Vogan v. Hayes Appraisal Associates, Inc.

The Vogans (the plaintiffs) hired a contractor to build a new home. They obtained a construction loan from MidAmerica Savings Bank (MidAmerica) for $170,000. MidAmerica entered into a contract with Hayes Appraisal Associates, Inc. (the defendant), whereby the defendant agreed to monitor the progress of the construction of the plaintiff’s home. MidAmerica would disburse payments to the contractor based upon Hayes’s progress reports.

In November of 1989, construction commenced. By December, the defendant reported that 25% of construction was completed. By February of 1990, all but $168,000 of the $170,000 loan was disbursed as a result of cost overruns. Additionally, the plaintiffs took out a second loan for $42,000 and incurred out-of-pocket expenses to MidAmerica to disburse to the contractor. By March, the defendant reported that 90% of the construction was completed. By October, the contractor defaulted, substantial construction was still needed, and the entire original loan and additional money was used up. Another contractor estimated that it would take an additional $60,000 to complete the construction.

Subsequently, the plaintiffs stopped payments to MidAmerica, who then sought to foreclose on the property. The plaintiffs counterclaimed, arguing that MidAmerica failed to follow its disbursement procedures when it did not retain at least 30% of the loan until completion of the construction.

The plaintiffs settled with MidAmerica and subsequently filed suit against the defendant for negligent performance of the contract between the defendant and MidAmerica.

The defendant filed a motion for summary judgment, arguing that the plaintiffs did not suffer damages as a result of their late-March report because MidAmerica already disbursed all but $2,000 of the original loan. The trial court denied the motion.

At trial, the defendant moved for a directed verdict, arguing that the plaintiffs were not an intended beneficiary of the contract. The trial court entered judgment in favor of the plaintiffs. The defendant appealed. The court of appeals reversed, holding that the contract, including the progress reports, governed the disbursement of the original loan only, not the disbursement of any of the additional money. The plaintiffs appealed to the Iowa Supreme Court.