Summary
In Takach v. Williams Homes, Inc. (1983), 6 Ohio St.3d 357, 6 OBR 411, 453 N.E.2d 656, this court examined the necessity of obtaining affidavits for disbursements from a construction loan in light of R.C. 1311.011(B)(4).
Summary of this case from Thompson Electric, Inc. v. Bank One, Akron, N.A.Opinion
No. 82-1399
Decided August 31, 1983.
Mechanics' liens — Banks and banking — Contracts — Statutory duty of lending institution to require original contractor to provide affidavits prior to disbursement of funds — R.C. 1311.011.
O.Jur 2d Mechanics' Liens § 12.
Pursuant to R.C. 1311.011 (B)(4), a lending institution has a statutory duty to require an original contractor to provide affidavits for protection against mechanics' liens prior to the disbursement of any funds to the contractor. This duty is owed to one, having a loan commitment from the same lending institution for the subject home, who might be damaged by such wrongful disbursement.
APPEAL from the Court of Appeals for Cuyahoga County.
Plaintiffs-appellees, Ronald A. and Nancy L. Takach ("appellees"), brought this action against defendants, Williams Homes, Inc. ("the contractor"), Larry C. Williams, and Cardinal Federal Savings Loan Association ("appellant"), to recover damages from the contractor's alleged misuse of construction loan funds, and $294,132.59 in compensatory and punitive damages for appellant's failure to comply with R.C. 1311.011. Appellees also alleged in their complaint that the appellant breached common-law duties concerning the disbursement of such funds, which were for the construction of their new home.
Appellees, on April 24, 1978, entered into an agreement with Williams Homes, whereby the latter agreed to build a house on land selected by appellees for Williams Homes to purchase and, upon completion of the house, Williams Homes was to sell both the house and land to appellees for $110,170. Appellees made a down payment of $5,000 and Williams Homes used these funds as part payment for the land. Appellees had previously applied to appellant for a mortgage loan to purchase the premises from Williams Homes upon completion of the house. Appellant issued a mortgage loan commitment to appellees for $66,000 at nine percent interest, which was to expire on November 11, 1978.
Further, on May 12, 1978, Williams Homes entered into an agreement with appellant for a construction loan of $80,000 to finance construction. This loan was secured by a mortgage on the land. Appellees were not parties to the construction loan agreement or the note Williams Homes gave to appellant, and the construction agreement made no reference to appellees or their purchase agreement with Williams Homes. Appellees, however, claim that appellant made the construction loan with full knowledge of the purchase agreement and the fact that appellees had already paid $5,000 to Williams Homes for it to obtain the land to build the house.
Construction began in June 1978. During the year, appellant disbursed $68,999.20 of the construction loan to Williams Homes. Appellant, however, never required Williams Homes to produce any evidence, assurance or affidavits for protection against mechanics' liens that it paid all of the subcontractors and materialmen from such funds prior to disbursement to Williams Homes.
Williams Homes misapplied a significant portion of these funds (over $19,000) and became insolvent. Consequently, several mechanics' liens were filed against the premises. Moreover, construction was delayed beyond November 11, 1978 so that appellees' final mortgage loan commitment became ten and one-quarter percent rather than nine percent. Appellant, after having received notice of the mechanics' liens, failed to act to have them removed.
Concerned about the possibility of Williams Homes declaring bankruptcy, the increase in interest rates, and to obtain good and sufficient title to the premises, appellees contacted an attorney. He ascertained the amount they would have to provide for closing if the mechanics' liens were paid, regardless of their validity or enforceability. Appellees, who did not check their liability under the Ohio mechanics' liens law, arranged to borrow additional funds to have delivered to appellant with instructions to pay the claims in full.
After commencing this action, appellees and appellant filed cross-motions for summary judgment. The trial court sustained appellant's motion and overruled appellees' motion. The basis for the trial court's decision was that there was no contractual relationship between appellees and appellant concerning the construction loan from appellant to Williams Homes, which proceeds were to be used in the construction of appellees' house. Hence, under the trial court's theory, appellant owed no duty to appellees in the disbursement of such loan funds to Williams Homes. Appellees appealed the trial court's judgment to the court of appeals, which in a split decision reversed the judgment and remanded the cause for trial.
The cause is now before this court pursuant to the allowance of a motion to certify the record.
Messrs. Benesch, Friedlander, Coplan Aronoff, Mr. Edward Kancler and Mr. Kenneth A. Bravo, for appellees.
Messrs. Parks, Eisele, Bates Wilsman, Mr. Ebert Weidner and Mr. John A. Hallbauer, for appellant.
Appellant presents this court with the following proposition of law.
"Revised Code § 1311.011 does not require a construction lender to protect the interests of a non-borrower while disbursing a borrower's loan funds."
Two loan contracts were made in this case. Appellant made a commitment to appellees for a purchase money mortgage plan and also a construction loan to Williams Homes. There is no dispute that appellant properly disbursed the mortgage loan funds. Similarly, there is no question that appellant improperly disbursed the construction loan funds, since it did not comply with the mandatory statutory duty under R.C. 1311.011 (B)(4) to obtain affidavits from Williams Homes for protection against mechanics' liens prior to the disbursement of funds to the contractor. Appellant's duties in relation to the contractor's loan are at issue. The question presented is whether pursuant to R.C. 1311.011 a lender, when disbursing the contractor-borrower's funds, has a duty to protect the interests of appellees, based upon the lender's commitment of a mortgage for the subject home.
R.C. 1311.011 (B)(4) specifies the duty of lending institutions concerning such affidavits as follows:
"No lending institution shall make any payment to any original contractor until the original contractor has given the lending institution his affidavit stating:
"(a) That the original contractor has paid in full for all work performed and for all labor, materials, machinery, or fuel furnished by the original contractor and all subcontractors, materialmen, and laborers prior to the date of the closing of the purchase or during and prior to the payment period, except such unpaid claims as the original contractor shall specifically set forth and identify both by claimant and by amount claimed;
"(b) That no claims exist other than those claims so set forth and identified in the affidavit required by division (B)(4) of this section."
Therefore, considering the foregoing statute, appellant has a duty to appellees, pursuant to the construction loan agreement with Williams Homes, because R.C. 1311.011 (B)(4) requires a lending institution not to make "any" payments to the contractor until the contractor has given the lending institution the required affidavits. The General Assembly, by the use of the word "any" in the statute, does not distinguish between payments on the purchase and mortgage loans. Thus, pursuant to the statute, the lending institution has a duty to appellees regardless of whether the funds are disbursed to the contractor under either the mortgage or construction loan agreement. This duty is statutory and under the provisions of the statute is not owed solely to the contracting parties. The duty is owed to one, having a loan commitment from the same lending institution for the subject home, who may be damaged by a wrongful disbursement.
The determination of this case rests upon a consideration of R.C. 1311.011 (B)(4) in conjunction with R.C. 1311.011 (A)(3), the latter of which reads as follows:
"`Lending institution' means any person that enters into a contract with the owner, part owner, purchaser, or lessee to provide financing for a home construction contract or a home purchase contract, which financing is secured, in whole or in part, by a mortgage on the real estate upon which the improvements contemplated by the home construction contract are to be made or upon the property that is the subject of the home purchase contract, and that makes direct disbursements under the contract to any original contractor or the owner, part owner, purchaser, or lessee."
There are two contracts involved, a purchase loan and a construction contract. R.C. 1311.011 (B)(4) refers to any disbursements to any original contractor and does not distinguish between contracts. Consequently, the statutory duty not to make disbursements without obtaining affidavits is to anyone who could be injured by a failure to comply with the statute. The disbursements in this case were made pursuant to the construction loan agreement to which appellees were not a party. It is reasonable to assume that lending institutions do not function in a vacuum. It is apparent that the lending institution had at least constructive knowledge of appellees' purchase loan.
For the foregoing reasons, the judgment of the court of appeals is affirmed.
Judgment affirmed.
CELEBREZZE, C.J., SWEENEY, HOLMES, C. BROWN and HOFFMAN, JJ., concur.
W. BROWN, J., dissents.
REILLY, J., of the Tenth Appellate District, sitting for LOCHER, J.
HOFFMAN, J., of the Fifth Appellate District, sitting for J.P. CELEBREZZE, J.
Because I believe that the lender's duty under R.C. 1311.011 (B)(4) relates solely to transactions in which the lender pays the contractor-builder with funds borrowed by the homeowner or home purchaser, or pays the funds to the homeowner or home purchaser himself, I must respectfully dissent.
R.C. 1311.011 is the homeowner's amendment to the mechanics' lien statute. Its purpose is to protect home purchasers from paying the contract price for their homes and then having to contend with mechanics' liens which remain on their property. Appellees argue, and the majority so holds, that this statute places an affirmative duty on a lending institution to protect the interests of home purchasers and prohibits lenders from making any payments to contractors prior to receiving a required affidavit. In reaching this conclusion the majority relies on R.C. 1311.011 (B)(4) which reads as follows:
"No lending institution shall make any payment to any original contractor until the original contractor has given the lending institution his affidavit stating:
"(a) That the original contractor has paid in full for all work performed * * * by * * * all subcontractors, materialmen, and laborers prior to the date of the closing of the purchase * * * except such unpaid claims as the original contractor shall specifically set forth and identify both by claimant and by amount claimed;
"(b) That no claims exist other than those claims so set forth and identified in the affidavit * * *."
However, the majority's interpretation would impose liability upon a lender for mechanics' liens on property despite the fact that the purchaser has no obligation to pay those debts and no need to suffer any resulting liens on the property. This result could not have been what the General Assembly intended when it enacted this statutory provision.
In the first place, R.C. 1311.011 (B)(4) applies only to "lending institutions" which are defined in R.C. 1311.011 (A)(3) as: "* * * [A]ny person that enters into a contract with the owner, part owner, purchaser, or lessee to provide financing for a home construction contract or a home purchase contract * * * and that makes direct disbursements under the contract to any original contractor." (Emphasis added.) In the present case, the bank was not a lending institution for purposes of R.C. 1311.011. The contract to provide construction financing was between the lender and the contractor and did not mention appellees at all. There was a separate contract for the bank to provide a purchase money mortgage loan to appellees but it appears this loan was not for home construction and thus does not fit the definition. In addition, it is undisputed that these latter funds were properly paid. The funds under this second contract were to be used to purchase the home after construction was completed.
R.C. 1311.011 (B)(4) mandates that the lender has a duty to the borrower in certain circumstances to protect his interests by withholding payment of the borrower's funds until the contractor-builder demonstrates by affidavit that all subcontractors and materialmen have been paid. Those circumstances exist when the lender is disbursing the borrower's funds to the borrower himself or to a builder-contractor on the borrower's behalf. The facts of the case at hand demonstrate that those circumstances are not present. R.C. 1311.011 does not require a lender to protect the interests of a non-borrower while dispensing a borrower's loan funds. While the lender may choose to safeguard against mechanics' liens in order to protect its own security interests in the property, it has no statutory duty to do so on behalf of a stranger to that transaction. In the present case, none of the funds paid by the lender were supplied by or on behalf of appellees. Instead they were paid from the builder's line of credit.
In the second place, even if appellant did owe a duty, appellees suffered no damage as a result of the manner in which the construction funds were disbursed but were themselves the cause of any loss sustained. Part of the purpose of the statute is to force mechanics' lienors to obtain payment from the contractor-builder rather than the home purchaser who has already paid the builder for those goods and services. The statute provides complete protection to purchasers by establishing procedures whereby the home purchaser may limit all known perfected liens to the unpaid balance of the contract price, R.C. 1311.011 (B)(2), and to eliminate completely all liens for which the purchaser did not obtain actual notice by receiving a copy of the lien affidavit before making payment to the builder of the full contract price. R.C. 1311.011 (B)(1) and (3).
R.C. 1311.011 (B)(1) deals with protecting purchasers against liens which might otherwise be perfected after the closing. "No subcontractor, materialman, or laborer has a lien to secure payment for work done * * * if the owner * * * paid the original contractor in full or if the purchaser has paid in full for the amount of the home construction or home purchase contract price, and the payment was made prior to the owner's * * * receipt of a copy of an affidavit of mechanic's lien * * *." In other words, if appellees in the present case had closed on the house and paid the contractor the full contract price before receiving notice of any mechanics' liens, those mechanics' liens could not have attached to the property.
Subdivision (B)(2) protects the purchaser against liens which are perfected before he has paid the full contract price. "If the original contractor has not been paid in full * * * no subcontractor, materialman, or laborer has a lien to secure payment for work done * * * for an amount greater than the amount due under the home construction contract that has not been paid to the original contractor * * * or for an amount greater than the amount of the home purchase contract price that has not been paid to the original contractor. The total amount of all liens * * * that may be enforced in lien foreclosure proceedings shall not exceed the amount due under the home construction contract that has not been paid to the original contractor or the amount due under the home purchase contract that has not been paid to the original contractor." Mechanics' liens claimants are entitled only to share pro rata in the unpaid balance of the contract price.
In the present case, if appellees had knowledge of the existence of mechanics' liens prior to closing and paying the balance of the contract price, appellees could simply have paid the mechanics' lienors on a pro rata basis up to the unpaid amount of the contract price and avoided the controversy. The existence of these provisions demonstrates that the lender's making payments, without receiving affidavits, did not impair appellees' new statutory rights to limit all known perfected liens or all liens after the contract price was paid. Appellees had complete protection against double payment.
In conclusion, appellees did not pursue the remedies available to them under the statute. Thus, even if R.C. 1311.011 created a duty on the part of the lender to appellees, a breach of that duty would not have been the cause of appellees' losses. However, I would conclude that in the circumstances of the present case the statute imposed no duty upon appellant to protect appellees' interests. Similarly, I find no authority which would require imposition of a common-law duty by the lender to a non-borrower in these circumstances.
For the foregoing reasons, I would reverse the judgment of the court of appeals.