Iowa Supreme Court refuses to extend protections of implied warranty of workmanlike construction

by Gary Taylor

Luana Savings Bank v. Pro-Build Holdings, Inc. and United Building Centers
(Iowa Supreme Court, December 12, 2014)

Rosauer Corporation v. Sapp Development, LLC et al.
(Iowa Supreme Court, December 12, 2014)

In two cases decided December 12, the Iowa Supreme Court addressed the scope of the implied warranty of workmanlike construction.  This is a common law remedy developed by the courts “to protect an innocent home buyer by holding the experienced builder accountable for the quality of construction.”  When introduced by the Iowa Supreme Court in 1985 as a “logical extension of the implied warranty of habitability for a tenant leasing a home.”  The primary policy reason for these warranties is the “protection of innocent homeowners as consumers…to address the disparity in bargaining power between the consumer and the sophisticated builder-vendor.”

In Iowa, the elements of the implied warranty of workmanlike construction are:
(1) That the house was constructed to be occupied by the warrantee as a home;
(2) that the house was purchased from a builder-vendor, who had constructed it for the purpose of sale;
(3) that when sold, the house was not reasonably fit for its intended purpose or had not been constructed in a good and workmanlike manner;
(4) that, at the time of purchase, the buyer was unaware of the defect and had no reasonable means of discovering it; and
(5) that by reason of the defective condition the buyer suffered damages.

In Luana Savings Bank v. Pro-Build Holdings, Inc. and United Building Centers  the Court was asked to extend the warranty to protect a bank that had acquired a mold-infested apartment complex by deed in lieu of foreclosure.  Luna Savings Bank had financed the construction of two apartment buildings that, after a series of transactions, came to be owned by Shalom Rubashkin, an owner of Agriprocessors, Inc. in Postville, who was eventually indicted, convicted, and sentenced to prison for bank fraud and other financial and  immigration crimes after the federal Immigration and Customs Enforcement raid on Agriprocessors in 2008.  In June 2009 Rubashkin gave the bank a deed in lieu of foreclosure in satisfaction of the bank’s mortgage interest in the apartment complexes.  It was then that the bank discovered substantial black mold in the apartments, resulting from improper installation of window and air conditioning units, and inadequate attic ventilation.

After determining that the bank’s claim failed the 5-part test set forth above, the court found that none of the policy justifications for the implied warranty of workmanlike construction justified extending it for the protection of lenders.  A defective dwelling is not the same problem for a lender as it is for a home dweller.  Furthermore, the lender has other ways of protecting itself in a transaction, and it is not the case that the lender is in an unequal bargaining position relative to the builder.

In Rosauer Corporation v. Sapp Development, LLC et al. the court refused the protections of the implied warranty to the purchaser of a residential lot without a home or other structure.  In this case the plaintiff, a contractor-developer, bought a lot from a realtor to build townhomes for sale. The contractor alleged that the lot had improperly compacted backfill, requiring extensive additional work to get it ready for construction. Plaintiff sued the original developers whose contractor had performed the substandard soil work.

The court applied the 5 elements listed above, and found the plaintiff’s claim lacking in all respects. As in Luana Savings, the court then examined the policy justifications for the implied warranty of workmanlike construction and found that they did not demand the extension of its protection to this purchaser, who was in no way in a similar position to an innocent homebuyer.

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