any liability in connection with inspection and completion of construct ion of the Lomaxes’ home. Sp ec if ic al ly, the provision states that Leader F ederal has no liability in connection w ith the construction, that Leader

Federal assumes no responsibility for completion of the construction, and that the Lomaxes should not rely on Leader

Federal’s inspections of

the construction to be for the Loma xes’ protection. As previously discussed, L eader Fe deral assumed a duty under the Construction Loan Agreement to inspect the progress of the construction and to disburse f unds only in proportion to its report of progress. Having e xpressly assumed this duty , Leader F ederal may

be held liabl e for i ts negl igen t performance of such duty
. Prater v. Fidelity Trust Co. , 34 S.W.2d at 207; Goodner v. Lawson , 232 S.W.2d at 589-90; 59 C.J.S. Mortgages § 297 (1949). Ac co rd in gl y, to the extent that the foregoing provision seeks to relieve L eader Federal from a

ny liability associated withits performance of this duty , we conclude that the provision qualifies as an exculpatory clause
.As for the validity of the e xculpatory clause, Tennessee courts “have long recognized that, subject to

certain exception s, parties may

contrac t that one shallnot be liable for his negligence to another.” Olson v. Molzen , 558 S.W.2d 429, 430 (Tenn . 1977). Ind eed, “the public policy of Tennessee favors freedom to contract ag ainst liability for neglig ence.” Empress Healt h & Beauty S pa v. Turner , 503 S.W.2d 188, 190 (Tenn. 1973). In the absence of fraud or o verreaching , therefore, such excul

patory provision s gene

rally are hel d to be enforceable. Houghland v. Security Alarms & Servs. , 755 S.W.2d 769, 773 (Tenn. 1988).

Neverth eless, under ce

rtain cir cumstanc es, such exculpatory clausesmay

be invali d
as contrary

to public policy. I

n Olson v. Molzen , 558 S.W.2d 429 (Tenn. 1977), our supreme court adoptedcriteria to be used in determining the validity of a par ticular exculpatory provision. I n order for such an exculpatory provision to be he ld invalid under the “public interest” exception , t he underly ing tra nsaction must posse ss at leas t some of th e following cha

racter istics:
(a.) [The transaction] conc erns a bu siness of a ty pe generally thought suitable for public regulation. (b.) The party

seeking exculp a tion is enga ged in p erform ing a service of g rea t importance to the public, which is often a matter of practical necessity

for some members of the public. (c.) The party holds himself out as willing to perform

this service for any member of

the public who seeks it, or at least for any

member coming within cer

tain esta blished sta

ndards. (d.) As a result of the essential nature of the se rvice, in the economic setting of the transaction, the party invoking exculpation possesses a decisive advantage of ba r gai ning strength against any member o f the publ

ic who se eks his se

rvices. (e.) In exercising a superior barga ining power, theparty

confron ts the public with a standardizedadhesion contract of exculpation, and makes no provision whereby a pur chaser may

pay additional reasonable fees and obtain protection ag ainst negligence. (f.) Fi na ll y, as a res ult o f the tra nsaction , the per son or pro perty of the purchaser is placed under the control of the seller, subject to the risk of c areles sness by

the selle r or his a gents.

Olson v. Molzen , 558 S .W.2 d at 43 1 (quo ting Tunkl v. Regents of U niversity of C

alifornia , 383 P.2d 441, 445-46 (Cal. 1963)).In Olson v. Molzen , the court expl ained thatnot all of t hese tra nsaction al crite

ria needed to be present

to invalidate an exculpatory pr ovision under the public interest exception, but the court did not indicate just how many of the c riteria needed to be present, other than “some .” Olson v. Molzen , 558 S.W.2d at 431. In an y eve nt, the court found that all of the characteristics
were presen t in t hat cas e. Ther e, the plain tiff s ign ed a release wh ich purported to relieve an osteopat h from any

legal responsibility a ssociated with the osteopath’s performance of an abortion
on the plaintiff. In invalidating the releas e, the co

urt anal yze d the appl

ication o f the publ

ic intere st criteria:
Ap plyingth e first criterion, we can hardly think of any are a more suitable for public regulation than abortions. . . . [The docto r] held himself out as being willing to perform abortions for the general public. This is obvious from the fact that he operated an abortion clinic. [The plaintiff] met the stat utor ily established standards. . . . [Th e plaintiff] wanted an abortion. [The doctor] perfo rme d abortion s. It begs the question to say she could have gone to another doctor or that she elected to undergo a surgical procedure that was not mand at or y. Perhaps so. However, there is no assurance that any other doctor would not have made a similar demand. The record does notshow how many other phy sicians in the Knoxville area perform abortion s, but we have no doubt but that the number is limited. Physicians are not

require d to perform abortions. . . . [The plaintiff] had a right

to elect to have a legal surgical procedure performed eve n th ou gh th er e w as no co mp el li ng me di ca l n ec es si ty.

. . . . The doctor not only exercised a supe rior bargaining power, butthere is nothing to indicate that he made an y prov ision for the payment of additional compensation or fees to obtain insurance or protection against neglige nce. As a d ir ect consequence of this transaction, [the plaintiff] placed her personunder the control o f [the doc tor] subject to the ris k of negligence after

he had demanded that she contract away

any cause of action that might arise.

. . . . Under the guidelines herein adop ted , we hold that an exculp atorycon tract signed by a patient as a condition of receiving medical treatment is invalid as contrary to public policy

and may not be pleaded as a bar to the patient’s suit for negligence.

Id. at 431-32.The supreme court simi larly

in va lidated an exculpatory provision in Crawford v. Buckner , 839 S.W.2d 754 (Tenn. 1992). In that case, as a condition of renting an apartment from th e defendants, the plain tiff wasrequire d to sign t he defe ndants’ s tandard

form lea se. The le ase containedan exculpatory clause w hich purported to relieve the defendants from any liability to the plaintiff “for any injury to the person or loss of or da mage to property

for any c ause.” Id. at 755. After the p laint iff s uffe red i njuri es wh

ile e scap ing a

fire in the apar tment comp lex, the plaintiff

sued the defendants for

negligence, citing the

defendants’ negligent fa

ilure to maintain the fire alarm and other theories. Id. As before, the cour t applied the public

interest criteri a to the facts of the case and concluded that all o f the cr iteria w ere pre sent:
[F]irst, we concludea residential lease concerns a business of a type that is generally

thought suitab l e for public regulation. Our conclusion is bolstered by the fact that the legislature of this state has seen fit to regulat e this area, and that other states, . . . have enac ted legislation regulating the residential landlord-tena nt relationship.
. . . Second, it is clear we no longer live in a n agr arian so ciety where land, not housing, was the important part of a rental a greem ent. Nor do we live in an era of

the occasio nal rent

al of roo ms in a priv ate homeor ov er th e c or ne r g ro ce ry. Residential landlords offer shelter, a basic ne cessity

of life, t o more tha

n a million in habitan ts of this state. . . . Accor

dingly , it is self-ev

ident tha t a reside ntial land lord is engaged in performing a service of g reat importance to the p ubl ic, which is often a matter

of practical necessity

for some members of the pu b lic. In addition, a residential landlord holds itself out as willing to perform a service for any member of the public who seeks it. . . . With respect to the fourth pu blic inter est crite rion, as a result of the essential nature of

the service and the economic setting of the transac tio n, a reside

ntial land

lord has a

decisive advanta ge in bargainingstr ength agains t any member o f the publ

ic who se eks its service s. A potenti al tenant is usually confr onted with a “take it or leave it” form cont

rac t, which the tenant is powerless to alter. The tenant’s only alterna

tive is to reject the entire transaction. Moreover, du e to its superior b argaining position, a residential landlord confron

ts the pub lic with a standardized adhesion contract of ex cu lp at io n, wh ic h c on ta in s n o p ro vi si on wh er eb y a tenant can pay additional reasona

ble fee s to obtain

protect ion from t

he l andlord’s negligence. The leas e inthis case is a good e

xample. I n her af fidavit in opposition to the defendants’ motion for summary judg ment, [the pl ainti ff] testifie d that she was giv en the defendant s’ standa rd lease form to sign, and was never offere d the opportunity to pay additional reasona ble fees to obtain pr ot ection f rom the la

ndlords’ negligence. . . . F in al ly, we conc lude that by d efinition a reside ntial l eas e places the person and the property of

the tenant under the control of the landlord , subject

to the risk

of care lessnessby t

he landlo rd and his10 In this regar d, we observe that the public interest exception requires only that the service be a “practical” necessity ; the service need not be a “compelling” necessity. Olson v. Molzen , 558 S.W.2d at 431.

agents. . . .

. . . . Based on the foregoing, we con clu de that the exculpatory clause in the re sidential

lease in this ca se is co nt ra ry t o p ub li c p ol ic y.

Id. at 757-59.
Turning to the case at bar, we conclude that these public interest criteria apply to the homeconstruction loan transacted by the Lomaxes and L

eader Feder al. As an initial mat

ter, we note that the consumer lending activities of banks and other financial institutions fall within the type of business gener

ally thought s uitable f

or public regulation. Thelegislature of this state, for example, has enacte d legisl ation aut horizing financi al instit

utions to make loa

ns and impo sing ce

rtain restrictions on su ch ac tivities. See T.C.A. §§ 45-2-1101 to -1108 (1993 & Supp. 1996) (banks); T.C.A. §§ 45-3-7 01 to -707 ( 1993) (sa vings and loan ass ocia

tion s); T.C.A. §§ 45-4-601 to -610 (1993) (credit unions); T.C.A. §§ 45-5-401 to -405 (1993 & Supp. 1996) (industrial loan and thrift companies). The United States Congress also has enacted laws reg ulating this area. See 12 U.S.C.A. §§ 83--86 (West 1989) (lending powers of national banks); 12 U.S.C.A. §§ 2801--2810 (West 1989 & Supp . 1997 ) (hom e mort gage disclosure requirements); 15 U.S.C.A. §§ 1601--1667 (West 1982 & Supp. 1997) (truth in lending requirements).

Moreover, Lea

der Fe deral, the party see

king exculpation, was engaged in per forming
a service of great importance which was a practical

necessity for

some members of the public. See Crawford v. B uckner , 839 S.W.2d at 758 (noting that shelter is “basic necessity of life”). In he r deposition, Mrs. Lomax testified that neither she nor her hus band had ever been involved in the construction of a new home, although they had purchased existing homes b efore. When the Lomaxes decided

to buy a new hou se during

the sprin g of 199 3, they began looking a

t existi ng homes, but they were

unable to finda home tha t suited the

ir needs . As a re sult, like many couples, the Lomaxes decided to build a new home. 10 The Lomaxes found a lot that they liked, purchased the lotfrom Headley

Homes, and then proceeded to neg otiat e with Headley Homes to construct thehom e. In order to finance the construction project , the L

omaxes turn

ed to L eader F ederal . In th

is regard, Lea

der Fe deral he

ld itself out as willing to make home construction loans to any members of the public who sought such loans, provided the customers met certain e s tablished standar ds. Here, the Lomaxes met the loan qualifications and, thus, were e xtended a home construction loan by L eader F ederal
.

With respect to the fourth public interest criterion, as a result of the essential nature of the service and the economic setting of the trans actio n, Leader Federal had a d ecisi ve adv antage in bar gaining

streng th against the L

omaxes or a

ny other memb er of the

public wh o sought it s services. This conclusion is supported by evidence in this case that the Loma xes were confronted witha “take-it-or-leave-it” form a greement which they we

re powerless to alter. I

n his deposition, Wayne Anderson, the Senior Vice President in charge of Leader F

ederal’s Construction Lending De pa rt me nt , g av e t he fo ll ow in g t es ti mo ny:

Q. Is this the same construction loan agreement the bank use s on every single o ne of its c onstruct ion loan a greem ents? A. Yes. Q. Every

provision that’s contained in the seven pages of thi s construction loan agreement is in every other c on struction loan agree ment. A. Yes. Q. Including

the paragraph, the famous par agraph which is, I believe, 3-H, which I will refer to as the exculpatory clause. A. Yes. Q. Has Leader F

ederal ever agreed to take out the provi sion containedin paragr aph 3-H in any of its construction loan agreements, to the best of y our knowledge? A. No. Q. It’sin every

single o ne of thos e agre

ements. A. Every single one. Q. To th e b es t o f yo ur kn ow le dg e, do you kn ow if an yo ne has ever asked that Le ader Federal remove that pr ovision? A. No.11 We recognize that the Construction Loan Ag reement executed in this case may not possess all of the characteristics of an adhesion contr act as recently

set forth by the supre

me court in Wallace v. National Bank of Commerce , 938 S.W.2d 684 (Tenn. 1996). Nevertheless, we believe that the A greem

ent posse sses enou gh adhe sive qual ities to sa tisfy the fifth public inte

rest criteri on. I

n reach ing this c onclusion , we are reminde d that not a

ll of the pu

blic inter est crite ria must be pr

esent in o rder fo r an excul patory provision

to be found invalid a s contra ry to public policy. Olson v. Molzen , 558 S.W.2d a t 431; accord Crawford v. Buckner , 839 S.W.2d at 757; Smith v. Peopl

es Bank , No. 01A01-9111-CV-00421, 1992 WL 117061, at *4 (Tenn. App. June 3, 1992). Q. Buti f they would ask , Lea

der Fe deral wo

uld refu se; is tha t correct? A. Yes.

Under thesecircumst

ances, t he Lo maxes’ only

alterna tive was t o rejec t the entir

e transa ction with Leader F ederal.

Based on the for

egoing testimony , we also

conclude that the Con struction Loan Agreement

executed in this case possessed sufficient character istics of an ad hesion contract to satisfy the fifth public interest criterion. 11 In extending a loan to the Lomaxes, L eader Federal confr

onted them w ith a standardized Construction Loan Agre ement which authorized Leade r Fed eral to disburs e the loan pro ceeds to the Lomaxes’ contractor in acc ordance with the progress repor ts of Leader Federal’s inspector. In a subsequent provision, how ever, th e form Ag reemen t purport ed to excul

pate Leader Federal from any

liability in connection with completion of the co nstructio n and, relative thereto, provided that the Lomaxes had no right to rely on Leader F ederal’s inspections of the construction. The Lomaxes wer e never offere d the oppo

rtunity to pay additiona l reason able

fees to obtain protect ion from L eader Fe deral’ s negli gence in disb ursin g the lo an pro ceeds. Alth ough customers might or might not choose to pay higher interest rates to obtain such protection, in our vi ew th e i mp or ta nt co ns id er at io n i s t ha t t he Lom ax es we re ne ve r o ff er ed su ch an op po rt un it y.

Fi na ll y, we conclude that

by definition the Construction L oan Agreement placed the Loma xes’ propert

y under the control of Lea

der Federal, subject to the risk of carelessness by

Leader Federaland its agent, George B urton. Although the Agreement advanced a construction loan to the Loma xes, the Agreement placed the loan proceeds under

the control of Leader

Federal. Because of Burton’s admitted carelessness, some of the loan proce eds were a pplied toward phases of construction which never were completed. Despite the f act that the Lomaxes’ loss may have beenoccasioned by the acts of L

eader Federal’s employee, if the Agreement’s exculpatory provision were upheld, the Lomaxes still would be responsible for repay ing the entire amount of the loan proceeds to Le ader F

ederal
.

Based on theforegoinganalysis of the public intere st criteria, we conclude that the exculpator y claus e in the Construction Loan Agreement executed by the L omaxes and Leader Federalis co ntrary to public policy and, thus, is unenforceable. According ly, we reve rse the trial court’sorder g

ranting summary judgmen t to Le ader F

ederal
. IV. Burton’s Liability for Negligence

We affirm, however, that portion of the trial court’s order g ranting summary judgmen t to George Burton. The

Loma xes’ neg ligenc e action

agains t Burton i s based on section 552 of the Restatement (

Second) o f Torts :
(1) One who , in the course of his business, profession or employ ment, or in any other

transaction in whichhe has a pecuniary interest , supplies false information for the guidance of others in their business transactions, is subject to liability for pecunia ry loss caused to themby their justifiable relianc e upon the infor mation, if he fails to exercise reasonable care or c ompetence in the o btaining or communicating of the information. (2) Exceptas st at ed in Su bs ec ti on (3 ), th e l ia bi li ty s t ated in Subsection (1), is limited to loss suffered (a) by the person or one of a limited group of persons for whose be ne fi t a nd gu id an ce he in te nd s t o s up pl y the information or knows that the recipient intends to supply it; and (b) throu gh reliance upon it in a transaction tha t he intend s the information to influence or knows that the recipient so intends or in a substantially similar transaction.

John Martin Co. v. Morse/Diesel, Inc. , 819 S .W.2 d 428, 431 (T enn. 1 991) ( quot ing Restatement (Second) of Torts § 552 (1977)).

The Supreme Court of Tennessee has adopted section 552 as the ap pro priate standardfor actions by third pa rties against professionals and business persons based on negligentmisrepresentation. John Martin Co. , 819 S.W.2d at 431; see also Bethlehem Steel Corp. v. Ernst &

Whinney , 822 S.W.2d 592, 595 ( Tenn. 199 1). Unde r this standard, a d

efenda nt may incur lia bility in tort when, despite a lack of contractual privity with the plaintiff,
(1) the defend ant is actin g in the c ourse of his busine ss, profession, or employ

ment, or in

a transa ction in wh

ich he ha s a pecunia ry (as oppos ed to gr

atuitous) interest ; and (2) the defend ant s upplies f aulty informat ion meant

to guide o thers in th

eir business tran saction; and (3) the defenda

nt fai ls to exerc ise rea sonable c are in obtaining or commun

icating the infor mation; and (4) the plaintiff justifiably relies upon the infor mation.

John Martin Co. , 819 S.W.2d at 431 (emphases in original).

The principal re q uirements of this rule are that “the information supplied must be false and the supplier must have failed to exercise reasonable care or c ompetence in obtaining or communicating the information.” McFarlin v. Watts , 895 S.W.2d 687, 690 (Tenn. App. 1994). The ruleis not limited to professionals but includes non-professionals involved in business activities or transactions. Ritter v. Custom Chemicides, Inc. , 912 S.W.2d 128, 131 (Tenn. 1995). As in other negligence

actions, the defe

ndant may

raise the plaintiff ’s compa rativ e negligenc e as a defense. John Martin Co. , 819 S.W.2d at 432.

Applying the foreg oing standard, we conclude that the trial court proper ly entered summary judgment in favor of Burton on the Loma xes’ claim

under se ction 552. Although the firs t three elements of this cause of action appea r to be present in this case, the undisputed evidence shows that the fourth element has not been m et beca use the L omaxes did

not justifiably rely

on the faulty information provided by Burton.

With regar

d to the fir st two elements of this cause of action, it is undisputed that Burton, acting in the course o f his employ ment, supp lied faulty informati on which w as intend ed to guide others in

their bus iness tra

nsaction . Specifi c al ly, Bur ton falsely repr

esented that certain phases in the construction of the Lomaxes’ home had been completed when, in fact, the construction hadnotbeen completed. Moreover, the intended result of this information w as to influ ence Leade r Federalto disburs e the L

omaxes’ construction loan proceeds to the contractor, Headley Homes. As for the third e

lement, th

e evidence indic ates tha

t Burto n failed to e xercise r easonab le care

in obtaining or commun

icating this infor mation, a t least wit h rega rd to the f inal inspection re

port.
Regardingthe four

th elemen t, however, the undisputed evidence demonstrates that, contrary to their contention, the Lomaxes (as opposed to Leader F ederal) did not act in reliance upon Burton’s faulty inspection repor t. The Lomaxes’ amended complaint alleg es that, in completing the closing transa

c tion on the house, the Lomaxes relied on the repre sentation contained in Burton’s final inspection report

th at the home was “O.K. for satisfactory completion.” The uncontradicted deposition testimony of Mrs. L omax, however, fails to support this allegation of reliance.

The purpose of the c losing was to convert the Loma xes’ construction loan into a permanent

mortgage. Mrs. L

omax’s deposition reveals that, pri or to th e closing, the Lomaxes visited the site on a regular basis to observe the progress of the construction of their home. In accor

dance wit h this practice, the Lomaxes inspected the site on the da y of the closing . At

the time of

th e closi ng, therefore, the Lomaxes knew which portions of the construction had not been completed. The Lomaxes were given a final accounting statement showing the amount of loan proceeds being disbursed to Headle

y H omes, the

amount of

procee ds being

retaine d to pay

for unco mpleted it

ems, and the items that had not been completed. The final accounting sta tement sh owed that, upon completion of the closing, most of the loan proceed s wo uld be disbursed to Headley Homes. Becau se the Lomaxes had inspected the house themselve s and knew many of the co nstructio n items had not been c ompleted , they asked the

closing attorne y if more of th

e loan proce eds could be retained and then disbursed at

a later t ime when t

he incomp lete item s were f inished. D espite the

ir kn owled ge that the house was not complete and that most of the construction loan proceeds we re being d isbursed to Headle

y H omes, the

Loma xes still cho se to complete the closing. Mrs. Lomax explained that, if the Lomaxes had not closed on the date in que stion, they would have incurr ed a pe na lt y.

Based

on th e u nd is pu te d e vi de nc e, we co nc lu de th at su mm ar y judgment wa s proper ly granted because no genuine issue of mater ial fact exists with

regard to whether the L

omaxes reliedu pon the faulty information provide d by Burton. The evidence reveals that, in spite of thei r knowl edge of the discrepancy between the percentage

of the house that was completed and the percen tage of the loan proceeds that were being disbursed, the L omaxes proceeded

to close on the house in order to avoid paying a penalty. Unde

r these circumstances, the L omaxes could not have justifiab ly r

elied on t he infor mation pro vided in B urton’s f inal inspection re

port.

V. Conclusion

The trial court’s judgment in favor of Burton is affirmed; however, the trial court’s judgment in favor of Leader F

ederal is reversed and this cause re manded for

proceedings consistent withthis opinion . Costs of th is appea l are taxe d to Le ader F

ederal , for which execution may issue if ne ce ss ar y.

______ _______ __________________

_ FAR MER , J.

______________________________ CRAWFORD, P.J., W.S. (Conc urs)

______________________________ LI LL ARD, J. (Conc

urs)