Rossman Mill & Lumber Co. v. Fullerton Sav. & Loan Ass'n

• Decision Date: 30 October 1963
• Citation: 34 Cal.Rptr. 644,221 Cal.App.2d 705
• Court: California Court of Appeals Court of Appeals
• Parties: ROSSMAN MILL & LUMBER CO., Ltd., a California corporation, Plaintiff and Appellant, v. FULLERTON SAVINGS AND LOAN ASSOCIATION, Defendant and Respondent. Civ. 7118.

Page 644

34 Cal.Rptr. 644

221 Cal.App.2d 705

ROSSMAN MILL & LUMBER CO., Ltd., a California corporation, Plaintiff and Appellant, v. FULLERTON SAVINGS AND LOAN ASSOCIATION, Defendant and Respondent.

Civ. 7118.

District Court of Appeal, Fourth District, California.

Oct. 30, 1963.

Hearing Denied Dec. 18, 1963.

Lind & Schmitz and Fidel Schmitz, Wilmington, for plaintiff and appellant.

Allen, Pitts & Kane and John H. Pitts, Fullerton, for defendant and respondent.

STONE, Justice. ^*

This appeal comes to us on an agreed statement of facts relating that Floyd McNabb obtained a building loan of $18,000 from respondent Savings & Loan Association, to build a home on his lot in Orange County. The loan was evidenced by a promissory note secured by a first deed of trust on the property. The loan was set up under Account No. 4217, and McNabb executed a 'Building Loan Agreement and Assignment of Account No. 4217.' The agreement provided for progress payments to McNabb at four specified stages of completion of the residence.

After an on-site inspection, respondent paid McNabb the first progress payment on February 24, 1960, from which it deducted $783 for title fees, insurance charges, points on loan charges, and incidental costs. On March 28, 1960, respondent made an inspection of the premises and found construction had progressed sufficiently to warrant the second progress payment. After deducting a fire insurance premium and making a payment directly to a plumbing company, respondent paid the balance of the second payment to McNabb. Very little work was done after the second payment because McNabb disappeared. Respondent held the loan open pursuant to the terms of the 'Building Loan Agreement and Assignment of Account,' until July 28, 1960, although NcNabb disappeared in April. From the fund respondent paid itself interest for the months of March, April, May, June and July.

On April 25, 1960, appellant, a mechanic and materialman who had furnished construction materials, served a verified claim therefor and a 'Notice to Withhold' on respondent, together with a bond in support of the withhold notice, as required by Code of Civil Procedure section 1190.1, subsection (h). Respondent ignored appellant's notice, and at the end of the loan period applied the balance of the building loan fund to the account of McNabb's note. The holder of the second deed of trust foreclosed, wiping out a mechanic's lien which appellant had also filed. The holder of the second deed of trust paid respondent the amount charged against the McNabb note and thus cleared from the title the first deed of trust.

Appellant brought this action for the amount claimed under the stop notice. The appellant's mechanic's lien was wiped out by the trust deed foreclosure has no bearing on the case since a stop notice or notice to withhold is a cumulative remedy completely independent of the mechanic's lien foreclosure procedure. (Calhoun v. Huntington Park First Sav. & Loan Ass'n, 186 Cal.App.2d 451, 459, 9 Cal.Rptr. 479, and authorities cited therein.)

Briefs of counsel discuss whether the lien created by a notice to withhold under section 1190.1(h) effects 'an equitable garnishment,' 'an equitable lien,' 'an assignment pro tanto,' and whether it results in 'a form of equitable subrogation.' (See cases cited in Calhoun v. Huntington Park First Sav. & Loan Ass'n, supra, 186 Cal.App.2d p. 459, 9 Cal.Rptr. pp. 483-484.) The section itself speaks of 'the equitable garnishment effected by the claim.' These arguments lead to legal niceties that are not controlling, since the pivotal question here is whether there was a construction fund or building loan fund within the sense of Code of Civil Procedure section 1190.1(h), against which the notice to withhold could take effect. If there was such a fund, the nature of the lien created is of no consequence as the section placed upon respondent a duty to withhold the amount claimed.

Code of Civil Procedure section 1190.1(h) permits a mechanic or materialman to serve upon the holder of a construction fund a notice to withhold funds to cover his claim 'in any instance in which the funds with which the cost of the work of improvements are, wholly or in part, to be defrayed from the proceeds of a building loan * * *.' The notice may be given to the 'mortgagee, beneficiary under deed of trust, or assignee or successor in interest of either, or to any escrow holder or other party holding any funds furnished or to be furnished by the owner or lender or any other person as a fund from which to pay construction costs or arising out of a construction or building loan, * * *.' The section further provides that if one who files a notice to withhold also furnishes a bond as prescribed therein, the holder of the fund upon whom the notice is served is under an obligation to withhold funds sufficient to answer such claim.

Respondent takes the position that the 'Building Loan Agreement and Assignment of Account' controls the payments from the building fund, and that the notice to withhold funds is subordinate to the agreement. The owner had been paid the first two progress payments and no additional payments were due until completion of additional work. No other construction work was done; therefore, argues respondent, appellant 'caught nothing' by its notice to withhold.

Unquestionably, a building fund was established within the contemplation of Code of Civil Procedure section 1190.1(h). The note and deed of trust evidenced a loan for the entire $18,000 construction cost. Respondent in accordance with the agreement, kept the fund open from April, when the owner disappeared, until July 28, charging interest all this time. Furthermore, respondent charged the owner interest not according to the amount advanced pursuant to progress payments, but upon the entire amount evidenced by the note. And, of course, there could have been no assignment in the first instance had there not been a fund to assign.

Therefore the question narrows to whether a lender and a borrower can set up a building fund and control disbursements therefrom according to their private agreement, and thus nullify the intent and purpose of Code of Civil Procedure section 1190.1(h). The statute is remedial and must be liberally construed to effect its objects...