Doud Lumber Co. v. Guaranty Sav. & Loan Ass'n

• Decision Date: 29 June 1967
• Citation: 254 Cal.App.2d 585,60 Cal.Rptr. 94
• Court: California Court of Appeals Court of Appeals
• Parties: DOUD LUMBER COMPANY, Inc., a Callfornia corporation, Plaintiff and Appellant, v. GUARANTY SAVINGS AND LOAN ASSOCIATION, a California corporation, Defendant and Respondent. Civ. 23564.

Page 94

60 Cal.Rptr. 94

254 Cal.App.2d 585

DOUD LUMBER COMPANY, Inc., a Callfornia corporation, Plaintiff and Appellant, v. GUARANTY SAVINGS AND LOAN ASSOCIATION, a California corporation, Defendant and Respondent.

Civ. 23564.

Court of Appeal, First District, Division 2, California.

June 29, 1967.

Amended on Denial of Rehearing July 28, 1967.

Hearing Granted and Cause Retransferred Sept. 21, 1967.

Original Opinion Readopted Sept. 22, 1967.

Weir, Hopkins, Donovan & Zavlaris, San Jose, for appellant.

Emery J. Delmas, San Jose, for respondent.

TAYLOR, Associate Justice.

Doud Lumber Company, Inc. (hereafter Doud) appeals from an adverse judgment on its complaint to impose an equitable lien on certain funds realized by defendant, Guaranty Savings and Loan Association (hereafter Guaranty) after a foreclosure sale of an uncompleted apartment building in San Jose. Doud argues that the materials it supplied enhanced the value of the security and unjustly enriched Guaranty.

The facts are not in dispute. In November 1960 Guaranty entered into a written contract with the owner, Bonanza, Inc. (hereafter Bonanza), for a construction loan in the amount of $110,000 to be used to build an apartment house on Bonanza's Tyrella Street property. The loan was secured by a first deed of trust on the property in favor of Guaranty. The loan funds were to be disbursed as the work progressed, to the satisfaction of Guaranty, as follows: the first installment of $22,292 when the building had been roofed and enclosed and the rough plumbing topped out through the roof and roof wiring completed; the second (likewise $22,292) when sheet rock had been applied and the interior improvement and exterior had stucco or cement finish applied; the third (also $22,292) when the improvement was completed and notice of completion appeared on its face to be valid and had been delivered for recordation; and the fourth installment, consisting of the balance, 35 days after the filing of the notice of completion.

Doud was to provide the lumber and lumber materials for the Tyrella Street project to J. G. Enterprises, the general contractor for Bonanza. Doud had done business with the general contractor for about a year and had experienced a generally satisfactory business relationship. At the time here in question, Doud was to provide materials for the general contractor on two other jobs. Before any of these three construction projects began, the general contractor was $4,800 in arrears to Doud and had been so for several months. Thus, prior to starting any of these jobs, Doud ascertained from Jack O'Neil, the principal of Bonanza's general contractor's firm, that there was a construction loan on each job and also the name of the lender. Thereafter, pursuant to its oral agreement with the general contractor, Doud began delivery on the Tyrella job about April 3, 1961, at the then existing market price.

Doud's final delivery for the Tyrella job was made on May 16--18, 1961. On May 3, 1961, Doud, for the first time, met with Guaranty and indicated that its payments were not coming as expected and that it wanted the loan checked to see if there was anything that could be done to speed up the flow of money. Guaranty informed Doud that because of the payment schedule on the loan, the money was slow in coming and there was nothing to be done about it. Thereafter, Doud kept in touch with Guaranty through numerous telephone conversations and additional meetings. In the latter part of 1961, Doud filed a mechanic's lien claim for its $6,884.51 balance due on the Tyrella job. Thereafter, Guaranty initiated foreclosure proceedings under its first deed of trust and extinguished all lien rights held by Doud.

The loan disbursements were not made as provided in the construction loan agreement. Because of Bonanza's financial difficulties, Guaranty advanced $9,000 when the loan was recorded on November 29, 1960; on December 13, 1960, there was an advance of $322.50 for title and recordation fees. Thereafter, Guaranty advanced interest payments on the loan, a loan fee of $6,050, and a $60 membership share. The first construction disbursement of $12,000 was made on April 27, 1961. On May 16, 1961, Guaranty disbursed $10,292 and on May 25, the second installment of $22,292.

The first payment of principal and interest on the construction loan in the amount of $870 was due on August 1, 1961, the projected date of completion. Bonanza failed to make the first payment and defaulted on the loan. Thereafter, Guaranty sold the property under the power of sale in its deed of trust after foreclosure for $81,000. At the time of the foreclosure sale, the principal balance on the loan, plus certain costs of sale, was about $74,500.

The court found that Doud did not rely on and was not materially induced by the loan agreement between Bonanza and Guaranty; that Bonanza was in default on its contract with Guaranty and was without assets; that the building contemplated was not substantially completed prior to the foreclosure sale; and that Guaranty has not received an unconscionable benefit from the project or the foreclosure of the deed of trust. Accordingly, the court concluded that Doud was not entitled to an equitable lien on the funds recovered by Guaranty.

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 (A--1 Door & Materials Co. v. Fresno Guar. Sav. & Loan Assn., 61 Cal.2d 728, 732, 40 Cal.Rptr. 85, 394 P.2d 829). Therefore, the only question before us is whether, from the above uncontroverted facts, the trial court properly concluded that Doud was not induced by Guaranty or Bonanza to rely on the loan fund and was, therefore, precluded from asserting an equitable lien.

The record indicates that the court, in finding a lack of inducement and reliance, attached particular significance to the facts that Doud had delivered all but the last $200 worth of its materials to the job prior to its first discussions with Guaranty on May 3, and that the building was not completed at the time of the foreclosure sale. These circumstances would appear to be of little or no significance under the reasoning of the most recent cases (McBain v. Santa Clara Sav. & Loan Assn., 241 Cal.App.2d 829, 841, 51 Cal.Rptr. 78; Miller v. Mountain View Sav. & L. Assn., 238 Cal.App.2d 644, 658--659, 48 Cal.Rptr. 278) and after considering the entire record, it is our opinion that the trial court would have felt compelled, as a matter of law, to reach a contrary conclusion had it had the benefit of these decisions at the time judgment was rendered.

McBain v. Santa Clara, supra, relying on Smith v. Anglo-California Trust Co., 205...