Opinion ID: 1867644
Heading Depth: 2
Heading Rank: 3

Heading: Hoida's Claims

Text: ¶ 17 Hoida claims that M & I and McDonald Title are liable for the damages it sustained based on the following allegations set out in the complaint: (1) the defendants had a duty of identification of subcontractors and materialmen at the project; (2) the defendants had a duty of determination that the work has reached the proper stage to justify disbursement; (3) the defendants had a duty of collection of lien waivers from contractors, subcontractors and suppliers before disbursement of loan funds were made; (4) the defendants owed a duty to the subcontractors and material suppliers, including Hoida, because [the subcontractors and material suppliers] were third-party beneficiaries and also because it was reasonably foreseeable that any failure by [the defendants] . . . could harm subcontractors and material suppliers, including Hoida; and (5) the defendants breached these duties causing damage to Hoida. M & I and McDonald Title denied all of Hoida's allegations. ¶ 18 The first step of our summary judgment analysis is to determine whether the complaint sets forth a claim for relief. Trinity Evangelical Lutheran Church & Sch.-Freistadt v. Tower Ins. Co., 2003 WI 46, ¶ 32, 261 Wis.2d 333, 661 N.W.2d 789. It appears that Hoida attempted to plead both a claim for breach of contract, as a third-party beneficiary, and a claim for negligence. [11]
¶ 19 The complaint does not allege whether the duties outlined in ¶ 17 above arise from a loan document, an agreement between M & I and McDonald Title or from some other agreement that could give rise to a contract theory of recovery. It also does not allege that Hoida was an intended beneficiary of any such agreement. However, in order to state a claim based on third-party beneficiary status, the complaint must allege facts sufficient to show that the agreement that was breached was entered into primarily and directly for plaintiff's benefit or the complaint must have attached a copy of the agreement that demonstrates that purpose. Schell v. Knickelbein, 77 Wis.2d 344, 349, 252 N.W.2d 921 (1977). Hoida did neither. Therefore, its attempted breach of contract claim fails to state a claim for relief.
¶ 20 Hoida alleged that the defendants breached the duty of care owed to it, not by doing some act that caused harm, but by failing to perform certain tasks that Hoida claims M & I and McDonald Title had an obligation to perform. Hoida does not assert that this obligation arose from any heightened duty of care, such as a fiduciary duty. Rather, it pleads that the duty of ordinary care required M & I and McDonald Title to identify the subcontractors and materialmen for the project; to verify that sufficient work on the project had been completed to justify disbursement; and to collect lien waivers from Hoida before disbursing funds from Villager's loan. Hoida characterizes these obligations as basic industry standards of conduct for lenders and their agents, and it claims that if the lender does not complete these tasks, it is reasonably foreseeable that subcontractors and materialmen will be harmed. ¶ 21 Wisconsin's common law of negligence has developed primarily through cases of personal injury and property damage. The specific question of a lender's liability to a third party who suffers losses, where the lender and the third party are not in privity of contract and the lender has no fiduciary duty to the third party, is a question of first impression in Wisconsin. We review established common law negligence principles as our starting point. ¶ 22 Generally stated, [t]he test of negligence is whether the conduct foreseeably creates an unreasonable risk to others. Morgan v. Pa. Gen. Ins. Co., 87 Wis.2d 723, 732, 275 N.W.2d 660 (1979) (citing, e.g., Coffey v. Milwaukee, 74 Wis.2d 526, 537, 247 N.W.2d 132 (1976); Antoniewicz v. Reszczynski, 70 Wis.2d 836, 857, 236 N.W.2d 1 (1975); A.E. Inv. Corp. v. Link Builders, Inc., 62 Wis.2d 479, 484-85, 214 N.W.2d 764 (1974)). The risk of harm need not be to a particular plaintiff. Morgan, 87 Wis.2d at 732, 275 N.W.2d 660. The allegedly negligent act must also cause an injury. A cause of action in negligence requires proof that the defendant failed to exercise ordinary care and that the act or omission complained of was the cause of the plaintiff's injury. Fischer v. Cleveland Punch & Shear Works Co., 91 Wis.2d 85, 92, 280 N.W.2d 280 (1979) (citing Greiten v. La Dow, 70 Wis.2d 589, 601, 235 N.W.2d 677 (1975)). ¶ 23 For decades, Wisconsin courts have engaged a four-element analysis to determine whether an actionable claim for negligence has been stated. We require a plaintiff to plead facts, which if proved true, would establish the following four elements: (1) the existence of a duty of care on the part of the defendant, (2) a breach of that duty of care, (3) a causal connection between the defendant's breach of the duty of care and the plaintiff's injury, and (4) actual loss or damage resulting from the [breach]. [12] Gritzner, 235 Wis.2d 781, ¶ 19, 611 N.W.2d 906; see also Rockweit v. Senecal, 197 Wis.2d 409, 418, 541 N.W.2d 742 (1995). ¶ 24 Wisconsin courts have also reserved the right to deny the existence of a negligence claim based on public policy reasons: [I]n Wisconsin, even if all the elements for a claim of negligence are proved, or liability for negligent conduct is assumed by the court, the court nonetheless may preclude liability based on public policy factors. Smaxwell v. Bayard, 2004 WI 101, ¶ 39, 274 Wis.2d 278, 682 N.W.2d 923. The legislature also establishes public policy for the state through the statutes it enacts, and we are limited to applying the policy the legislature has chosen to enact, and may not impose [our] own policy choices. Fandrey v. Am. Family Mut. Ins. Co., 2004 WI 62, ¶ 16, 272 Wis.2d 46, 680 N.W.2d 345. [13] ¶ 25 The analysis of the four elements necessary to state a claim for actionable negligence is the first consideration for a court when deciding motions for summary judgment, even if an appellate court can directly consider the judicial public policy factors to preclude liability when the facts are particularly clear. Alvarado v. Sersch, 2003 WI 55, ¶ 18, 262 Wis.2d 74, 662 N.W.2d 350; see also Gritzner, 235 Wis.2d 781, ¶ 24, 611 N.W.2d 906. This is because negligence and liability are distinct concepts. Alvarado, 262 Wis.2d 74, ¶ 17, 662 N.W.2d 350. ¶ 26 We have not addressed previously the precise question before us, and therefore have given no guidance for the pleading requirements for a claim of lender liability due to an alleged failure to undertake certain tasks. Further, undisputed material facts that were not pleaded will be helpful to our explanation of this new claim that Hoida seeks to develop. For these reasons, we will assume, while not deciding, that the complaint states an actionable claim for negligence in regard to M & I and McDonald Title. ¶ 27 The first element of the four-element analysis for a claim of actionable negligence, duty, involves two aspects: (1) the existence of a duty of ordinary care; and, (2) an assessment of what ordinary care requires under the circumstances. Hatleberg v. Norwest Bank Wis., 2005 WI 109, ¶¶ 17-18, 283 Wis.2d 234, 700 N.W.2d 15. We begin with the duty of ordinary care. ¶ 28 In Klassa v. Milwaukee Gas Light Co., 273 Wis. 176, 77 N.W.2d 397 (1956), we reviewed the established concept that in order to find negligence, a court first must decide whether the defendant owed a duty to the plaintiff. Id. at 181-82, 77 N.W.2d 397. We cited previous case law and secondary sources as foundation for our statement that it is not necessary in order for an act to be negligent that the actor should reasonably have foreseen the particular injury which did result from such act so long as he should have foreseen that harm was likely to be caused to someone by reason [of his act]. Id. at 182, 77 N.W.2d 397 (citing Pfeifer v. Standard Gateway Theater, Inc., 262 Wis. 229, 55 N.W.2d 29 (1952)). ¶ 29 Klassa explained that despite this broad, general statement of duty, courts could conclude that an act that caused harm did not constitute negligence under certain circumstances: Whenever a court holds that a certain act does not constitute negligence because there was no duty owed by the actor to the injured party, although the act complained of caused the injury, such court is making a policy determination. Klassa, 273 Wis. at 183, 77 N.W.2d 397. In making that assertion, we explained that the shifting sands of society's ideas about responsibility drive courts' conclusions with regard to what the duty of ordinary care requires under the circumstances presented. [14] Id. at 183-84, 77 N.W.2d 397. However, we also have explained that the duty of ordinary care is not a judicial public policy factor, but rather, it is an ingredient in the determination of negligence. A.E. Inv., 62 Wis.2d at 484, 214 N.W.2d 764. ¶ 30 To summarize, one has a duty to exercise ordinary care under the circumstances. [15] Gritzner, 235 Wis.2d 781, ¶ 20, 611 N.W.2d 906. If a person, without intending to do harm, acts, or fails to do an act, that a reasonable person would recognize as creating an unreasonable risk of injury or damage to a person or property, he or she is not exercising ordinary care under the circumstances, and is therefore negligent. Rockweit, 197 Wis.2d at 424, 541 N.W.2d 742 (citation omitted). Ordinary care involves the concept of foreseeability, in that a reasonable person exercising ordinary care would have foreseen injury as a consequence of his act. Greiten, 70 Wis.2d at 602, 235 N.W.2d 677; Osborne v. Montgomery, 203 Wis. 223, 234, 234 N.W. 372 (1931). ¶ 31 These concepts, taken together, establish certain relationships. The existence of a duty of ordinary care encompasses what is reasonable according to facts and circumstances present in each individual case. Whether there has been a breach, the next element of a negligence claim, will depend in part upon what is reasonable to require a person to do, or to refrain from doing, under the circumstances. Hatleberg, 283 Wis.2d 234, ¶¶ 18-20, 700 N.W.2d 15. ¶ 32 Therefore, what is within the duty of ordinary care depends on the circumstances under which the claimed duty arises. For example, what is comprised within ordinary care may depend on the relationship between the parties or on whether the alleged tortfeasor assumed a special role in regard to the injured party. See id. (concluding that Wells Fargo Bank's duty of ordinary care under the circumstances did not include an affirmative obligation to review a trust document to ensure that it would be effective in reducing estate taxes); see also id., ¶ 42 (concluding that because Wells Fargo undertook the role of giving financial advice to its client, its duty of ordinary care under the circumstances required it to avoid providing false information to her). When a party is alleged to have a fiduciary duty to another individual, we examine what is encompassed within ordinary care under a different lens because of that claimed fiduciary relationship. [16] See Beloit Liquidating Trust v. Grade, 2004 WI 39, ¶ 2, 270 Wis.2d 356, 677 N.W.2d 298 (concluding that a corporate officer's or director's duty of ordinary care under the circumstances to corporate creditors was not that of a fiduciary unless the corporation was insolvent and no longer a going concern). Stated otherwise, the duty of ordinary care under the circumstances is determined by what would be reasonable given the facts and circumstances of the particular claim at hand. ¶ 33 This limitation on what is required by the duty of ordinary care is not a new concept. It is a well-established consideration in the analysis of claims of intentional misrepresentation based on a failure to disclose. For example, the duty of ordinary care in regard to being required to speak is limited by the circumstances surrounding the transaction. Kaloti Enters., Inc. v. Kellogg Sales Co., 2005 WI 111, ¶¶ 16-19, 283 Wis.2d 555, 699 N.W.2d 205; Ollerman v. O'Rourke Co., Inc., 94 Wis.2d 17, 46, 288 N.W.2d 95 (1980). No misrepresentation occurs through nondisclosure unless there is a duty to disclose. Kaloti, 283 Wis.2d 555, ¶ 13, 699 N.W.2d 205; Ollerman, 94 Wis.2d at 42, 288 N.W.2d 95. ¶ 34 Hoida's claims against M & I and McDonald Title present no special relationship, such as a fiduciary relationship, nor did either defendant assume a special role with regard to Hoida. Accordingly, we examine what a reasonable lender and its agent in the position of M & I and McDonald Title would be obligated to do in similar circumstances. ¶ 35 In previous cases, we have examined business contracts and agreements to help determine what is included within the duty of ordinary care, where the alleged negligence arose out of a business relationship. Kaloti, 283 Wis.2d 555, ¶¶ 6-9, 699 N.W.2d 205; Baumeister, 277 Wis.2d 21, ¶¶ 21-24, 690 N.W.2d 1. Baumeister provides the foundation for our analysis here. ¶ 36 Baumeister involved the claims of two workmen who were injured during the construction of a church when the trusses that would support the church roof were being installed and the structure collapsed. Baumeister, 277 Wis.2d 21, ¶ 6, 690 N.W.2d 1. They sued the architect, among others, claiming that he was negligent in providing instructions and in supervising the placing of temporary bracing that was to support the trusses during installation. Id., ¶ 8. The workmen claimed that their injuries were foreseeable, if the temporary bracing was not properly placed and therefore the architect breached his duty of ordinary care. Id., ¶ 13. ¶ 37 We concluded that the architect did not breach the duty of ordinary care exercised by an architect in similar circumstances. Id., ¶ 18. In so concluding, we established that an architect's duty of ordinary care required a review of the architect's contract with the church. We did so because the terms of the architect's contract assisted us in determining what would be reasonable for an architect to foresee under the circumstances. The contract in Baumeister stated that the architect was relieved of liability with regards to `construction means, methods, techniques, sequences or procedures, or for safety precautions and programs in connection with the Work.' Id., ¶ 21, 690 N.W.2d 1 (quoting the architect's contract with the church). We also considered the uncontroverted expert testimony of another architect whose opinion was that an architect is not responsible for, nor does he control, the methodology and techniques chosen by the contractor to construct a building. Id. (quoting from architect Lee Madden's affidavit). ¶ 38 Here, the business context in which M & I lent construction funds was one in which each party had its own respective contractual relationship to another in a construction project. For example, M & I's contract was with Villager, who was the owner of the project and the borrower of the funds. According to their contract, M & I was not to release any funds without the owner's approval. It complied with that obligation by having McDonald Title collect a completed Application and Certification for Payment form that included Villager's signature for each draw on the loan proceeds. Although not required by its contract with Villager, M & I also had McDonald Title obtain the signature of the architect and an itemization of the general contractor before funds were released. Furthermore, M & I's contract with Villager specifically provided that M & I had no duty to secure lien waivers or to oversee construction. These contractually assumed obligations and agreed upon limitations for M & I shaped its duty of ordinary care in disbursing the proceeds of the construction loan because they set out what the parties agreed was reasonable under the circumstances. ¶ 39 McDonald Title's contract was with M & I. It was obligated to perform only those tasks that M & I requested, just as if it were an employee of M & I rather than an independent agent. M & I required completed Application and Certification for Payment forms for all disbursements, and McDonald Title secured those forms. It acted solely at M & I's direction. And while it is true that an agent can be individually liable if he does an act that would be a tort if he were not then acting as an agent, Ramsden v. Farm Credit Services of North Central Wisconsin ACA, 223 Wis.2d 704, 715, 590 N.W.2d 1 (Ct.App.1998), the principles of Ramsden do not enlarge an agent's duty of ordinary care beyond the principal's duty of ordinary care when the agent is acting solely as M & I, itself, could lawfully have acted. Here, Hoida seeks to ascribe liability to McDonald Title for not undertaking the same tasks as it alleges M & I should have undertaken. And, as we have explained, M & I's duty of ordinary care under the circumstances did not include the obligation to undertake the tasks Hoida seeks to impose on M & I. Furthermore, Hoida cites no Wisconsin case that would create the obligations for an agent that it ascribes to McDonald Title. [17] ¶ 40 Neither M & I nor McDonald Title reasonably could have foreseen that the general contractor and the owner would act together to forge the architect's signature on Application and Certification for Payment forms and to convert the loan proceeds for the project to their own use. Nor could they reasonably have foreseen that Hoida would produce such a mass of materials for the project without enforcing its contract with Packard to be paid within 15 days of delivery. To the contrary, two other subcontractors who were not timely paid contacted M & I, and McDonald Title paid them. ¶ 41 However, even assuming, arguendo, that McDonald Title was negligent in its distribution of the loan proceeds, we conclude that Hoida's claim against McDonald Title was precluded by judicial public policy. The application of judicial public policy factors to preclude recovery for negligence has a long history in Wisconsin. See Colla v. Mandella, 1 Wis.2d 594, 598-99, 85 N.W.2d 345 (1957). In Colla, we articulated the six public policy factors that Wisconsin courts use today to limit liability in negligence claims: (1) the injury is too remote from the negligence; (2) the recovery is `wholly out of proportion to the culpability of the negligent tortfeasor'; (3) the harm caused is highly extraordinary given the negligent act; (4) recovery would place too unreasonable a burden on the negligent tort-feasor; (5) recovery would be too likely to open the way to fraudulent claims; and (6) recovery would enter into `a field that has no sensible or just stopping point.' Id. (citations omitted); see also Fandrey, 272 Wis.2d 46, ¶¶ 30-35, 680 N.W.2d 345. If any one of the six factors applies, we may preclude liability. Id. ¶ 42 While there are occasions when we determine that judicial public policy factors should not be applied in advance of a full trial, Bowen v. Lumbermens Mut. Cas. Co., 183 Wis.2d 627, 654, 517 N.W.2d 432 (1994), when the public policy is well presented by the pleadings and the materials accompanying a summary judgment motion, we may decide whether any of them should be applied, Sawyer, 227 Wis.2d at 141, 595 N.W.2d 423. ¶ 43 Here, we conclude that permitting recovery would place too unreasonable a burden on McDonald Title, who acted solely at the direction of M & I. Fandrey, 272 Wis.2d 46, ¶ 15 n. 12, 680 N.W.2d 345. The burden that Hoida asks that we place on McDonald Title when it is acting as a disbursing agent for a construction loan is to require it to: (1) identify all subcontractors and all materialmen who provide either services or goods for the construction project at any time during the course of construction; (2) for every disbursement, assess the progress of the construction and determine whether enough construction has been completed to warrant the amount of money that is being requested for that draw on the loan proceeds; and (3) before each disbursement, to collect lien waivers from all subcontractors and materialmen who provided goods or services to the construction project. Subcontractors and materialmen change as a construction project progresses. For example, a concrete subcontractor may pour the foundation and have concluded his work on the job, while a painter may work only on the inside of a building after it is largely completed. Supplies that become incorporated into a building are purchased by both general contractors and subcontractors. Tracking who purchased what and when would be a never-ending task, if we were to require McDonald Title to perform it. Additionally, we find nothing in the record that would permit us to conclude that McDonald Title has any special expertise in evaluating whether the progress in the construction of a building is equivalent to the dollar amount of any given draw request Accordingly, we conclude that Hoida's claim against McDonald Title is precluded by the fourth judicial public policy factor. [18] ¶ 44 Accordingly, we conclude that M & I and McDonald Title's duty of ordinary care under the circumstances with regard to Hoida did not require either of them to identify Hoida as a subcontractor on the project, to verify that progress on the project was sufficient to justify the release of the amount of funds that the general contractor and the owner requested, or to secure lien waivers from Hoida. ¶ 45 We further conclude that M & I exercised ordinary care under the circumstances this case presents when it retained McDonald Title to act as its disbursing agent and instructed it to secure completed Application and Certification for Payment forms for all disbursements. These forms contained the signature of Villager, who was the owner/borrower in regard to the project, the signature of the architect and the signature of the general contractor. ¶ 46 Once what is required by the duty of ordinary care under the circumstances is established, the second element of actionable negligence, whether a breach of that duty has occurred, can be ascertained. Hoida's claim of a breach is based entirely on the theory that the defendants' duty of ordinary care under the circumstances required them to undertake certain tasks that we have concluded ordinary care under the circumstances did not require. It then follows that no breach occurred and therefore the defendants were not negligent, as a matter of law. [19] In the future, when attempting to plead lender liability based on negligently failing to undertake certain tasks, a plaintiff must allege why the duty of ordinary care of the lender or disbursing agent includes the obligation to affirmatively undertake the tasks that plaintiff claims the lender or disbursing agent reasonably failed to perform under the circumstances. ¶ 47 Normally, we would conclude our discussion at this point. However, it may be helpful to those who suffer losses arising from similar circumstances in the future to point out that the legislature has made a policy choice in regard to the relative priority of a subcontractor and a lender when funds are insufficient to cover both of their losses. As the court of appeals said: Under Wis. Stat. ch. 779, the legislature made a policy choice to provide protection to subcontractors and material suppliers on construction projects. It also elected, under Wis. Stat. §§ 779.01(4) and 706.11, to limit that protection in certain situations by providing priority status to lenders. Establishing for Hoida a new claim against M & I and McDonald would contravene the public policy choices of the legislature. [T]he judiciary is limited to applying the policy the legislature has chosen to enact, and may not impose its own policy choices. Hoida, 276 Wis.2d 705, ¶ 23, 688 N.W.2d 691 (citation omitted). ¶ 48 We agree with the court of appeals that if this court were to develop a new lender liability claim by imposing affirmative obligations on a lender that it has not undertaken by contract or voluntarily assumed, the result would be to give subcontractors and material suppliers payment priority over construction lenders when a third party acts in a way that could cause loss for both. However, the legislature has enacted statutes that evince the public policy of Wisconsin to pay construction lenders first. Wis. Stat. § 779.01(4) and Wis. Stat. § 706.11. We cannot establish a common law claim that would contravene that legislative choice. If a new claim is to be established for those in Hoida's position, it is for the legislature to do so, not this court. ¶ 49 As we explained above, Hoida has not shown there are any material facts in dispute, or any inferences favorable to it from undisputed facts, that would entitle it to a trial. Instead, Hoida claims support for its position from Kornitz v. Earling & Hiller, Inc., 49 Wis.2d 97, 181 N.W.2d 403 (1970), which allowed a purchaser of an apartment building a trial to resolve its misrepresentation and negligence claims against a mortgage lender. It also cites Klein-Dickert Oshkosh, Inc. v. Frontier Mortgage Corp., 93 Wis.2d 660, 287 N.W.2d 742 (1980), which supported a prior court's finding that a construction project lender had guaranteed payment to a swimming pool dome subcontractor. Neither case persuades us. ¶ 50 Kornitz concluded that more facts were necessary before the court could fully consider the issues. It involved a misrepresentation claim, the distinct legal elements of which weighed significantly in the court's conclusion that the plaintiff had a viable legal claim that warranted a full trial. Kornitz, 49 Wis.2d at 103, 181 N.W.2d 403. As we explained in footnote 11, supra, Hoida did not plead a misrepresentation claim. In Klein-Dickert, there was privity of contract between the lender and the subcontractor because the subcontractor explained that it would not proceed with construction unless the lender guaranteed payment of its bid, and the lender agreed to that request. Klein-Dickert, 93 Wis.2d at 669, 287 N.W.2d 742. The decision in Klein-Dickert turned on a contractual obligation. Here, Hoida had no privity of contract or third-party beneficiary status. [20]