Summary
In Winnebago, the plaintiff builder sought recovery from the defendant mortgage lender which promised payment upon completion of a dwelling.
Summary of this case from Gruen Industries, Inc. v. BillerOpinion
January 10, 1966. —
February 1, 1966.
APPEAL from a judgment of the circuit court for Milwaukee county: HARVEY L. NEELEN, Circuit Judge. Affirmed.
For the appellant there was a brief by Camp Camp of Wauwatosa, and oral argument by Mark M. Camp.
For the respondent there was a brief by Hersh Magidson, attorneys, and Harry Lensky and Robert L. Hersh of counsel, all of Milwaukee, and oral argument by Arthur B. Magidson.
These two actions were instituted by the plaintiff, Winnebago Homes, Inc., against the Advance Mortgage Corporation and L. Richard Sheldon and Kathleen Sheldon, his wife. In one action, the plaintiff claims damages as a third-party beneficiary under an agreement entered into by the defendants between themselves. The other action is a garnishment proceeding commenced by the plaintiff by reason of its above claim for damages.
A contract for the construction of a home for the price of $15,900 was entered into between the plaintiff and the Sheldons on April 22, 1961. The plaintiff brought the Sheldons to Advance Mortgage Corporation to obtain a mortgage loan to finance the home construction. Such loan was to be insured by the Federal Housing Administration (FHA).
The necessary applications to obtain FHA insurance were completed. Mr. John Vishnevsky, the plaintiff's president, knew of this application and had signed a statement on an FHA form entitled "Mortgagee's Application for Commitment" by which he agreed to deliver to the purchaser a warranty to the effect that the dwelling was constructed in substantial conformity with the FHA approved plans and specifications. The statement also committed Mr. Vishnevsky to furnish the federal housing commissioner with a conformed copy of the warranty.
The Sheldons signed an FHA form entitled "Supplement to Mortgagee's Application; and Mortgagor's Statement" in which they stated that it was being executed by them "for the purpose of obtaining the benefits of a mortgage loan to be or which may be insured under the provisions of the National Housing Act."
These two application forms were forwarded to Advance Mortgage and transmitted to the FHA for approval. The FHA issued its commitment for insurance on June 23, 1961, but this commitment does not constitute the ultimate act in obtaining FHA insurance. 24 CFR, sec. 203.13, ch. II, p. 105, states:
"Upon approval of an application, acceptance of the mortgage for insurance will be evidenced by the issuance of a commitment setting forth, upon a form prescribed by the commissioner, the terms and conditions upon which the mortgage will be insured."
The conditions of the FHA commitment require that the mortgagor must be the owner and occupant of the mortgaged property at the time that the FHA endorsement is finally secured and also require that the builder must deliver the warranty (described above) to the purchaser on an FHA form.
The commitment also provides that at the time the loan is submitted for final endorsement of insurance, there must be returned to the federal housing commissioner:
"(a) This commitment signed by the Mortgagee and Mortgagor.
"(b) The original note bond or other credit instrument, a copy of the original mortgage or other security instrument, together with one copy of the credit instrument and the security instrument.
"(c) One copy of the loan closing statement or settlement sheet signed by the Mortgagee or a separate statement signed by the Mortgagee which completely itemizes all charges and fees collected by the Mortgagee from the Mortgagor."
The mortgagor's certificate appearing on said commitment must be signed by the mortgagor; it certifies among other things that the mortgaged property will be owned free and clear of all liens except the insured mortgage, and that there will not be outstanding any unpaid obligations contracted in connection with the mortgage transaction or the purchase of the property unless secured by independent collateral. The mortgagee's certificate which also appears on the commitment certifies among other things that none of the mortgagor's statements are untrue or incorrect and that complete disbursement of the loan has been made to the mortgagor "or to his creditors for his account and with his consent."
The plaintiff received a letter from Advance Mortgage on June 26, 1961, informing the plaintiff that the FHA had issued its firm commitment regarding the mortgage loan in question. Mr. Vishnevsky testified that he understood the term "firm commitment" to mean that the FHA would insure the loan without the necessity of performing any further conditions. He stated that he relied on this letter to begin the construction of the home and that no work had been commenced prior to the receipt of the letter.
The Sheldons executed the note and mortgage in favor of Advance Mortgage on August 15, 1961, in order to obtain the loan of $15,200 which Advance Mortgage would make available. The note and mortgage were executed on FHA forms and recorded by Advance Mortgage, and the money was allocated to the Sheldon construction project. The Sheldons moved into the substantially completed home in January, 1962.
At the Sheldons' direction Advance Mortgage paid to the plaintiff the sum of $8,289.75 representing compensation for work completed on the home as of December 18, 1961. The plaintiff continued construction and requested progress draws but was informed by Advance Mortgage that the latter's new policy was to make a final payment only upon completion of the building.
Mr. Vishnevsky testified that in the spring of 1962 he was informed by Advance Mortgage that full payment would not be made until final clearance from FHA was obtained. He stated that this conversation led him to understand that the balance of the moneys loaned would be available once the FHA clearance was obtained.
The FHA certificate of final inspection was obtained on August 1, 1962, whereupon the plaintiff made demand upon Advance Mortgage for final payment. Advance Mortgage refused on the grounds that the Sheldons were eight months behind in their mortgage payments.
A meeting was held on October 27, 1962, between the Sheldons, Advance Mortgage, and the plaintiff for the purpose of closing the transaction. Mr. Robert Koch, the attorney for Advance Mortgage, was authorized to disburse the balance of the loan proceeds upon compliance with all the FHA requirements by both the Sheldons and the plaintiff.
At the closing conference, it was determined that the Sheldons would have to provide $1,400 in addition to the loan proceeds in order to pay the plaintiff the full amount due on the construction contract. The Sheldons refused to pay any amount of money, claiming that the building was improperly constructed. They asked for setoffs, and they specifically refused to authorize any further payments to the plaintiff.
The meeting ended without securing the Sheldons' signatures on either the FHA commitment or on the authorization for disbursement by the lender. Similarly, Winnebago Homes did not sign the builder's warranty.
Had the FHA requirements been complied with in all respects, the final act with reference to obtaining an insured loan would have been to submit the original mortgage note to the FHA for endorsement, whereupon the federal housing commissioner would have endorsed the note on the reverse side thereof in the space provided for that purpose. This endorsement was never obtained.
The trial court found that there was no third-party-beneficiary contract and that the loan by Advance Mortgage was conditioned upon compliance with FHA regulations, which conditions were not met.
The plaintiff appeals from the judgment which dismissed its complaint.
This appeal presents a dispute between a builder and a lender. The Sheldons, for whom the builder agreed to construct a house and to whom the lender agreed to supply funds, have not participated in the appeal. The Sheldons have gone through bankruptcy, and in the wake thereof are the two disputants now before this court.
We must determine whether the trial court was correct in denying recovery to the builder. Winnebago Homes advances three principal arguments in support of its claim that Advance Mortgage should be required to pay the unpaid balance owed for the construction. First, Winnebago Homes claims that it is a third-party beneficiary of the contractual arrangement entered into between Advance Mortgage and the Sheldons.
As a second contention, Winnebago Homes argues that it is entitled to payment upon the theory of promissory estoppel which arose by reason of Advance Mortgage's representation that payment would be made upon completion of the construction.
Finally, it is contended that the garnishment action which Winnebago Homes commenced against Advance Mortgage, with the Sheldons as principal defendants, entitled Winnebago Homes to the amount which remained unpaid by Advance Mortgage to the Sheldons.
Winnebago Homes as a Third-Party Beneficiary.
The trial court rejected the theory that the note and mortgage were executed for the benefit of Winnebago Homes, and we share that conclusion.
The trial court was correct, in our opinion, in relying upon State Department of Public Welfare v. Schmidt (1949), 255 Wis. 452, 455, 39 N.W.2d 392, where it was pointed out that "to entitle the third person to recover upon a contract made between other parties, there must not only be an intent to secure some benefit to such third person, but the contract must have beer, entered into directly and primarily for his benefit."
There was no promise, either express or implied, that Advance Mortgage was to pay the amount of the loan to Winnebago Homes even if the Sheldons were in default or even if FHA insurance was never issued. The lender's commitment to supply the money to the Sheldons was circumscribed with numerous conditions. In order to entitle a stranger to a contract to recover thereon, the contract must indicate an intention to secure some benefit to such third party. Rowe v. Moon (1902), 115 Wis. 566, 569, 92 N.W. 263; Electric Appliance Co. v. United States Fidelity Guaranty Co. (1901), 110 Wis. 434, 439, 85 N.W. 648.
Our examination of the relevant instruments persuades us that there was no contract wherein Advance Mortgage agreed to do anything for the benefit of Winnebago Homes. While the latter may have indirectly benefited from the agreement, such benefit was only incidental to the agreement between the mortgagor and the mortgagee. However, even if an express promise to pay Winnebago Homes could be spelled out of these instruments, we see no reason why it would not be subject to the same conditions that existed between the principals to the agreement. Thus, if Advance Mortgage did not have to pay the moneys to the Sheldons because FHA insurance was not obtained, this condition should preclude any responsibility by Advance Mortgage to Winnebago Homes. In Watkins v. Watkins (1933), 210 Wis. 606, 612, 245 N.W. 695, this court stated:
"It has been repeatedly held by this court, however, that when a right has been created by contract, the third party claiming the benefit of the contract takes the right subject to all the terms and conditions of the contract creating the right."
Promissory Estoppel.
Winnebago Homes urges that the lender induced it to complete the construction contract by promising final payment upon completion. According to the plaintiff, this promise was made when the builder requested further payments from the lender. In response to this request, it is claimed that the lender directed that the building be completed and that upon completion the balance would be paid.
This court has recognized that a cause of action may arise under circumstances covered by Restatement, 1 Contracts, p. 110, sec. 90. This section provides:
"A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise."
See Hoffman v. Red Owl Stores, Inc. (1965), 26 Wis.2d 683, 696, 133 N.W.2d 267.
The respondent points out that the theory of estoppel was not pleaded and therefore may not be raised by the builder. This contention is supported by National Farmers Union Property Casualty Co. v. Maca (1965), 26 Wis.2d 399, 408, 132 N.W.2d 517, Mack Trucks, Inc., v. Sunde (1963), 19 Wis.2d 129, 139, 119 N.W.2d 321, and Megal v. Kohlhardt (1960), 11 Wis.2d 70, 82, 103 N.W.2d 892.
While we think that this prevents the plaintiff from successfully relying upon the theory of promissory estoppel, we are also of the opinion that this contention would fail on its merits. This is because the so-called promise on the part of the lender may not fairly be construed to constitute an unqualified promise to pay upon completion. We believe it is clear that the payment by Advance Mortgage was necessarily conditioned both upon the Sheldons' authorizing it and also the lender's obtaining FHA insurance on the loan. The latter point distinguishes this case from Anglo-American Asso. v. Campbell (1898), 13 App. D.C. 581, 43 L.R.A. 622, which case is relied upon by the appellant. In the Anglo-American Case, at page 602, the court specifically concluded that there were no contractual conditions which would justify the lender's withholding of a portion of the allotted funds.
The construction company either knew or should have known that the disbursement of the funds by the lender was conditioned upon the FHA's insuring this loan. We think it unrealistic to hold, as the appellant proposes, that Advance Mortgage estopped itself from refusing to make payment to the builder even though FHA insurance was not ultimately procured. This is particularly true since the failure to obtain FHA insurance was not through the action or inaction of the lender.
The Effect of Garnishment.
By commencing the garnishment action against the Sheldons as principal defendants and against Advance Mortgage as garnishee defendant, it is claimed by the appellant that it obtained an equitable lien on the funds which were allocated by the lender for this loan.
We do not believe that the builder can lift itself up by its bootstraps so as to succeed on the merits by reason of any collateral proceedings in garnishment.
The flaws in the plaintiff's case which preclude its recovery against Advance Mortgage remain operative notwithstanding the garnishment proceedings. Sec. 267.18(4), Stats., holds in substance that one is not liable as garnishee by reason of anything owing upon a contingency. The record in this case establishes that any obligation which Advance Mortgage had to the Sheldons was contingent upon the procurement of FHA insurance. The Sheldons themselves could not have forced Advance Mortgage to pay over the allocated funds without fulfilling the FHA requirements; thus, the plaintiff could not require this act to be done. Grant County Service Bureau v. Treweek (1963), 19 Wis.2d 548, 554, 120 N.W.2d 634.
By the Court. — Judgment affirmed.