BREWER CORPORATION еt al., Plaintiffs and Respondents, v. POINT CENTER FINANCIAL, INC., Defendant and Appellant.
No. D061665
Fourth Dist., Div. One.
Jan. 31, 2014.
223 Cal.App.4th 831
Fox Johns Lazar Pekin & Wexler, Michael H. Wexler, R. Gordon Huckins and Dale A. Martin for Defendant and Appellant.
Marks, Finch, Thornton & Baird, Jason R. Thornton, Jon F. Gauthier, Christopher R. Sillari; Hoyt Law Firm and Kenneth C. Hoyt for Plaintiffs and Respondents Brewer Corporation and Division 8, Inc.
Lincoln, Gustafson & Cercos and Theodore R. Cercos for Plaintiff and Respondent Brady Company/San Diego, Inc.
Niddrie Fish & Addams and David A. Niddrie for Plaintiffs and Respondents.
Law Offices of Murray M. Helm, Jr., and Murray M. Helm, Jr., for Plaintiff and Respondent Dynalectric Company.
McINTYRE, J.—In this case, we are required to interpret several stop notice statutes. (
We next conclude that the trial court correctly found that one stop notice claimant’s failure to serve a preliminary 20-day notice (preliminary notice) under
Finally, we conclude that the trial court correctly found one stop notice claimant’s failure to give the lender a notice of the commencement of the stop notice action under
FACTUAL AND PROCEDURAL BACKGROUND
Appellant Point Center Financial, Inc. (Lender), is a licensed real estate broker that facilitated the raising of construction loan funds for a condominium project (the project) located in San Diego, California, adjаcent to Balboa Park. In 2006, the owner of the project borrowed $13,625,000 (the loan amount) from Lender to fund the remaining construction of the project (the construction loan). Lender agreed that it acted as a “[c]onstruction [l]ender” for purposes of the stop notice statutory scheme as this term is defined in
As Lender raised funds for subsequent stages of construction, it assigned portions of its beneficial interest in the construction loan trust deed to third party investors. Lender entered into private loan servicing agreements with its third party investors, by which it served as each investor’s agent with regard to the construction loan. Lender paid the third party investors interest on their
Lender contributed some of its own money to fund the construction loan, which resulted in it obtaining a 2.99 percent beneficial interest in the construction loan trust deed and promissory note. In connection with the construction loan, Lender raised and disbursed a total of $12,018,612.50. Lender never funded the remaining balance of the loan amount.
Respondents Brady Company/San Diego, Inc. (Brady), Dynalectric Company (Dynalectric), Division 8, Inc. (Division 8), and Brewer Corporation (Brewer, collectively Respondents) are contractors that provided labor, services, equipment and materials to the project. In June 2007, Brewer served on Lender its bonded stop notice. At that time, Lender was holding sufficient unexpended construction loan funds to cover the claim. Lender, however, did not withhold funds pursuant to Brewer’s bonded stop notice claim. The parties agreed that Lender had stop notice liability stemming from its failure to withhold funds under Brewer’s bonded stop notice claim.
By October 2007, Lender had fully disbursed all monies in the construction loan fund. Thus, when Lender received additional bonded stop notices from Brady, Dynalectric and Division 8 in March and April 2008, all construction loan funds held by it had already been disbursed.
Respondents filed individual actions against Lender, the owner and others; the trial court later consolidated these actions. All claims against the owner were stayed upon its bankruptcy filing. The bankruptcy court decided the priority of Respondents’ mechanic’s lien claims. The sole issue before the trial court was Lender’s liability with rеspect to Respondents’ bonded stop notice claims. Specifically, Respondents cited
Relying on Familian, the trial court determined that Respondents’ stop notice claims took precedence over Lender’s alleged contractual right to pay itself all interest, loan fees and other preallocated expenses. The trial court awarded Respondents a total of $1,555,771.37, which was then apportioned among them under
DISCUSSION
I. General Legal Background
A mechanic’s lien is a claim against real property, which may be filed if a claimant has provided labor or furnished materials for the property and has not been paid. (Kim v. JF Enterprises (1996) 42 Cal.App.4th 849, 854 [50 Cal.Rptr.2d 141].) The mechanic’s lien derives frоm the California Constitution and “courts have uniformly classified the mechanics’ lien laws as remedial legislation, to be liberally construed for the protection of laborers and materialmen.” (Connolly Development, Inc. v. Superior Court (1976) 17 Cal.3d 803, 826–827 [132 Cal.Rptr. 477, 553 P.2d 637] (Connolly).) The mechanic’s lien, however, lost its effectiveness when lenders began recording construction loan trust deeds before commencement of construction. (Id. at p. 827.) The recorded construction loan trust deed is superior to any later recorded mechanic’s lien; thus, if the lender forecloses on the property, the mechanic’s lien has no value. (10 Miller & Starr, Cal. Real Estate (3d ed. 2012) § 28:68, p. 28-234 (rel. 12/2012).) “Even if the prior lien is not foreclosed, if the value of the property does not exceed the debt secured by the prior lien, there will be no equity in the property to secure the mechanic[’]s liens.” (Ibid.)
The Legislature created the stop notice, now referred to as the stop payment notice, as an additional and cumulative remedy to protect laborers and materialmen. (Connolly, supra, 17 Cal.3d at p. 809; current
After giving a 20-day preliminary notice (
II. Familian Issue
A. Background
A stop notice claimant obtains priority over any “assignment” of the construction loan funds, whether the assignment is made before or after a stop notice is served. (
In Familian, the court answered a question of first impression, whether a secured construction lender could defeat a bonded stop notice claimant’s statutory priority to construction loan proceeds by segregating the fund into preallocated accounts аnd thereafter deducting charges and interest as accrued. (Familian, supra, 213 Cal.App.3d at p. 683.) During construction, the
Interpreting
The Familian court then addressed the lender’s argument that “a stop notice claimant’s priority applie[d] only to ‘unexpended’ or ‘undisbursed’ loan funds” and that stop notice claimants were not entitled to priority for fees, points and interest incurred and paid to a lender before the borrower commenced work on the project as these funds had already been spent. (Familian, supra, 213 Cal.App.3d at p. 687.) The court quickly rejected this contention stating: “[T]his argument seeks to engraft a loophole into
B. Analysis
Lender contends that Familian was wrongly decided and should be rejected. Alternatively, it asserts we should not follow Familian as the facts are distinguishable. Finally, it claims that the trial court went beyond the Familian facts and holdings. We address each contention, in turn.
This presents a question of law subject to de novo review. (Bialo v. Western Mutual Ins. Co. (2002) 95 Cal.App.4th 68, 76–77 [115 Cal.Rptr.2d 3].) The objective of statutory interpretation is to ascertain and effectuate legislative intent. (Burden v. Snowden (1992) 2 Cal.4th 556, 562 [7 Cal.Rptr.2d 531, 828 P.2d 672].) We examine the words of the statute, giving them a plain and commonsense meaning, the entire substance of the statute, and consider the statutory framework as a whole. (People v. Murphy (2001) 25 Cal.4th 136, 142–143 [105 Cal.Rptr.2d 387, 19 P.3d 1129].) Where the statutory language in dispute is clear and unambiguous, there is no need for construction and we should not indulge in it. (California Fed. Savings & Loan Assn. v. City of Los Angeles (1995) 11 Cal.4th 342, 349 [45 Cal.Rptr.2d 279, 902 P.2d 297].) “Only when the language of a statute is susceptible to more than one reasonable construction is it appropriate to turn to extrinsic aids, including the legislative history of the measure, to ascertain its meaning.” (Diamond Multimedia Systems, Inc. v. Superior Court (1999) 19 Cal.4th 1036, 1055 [80 Cal.Rptr.2d 828, 968 P.2d 539].) The separation of powers doctrine requires that we “limit ourselves to interpreting the law as written and leave for the Legislature the task of revising it as [it might] deem wise.” (People v. Garcia (1999) 21 Cal.4th 1, 14–15 [87 Cal.Rptr.2d 114, 980 P.2d 829]; see
An assignment is defined as a “transfer of rights or property.” (Black’s Law Dict. (9th ed. 2009) p. 136.) Here, the full amount of the loan was for the purpose of “fund[ing] the subject construction project.” The parties, however, agreed that Lender could prepay itself interest, a loan fee and other fees. This agreement amounts to a transfer of rights over the construction loan funds from the borrower to Lender and constituted an assignment.
Lender presents lengthy arguments explaining why money it has already removed from the construction loan funds pursuant to its agreement with the bоrrower are unavailable to stop notice claimants. It notes that
While Lender’s argument has superficial appeal, its proposed construction defeats the purpose of the stop notice procedure. The Legislature created the stop notice law to give laborers and materialmen priority over lenders to payment from the construction loan fund. (Connolly, supra, 17 Cal.3d at p. 827section 3166 (Code Civ. Proc., former § 1190.1, subd. (h)), if the terms of the construction loan agreement determined the rights of stop notice claimants “the parties to the contract could effectively eliminate those rights.” (A-1 Door, supra, 61 Cal.2d at p. 734.) The Familian court recognized this, stating such an interpretation would allow lenders and borrowers to “engraft a loophole into section 3166.” (Familian, supra, 213 Cal.App.3d at p. 687Ibid.)
Lender is correct that cases decided before Familian involved claims against unexpended funds. (Calhoun v. Huntington Park First Sav. & Loan Assn. (1960) 186 Cal.App.2d 451, 455 [9 Cal.Rptr. 479]; Rossman Mill & Lbr. Co. v. Fullerton S. & L. Assn. (1963) 221 Cal.App.2d 705, 708 [34 Cal.Rptr. 644]; A-1 Door, supra, 61 Cal.2d at pp. 731–732; Miller v. Mountain View Sav. & L. Assn. (1965) 238 Cal.App.2d 644, 649–650, 651, 652 & fn. 5 [48 Cal.Rptr. 278].) That the Familian court decided an issue of first impression does not render its result suspect. As one commentator noted, “[b]ecause the stop notice remedy is so highly effective for stop notice claimants, construction lenders have made several attempts over the years to structure a construction loan that effectively circumvents it.” (Campbell, Stop Notice Risks for Construction Lenders (Jan. 2010) L.A. Law., at p. 18.)
Lender argue that part of the money preallocated and disbursed to it under the terms of the construction loan agreement was “earned,” meaning the money constituted reimbursements for out-of-pocket costs and expenses associated with locating lenders, raising funds, paying salaries, etc. It also argues that “the funds paid to [it] and the private party lenders were used to satisfy legitimate costs of construction.” Lender’s contention is supported by one commentator who advocates for a more “tailored approach” that “unearned prepayments, if proved as a matter of fact, do not qualify as sums earned and paid before receipt of the bonded stop notice, and do not reduce the fund available to the stop notice claimant.” (Soffer, Policy Considerations Trump Statutory Construction, Giving Stop Notice Claimants a Big Advantage Over Construction Lenders (Nov. 2009) 20 Miller & Starr: Real Estate Newsalert 85, 92–93, italics omitted.) On the other hand, Respondents suggest that all distributions to Lender out of the construction loan fund were “unearned,” meaning they constituted profits. The parties concede, however, that the issue whether the distributions Lender received were earned or unearned was never argued below. As the case was not tried on this theory, it is impossible for us to address it.
In any event, we conclude that labeling the disbursements Lender received as earned versus unearned is of little consequence. Our high court made it clear in Connolly, over 36 years ago, that monies in a construction loan fund are intended to pay construction costs. (Connolly, supra, 17 Cal.3d at pp. 807, 820, 825.) It held that a construction loan fund is “not available
Finally, it is worth noting that the Familian court did not invalidate the preallocation of construction loan funds by lenders. Lenders remain free to draft construction loan agreements to give themselves a contractual right to priority. It is only in situations, such as the one presented here, that lendеrs’ contractual priority cedes to a stop notice claimants’ statutory priority, allowing a court to reach back to funds a lender has disbursed to itself as a source to pay stop notice claimants.
2. Familian Is Not Distinguishable
Assuming we will follow the Familian analysis, Lender alternatively argues that the judgment in favor of Respondents should be reversed based on the distinguishable facts of this case.
Lender first points out that in Familian, the lending bank foreclosed on its trust deed (Familian, supra, 213 Cal.App.3d at p. 683); thus, it obtained a double recovery by obtaining the real property and that value added to the property by the stop notice claimants’ improvements. In contrast here, the property was encumbered by a “super-priority” first trust deed that was foreclosed thereby wiping out the Lender’s first trust deed. Accordingly, Lender asserts that it recovered nothing and was not unjustly enriched by the stop notice claimants’ contributions to the project.
Stated differently, Lender asserts that the stop notice claimants should not be entitled to statutory priority under
Lender next claims that Familian is distinguishable because the lending bank segregated the funds to pay itself from the remainder of the loan funds by setting up preallocated accounts. While the Familian court articulated the issue presented as whether “a secured construction lender [can] defeat a bonded stop notice claimant’s statutory priority to construction loan proceeds by segregating the fund into preallocated accounts and thereafter deducting charges and interest as accrued,” the segregation of the funds into different accounts did not factor into its analysis. (Familian, supra, 213 Cal.App.3d at p. 683.) Instead, the Familian court broadly hеld that “a preallocation of construction loan funds and periodic disbursements to the lender are assignments within the meaning of
Finally, Lender makes a number of arguments directed at specific portions of the trial court’s award, contending that the trial court went beyond the facts and holding of Familian. Lender claims the trial court erred when it awarded Respondents the total amount of interest paid on the loan because it received a small interest payment and the third party investors received the rest. Lender asserts we should reverse that portion of the judgment reflecting interest paid to the third party investors, approximately $1,012,200. Lender’s argument misses the point.
The purpose of
Lender also complains the trial court improperly awarded Respondents a loan servicing fee paid to Lender by the third party investors in the amount of
Lastly, Lender claims the trial court erred in awarding Respondents $19,500, representing the amount of fees paid to Lender by the owner in connection with a $390,000 supplemental loan to owner for the purpose of paying city permit fees, noting that the owner paid off the loan before the service of the first stop notice. We disagree. Trial testimony established that the owner paid Lender a loan fee of $476,875 at closing and that Lender later loaned $390,000 of thе fee back to the owner to pay for permits required to allow the start of construction. The supplemental loan was secured by a trust deed on the same property enhanced by Respondents’ labor, equipment and material. This evidence establishes that the loan was for the purpose of financing the construction of improvements on the property. Thus, the trial court properly included the loan fee from this supplemental loan as part of its Familian award.
III. Dynalectric Issue
Service of a preliminary 20-day notice is required to enforce a mechanic’s lien or stop notice claim. (
Dynalectric also contends we need not interpret
As we shall explain, we conclude the trial court erred as a matter of law when it concluded that Dynalectric was not required to serve Lender with a preliminary notice. We also conclude that the judgment in favor of Dynalectric should be provisionally reversed and the matter remanded to the trial court for an evidentiary hearing on the potentially dispositive factual excuse issue regarding when Dynalectric started work on the project. We first address the legal issue presented by the parties and then turn to the factual excuse issue.
A. Legal Issue
It is undisputed that Dynalectric was a contractor with a direct contract with the owner of the project and that it did not serve Lender with a preliminary notice. In a nutshell, Lender claims Dynalectric was required to serve a preliminary notice under
“(a) Except one under direct contract with the owner... every person who furnishes labor, service, equipment, or material [to a work of improvement] shall, as a necessary prerequisite to the validity of аny... notice to withhold, cause to be given to the owner or reputed owner, to the original contractor, or reputed contractor, and to the construction lender, if any, or to the reputed construction lender, if any, a written preliminary notice as prescribed by this section.
“(b) Except the contractor... all persons who have a direct contract with the owner and who furnish labor, service, equipment, or material [to a work of improvement] shall, as a necessary prerequisite to the validity... of a notice to withhold, cause to be given to the construction lender, if any, or to the reputed construction lender, if any, a written preliminary notice as prescribed by this section.” (Italics added.)
The term “‘[o]riginal contractor’” used in
Taking the liberty to rearrange the wording of these subdivisions and substitute “any contractor who has a direct contractual relationship with the owner” for the term “original contractor,”
We now take the rearranged subdivisions to determine whether Dynalectric, a person that furnished labor, etc., through a direct contract with the owner, was required to serve a preliminary notice on Lender under either
Interpreting the predecessor to
Recent amendments to the mechanic’s lien laws support this interpretation. The Legislature indicated that the 2010 amendments were intended to, among other things, “recodify, reorganize, and clarify the mechanics lien statute; modernize terminology and eliminate inconsistencies in language; make provisions more readable and easier to use; enact separate provisions for private and public works; [and] modernize and streamline existing notice requirements.” (Sen. Com. on Judiciary, Analysis of Sen. Bill No. 189 (2009–2010 Reg. Sess.), as amended Dec. 15, 2009, p. 1 (Senate Committee on Judiciary Analysis); available at <http://www.leginfo.ca.gov/pub/09-10/bill/sen/sb_0151-0200/sb_189_cfa_20100111_183140_sen_comm.html> [as of Jan. 31, 2014].) The California Law Revision Commission “placed its highest priority on drafting a ‘nonsubstantive reorganization of the existing mechanics lien statute that would modernize and clarify existing law.’” (Id. at p. 2.) The Legislature noted that
Once again, our rearranged
In summary, the trial court erred when it concluded that Dynalectric was not required to serve a preliminary notice on Lender.
B. Factual Excuse Issue
1. Facts
Before trial, Lender movеd for nonsuit or a partial judgment under Code of Civil Procedure section 631.8 to determine the validity of Dynalectric’s stop notice claim on undisputed facts. Lender argued that, as a matter of law, Dynalectric was required to serve Lender a preliminary notice, and Dynalectric did not do so and was barred from pursuing a stop notice claim against
At the hearing on the motion, Lender presented an oral reply to Dynalectric’s opposition that addressed the legal issue, but not the factual issue of when Dynalectric began work on the project. Lender later admitted it “was nowhere on the scene” in 2004 when Dynalectric executed a letter of intent with the owner, but that the initial work Dynalectric did was of “no consequence” because it pertained to a “separate work of improvement.” Lender claimed that another judge found that the “current work of improvement” started a few weeks before it recorded its trust deed in June 2006, that Dynalectric first started work under the contract in September 2006, and that Dynalectric prepared its preliminary notice 20 days after it started work, but never served Lender. Lender asserted that even if the court had “question of fact” regarding whether Dynalectric was excused from the preliminary notice requirement, it could still rule on the legal issue.
Thereafter, the trial court denied Lender’s motion to find Dynalectric’s stop notice claim invalid. The court later clarified that it ruled on the legal issue of whether Dynalectric was required to file a preliminary notice on Lender, not the factual issue. Lender filed a “Motion for Reconsideration of Prior Mоtion Re Dynalectric’s Statutory Duty to Serve a Preliminary Notice on Point Center; for Renewal of Prior Motion as to Said Duty Issue; For Relief Based on Mistake, Inadvertence, Surprise or Excusable Neglect; For a Determination, as a Motion in Limine, that Dynalectric’s Contention that it was Excused for Factual Reasons from Serving a Preliminary Notice on Point Center Raises a Triable Issue of Fact; and for Related Relief” (the reconsideration motion). Among other things, Lender explained during argument that its in limine motion requested that the trial court reserve for trial any determination on the factual issue regarding whether Dynalectric was excused from serving a preliminary notice on Lender. The trial court denied the reconsideration motion.
2. Analysis
In its opening brief, Lender focused exclusively on the trial court’s ruling on the legal issue. Seizing on the fact Lender failed to argue the factual excuse issue as a basis for reversing the trial court’s ruling, Dynalectric
The parties impliedly agree that a ruling on the factual excuse issue potentially moots the legal issue that we addressed above. (Ante, pt. III.A.) Our review of the record reveals, however, that Lender did not have the opportunity to present evidence on the factual excuse issue. Dynalectric raised the factual excuse issue in its opposition to Lender’s motion and presented a declaration to support its argument. Lender provided an oral reply at the hearing on the motion. It asserted the court could rule on the legal issue even if factual questions existed regarding whether Dynalectric was excused from the preliminary notice requirement. After the trial court ruled in Dynalectric’s favor on the legal issue, Lender filed its multifaceted reconsideration motion which argued that Dynalectric’s factual excuse issue should be tried. Lender stated during oral argument on the reconsideration motion that it had a number of exhibits and witnesses to address the factual excuse issue. Although Dynalectric chides Lender for not presenting this evidence as part of its reconsideration motion, Lender was not required to do so because the court made no factual determination that was subject to reconsideration. Lender argued below that the factual excuse issue needed to be tried. Dynalectric agrees as it alternatively argued on appeal that we could remand the matter for further proceedings.
Because the record reveals that the parties did not have a full and fair opportunity to litigate the potentially dispositive factual excuse issue, we decline to rule on whether Dynalectric had a factual excuse for not complying with the preliminary notice requirement. In the interest of justice, we provisionally reverse the judgment in favor of Dynalectric and remand the matter to the trial court with directions to hold an evidentiary hearing on when Dynalectric started work on the project. For purposes of this appeal, the provisional reversal means that on remand, Dynalectric and the lender are placed in the same positions and have the same rights as before rendition of the judgment (Hall v. Superior Court (1955) 45 Cal.2d 377, 381 [289 P.2d 431].) If the trial court finds in favor of Dynalectric on the existence of a factual excuse for not serving a preliminary notice on Lender the judgment in favor of Dynalectric should be affirmed. Alternatively, if the trial court finds against Dynalectric on the existence of a factual excuse, the judgment in favor of Dynalectric should be reversed.
A. Facts
On April 10, 2008, Division 8 served Lender with its bonded stop notice and filed a complaint to foreclose its mechanic’s lien on the project. In May 2008, Division 8 filed a first amended complaint which added a stop notice claim against Lender. In July 2008, Division 8 served its first amended complaint on Lender. Division 8, however, never served Lender with a notice of the commencement of its stop notice action within five days after filing its complaint as required by
During trial, Lender orally moved under Code of Civil Procedure section 631.8 for entry of judgment against Division 8 for Division 8’s failure to serve a notice of commencement of action under
B. Analysis
An action to enforce а stop notice must be commenced between 10 and 90 days after filing of the stop notice. (
Lender contends the trial court erred when it refused to enter judgment in its favor based on Division 8’s failure to ever serve a notice of the commencement of its stop notice action because the use of the word “shall” in the statute requires mandatory compliance. We disagree.
Again, we are faced with a question of statutory interpretation subject to de novo review. (Bialo v. Western Mutual Ins. Co., supra, 95 Cal.App.4th at pp. 76–77.) “[T]here is no simple, mechanical test for
Looking at the language of
We are not the first court to come to this conclusion. Almost 50 years ago, the court in Sunlight Elec. Supply Co. v. McKee (1964) 226 Cal.App.2d 47 [37 Cal.Rptr. 782] (Sunlight) similarly interpreted Code of Civil Procedure former section 1197.1, subdivision (b), the predecessor provision to the language at issue in
While Lender is correct that Sunlight is distinguishable because there a notice of commencement of action was filed 14 days late, which led the trial court to find substantial compliance with the statute. (Sunlight, supra, 226 Cal.App.2d at p. 49.) In contrast, here, a notice was never filed. We believe this to be a distinction without a difference beсause the critical aspect of the Sunlight decision, with which we agree, is that the notice of commencement of action requirement is directory in the absence of prejudice. (Id. at p. 50.) Here, Lender does not allege it suffered any prejudice as a result of Division 8’s failure to give it a notice of the commencement of the action. The evidence shows that Lender suffered no prejudice because it had no undisbursed construction funds left in its control when Division 8 served Lender its bonded stop notice. Thus, Division 8’s failure to give Lender the notice of commencement of action after it served Lender its stop notice action resulted in no prejudice as it had no funds to release.
Finally, we reject Lender’s assertion that Sunlight has been superseded by more recent strict compliance cases. The cases Lender relies on are inapposite because they address the
DISPOSITION
The judgments in favor of respondents Brady, Division 8 and Brewer are affirmed. These respondents are to recover their costs on appeal.
The judgment in favor of Dynalectric is provisionally reversed and the matter is remanded to the trial court for further proceedings, on an expedited basis, consistent with the views expressed in this opinion. If the trial court finds in favor of Dynalectric on the existence of a factual excuse for not serving a preliminary notice on Lender, the judgment in favor of Dynalectric
Benke, Acting P. J., and Irion, J., concurred.
A petition for a rehearing was denied February 27, 2014, and the opinion was modified to read as printed above. Appellant’s petition for review by the Supreme Court was denied April 30, 2014, S217079.