Trying Wrong Legal Theory Like Trying to Pound Square Peg Into Round Hole

Since 1985, the Iowa Supreme Court has recognized an implied warranty of workmanlike construction for homeowners. The purpose of the warranty is to address the disparity in bargaining power and expertise between the consumer and a sophisticated builder-vendor. It provides the homeowner a cause of action against the builder where the house, when sold, was not reasonably fit for its intended purpose or had not been constructed in a good and workmanlike manner. The doctrine originated in 1972, when the Court adopted an implied warranty of habitability for a tenant leasing a home. In 2008, the Court extended the doctrine further to find that it also applied to subsequent purchasers of the home.

Recently, the Court refused an opportunity to extend the doctrine again, this time finding that there was no valid policy reason for providing the warranty to a sophisticated financial institution foreclosing on residential property. The Court stated that the bank’s effort to recover from the builder under the implied warranty as a foreclosing lender was “like trying to pound a square peg into a round hole.”

A bank provided financing to a company developing two apartment complexes. After the developers failed to pay their obligations under the promissory note, the bank obtained the apartment buildings through a deed in lieu of foreclosure. When acquired, the complex was infested by black mold and not habitable. The bank sued the builder, alleging “shoddy construction” and arguing that the implied warranty of workmanship construction should be applied to its case.

The Court rejected the bank’s theory, refusing to extend the implied warranty of workmanlike construction to protect the bank. The Court noted that no other court has ever extended the theory to allow recovery by a foreclosing lender. The Court also stated that a clear majority of courts had refused to allow recovery under the doctrine by for-profit owners of apartment buildings. The Court found that there was no valid policy reason to extend the implied warranty doctrine to a sophisticated financial institution that can protect itself through other measures. It thus affirmed the summary judgment dismissing the bank’s implied warranty claim.