Lawsuit for Cracking Due to Ill-designed and Negligently Constructed Foundations
In Connor v. Great Western Sav. & Loan Assn. (1968) 69 Cal.2d 850, homes in a residential development suffered serious damage from cracking due to ill-designed and negligently constructed foundations that could not withstand the expansion and contraction of the underlying soil.
The home purchasers sought rescission and damages from, among others, the construction lender, Great Western Savings & Loan Association (Great Western). (Id. at p. 856.)
The following facts were presented to support the plaintiffs' claim.
Goldberg and Brown, acting through South Gate Development Company (South Gate), undertook to purchase 547 acres in a housing project for the construction of tract homes. They signed an agreement to purchase 100 acres and a conditional agreement to purchase the remaining 447 acres over a 10-year period. (Connor, supra, 69 Cal.2d at pp. 857-858.)
Goldberg approached Great Western for the funds to purchase the 100 acres. During the next several months, the parties and their lawyers worked out the details of an arrangement whereby Great Western would supply the necessary funding for purchase of the land and construction and Great Western would be given the right to make construction loans on homes and the right of first refusal on long-term loans to home buyers. (Id. at p. 858.)
Conejo Development Company (Conejo), a company that had been incorporated several months earlier with only $ 15,000 in capital, was later substituted as the purchaser of the land and the developer. (Connor, supra, 69 Cal.2d at p. 859.)
The parties entered into a "land warehousing" arrangement whereby Great Western obtained title to the land for the developer until the developer was ready to use it. Great Western deposited $ 150,000 into escrow for purchase of the property and took title. South Gate was given a one-year option to purchase the land in three parcels for $ 180,000. (Id. at p. 859.)
Great Western agreed to loan the necessary construction funds to Conejo only after assuring itself that the homes could successfully be built and sold. However, Great Western had investigated and learned that Goldberg's financial condition was weak. It had also received a financial statement from Conejo listing capital of $ 325,000, of which all but $ 5,000 was estimated profits from the sale of homes. Great Western investigated no further into Conejo's finances, or the foundations on which the homes were to be built. It did not require plans or specifications for the homes, cost breakdowns, a list of subcontractors, or a schedule of proposed prices. Conejo submitted to Great Western house plans that had been prepared for other developments. Great Western suggested increases in the proposed selling prices and refused any formal commitment of construction funding until a specific number of homes were presold. (Connor, supra, 69 Cal.2d at pp. 859-860.)
After the specified number of homes had been presold, Great Western loaned Conejo approximately $ 3,000,000 in construction financing, for which Conejo agreed to pay a 5 percent loan fee and 6.6 percent interest. The 5 percent loan fee was higher than usual because Great Western assessed the loan as involving a substantial risk. (Connor, supra, 69 Cal.2d at p. 861.)
A subcontractor employed by Conejo began grading the property in preparation for home construction. Great Western inspectors visited the property weekly to verify that the plans were being followed and the money was being used for construction. Under the loan agreement, Great Western had the right to withhold disbursement of funds if the work did not conform to the specifications. Representatives of Great Western remained in constant communication with the developers until all the homes were completed. (Id. at p. 862.)
Pursuant to the overall agreement, when Conejo sold lots it informed buyers that Great Western was willing to make long-term loans. If a buyer wished to obtain a loan elsewhere, Great Western had 10 days to meet the terms of the proposed financing. If it did so, but the buyer still borrowed elsewhere, Goldberg and Brown were required to pay Great Western any fees and interest obtained by the other lender. (Connor, supra, 69 Cal.2d at pp. 860-861.)
Under the circumstances presented, the state high court concluded that Great Western owed home buyers a duty of care to protect them from damages caused by structural defects. (Connor, supra, 69 Cal.2d at p. 866.)
Although the court rejected the plaintiffs' claim that Great Western had entered into a joint venture with the developers (id. at pp. 862-863), it nevertheless applied the six-factor test of Biakanja v. Irving (1958) 49 Cal.2d 647, to impose an independent duty.
Biakanja explained that "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 involves the balancing of various factors, among which are 1 the extent to which the transaction was intended to affect the plaintiff, 2 the foreseeability of harm to him, 3 the degree of certainty that the plaintiff suffered injury, 4 the closeness of the connection between the defendant's conduct and the injury suffered, 5 the moral blame attached to the defendant's conduct, and 6 the policy of preventing future harm." (Id. at p. 650.)
Regarding factor one, the court indicated that "the success of Great Western's transactions with South Gate and Conejo depended entirely upon the ability of the parties to induce plaintiffs to buy homes in the Weathersfield tract and to finance the purchases with funds supplied by Great Western." (Connors, supra, 69 Cal.2d at p. 866.)
Under factor two, the court concluded that Great Western "should have known that neither Goldberg nor Brown had ever developed a tract of similar magnitude" and that "Conejo was operating on a dangerously thin capitalization, creating a readily foreseeable risk that it would be driven to cutting corners in construction." (Ibid.)
As to factors three and four, the court found it was certain that the plaintiffs suffered harm and that the harm was closely connected to Great Western's conduct. According to the court, "Great Western not only financed the development of the Weathersfield tract but controlled the course it would take. Had it exercised reasonable care in the exercise of its control, it would have discovered that the pre-packaged plans purchased by Conejo required correction and would have withheld financing until the plans were corrected." (Id. at p. 867.)
On factor five, the court found moral blame in Great Western's actions, because Great Western failed to exercise reasonable care to avoid structural defects and "was well aware that the usual buyer of a home is ill-equipped with experience or financial means to discern such structural defects." (Ibid.)
Finally, the court concluded that "the admonitory policy of the law of torts calls for the imposition of liability on Great Western for its conduct . . . ." (Ibid.)