Cummins v. Bank of America National Trust & Savings Ass'n

GIBSON, C. J.

The cross-complainant bank appeals from a judgment in its favor urging that the amount awarded to it and for which foreclosure of a deed of trust is decreed, is inadequate. The cause turns on the interpretation of written instructions as to the disbursement of a construction loan.

In 1936, respondents entered into a contract with one Sweet whereby he agreed to construct a dwelling for them at a cost of $7,200. Arrangements were made with appellant bank for a construction loan, to be insured under the National Housing Act (12 U. S. C. A., sec. 1701). The respondents thereupon deposited with the bank the building contract, $720 in cash ($320 of which was to cover financing costs), and their note for $6,800 secured by deed of trust on the property. At the same time they advised the bank in writing that they were satisfied as to the financial responsibility of the contractor and requested that no completion and lien bond be required of him. They also gave written disbursement instructions, approved by the contractor, which, so far as here material, provide:

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“ . . . Ton are authorized and instructed to pay to my contractor . . . the sum of $7200.00, payable in five equal payments at such times and subject to the conditions hereinafter set forth . . . (specifying five progress points in construction at which payments were to be made). My contractor will notify your office when the foundation trench is dug,... in order that you may obtain Federal Housing Administration’s inspection approval. In addition, said contractor will advise you when work has progressed sufficiently for each of the above mentioned first four payments, in order that your appraisers may make inspection thereof before making the payments affected thereby.

The undersigned applicants will furnish your office with written authorization instructing you to make each respective payment prior to disbursement.”

This appeal, as indicated, turns on the interpretation to be given to the italicized portion of the instructions. The bank made three progress payments, aggregating $4,320,- to the contractor at appropriate stages of the work, but admittedly without the prior written authorization provided by the instructions. Shortly thereafter the contractor gave notice that he was insolvent. No further payments were made to him, and no attempt was made to complete the building. Neither were any payments made to the bank by respondents on their note. Mechanics’ and materialmen’s liens were filed on the property.