Opinion
Rehearing Denied Aug. 30, 1967.
For Opinion on Hearing, see 73 Cal.Rptr. 369, 447 P.2d 609. Harris K. Lyle, Van Nuys, for appellants. Overton, Lyman & Prince, Ernest E. Johnson, Phyllis M. Hix and John McClure, Los Angeles, for appellants Meyer Pritkin and others.
Swerdlow, Glikbarg & Shimer, Irving A. Shimer, Beverly Hills, William D. Moore and Michael H. Shapiro, Los Angeles, for respondent Great Western Savings & Loan Assn.
FOURT, Associate Justice.
This is an appeal from a nonsuit granted in two actions which were consolidated for trial pursuant to stipulation and pretrial order. The appeal is from the minute entry granting a nonsuit which is entitled to the same treatment as a final judgment; hence the appeal is proper. (Budrow v. Wheatcraft, 115 Cal.App.2d 517, 252 P.2d 637; Costa v. Regents of University of Cal., 103 Cal.App.2d 491, 229 P.2d 867.)
The plaintiffs in each action were similarly situated home owners in the Weathersfield Tract, a residential subdivision located n the Conejo Valley at Thousand Oaks in the County of Ventura, California. The complaint in each of the consolidated actions joined as defendants certain developers, contractors, subcontractors, lending institutions and other persons involved in the development of the Weathersfield Tract. Each complaint requested rescissions and restitution or alternative damages for the extensive losses which allegedly resulted from defective home construction.
One of the principal defendants was Great Western Savings and Loan Association (hereinafter sometimes referred to as Great Western) the primary lender and financial backer of the project. Also named as defendants in each of the actions were various individuals and copartners (hereinafter referred to collectively as Pritkin-Finkel) who assisted in the financing by purchasing certain promissory notes secured by second deeds of trust on the homes. The Pritkin-Finkel defendants filed cross-complaints joining as defendants a number of Weathersfield home owners not included among the plaintiffs in either action. Their cross complaints allege the impairment of their security and seek to impose a lien on any recovery the home owners might obtain from Great Western.
Pursuant to stipulation and pretrial order, the court first proceeded with trial solely on the issues relating to the alleged liability of Great Western. A jury was impanelled and the plaintiffs and cross-complainants introduced extensive evidence at the close of which Great Western moved for and was granted a nonsuit.
Plaintiffs contend on appeal that the trial court improperly granted Great Western's motion for nonsuit and erred in striking portions of the testimony of Judge Alfred Gitelson. The broad and fundamental issue presented is how extensively may a financial institution become involved in residential tract development in California before it will be considered to bear, as one of the developers or otherwise, commensurate responsibility and financial liability to the purchasers for basic structural defects. We find, under our view of the law, that the plaintiffs and cross-complainants were entitled upon the evidence adduced to have the jury determine the issue of Great Western's liability.
The evidence discloses that the Weathersfield project is a typical example of contemporary tract development. The project Goldberg knew that his business enterprises were financially unable to complete these purchase agreements, so he approached Judge Alfred Gitelson, his former counsel in real property matters, in an attempt to find someone who would lend him the money to purchase the acreage and build a tract of homes, allowing him to repay the loan and divide the profits when the homes were sold. Judge Gitelson felt the project was too large for private capital to handle, but suggested that some savings and loan institution might make a deal whereby they would put up the money, acquire the land, and then arrange for Goldberg to reacquire it by means of advances when the construction loans were recorded.
Goldberg thereafter contacted Elwood Teague, vice-president in charge of lending and member of Great Western's loan committee, who agreed that Great Western might purchase the 100 acres on such a financing arrangement if their appraisal confirmed the purchase price value. Later, Goldberg advised the judge that Great Western agreed to finance the development of the 100-acre parcel in this manner, that his cash flow under the proposed arrangement would enable him to exercise his purchase options, and that he had decided to do this even though the cost would be 50 percent of his anticipated profits, as Judge Gitelson had earlier estimated. Great Western was interested in developing a volume of new construction loan business and as a consequence demanded and received a right f first refusal as to the first trust deed financing for all individual purchasers of homes in the proposed Weathersfield tract. Great Western also expressed an interest in financing the future development of the additional 447 acres and exacted a gentlemen's agreement that it might, in that event, enjoy a similar right of first refusal.
Goldberg understood that he would have no personal liability under these financing arrangements, but that the homes would be sold with a very low down payment and, while Great Western would receive 50 percent of the total profits in the form of loan fees and other charges, he would receive his share of the profits in the form of second trust deeds on the homes. Although the record is not entirely clear, it appears that Goldberg originally anticipated a gross profit of almost $2,000 per house. Great Western's loan charges would be approximately $600 per house. Goldberg apparently calculated that he would receive second trust deeds of $1,200, or so, which he could sell at a 50 percent discount, thus insuring himself a prompt cash flow of $600 per house. He established a new corporation, Conejo Valley Development Company (hereinafter sometimes referred to as Conejo) to handle the tract development.
Fred Strohmenger, Great Western's vice-president in charge of tract loans, personally inspected the property and appraised the 100 acres at $340,000. It was thereupon proposed that Goldberg would pay $190,000; Up to this time Goldberg had engaged principally in subdividing raw acreage and had built only a few houses. Keith Brown had built only 50 homes, few with slab foundations, prior to 1958, but his general contractor's license entitled him to become the responsible managing employee of Conejo which was formed by Goldberg and brown in March 1959 with a total capitalization of $5,000 to develop the projected Weathersfield tract of 300 homes.
Great Western, which had no previous experience with Goldberg, might have been expected, as was its custom under such circumstances, to obtain additional historical and credit information. Even in the case of known responsible contracts Great Western, before finally approving a construction loan generally, would require that completed plans, specifications, tract maps, borrower's financial statement, feasibility report and general area report be submitted in advance to their loan committee. Although admittedly none of these items had been received on April 27, 1959, the jury might properly infer from the committee minutes that final approval of a tract loan, rather than mere approval for the purchase of acreage, was then granted. Surely Goldberg would not have agreed to pay $190,000 on acreage worth $340,000 and allow Great Western to take title were he not assured that thereafter he could obtain from the same source construction loan advances sufficient to enable his corporation to exercise the option to repurchase. In any event, Goldberg, possibly anticipating loan approval, on April 24, directed the escrow holder to send $50,000 to the sellers, ostensibly to secure an extension of time for performance.
Conejo was, by amended escrow instructions dated June 12, 1959, substituted as purchaser in lieu of South Gate and all funds deposited theretofore by South Gate were credited to Conejo. Simultaneously an escrow was opened between Conejo as seller and Great Western as buyer wherein it was provided that Great Western would, on or before June 20, 1959, deposit $150,000 which was to be transferred to Conejo when title to the 100 acres, as approved by engineers Ramelli and Martin, was vested in Great Western. On June 18, 1959, Ramelli and Martin approved title and on June 19 Conejo authorized the payment of an additional $50,000 to the McCreas, ostensibly to secure a deed to the 1.6 acres allotted to model home development. On the same date Great Western sent to escrow an executed option agreement whereby the 100-acre tract might be repurchased from Great Western at any time within a one-year period, singly or in three separate parcels, for a full price of $180,000.
The McCreas' deed to the 1.6-acre model area was duly recorded "without consideration and as an accommodation" on July 2, 1959, and on July 7 Conejo authorized another, unexplained payment of $50,000 to the McCreas. The deed to Great Western of the balance of the 100-acre parcel excepting therefrom the 1.6-acre model home tract, was recorded on July 20th, and title remained vested in Great Western until the Meanwhile Conejo, which at no time employed an architect, had obtained from L.C. Major Company prepared plans and specifications for the several model homes they intended to construct. These they submitted to Great Western for approval on or about July 20, 1959; no changes were recommended by the lender and these plans were subsequently used without substantial alteration. Immediately upon recordation of the deed to the model home tract, Conejo proceeded with grading on both the model home sites and the principal tract, the latter under an indemnity agreement to protect Great Western's interest. Construction started and by August 14, 1959, notices of completion had been filed and three model homes, completely landscaped and furnished, stood in the heart of the otherwise barren 100-acre parcel. By that date, also, Conejo had received approval from the real estate commissioner's office for tract subdivision and the sale of some 250 lots, including the three model homesites. Conejo was required, as one of the loan conditions, to pre-sell a certain number of homes before Great Western would record the individual construction loans which would entitle Conejo to withdraw funds for tract construction. Most homes were, therefore, sold to prospective purchasers on the "pink" real estate commissioner's report; a lot was reserved on a deposit of less that $400 and the purchaser submitted a loan application to Great Western. Within 30 days all the homes had been pre-sold in this manner and Conejo was able to withdraw sufficient funds to exercise the repurchase option.
There was cumulative evidence that adobe soil was common in the Weathersfield area and some evidence that, in the exercise of due care, Great Western was, or should have been, on notice that this condition prevailed. Adobe clay, which is typically black or dark gray, may readily be distinguished by the naked eye in dry weather in areas where the ground cover is sparse. This clay, known to the building industry as "expansive" soil, has a capacity to absorb large quantities of water and may expand up to five or more times its dry dimensions; when it later dries, it contracts and the surface cracks into plates, frequently hexagonal in shape and perhaps 10 or 12 inches in diameter. Expansive soil, which is frequently encountered in southern California, calls for special foundation reinforcements or other techniques to allow slab foundations to absorb the earth movement without cracking, buckling, or otherwise distorting the foundation structure.
Great Western was at all times concerned, in the interest of protecting its security, that the homes should prove to be an "acceptable saleable product," especially since Goldberg's financial condition was "not very good." On this account Great Western investigated water and sewer conditions in the Weathersfield area. Geologist Thomas Bailey, who prepared and submitted an independent water survey at the request of Great Western, noted therein that cracks and fissures in the subsurface volcanic rocks in that area were filled with a clay-type deposit known as bentonite which allowed no space for water. The report further advised that the property had a deficiency of water for subdivision purposes although enough ground water might be found by drilling wells on selected sites to supply about 600 homes with water for five to ten years, even in the event of continued drought. Great Western was satisfied with the report and the interim water supply, anticipating the extension of metropolitan water service; it assumed the risk of a water shortage, requiring the developers only to construct water service; it assumed the risk of a water shortage, requiring the developers only to construct water service lines. A similar ominous reference to clay soil appeared in the report of Ralph Stone Company regarding a proposed private sewage facility to be constructed off the Weathersfield tract to provide service for the homes therein; evidence failed, however, Presumably anyone knowledgeable as to soil conditions in southern California would, upon inspection or inquiry in the area, be placed on notice at least that the soil in the tract deserved careful investigation. In fact, William S. Colvard, who was employed as subdivision officer by Conejo during the summer of 1959, testified that it was common knowledge among the farmers who inhabited the area before the suburban encroachment, that Conejo Valley soil was largely adobe and difficult to farm. Charles Borse, an employee of another Goldberg and Brown entity, Conejo Valley Escrow Company, also noted this soil condition.
The Donald R. Warren Company, a firm which performed soil engineering work, was requested on various occasions during the course of tract preparation, both by Conejo and by engineers Ramelli and Martin, to provide certain grading studies and reports required by Ventura County. Donald R. warren submitted several letter reports to Conejo on the subject of soil composition in the Weathersfield area, the earliest dated July 7, 1959, shortly before Conejo tendered final construction plans and specifications to Great Western. These studies indicated that the Weathersfield area consisted mostly of expansive soil, and Warren submitted therewith its recommendations for the type of foundation construction which would compensate for this condition. These recommendations admittedly were not followed by Conejo and there is no evidence that they were transmitted to anyone else. No evidence was introduced concerning the additional expense Conejo presumably would have incurred by incorporating these recommendations into the prepared plans and specifications it utilized.
It is apparent, even from the sketchy information disclosed by the record, that Goldberg exceeded his depth in both expertise and finances. When he first approached Great Western he disclosed ultimate plans to create, on the 1600 or more acres that comprised the entire McCrea Ranch, a complete planned community of perhaps 2000 homes. It appears that in his enthusiasm to develop the first 100 acres he was led to pare profits to a dangerously slim margin. The construction of 250 homes thereon with a slim budget, limited resources, and closely-timed cash flow requirements taxed his ingenuity and allowed few deviations from original cost estimates. Colvard testified that, although the grading engineers suggested that Conejo comply with FHA grading standards which required all homes to drain to the street, Goldberg refused because the cost would be an extra $200 per lot. From such evidence a jury might reasonably infer that Goldberg was forced to engage in the type of cost-cutting which requires the expert judgment of a tightrope walker. The record is replete with inferences that as construction progressed, Goldberg's financial position deteriorated; whether this was due to inexperience in cost estimating and projections, over-extension in additional land acquisitions, or other causes is left to conjecture. In any event, there is testimony that he ultimately discounted the notes secured by second trust deeds for cash at 43 percent of their face value, thus forfeiting profits to his need for liquid capital.
We feel that Great Western is not entitled to hold itself aloof from the consequences of these events. It is a matter of fact that Great Western, by lending the sum of approximately three millions dollars to an inexperienced developer, whose own direct financial contribution was nominal by comparison and who was unprepared to assume any personal financial responsibility for the venture, at least demonstrated a bland disregard for the ultimate consumer, let alone its own security. Surely Great Western, no less than Goldberg, was motivated by prospective profits since it exacted for its loan not only maximum fees and charges, but a right of first refusal to place permanent first trust deeds on the homes under penalty that the developer While it is clear that Harris Goldberg's cash investment was small, the record leaves the exact nature of that investment to conjecture. Conejo's original capitalization was a mere $5,000. On August 4, 1959, Conejo submitted a financial statement to Great Western showing a stated capital of $325,000, including $320,000 attributed to an increase in equity on homes not yet constructed with the notation that such transactions were then in escrow. Mr. Finkel, a qualified certified public accountant, testified that officers of financial institutions should recognize that the inclusion of projected profit on houses not yet in being was definitely contrary to any generally accepted accounting practice. Mr. Finkel thereafter testified, interpreting a July 31, 1959, combined financial statement, that the combined net worth of the Goldberg enterprises as of that date was only $35,950.93. Great western in early August received and approved these financial statements without further inquiry, knowing that no Weathersfield houses were in escrow, as implied, because none would be available for sale until August 14 or thereabouts. Despite the facts disclosed by these financial statements, Goldberg indicated that he paid approximately $190,000 into escrow, completely landscaped and furnished several display models, and initiated substantial grading activities before the principal construction loans were recorded. In view of the fact that he made no disclosure concerning his personal finances, or the source and application of these funds, and since Conejo had no other income, the only plausible inference in the absence of affirmative evidence to the contrary is that this "investment" in fact represented advances against anticipated future loan withdrawals or sales income.
The pretrial statement as amended, sets forth the issues to be determined in the first phase of the trial. These are whether a principal-agent, joint venture, or joint enterprise relationship existed between Great Western and Conejo, Goldberg or Brown; whether in the absence of any such relationship Great Western had an independent duty to Weathersfield home purchasers; and whether Great Western, by nondisclosure or otherwise, committed actionable fraud upon which it could be held liable for damages. All other issues were postponed for consideration in the final stages of the trial.
It is the essence of a motion for non suit that the grounds be stated explicitly and that only the grounds so specified will be considered by an appellate court since a nonsuit will not be granted for merely technical error, but only if it is clear that the defect could not have been remedied at the trial had it been called to plaintiff's attention. (Lawless v. Calaway, 24 Cal.2d 81, 93-94, 147 P.2d 604.) Although the grounds of subject motion were drawn with a broad brush, we sympathize with court and counsel that it is difficult to argue from a negative position. The motion as we interpret it charges that plaintiffs failed to introduce evidence upon which we would be justified in imposing either imputed liability or any independent duty upon Great Western to plaintiff purchasers or the holders of second encumbrances for damage to these properties.
"While in most appeals it is the duty of a reviewing court to indulge every reasonable intendment in favor of sustaining the trial court, substantially the reverse is true when the appeal is from a judgment of nonsuit. Thus, 'The granting of a motion for nonsuit is warranted " * * * when, and only when, disregarding conflicting evidence, and giving to plaintiff's evidence all the value to which it is legally entitled, indulging in every legitimate inference which may be drawn from that evidence, the result is a determination that there is no evidence of sufficient substantiality to support a verdict in favor of the plaintiff." [Citations.]' " (McCafferty
Although we concur with the trial court that plaintiffs and cross-complainants adduced no substantial evidence of the existence of agency, joint venture or joint enterprise, we cannot say as a matter of law that Great Western born no duty to protect the consumer public from latent structural defects under circumstances such as these where it constituted the principal energizing force behind a large subdivision of law-priced, publicly offered homes. Nor do we believe it inconceivable that a jury, presented with such facts, might properly conclude that Great Western bore an obligation to this segment of the public which it failed t fulfill.
The trial court with exceeding patience allowed plaintiffs and cross-defendants to adduce evidence from which a relationship of mutual agency might be inferred. The evidence, however, established without dispute the lack of an express agreement, either written or oral, which might tend to create a joint interest between Great Western and Conejo (sometimes hereinafter used to refer to Conejo, Goldberg, and/or Brown, collectively). The testimony of the principal witnesses, without exception, disclosed specific disclaimers of intention by Great Western and Conejo, respectively, that a joint interest of any kind should exist between them. It remains then to determine whether the relationship of joint venture of mutual agency may be imposed by virtue of the circumstances.
A joint venture "is an undertaking by two or more persons jointly to carry out a single business enterprise for profit" (Stilwell v. Trutanich, 178 Cal.App.2d 614, 618, 3 Cal.Rptr. 285), by contrast with a partnership which generally contemplates a continuing relationship. (Freedman v. Industrial Acc. Com., 67 Cal.App.2d 629, 154 P.2d 922; Orlopp v Willardson Co., 232 Cal.App.2d 750, 43 Cal.Rptr. 125.) The elements required to constitute a joint venture are: (1) an agreement to share profits and/ or losses; (2) a community of interest in the object of the undertaking; (3) a mutual and equal right, or the right in some substantial degree, to direct and govern the conduct of the other putative joint venturers with respect to the object of the undertaking; (4) a fiduciary relationship between the parties; (5) joint participation in the conduct of the business; and, in most cases, (6) a joint proprietary interest in the subject matter of the venture. (Sedia v. Elkins, 201 Cal.App.2d 440, 450-451, 2d Cal.Rptr. 278; Stilwell v. Trutanich, supra, 178 Cal.App.2d p. 618, 3 Cal.Rptr. 285; James v. Herbert, 149 Cal.App.2d 741, 748, 309 P.2d 91; Beck v. Cagle, 46 Cal.App.2d 152, 161, 115 P.2d 613.)
When the existence of a joint venture is alleged by third parties in an action against one or more of the purported conventurers on the basis that such persons relied upon the representations of the parties in this regard (Corp.Code, § 15016; Hansen v. Burford, 212 Cal. 100, 106, 112, 297 P. 908; Foster v. Fisher, 44 Cal.App.2d 33, 37-38, 111 P.2d 935) the court may examine the surrounding circumstances, but in no event will the law presume such a relationship without "clear evidence of a community of interest in a common undertaking in which each participant has or exercises the right of equal or joint control and direction." (Roberts v. Craig, 124 Cal.App.2d 202, 208, 268 P.2d 500, 504, 43 A.L.R.2d 1146.) The financer of an operation, even though he may pay and guarantee payment of bills or takes an interest in the venture's progress, does not thereby become a joint venturer unless there is evidence that he has taken part in the general management of the enterprise. (Foster v. Fisher, supra, 44 Cal.App.2d p. 38, 111 P.2d 935.) Nor does the action of a lender, in the exercise of the powers granted it by the loan agreement to insure the preservation of its security, constitute management of the borrower's business which would render it a joint venturer. (Enos v. Picacho Generally the existence of a joint venture is a question of fact (Spier v. Lang, 4 Cal.2d 711, 716, 53 P.2d 138), but plaintiffs and cross-complainants maintain that the conduct of the parties herein,as a matter of law, justifies the inference that the loan documents were a sham and an agreement to participate in a joint venture in fact existed between Great Western and the developers. It is, however, the strong presumption that the written documents which reflected the transaction, which on their faces appeared to be typical loan and security documents, were precisely that. (Shusett, Inc. v. Home Sav. & Loan Assn., 231 Cal.App.2d 146, 41 Cal.Rptr. 622.) Plaintiffs and cross-complainants failed to overcome this presumption and, in addition, failed to establish certain significant elements of a joint venture. They did not show that either a fiduciary relationship (Beck v. Cagle, supra, 46 Cal.App.2d 152, 115 P.2d 613), a joint participation in the conduct of the tract development (Sedia v. Elkins, supra, 201 Cal.App.2d 440, 451, 20 Cal.Rptr. 278), or a joint proprietary interest in the development as the subject matter of the venture (Freedman v. Industrial Acc. Com., supra, 67 Cal.App.2d 629, 630-631, 154 P.2d 922) existed at any time during the course of the transaction. Finally, they introduced no evidence that any third parties or purchasers relied upon the belief that Great Western was engaged in a joint venture with Conejo or any of its principals. For similar reasons, plaintiffs and cross-complainants failed to establish the existence of a "joint enterprise", a term without any clearly developed definition in the law which may be applied to undertakings for mutual benefit, social diversion, recreation or pleasure falling short of joint ventures (Williston on Contracts (3d ed. 1959) § 318, pp. 554-555). When occasionally applied by courts to commercial or business undertakings, this term is used to refer to the same collection of material elements as does the term "joint venture". (Boyd v. White, 128 Cal.App.2d 641, 657, 276 P.2d 92; Ambrose v. Alioto, 65 Cal.App.2d 362, 366, 150 P.2d 502.)
On this basis certain small portions of Judge Gitelson's testimony were properly stricken from the record by ruling of the trial court. Judge Gitelson, among other things, related the substance of conversations which allegedly took place between Goldberg and Great Western outside his presence, but which were later repeated to him by Goldberg. This testimony was self-serving insofar as the interests of Judge Gitelson, a member of the Pritkin-Finkel group, were allied with those of plaintiffs, and insofar as it included statements attributed to Great Western it constituted inadmissible hearsay. This is so not only because plaintiffs and cross-complainants failed to adduce prima facie proof of an agency or joint venture independent of this testimony, but also because the statements thus related were preliminary to the loan transaction and only statements made during the existence of the agency or joint venture would be otherwise admissible. (Kloke v. Pongratz, 38 Cal.App.2d 395, 101 P.2d 522; Marshall v. Marshall, 232 Cal.App.2d 232, 42 Cal.Rptr. 686; Code Civ.Proc. § 1870, subd. (5).) Moreover, unauthorized statements of a coventurer made outside the presence of his alleged partner may not be admitted to establish their ostensible relationship of mutual agency. (J & J BUILDERS SUPPLY V. CAFFIN, 248 Cal.App.2d 292, 297, 56 CAL.RPTR. 365 .)
Advance Report Citation: 248 A.C.A. 342, 347.
The fact, however, that Great Western has not, by virtue of an agency relationship, a direct participant in the home construction fails to convince us that its position as lender fully insulates it from responsibility to the ultimate purchasers. "Privity of contract is not necessary to establish the existence of a duty to exercise Merrill v. Buck,
"An affirmative declaration of duty simply amounts to a statement that two parties stand in such relationship that the law will impose on one a responsibility for the exercise of care toward the other. Inherent in this simple description are various and sometimes delicate policy judgments. The social utility of the activity out of which the injury arises, compared with the risks involved in its conduct; the kind of person with whom the actor is dealing; the workability of a rule of care, especially in terms of the parties' relative ability to adopt practical means of preventing injury; the relative ability of the parties to bear the financial burden of injury and the availability of means by which the loss may be shifted or spread; the body of statutes and judicial precedents which color the parties' relationship; the prophylactic effect of a rule of liability; * * * and finally, the moral imperatives which judges share with their fellow citizens--such are the factors which play a role in the determination of duty." (Raymond v. Paradise Unified School Dist., 218 Cal.App.2d 1, 8, 31 Cal.Rptr. 847, 851.)
A contractor may be held responsible, for his own work or that of a subcontractor, to the purchasers, subsequent purchasers, or third parties for personal injuries or property damages resulting from substantial defects in construction. Such liability has been imposed on the basis of the social significance of the contractor's role, by analogy to the role of manufacturers, the economic consequences of whose acts have been extensively recognized in the field of product liability. (Sabella v. Wisler, 59 Cal.2d 21, 27 Cal.Rptr. 689, 377 P.2d 889; Stewart v. Cox, 55 Cal.2d 857, 13 Cal.Rptr. 521, 362 P.2d 345; Dow v. Holly Manufacturing Co., 49 Cal.2d 720, 321 P.2d 736; Greenman v. Yuba Power Products, Inc., 59 Cal.2d 57, 27 Cal.Rptr. 697, 377 P.2d 897; Vandermark v. Ford Motor Co., 61 Cal.2d 256, 37 Cal.Rptr. 896, 391 P.2d 168; Schipper v. Levitt & Sons, Inc., (1965) 44 N.J. 70, 207 A.2d 314; see also Lascher, Strict Liability in Tort for Defective Products: The Road to an Past Vandermark, 38 So.Cal.L.Rev. 30.)
Following the line of cases which dealt with products liability, the California Supreme Court disposed with privity to find that a notary public, who so negligently prepared a will that it was invalid, was liable to the erstwhile beneficiary. (Biakanja v. Irving, 49 Cal.2d 647, 320 P.2d 16, 65 A.L.R.2d 1358.) "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 Biakanja v. Irving,
Exercising similar logic, the court subsequently held an independent contractor, who negligently gunited a swimming pool, responsible for the damage to plaintiff's house caused by escaping water, applying the same standard of reasonable care to protect anyone who foreseeably might be endangered by negligence even after the work was accepted. (Stewart v. Cox, supra, 55 Cal.2d 857, 863, 13 Cal.Rptr. 521, 362 P.2d 345.) In the same vein, a contractor was held responsible for negligently constructing a home on improperly compacted earth, so that several years later, when the home was occupied by persons other than the original purchasers serious property damage resulted. (Sabella v. Wisler, supra, 59 Cal.2d 21, 27 Cal.Rptr. 689, 377 P.2d 889.) The court found no insurmountable difficulty in the absence of privity but noted that "while this house was not constructed with the intention of ownership passing to these particular plaintiffs, the Sabellas are members of the class of prospective home buyers for which Wisler admittedly built the dwelling. Thus as a matter of legal effect the home may be considered to have been intended for the plaintiffs, and Wisler owed them a duty of care in construction. * * * It is apparent that harm was foreseeable to prospective owners when the home was constructed upon the inadequately compacted earth in the lot, and it is undisputed that the Sabellas' home was seriously damaged." (p. 28, 27 Cal.Rptr. p. 693, 377 P.2d 893.
The same legal reasoning has recently been applied by a New Jersey court in a decision bearing upon tract development. (Schipper v. Levitt & Sons, Inc., supra, 207 A.2d 314.) "[W]hen a manufacturer presents his products for sale to the public he accompanies them with an implied representation that they are reasonably fit for the intended use, and he is subject to an enterprise liability, the purpose of which is to insure that the cost of injury or damage resulting from defective products 'is borne by the makers of the products who put them in the channels of trade, rather than by the injured or damaged persons who ordinarily are powerless to protect themselves.'
" * * *
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"When a vendee buys a development house from an advertised model, as in a Levitt or in a comparable project, he clearly relies on the skill of the developer and on its implied representation that the house will be erected in reasonably workmanlike manner and will be reasonably fit for habitation. * * * The public interest dictates that if such injury does result from the defective construction, its cost should be borne by the responsible developer who created the danger and who is in the better economic position to bear the loss rather than by the injured party who justifiably relied on the developer's skill and implied representation." (Schipper v. Levitt & Sons, Inc., supra, pp. 325-326.)
It is such powerful circumstances as those with which we are presently confronted which ultimately command the attention of the law to areas which previously evaded recognition. Woe betide the purchaser who relies, through ignorance or innocence, upon the skill of a developer of less substance and renown than Levitt & Sons, Inc! "The small developer's lifeline is the savings and loan association. This is where he obtains funds for real estate projects that are too small and too risky to raise even an investigation from most banks and life insurance companies. Savings associations survive by paying a higher rate of interest than banks, and they need the extra margin that small builders are willing to pay to finance their speculative ventures." The majority of home owners who purchase homes under $20,000 devote a substantial portion of their earnings, estimated at 25 percent, or more, of their annual income, to home payments and maintenance. The Weathersfield residences, which originally sold for $14,950 to $15,950, suffered estimated damage of approximately $6,000 per dwelling; from another point of view, their value decreased by approximately 40 percent, the proportionate expense of the necessary structural modifications. Although the complaint alleges that the builder was called upon to repair the homes, he was either unable or unwilling so to do and failed to fulfill that obligation.
The purchase of a home is a substantial investment in proportion to income, the nature of which is rarely equalled and infrequently encountered in the lifetime of a typical family. While sociologists and economists encourage home acquisition in the interests of family stability, the mortgage obligation undertaken to effect such a purchase frequently expands the family budget to the outer margins of safe financial planning. The uninsured loss or destruction of the residence thus purchased may ultimately constitute not only a financial disaster, but a loss of family security, well-being, and daily convenience upon the extent of which we can only speculate. It is certain, however, that many individual families in the income brackets of those who purchased Weathersfield homes would be unable to afford the expense of repairs for such extensive damages as those residences suffered.
The need for housing has been and gives promise of continuing to be a fruitful field for enterprising speculators. The hills of California continue to be demolished by bulldozers under the direction of developers intent upon the construction of vast tracts of homes which are sold to the public by advertisement, by the display of a few models, and by preselling techniques similar to those utilized in this instance. Gone are the days when individual construction and a personal relationship characterized the transaction between contractor and purchaser. Potential home purchasers today meet developers and sales agents completely unfamiliar to them and rarely become acquainted with the general contractor. Except when dealing with one of the few giants of the construction industry who enjoy a limited renown, such as does Levitt & Sons, Inc., the potential buyer is prompted and, indeed, almost required to proceed, if at all, on faith. Moreover, while materialmen, subcontractors, and suppliers of materials may look to construction bonds and loan funds when dealing with builders and developers, there is no adequate source of protection available, even upon inquiry or demand, to the most wary home purchaser.
Since we recognize the obligation of the manufacturer who has the capacity to launch numerous potentially hazardous products on the market, should we not be prepared to impose similar standards of responsibility on the experienced and knowledgeable home-lending institution when it financially launches an untried developer by assisting him to produce and sell residential units to the uninformed public? "Developers depend on institutional lenders for most of their funds and only acquire land for which lenders are willing to supply construction loans. Yet rarely have those concerned with the quality of suburban land development attempted We do not foresee that the extension of potential liability and the recognition of the financer's duty to the public under these conditions will either disrupt the logical sequence of legal development or subject lenders to undue risk. We merely acknowledge herein the obligation which must ultimately be assumed by the participant best able to bear the financial risk, and infinitely better able than the public to protect both itself and others from the risks of irresponsible construction ventures in our age of mass residential production. The experienced institutional lender is the party with the awareness, expertise, and opportunity to control the course of construction.
Nor do we hereby suggest that the lender's responsibility should cover the repair of every leaky faucet, sagging door, or haphazard paint job. We note the California Supreme Court's recent observation that: " * * * imposition of liability upon * * * [the contractor for his negligence resulting in the fundamental defect here involved, causing reduction in the value of the house by nearly 50 percent, does not necessarily presage a contractor's liability for any and all imaginable defects in construction." (Sabella v. Wisler, supra, 59 Cal.2d 21, 30, 27 Cal.Rptr. 689, 694, 377 P.2d 889, 894.) Similarly, the construction lender's duty to discover and insure that gross subdivision construction problems are appropriately resolved should not render it accountable to the purchasers for minor defects.
The trial court's order granting Great western a nonsuit is reversed, and the case is remanded to the trial court for further proceedings in accordance with this opinion.
WOOD, P.J., and LILLIE, J., concur.