Bel Air Carpet, Inc. v. Korey Homes Bldg. Grp., LLC

• Decision Date: 28 January 2021
• Docket Number: No. 1006, Sept. Term, 2019,1006, Sept. Term, 2019
• Citation: 249 Md.App. 109,245 A.3d 64
• Parties: BEL AIR CARPET, INC. v. KOREY HOMES BUILDING GROUP, LLC, et al.
• Court: Court of Special Appeals of Maryland

249 Md.App. 109

245 A.3d 64

BEL AIR CARPET, INC.

v.KOREY HOMES BUILDING GROUP, LLC, et al.

No. 1006, Sept. Term, 2019

Court of Special Appeals of Maryland.

January 28, 2021

Argued by: David S. Lynch (Elizabeth H. Thompson and Stark & Keenan, P.A. on the brief) Bel Air, Maryland, for Appellant.

Argued by: James T. Heidelbach (Keith M. Lusby and Gebhardt & Smith, LLP on the brief) Baltimore Maryland, for Appellee Hamilton Bank.

Panel: Kehoe, Nazarian, Leahy, JJ.

Leahy, J.

The underlying lawsuit was brought by a subcontractor in the construction industry left unpaid at the end of a construction project.¹ Appellant Bel Air Carpet, Inc. ("Bel Air Carpet") was one of the last subcontractors to complete work on a series of new homes built by Korey Home Building Group, LLC ("Korey Homes"), a custom home builder with its principal place of business in Harford County. Bel Air Carpet filed a negligence action to recover damages in the Circuit Court for Harford County against Korey Homes and several other defendants. This appeal concerns just one of the defendants in that action—appellee Hamilton Bank.²

The trial court granted Hamilton Bank's motion to dismiss the single count of negligence against it on the ground that the complaint failed to state a claim because Bel Air Carpet failed to allege any contractual relationship or intimate nexus between it and Hamilton Bank to establish a duty of care. Upon a consent motion, the circuit court certified its order as final and appealable under Maryland Rule 2-602(b).

Bel Air Carpet presents two questions for our review,³ which we have recast as follows:

I. Did the circuit court err in dismissing the negligence count against Hamilton Bank by finding, as a matter of law, that Hamilton Bank did not owe a duty of care to Bel Air Carpet?

II. Did the circuit court err or abuse its discretion in dismissing the negligence count against Hamilton Bank prior to discovery?

Bel Air Carpet urges that we hold that Hamilton Bank owed a duty of care to the subcontractors of Korey Homes to ensure they were paid under the theory that Hamilton Bank should have required mechanics lien releases from all subcontractors and conducted independent inspections of the work. Maryland law does not support the imposition of such a duty, and we cannot step beyond the statutes and cases that the Maryland General Assembly and our Courts have established to create one. We further note that, because the existence of a duty is a legal determination, the circuit court did not abuse its discretion in dismissing the negligence count prior to discovery. Consequently, we affirm the judgment of the circuit court.

BACKGROUND⁴

Bel Air Carpet sells and installs flooring materials, including carpet, hardwood flooring and ceramic tile. As stated in Bel Air Carpet's complaint, "[f]rom on or about March 28, 2018 through July 14, 2018, [Bel Air Carpet] and Korey Homes entered into a contract whereby [Bel Air Carpet] provided materials and labor for the installation of flooring and wall materials to all of Korey Homes’ private custom home contracts based upon building specifications provided by Korey Homes[.]" In total, Korey Homes placed orders to Bel Air Carpet to provide labor and material to install flooring at twelve different custom homes in Harford and Baltimore Counties. In return, Korey Homes "agreed to pay [Bel Air Carpet] out of the sums obtained either directly from the homeowners or through draws issued from the buyers’ lenders, the collective sum of three-hundred thirteen thousand, nine-hundred dollars and fifty-two cents ($313,900.52) for all materials and labor."

Hamilton Bank financed seven of the twelve custom homes for which Bel Air Carpet supplied and installed flooring and related materials. Bel Air Carpet provided invoices to Korey Homes for its work on the seven homes financed by Hamilton Bank. These invoices totaled $171,167.29.

Bel Air Carpet avers that it "provided all of the requested materials and labor" and "completed the work" for the twelve homes "in a good and workmanlike fashion." Despite submitting invoices for this work, Korey Homes never paid Bel Air Carpet.

Mechanic's Liens

In an attempt to recover its losses, Bel Air Carpet "retained [ ] counsel to protect its rights utilizing the Maryland Mechanic's Lien Statute in order to obtain payment of its outstanding invoices." In response, Korey Homes held a meeting on September 28, 2018 with approximately twenty subcontractors and informed them that Korey Homes had no funds to pay the amounts owed. However, Korey Homes also assured the subcontractors that it would contact each subcontractor to devise a plan to pay their invoices, although most invoices would need to be reduced. Korey Homes "implored the subcontractors in attendance to continue to work on Korey Homes’ contracts and to refrain from filing mechanic's liens because the subcontractors, including [Bel Air Carpet], would receive ‘pennies on the dollar’ from the homeowners and because it was not the buyers’ fault that Korey Homes did not pay the subcontractors[.]" Less than a week later, "on or about October 2, 2018, Korey Homes shuttered its doors and never communicated further with [Bel Air Carpet]."

Complaint

On February 15, 2019, Bel Air Carpet filed a seven-count complaint in the Circuit Court for Harford County against Korey Homes, the individual members of Korey Homes—Korey and Stacy Smith, and Hamilton Bank. The first six counts of the complaint included a breach of contract claim against Korey Homes and a variety of counts against both Korey Homes and Korey and Stacy Smith: trover and conversion; constructive fraud and breach of fiduciary duty; intentional misrepresentation (fraud and deceit); violation of the Maryland Construction Trust Statute; and violation of the Maryland Custom Home Protection Act. The seventh count asserted a negligence claim against Hamilton Bank.

In its complaint, Bel Air Carpet alleged the following pertinent facts concerning Hamilton Bank under the heading "Facts":

• Korey Homes and Hamilton Bank had a relationship in which Hamilton Bank ignored most, if not all, standard financial practices in disbursing construction loan funds to Korey Homes on behalf of its borrowers. For example, Hamilton Bank did not require Korey Homes, Korey [Smith], or Stacy [Smith] ... to obtain Mechanic's Lien Releases from its subcontractors before Hamilton Bank would issue draws to Korey Homes despite Hamilton Bank's explicit requirement that releases were a condition precedent to Korey Homes receiving draws. Hamilton Bank never required Korey Homes to furnish requisition orders prior to disbursement, which was also a condition precedent to Hamilton Bank issuing draws. Indeed, Hamilton did not require Korey Homes to show any evidence that Korey Homes completed its work or paid its subcontractors before Hamilton released additional funds to Korey Homes.

• In contrast to Hamilton Bank, other lenders required Korey Homes to obtain and forward Mechanic's Lien Releases before releasing draws.

• Hamilton Bank issued wires of its borrowers’ funds based only [on] a phone call from Korey [Smith], without additional documentation from Korey Homes.

• Hamilton Bank wired hundreds of thousands of dollars to Korey Homes, some of which [Bel Air Carpet] had earned and was entitled to, into Korey Homes’ operating account without obtaining any accountability from Korey Homes that Korey Homes used that money to pay its subcontractors.

In its negligence count against Hamilton Bank, Bel Air Carpet asserted that "Hamilton Bank owed a duty of care to [Bel Air Carpet] to ensure that the funds it disbursed to Korey Homes w[ere], in fact, paid to [Bel Air Carpet]." Hamilton Bank breached its duty to Bel Air Carpet "by failing to obtain Mechanic's Lien Releases ... for work performed and materials provided to its borrowers’ custom homes," which was "standard industry practice." Bel Air Carpet claimed that their "losses proximately resulted from Hamilton Bank's breach of its duty of care."

Motion to Dismiss

On March 19, 2019, Hamilton Bank filed a motion to dismiss in the circuit court. In its memorandum in support of this motion, Hamilton Bank argued that Bel Air Carpet could not "prevail on its negligence claim against Hamilton Bank as a matter of law because Hamilton Bank had no obligation to ensure that Korey Homes paid subcontractors such as Bel Air [Carpet]."

Invoking the economic loss rule as articulated in Jacques v. First National Bank of Maryland , 307 Md. 527, 534, 515 A.2d 756 (1986), Hamilton Bank asserted that "[i]t is well-settled that, ‘[w]here the failure to exercise due care creates a risk of economic loss only, courts have generally required an intimate nexus between the parties as a condition to the imposition of tort liability.’ " According to Hamilton Bank, due to the intimate nexus requirement, "courts have generally concluded that a lender does not owe a duty of care to non-customers such as Bel Air [Carpet]." Hamilton Bank averred that it did not have a contract with Bel Air Carpet and that Bel Air Carpet failed to allege "the existence of any relationship between itself and Hamilton Bank, let alone a close relationship of the type that could give rise to an ‘intimate nexus.’ " (Emphasis in original.) Relying on Richard F. Kline, Inc. v. Signet Bank/Maryland , 102 Md. App. 727, 735, 651 A.2d 442 (1995) and related cases from other jurisdictions, Hamilton Bank argued that courts "uniformly hold[ ] that a construction lender does not owe any duty to a subcontractor, including a duty to ensure that the subcontractor is paid by the contractor that hired it."

Finally, Hamilton Bank asserted that, even if it owed a duty of care to Bel Air Carpet, the failure to obtain mechanics’ lien releases would not breach that duty or ensure that the subcontractors would have been paid. Rather, "[w]hether or not subcontractors were ultimately paid depended solely upon whether Korey Homes paid them, either from...