## Facts

- Homeowners Susan and Rollin Vogan contracted with a builder to construct a new residence for about $169,633.59.
- The Vogans financed construction through a $170,000 construction mortgage from MidAmerica Savings Bank.
- MidAmerica engaged Hayes Appraisal Associates, Inc. to perform an initial appraisal and periodic progress inspections so the bank could make progress payments to the builder based on Hayes’s reports.
- Hayes appraised the lot and proposed home at $250,000.
- Construction began in late 1989; Hayes issued progress reports stating percentages of completion used by the bank to disburse loan proceeds.
- Cost overruns depleted the original loan proceeds; the builder represented that significant additional funds were needed to finish.
- The Vogans obtained a second mortgage and contributed additional personal funds, turning those funds over to the bank to continue progress payments based on Hayes’s progress reports.
- The Vogans alleged Hayes overstated construction completion, resulting in continued disbursements despite substantial unfinished work.
- The builder ultimately defaulted, and a replacement contractor estimated substantial additional funds were required to complete the home.
- After a foreclosure dispute with the bank was settled, the Vogans sued Hayes seeking damages for negligent performance of Hayes’s contract with the bank as intended third-party beneficiaries.

## Issues

1. Whether the Vogans were intended third-party beneficiaries of the contract between MidAmerica and Hayes, permitting them to sue Hayes for negligent performance.
2. Whether Hayes’s inaccurate progress reports were a proximate cause of the Vogans’ losses, including losses tied to the second mortgage and personal funds advanced after the original loan proceeds were largely disbursed.

## Decision

- The Iowa Supreme Court granted further review, vacated the court of appeals decision, and affirmed the district court’s judgment for the Vogans.
- The court held the Vogans were intended third-party beneficiaries of the MidAmerica–Hayes agreement because Hayes knew its services were rendered for the Vogans’ benefit in connection with disbursement of construction funds for their project.
- The court held there was sufficient evidence for the factfinder to determine Hayes’s negligent progress reporting was a substantial factor in causing the Vogans’ losses, including losses tied to later disbursements from the second mortgage and the Vogans’ personal funds.

## Legal Principles

- A nonparty may enforce a contract as an intended third-party beneficiary when the promisor knows its performance is intended, at least in part, to benefit that nonparty rather than merely producing an incidental benefit.
- A professional retained by a lender to inspect and report construction progress may owe enforceable contractual duties to borrower-owners when the professional understands its reports will be used to control disbursements on the borrowers’ project.
- Causation may be established when inaccurate progress certifications foreseeably induce continued disbursement of funds and the resulting losses are linked to reliance on those certifications, even if the original loan funds were largely disbursed before later reports.

## Conclusion

The court reinstated a judgment for borrower-owners against an appraisal/inspection firm, holding the owners were intended beneficiaries of the lender’s inspection contract and that negligent progress reports could proximately cause recoverable losses, including losses from additional funds advanced in reliance on those reports.


Vogan v. Hayes Appraisal Assocs., Inc., 588 N.W.2d 420 (Iowa 1999)