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Finuoli Construction, L.L.C. v. Hoffman

A-5826-02T1 (N.J. Super. App. Div. 2005) (Unpublished)

MORTGAGES; CONSTRUCTION LOANS—Absent some express duty assumed by a lender to its borrower, inspections of a construction project made by the lender are for the benefit of the lender and the borrower is not entitled to rely on those inspections.

Homeowners sued a bank “for losses they allegedly incurred in the construction of a home ... for which the bank provided financing.” The bank cross-appealed for sanctions against the homeowners for pursuing a frivolous lawsuit.

The homeowners bought a lot “containing an uninhabitable house, upon which they intended to effect a major renovation and reconstruction.” Thereafter the homeowners applied for a bank loan, and the bank provided them with a $400,000 line of credit for construction. The homeowners claimed that the bank had told them that the amount it provided them “appeared sufficient to construct the project, and that they relied upon the banks’ expertise to satisfy themselves that the project could be completed for that amount.” During construction, the homeowners “requested several draws from the bank [and] [e]ach time, the bank sent an inspector who conducted an inspection and issued a report to the bank of” the construction’s progress. The “entire $400,000 line of credit had been exhausted” long before the construction project was complete and the homeowners still owed money to the construction company they’d hired to complete the project. The homeowners thereafter instructed the construction company “to cease all work” and then sold the property “in its incomplete state” shortly after that.

The construction company subsequently sued the homeowners “for money still owed for work performed.” The homeowners brought a third-party complaint against the bank alleging that: 1) the bank had lender’s liability because it “was under a duty to disburse funds only upon inspection of the construction project and breached that duty when it failed to inspect the property;” 2) the bank breached its contract with the homeowners because “the requirement for property inspections prior to disbursements to” the construction company “was a material term of the contract between” the bank and the homeowners “and that the [homeowners] were direct, intended beneficiaries of the bank’s covenant to monitor construction, conduct inspections, and only disburse funds if” the construction company property proceeded with construction; and 3) the bank was negligent since both it and the construction company “knew or should have known that the architect’s original plans contained a material defect and that the house could not be constructed for $400,000.”

First, the Appellate Division denied the bank’s application for sanctions. Next, the Court rejected the homeowner’s breach of contract and lender liability claims. The homeowners alleged that the bank “breached its contractual “duty of good faith and fair dealing and [was] therefore liable for lender liability because it represented that periodic inspections would be accomplished and was award of the [homeowners’] reliance upon the inspections.” In response, the bank contended that “it is clear under New Jersey law that lenders have the right to protect their own interest and [that] borrowers or third parties have no right to rely upon such protective measures or to compel the lender to follow through with its own protective measures.” The Court agreed, holding that the law does not require moneylenders “to supervise the distribution of loan proceeds.”

The Court was likewise unmoved by the homeowners’ breach of contract claim, holding that the homeowners’ “attempts to have the mortgage documents read in light of other conversations with bank officials” violated the parol evidence rule as well as New Jersey statutes. The Court held that the bank had inspections “made before making advances to” the homeowners “for its own internal purposes” and that under these arrangements, the homeowners, “not the bank, made payments to” the construction company.

Regarding the homeowners’ negligence claim, the Court held that “‘[t]here is no ... liability for ... failing to do what one has promised to do in the absence of a duty to act apart from the promise made.’” The Court further held that although “the bank did not act in accordance with standard and commonly accepted banking practices in issuing the line of credit” instead of “a traditional construction loan,” “[p]roviding a party with a loan program does not give rise to a duty” under non-statutory law. Thus, “[i]ndustry standards, and their violation, can only support a cause of action when there is a duty” and the bank owed no duty to the homeowners in this case. The Court supported its decision by the fact that the bank was neither involved in the home’s construction or design, nor did the bank “exceed its role as a lender and did not undertake any duty to the [homeowners] beyond those expressly contracted for.” Finally, the Court held that “even if the bank owed a duty to the [homeowners] to comply with industry standards and provide [the homeowners] with a construction loan rather than a home equity line of credit, the bank’s breach of that duty was not the cause of the cost overrun.”

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