Court Opinion

ID: 9574413
Source: CourtListenerOpinion
Date Created: 2023-08-21 21:04:43.570589+00
Date Added: 2024-06-11T12:44:31.152122
License: Public Domain

MOSK, J.
I dissent.
The evidence is overwhelming, and the majority concede, that as between the lender of funds and the tract developer there was no agency, no joint venture, no joint enterprise. It is clear there was merely a lender-borrower relationship. Nevertheless, the majority here hold the lender of funds vicariously liable to third parties for the negligence of the borrower. This result is (a) unsupported by statute or precedent; (b) inconsistent with accepted principles of tort law; (c) likely to be productive of untoward social consequences.
At the threshold, it would be helpful to review some elementary economic factors and relationships that appear to be involved in this proceeding.
The function of the entrepreneur in a free market is to discern what goods or services are in apparent demand and to gather and arrange the factors of production in order to supply to the consumer, at a profit, the goods and services desired. In so doing, the entrepreneur undertakes a number of risks. The demand may be less than he calculated; the costs of production may be greater. He is not only in danger of losing his own capital investment but he incurs obligations to the suppliers of land, materials, labor and capital, and he stands liable under now-accepted principles of law for harm and loss caused by defects in his products to those persons injured thereby.
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 Ms product and his minimizing losses through skillful production.

*873
Conejo Valley Development Company and associated parties were entrepreneurs.

The role of the supplier of capital is entirely different. The lender, as a supplier of capital, is to receive by contract a fixed return or price for his investment. He owns no right to participate in the profits of the enterprise no matter how great they may be. On the other hand, he is insulated from the risk of loss of capital and interest in return for making his money available, other than the risk of nonpayment of the contract obligations. Indeed, it is elementary that the owner of money lends it to an entrepreneur and receives only a fixed return, rather than obtaining the gain from using the money himself as an entrepreneur, on the condition that he be relieved of risk. The basic, underlying risk in mortgage lending is that the lender might not get back what is owed to him in principal and interest.
It seems abundantly clear, both legally and logically, that if the lender has no opportunity to share in the profits or gains beyond the fixed return for his supplying of capital, i.e., if he has no chance of reaping the entrepreneur’s reward and exercises no control over the entrepreneur’s business, elementary fairness requires that he should not be subjected to the entrepreneur’s risks.
Great Western Savings and Loam Association was a lender, a supplier of capital.
By imposing the entrepreneur’s risks upon the supplier of capital, even though the latter has bargained away the opportunity of participating in the entrepreneurial gain on his capital by lending it at a fixed fee, the majority have effected a drastic restructuring of traditional economic relationships. The results may reverberate throughout the economy of our state, and may seriously affect the money and investment market, the construction industry, and regulatory schemes of financial institutions, all without the faintest hint in either stautory or case authority that such a draconian result is compelled.
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 negli*874genee 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 Within, Summary of Cal. Law (1960) Torts, §4.) The remedy is, as it should be, against the negligent builder.
It has never been doubted that the imposition of a duty implies significant control over the agency of harm. The issue of right of control goes to the very heart of the ascription of tortious responsibility, particularly where the alleged negligent conduct is asserted to be a failure to control the conduct of an independent third party.
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 *875and 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. Ñor is there any showing of a voluntarily assumed relationship between defendant and plaintiffs from which such an obligation might arise.” (Pp. 756-757.)
The evidence is barren of indicia that the defendants maintained any element of control over the enterprise involved here. The record establishes without conflict that Great Western and Conejo had no mutual right to direct each other’s activities. The fact that Great Western was required by law (Pin. Code, § 7156) to limit its rate of disbursements to the borrower cannot import a duty to the ultimate purchaser and is not the equivalent of a right to control the progress of development or to participate in the management of the borrower’s enterprise. By regulating disbursements the lender may to some extent affect the borrower, but this is far removed from control over the borrower’s business and from an affirmative duty to prevent the borrower’s negligence toward third parties.
Actual control or an implied agreement to control construction is a factual question, decided against the plaintiffs here by the trier of fact. Before the written loan contract between the lender and the developer was signed and before the plans were approved, the lender could have exercised “control” over the building project only by insisting on changes in the foundation plans as a condition of making the loan. In this respect, the lender here is in no different position than any other lender and exercised no greater “control” over the building project than any other lender who can, if he wishes, withhold funds if he believes the funds will be used in a harmful manner.
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.
*876■ As to the “control” exercised by Great Western after construction began, the only right it had under the contract was to withhold funds if the work did not conform to the plans. The inspections conducted by it were performed for this purpose and to comply with the statutory requirements concerning disbursement of funds. Thus, if the foundation plans . appeared defective, the lender had no right under the contract to insist upon their revision.
. Great Western’s position, as indicated above, was no differ- - ent from that of any other lender: it had no contractual or statutory right to conduct the operations of the builder- .. borrower. Even if it were to be established that Great Western was negligent in its duty to its own shareholders by extending loans to a builder of dubious competence, this did not set in motion the subsequent relationship of the builder to the third parties, and the builder’s superseding negligence insulates Great Western from liability for whatever negligence resulted from merely lending .money. “If the accident would have happened anyway, whether the defendant was negligent or not, . then his negligence was not a cause in fact, and of course cannot be the legal or responsible cause.” (2 Witkin, Summary of Cal. Law (1960) Torts, § 284, p. 1484.)
In short, neither the identity of the lender nor the terms of the loan had any effect whatever upon the builder’s ultimate negligence. The lending of money cannot be said to have ' created a possibility of harm to third parties. The producing institution, here the builder, created the risk, controlled the agency of harm, and thus was the actor under a duty to minimize the risk. The defects in home construction were not caused by the lending of money; they were an incident of the process of physical construction.
The majority assert the lender knew or should have known the developers were inexperienced and undercapitalized and that there were soil problems. Assuming this to be so, the lender may have been remiss in its duty to its shareholders, but that conduct is unrelated to the builder’s negligence in creating structural defects which resulted in injury to plaintiffs. The defects would have occurred if the loans were made by defendant, if they were not made by defendant, if they were made by another lending institution, or if the builders used their own resources exclusively. No relationship, however tenuous, can be established between the loans and the negligence of .the builder. .
The plaintiffs also rely upon the appraisals and inspections hy defendant, These, however, were performed in compliance *877with 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 com mu - nicated 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.
A duty of care is imposed only upon parties creating a risk of foreseeable harm. To find that an institutional lender, merely by providing capital, creates a risk of foreseeable harm in place of or in addition to the borrower who constructs or sets the harmful agency in motion, is a novel concept of tort law. By parity of reason, a finance company would, by lending money for the purchase of an automobile, be liable for injuries to third parties caused by the owner’s negligent operation of the vehicle.
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:
1. The extent to which the transaction was intended to affect plaintiff. Defendant's conduct, including its appraisals, cursory inspections, and the making of loans, was intended for its own purposes exclusively, i.e. for the benefit of its shareholders and depositors. No representations were made to any prospective homeowner and there was no testimony whatever indicating any actual or prospective homeowners relied on any representations. There can be no question that the transaction was intended to affect the lender and the borrower, and was not for the benefit direct or indirect of plaintiffs.
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 *878overseen 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.
3. The degree of certainty that the plaintiffs suffered injury. We can, for purposes of this discussion, concede that plaintiffs suffered injury. The issue is whether liability for that injury is to be imposed on the nearest solvent bystander or upon the party whose negligent conduct produced the injury.
4. Closeness of connection between injury suffered and defendant’s conduct. The lender here built no homes, drew no plans and did not drive in a single nail. Its function was to finance and not to construct. The experience of the institutional lender is in lending money, not in building homes. In short, the two enterprises have no “closeness of connection”; they are significantly remote. There is no evidence that any purchasers knew of the existence of the defendant in its role as lender of construction funds, much less that they relied upon any activity of the lender with regard to the development.
5. Moral blame. Blameworthiness implies responsibility. The lender’s only responsibility here was to its shareholders and depositors. If any moral blame is to be assessed, it must be by them and not the plaintiff.
6. The policy of preventing future harm. Rules of law or conduct intended to deter or minimize the risk of future harm are imposed only upon those creating and controlling the risk of harm. The only manner in which this policy could apply to lenders in the future—and this may be the ultimate result of the majority opinion—is by compelling lenders to become joint venturers with entrepreneurs. This, as indicated heretofore, will result in a substantial alteration in the previously accepted economic relationship between lenders and entrepreneurial borrowers.
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 *879more 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.
For all of the foregoing reasons, I would affirm the judgment.