Opinion ID: 1203744
Heading Depth: 1
Heading Rank: 1

Heading: lender liability

Text: The facts of this case fall between those involved in Lane v. Trenholm Bldg. Co. , 267 S.C. 497, 229 S.E. (2d) 728 (1976) and those involved in Roundtree Villas Ass'n, Inc., v. 4701 Kings Corp. , 282 S.C. 415, 321 S.E. (2d) 46 (1984). We hold that Roundtree Villas should be applied here to absolve the lender of liability under an implied warranty of habitability theory. In Lane , the developer of a subdivision sold an undeveloped lot to a builder. The developer gained a second mortgage on a house subsequently built on the lot. The builder, experiencing financial problems, deeded the house to the developer in satisfaction of its mortgage. The developer paid off the first mortgage on the house, and then sold it to Lane. Lane complained shortly thereafter about septic tank problems, and the developer endeavored to remedy them by ultimately installing a new septic tank. The repairs failed, and Lane brought suit, asserting the implied warranty of habitability. We ruled in Lane that the developer was liable, citing our long held maxim of caveat venditor , and noting that one of the primary objectives of the law of contracts is to carry out the reasonable expectations of the parties. Lane , 267 S.C. at 503, 229 S.E. (2d) at 730. While Lane is pertinent to the facts here, it is not fully controlling. Lane differs from the instant case in that there the lender was also the developer of the subdivision. The developer's status as a lender was at most of secondary importance in the transaction. To have held against the buyer there would have been to frustrate his reasonable expectations when he entered the transaction. Here, Columbia Lumber is merely a materials supplier, and sold in its capacity only as lender attempting to recoup its losses, which it never fully accomplished. Columbia Lumber became a seller only by virtue of the fact that it took a deed in lieu of foreclosure, and we find that Lane does not direct the disposition of the case at bar. [2] In Roundtree Villas , a construction lender monitored a construction project to protect its loan investment to the builder. The builder sold several units of the project, but then faced insurmountable financial problems. The builder deeded the remaining units in the project, to prevent foreclosure, to a selling corporation created at the instigation of the lender. This selling corporation assumed the obligations owed by the builder to the lender. The lender undertook to repair defects in the remaining units in order to facilitate further sales by the seller corporation. Purchasers of these units brought suit upon discovering construction defects, asserting that the lender was liable under negligence and implied warranty of habitability theories. We held in Roundtree Villas that the lender could not be held liable in tort for construction defects caused by the builder's work. The monitoring by the lender was not enough to impose a legal duty on it to prevent construction defects. We agreed, however, that a duty on the lender to use due care did arise regarding the repair work it undertook. We further held that the lender was not a party to any sales of the units sufficient to incur liability under an implied warranty of habitability. In Roundtree Villas , this Court did not address the warranty liability of a mere lender who sells a house, since there we found that the lender was not sufficiently a party to the sale. We now hold that a mere lender, even if a party to the sale, is ordinarily not liable under an implied warranty of habitability theory. The public policy reasons for refusing to impose warranty liability on a mere lender are myriad. To require every lender to foreclose in order to shield itself from liability instead of taking a deed in lieu would be unduly burdensome on the state's judicial and administrative machinery. The imposition of warranty liability on all lenders/sellers would discourage lending, and thus economic growth. Further, it is unduly punitive to impose potential warranty liability on a lender that is searching for some way to recover the losses it has suffered due to the default of the debtor. This is not to say that a lender will never incur implied warranty liability when it makes a sale after default. Obviously, a lender can be held liable if it is also a developer. See discussion of Lane, supra . Roundtree Villas establishes liability on lenders for defects in those portions of the house(s) which they complete. A lender will also incur liability for the performance of express representations made to a buyer. A lender should be held responsible if it is aware of defects but conceals them from an unwitting buyer. Liability may also attach when the lender becomes highly involved with construction in a manner that is not normal commercial practice for a lender. In such a situation, the lender might be said to be a joint venturer. See generally Central Bank v. Baldwin , 94 Nev. 581, 583 P. (2d) 1087 (1978). The lender may be liable if it is so amalgamated with the developer or builder so as to blur its legal distinction. See generally Kincaid v. Landing Dev. Corp. , 289 S.C. 89, 344 S.E. (2d) 869 (Ct. App. 1986). A lender may also be liable where it forecloses on a developer in the midst of construction, takes title, has substantial involvement in completing the construction and sells homes. See Ferguson, Lender's Liability for Construction Defects , 11 Real Est. L.J. 310 (1983). None of these possibilities for liability apply to Columbia Lumber. It therefore cannot be found responsible in the instant case and the trial court must be affirmed.