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Brewer Corporation. v. Point Center Financial, Inc.

California Court of Appeals, Fourth District, First Division

January 31, 2014

BREWER CORPORATION et. al., Plaintiffs and Respondents,
v.
POINT CENTER FINANCIAL, INC., Defendant and Appellant.

Filed Ordered Date 2/27/14

APPEAL from a judgment of the Superior Court of San Diego County No. 37-2007-74230-CU- BC-CTL, William R. Nevitt, Jr., Judge.

Fox Johns Lazar Pekin & Wexler, Michael H. Wexler, R. Gordon Huckins and Dale A. Martin, for Defendant and Appellant Point Center Financial, Inc.

Marks, Finch, Thornton & Baird, Jason R. Thornton, Jon F. Gauthier and Christopher R. Sillari; Hoyt Law Firm and Kenneth C. Hoyt for Plaintiffs and Respondents Brewer Corporation and Division 8.

Lincoln, Gustafson & Cercos and Theodore R. Cercos for Plaintiff and Respondent Brady Company/San Diego, Inc.

Niddrie Fish & Addams and David A. Niddrie for Respondents.

Law Offices of Murray M. Helm, Jr., and Murray M. Helm, Jr., for Respondent Dynalectric Company.

THE COURT:

The petitions for rehearing are denied.

It is ordered that the opinion filed herein on January 31, 2014, be modified as follows:

1. On page 3 of the opinion the first full paragraph is deleted, and the following is inserted:

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 fractional loan interest at a rate of 10 percent and charged a servicing fee of 1.5 percent. Significant to this action, under the private loan placement and fee agreements on each of these loans Lender prepaid itself interest, loan fee/points, loan underwriting and other fees-totaling $1, 555, 771.37. (As used in this decision, the term "prepaid" means that the Lender was paid before the stop notice claimants were paid in full on their claims.) The loan servicing agreements between Lender and the third-party investors were not recorded as a public record.

2. On page 27 of the opinion the last paragraph which continues onto page 28 is deleted, and the following is inserted:

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 for 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.) If 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 trial court finds against Dynalectric on the existence of a factual excuse, the judgment in favor of Dynalectric should be reversed.

3. On page 32 of the opinion the last paragraph is deleted, and the following is inserted:

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 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 is affirmed and Dynalectric is to recover its costs on appeal. Alternatively, if trial court finds against Dynalectric on the existence of a factual excuse, the judgment in favor of Dynalectric is reversed and Lender is to recover its costs on appeal.

McINTYRE, Acting P. J.

In this case, we are required to interpret several stop notice statutes. (Former Civ. Code, §§ 3082-3267; Civ. Code, §§ 8000-9566, effective July 1, 2012 (Stats. 2010, ch. 697, § 16). Unless otherwise indicated, undesignated statutory references are to the former Civil Code, which was in effect at all times material to this appeal and references to the current Civil Code are designated by the word current.) First, we conclude the trial court correctly followed Familian Corp. v. Imperial Bank (1989) 213 Cal.App.3d 681 (Familian) when it held that a construction lender must make available to stop notice claimants those amounts the lender has already disbursed to itself on the construction loan.

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 section 3097 prevented it from recovering under its bonded stop notice. Nonetheless, the judgment in favor of the stop notice claimant is provisionally reversed and the matter remanded for further proceedings on a potentially dispositive factual issue.

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 section 3172 did not bar the stop notice claimant from recovering where the lender suffered no prejudice.

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, adjacent 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 section 3087. Under the terms of the construction loan, Lender was obligated to obtain about $2.8 million to close the transaction and agreed to use its best efforts to raise the balance of the loan amount in stages. Lender obtained the initial funds and disbursed them to the owner.

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 fractional loan interest at a rate of 10 percent and charged a servicing fee of 1.5 percent. Significant to this action, under the private loan placement and fee agreements on each of these loans Lender prepaid itself interest, loan fee/points, loan underwriting and other fees-totaling $1, 555, 771.37. The loan servicing agreements between Lender and the third-party investors were not recorded as a public record.

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 who 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' mechanics' lien claims. The sole issue before the trial court was Lender's liability with respect to Respondents' bonded stop notice claims. Specifically, Respondents cited section 3166, which prohibits assignments, before or after receipt of a stop notice, and Familian, supra, 213 Cal.App.3d 681 which holds that "lenders cannot avoid a section 3166 priority by private agreement." (Id. at p. 686.)

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 section 3167. It further awarded Respondents costs, prejudgment interest and attorneys' fees pursuant to statute. The trial court also denied motions by Lender for entry of judgment against Dynalectric and Division 8 based on the alleged failure of these claimants to comply, respectively, with sections 3097 and 3172.

DISCUSSION

I. General Legal Background

A mechanics' lien is a claim against the 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.) The mechanics' lien derives from 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 (Connolly).) The mechanics' 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 mechanics' lien; thus, if the lender forecloses on the property, the mechanics' lien has no value. (10 Miller & Starr, Cal. Real Estate (3d ed. 2011) § 28:68, p. 234.) "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 mechanics['] 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 ยง 8044, subd. (c).) As our high court explained, " '[l]abor and material contractors [in the construction industry] are in a particularly vulnerable position. Their credit risks are not as diffused as those of other creditors. They extend a bigger block of credit, they have more riding on one transaction, and they have more people vitally dependent upon eventual payment. They have much ...


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