McBain v. Santa Clara Sav. & Loan Ass'n

• Decision Date: 05 May 1966
• Court: California Court of Appeals Court of Appeals
• Parties: John C. McBAIN, L. D. Gray, and Doud Lumber Company, Inc., a corporation, Defendants and Appellants, v. SANTA CLARA SAVINGS & LOAN ASSOCIATION, Defendant and Respondent. Civ. 22151.

Page 78

51 Cal.Rptr. 78

241 Cal.App.2d 829

John C. McBAIN, L. D. Gray, and Doud Lumber Company, Inc., a corporation, Defendants and Appellants, v. SANTA CLARA SAVINGS & LOAN ASSOCIATION, Defendant and Respondent.

Civ. 22151.

District Court of Appeal, First District,

Division 1, California.

May 5, 1966.

Hearing Denied June 29, 1966.

Mezzetti & McDiarmid, by Elva Soper Aguilar, San Jose, for appellants

Christy, Costello, Hoffman & Premo, Santa Clara, for respondent.

SULLIVAN, Presiding Justice.

This is an appeal from a judgment entered in an action for declaratory relief determining that certain unpaid subcontractors and materialmen were not entitled to the unexpended balance of a construction loan held by a lender savings and loan association.

In the main, the facts are undisputed. Plaintiffs Robert L. Dodge and Walker Vaughn, partners, doing business under the name of Surrey Farm Developers, owned a certain lot in a tract in Santa Clara County. On March 21, 1961 they entered into an agreement with defendants Arthur P. Petersen and Dorothy Petersen to sell the lot to the latter for $7,500. Plaintiffs received a down payment of $100 and a promissory note for the balance secured by a deed of trust on the property. According to the agreement, the sale was subject to the buyers obtaining a construction loan and the sellers were to subordinate their purchase money deed of trust to any such loan. On April 30, 1961, plaintiffs received a payment of $900.

Mr. and Mrs. Petersen obtained a.$19,000 construction loan from defendant Santa Clara Savings and Loan Association (Santa Clara Savings). This loan was evidenced by a promissory note executed by them in favor of Santa Clara Savings, secured by a deed of trust. Both of the aforementioned deeds of trust were recorded on March 30, 1961, the instrument securing Santa Clara Savings' loan being placed of record first in accordance with the subordination agreement and thereby becoming the senior encumbrance on the property.

The Petersens commenced construction of a home on the property according to plans approved by both plaintiffs and Santa Clara Savings. To this end they contracted with defendants and appellants John C. McBain, a plastering contractor, L. D. Gray, a concrete contractor, and Doud Lumber Company, Inc. and with defendant Williams & Russo, a masonry contractor.

Pursuant to the loan agreement entered into between them, Santa Clara Savings in April and May 1961 disbursed to the Petersens from the loan proceeds three progress payments of $3,800 each, the last of these being made on May 11, 1961. In addition, several smaller disbursements were made from the loan fund. The parties before us agree that all disbursements totalled $12,051.56, ¹ leaving a balance in the loan account of $6,948.44.

After receiving the third progress payment, the Petersens performed no additional work on the property and eventually abandoned the construction, defaulting on their purchase money note to plaintiffs. The latter thereupon caused the property to be sold under the power conferred in the purchase money (second) deed of trust and at such sale in October 1961 purchased the property themselves for $5,000 subject to the first deed of trust in favor of Santa Clara Savings.

When the construction of the building was abandoned, the four subcontractors abovementioned had unpaid bills against the Petersens for labor or materials totalling $4,311.59. ² Each of them thereupon filed a mechanic's lien against the property and an action to foreclose the same. In addition, defendant and appellant McBain gave a stop notice to Santa Clara Savings (Code Civ.Proc. § 1190.1, subd. (h)), which notice was not accompanied by any bond.

Having purchased the subject property at the trustee's sale, plaintiffs Dodge and Vaughn on December 20, 1961 commenced the instant action for declaratory relief seeking a determination of the respective rights of the parties in the real property and in the undisbursed loan funds in the hands of Santa Clara Savings. Named as defendants, Inter alios, were Mr. and Mrs. Petersen, Santa Clara Savings and the four lien claimants mentioned above. As disclosed by the pretrial conference order, plaintiffs took the position that the sale under the second deed of trust had eliminated the liens of the above four lien claimants; that none of the defendants except Santa Clara Savings had a valid lien on the property or claim to the unexpended loan funds; that if the court should declare that Santa Clara Savings' lien was only for the amount actually disbursed from the loan fund ($12,051.56), plaintiffs would make no claim to the unexpended loan funds; but that, if the court should declare that plaintiffs held their title subject to a lien in favor of the lender for the full amount of the loan, these plaintiffs were claiming all of the unexpended loan funds ($6,948.44) to complete the construction of the house. Defendant lien claimants, appellants ³ herein, contended not only that their mechanics' liens constituted valid liens against the property because construction had commenced prior to the recordation of plaintiffs' purchase money deed of trust but also that they had An equitable lien against the unexpended loan funds in the hands of Santa Clara Savings.

The cause proceeded to trial ⁴ and on August 1, 1962, after two days of testimony, was taken under submission. On September 5, 1962 the court filed its memorandum decision in which it concluded: that the lien of Santa Clara Savings was for the full amount of the loan ($19,000) plus interest accrued thereon; that the lien claimants failed to establish that the work of construction as a whole was started prior to the recordation of the two deeds of trust on March 30, 1961; that the 'foreclosure of the purchase money (second) deed of trust wiped out mechanic's liens upon the property itself'; and that such 'foreclosure' by plaintiffs cut off all their rights in the loan fund, thereby precluding them from asserting any claim to the unexpended balance in the hands of the lender. The decision concluded: 'It is the conclusion of the Court, therefore, that the Defendant Santa Clara Savings & Loan Association has a lien on the property in the full amount of the construction loan; that to satisfy it, it must first exhaust its security, that is, by foreclosure of its deed of trust. If upon exhaustion of the security a deficiency remains, the Association may then apply the unexpended balance it has on hand to the satisfaction of that deficiency. If after this is done any unexpended balance still remains in the hands of the Association, it is subject to Equitable liens on behalf of the four lien claimants mentioned above. If any balance should then remain, it would be payable to the Petersens.' (Emphasis added.)

Presumably in accordance with the foregoing suggestion made in the court's memorandum decision, Santa Clara Savings caused the property to be sold under the power conferred in the first deed of trust and at the trustee's sale held on November 8, 1962 bought in the property itself for $14,600. The record reflects expenses of sale and accrued and unpaid interest due from the Petersens to the lender in the sum of $1,777.08. ⁵

On February 18, 1964 the court filed findings of fact and conclusions of law which were generally in accord with its memorandum decision of September 5, 1962. So far as is here pertinent, it found that the lien of Santa Clara Savings was for the full amount of.$19,000 plus accrued interest of $1,777.08; that the mechanics' liens of the four lien claimants did not take precedence over either the purchase money deed of trust or the construction loan deed of trust; that the work of construction was not commenced prior to the recordation of the two deeds of trust; that 'the foreclosure of the purchase money deed of trust wiped out the mechanic's liens'; that the subcontractors and materialmen had valid and unpaid claims against the Petersens in amounts as previously noted herein (see fn. 2, Ante); that the property had been sold under the first deed of trust as we have set forth supra and that there were expenses in regard to said sale totalling $871.36; and that after said sale for $14,600 and the application of $6,948.44 undisbursed loan funds to the debt owing from the Petersens to Santa Clara Savings 'there remained no 'excess' for distribution to Defendant lien claimants.' ⁶ Judgment was entered accordingly. This appeal followed. ⁷

We reject as without merit appellants' initial contention that the work of construction was commenced prior to the recordation of the deeds of trust, thus establishing valid mechanics' liens against the property. Appellants urge this point upon us, seemingly oblivious of the settled principles requiring us to view the evidence in the light most favorable to respondent (see Marshall v. Marshall (1965) 232 Cal.App.2d 232, 236, 42 Cal.Rptr. 686 and cases there cited) and to uphold the finding under attack if any substantial evidence contradicted or uncontradicted supports it. (See Marshall v. Marshall, supra, at p. 246, 42 Cal.Rptr. 686 and cases there cited.) Our examination of the evidence pertinent to the issue, which we deem unnecessary to set forth in detail, satisfies us that it was in conflict, as indeed counsel for appellants conceded at oral argument. The resolution of this conflict was for the trial court. Its determination that the work of construction was not commenced prior to the recordation of the deeds of trust and that the mechanics' liens therefore were not to take precedence over the latter (Code Civ.Proc. § 1188.1) but in fact were extinguished by the trustee's sale under the second deed of trust (Rheem Mfg. Co. v. United States (1962) 57 Cal.2d 621, 625 21 Cal.Rptr. 802, 371 P.2d 578) must be upheld.

We reach the main issue on this appeal: whether appellants are entitled to payment from the unexpended balance of the loan funds upon a theory...