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Connor v. Great Western Sav. & Loan Assn. :: :: Supreme Court of California Decisions :: California Case Law :: California Law :: US Law :: Justia
Justia › US Law › Case Law › California Case Law › Cal. 2d › Volume 69 › Connor v. Great Western Sav. & Loan Assn.
Harris K. Lyle, Edward L. Lascher, Lyle & Di Giuseppe and James Di Giuseppe for Plaintiffs, Cross-defendants and Appellants. [69 Cal. 2d 856]
There was abundant evidence that defendant Conejo Valley Development Company, which built and sold the homes, negligently constructed them without regard to soil conditions prevalent at the site. Specifically, it laid slab foundations on adobe soil without taking proper precautions [69 Cal. 2d 857] recommended to it by soil engineers. When the adobe soil expanded during rainstorms two years later, the foundations cracked and their movement generated further damage.
A brief review of the negotiations leading to Great Western's role in the development of the Weathersfield tract is essential to a clear perspective of the issues. [1] Since the appeals are from a judgment of nonsuit, such a review must give to plaintiffs' evidence all the value to which it is legally entitled, must recognize every legitimate inference that may be drawn from that evidence, and must disregard conflicting evidence. (Raber v. Tumin (1951) 36 Cal. 2d 654, 656 [226 P.2d 574]; Blumberg v. M. & T., Inc. (1949) 34 Cal. 2d 226, 229 [209 P.2d 1].) If there is evidence that would support a recovery against Great Western on either of the grounds set forth by plaintiffs, the judgment of nonsuit must be reversed.
Neither Goldberg nor Brown had any significant experience in large-scale construction of tract housing. Goldberg had left the men's apparel business in 1955 to begin a career in real estate. He subsequently established a number of companies that engaged principally in subdividing raw acreage. In 1958 he undertook the construction of a 31-home development called Waverly Manor; when 15 or 20 homes had been partially completed under the supervision of a South Gate employee, he engaged Brown to supervise completion of the job. This task was Brown's first experience with tract construction, although he had been licensed as a general contractor in 1950 and had built approximately 50 single-family dwellings on an individual custom basis before 1958. [69 Cal. 2d 858]
In July, Great Western provided the necessary funds for the purchase of the Weathersfield tract. Goldberg had deposited $190,000 of the $340,000 purchase price with the escrow [69 Cal. 2d 859] agent on behalf of South Gate. He apparently obtained the money by draining assets from his corporations, leaving a combined net worth in those enterprises of $36,000 as of July 31.
Great Western agreed to make the necessary construction loans to Conejo only after assuring itself that the homes [69 Cal. 2d 860] could be successfully built and sold. During the negotiations on the terms of the contemplated construction loans to Conejo and the long-term loans to be offered to the buyers of homes in the proposed development, Great Western investigated Goldberg's financial condition and learned that it was weak. Moreover, Great Western received, without comment or inquiry, an August 1959 financial statement from Conejo that set forth capital of $325,000, of which $320,000 was accounted for as estimated profits from the sales of homes when the sales transactions, then in escrow, were completed. Such an entry was far outside the bounds of generally accepted accounting principles. The estimated profits, representing 64/65 of the total purported capital, were not only hypothetical, but were hypothesized on the basis of houses that had not yet been constructed.
Prospective buyers reserved lots after inspecting three landscaped and furnished model homes standing on 1.6 acres of the otherwise barren tract. The model homesites as well as a 60-foot wide access road had been granted by the McReas directly to Conejo "without consideration and as an accommodation" two weeks before the close of the land-purchase escrows. fn. 4 [69 Cal. 2d 861]
Conejo accepted notes secured by second trust deeds from the buyers of homes for the balance of the purchase price that was not provided by Great Western. Goldberg planned to discount the notes at 50 percent of their face value and to [69 Cal. 2d 862] use the proceeds to pay the interest and fees to Great Western and provide a profit to Conejo. The evidence indicates, however, that in his enthusiasm to develop the first 100 acres of his projected community, Goldberg pared estimated profits to the dangerously thin margin of $500 per house, and that he exceeded his depth in expertise and finances, with a resulting deterioration in his financial position as construction progressed. Conejo ultimately pledged the notes as security for a $300,000 loan, 43 percent of their face value, forfeiting profits in the urgent need for liquid capital. This loan was obtained from cross- complainants Meyer Pritkin et al. seven business acquaintances of Goldberg who at his suggestion organized a joint venture in December 1959 to purchase 382 acres of land in the Conejo Valley.
The evidence establishes without conflict that there was no express agreement either written or oral creating a joint venture or joint enterprise relationship between Great Western and Conejo or Goldberg. Without exception the testimony of the principal witnesses discloses specific disclaimers of all intention that any such relationship should exist, and the written documents provided only for typical option and purchase agreements and loan and security transactions.plaintiffs contend, however, that the evidence of the conduct of the parties demonstrates that neither the documents nor the testimony as to the parties' intentions accurately reflect their legal relationship. They assert that such evidence of conduct supports an inference that a joint venture or joint enterprise relationship existed. (See Civ. Code, § 1621; Universal Sales Corp. v. California Press Mfg. Co. (1942) 20 Cal. 2d 751, 764-765 [128 P.2d 665]; Nelson v. Abraham (1947) 29 Cal.2d [69 Cal. 2d 863] 745, 749-750 [177 P.2d 931]; Holtz v. United Plumbing & Heating Co. (1957) 49 Cal. 2d 501, 506-507 [319 P.2d 617].)
[2] A joint venture exists when there is "an agreement between the parties under which they have a community of interest, that is, a joint interest, in a common business undertaking, an understanding as to the sharing of profits and losses, and a right of joint control." (Holtz v. United Plumbing & Heating Co., supra, 49 Cal. 2d 501, 506-507. See also Nelson v. Abraham, supra, 29 Cal. 2d 745, 749; Spier v. Lang (1935) 4 Cal. 2d 711, 716 [53 P.2d 138]; Quinn v. Recreation Park Assn. (1935) 3 Cal. 2d 725, 728 [46 P.2d 144].) [3] Although the evidence establishes that Great Western and Conejo combined their property, skill, and knowledge to carry out the tract development, that each shared in the control of the development, that each anticipated receiving substantial profits therefrom, and that they cooperated with each other in the development, there is no evidence of a community or joint interest in the undertaking. Great Western participated as a buyer and seller of land and lender of funds, and Conejo participated as a builder and seller of homes. Although the profits of each were dependent on the overall success of the development, neither was to share in the profits or the losses that the other might realize or suffer. Although each received substantial payments as seller, lender, or borrower, neither had an interest in the payments received by the other. fn. 5 Under these circumstances, no joint venture existed. (See Wallace v. Pacific Elec. Ry. Co. (1930) 105 Cal. App. 664, 667 [288 P. 834]; Martin v. Ajax Constr. Co. (1954) 124 Cal. App. 2d 425, 433 [269 P.2d 132]; Enos v. Picacho Gold Min. Co. (1943) 56 Cal. App. 2d 765, 770-772 [133 P.2d 663]; United Farmers Assn. v. Sakiota (1935) 7 Cal. App. 2d 559, 560 [46 P.2d 770]; Sedia v. Elkins (1962) 201 Cal. App. 2d 440, 451 [20 Cal. Rptr. 278]; Nichols, Joint Venturers (1950) 36 Va.L.Rev. 425, 438-439. Cf. Martter v. Byers (1946) 75 Cal. App. 2d 375, 384 [171 P.2d 101]; Lasry v. Lederman (1957) 147 Cal. App. 2d 480, 486 [305 P.2d 663]; Stilwell v. Trutanich (1960) 178 Cal. App. 2d 614, 620 [3 Cal. Rptr. 285].) fn. 6 [69 Cal. 2d 864]
Since the value of the security for the construction loans and thereafter the security for the permanent financing loans depended on the construction of sound homes, Great Western was clearly under a duty of care to its shareholders to exercise its powers of control over the enterprise to prevent the construction of defective homes. Judged by the standards governing nonsuits, it negligently failed to discharge that duty. It knew or should have known that the developers were inexperienced, undercapitalized, and operating on a dangerously thin capitalization. It therefore knew or should have known that damage from attempts to cut corners in construction was a risk reasonably to be foreseen. (See Lefcoe & Dobson, Savings Associations as Land Developers (1966) 75 Yale L.J. 1271, 1293.) fn. 7 It knew or should have known of the [69 Cal. 2d 865] expansive soil problem, fn. 8 and yet it failed to require soil tests, to examine foundation plans, to recommend changes in the pre-packaged plans and specifications, or to recommend changes in the foundations during construction. It made no attempt to discover gross structural defects that it could have discovered by reasonable inspection and that it would have required Conejo to remedy. It relied for protection solely upon building inspectors with whom it had had no experience to enforce a building code with the provisions of which it was ignorant. The crucial question remains whether Great Western also owed a duty to the home buyers in the Weathersfield tract and was therefore also negligent toward them.
[5a] The fact that Great Western was not in privity of contract with any of the plaintiffs except as a lender does not absolve it of liability for its own negligence in creating an unreasonable risk of harm to them. [6] "Privity of contract is not necessary to establish the existence of a duty to exercise ordinary care not to injure another, but such duty may arise out of a voluntarily assumed relationship if public policy dictates the existence of such a duty." (Merrill v. Buck (1962) 58 Cal. 2d 552, 561-562 [25 Cal. Rptr. 456, 375 P.2d 304]. See, e.g., Biakanja v. Irving (1958) 49 Cal. 2d 647, 650 [320 P.2d 16, 65 A.L.R.2d 1358]; Lucas v. Hamm (1961) 56 Cal. 2d 583, 588 [15 Cal. Rptr. 821, 364 P.2d 685]; Stewart v. Cox (1961) 55 Cal. 2d 857, 863 [13 Cal. Rptr. 521, 362 P.2d 345].) [7] The basic tests for determining the existence of such a duty are clearly set forth in Biakanja v. Irving, supra, 49 Cal. 2d 647, 650, as follows: "The determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are [1] the extent to which the transaction was intended to affect the plaintiff, [2] the foreseeability of harm to him, [3] the degree of certainty that the plaintiff suffered injury, [4] the closeness of the connection between the defendant's conduct and the injury suffered, [5] the moral blame attached to the defendant's conduct, and [6] the policy of preventing future harm." [69 Cal. 2d 866]
Counsel stipulated that each of the plaintiff homeowners, if called, would testify that their respective homes sustained damage in varying degrees "of the character of which we have been concerned in this action." Sufficient evidence was presented to show by way of example the existence of damage to the homes and therefore injury to plaintiffs. Under the terms of the pretrial order, the extent of each plaintiff's injury is to be litigated in further proceedings after the question of Great Western's liability is determined. [69 Cal. 2d 867]
[5c] By all the foregoing tests, Great Western had a duty to exercise reasonable care to prevent the construction and sale of seriously defective homes to plaintiffs. The countervailing considerations invoked by Great Western and amici curiae are that the imposition of the duty in question upon a lender will increase housing costs, drive marginal builders out of business, and decrease total housing at a time of great need. These are conjectural claims. In any event, there is no enduring [69 Cal. 2d 868] social utility in fostering the construction of seriously defective homes. If reliable construction is the norm, the recognition of a duty on the part of tract financiers to home buyers should not materially increase the cost of housing or drive small builders out of business. fn. 10 If existing sanctions are inadequate, imposition of a duty at the point of effective financial control of tract building will insure responsible building practices. fn. 11 Moreover, in either event the losses of family savings invested in seriously defective homes would be devastating economic blows if no redress were available.
[15] Great Western contends that lending institutions have relied on an assumption of nonliability and hence that a rule imposing liability should operate prospectively only. In the past, judicial decisions have been limited to prospective operation when they overruled earlier decisions upon which parties had reasonably relied and when considerations of fairness and public policy precluded retroactive effect. (Forster Shipbuilding Co. v. County of Los Angeles (1960) 54 Cal. 2d 450, 458-459 [6 Cal. Rptr. 24, 353 P.2d 736].) Conceivably [69 Cal. 2d 869] such a limitation might also be justified when there appeared to be a general consensus that there would be no extension of liability. Such is not the case here. At least since MacPherson v. Buick Motor Co. (1916) 217 N.Y. 382 [111 N.E. 1050, L.R.A. 1916F 696], there has been a steady expansion of liability for harm caused by the failure of defendants to exercise reasonable care to protect others from reasonably foreseeable risks. (See generally Prosser, The Law of Torts (3d ed. 1964) ch. 19.) By the time of the decision in Sabella v. Wisler (1963) 59 Cal. 2d 21 [27 Cal. Rptr. 689, 377 P.2d 889], such liability had been imposed on a builder who negligently constructed a seriously defective home. (See also Stewart v. Cox, supra, 55 Cal. 2d 857.) Those in the business of financing tract builders could therefore reasonably foresee the possibility that they might be under a duty to exercise their power over tract developments to protect home buyers from seriously defective construction. Moreover, since the value of their own security depends on the construction of sound homes, they have always been under a duty to their shareholders to exercise reasonable care to prevent the construction of defective homes. Given that traditional duty of care, a lending institution should have been farsighted enough to make such provisions for potential liability as would enable it to withstand the effects of a decision of normal retrospective effect.
[16a] Great Western contends finally that the negligence of Conejo in constructing the homes and the negligence of the county building inspectors in approving the construction were superseding causes that insulate it from liability. Conejo's negligence could not be a superseding cause, for the risk that it might occur was the primary hazard that gave rise to Great Western's duty. [17] " 'If the realizable likelihood that a third person may act in a particular manner is the hazard or one of the hazards which makes the actor negligent, such an act whether innocent, negligent, intentionally tortious or criminal does not prevent the actor from being liable for harm caused thereby.' " (Richardson v. Ham (1955) 44 Cal. 2d 772, 777 [285 P.2d 269], quoting Rest. Torts, § 449; see also Rest.2d Torts, § 449; Weaver v. Bank of America (1963) 59 Cal. 2d 428, 433-434 [30 Cal. Rptr. 4, 380 P.2d 644].) [16b] The negligence of the building inspectors, confined as it was to inspection, could not serve to diminish, let alone spirit away, the negligence of the lender. Great Western's duty to plaintiffs was to exercise reasonable care to protect them from seriously defective construction whether caused by defective [69 Cal. 2d 870] plans, defective inspection, or both, and its argument that there was a superseding cause of the harm "is answered by the settled rule that two separate acts of negligence may be the concurring proximate causes of an injury. (Fennessey v. Pacific Gas & Elec. Co., 20 Cal. 2d 141, 145 [124 P.2d 51]; Lacy v. Pacific Gas & Elec. Co., 220 Cal. 97, 98 [29 P.2d 781]; ...)" (Merrill v. Buck, supra, 58 Cal. 2d 552, 563.)
[18] The question remains whether granting a nonsuit in favor of Great Western against cross-complainants was also erroneous. As pledgees of promissory notes secured by second deeds of trust, cross-complainants seek to hold Great Western liable for the impairment to their security caused by the damage to the homes and to impose liens on any recovery plaintiffs may obtain from Great Western or other defendants. By stipulation and pretrial order the parties agreed that the issue of Great Western's liability should be determined first and that thereafter the rights and liabilities of the other parties among themselves should be determined. The question whether cross- complainants are entitled to liens on any recoveries plaintiffs may obtain from Great Western has therefore not yet been litigated. (Cf. American Sav. & Loan Assn. v. Leeds (1968) 68 Cal. 2d 611 [68 Cal. Rptr. 453, 440 P.2d 933].) Accordingly, it was error to grant a nonsuit against cross-complainants as well as against plaintiffs, for in further proceedings cross-complainants may be able to establish some basis for sharing in plaintiffs' recoveries.
The foreseeability of harm to cross-complainants as a result of defective construction was substantially less than in the case of plaintiffs. As security cross-complainants had notes from the home owners as well as second deeds of trust. Furthermore, they assured themselves of a substantial margin of safety against the risk that the notes would not be paid or that the homes would be worth less than the purchase price [69 Cal. 2d 871] when they lent only 43 percent of the face value of the notes.plaintiffs, on the other hand, were powerless to protect their equities in their homes from reduction or extinction by diminution of the value of the property as a result of defective construction.
The parties stipulated that the homes of plaintiffs Elwood and Evelyn Guest and plaintiffs John and Grace Whitaker [69 Cal. 2d 872] are not located in tract 1158, 1159, or 1160. As to them, the nonsuit is affirmed. In all other respects the judgment is reversed.
The entrepreneur undertakes these calculated risks in the hope of an ultimate substantial monetary reward resulting from the return over and above his costs, which include not only land, materials and labor but the charges incurred in obtaining capital. Indeed, "profit" has been commonly understood to be the return above expenses to innovators or entrepreneurs as the reward for their innovation and enterprise. (People ex rel. Farnum v. San Francisco Sav. Union (1887) 72 Cal. 199, 202-203 [13 P. 498].) The upper limit of the entrepreneur's profit is determined by his success in the market, and this results from his skill in assessing the demand for his product and his minimizing losses through skillful production. [69 Cal. 2d 873]
In fact, all available authority points to a contrary result. "The obvious drawback of the negligence solution [to this problem] is the lack of legal precedent for imposing such a duty upon the lending institution." Lender Liability for Housing Defects (1968) 35 U.Chi.L.Rev. 739, 758. As Justice Carter wrote in Routh v. Quinn (1942) 20 Cal. 2d 488, 491 [127 P.2d 1, 149 A.L.R. 215]: "It is an elementary principle that an indispensable factor to liability founded upon negligence [69 Cal. 2d 874] is the existence of a duty of care owed by the alleged wrongdoer to the person injured, or to a class of which he is a member." And in Dahms v. General Elevator Co. (1932) 214 Cal. 733, 737 [7 P.2d 1013], it was also said to be "elementary, of course, that no tortious liability can be imposed on a defendant even though it was negligent, unless defendant owed a duty of care to plaintiff." (Italics added.) Without such a duty, any injury is as to this defendant damnum absque injuria. (2 Witkin, Summary of Cal. Law (1960) Torts, § 4.) The remedy is, as it should be, against the negligent builder.
In the absence of a special relationship a party has no duty to control the conduct of a third person, so as to prevent him from causing harm to another. (Richards v. Stanley (1954) 43 Cal. 2d 60, 65 [271 P.2d 23]; Fuller v. Standard Stations, Inc. (1967) 250 Cal. App. 2d 687 [58 Cal. Rptr. 792].) No authority holds that lender-borrower is the type of relationship contemplating the duty of control over the conduct of another so as to prevent injury to third parties.
The Financial Code, which contains California statutory rules governing the operations of institutional lenders, creates no duty of care by those institutions to any parties other than their shareholders and depositors, and, of course, to governmental regulatory agencies. Indeed, the majority point out that "Great Western was clearly under a duty of care to its shareholders to exercise its powers of control over the enterprise to prevent the construction of defective homes. Judged by the standards governing nonsuits, it negligently failed to discharge that duty." (Italics added.) That duty, the only duty delineated in the majority opinion, was care to its shareholders. Assuming arguendo that negligence to shareholders is reflected in the evidence, no cause of action by these plaintiffs is stated for the obvious reason that they were not Great Western shareholders, and thus no duty was owed to them. In Gill v. Mission Sav. & Loan Assn. (1965) 236 Cal. App. 2d 753 [46 Cal. Rptr. 456], the court held that a savings and loan association owed no duty of care to holders of promissory notes and subordinated trust deeds with respect to supervision [69 Cal. 2d 875] and management of construction loan funds. There, as here, it was not alleged or proved "that the defendant agreed with anyone to manage or supervise distribution of the loaned funds, assumed to do so, actually undertook such, or was required by statutory law or regulation to so manage or supervise. Nor is there any showing of a voluntarily assumed relationship between defendant and plaintiffs from which such an obligation might arise." (Pp. 756-757.)
Whether the lender should be under a duty to conduct an independent investigation to discover defects in the plans is an entirely different matter. The majority conclude that this duty should be imposed on the lender here because it had control of the construction enterprise. Upon analysis, however, it is clear that this control was mythical; it consisted merely of the power to refuse to lend money for the project. In this respect all lenders may be held to "control" the projects they finance. Therein lies the vice of the majority opinion. [69 Cal. 2d 876]
The plaintiffs also rely upon the appraisals and inspections by defendant. These, however, were performed in compliance [69 Cal. 2d 877] with law and were intended to be a means of verifying the existence of the construction for which loans had been made, and of determining the progress of construction in order to regulate the disbursement rate. The appraisals and inspections were intended only for the benefit of defendant and state regulatory authorities. They were never in fact communicated to outsiders, neither the general public nor the prospective homeowners. They were not used to encourage or induce anyone to purchase homes, but were adapted solely as tools of internal management.plaintiffs strain logic in attempting to convert these internal operations of the defendant into representations to them, negligent or otherwise.
The majority attempt to adapt the "balancing of various factors" in Biakanja v. Irving (1958) 49 Cal. 2d 647, 650 [320 P.2d 16, 65 A.L.R.2d 1358], to the factual circumstances here. That their reliance is clearly misplaced is demonstrated by an analysis of the six tests of Biakanja to establish liability in the absence of privity:
2. Foreseeability of harm. The issue under this phase of the test is the foreseeability of harm resulting from the lender's actions as distinguished from the conduct of the builder. It is scarcely foreseeable by the lender, as a result of simply providing funds for construction, that gross structural defects would exist in the homes ultimately constructed by the builder, particularly in a situation in which construction was [69 Cal. 2d 878] overseen and approved by the governmental agencies of Ventura County, in which experts submitted reports on construction problems both to the builder and to the county and in which, contrary to the inferences in the majority opinion, the builder came highly recommended by another experienced lender. There is a potential risk of structural defects in any construction, but it is impossible to find particular foreseeability of construction harm merely from the act of a financial institution lending money to a builder.
There appear to be adequate remedies both in law and in equity for victims of negligent builders. But if home purchasers are not sufficiently protected today in their available remedies for latent constructional defects, legislative bodies can take appropriate action to revamp building codes, give [69 Cal. 2d 879] more power to regulatory agencies, make licensing requirements more strict, compel bonding of home builders, provide for industry-wide insurance. The answer does not lie in a judicially created cause of action that will compel lending institutions to assume a supervisory role in home construction. Such a requirement will raise interest rates and the cost of money and thus increase the cost of home construction. More significantly, it will place supervisory responsibility on institutions which are limited by law to financing operations and therefore ill-equipped with the skilled scientific, mechanical and engineering personnel necessary to perform a supervisory function effectively.
I dissent. I agree with the Chief Justice that despite the extensive activities of Great Western here the evidence, viewed most favorably to plaintiffs, falls short of establishing the existence of a joint venture between Great Western and Conejo or Goldberg. However, I would hold a joint venture relationship to be the only basis for imposing liability upon Great Western. Its position vis-a-vis plaintiffs differs materially from the relationships between plaintiffs and defendants in the four cases upon which the majority opinion relies. (Merrill v. Buck (1962) 58 Cal. 2d 552, 561-562 [25 Cal. Rptr. 456, 375 P.2d 304] [defendant real estate agent showed and rented to injured plaintiff lessee a house with latent dangerous defect]; Biakanja v. Irving (1958) 49 Cal. 2d 647, 650 [320 P.2d 16, 65 A.L.R.2d 1358] [defendant notary public drew invalid will, thereby depriving plaintiffs of intended benefits thereunder]; Lucas v. Hamm (1961) 56 Cal. 2d 583, 588 [15 Cal. Rptr. 821, 364 P.2d 685] [attorney charged with drafting will with invalid trust provisions, causing loss to intended beneficiaries]; Stewart v. Cox (1961) 55 Cal. 2d 857, 863 [13 Cal. Rptr. 521, 362 P.2d 345] [defendant subcontractor installed defective and leaking concrete work for swimming pool built for plaintiff].)
In each of the cited cases defendant behaved negligently in carrying out a duty of care undertaken by defendant toward another. But in the present case Great Western undertook no duty toward Conejo, Goldberg, plaintiffs, or any one else, any violation of which resulted in plaintiffs' losses. The majority opinion speaks of a negligent failure by Great Western of "a duty of care to its shareholders ... to prevent the construction [69 Cal. 2d 880] of defective homes" ante, pp. 864, 867, 869, and on such asserted failure appears to predicate the pronouncement of an obligation to protect plaintiff home buyers from structural defects, (ante, p. 867.) Even assuming that certain officers or employees of Great Western were derelict in their duties of care toward Great Western and its shareholders, those officers or employees are not the corporation; more logically, in such a context it is the shareholders themselves who might be said to constitute the corporate entity. In my view negligent performance by corporate officers or employees of their duty of care toward the corporation and its shareholders provides no basis for imposing upon the corporation (and therefore upon its shareholders, who must bear the loss) a duty toward others (here, plaintiffs). The fallacy of such an approach is readily perceived by substituting an individual financier for Great Western. In that situation could it be said that the individual's failure to exercise prudence and care in protecting himself gives rise to a duty of care to others? I think not. Similarly it would appear as sound to rule that an agent's violation of his obligations to his principal would in and of itself render the principal liable to others injured in the same transaction, and up to now such has not been the law.
FN *. Previously entitled, "Conner v. Conejo Valley Development Co." and "Burgess v. Conejo Valley Development Co."
FN 1. Although Goldberg testified at the trial that he rejected Great Western's demand for such a right of first refusal, his testimony was to the contrary in a 1965 deposition that was also introduced.
FN 2. In 1961 the statute was amended to allow savings and loan associations to lend up to 70 percent of the appraised value of unimproved property.
FN 3. In 1959 section 6705 read in part: "An association may invest in real property and such investment may include subdividing and developing real property and building homes and other buildings on such property principally for residential use by veterans on such property. An association may own, rent, lease, manage, operate for income, or sell such property."
FN 4. The record does not disclose the source of the $111,000 supplied by Conejo to build and landscape the model homes. A permanent loan covering the cost of construction was eventually received from Great Western.
FN 5. We need not consider plaintiffs' contention that some of the testimony of Judge Alfred Gitelson, Goldberg's former counsel in real property matters, was improperly struck from the record; consideration of the testimony would not alter the conclusion that there is no evidence of a community or joint interest in the undertaking.
FN 6. For the same reasons, the evidence is insufficient to support an inference that there was a joint enterprise. The term "joint enterprise" is sometimes used interchangeably with "joint venture" and sometimes to describe a nonprofit undertaking for the mutual benefit or pleasure of the parties. (See Shook v. Beals (1950) 96 Cal. App. 2d 963, 967-968 [217 P.2d 56, 18 A.L.R.2d 919]; 2 Williston, Contracts (3d ed. 1959) § 318, pp. 554-555.) When used to describe a business or commercial undertaking, however, California decisions draw no significant distinctions between joint ventures and joint enterprises. (See, e.g., Boyd v. White (1954) 128 Cal. App. 2d 641, 657 [276 P.2d 92]; Larson v. Lewis-Simas-Jones Co. (1938) 29 Cal. App. 2d 83, 89 [84 P.2d 296]; Ambrose v. Alioto (1944) 65 Cal. App. 2d 362, 366 [150 P.2d 502].)
FN 7. For example, Goldberg refused to follow the suggestion of soil engineers that Conejo comply with FHA grading standards requiring all homes to drain to the street, because the cost would be an extra $200 per lot.
FN 8. Adobe soil is common in southern California. Tests conducted by Conejo's soil engineers indicated the presence of adobe soil. Such soil is distinguished easily by the naked eye in dry weather in areas where the ground cover is sparse; when it dries and contracts, the surface cracks into plates, frequently hexagonal in shape and 10 or 12 inches in diameter. Several Conejo employees noticed the characteristic cracks during the summer of 1959, as did the geologist hired by Great Western to investigate water supply problems.
FN 9. The vice-president in charge of Great Western's tract loan development activities testified that had Great Western known of the soil condition it would have required soil tests and the correction of plans before approving a construction loan. Although Conejo had the right to seek another lender at any time to continue as financier of the project, there is no reason to assume that such lender would not have exercised reasonable care and imposed similar requirements.
FN 10. In 1965 a state legislative committee found that hundreds of homes built upon expansive soil in California had cracked to such an extent as to make continued habitation uncomfortable or unsafe, that the existence of such soil could be easily and cheaply identified, that the cost of engineering solutions was minimal and easily financed by the builder and homebuyer, and that "local ordinances requiring soil analysis prior to home construction are virtually nonexistent," leaving the potential homebuyer "without minimum assurance that his purchase will be a safe and habitable home." (6 Assembly Interim Com. Report No. 21, Municipal and County Government (1965) p. 9, "Problems of Construction Upon Expansive Soil.") In 1965 soil analysis and precautionary measures were required by state statute. (Health & Saf. Code, §§ 17953, 17954.)
FN 11. The residential construction industry is composed principally of small builders, most of whom have so little equity that they must borrow money in order to finance the production of new homes. (See Gillies and Mittelbach, Management in the Light Construction Industry (1962) pp. 15-16, 19, 21; Gillies & Curtis, Institutional Residential Mortgage Lending in Los Angeles County (1956) pp. 41-42.) Savings and loan associations are bound by market forces and legal restraints to be a major supplier of funds to such small builders. (Lefcoe and Dobson, supra, 75 Yale L.J. 1271, 1284-1286.)
FN 12. Goldberg's accountant is one of four cross-complainants who are co- partners doing business as Pritkin-Finkel Investment Company. He testified that the partnership made investments on the advice of accounting clients without previous investigation, that it had made approximately a dozen investments in the last several years totalling less than a million dollars, and that the deals in which it had invested involved total dollar amounts of approximately one hundred million dollars. Goldberg's former counsel in real property matters is one of two cross-complainants who are co-partners doing business as K. G. & Company.