DePaul Law Review Volume 19 Issue 2 Winter 1969 Article 8 Torts - Lender Liability for Discoverable Structural Defects in New Tract Housing Michael O'Connor Follow this and additional works at: https://via.library.depaul.edu/law-review Recommended Citation Michael O'Connor, Torts - Lender Liability for Discoverable Structural Defects in New Tract Housing, 19 DePaul L. Rev. 394 (1969) Available at: https://via.library.depaul.edu/law-review/vol19/iss2/8 This Comments is brought to you for free and open access by the College of Law at Via Sapientiae. It has been accepted for inclusion in DePaul Law Review by an authorized editor of Via Sapientiae. For more information, please contact [email protected]. LENDER LIABILITY FOR DISCOVERABLE STRUCTURAL DEFECTS IN NEW TRACT HOUSING During the past decade the residential construction industry has under- gone substantial structural change. Many residential contractors today build housing developments of five hundred and more homes, whereas in 1950 the average contractor built only three or four homes per year.' Just as mass production techniques in the automotive industry, for exam- ple, have generated novel legal remedies,2 the marketing of housing on a massive scale has required an evolution in legal theory. In the sale of residential property, most states8 still adhere to the strict common law rule of caveat emptor, which provides that there is no implied warranty of freedom from structural defects in a conveyance of realty; the vendee accepts the property as is and assumes full responsibility for defects. 4 The plethora of exceptions to this rigid rule, however, has con- tinued to expand.5 Early exceptions to the rule were permitted in cases of fraud,0 on nuisance theories,7 and where particular use by the purchaser was intended to be or reasonably could be anticipated." More recently, several jurisdictions have explicitly asserted an implied warranty of hab- itability or good workmanship in the sale of new housing.9 A few states 1. Brehm, The Residential Construction Industry, in ADAMS, THE STRUCTURE OF AMERICAN INDUSTRY 108, 112 (1960). 2. E.g., MacPherson v. Buick Motor Co., 217 N.Y. 382, 111 N.E. 1050 (1916). 3. See Annot., 25 A.L.R.3d 383 (1969). 4. See, e.g., Druid Homes, Inc. v. Cooper, 272 Ala. 415, 131 So. 2d 884 (1961); Voight v. Ott, 86 Ariz. 128, 341 P.2d 923 (1959); Dooley v. Berkner, 113 Ga. App. 162, 147 S.E.2d 685 (1966). 5. See Bearman, Caveat Emptor in the Sale of Realty-Recent Assaults upon the Rule, 14 VAND. L. REV. 541 (1961); Dunham, Vendors Obligation as to Fitness of Land for a ParticularPurpose, 37 MINN. L. REV. 108 (1953). 6. Pennsylvania Steel Co. v. Elmore & Hamilton Contracting Co., 175 F. 176 (N.D. N.Y. 1909); O'Brien v. American Bridge Co., 110 Minn. 364, 125 N.W. 1012 (1910); Belote v. Memphis Development Co., 208 Tenn. 434, 336 S.W.2d 441 (1961); Dooley v. Berkner, supra note 5; Bray v. Cross, 98 Ga. App. 612, 106 S.E.2d 315 (1958). 7. Ackerman v. Ellis, 81 N.J.L. 1, 79 A. 883 (1911); Delaney v. Supreme Inv. Co., 251 Wis. 374, 29 N.W.2d 754 (1947); Schumacher v. Carl G. Neumann Dredging & Imp. Co., 206 Wis. 220, 239 N.W. 459 (1931). 8. Grodstein v. McGivern, 303 Pa. 555, 154 A. 794 (1931); Cf. Colbert v. Holland Furnace Co., 333 Ill. 78, 164 N.E. 162 (1928); McGlone v. William Angus Inc., 248 N.Y. 197, 161 N.E. 469 (1928). 9. E.g., F & S Construction Co. v. Berube, 322 F.2d 782 (10th Cir. 1963); Carpenter v. Donohoe, 154 Colo. 78, 388 P.2d 399 (1964); Humber v. Morton, 394 1969] COMMENTS 395 have gone further by applying negligence, 10 products liability," and strict liability theories.' 2 Thus the scope of relief for defects in new housing has been expanded by widening the grounds for relief and by dispensing with the requirements of privity, thereby extending relief to a larger group of plaintiffs-subsequent purchasers and injured third parties. However, even the broad remedies of products liability and strict lia- bility are inadequate against an insolvent or defunct construction com- pany. There are thousands of small companies that enter and leave the residential construction industry according to the ebb and flow of demand for housing and availability of financing.' 3 It is not unusual for a con- tractor to create a company to undertake a single development and then dissolve it after completing the project.' 4 Furthermore, since most con- struction firms, even those undertaking large developments, are severely undercapitalized and must obtain almost total financing from savings and loan associations at relatively high cost in terms of fees and interest, 15 the stage was set for an extension of liability far beyond the comparative de- velopment of products liability. In the future, where a valid claim of an aggrieved home purchaser is frustrated by an insolvent or defunct con- tractor, he may have recourse against the institutional lender which coop- erated with the irresponsible builder. In the case of Connor v. Great Western Savings and Loan Ass'n.,'8 the California Supreme Court has made the first step toward imposing liability on an institutional lender for structural defects in new housing. The objective of this paper is threefold: to briefly discuss the peculiar role of the savings and loan association in the residential construction in- 426 S.W.2d 554 (Tex. Sup. Ct. 1968); Westwood Development Co. v. Esponge, 342 S.W.2d 623 (Tex. Civ. App. 1961). 10. E.g., Sabella v. Wisler, 59 Cal. 2d 21, 377 P.2d 889 (1963); Mitchem v. Johnson, 7 Ohio St. 2d 66, 218 N.E.2d 594 (1966); Rogers v. Scyphers, 251 S.C. 128, 161 S.E.2d 81 (1968); Belote v. Memphis Development Co., 51 Tenn. App. 423, 369 S.W.2d 97 (1962). 11. E.g., Dow v. Holly Mfg. Co., 49 Cal. 2d 720, 321 P.2d 736 (1958); Lowe v. Francis Constr. Co., 373 P.2d 51 (Okla. 1962); Leigh v. Wadsworth, 361 P.2d 849 (Okla. 1961); Fisher v. Simon, 15 Wis. 2d 207, 112 N.W.2d 705 (1961); Freeman v. Mazzera, 150 Cal. App. 2d 61, 309 P.2d 510 (1957). 12. State Stove Mfg. Co. v. Hodges, 189 S.2d 113 (Miss. 1966), cert. denied, 386 U.S. 912 (1967). 13. See Lefcoe & Dobson, Savings Associations as Land Developers, 75 YALE L.J. 1271, 1273-82 (1965); LEFCOE, LAND DEVELOPMENT LAW 631 (1966); Smith Low Rise Speculative Apartment, 50, 52, Real Estate Research Program, University of California, Berkeley (1964). 14. Lefcoe & Dobson, supra note 13, at 1277. 15. Lefcoe & Dobson, supra note 13, at 1276. See also Connor v. Great West- ern Saving and Loan Ass'n, 73 Cal. Rptr. 369, 373, 447 P.2d 609, 611 (1968). 16. Supra note 15. 396 DE PAUL LAW REVIEW [Vol. XIX dustry; to analyze the nature and scope of the duty imposed by Connor; and to assess the practical implications of such a duty for the institutional lender. FINANCING ARRANGEMENTS IN THE RESIDENTIAL CONSTRUCTION INDUSTRY Approximately sixty-five per cent of the builders in America construct less than forty per cent of the single family homes each year, 17 usually contracting with the owner of the land to build a dwelling on an individual or build-to-suit basis. Builders in this group generally construct between ten and twenty-five units per year.18 The remaining builders are gener- ally termed "speculative" builders. A speculative development involves the purchase of a large tract of land, the construction of twenty to five hundred and more homes, and finally (during or after construction of the homes) sale of the homes to purchasers.'0 The large scale developer thus acts in a dual capacity: as builder and as salesman. In the latter cate- gory, developers typically use mass production merchandising techniques; for example, several model homes may be built for inspection by prospec- tive buyers. On the basis of the model, the purchaser may contract to buy a house before, during, or after its actual construction. The position of a purchaser in a tract development thus stands in sharp contrast to an individual who arranges for construction of a custom-made house. Al- though in either case a purchaser may be dissatisfied with the quality of materials and workmanship put into his house, studies report the most vociferous complaints are from purchasers in tract developments. 20 For a number of legal and economic reasons, savings and loan associa- tions contribute the bulk of financing for almost all tract developments. 2' First, restrictions on investments and loans imposed by statute and Internal Revenue Service rulings generally limit associations to investing most of their available funds in loans on residential properties, predominantly on one to four family units.2 2 The tract developer is thus an attractive and logical borrower. A second consideration involves the market forces under which a savings and loan association must operate. The cost of obtaining capital is high for a savings and loan association because it 17. Rogg, The Changing Home Building Industry, in UNITED STATES SAVINGS AND LOAN LEAGUE, SAVINGS AND LOAN ANNALS 1960 at 167, 175. 18. Id. 19. Lefcoe & Dobson, supra note 13, at 1283; Brehm, supra note 1, at 124-5. 20. Herzog, The Dynamics of Large-Scale Housebuilding 39, Real Estate Re- search Program, University of California, Berkeley (1963). 21. Lefcoe & Dobson, supra note 13, at 1273-82, 1297. 22. UNITED STATES SAVINGS & LOAN LEAGUE, 1969 SAVINGS & LOAN FACT BOOK 102 [hereinafter cited as 1969 FACT BOOK].