Opinion ID: 1167061
Heading Depth: 2
Heading Rank: 2

Heading: Does a lending institution which extends a short-term construction loan to a developer owe a duty of care to prospective buyers of the homes built by the developer?

Text: The legal theory upon which the Wierzbickis seek recovery against the Bank is not readily discernible. Given the particular facts and circumstances of this case as developed for purposes of the summary judgment motion, we think the only basis for recovery advanced by the Wierzbickis which warrants discussion is that which urges adoption of the rule articulated by the Supreme Court of California in Connor v. Great Western Savings and Loan Association, 69 Cal.2d 850, 73 Cal. Rptr. 369, 447 P.2d 609 (1968). [6] Connor involved an elaborate development scheme in which the defendant lending institution, Great Western participated extensively. The project was initiated with an agreement whereby Great Western was to warehouse the land to be developed; because California statutes precluded it from making a loan of more than one-third of the value of the unimproved property, it bought the property from the developer at a low price and promised to sell it back as development progressed. In addition to the profit that was to be realized on this arrangement, Great Western was given the right to make all construction loans on the project as well as the right of first refusal to make long-term loans to the buyers of the homes. Great Western exercised substantial control over the project as it progressed. Two years after completion of the tract the developer's negligent construction caused the foundations of several homes to crack, resulting in extensive damage. Id. 73 Cal. Rptr. at 371-75, 447 P.2d at 611-15. After rejecting the argument that Great Western was vicariously liable for the damage as a joint venturer with the developer, id. 73 Cal. Rptr. at 375-76, 447 P.2d at 615-16, the Supreme Court of California held that: `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.' Id. 73 Cal. Rptr. at 377, 447 P.2d at 617, quoting Merrill v. Buck, 58 Cal.2d 552, 25 Cal. Rptr. 456, 462, 375 P.2d 304, 310 (1962). The court listed six factors to be considered in determining whether such a duty exists: `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.' Connor, 73 Cal. Rptr. at 377, 447 P.2d at 617, quoting Biakanja v. Irving, 49 Cal.2d 647, 320 P.2d 16, 19 (1958). A divided Supreme Court of California concluded that each of those factors operated against Great Western, and that it had a duty to exercise reasonable care to prevent the construction and sale of seriously defective homes to plaintiffs. Connor, 73 Cal. Rptr. at 378, 447 P.2d at 618. [7] The Connor rule has not met with widespread acceptance. Subsequent cases have indicated that liability will be imposed on construction lenders only in unusual circumstances, where the lender's activities clearly exceed those of a normal money lender. [8] We need not decide whether we would have reached the same result as the California Supreme Court in Connor because the facts presented in this case are dramatically different from those in Connor. Under the Connor rule it is necessary to consider whether the six Biakanja criteria upon which the California Supreme Court relied in imposing liability on Great Western have been met in this case. Bradler v. Craig, 274 Cal. App.2d 466, 79 Cal. Rptr. 401 (1969), involved facts closely analogous to those of the case at bar. Santa Barbara Savings had lent money to a builder for the purchase and development of five residential lots, exercising roughly the same degree of control over the construction as did the Bank in this case. Id. 79 Cal. Rptr. at 403. The court described the lending institution's activity as follows: Santa Barbara's alleged participation was that of the usual and ordinary construction and purchase money lender, content to lend money at interest on the security of real property. Approval of plans and specifications, and periodic inspection of houses during the construction is normal procedure of any construction money lender. [9] Id. 79 Cal. Rptr. at 407. It went on to hold that, since the lending institution's behavior was limited to that of a conventional construction lender, that institution's participation in the construction project was so minimal and restricted that it had no effect on plaintiffs. Id. 79 Cal. Rptr. at 408. The court held, therefore, that the first Biakanja factor  which requires consideration of the extent to which the transaction was intended to affect the plaintiff, id. 79 Cal. Rptr. at 406  was not present at all. In the case at bar, there is no indication that the Bank's activities in this venture were intended to accomplish anything beyond protection of its investment in extending the construction loan to Burd. Its participation was in every way limited to that of a conventional construction lender, see Bradler, 79 Cal. Rptr. at 408, and, under the Connor rule, was not sufficient to create a duty of care running to the Wierzbickis. In short, the facts of the instant case fail to demonstrate any conduct on the Bank's part which would furnish the basis for the Wierzbickis successfully asserting a claim for relief against the Bank. Thus, on the particular facts of this case, which fail to disclose any express or implied undertaking on the Bank's part which would inure to the Wierzbickis' benefit, we hold that the superior court's grant of summary judgment in favor of the Bank should be affirmed. [10] Affirmed.