A-1 Door & Materials Co. v. Fresno Guarantee Sav. & Loan Ass'n

• Decision Date: 25 August 1964
• Docket Number: A-1
• Citation: 61 Cal.2d 728,40 Cal.Rptr. 85,394 P.2d 829
• Court: California Supreme Court
• Parties: , 394 P.2d 829 DOOR AND MATERIALS COMPANY, Plaintiff, Cross-defendant and Respondent, v. FRESNO GUARANTEE SAVINGS & LOAN ASSOCIATION, Defendant, Cross-complainant and Appellant; M. Kellner & Son Lumber Company et al., Cross-defendants and Respondents, Benjamin Levitt et al., Cross-defendants and Appellants. S. F. 21372.

Page 85

40 Cal.Rptr. 85

61 Cal.2d 728, 394 P.2d 829

A-1 DOOR AND MATERIALS COMPANY, Plaintiff, Cross-defendant and Respondent, v. FRESNO GUARANTEE SAVINGS & LOAN ASSOCIATION, Defendant, Cross-complainant and Appellant;

M. Kellner & Son Lumber Company et al., Cross-defendants and Respondents,

Benjamin Levitt et al., Cross-defendants and Appellants.

S. F. 21372.

Supreme Court of California, In Bank.

Aug. 25, 1964.

Docker, Docker, Perkins & Shelton, John M. Shelton and Frederick W. Docker, Fresno, for defendant, cross-complainant and appellant.

McKenna & Fitting, Norman H. Raiden, James C. Peterson, Los Angeles, Morrison, Foerster, Holloway, Clinton & Clerk, Douglas C. White, Landels, Ripley, Gregory & Diamond and Edward D. Landels, San Francisco, as amici curiae on behalf of defendant, cross-complainant and appellant.

Doty, Quinlan & Kershaw, Burke & La Rue and William A. Quinlan, Fresno, for cross-defendants and appellants.

Clifford R. Lewis, Sacramento, for plaintiff, cross-defendant and respondent.

Hynes, Bowser & Brunn and McKnight Brunn, Oakland, as amici curiae on behalf of plaintiff, cross-defendant and respondent.

Meux, Gallagher, Baker & Manock, Kendall L. Manock and Ralph Moradian, Fresno, for cross-defendants and respondents.

TRAYNOR, Justice.

Defendant and certain cross-defendants appeal from a judgment for plaintiff and cross-defendants determining the rights of unpaid materialmen to the proceeds of construction loans held by defendant savings and loan association.

The case was tried on an agreed statement of facts. Defendant entered into three construction-loan agreements with the owners of three parcels of unimproved real property. Each loan was secured by a deed of trust on the parcel of property to which the loan was to be applied. The owners assigned the loan funds to defendant, and defendant agreed to disburse them in five equal progress payments, the last payment to be due on the completion of each project. Construction of the buildings was not completed, and no further work was done after the fourth progress payment. Defendant retained the unexpended funds. Plaintiff and three other unpaid materialmen (hereinafter called stop-notice claimants) filed bonded stop notices with defendant pursuant to section 1190.1, subsection (h) of the Code of Civil Procedure. ¹ Several other materialmen (hereinafter called mechanic's lien claimants), who did not file stop notices, filed mechanic's lien claims. Plaintiff brought this action to enforce its claim, and defendant cross-complained for a declaration of the rights of all parties interested in the disposition of the loan funds. All of the cross-defendants who answered claimed a right to the loan funds, the stop-notice claimants on the basis of their notices and the mechanic's lien claimants on the ground that having recorded mechanic's liens, they had equitable liens on the funds. Defendant admitted that the claimants had not been paid and stipulated to the amounts of their claims, but contended that it had a right to apply the undisbursed funds to reduce the owners' debt to it or to complete the buildings.

The trial court held that the stop-notice claimants were entitled to recover from defendant on their claims; that those claims were of equal priority and had priority over all other claims; and that the mechanic's lien claimants had equitable liens on the loan funds of equal priority with the defendant's claim that it had a right to use the funds to complete the buildings. The trial court allowed interest on all claims and held it to be a personal liability of defendant.

We agree with defendant that the evidence does not support the finding that the mechanic's lien claimants were entitled to equitable liens on the loan funds. An equitable lien may be imposed on a construction-loan fund only if it is established that the borrower or lender induced the supplier of labor or materials to rely on the fund for payment. (Smith v. Anglo-California Trust Co., 205 Cal. 496, 501-504, 271 P. 898; Pacific Ready Cut Homes v. Title I. & T. Co ., 216 Cal. 447, 450-452, 14 P.2d 510.) There is no evidence in the record of any reliance on the loan funds or of any inducement so to rely. Nor is there any evidence from which reliance may reasonably be inferred . (Compare Smith v. Anglo-California Trust Co., supra, 205 Cal. at 502-503, 271 P. 898.)

Invoking Hayward Lumber & Investment Co. v. Coast Federal Savings etc. Assn., 47 Cal.App.2d 211, 117 P.2d 682, the mechanic's lien claimants contend that they established their right to an equitable lien merely by filing mechanic's lien claims. That case did not so decide. The fund-holder there conceded the claimants' right to the fund, and the only issue litigated was whether it was necessary to file suit to perfect the claims.

The mechanic's lien claimants contend that the trial court erred in upholding the claims of two stop-notice claimants because they did not file mechanic's lien claims. The right to recover on a stop-notice claim, however, 'does not depend upon the establishment of a lien.' (Diamond Match Co. v. Silberstein, 165 Cal. 282, 288, 131 P. 874, 877.) The remedies are independent and cumulative. (Id. at 288-289 131 P. 874, Calhoun v. Huntington Park First Sav. & Loan Ass'n, 186 Cal.App.2d 451, 459, 9 Cal.Rptr. 479, and cases cited.)

Defendant contends that the stop-notice claims should not have been allowed because section 1190.1, subsection (h) provides for an equitable garnishment of construction-loan funds. An effective legal garnishment depends on their being an existing debt owed by the garnishee to the debtor. Defendant owes the owners nothing, however, because of their default. In defendant's view there is therefore nothing to garnish.

Section 1190.1, subsection (h) does refer to the stop-notice claims as effecting an equitable garnishment. As defendant points out, this term undoubtedly was derived from series of cases interpreting the stop-notice provisions of the mechanic's lien law enacted in 1885 (Stats.1885, ch. 152, p. 143) and amended or repealed in 1911 (Stats.1911, ch. 681, p. 1313). The term 'equitable garnishment' was used interchangeably with 'equitable assignment,' 'equitable lien,' and 'equitable subrogation' (see, e. g., Bates v. Santa Barbara County, 90 Cal. 543, 546-547, 27 P. 438; Weldon v. Superior Court, 138 Cal. 427, 429-430, 71 P. 502; Butler v. Ng Chung, 160 Cal. 435, 439, 117 P. 512; Diamond Match Co. v. Silberstein, 165 Cal. 282, 288, 131 P. 874; Stettin v. Wilson, 175 Cal. 423, 426, 166 P. 6) to describe the effect of stop-notice claims on funds held by owners. Under the statutory provisions in effect at that time the personal liability of the owner to stop-notice climants was limited, as it presently is under section 1190.1, subsection (c), to the amount 'due or that may become due' to the owner's contractor. It was suggested in dicta in several of the foregoing cases that the claimants' rights against the owner were therefore limited to the contractor's rights under his contract. This position would be consistent with the use of the terms 'garnishment,' 'assignment,' or 'subrogation' in their usual senses. Nevertheless, in the most recent case decided by this court in which the issue was considered, Stettin v. Wilson, 175 Cal. 423, 426, 166 P. 6, it was held that the terms of the owner's contract with his contractor, which would have barred any recovery by the contractor because he had abandoned his contract, did not preclude recovery from the owner by stop-notice claimants. That there was no money due under the contract was held not to be determinative of the issue. (See also G. Ganahl Lumber Co. v. Weinsveig, 168 Cal. 664, 668-670, 143 P. 1025; Diamond Match Co. v. Silberstein, 165 Cal. 282, 286-288, 131 P. 874; Hampton v. Christensen, 148 Cal. 729, 737-739, 84 P. 200.) Thus the use of the term 'equitable garnishment' does not imply that the stop- notice claimants' right to recover depends on the owners' rights under their contract with defendant. Nor does the use of the word 'withhold' in subsection (h) imply that the monies withheld must be due the owner. The fact that the fundholder may be under no compulsion to pay does not mean that he may not voluntarily disburse the funds. The requirement that the fundholder withhold claimed funds applies not only when his contract calls for payment but even when it does not.

Subsection (h) requires that upon receipt of a bonded stop-notice claim the fundholder 'must withhold from the borrower or other person to whom said owner may be obligated to make payments or advancements out of said fund sufficient money to answer such claim.' The subsection does not require the fundholder to withhold only so much of the fund as may be due under its contract with the owner. On the contrary the 'said fund' from which a lender must withhold claimed money is defined in the first paragraph of subsection (h) as that amount 'furnished or to be furnished by the * * * lender * * * as a fund from which to pay construction costs,' or that amount 'arising out of a construction or building loan.' The fundholder must therefore withhold from funds furnished to pay construction costs or arising out of a construction loan sufficient money to answer bonded stop-notice claims regardless of the terms of its contract with the owner. If the terms of that contract determined the rights of the claimants under subsection (h), the parties to the contract could effectively eliminate those rights. They might, for example, condition the lender's obligation to pay on there being no stop notices filed. Subsection (h) requires that funds earmarked for construction purposes be used to pay suppliers of labor and materials who file claims under the subsection and therefore supersedes the private arrangements of borrower and lender.

Furthermore, defendant's claim to the funds in this is incompatible with the final sentence of subsection (h): ...