The Wisconsin Supreme Court has held that a lender’s duty of ordinary care to subcontractors and suppliers did not require the lender to ensure that the plaintiff received payments for its services before loan proceeds were disbursed. In Hoida, Inc. v. M&I Midstate Bank, 717 N.W. 2d 17 (Wis. 2006), the court further found that even if the plaintiff could show that the defendants did owe it such a duty, any recovery would be barred by public policy.

In October 1996, Villager at Nashotah LLC (“Villager”) borrowed approximately $1.32 million from M&I Mid- State Bank (“M&I”) to fund the construction of an eight-unit apartment building. The loan was secured by four separate mortgages. M&I entered into an oral agreement with McDonald Title (“McDonald”) to provide the loan disbursements following withdrawal requests by Packard Construction (“Packard”), Villager’s general contractor.

To receive a disbursement, Packard was required to provide McDonald a written Application and Certification for Payment form that contained Packard’s itemized application for payment, the project architect’s signed certificate for payment, and Villager’s signed certificate as owner/borrower, authorizing payment. The loan agreement stated that M&I was not responsible for any aspect of the construction or the procurement of lien waivers and had no obligation or liability to contractors, subcontractors, laborers or materialmen.

M& I was given the right, but was under no obligation, to inspect the construction project at any time. Villager was required to forward notices to M&I at any time that an individual or business providing goods or services to the project gave notice or made a demand relating to the project. Finally, M&I was given the right to complete construction if any breach of the contract occurred.

Packard purchased prefabricated wood from Hoida Inc. (“Hoida”) for use throughout the project. Pursuant to Hoida’s invoices, Packard was to pay the invoices within 15 days of receipt. Packard failed to pay any of the 51 invoices sent by Hoida. On June 6, 1997, Hoida served Villager with a Written Notice of Intent to File Construction Lien based on its failure to pay the invoices. On July 7, 1997, McDonald sent a letter to Villager informing it that two subcontractors, including Hoida, had filed notices of Intent to File Liens.

McDonald received no response from Villager. Throughout the month of July, McDonald became increasingly concerned about the construction project based on a variety of factors, including Packard’s failure to provide construction breakdowns and lien waivers, and the general lack of progress on the project. On July 28, Hoida filed a Claim for Lien on the project. M&I subsequently commenced foreclosure on Villager’s mortgages.

In May 2001, Hoida sued M&I and McDonald, alleging that they failed to protect Hoida against the losses that it incurred. The circuit court granted summary judgment for M&I and McDonald. The trial court found that Hoida failed to state a claim for relief and could not show that there was an affirmative duty to collect lien waivers. Hoida appealed. The court of appeals affirmed.

Hoida then appealed to the Wisconsin Supreme Court. The court concluded that public policy considerations precluded recovery.

Hoida claimed that McDonald and M&I were negligent and breached their duty of care by failing to perform certain tasks. Hoida alleged that M&I and McDonald owed it a duty of ordinary care, which included identifying the subcontractors and materialmen for the project; verifying that sufficient work on the project had been completed to justify disbursement, and collecting lien waivers from Hoida before disbursing advances. Hoida claimed these tasks constituted basic industry standards, and if a lender did not complete these tasks it was reasonably foreseeable that subcontractors or materialmen would be harmed.

The Supreme Court found that McDonald was not bound by the standard set forth by Hoida and that it did not breach its ordinary duty of care to Hoida. Further, even if McDonald had breached its ordinary duty of care, such a claim would be barred on public policy grounds, the court concluded. Wisconsin employs the near universal standard for negligence. There must be: (1) the existence of a duty of care; (2) breach; (3) causal connection between defendant’s breach and plaintiff’s injury; and (4) actual loss or damage resulting from the breach.

State courts have reserved the right to deny a negligence claim based upon public policy. There are six public policy factors that Wisconsin courts use to 15limit liability in negligence claims: (1) injury is too remote; (2) recovery is wholly out of proportion to the culpability of the negligent tortfeasor; (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.

Finding that allowing Hoida to recover would place too unreasonable a burden on McDonald, which acted solely at the discretion of M&I, the Supreme Court concluded that Hoida’s claim was barred based on public policy grounds. M&I could not be required to track and check every aspect of Packard’s dealings with subcontractors and suppliers. Not only would this task be never-ending, but it also would place an unreasonable burden on M&I. As such, even if Hoida could show that M&I and McDonald breached its duty of ordinary care, public policy precluded recovery by Hoida.