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Court of Appeal, First District, Division 2, California.

John C. WALKER and Bruce E. Moody, individually and as copartners under the name and style of Walker and Moody, Plaintiffs and Respondents, v. LYTTON SAVINGS AND LOAN ASSOCIATION OF NORTHERN CALIFORNIA and Lytton Financial Corporation, Defendants and Appellants.

Civ. 25289.

Decided: October 17, 1969

Tobin & Tobin, John J. Hopkins, San Francisco, for appellants. Lawrence W. Jordan, Jr., William S. Clark, Rogers, Clark & Jordan, San Francisco, for respondents.

For Opinion on Hearing, see 84 Cal.Rptr. 521, 465 P.2d 497.

Defendants Lytton Savings and Loan Association of Northern California and Lytton Financial Corporation appeal from a judgment awarding plaintiffs a mechanic's lien on property upon which defendants had loaned money for construction purposes, and holding that said lien was superior to the deed of trust given defendants to secure their loan.

The facts are without dispute.   On May 1, 1963, defendants 1231 Jones, Inc. and the Dunns (hereafter referred to as “owners”), who held feel title to certain San Francisco real property, entered into an oral contract (which was later reduced to writing) with plaintiffs (licensed architects).   Pursuant to said contract, plaintiffs were to perform architectural services and provide materials for the carrying out of a scheme of improvement on the owners' property, and the owners, in return, were to pay plaintiffs the reasonable value of said services and materials.   On the same date, plaintiffs commenced performance of the contract and thereafter performed the required architectural services.   Prior to August 1964, plaintiffs had completed surveys, scale details, working drawings, plans, specifications and studies on a 42–unit structure, and later, on a modified scheme of improvement, completed work of the same nature for a proposed 67–unit apartment.

Financing of the original 42–unit structure was provided by Lytton Financial Corporation (hereafter referred to as “Lytton”), and in August 1964 negotiations were commenced between the owners and Lytton for the financing of the 67–unit structure.   During the course of these negotiations, Lytton had actual knowledge of the agreement between plaintiffs and the owners and also had actual knowledge of the fact that plaintiffs had provided architectural services under said agreement since its inception in 1963 and that they were then modifying the plans and working drawings to provide for a 67–unit apartment.   The owners had submitted to Lytton letters to and from plaintiffs and the owners relating to the manner of payment and amount of plaintiffs' fees, although Lytton was unaware of the exact amount of money due plaintiffs.

In October 1964, at Lytton's request, plaintiffs' plans for the proposed 67–unit structure were submitted to Lytton, which reviewed and approved them.   Subsequently, on December 11, 1964, plaintiffs submitted by letter to Lytton an estimate of the construction costs for said 67–unit apartment in accordance with the above-mentioned plans and specifications.   Lytton relied upon this information in making its appraisal for loan purposes.

On December 15, 1964, the owners, in consideration of Lytton's construction loan, executed a promissory note in its favor in the amount of $1,609,000 and a deed of trust on the owners' real property as security therefor.   The deed of trust was duly recorded on December 28, 1964.   On said date no work had been done on the owners' property nor had any materials been delivered thereto.

Between March and May 1965, in furtherance of the plan to construct the 67–unit apartment building, existing structures on the owners' property were demolished and the building site was graded and excavated.   In addition, an eight-foot high chain fence was erected on the premises.   Plaintiffs supervised and inspected said services performed on the property and also secured site approval, excavation and foundation permits, and applied for a building permit.

Plaintiffs continued to perform architectural services and to provide materials for the proposed apartment building until September 15, 1965, on which date they performed the last such service.   On November 4, 1965, the owners orally notified plaintiffs to cease work.   No building permit was ever issued and the proposed work of improvement was never constructed.

On December 29, 1965, plaintiffs recorded a claim of lien against the real property.

On February 3, 1966, a trustee's sale was conducted under the deed of trust, and the property was purchased by the beneficiary Lytton.   Thereafter, on March 11, 1966, plaintiffs commenced the instant action to foreclose their mechanic's lien and filed a notice of lis pendens with the recorder.

In addition to the above evidentiary findings, the court made ultimate findings of fact and conclusions of law as follows:  that Lytton knew of the architectural services rendered and being rendered by plaintiffs and utilized them to some extent prior to recording its deed of trust against the owners' property;  that there was “commencement of the subject work of improvement,” as required by Code of Civil Procedure, section 1188.1, prior to the recordation of the Lytton deed of trust;  that Lytton's deed of trust was not superior to plaintiffs' lien against the property and that the sale under the deed of trust was subject to plaintiffs' lien for architectural services;  that plaintiffs were entitled to judgment in the sum of $19,500, plus interest from a specified date, against defendants 1231 Jones, Inc. and Morden Dunn;  that plaintiffs were entitled to a lien for said amount against the real property and were also entitled to foreclose said lien.

Judgment was subsequently entered in accordance therewith.

Defendants Lytton take the position for appeal that the trial court erred in holding plaintiffs' mechanic's lien to be superior to their deed of trust and in ordering foreclosure of said mechanic's lien.   Defendants rely primarily upon Design Associates, Inc. v. Welch (1964) 224 Cal.App.2d 165, 36 Cal.Rptr. 341, and McDonald v. Filice (1967) 252 Cal.App.2d 613, 60 Cal.Rptr. 832.   Plaintiffs, on the other hand, contend that the court's holding was entirely correct and supported by the reasoning of Nolte v. Smith (1961) 189 Cal.App.2d 140, 11 Cal.Rptr. 261, 87 A.L.R.2d 996.

There is no need for us to discuss the above-mentioned authorities, as none of them deal with the issue here presented.

Our research has found the recent case of Tracy Price Associates v. Hebard (1968) 266 Cal.App.2d 778, 72 Cal.Rptr. 600, in which the problem presented to us is completely resolved.   In Tracy, the owner of certain unimproved real property contacted in architectural firm in connection with the construction of certain buildings on the property.   After the firm had submitted a feasibility report and preliminary sketches of the proposed improvements, the owner entered into a written contract with the firm, which completed working drawings and applied for a building permit.   The owner subsequently became financially unable to proceed with the project, and the contemplated improvements were never constructed.   After the above-mentioned architectural services had been performed but before the architect had done any physical work on the property, the owner executed a deed of trust on the property, which was duly recorded.   Subsequently, the architect recorded a mechanic's lien against the property in the amount of $72,000 on account of the services rendered in preparing the working drawings and specifications for the proposed project.   The architect thereafter brought suit to foreclose the mechanic's lien and, following the commencement of said action, a trustee's sale was held under the deed of trust, and the beneficiary purchased the property.   The architect's complaint was then amended to seek an adjudication that the mechanic's lien was superior to the deed of trust against the property.   Although the trial court found in favor of the architect on this issue, this finding was reversed on appeal.   After discussing in some detail the cases relied upon by the parties in the instant action, the court pointed out that even if it were to be assumed that the owner of the property was at fault in causing the project to fail and that he was thereby estopped from defeating the architect's right to a lien, there was no basis whatever for invoking such an estoppel against the beneficiary under the deed of trust because there was no evidence that said beneficiary was invested with or exercised any control over the project or wrongfully prevented its construction.   The court likewise rejected the architect's contention that the mechanic's lien was entitled to priority because the beneficiary under the deed of trust had knowledge of the proposed project and of the architect's work before the deed of trust was recorded.   The court stated:  “The condition precedent to [the architect's] priority was the commencement of construction.   It not having commenced insofar as the trust deed was concerned, [the architect] is in no position to assert priority.  [The architect] is in effect contending that where one takes a trust deed with knowledge that the owner plans to construct improvements on the land and that if he does an architect has a potential lien, he waives or is estopped to assert his rights under the trust deed if through the fault of the owner the project is abandoned.   Clearly such knowledge alone cannot constitute waiver or estoppel.   [Citations.]  There can be no estoppel unless the party asserting it relied to his detriment on the conduct of the person to be charged.  [Citation.] * * * To hold that such knowledge constitutes waiver or estoppel would expose lenders to so many unpredictable hazards that construction financing would become extremely difficult.   Although mechanic's lien laws should be liberally construed to protect those who have contributed skills, services or materials, towards the improvement of property, it has been recognized that lien laws are for the protection of owners as well as mechanic's lien claimants.   [Citations.]  It may be said with equal validity that section 1188.1 of the Code of Civil Procedure prescribing a rule for determining priorities was designed for the protection of those who take security interests in land as well as for the protection of mechanic's lien claimants.

“In the case under review no actual work on the ground having been commenced, visible or otherwise, we conclude that the claim for architectural services may not be asserted as a valid lien against [the beneficiary under the deed of trust] * * *.”  (Pp. 787–788, 72 Cal.Rptr., p. 606.)

In this case, as we have noted, the trial court expressly found that at the time the Lytton deed of trust was recorded, no work had been done on the owners' property and no materials had been delivered thereto.   The record contains no evidence that Lytton had any control whatever over the contemplated construction project or wrongfully prevented its construction.   Under the Tracy case, the Lytton deed of trust was entitled to priority over plaintiffs' mechanic's lien and the trial court erred in ruling to the contrary.

We note that the judgment included a monetary award of damages against Lytton Financial Corporation and Lytton Savings and Loan Association of Northern California.   There is no justification whatever for any such award, and the same must be set aside.

That portion of the judgment awarding plaintiffs money damages against defendants 1231 Jones, Inc. and Morden Dunn is affirmed.   In all other respects the judgment is reversed, with directions to the trial court to enter its judgment in favor of defendants Lytton Savings and Loan Association of Northern California and Lytton Financial Corporation.