OH, East is East, and West is West, and never the twain shall meet,
Till Earth and Sky stand presently at God’s great Judgment Seat;
But there is neither East nor West, Border, nor Breed, nor Birth,
When two strong men stand face to face, tho’ they come from the ends of the earth!
-- Rudyard Kipling, "The Ballad Of East And West."
When he penned those lines, Rudyard Kipling was writing about a thief who stole a beloved horse and is tracked down. It's a poem I thought of when I read the case of Hoida, Inc. v. M&I Midstate Bank, 2006 WI 69.
I couldn't help but recall the phrase never the twain shall meet as the Wisconsin Supreme Court considered whether subcontractors in Wisconsin can sue banks for negligent disbursement of construction funds.
The answer to that question, which will surprise nobody, is no: Subcontractors are barred from that type of suit by public policy, that public policy being "let's not overburden title companies," apparently.
In Hoida, M&I Bank agreed to lend money for a construction project, and hired (informally) McDonald Title Company to act as a disbursing agent for it. Hoida, Inc. was one of the subcontractors on the project, building prefabricated wooden wall sections. Hoida periodically invoiced the lender, and periodically did not get paid, but kept on working, for some reason, eventually running up a bill totaling $291,000 or so (by the time of the suit, Hoida claimed it was owed about double that.)
The construction project was riddled with questions, most of the questions being raised by the lender and the title company, who wrote to the builders to ask why subs weren't getting paid and visited the project, and ultimately refused to disburse any more funds until lien waivers were obtained. Eventually, M&I learned that the contractor had embezzled the money and foreclosed on the property, leading Hoida to sue M&I and McDonald.
Hoida raised two claims: breach of contract, and negligence. It lost on both in the trial court, and appealed. The Court of Appeals ruled against it, and undeterred, Hoida took its case all the way to the Supreme Court of Wisconsin, which likewise held that Hoida was out of luck.
The Court first picked apart Hoida's breach-of-contract claims:
The complaint does not allege whether the duties outlined ...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. ....Hoida did neither. Therefore, its attempted breach of contract claim fails to state a claim for relief.That's the total analysis given to the complaint, with no discussion of the "liberal construction of pleadings" standard in Wisconsin or whether the facts construed in Hoida's favor after looking at the pleadings could potentially be read to claim a breach of contract of some sort. Fans of the Rabideau v. Racine case might wonder: If the Supreme Court of Wisconsin could read a pro se small claims complaint to allege loss of property, why can't it read this complaint to allege a third-party beneficiary breach of contract?
You'll be left wondering, though -- and wondering why the Supreme Court bothered to analyze the pleadings when the case was before it following the entry of summary judgment against Hoida. Granted, the SOP for summary judgment is to examine the pleadings to see if a cause of action is stated before moving on to determine whether one or the other side has shown an entitlement to summary judgment, but as I read the case, both M&I Bank and McDonald, as well as possibly the circuit court, felt that Hoida did state a claim for relief on contract theory -- because they moved for (and granted) summary judgment, not judgment on the pleadings.
But who am I to second-guess the decision of four Wisconsin Supreme Court Justices?
Having settled the breach of contract claims by determining that Hoida hadn't included the magic words that would entitle it to proceed on that theory, the Court then moved on to whether Hoida could sue the bank for negligence in disbursing the funds or supervising the project.
The Court jumped around in discussing this case -- noting that courts are reluctant to address policy factors before a trial on the merits of the case, but noting, too, that they could do just that -- decide a case on public policy without a fact-finding hearing -- while also noting that the facts here weren't very helpful in making a pre-trial decision on whether or not to dismiss the case:
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.Got that? It's an issue of first impression, and the Court felt there were facts that were "not pleaded" (again, no mention of the fact that this was on summary judgment which implies, at least, that there were affidavits of proposed undisputed facts on file with the Court) that would be helpful to decide the case so...
... so why not decide the case anyway by just assuming the facts we want to be established are there! Yay for jurisprudence!
The Court then spends a while discussing the duty of ordinary care that we all owe to each other, presumably including "banks" in "we all," but it's not clear why the four majority justices do that -- as Dissenting Justices Bradley and Butler pointed out:
....I am perplexed by the majority's approach here. It is as though the majority initially wrote the opinion limiting liability based on duty. ....Then, recognizing that such an approach is inconsistent with Wisconsin law, it reworded some things and tagged on an ending that limits liability based on public policy, without deleting the initial duty analysis. ....
Hoida's claim, it spends approximately twenty lengthy paragraphs of discussion to determine, in essence, that M & I and McDonald Title's liability is limited because they did not owe certain duties to Hoida. .... Substituting the word "obligation" for the word "duty," the majority concludes that neither M & I nor McDonald Title had "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."
The majority's decision, as you'll note, rests in part on the idea that Hoida did not cite a Wisconsin case establishing the duty it wanted to ascribe to M&I -- which, of course, Hoida could not do because, as the majority had already noted, Hoida presented a claim of first impression.
Practice Tip: If you want to establish a brand new claim that's never existed in Wisconsin before, it would be very helpful if you would cite to a case establishing, in the past, this brand new claim that's never existed before.
Then things get even a little more muddled. Having determined that the contract established no rights whatsoever for Hoida, the Court decided to see what duties M&I, McDonald, or the project architect might have owed to Hoida under the common law -- the common law of torts, of course, applying only where there is no contract in place.
So where did the Court look for guidance on this duty? At the contract:
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.
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...
The Court then determined that M&I and McDonald -- the parties to the contracts, with the embezzling contractor, never undertook any of the duties Hoida wanted to ascribe to them:
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.
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.... 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.
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.
(I embellished that part for a reason that I'll get to in a minute.) Having determined that M&I and McDonald simply owed no duty to Hoida -- a decision that allowed private parties, contracting privately amongst each other before ever involving Hoida, to limit their common law, extra-contractual duties to Hoida -- the Court seems, then, to have wanted to shore up that logic, and so it went on to rule, too, that even if there were a duty to a noncontracting third party that could not be contractually abrogated, public policy precluded Hoida's claim:
Here, we conclude that permitting recovery would place too unreasonable a burden on McDonald Title, who acted solely at the direction of M & I. ... 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.But, in case you're a banker and you were thinking that public policy preclusion might not be enough to avoid liability, don't worry: the Court has you covered:
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.
So the Court made a determination that M&I exercised ordinary care -- that it did not breach a duty -- despite the fact that it (a) had determined there were not essential facts in the record to make a decision and (b) had determined that no duty existed and (c) determined that even if a duty did exist, public policy precluded suit.
Hoida is thus something of a security blanket for bankers, it seems.
But if you're not a banker -- if you you wanted to sue the bankers-- don't get mad at the Court, because it's totally not their fault that the decision came out this way:
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:See? It's not the Supreme Court of Wisconsin's problem: they're just quoting the Court of Appeals, which is only doing what the legislature wanted the Court to do.
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."
All of this might not have been necessary, as I've been implying; it might not have been necessary for the Supreme Court of Wisconsin to enact a force-field dog around the Mr. Potato Head of Wisconsin Banking if the courts had simply let the case develop. Remember that section I highlighted, above? I'll give it to you again:
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.
What do you make of that? What I make of it is the very first thing I asked myself as I read this case: Why did Hoida keep working? Hoida made nearly $300,000 worth of goods and not only didn't get paid more than about 10% of the money it was owed, it apparently never did very much to try to collect the money. The opinion points out that other subs went to the bank and got paid, and, of course, a subcontractor who's not getting paid can file a claim for lien and can refuse to do more work.
So what the Court could have done is determine, as a matter of law, that Hoida was more negligent than M&I Bank or McDonald's or the architect, because it just kept on working. The Court could have said "Look, we're not sure we're going to recognize a claim of lending negligence here, and we're not sure that if a claim is recognized it wouldn't be precluded by public policy. What we are sure of is that a company who just keeps on churning out materials without ever bothering to stop and see if it's getting paid is more than 50% negligent as a matter of law," and stopped there. That would be simply applying a long-established rule of law and would put the burden on subcontractors to either demand they be paid or stop working, which would have the effect of reducing the amount of money contractors might embezzle, and would reduce the workload on banks, who wouldn't have to search out subs but could simply sit and wait until a sub contacted them for payment not being disbursed, while still allowing for the possibility of a common law remedy in the future.
In Kipling's poem, which is where I started out, a thief steals a valuable horse and the son of the horse owner gives chase -- when the two meet up, each claims that he could have destroyed the other, but they befriend one another and join forces:
They have looked each other between the eyes, and there they found no fault,
They have taken the Oath of the Brother-in-Blood on leavened bread and salt:
They have taken the Oath of the Brother-in-Blood on fire and fresh-cut sod, 85
On the hilt and the haft of the Khyber knife, and the Wondrous Names of God.
The Colonel’s son he rides the mare and Kamal’s boy the dun,
And two have come back to Fort Bukloh where there went forth but one.
It would be a happy ending if the poem stopped there -- just as the Supreme Court of Wisconsin could've forced subcontractors and lenders to join forces to make sure subs get paid and contractors don't get to take off with the money. But both the Court and the poem went on a bit longer:
And when they drew to the Quarter-Guard, full twenty swords flew clear—And only the poem had a happy ending as people realized they could work together:
There was not a man but carried his feud with the blood of the mountaineer.
“Ha’ done! ha’ done!” said the Colonel’s son. “Put up the steel at your sides!
Last night ye had struck at a Border thief—to-night ’t is a man of the Guides!”