Nibbi Brothers, Inc. v. Home Federal Sav. & Loan Assn.

• Decision Date: 21 November 1988
• Docket Number: No. A040248,A040248
• Citation: 205 Cal.App.3d 1415,253 Cal.Rptr. 289
• Court: California Court of Appeals Court of Appeals
• Parties: NIBBI BROTHERS, INC., Plaintiff and Appellant, v. BRANNAN STREET INVESTORS et al., Defendants and Respondents. *

Page 289

253 Cal.Rptr. 289

205 Cal.App.3d 1415

NIBBI BROTHERS, INC., Plaintiff and Appellant, v. BRANNAN STREET INVESTORS et al., Defendants and Respondents. ^*

No. A040248.

Court of Appeal, First District, Division 1, California.

Nov. 21, 1988.

Rehearing Denied Dec. 20, 1988.

Reuben, Quint & Valkevich, James A. Reuben, Lawrence R. Sussman, San Francisco, for plaintiff and appellant.

Joshua Genser, Norris & Norris, Richmond, for defendants and respondents.

NEWSOM, Associate Justice.

Nibbi Brothers, Inc., (hereafter Nibbi) appeals from a judgment of dismissal entered after Home Federal Savings & Loan Association (hereafter Home) filed a demurrer and a motion to strike portions of its second amended complaint. Nibbi there alleged nine causes of action against Home, Brannan Street Investors, and four additional defendants but named Home as a defendant in only three causes of action. Home filed a demurrer against two of these causes of action and a motion to strike a third cause of action. The trial court sustained the demurrer and granted the motion to strike without leave to amend.

Nibbi's opening and reply briefs address only two of the three causes of action subject to demurrer--the third cause of action alleging a theory of unjust enrichment and the fifth cause of action alleging negligent misrepresentation. In the absence of argument, we regard Nibbi as having waived any objection to the order sustaining the motion to strike its remaining cause of action against Home. (9 Witkin, Cal. Procedure (3d ed. 1985) Appeal, § 479, p. 469.)

Home had extended a secured loan to Brannan Street Investors, a California general partnership, for a series of construction projects. In March 1985, Brannan Street Investors contracted with Nibbi as a general contractor to make approximately $290,000 in tenant improvements to certain property in San Francisco. Before agreeing to perform the job, Nibbi received an assurance from Home that enough money had been set aside in a construction loan fund to cover the cost of the work. In the early stages of the project, Home paid Nibbi directly from the construction loan fund but suspended payments in July 1985 after recording a notice of default on the deed of trust securing the loan. Nibbi did not learn of the notice of default but asked Home when it would be paid. Home assured Nibbi that it "would be paid for work performed." Nibbi proceeded to expend $66,000 in additional tenant improvements, but was never paid for the work. In February 1986, Home acquired the property at a private foreclosure sale and remains the owner. Nibbi then sued Home, Brannan Street Investors, and certain tenants to recover the value of its work.

The allegations of unjust enrichment in the third cause of action raise two issues: does Nibbi in effect claim an equitable lien barred by Civil Code section 3264? and does it state a valid cause of action under the law of restitution? We will first examine the effect of Civil Code section 3264.

Suppliers of labor and materials in real estate construction projects have long enjoyed two statutory remedies: foreclosure of a mechanics lien and service of a bonded stop notice on the construction lender requiring it to withhold sufficient funds from the construction loan account to pay for the work. But a line of cases beginning with Smith v. Anglo-California Trust Co. (1928) 205 Cal. 496, 271 P. 898, disapproved on another point in Lucas v. Hamm (1961) 56 Cal.2d 583, 15 Cal.Rptr. 821, 364 P.2d 685, also gave suppliers of labor and materials a nonstatutory right known as an equitable lien to unexpended funds in the construction loan account. This right, based on the equitable principles of estoppel and unjust enrichment, was recognized where the suppliers contributed services in reliance on the construction loan account and thereby enhanced the value of the lender's security.

In its early application, the equitable lien was recognized only where the project reached a stage of completion that actually benefited the lender's security interest and the evidence "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. (1964) 61 Cal.2d 728, 732, 40 Cal.Rptr. 85, 394 P.2d 829; Marsh, California Mechanics' Lien Law (4th ed. 1985) § 5.27, p. 5-24.) But two Court of Appeal decisions in the mid-sixties extended the doctrine both to uncompleted construction projects and to cases where the suppliers relied on representations of the borrower rather than the lender in contributing their services. (Miller v. Mountain View Sav. & L. Assn. (1965) 238 Cal.App.2d 644, 48 Cal.Rptr. 278; McBain v. Santa Clara Sav. & Loan Assoc. (1966) 241 Cal.App.2d 829, 51 Cal.Rptr. 78.) This judicial expansion of the doctrine appeared to prevent lenders from applying unexpended construction loan funds to the repayment of the developer's debt until the rights of all subcontractors and materialmen had been settled, consequently increasing their financial exposure. It was widely feared that the expanded doctrine would discourage investment in real estate development.

In 1967 the Legislature responded by eliminating altogether the supplier's equitable lien on construction loan accounts. Civil Code section 3264 now provides: "The rights of all persons furnishing labor, services, equipment, or materials for any work of improvement, with respect to any fund for payment of construction costs, are governed exclusively by Chapters 3 (commencing with Section 3156) and 4 (commencing with Section 3179) of this title, and no person may assert any legal or equitable right with respect to such fund, other than a right created by direct written contract between such person and the person holding the fund, except pursuant to the provisions of such chapters."

Nibbi argues that section 3264 should not be applied to general contractors. In denying nonstatutory rights to the construction loan fund, the section relegates suppliers to the statutory stop notice procedure provided by Chapters 3 and 4 of the title. The stop notice procedure, however, is not available to general contractors but only to subcontractors and materialmen. (Civ.Code §§ 3158, 3159, and 3181.) The Legislature, Nibbi reasons, could not have intended to bar contractors from an equitable lien on the construction fund since it did not give them the alternative statutory remedy mentioned in the section. But the argument is best directed to the Legislature. Section 3264 provides that the rights of "all persons" to the construction loan fund are governed exclusively by the statutory stop notice procedure and that "no person" may assert a legal or equitable right to the fund other than a right created by a direct written contract. The unequivocal phrases, "all persons" and "no person," do not admit of any exception. It is not surprising that two recent cases have assumed without discussion that section 3264 applies to general contractors. (Sofias v. Bank of America (1985) 172 Cal.App.3d 583, 218 Cal.Rptr. 388; Pankow Const. Co. v. Advance Mortg. Corp. (9th Cir.1980) 618 F.2d 611.)

Nibbi further argues that section 3264 does not apply generally to suppliers' claims against the construction lender but only to liens asserted against the construction loan fund. Section 3264 indeed applies only to rights "with respect to any fund for payment of construction costs, ..." But the legislative intent could be easily evaded by allowing suppliers, who are barred from claiming a lien against the construction loan fund itself, to claim instead damages recoverable from the general assets of the lender. In Boyd & Lovesee Lumber Co. v. Western Pacific Financial Corp. (1975) 44 Cal.App.3d 460, 465, 118 Cal.Rptr. 699, the court observed that under the statute "[a] fair line is drawn between the contractors, subcontractors and materialmen on the one hand and the construction lenders on the other. The former at least have remedies by mechanics lien against the property, unbonded stop notice against the owner, and action upon the contract against the person or persons personally ordering the labor of material. The latter are relieved of the expense and risk of policing the ultimate distribution of construction funds and can concentrate on their primary duty of providing construction loans at lesser expense to the borrower and ultimately to the consuming public." (Fn. deleted.) To maintain this "fair line" between construction lenders and the suppliers of labor and materials, the court held that section 3264 should be construed broadly to bar "all theories of equitable liens or trust funds" asserted by the suppliers against lenders.

Under the analysis of Boyd & Lovesee Lumber Co., section 3264 should not be given a narrow, technical interpretation but should be applied so as to maintain the allocation of financial risks--the "fair line"--among lenders and other parties that the Legislature intended. The analysis indicates that the section bars claims, based on the kind of activity that formerly gave rise to the equitable lien, whether the claimant seeks to recover from the construction loan fund or from the general assets of the lender. In a perceptive study, "Section 3264 and Equitable Liens," (1979) 30 Hastings L.J. 493, 515, P. Gutierrez writes, "[t]he phrase 'with respect to' does not mean simply a direct attack on the loan fund itself. The language is broader in scope and appears to address indirect attacks as well. The basic test, so far as one may be discerned, appears to be whether the rights asserted focus on activities of the construction lender undertaken with regard to the loan fund." (See also Pankow Const. Co. v. Advance Mortg. Corp., supra, 618 F.2d 611, 617.)

Nevertheless, it does not follow that section 3264 always bars a supplier of labor and materials from recovering from a construction lender on a theory of unjust enrichment....