In Kroeger v AEC Enterprises Construction, Inc., 2009 WL 4981180 (Mich App), the Michigan Court of Appeals affirmed the Circuit Court’s decision granting summary disposition to Republic Bank on the plaintiff’s claims that the bank breached the construction loan agreement by disbursing loan proceeds when sworn statements submitted for those advances contradicted the bank inspector’s progress reports. In granting summary disposition, the Kroeger Court focused on the language set forth in the construction loan agreement and found that the clear and unambiguous language obligated the bank to advance the construction proceeds or otherwise expose the bank to liability for failure to do so.

The plaintiffs argued that under Michigan law a lender must disburse loan proceeds only after work is completed and will be liable for funds disbursed for work not documented in sworn statements and lien waivers. In rejecting this argument, the court found that the conditions contained in the construction loan agreement did not create a promise and a duty on behalf of the bank. Rather, the provisions concerning the bank’s inspections are solely for the benefit of the bank and, therefore, created no obligation on behalf of the lender.

In addition to rejecting the plaintiff’s interpretation of the construction loan agreement, the Court of Appeals also affirmed the Circuit Court’s decision to dismiss the plaintiff’s implied covenant of good faith and fair dealing claim as Michigan law does not recognize a cause of action for breach of the implied covenant of good faith and fair dealing. Furthermore, the Court of Appeals also affirmed the Circuit Court’s granting of sanctions in favor of the lender as the customer’s claims were devoid of arguable legal merit as the plain language of the construction loan agreement contravening the customer’s theory of relief.

In light of the Kroeger decision, an owner or contractor should never rely on its lender to properly disburse construction loan proceeds because a lender’s determination as to when such proceeds should be advanced may be incorrect. Accordingly, it is important for an owner or a contractor to stay actively involved in the disbursement of construction loan proceeds to ensure the funds are not being advanced prematurely.