        IN THE COURT OF APPEALS OF TENNESSEE, WESTERN SECTION
                                 AT JACKSON
            _______________________________________________________

                                    )
WILLIE LOMAX and wife,              )     Shelby Equity No. 104517-1
BOBBIE LOMAX,                       )
                                    )
  Plaintiffs/Appellants.            )
                                    )
VS.                                 )     C. A. NO. 02A01-9607-CH-00163
                                    )
HEADLEY HOMES, a Tennessee          )
General Partnership composed of     )
Dennis Headley and Betty Headley,   )
                                    )
                                                 FILED
  Defendants                        )
                                    0        May 22, 1997
AND                                 )
                                    )     Cecil Crowson, Jr.
LEADER FEDERAL BANK FOR             )     Appellate C ourt Clerk

SAVINGS and GEORGE E. BURTON, )
                                    )
   Defendants/Appellees.            )
______________________________________________________________________________

From the Chancery Court of Shelby County at Memphis.
Honorable Neal Small, Chancellor



J. Alan Hanover,
Jeffrey S. Rosenblum,
HANOVER, WALSH, JALENAK & BLAIR, PLLC, Memphis, Tennessee
Attorney for Plaintiffs/Appellants.



Robert E. Craddock, Jr.,
O. John Norris, III,
WYATT, TARRANT & COMBS, Memphis, Tennessee
Attorney for Defendants/Appellees Union Planters National Bank and George E. Burton.



OPINION FILED:

AFFIRMED IN PART, REVERSED IN PART AND REMANDED


                                          FARMER, J.



CRAWFORD, P.J., W.S. : (Concurs)
LILLARD, J. : (Concurs)
               Plaintiffs Willie and Bobbie Lomax appeal the trial court’s order entering summary

judgment in favor of Defendants/Appellees Leader Federal Bank for Savings 1 and George E. Burton.

The trial court apparently granted the Defendants’ motion for summary judgment based upon the

provisions of the Construction Loan Agreement entered into between the Lomaxes and Leader

Federal. We affirm the trial court’s order as to Defendant George E. Burton. With regard to

Defendant Leader Federal, however, we reverse and remand for further proceedings.



                                             I. Facts



               For purposes of the Defendants’ summary judgment motion, the following facts were

undisputed. In April 1993, the Lomaxes approached Leader Federal to obtain a construction loan

for a home the Lomaxes planned to build in southeast Memphis. At the bank, the Lomaxes first

spoke with Cheryl Hayes. Ms. Hayes informed the Lomaxes that their contractor, Headley Homes,

was on Leader Federal’s approved list of builders; that Leader Federal had an inspector in its employ

who would make sure Headley Homes was paid only for work that was actually completed; and that

Leader Federal would make disbursements to Headley Homes only for work that was actually

completed.



               In reliance on Ms. Hayes’ representations,2 the Lomaxes executed a Construction

Loan Agreement with Leader Federal. Regarding Leader Federal’s obligation to disburse funds

thereunder, the Agreement provided that:



               Lender [Leader Federal] agrees to advance and disburse the loan, . . .
               in installments as work progresses in accordance with schedule
               attached, or if no schedule attached, then the Lender is authorized to
               disburse funds under its control in said construction loan account only
               in proportion to its inspector’s report of progress or by architect’s
               certificate accompanied by a proper affidavit from the contractor.




       1
         After this litigation began, Leader Federal was acquired by Union Planters National
Bank. Accordingly, this Court recently entered an order granting Leader Federal’s motion to
substitute Union Planters National Bank as Defendant/Appellee.
       2
        In deciding this appeal, we express no opinion on the admissibility of the statements
allegedly made by Ms. Hayes to the Lomaxes prior to their execution of the Construction Loan
Agreement.
The Agreement also contained the following provision:



              Lender has no liability in connection with said improvements or the
              construction or completion thereof or work performed thereon and
              has no obligation except to advance the loan as herein agreed. The
              Borrower [the Lomaxes] acknowledges and hereby accepts the sole
              responsibility for the selection of his own contractor, materials,
              supplies and equipment to be used in the construction, and the Lender
              assumes no responsibility for the completion of the improvements
              according to the plans and specifications and for the contract price, all
              inspections by Lender or its representative for its benefit, and the
              Borrower should not rely on such inspections or acceptance by
              Lender to be for his protection regardless of the circumstances,
              representations or appearance as may hereinafter exist.



              The Construction Loan Agreement authorized Leader Federal to disburse loan

proceeds to the “Borrower or to the Contractor or any other persons furnishing labor, supplies or

services for or in connection with the construction or completion of said improvements.”3 After

executing the Agreement, the Lomaxes authorized Leader Federal to disburse the loan proceeds

directly to their contractor, Headley Homes. Mrs. Lomax thought that Leader Federal would ask for

the Lomaxes’ permission each time it issued a check to Headley Homes. Mrs. Lomax later

discovered that Leader Federal was issuing checks directly to Headley Homes without first seeking

permission from the Lomaxes. When Mrs. Lomax questioned someone at Leader Federal about the

payments, she was told that “that was the procedure.”



               Leader Federal’s construction inspector was Defendant George E. Burton. In

conducting his final inspection of the Lomaxes’ home in March 1994, Burton authorized

disbursements to Headley Homes for work that was never completed. Burton later admitted that he

missed some items in the final inspection and that he “did a really bad job inspecting the Lomax

home.” As a result, the Lomaxes obtained a home which, contrary to Burton’s final inspection

report, was not substantially complete. Additionally, some of the construction work that had been

completed contained blatant and obvious defects.



               The Lomaxes subsequently filed this action against Headley Homes, Leader Federal,


       3
        Although this provision authorized Leader Federal to disburse funds directly to the
Borrower, the language of this and other provisions of the Agreement suggested that this option
applied to situations where the Borrower and the Contractor were the same entity.
and Burton for the faulty construction of the Lomaxes’ house. The Lomaxes’ amended complaint

sought to hold Leader Federal liable for its breach of the duty of good faith and fair dealing,

negligence, and misrepresentation.4 The complaint sought to hold Burton individually liable for his

negligent inspection of the home.



               Leader Federal and Burton filed a motion for summary judgment and attached a copy

of the Construction Loan Agreement. The trial court granted the motion and directed the entry of

a final judgment in favor of Leader Federal and Burton. See T.R.C.P. 54.02. On appeal, the

Lomaxes present the following issue for review:



                       Whether an exculpatory clause in a construction loan
               agreement can relieve a lender who negligently disburses loan
               proceeds to a builder for work that has not been completed from any
               and all liability associated with construction of a home, including
               blatant misrepresentations made by such lender.



Accordingly, this appeal requires us to determine whether the “exculpatory” provision contained in

the Construction Loan Agreement is enforceable against the Lomaxes so as to bar their present action

against Leader Federal. Whether the provision is an exculpatory clause is addressed later.



              II. Leader Federal’s Duty to Disburse Construction Loan Proceeds



               As a preliminary matter, however, we must determine what duty, if any, Leader

Federal owed to the Lomaxes with respect to inspection of the Lomaxes’ home and disbursement

of the loan proceeds. If Leader Federal owed no duty to the Lomaxes, then the Lomaxes have no

cause of action against Leader Federal and we need not decide the issue of the enforceability of the

exculpatory provision contained in Leader Federal’s contract.



               In the absence of a contrary agreement between the parties, the general rule in

Tennessee is that a lender owes no duty to a borrower to disburse loan proceeds for the borrower’s



       4
        In their complaint, the Lomaxes also asserted a claim for violation of the Tennessee
Consumer Protection Act of 1977. See T.C.A. §§ 47-18-101 to -5002 (1995 & Supp. 1996). On
appeal, however, no issue has been raised regarding the trial court’s dismissal of this claim.
benefit. In disbursing loan proceeds, therefore, a lender has no affirmative duty to protect the

borrower’s interests. Goodner v. Lawson, 232 S.W.2d 587, 589-90 (Tenn. App. 1950) (in absence

of agreement, loan association had no duty to pay mechanic’s liens out of loan proceeds prior to

disbursing loan proceeds to contractor); see also Forest Inc. v. Guaranty Mortgage Co., 534 S.W.2d

853, 856-59 (Tenn. App. 1975) (in absence of express contractual provision or industry custom,

lender had no duty to subordinate creditors, such as suppliers, materialmen, and developer, to inspect

construction and advance funds to contractor only in proportion to percentage of construction

completed).



               An exception to the general rule arises, however, where a lender assumes such a duty

by express or implied agreement. Goodner v. Lawson, 232 S.W.2d at 589-90. For example, where

a lender retains the loan proceeds and assumes the responsibility of discharging prior liens, the lender

may be liable for its negligent failure to perform this duty. Prater v. Fidelity Trust Co., 34 S.W.2d

205, 207 (Tenn. 1930); see also Crum v. AVCO Fin. Servs., 552 N.E.2d 823, 827 (Ind. Ct. App.

1990) (lender who agrees to disburse loan proceeds for certain purpose must exercise due care in

performance of obligation); 59 C.J.S. Mortgages § 297 (1949) (“If . . . the mortgagee agrees to apply

the proceeds for a certain purpose he is liable for a failure to do so.”).



                Although a lender’s duty to a borrower when disbursing construction loan proceeds

apparently has not been considered by Tennessee courts,5 courts in other jurisdictions have

recognized that a lender’s duty in this situation is governed by the provisions of the construction loan

agreement between the lender and the borrower. Thus, in Henry v. First Federal Savings & Loan

Ass’n, 459 A.2d 772, 775 (Pa. Super. Ct. 1983), a Pennsylvania court held that, in the absence of a

contractually assumed duty, a loan association owed no duty to borrowers to inspect construction of

the borrowers’ home prior to making progress payments to the borrowers’ contractor. Although the

construction loan agreement’s terms gave the association the right to enter the construction premises

and to conduct inspections, the agreement did not require the association to do so. Similarly, in

Daniels v. Army National Bank, 822 P.2d 39, 42 (Kan. 1991), the Kansas court held that, in the



       5
        Cf. Forest Inc. v. Guaranty Mortgage Co., 534 S.W.2d 853, 856-59 (Tenn. App. 1975)
(addressing lender’s duty to subordinate creditors when lender disburses construction loan
proceeds).
absence of a contractual provision to the contrary, the bank had no duty to inspect the construction

site for the protection of the borrowers prior to disbursing loan proceeds. There, the contract

authorized, but did not require, the bank to inspect the progress of the work and the quality of the

workmanship. See also Meyers v. Guarantee Sav. & Loan Ass’n, 144 Cal. Rptr. 616, 619-20 (Ct.

App. 1978) (holding that, in absence of contractual provision imposing such duty, savings and loan

association had no duty to inspect construction to determine that work had been done according to

specifications prior to making payments to contractor from loan proceeds).



               In contrast, the Construction Loan Agreement at issue in the present case did impose

a duty, albeit a limited one, on Leader Federal relative to its disbursement of the loan proceeds. The

Agreement authorized Leader Federal “to disburse funds under its control in said construction loan

account only in proportion to its inspector’s report of progress.” By its express terms, this provision

imposed a two-fold duty on Leader Federal: (1) Leader Federal, through its inspector, was obligated

to make a report of progress of the construction;6 and (2) Leader Federal was obligated to disburse

loan proceeds only in proportion to the inspector’s report of progress. Inasmuch as Leader Federal

retained the loan proceeds and expressly assumed the duty to disburse the proceeds subject to the

provisions of the parties’ Agreement, Leader Federal may be held liable for its negligent performance

of this duty. Prater v. Fidelity Trust Co., 34 S.W.2d at 207; Goodner v. Lawson, 232 S.W.2d at

589-90; 59 C.J.S. Mortgages § 297 (1949).7



               Although we conclude that Leader Federal did owe a duty to the Lomaxes, we find

it necessary to explain why we have described the duty as a limited one. By the express terms of the

Construction Loan Agreement, Leader Federal only assumed a duty to inspect the progress of the

work and to make loan disbursements in proportion to such progress. Leader Federal did not

undertake to inspect the construction for defective, as opposed to incomplete, work. Accordingly,


       6
         As previously indicated, the Construction Loan Agreement also gave Leader Federal the
option, in disbursing the loan proceeds, of relying on an architect’s certificate, accompanied by
the contractor’s affidavit. Inasmuch as Leader Federal chose to rely on its own inspector’s report
of progress, we need not address the question of Leader Federal’s liability had it instead chosen
to rely on the architect and contractor.
       7
         Moreover, in Tennessee the common law imposes upon Leader Federal a duty of good
faith in performing this contractual obligation. Wallace v. National Bank of Commerce, 938
S.W.2d 684, 686 (Tenn. 1996); accord Crum v. AVCO Fin. Servs., 552 N.E.2d 823, 827 (Ind.
Ct. App. 1990) (reaching same conclusion under Indiana law).
to the extent that the Lomaxes’ complaint seeks to recover against Leader Federal for any defects in

the construction of their home, we conclude that the trial court properly granted summary judgment

in favor of Leader Federal.8 See Daniels v. Army Nat’l Bank, 822 P.2d at 42 (absent contractual

provision imposing such a duty, bank had no duty to inspect construction site for quality of

workmanship prior to disbursing loan proceeds to contractor); Henry v. First Fed. Sav. & Loan

Ass’n, 459 A.2d at 775 (absent provision in construction loan agreement imposing such duty, loan

association had no duty to inspect construction work for quality of workmanship as well as quantity

of work before disbursing construction loan funds); see also Davis v. Nevada Nat’l Bank, 737 P.2d

503, 505 (Nev. 1987) (normally, lender “has no duty to exercise care to identify unworkmanlike or

deficient construction”).9


       8
        We recognize that, under some circumstances, a finder of fact might have difficulty
ascertaining what constitutes defective construction, as opposed to merely incomplete
construction. At this point in the proceedings, however, we need not address such a hypothetical
issue.
       9
        In Davis v. Nevada National Bank, the Nevada court limited the circumstances under
which a borrower could sue for defective construction to cases where:

               (1)     the lender assumes the responsibility or the right to
               distribute loan proceeds to parties other than its borrower during
               the course of construction;

               (2)     the lender is apprised by its borrower of substantial
               deficiencies in construction that affect the structural integrity of the
               building;

               (3)     the borrower requests that the lender withhold further
               distributions of loan proceeds pending the satisfactory resolution of
               the construction deficiency;

               (4)    the lender continues to distribute loan proceeds in complete
               disregard of its borrower’s complaints and without any bona fide
               attempt to ascertain the truth of said complaints; and

               (5)     the borrower ultimately is damaged because the substance
               of the borrower’s complaints was accurate and the borrower is
               unable to recover damages against the contractor or other party
               directly responsible for the construction deficiencies.

Davis v. Nevada Nat’l Bank, 737 P.2d at 506. On appeal, the Lomaxes suggest that their action
against Leader Federal falls within this exception because, during construction of their home,
Mrs. Lomax complained about Headley Homes’ work to Leader Federal employees. Even if this
Court were to adopt the exception set forth in Davis v. Nevada National Bank, we conclude that
the facts of this case do not fall within such exception. Here, Leader Federal was not apprised by
the Lomaxes “of substantial deficiencies in construction that affect[ed] the structural integrity of
the building.” Id. At most, the evidence reveals that Mrs. Lomax complained that Headley
Homes “was slow about doing the work” and that the “work wasn’t going right.” Further, Mrs.
Lomax admitted that she never requested Leader Federal to withhold further disbursements of the
loan proceeds pending the satisfactory resolution of Mrs. Lomax’s complaints. Finally, at this
point in the proceedings, there is no showing that the Lomaxes will be unable to recover damages
                III. The Construction Loan Agreement’s Exculpatory Provision



                Having defined the duty owed by Leader Federal to the Lomaxes, we next must

determine the validity of the Construction Loan Agreement’s exculpatory provision. As an initial

matter, we must determine whether the provision at issue even qualifies as an exculpatory clause.

An exculpatory clause is one which deprives one party to the agreement of the right to recover

damages for harm caused by the other party’s negligence. Crawford v. Buckner, 839 S.W.2d 754,

755-56 (Tenn. 1992). The clauses typically contain such language as “landlord . . . shall not be liable

to tenant . . . for any injury to the person or loss of or damage to property for any cause,” Id. at 755,

and “I completely release [the doctor] and his staff from any present or future responsibility.”

Olson v. Molzen, 558 S.W.2d 429, 430 (Tenn. 1977). It is not necessary that the word “negligence”

appear in the exculpatory clause. Empress Health & Beauty Spa v. Turner, 503 S.W.2d 188, 190

(Tenn. 1973).



                Upon reflection, we believe that the provision at issue in this case meets the above

definition of an exculpatory clause because the provision seeks to relieve Leader Federal of any

liability in connection with inspection and completion of construction of the Lomaxes’ home.

Specifically, the provision states that Leader Federal has no liability in connection with the

construction, that Leader Federal assumes no responsibility for completion of the construction, and

that the Lomaxes should not rely on Leader Federal’s inspections of the construction to be for the

Lomaxes’ protection.      As previously discussed, Leader Federal assumed a duty under the

Construction Loan Agreement to inspect the progress of the construction and to disburse funds only

in proportion to its report of progress. Having expressly assumed this duty, Leader Federal may be

held liable for its negligent performance of such duty. Prater v. Fidelity Trust Co., 34 S.W.2d at

207; Goodner v. Lawson, 232 S.W.2d at 589-90; 59 C.J.S. Mortgages § 297 (1949). Accordingly,

to the extent that the foregoing provision seeks to relieve Leader Federal from any liability associated

with its performance of this duty, we conclude that the provision qualifies as an exculpatory clause.




against the contractor, Headley Homes.
                As for the validity of the exculpatory clause, Tennessee courts “have long recognized

that, subject to certain exceptions, parties may contract that one shall not be liable for his negligence

to another.” Olson v. Molzen, 558 S.W.2d 429, 430 (Tenn. 1977). Indeed, “the public policy of

Tennessee favors freedom to contract against liability for negligence.” Empress Health & Beauty

Spa v. Turner, 503 S.W.2d 188, 190 (Tenn. 1973). In the absence of fraud or overreaching,

therefore, such exculpatory provisions generally are held to be enforceable. Houghland v. Security

Alarms & Servs., 755 S.W.2d 769, 773 (Tenn. 1988).



                Nevertheless, under certain circumstances, such exculpatory clauses may be invalid

as contrary to public policy. In Olson v. Molzen, 558 S.W.2d 429 (Tenn. 1977), our supreme court

adopted criteria to be used in determining the validity of a particular exculpatory provision. In order

for such an exculpatory provision to be held invalid under the “public interest” exception, the

underlying transaction must possess at least some of the following characteristics:



                (a.)   [The transaction] concerns a business of a type generally
                thought suitable for public regulation.

                (b.)    The party seeking exculpation is engaged in performing a
                service of great importance to the public, which is often a matter of
                practical necessity for some members of the public.

                (c.)    The party holds himself out as willing to perform this service
                for any member of the public who seeks it, or at least for any member
                coming within certain established standards.

                (d.)   As a result of the essential nature of the service, in the
                economic setting of the transaction, the party invoking exculpation
                possesses a decisive advantage of bargaining strength against any
                member of the public who seeks his services.

                (e.)   In exercising a superior bargaining power, the party confronts
                the public with a standardized adhesion contract of exculpation, and
                makes no provision whereby a purchaser may pay additional
                reasonable fees and obtain protection against negligence.

                (f.)    Finally, as a result of the transaction, the person or property
                of the purchaser is placed under the control of the seller, subject to the
                risk of carelessness by the seller or his agents.



Olson v. Molzen, 558 S.W.2d at 431 (quoting Tunkl v. Regents of University of California, 383

P.2d 441, 445-46 (Cal. 1963)).
                 In Olson v. Molzen, the court explained that not all of these transactional criteria

needed to be present to invalidate an exculpatory provision under the public interest exception, but

the court did not indicate just how many of the criteria needed to be present, other than “some.”

Olson v. Molzen, 558 S.W.2d at 431. In any event, the court found that all of the characteristics

were present in that case. There, the plaintiff signed a release which purported to relieve an

osteopath from any legal responsibility associated with the osteopath’s performance of an abortion

on the plaintiff. In invalidating the release, the court analyzed the application of the public interest

criteria:



                        Applying the first criterion, we can hardly think of any area
                 more suitable for public regulation than abortions. . . .

                         [The doctor] held himself out as being willing to perform
                 abortions for the general public. This is obvious from the fact that he
                 operated an abortion clinic. [The plaintiff] met the statutorily
                 established standards. . . .

                         [The plaintiff] wanted an abortion. [The doctor] performed
                 abortions. It begs the question to say she could have gone to another
                 doctor or that she elected to undergo a surgical procedure that was not
                 mandatory. Perhaps so. However, there is no assurance that any
                 other doctor would not have made a similar demand. The record does
                 not show how many other physicians in the Knoxville area perform
                 abortions, but we have no doubt but that the number is limited.
                 Physicians are not required to perform abortions. . . . [The plaintiff]
                 had a right to elect to have a legal surgical procedure performed even
                 though there was no compelling medical necessity.

                        ....

                         The doctor not only exercised a superior bargaining power,
                 but there is nothing to indicate that he made any provision for the
                 payment of additional compensation or fees to obtain insurance or
                 protection against negligence.

                         As a direct consequence of this transaction, [the plaintiff]
                 placed her person under the control of [the doctor] subject to the risk
                 of negligence after he had demanded that she contract away any cause
                 of action that might arise.

                        ....

                        Under the guidelines herein adopted, we hold that an
                 exculpatory contract signed by a patient as a condition of receiving
                 medical treatment is invalid as contrary to public policy and may not
                 be pleaded as a bar to the patient’s suit for negligence.



Id. at 431-32.
                The supreme court similarly invalidated an exculpatory provision in Crawford v.

Buckner, 839 S.W.2d 754 (Tenn. 1992). In that case, as a condition of renting an apartment from

the defendants, the plaintiff was required to sign the defendants’ standard form lease. The lease

contained an exculpatory clause which purported to relieve the defendants from any liability to the

plaintiff “for any injury to the person or loss of or damage to property for any cause.” Id. at 755.

After the plaintiff suffered injuries while escaping a fire in the apartment complex, the plaintiff sued

the defendants for negligence, citing the defendants’ negligent failure to maintain the fire alarm and

other theories. Id. As before, the court applied the public interest criteria to the facts of the case and

concluded that all of the criteria were present:



                [F]irst, we conclude a residential lease concerns a business of a type
                that is generally thought suitable for public regulation. Our
                conclusion is bolstered by the fact that the legislature of this state has
                seen fit to regulate this area, and that other states, . . . have enacted
                legislation regulating the residential landlord-tenant relationship. . . .

                          Second, it is clear we no longer live in an agrarian society
                where land, not housing, was the important part of a rental agreement.
                Nor do we live in an era of the occasional rental of rooms in a private
                home or over the corner grocery. Residential landlords offer shelter,
                a basic necessity of life, to more than a million inhabitants of this
                state. . . . Accordingly, it is self-evident that a residential landlord is
                engaged in performing a service of great importance to the public,
                which is often a matter of practical necessity for some members of the
                public. In addition, a residential landlord holds itself out as willing
                to perform a service for any member of the public who seeks it. . . .

                        With respect to the fourth public interest criterion, as a result
                of the essential nature of the service and the economic setting of the
                transaction, a residential landlord has a decisive advantage in
                bargaining strength against any member of the public who seeks its
                services. A potential tenant is usually confronted with a “take it or
                leave it” form contract, which the tenant is powerless to alter. The
                tenant’s only alternative is to reject the entire transaction.

                        Moreover, due to its superior bargaining position, a residential
                landlord confronts the public with a standardized adhesion contract
                of exculpation, which contains no provision whereby a tenant can pay
                additional reasonable fees to obtain protection from the landlord’s
                negligence. The lease in this case is a good example. In her affidavit
                in opposition to the defendants’ motion for summary judgment, [the
                plaintiff] testified that she was given the defendants’ standard lease
                form to sign, and was never offered the opportunity to pay additional
                reasonable fees to obtain protection from the landlords’
                negligence. . . .

                        Finally, we conclude that by definition a residential lease
                places the person and the property of the tenant under the control of
                the landlord, subject to the risk of carelessness by the landlord and his
                 agents. . . .

                          ....

                         Based on the foregoing, we conclude that the exculpatory
                 clause in the residential lease in this case is contrary to public policy.



Id. at 757-59.



                 Turning to the case at bar, we conclude that these public interest criteria apply to the

home construction loan transacted by the Lomaxes and Leader Federal. As an initial matter, we note

that the consumer lending activities of banks and other financial institutions fall within the type of

business generally thought suitable for public regulation. The legislature of this state, for example,

has enacted legislation authorizing financial institutions to make loans and imposing certain

restrictions on such activities. See T.C.A. §§ 45-2-1101 to -1108 (1993 & Supp. 1996) (banks);

T.C.A. §§ 45-3-701 to -707 (1993) (savings and loan associations); T.C.A. §§ 45-4-601 to -610

(1993) (credit unions); T.C.A. §§ 45-5-401 to -405 (1993 & Supp. 1996) (industrial loan and thrift

companies). The United States Congress also has enacted laws regulating this area. See 12 U.S.C.A.

§§ 83--86 (West 1989) (lending powers of national banks); 12 U.S.C.A. §§ 2801--2810 (West 1989

& Supp. 1997) (home mortgage disclosure requirements); 15 U.S.C.A. §§ 1601--1667 (West 1982

& Supp. 1997) (truth in lending requirements).



                 Moreover, Leader Federal, the party seeking exculpation, was engaged in performing

a service of great importance which was a practical necessity for some members of the public. See

Crawford v. Buckner, 839 S.W.2d at 758 (noting that shelter is “basic necessity of life”). In her

deposition, Mrs. Lomax testified that neither she nor her husband had ever been involved in the

construction of a new home, although they had purchased existing homes before. When the

Lomaxes decided to buy a new house during the spring of 1993, they began looking at existing

homes, but they were unable to find a home that suited their needs. As a result, like many couples,

the Lomaxes decided to build a new home.10 The Lomaxes found a lot that they liked, purchased the

lot from Headley Homes, and then proceeded to negotiate with Headley Homes to construct the


       10
         In this regard, we observe that the public interest exception requires only that the service
be a “practical” necessity; the service need not be a “compelling” necessity. Olson v. Molzen,
558 S.W.2d at 431.
home. In order to finance the construction project, the Lomaxes turned to Leader Federal. In this

regard, Leader Federal held itself out as willing to make home construction loans to any members

of the public who sought such loans, provided the customers met certain established standards.

Here, the Lomaxes met the loan qualifications and, thus, were extended a home construction loan

by Leader Federal.



               With respect to the fourth public interest criterion, as a result of the essential nature

of the service and the economic setting of the transaction, Leader Federal had a decisive advantage

in bargaining strength against the Lomaxes or any other member of the public who sought its

services. This conclusion is supported by evidence in this case that the Lomaxes were confronted

with a “take-it-or-leave-it” form agreement which they were powerless to alter. In his deposition,

Wayne Anderson, the Senior Vice President in charge of Leader Federal’s Construction Lending

Department, gave the following testimony:



               Q.      Is this the same construction loan agreement the bank uses on
               every single one of its construction loan agreements?

               A.      Yes.

               Q.     Every provision that’s contained in the seven pages of this
               construction loan agreement is in every other construction loan
               agreement.

               A.      Yes.

               Q.     Including the paragraph, the famous paragraph which is, I
               believe, 3-H, which I will refer to as the exculpatory clause.

               A.      Yes.

               Q.     Has Leader Federal ever agreed to take out the provision
               contained in paragraph 3-H in any of its construction loan
               agreements, to the best of your knowledge?

               A.      No.

               Q.      It’s in every single one of those agreements.

               A.      Every single one.

               Q.     To the best of your knowledge, do you know if anyone has
               ever asked that Leader Federal remove that provision?

               A.      No.
               Q.      But if they would ask, Leader Federal would refuse; is that
               correct?

               A.      Yes.



Under these circumstances, the Lomaxes’ only alternative was to reject the entire transaction with

Leader Federal.



               Based on the foregoing testimony, we also conclude that the Construction Loan

Agreement executed in this case possessed sufficient characteristics of an adhesion contract to satisfy

the fifth public interest criterion.11 In extending a loan to the Lomaxes, Leader Federal confronted

them with a standardized Construction Loan Agreement which authorized Leader Federal to disburse

the loan proceeds to the Lomaxes’ contractor in accordance with the progress reports of Leader

Federal’s inspector. In a subsequent provision, however, the form Agreement purported to exculpate

Leader Federal from any liability in connection with completion of the construction and, relative

thereto, provided that the Lomaxes had no right to rely on Leader Federal’s inspections of the

construction. The Lomaxes were never offered the opportunity to pay additional reasonable fees to

obtain protection from Leader Federal’s negligence in disbursing the loan proceeds. Although

customers might or might not choose to pay higher interest rates to obtain such protection, in our

view the important consideration is that the Lomaxes were never offered such an opportunity.



               Finally, we conclude that by definition the Construction Loan Agreement placed the

Lomaxes’ property under the control of Leader Federal, subject to the risk of carelessness by Leader

Federal and its agent, George Burton. Although the Agreement advanced a construction loan to the

Lomaxes, the Agreement placed the loan proceeds under the control of Leader Federal. Because of

Burton’s admitted carelessness, some of the loan proceeds were applied toward phases of

construction which never were completed. Despite the fact that the Lomaxes’ loss may have been


       11
          We recognize that the Construction Loan Agreement executed in this case may not
possess all of the characteristics of an adhesion contract as recently set forth by the supreme court
in Wallace v. National Bank of Commerce, 938 S.W.2d 684 (Tenn. 1996). Nevertheless, we
believe that the Agreement possesses enough adhesive qualities to satisfy the fifth public interest
criterion. In reaching this conclusion, we are reminded that not all of the public interest criteria
must be present in order for an exculpatory provision to be found invalid as contrary to public
policy. Olson v. Molzen, 558 S.W.2d at 431; accord Crawford v. Buckner, 839 S.W.2d at 757;
Smith v. Peoples Bank, No. 01A01-9111-CV-00421, 1992 WL 117061, at *4 (Tenn. App. June
3, 1992).
occasioned by the acts of Leader Federal’s employee, if the Agreement’s exculpatory provision were

upheld, the Lomaxes still would be responsible for repaying the entire amount of the loan proceeds

to Leader Federal.



               Based on the foregoing analysis of the public interest criteria, we conclude that the

exculpatory clause in the Construction Loan Agreement executed by the Lomaxes and Leader

Federal is contrary to public policy and, thus, is unenforceable. Accordingly, we reverse the trial

court’s order granting summary judgment to Leader Federal.



                              IV. Burton’s Liability for Negligence



               We affirm, however, that portion of the trial court’s order granting summary judgment

to George Burton. The Lomaxes’ negligence action against Burton is based on section 552 of the

Restatement (Second) of Torts:



               (1)     One who, in the course of his business, profession or
               employment, or in any other transaction in which he has a pecuniary
               interest, supplies false information for the guidance of others in their
               business transactions, is subject to liability for pecuniary loss caused
               to them by their justifiable reliance upon the information, if he fails
               to exercise reasonable care or competence in the obtaining or
               communicating of the information.

               (2)    Except as stated in Subsection (3), the liability stated in
               Subsection (1), is limited to loss suffered

                      (a)     by the person or one of a limited group of persons for
               whose benefit and guidance he intends to supply the information or
               knows that the recipient intends to supply it; and

                       (b)     through reliance upon it in a transaction that he intends
               the information to influence or knows that the recipient so intends or
               in a substantially similar transaction.



John Martin Co. v. Morse/Diesel, Inc., 819 S.W.2d 428, 431 (Tenn. 1991) (quoting Restatement

(Second) of Torts § 552 (1977)).



                 The Supreme Court of Tennessee has adopted section 552 as the appropriate

standard for actions by third parties against professionals and business persons based on negligent
misrepresentation. John Martin Co., 819 S.W.2d at 431; see also Bethlehem Steel Corp. v. Ernst &

Whinney, 822 S.W.2d 592, 595 (Tenn. 1991). Under this standard, a defendant may incur liability

in tort when, despite a lack of contractual privity with the plaintiff,



                      (1)     the defendant is acting in the course of his business,
               profession, or employment, or in a transaction in which he has a
               pecuniary (as opposed to gratuitous) interest; and

                       (2)     the defendant supplies faulty information meant to
                guide others in their business transaction; and

                       (3)     the defendant fails to exercise reasonable care in
                obtaining or communicating the information; and

                        (4)     the plaintiff justifiably relies upon the information.



John Martin Co., 819 S.W.2d at 431 (emphases in original).



                The principal requirements of this rule are that “the information supplied must be

false and the supplier must have failed to exercise reasonable care or competence in obtaining or

communicating the information.” McFarlin v. Watts, 895 S.W.2d 687, 690 (Tenn. App. 1994). The

rule is not limited to professionals but includes non-professionals involved in business activities or

transactions. Ritter v. Custom Chemicides, Inc., 912 S.W.2d 128, 131 (Tenn. 1995). As in other

negligence actions, the defendant may raise the plaintiff’s comparative negligence as a defense.

John Martin Co., 819 S.W.2d at 432.



                Applying the foregoing standard, we conclude that the trial court properly entered

summary judgment in favor of Burton on the Lomaxes’ claim under section 552. Although the first

three elements of this cause of action appear to be present in this case, the undisputed evidence

shows that the fourth element has not been met because the Lomaxes did not justifiably rely on the

faulty information provided by Burton.



                With regard to the first two elements of this cause of action, it is undisputed that

Burton, acting in the course of his employment, supplied faulty information which was intended to

guide others in their business transaction. Specifically, Burton falsely represented that certain phases

in the construction of the Lomaxes’ home had been completed when, in fact, the construction had
not been completed. Moreover, the intended result of this information was to influence Leader

Federal to disburse the Lomaxes’ construction loan proceeds to the contractor, Headley Homes. As

for the third element, the evidence indicates that Burton failed to exercise reasonable care in

obtaining or communicating this information, at least with regard to the final inspection report.



               Regarding the fourth element, however, the undisputed evidence demonstrates that,

contrary to their contention, the Lomaxes (as opposed to Leader Federal) did not act in reliance upon

Burton’s faulty inspection report. The Lomaxes’ amended complaint alleges that, in completing the

closing transaction on the house, the Lomaxes relied on the representation contained in Burton’s

final inspection report that the home was “O.K. for satisfactory completion.” The uncontradicted

deposition testimony of Mrs. Lomax, however, fails to support this allegation of reliance.



               The purpose of the closing was to convert the Lomaxes’ construction loan into a

permanent mortgage. Mrs. Lomax’s deposition reveals that, prior to the closing, the Lomaxes visited

the site on a regular basis to observe the progress of the construction of their home. In accordance

with this practice, the Lomaxes inspected the site on the day of the closing. At the time of the

closing, therefore, the Lomaxes knew which portions of the construction had not been completed.

The Lomaxes were given a final accounting statement showing the amount of loan proceeds being

disbursed to Headley Homes, the amount of proceeds being retained to pay for uncompleted items,

and the items that had not been completed. The final accounting statement showed that, upon

completion of the closing, most of the loan proceeds would be disbursed to Headley Homes.

Because the Lomaxes had inspected the house themselves and knew many of the construction items

had not been completed, they asked the closing attorney if more of the loan proceeds could be

retained and then disbursed at a later time when the incomplete items were finished. Despite their

knowledge that the house was not complete and that most of the construction loan proceeds were

being disbursed to Headley Homes, the Lomaxes still chose to complete the closing. Mrs. Lomax

explained that, if the Lomaxes had not closed on the date in question, they would have incurred a

penalty.



               Based on the undisputed evidence, we conclude that summary judgment was properly

granted because no genuine issue of material fact exists with regard to whether the Lomaxes relied
upon the faulty information provided by Burton. The evidence reveals that, in spite of their

knowledge of the discrepancy between the percentage of the house that was completed and the

percentage of the loan proceeds that were being disbursed, the Lomaxes proceeded to close on the

house in order to avoid paying a penalty. Under these circumstances, the Lomaxes could not have

justifiably relied on the information provided in Burton’s final inspection report.



                                          V. Conclusion



                The trial court’s judgment in favor of Burton is affirmed; however, the trial court’s

judgment in favor of Leader Federal is reversed and this cause remanded for proceedings consistent

with this opinion. Costs of this appeal are taxed to Leader Federal, for which execution may issue

if necessary.



                                                              ________________________________
                                                              FARMER, J.



______________________________
CRAWFORD, P.J., W.S. (Concurs)



______________________________
LILLARD, J. (Concurs)
