Duty: Does It Matter?

by: Catherine M. Rottier and Tess O’Brien-Heinzen, Boardman Law Firm

A decision recently issued by the Wisconsin Supreme Court, Hoida, Inc., v. M&I Midstate Bank and McDonald Title Co.,1 raises the much-debated question under Wisconsin law of whether a duty analysis is part of the four-pronged test for negligence.  The 4-2 decision provoked both a majority opinion and a rigorous dissent.2  Both opinions recite well-settled principles of negligence law but neither provides true clarity for practitioners in this muddled area.  Although true clarity remains elusive, the case does seem to show that duty still matters in the negligence analysis and has not become obsolete.  Thus, Hoida may lead defendants to frame the old question of negligence in a new and perhaps improved way.

In 1996, The Villager at Nashotah, L.L.C., entered into a loan agreement with M&I Midstate Bank to borrow money to build four eight-unit apartment buildings in Plover, Wisconsin.  The agreement called for M&I to lend a total of $1,320,000 and was secured by four separate real estate mortgages.  M&I engaged McDonald Title to be the disbursing agent for the loan proceeds.  Their contract was oral, with McDonald Title acting solely as the bank’s agent.

The loan agreement between M&I and The Villager stated that M&I “shall not be responsible for any aspect of the Construction ... or the procurement of lien waivers” and that M&I would have “no obligation or liability to contractors, subcontractors, laborers [or] materialmen.”3

The Villager hired Packard Construction, Inc., as the general contractor.  Packard submitted draw requests in October 1996 for four draws of $50,500, one for each of the four buildings.  McDonald Title paid those draw requests and others without obtaining lien waivers even though M&I and McDonald Title conceded that such a practice was contrary to M&I’s internal procedures, standards within the lending industry, and accepted practice in Portage County.

In February 1997, the general contractor subcontracted with plaintiff Hoida, Inc. for prefabricated wooden wall sections and roof trusses.  Hoida performed its work over the next two months. During that time, Hoida was paid only $25,000.  Hoida wrote to The Villager, the project owner, in March explaining that it had lien rights and had not yet been paid for its early invoices.  Nonetheless, Hoida continued to provide materials to the construction site.  On June 5, 1997, almost three months after Hoida commenced delivery of the material, Hoida served The Villager with a Written Notice of Intent to File Construction Lien Claims pursuant to Wis. Stat. § 779.06.

At about that same time, McDonald Title informed the general contractor that no more funds would be disbursed until McDonald Title and M&I received lien waivers for the funds that had already been released.  Ultimately, M&I and McDonald Title learned that Mike Imperl, a principal of The Villager, and John Christianson, the owner of Packard, had misappropriated $650,000 to $700,000 of the construction funds.  Imperl was later indicted for bank fraud.

To recover its losses, M&I foreclosed on The Villager’s mortgages.  Hoida also obtained judgments against The Villager and its guarantors but remained unpaid.  Hoida’s unpaid invoices totaled nearly $300,000.  With interest, it claimed losses of nearly $550,000.

In May 2001, Hoida sued M&I and McDonald Title alleging that they were negligent because they did not identify the subcontractors and materialmen who worked on The Villager project, did not verify that the progress on the work was sufficient to justify the release of loan funds, and did not secure lien waivers from the subcontractors and suppliers before disbursing funds.  The circuit court granted summary judgment in favor of M&I and McDonald Title, finding that neither owed a duty to protect Hoida against the losses it incurred.
           
The court of appeals was unwilling to limit liability based on duty, but affirmed on different grounds.4  The court stated that everyone owes a duty to all others to refrain from any act that would cause foreseeable harm.  Since it was foreseeable that the failure to obtain lien waivers could harm a subcontractor like Hoida, the court of appeals concluded M&I and McDonald Title owed Hoida a duty of care.  In addition, the court found that M&I and McDonald Title breached their duty

of ordinary care, that the breach caused Hoida’s injuries, and that Hoida suffered actual loss.

Although Hoida had established all elements of a negligence claim, the court of appeals ruled in favor of M&I and McDonald Title on grounds of public policy.  The court determined that, since Chapter 779 of the Wisconsin Statutes places lenders above subcontractors in lien prioritization on construction projects, allowing Hoida to recover would contravene the public policy choices of the legislature.5

The supreme court accepted certification and affirmed, but on different grounds.  The court ruled that Hoida had not met its burden of proving that M&I and McDonald Title breached a duty of ordinary care under the circumstances.  Moreover, the court held, even if Hoida had provided such proof, its negligence claim would be precluded by both judicial public policy and legislative public policy.6

The majority framed the issue on appeal as whether Wisconsin law recognizes a lender’s liability to a third party who suffers losses, where the lender and the third party are not in privity of contract and the lender has no fiduciary duty to the
third party. 

In deciding this issue, the court focused first on the common law of negligence and specifically on the issue of duty under Wisconsin’s four-part negligence test.  In Wisconsin, a plaintiff alleging negligence must establish four elements: (1) the existence of a duty of care on the part of the defendant, (2) a breach of that duty of care, (3) a causal connection between the defendant’s breach of the duty of care and the plaintiff’s injury, and (4) actual loss or damage resulting from the breach.7 

The first element relating to duty has been the topic of much debate.  While most lawyers agree that in Wisconsin every person owes a duty of ordinary care, courts in numerous cases have concluded that no duty exists under specific sets of circumstances.

Hoida dealt with duty in a different way, focusing on what duty requires.  The court broke duty into two parts: (a) the existence of a duty of ordinary care; and (2) an assessment of what ordinary care requires under the circumstances.8  As to the existence of duty, the court recited well-settled law that every person has a duty to exercise ordinary care under the circumstances, and that, if a person acts or fails to do an act that a reasonable person would recognize as creating an unreasonable risk of injury or damage to a person or property, he or she is not exercising ordinary care under the circumstances, and is therefore negligent.

The court then turned to what ordinary care requires, stating that “[t]he existence of a duty of ordinary care encompasses what is reasonable according to facts and circumstances present in each individual case.”9  Thus, the circumstances under which the claimed duty arises determine what falls within the duty of ordinary care.
           
To determine what was reasonable under the circumstances of the case before it, the court looked at the business relationships of M&I, McDonald Title and Hoida.  The court pointed out that the business context in which M&I lent construction funds was one in which each party had its own contractual relationship to another in the construction project.  Those contractual relationships shaped the parties’ duty of ordinary care because they set out what the parties agreed was reasonable under the circumstances.

M&I had a contractual relationship with The Villager which specifically provided that M&I had no duty to secure lien waivers or to oversee construction.  McDonald Title’s oral contract with M&I obligated McDonald Title to perform only those tasks that M&I requested.  In light of these contracts, the court concluded that neither M&I nor McDonald Title had a duty of care under the circumstances that encompassed an obligation to identify subcontractors, supervise construction or obtain lien waivers, the acts Hoida alleged the defendants had negligently performed. 

To support its conclusion, the court employed the test of foreseeability.  The court concluded that neither M&I nor McDonald Title could have reasonably foreseen:  (a) that the general contractor and the owner would act together to convert the loan proceeds for the project to their own use; or (b) that Hoida would deliver such a massive amount of materials for the project without enforcing its contract with Packard to be paid within 15 days of delivery.10

Having determined that the defendants’ duty of ordinary care did not include performing the tasks alleged by Hoida, the court ended its discussion by warning future litigants that, when pleading lender liability based on negligence, “a plaintiff must allege why the duty of ordinary care of the lender or disbursing agent includes the obligation to affirmatively undertake the tasks that plaintiff claims the lender or disbursing agent reasonably failed to perform under the circumstances.”11

The court went on to discuss two other limitations on liability.  First, the court determined that, even if McDonald Title had been negligent, public policy considerations developed by the court precluded liability because permitting recovery would place too unreasonable a burden on McDonald Title, a party that acted solely at the discretion of M&I.12  Keeping track of subcontractors, what they purchased and when, and determining whether the progress in the construction is equivalent to the dollar amount of a fund request would be too monumental a task for McDonald Title, the court concluded.13 
Second, the court determined that Hoida’s negligence claim was barred by the legislative determination of priority as between a lender and subcontractor set out in Chapter 779 of the Wisconsin Statutes.14  Developing a new lender liability claim by imposing obligations on a lender that are not contractually required or voluntarily assumed would give subcontractors and suppliers payment priority over construction lenders when a third party acts in a way that could cause loss for both.  Such a result, said the court, would contravene legislative public policy.15  Thus, the majority opinion ultimately affirmed the rationale employed by the Court of Appeals.

The dissent focused primarily on the majority’s negligence analysis, arguing that the majority opinion clouded rudimentary principles of negligence law that allow courts to limit liability for negligence only on grounds of public policy, not duty.  The dissent cited numerous cases holding that, in Wisconsin, common law limitations on liability are determined not by reference to the absence of a duty, but as a matter of public policy.  The dissent complained that the majority ignored this law and focused instead on a detailed duty analysis that is no longer acceptable under Wisconsin law.16

As to the majority’s discussion of public policy, the dissent took issue with the court’s conclusion that permitting recovery would place too unreasonable a burden on McDonald Title.  The dissent emphasized that both M&I’s policies and industry standards require the collection of lien waivers.  Claiming that the parties’ arguments demonstrated significant factual disagreements, the dissent further maintained that the better practice would have been to submit the case to the jury before deciding whether public policy should
preclude liability.

Where does Hoida leave us as a practical matter?  One thing is certain - it does not clarify the ambiguity the duty question has created.  While both the majority opinion and the dissent agree that a duty of ordinary care always exists, neither addresses the line of cases in which the court finds no duty on the part of the defendant as a matter of law.  For example, an insurance agent has no duty to inform an insured concerning the availability or advisability of underinsured motorist coverage (Nelson v. Davidson);17 an insurance agent has no duty to procure coverage when he or she has not agreed to do so (Avery v. Diedrich),18 and a landlord has no duty to the victim of a dog bite on his property when he is neither the owner nor keeper of the dog (Malone v. Fons).19

By returning the focus to the question of duty, Hoida seems to enhance the possibility of arguing successfully for a summary judgment dismissing a claim of negligence.  That is because the existence of a duty and the scope of that duty are questions of law for the court to decide.20  With the proper exposition of the facts, a court, relying on Hoida, may be able to determine as a matter of law that a defendant fulfilled its duty of care under the circumstances. 

In Hoida, the court determined that M&I and McDonald Title did not have a duty of ordinary care to complete the tasks Hoida asserted they should have performed.  The reasoning of Hoida seems largely based on the court’s desire to enforce and not expand the contractual obligations the parties assumed when they agreed to become involved in the construction project.  This part of Hoida is perhaps most instructive.  While the economic loss doctrine does not apply to prevent a party disappointed with the performance of a service contract from suing in tort,21 the terms of the service contract may help define and limit the tort duty.  A defendant company that can demonstrate compliance with all contractual obligations may also demonstrate fulfillment of the duty to exercise ordinary care under the circumstances.

Because the duty analysis and the public policy analysis are not always clearly differentiated, a litigant may be well advised to phrase the argument both ways.  The public policy determination is also a question of law for the court to decide.22  Although there are frequent statements in the case law suggesting that public policy matters should not be decided until after a jury has had a chance to weigh in, there are also numerous cases showing that the public policy decision can be made at the summary judgment or pleadings stage.23 

Allowing a jury to weigh in before a public policy question is determined may seem like a reasonable approach, but frequently it is not.  Burgeoning litigation costs counsel in favor of ruling on public policy considerations sooner rather than later.  Otherwise, a defendant’s costs of proving he is right may be too high to bear, forcing settlements based on financial realities, not legal ones. 

Based on Hoida, defendants may be more willing to take a run at showing compliance with the standard of ordinary care under the circumstances, thereby forcing their opponents to identify specifically the acts or omissions alleged to constitute negligence.  With such a record established, a court may decide that the negligence claim is not viable, either because no duty was breached or because public policy does not support a finding of liability.

Cathy Rottier graduated with honors from the University of Wisconsin Law School in 1986.  She is a partner with Boardman, Suhr, Curry & Field LLP, Madison, where she practices primarily in the area of civil litigation, with an emphasis on insurance and professional malpractice defense. 

M. Tess O’Brien-Heinzen is an associate at the Boardman Law Firm.  Her assistance with this article is greatly
appreciated. 

1Hoida, Inc., v. M&I Midstate Bank and McDonald Title Company, Inc., 2006 WI 69, aff’g, 2004 WI App 191, 276 Wis. 2d 705, 688 NW.2d 691.

2Justice Roggensack authored the majority opinion and was joined by Justices Wilcox, Crooks and Prosser.  Justice Bradley dissented and was joined by Justice Butler.  Chief Justice Abrahamson did not participate.

3Hoida, 2006 WI 69, ¶4, ___ Wis. 2d ___, ___ N.W.2d ___.

4Hoida, Inc. v. M&I Midstate Bank, 2004 WI App 191, ¶¶1, 12.

5Id., ¶¶23-24.

6Hoida, 2006 WI 69, ¶2.

7Gritzner v. Michael R., 2000 WI 68, ¶19, 235 Wis. 2d 781, 611 N.W.2d 906.

8Hoida, 2006 WI 69, ¶27.

9Id., ¶31.

10Id., ¶40.

11Id., ¶46.

12Courts use six public policy factors to limit liability in negligence claims: (1) the injury is too remote from the negligence; (2) the recovery is wholly out of proportion to the culpability of the negligent tort-feasor; (3) the harm caused is highly extraordinary given the negligent act; (4) recovery would place too unreasonable a burden on the negligent tortfeasor; (5) recovery would be too likely to open the way to fraudulent claims; and (6) recovery would enter into a field that has no sensible or just stopping point.  See Hoida, 2006 WI 69, ¶41.  The majority focused on the fourth factor.

13Id., ¶43.

14 Wisconsin Stat. § 779.01(4), gives lien prioritization to lenders over subcontractors in construction contracts.

15Hoida, 2006 WI 69, ¶48.

16Id., ¶¶58-65.

17Nelson v. Davidson,155 Wis. 2d 674, 685, 456 N.W.2d 343 (1990).

18Avery v. Diedrich, 2006 WI App 144, ¶15 (pet. for rev. pending).

19Malone v. Fons, 217 Wis. 2d 746, 753, 580 N.W.2d 697 (Ct. App. 1998).

20Hoida, 2006 WI 69, ¶23 n.12.

21Insurance Co. of  N. America v. Cease Electric, Inc., 2004 WI 139, 276 Wis. 2d 361, 688 N.W.2d 462.

22Rockweit v. Senecal, 197 Wis. 2d 409, 425, 541 N.W.2d 742 (1995).

23See, e.g., Bowen v. Lumbermen’s Mut. Cas. Co., 183 Wis. 2d 627, 654-55, 517 N.W.2d 432 (1994); Kleinke v. Farmers Coop. Supply & Shipping, 202 Wis. 2d 138, 144, 549 N.W.2d 714 (1996).