Luana Sav. Bank v. Pro-Build Holdings, Inc.

• Decision Date: 12 December 2014
• Docket Number: No. 13–0060.,13–0060.
• Citation: 856 N.W.2d 892
• Parties: LUANA SAVINGS BANK, Appellant, v. PRO–BUILD HOLDINGS, INC. and United Building Centers, Appellees.
• Court: Iowa Supreme Court

856 N.W.2d 892

LUANA SAVINGS BANK, Appellant

v.PRO–BUILD HOLDINGS, INC. and United Building Centers, Appellees.

No. 13–0060.

Supreme Court of Iowa.

Dec. 12, 2014.

Dale L. Putnam of Putnam Law Office, Decorah, for appellant.

Samuel C. Anderson of Swisher & Cohrt, P.L.C., Waterloo, for appellees.

Opinion

WATERMAN, Justice.

In this interlocutory appeal, we must decide whether to extend the implied warranty of workmanlike construction to protect a bank that acquired a mold-infested apartment complex by deed in lieu of foreclosure. The bank sued the builder under that theory, alleging shoddy construction. This implied warranty “is a judicially created doctrine implemented to protect an innocent home buyer by holding the experienced builder accountable for the quality of construction.” Speight v. Walters Dev. Co., 744 N.W.2d 108, 110 (Iowa 2008). In Speight, we extended the doctrine to allow a subsequent purchaser of a single-family residence to sue the builder for latent defects. Id. at 113–14.¹ The plaintiff bank argues it is in a position analogous to a subsequent homeowner. The district court disagreed and granted the builder's motion for summary judgment dismissing that theory. The court of appeals affirmed, appropriately deferring to our court to decide whether to further extend this implied warranty.

We hold the bank may not recover under the implied warranty of workmanlike construction. No other court has extended the theory to allow claims by foreclosing lenders. Additionally, a clear majority of courts decline to allow recovery by for-profit owners of apartment buildings. The doctrine's rationale does not support extending it to the bank. We created the doctrine to redress the disparity in bargaining power and expertise between homeowners and professional builders, and to provide a remedy for consumers living in defectively constructed homes. We see no valid policy reason to extend the implied warranty doctrine to a sophisticated financial institution that can protect itself through other measures. Accordingly, we affirm the summary judgment dismissing the bank's implied warranty theory.

I. Background Facts and Proceedings.

This litigation arose from the discovery of black mold infesting two apartment buildings in Postville, Iowa. Luana Savings Bank (bank) financed the construction of the buildings. The borrowers, Ronald Wahls and Karen Wahls, acting as officers of RO-KA Acres, Inc. (RO-KA), purchased farmland to develop into the RO-KA Heights First Addition in 2002. The bank financed their purchase through a line of credit secured by an open-ended mortgage. RO-KA subdivided the land into twenty-one lots and sold nine lots to various buyers over the next several years. In May of 2006, the bank filed a foreclosure action against RO-KA for amounts due on promissory notes.

On July 1, RO-KA entered into a real estate contract with Amereeka Properties, LLC (Amereeka) conveying its remaining interest in the RO-KA Heights Addition in exchange for a purchase price of $1,231,000. This land included lots 15 and 16, at issue in this case. The agreement between Amereeka and RO-KA contained provisions assigning all payments on the purchase price to the bank until RO-KA's indebtedness to the bank was satisfied. In exchange, the bank agreed to dismiss the foreclosure action. Amereeka's president was Shalom Rubashkin, an owner of Agriprocessors Inc., a kosher meatpacking plant. The bank's chief financial officer, Collin Cook, testified he understood Amereeka was formed to avoid the perception that Rubashkin owned the apartment buildings where many employees of Agriprocessors lived.

RO-KA and Amereeka entered into a separate management agreement. RO-KA agreed to manage the existing apartment complexes on lots 12 and 13 of RO-KA Heights, as well as any other apartments to be built on the land. At this time, lots 15 and 16 were undeveloped. On July 28, Ronald Wahls entered into a written contract for materials and labor with United Building Centers (UBC), the predecessor of Pro-Build Holdings, Inc. (Pro-Build), to construct two twelve-plex apartment buildings on lots 15 and 16. Wahls signed the contract in his own name instead of as an agent for RO-KA or Amereeka. The plans for construction were based on the floor plans of the existing apartment complexes. Construction began in 2006 and was completed in 2007. RO-KA managed the new buildings under its existing management agreement. Amereeka executed an open-ended mortgage on the property it had purchased from RO-KA in favor of the bank. Amereeka also executed a commercial security agreement securing a commercial real estate loan made by the bank to Nevel Properties, Inc., Amereeka's parent company. The proceeds of that loan were used to pay for the construction of the apartment buildings on lots 15 and 16.

On May 12, 2008, federal immigration and customs enforcement (ICE) agents raided Agriprocessors and arrested nearly 400 undocumented workers who were charged with a variety of immigration-related criminal offenses. United States v. Rubashkin, 718 F.Supp.2d 953, 964 (N.D.Iowa 2010). On November 4, Agriprocessors filed a bankruptcy petition, and its assets ultimately were sold. Id. at 966–67. Rubashkin was indicted for bank fraud and other financial and immigration crimes, convicted, and sentenced to prison. United States v. Rubashkin, 655 F.3d 849, 854–55 (8th Cir.2011).

In 2009, both RO-KA and Amereeka defaulted on their obligations to the bank. RO-KA quitclaimed its interest in the properties at RO-KA Heights to the bank in February of 2009 in exchange for a release of its remaining obligations to the bank. On June 26, Amereeka gave the bank a “Deed in Lieu of Foreclosure” signed by Rubashkin conveying all of the property it owned in RO-KA Heights to the bank as a release from liability under the mortgage, including lots 15 and 16. After acquiring ownership in the apartment complexes, the bank discovered substantial black mold in the units. Investigation revealed that the mold resulted from improper installation of windows and air-conditioning units, and inadequate attic ventilation.

The bank commenced this action by filing a petition against Pro-Build in Allamakee County. Count I of the petition alleged negligence in the construction of apartments for Amereeka. Count II alleged that Pro-Build breached the implied warranty of workmanlike construction.

Count III alleged that Pro-Build breached an oral contract with Amereeka for the construction of the apartments. The bank sought recovery of its holding costs as well as the cost of repairs to remediate the mold. Pro-Build moved for summary judgment on all three counts. The district court granted summary judgment in favor of Pro-Build on counts I² and II, but denied summary judgment on count III to determine if the bank was a third-party beneficiary of Wahls' contract with UBC. The bank applied for an interlocutory appeal of the summary judgment on count II. Pro-Build resisted the application and conditionally applied for interlocutory appeal of the order denying summary judgment on count III. We granted both applications and transferred the case to the court of appeals. The court of appeals affirmed the summary judgment dismissing the implied warranty claim, reversed the order denying summary judgment on the third-party beneficiary theory, and remanded the case for entry of judgment of dismissal against the bank. We granted further review to decide whether to extend the implied warranty of workmanlike construction to a lender acquiring multiplex apartment buildings by deed in lieu of foreclosure.

II. Scope of Review.

We review rulings that grant summary judgment for correction of errors at law. Parish v. Jumpking, Inc., 719 N.W.2d 540, 542 (Iowa 2006). Summary judgment is appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Iowa R. Civ. P. 1.981(3). We view the evidence in the light most favorable to the nonmoving party. Parish, 719 N.W.2d at 543.

On further review, we have discretion to choose which issues to address. Hills Bank & Trust Co. v. Converse, 772 N.W.2d 764, 770 (Iowa 2009). We exercise our discretion to limit our review to the implied warranty of workmanlike construction. The court of appeals decision on the third-party-beneficiary claim shall stand as the final appellate decision on that issue. See id.

III. Analysis.

We must decide whether to extend the implied warranty of workmanlike construction to a lender that acquires a multiunit residential apartment complex by a deed in lieu of foreclosure. This is a question of first impression in Iowa. We conclude the bank's implied warranty claim fails for several reasons. First, the bank is not the type of innocent homeowner the implied warranty was adopted in Iowa to protect. Second, Pro-Build is not the type of builder-vendor subject to the implied warranty. Third, the requested extension to a foreclosing lender is not supported by caselaw in other jurisdictions. Finally, the policy reasons underlying the implied warranty do not support its extension to a foreclosing lender.

The implied warranty of workmanlike construction adopted for the protection of homeowners in our state was an extension of Mease v. Fox, 200 N.W.2d 791, 796 (Iowa 1972),³ which adopted an implied warranty of habitability for a tenant leasing a home. See Kirk v. Ridgway, 373 N.W.2d 491, 496 (Iowa 1985) (describing the adoption of the implied warranty for homeowners as a “logical extension” of Mease ). In Kirk, we required proof “the house was constructed to be occupied by the [plaintiff] warrantee as a home.” Id. We extended the warranty to subsequent home purchasers in Speight, 744 N.W.2d at 113–14. In Rosauer Corp. v. Sapp Development, decided today, we explore in more depth the history of the implied warranty of workmanlike construction in Iowa and the policy reasons supporting the doctrine. 856 N.W.2d 906, 908, 2014 WL 7003804 (Iowa 20...