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Callaizakis v. Astor Development Co.

FEBRUARY 18, 1972.

MICHAEL G. CALLAIZAKIS ET AL., PLAINTIFFS-APPELLANTS,

v.

ASTOR DEVELOPMENT CO. ET AL., DEFENDANTS — (UPTOWN FEDERAL SAVINGS & LOAN ASSOCIATION OF CHICAGO, DEFENDANT-APPELLEE.)



APPEAL from the Circuit Court of Cook County; the Hon. SAMUEL B. EPSTEIN, Judge, presiding.

MR. JUSTICE DRUCKER DELIVERED THE OPINION OF THE COURT:

Plaintiffs appeal from the dismissal of defendant, Uptown Federal Savings & Loan Association of Chicago, as a party defendant. The trial court certified that the dismissal was to be considered a final and appealable order.

This is a class action. The two classes of plaintiffs are (1) owners of condominium apartments located at 6101 North Sheridan Road East, Chicago, Illinois (hereinafter "East Point"), and (2) owners of condominimum apartments at East Point who purchased their apartments from the builder and developer, Astor Development Company, a defendant in this action. Also joined as defendants were Morris Handler Company, Inc., (the general contractor), The Arpen Group, Inc., (the architect), Commonwealth Edison Company, (a sub-contractor), and the defendant-appellee, Uptown Federal Savings & Loan Association of Chicago (the financer of the project and hereinafter "Uptown").

The relevant counts of the complaint sound in tort and allege that the defendants were all guilty of various negligent acts and omissions which caused East Point to be constructed with substantial structural defects. The sole issue on this appeal is whether the amended complaint states a cause of action against the defendant Uptown. We, therefore, set forth below the pertinent portions of the amended complaint.

After stating that the premises "were not constructed in a good and workmanlike manner or in accordance with the representations and agreements made by defendant Astor" (the builder and developer), and then specifying the various structural defects, plaintiffs alleged the following:

"(12). Defendant Uptown was aware of the purposes for which its construction loan to Astor was to be used and was aware of the fact that the condominium units in East Point were to be sold to the general public. Uptown was aware of the advertising done and used to promote the sale of units in East Point, and was aware of the form and contents of the purchase agreements entered into between Astor and plaintiffs.

(13). Plaintiffs believe that defendant Uptown, through its duly authorized agents, inspected the East Point premises on several occasions during its construction and prior to the taking of possession by plaintiffs, for the purpose of determining whether said premises were being constructed in accordance with the plans and specifications and in a good and workmanlike manner fit for habitation and occupancy, and to determine whether said premises complied with the purchase agreements entered into by plaintiffs. Plaintiffs believe that Uptown employed its own architects and engineers to inspect and supervise the construction of East Point, and for the aforesaid purposes, and that said architect and engineer inspected the construction site on numerous occasions prior to completion. As a consequence of its inspection of the premises, Uptown assumed a duty to the plaintiffs to inspect the premises in a careful manner so as to detect defective workmanship and materials and to so inform plaintiffs prior to their payment and taking of possession."

Plaintiffs contend that the sole issue is whether a savings and loan institution which finances a residential construction project owes an independent duty to the original and subsequent owners of homes or apartments therein "[t]o exercise reasonable care that the homes are constructed without defects, if the activities of the savings and loan association in connection with the construction project take on attributes beyond the domain of the usual lender of money." In their complaint plaintiffs not only alleged defendants' duty to detect defective workmanship and materials but a duty to inform plaintiffs of such defects. They claim this question is one of first impression in this state. Both parties rely extensively on Connor v. Great Western Savings and Loan Association (1968), 73 Cal.Rptr. 369, 447 P.2d 609, aff'g. 61 Cal.Rptr. 333 (Dist.Ct.App. 1967), in which the California Supreme Court (Traynor) held that under the facts of that case the financial lending institution did owe a duty to the purchasers of residential homes to exercise reasonable care so that the homes were built free of construction defects. Each party interprets Connor as being supportive of its respective position.

Plaintiffs urge that the allegations in the amended complaint place this case within the rule laid down in Connor. They then argue that the Illinois courts should adopt the Connor rationale.

Defendant, on the other hand, contends that on its facts Connor is distinguishable from the allegations set forth in the amended complaint and that the Connor holding should not be expanded to meet the alleged facts. As a backup argument, defendant states that even if the amended complaint states a cause of action under Connor, the Connor decision should not be adopted in this state on policy grounds.

A detailed discussion of Connor is necessary. The plaintiffs in Connor were purchasers of homes from Canejo Valley Development Company (hereinafter Canejo). Defendant, Great Western Savings and Loan Association (hereinafter Great Western), was a large California lending institution which financed the residential project. Great Western was approached by a land developer, David Goldberg, who was then president of South Gate Development Company. South Gate sought a loan in order to purchase a 100 acre tract of land in Ventura County, California, and to construct residential homes thereon. After coming to terms on the details of the project, Great Western loaned South Gate the funds to purchase the tract. Thereafter Canejo was substituted for South Gate as purchaser of the tract. Canejo had been incorporated several months earlier. Its net capital was $5000. Great Western knew that both Goldberg's and South Gate's financial conditions were weak and that Goldberg and his business associate had little experience in the construction industry. It required Canejo to submit plans and specifications for the various types of proposed homes. Great Western did not examine the foundation plans, as was its usual procedure when making a construction loan, nor did it make recommendations as to design or construction. As the court stated, "It was preoccupied with selling prices and sales."

Great Western's financial interests in the project were substantial. It received the following: (1) 6.6% interest on the construction loan of $3,000,000 to Canejo; (2) a 5% construction loan fee; (3) the right of first refusal to supply mortgage funds to the eventual purchasers of homes; if a purchaser approved by Great Western wished to obtain long term financing elsewhere, Great Western had 10 days to meet the terms of the proposed financing; if it met the terms but the buyer still financed elsewhere, South Gate Development Company, Goldberg and his business associate were liable to Great Western for the fees and interest obtained by the other lender; (4) a 1.0 to 1.5% loan fee from Canejo for every purchaser who obtained mortgage funds from Great Western; (5) a 20% capital gain on its land investment resulting from a financial technique called "land warehousing" whereby Great Western financed the original purchase of the 100 acre tract and held title to it until the developer (Canejo) was ready to use it; at that time Canejo would repurchase the land from Great Western at a price 20% above Great Western's cost.

Great Western had agreed to make the necessary construction loans to Canejo only "after assuring itself that the homes could be successfully built and sold." During the course of construction Great Western's inspectors visited the property weekly to verify that the plans were being followed and that money was being disbursed only for work completed.

The court found that Great Western and Canejo were not participants in a joint venture so as to render Great Western vicariously liable for Canejo's negligent acts but that Great Western owed an independent duty to exercise reasonable care to prevent ...


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