A construction loan of $1.35 million was obtained by Frank and Beverly Booker from First Citizens National Bank to finance their home construction, later modified to $1.7 million. During the construction, the Bookers requested loan draws, which the bank processed without performing required inspections as stipulated in the loan agreement. By spring 2006, the loan funds were exhausted before the home was completed. Subsequently, the contractor, Jim Suzich, filed a materialmen’s lien for $95,000 against the property, leading the Bookers to counterclaim against the bank for breach of contract. They argued that the bank failed to conduct inspections before disbursing funds, which resulted in improper disbursements and additional costs. The trial court granted summary judgment in favor of the bank, concluding it had no contractual duty to inspect, and the Bookers’ appeal was affirmed by the Court of Appeals.
The Bank denied any failure to inspect the construction of the Bookers' residence and asserted it had no duty to do so. It filed a motion for summary judgment, supported by an affidavit from Nick Nichols, the former community bank president, who stated he had conducted multiple inspections between 2004 and 2006, along with 23 dated inspection sheets. The Bank referenced terms in the construction loan agreement indicating its inspections aimed to protect its own interests, thus arguing it owed no duty to the Bookers.
In opposition, the Bookers claimed through Beverly Booker’s affidavit that no inspections occurred prior to January 2006, despite being present onsite daily. A subsequent supplemental affidavit from Mrs. Booker corrected her earlier statement about the duration of their presence on site, but it remained unclear which four months she referred to. The trial court granted summary judgment for the Bank, determining it had no inspection duty under the loan agreement, negating a vital element of the Bookers’ breach of contract claim. The ruling was certified as final, prompting the Bookers to appeal.
On appeal, the Bookers contended that the trial court mistakenly concluded the Bank had no inspection obligation. The Bank maintained that the trial court acted correctly, either due to a lack of duty or because inspections were indeed conducted. The appellate court affirmed the trial court’s summary judgment, noting that issues of contract interpretation are apt for summary judgment resolution, confirming that no genuine material facts were in dispute.
The dispute centers on whether the case outcome is influenced by the precedent set in Lomax v. Headley Homes. In Lomax, plaintiffs sued a bank for negligently disbursing a construction loan to a builder for incomplete work. The court addressed the bank's duty regarding inspection and disbursement of loan proceeds, establishing that, under Tennessee law, lenders generally have no duty to protect borrowers' interests in disbursing loan funds unless explicitly agreed otherwise. Prior cases indicate that without a specific agreement, a lender is not obligated to ensure that funds are paid only for completed work or to prioritize the interests of other creditors. However, if a lender assumes such a duty through an express or implied agreement, they may be held liable for negligence. Other jurisdictions have similarly ruled that a lender's responsibilities in construction loans are dictated by the terms of the loan agreement. For instance, Pennsylvania and Kansas courts found no duty to inspect construction unless the contract imposed such a requirement. Thus, the lender's obligation to inspect or protect the borrower's interests during loan disbursement is contingent upon the contractual agreements in place.
The construction loan agreement between the Lomaxes and the bank imposed a limited duty on the bank regarding the disbursement of loan proceeds. The bank was required to advance the loan in installments based on the progress reported by its inspector. While the bank had an obligation to report on construction progress and disburse funds accordingly, it explicitly disclaimed any liability for the construction or completion of the improvements and stated that the borrower (the Lomaxes) was solely responsible for selecting contractors and materials. The bank did not undertake to inspect for defects, leading to a ruling that summary judgment was appropriate in its favor regarding such claims.
In analyzing the terms of the construction loan agreement between the Bookers and the bank, the court will focus on the bank's assumed duties concerning loan disbursement and construction inspections. The interpretation of contracts is governed by the intention of the parties, requiring that all provisions be given reasonable meaning without nullifying any part of the agreement. The Bookers highlighted a specific provision concerning conditions precedent to loan disbursements, which included inspection requirements.
The Bank and its consulting architect must inspect the Project and verify that it meets quality standards and complies with Plans and Specifications before disbursing loan proceeds. However, contract interpretation requires that all provisions be considered as a whole. Prior sections of the agreement emphasize that the Bookers must fulfill certain conditions precedent, including providing documents, making timely payments, and allowing inspections, before receiving advances. The Bank is not obligated to inspect or supervise the Project, nor to inform the Bookers about its progress. Inspections conducted by the Bank serve solely for its protection and do not imply compliance by the Bookers with the contract or applicable laws. Thus, the Bank had the right, but not the obligation, to conduct inspections prior to fund disbursement. The trial court's ruling in favor of the Bank regarding the Bookers' breach of contract claim for failure to inspect was upheld, affirming that the Bookers' obligations were necessary for disbursements, not the Bank's. The costs of the appeal are assigned to the Bookers and their surety.
