Pacific Ready Cut Homes, Inc. v. Title Insurance & Trust Co.

THE COURT.

This is an action to subject the unexpended balance of a building loan to an equitable lien in favor of a materialman. Defendants A. W. Menkins and Violet Menkins, his wife, were owners of a lot, upon which they desired to erect an apartment house. They secured a loan of $16,000 from defendant Meline Bond and Mortgage Company, secured by a first deed of trust on the property, recorded June 26, 1928. Two other trust deeds in the amount of !$6,000 each were also recorded in favor of other persons, on July 23, 1928. These instruments were all recorded prior to the commencement of the work and were therefore prior to mechanics’ liens. During the period of construction a number of payments were made to laborers and materialmen, including plaintiff. In March, 1929, the building was completed. The amount then due plaintiff was $2,705.04. Further sums for labor and materials were owing to other parties. The balance of the loan, $3,535.63, was insufficient to cover them all. Plaintiff and other claimants filed liens against the building. The defendant mortgage company thereupon, as permitted by its loan contract with the owners, kept the said balance, using it to reduce the amount of the principal and interest due on the loan. Thereafter the owners defaulted, and defendant Title Insurance and Trust Company, trustee under the first deed of trust, elected to sell the property. Plaintiff then commenced this action to enjoin the sale and to subject the unexpended balance in the loan fund to a lien in its favor. Other mechanics’ lien claimants were joined as defendants.

The encumbrances, i. e., the first, second and third deeds of trust, were greater than the value of the property, with the result that the mechanics’ liens were worthless.

The theory of plaintiff was that it had relied upon the loan in extending credit to the owners, and that the facts of the case were such as to justify the imposition of the

[449]

lien under the rule of

Smith

v.

Anglo-California Trust Co.,

205 Cal. 496 [271 Pac. 898]. In this latter case, Smith, the owner of certain land, was given a building loan of $20,000 by Anglo-California Securities Company, secured by a deed of trust. An account was opened in Smith’s name and the necessary sums were paid to him as the work progressed. Shortly after completion of the building Smith died. A balance of $4,090 remained undisbursed in the account. Smith’s administratrix brought suit to recover this sum, and claimants of mechanics’ liens totaling $5,633.30 also demanded the money, their liens being valueless because of the priority of deeds of trust. This court held that the said sum should be charged in equity with a lien and distributed