HJH Construction v. Cal. Bank & Trust
Filed 2/7/13 HJH Construction v. Cal. Bank & Trust
CA4/2
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California
Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or
relying on opinions not certified for publication or ordered published, except
as specified by rule 8.1115(b). This
opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF
FOURTH APPELLATE DISTRICT
DIVISION TWO
HJH CONSTRUCTION, INC.,
Plaintiff
and Respondent,
v.
CALIFORNIA BANK & TRUST, as Assignee, etc.,
Defendant
and Appellant.
E053033
(Super.Ct.No.
INC081550)
OPINION
APPEAL
from the Superior Court
of
County. Mark E.
Johnson, Judge. Affirmed with
directions.
Troutman
Sanders, Dan E. Chambers, Amy A. Hoff, and Thomas H. Prouty for Defendant and
Appellant.
Marc
S. Homme; Law Offices of Rodney L. Soda and Rodney L. Soda for Plaintiff and
Respondent.
This
action arises out of a failed real estate development project in Palm
Springs, California. P.S. Racquet Club Properties, LLC (Borrower),
the owner/developer, borrowed money from Vineyard Bank. Borrower entered into an agreement with
plaintiff and respondent HJH Construction, Inc. (HJH) wherein HJH agreed to
serve as the general contractor on the project.
When Borrower defaulted on the loan, Vineyard Bank attempted to
foreclose on the property.
Simultaneously, HJH recorded its mechanic’s lien and initiated this
action. Subsequently, the FDIC closed
Vineyard Bank and sold its interest and liabilities with respect to the loan to
Borrower to defendant and appellant California Bank & Trust (Lender). HJH’s action was tried before the court and
judgment was entered in its favor, awarding damages, attorney fees and
costs. The judgment is based on a stop
notice against Lender and foreclosure on mechanic’s lien. Lender appeals.
I. PROCEDURAL BACKGROUND AND FACTS
On
November 1, 2004,
(Borrower) purchased the Racquet Club of Palm Springs. At the time of the purchase, the Racquet Club
consisted of 10.1 acres with 20 existing structures, including storage,
restaurant, and conference area. Van
Scott Jones (Jones
title="">[1])
was one of the Borrower’s principals.
Borrower sought a general contractor and approval from the City of Palm
Springs to develop the property for residential use
(the Project).
Early in 2006, Jones approached Hal
Hall (Hall), owner of HJH, to discuss the possibility of HJH serving as general
contractor. Borrower and HJH entered
into an oral cost plus fee contract, whereby it was agreed that HJH was to be
reimbursed for its costs, and paid a fee of $1.2 million over a term of 24
months at the rate of $50,000 per month from the date of the construction loan
funding. Both Jones and Hall had
previously worked on a “handshake†agreement with other parties. In May 2006, HJH began work on the
Project. Payment was to commence with
the eventual funding of the construction loan.
In
December 2006, Lender sent Borrower a letter of interest requesting further
information. Lender also required a
written contract between Borrower and HJH.
Thus, on or about January 12,
2007, Borrower and HJH entered into a written Construction Contract
to submit to Lender. HJH prepared the
Construction Contract, which was a standard short form “AIA†agreement between
owner and contractor with typewritten insertions of the terms of the oral
agreement, including the payment of $1.2 million to HJH over 24 months.; RT 17,
143, 691} The parties intended to
memorialize the terms of their preexisting oral agreement. However, the Construction Contract
represented that construction work had not yet begun. In response to one of the title insurance
company’s questionnaires dated January 29,
2007, Borrower described “the current stage of construction†as
“not yet started.†Sean Johnson, the
executive vice-president of Lender, briefly reviewed the contract but never
raised an issue concerning the fee of $1.2 million being paid over 24
months. Hall did not take part in the
negotiations between Borrower and Lender, nor did Lender have any
communications with HJH about the contract or the job.
Based
on Borrower’s representations and information, Lender and Borrower entered into
a written Construction Loan Agreement dated January 19, 2007 (the Loan Agreement). According to the Loan Agreement, Lender did
not agree to loan Borrower a set, specific amount of money. Instead, the Loan Agreement provided, “The
Loan shall be in an amount not to exceed the principal sum of U.S.
$15,180,000.00 and shall bear interest on so much of the principal sum as shall
be advanced pursuant to the terms of this Agreement and the Related
Documents.†Borrower could “apply†for
weekly advances to pay for labor and materials provided for the Project. However, Lender could refuse to pay the
requested advances if Borrower failed to comply in any respect with any of the
Loan Agreement’s provisions. The Loan
Agreement contemplated use of a fund control system through which application
for advances would be submitted, processed, and if approved, paid.
Borrower
executed a promissory note promising to pay Lender, on or before April 19, 2008, the sum of the
outstanding principal amounts advanced under the Loan Agreement plus interest
calculated from the date of each advance.
Borrower agreed to make regular monthly payments of all accrued unpaid
interest due, beginning February 10,
2007. Lender recorded a
construction deed of trust on January 31,
2007.
At
the owner’s request, work on the Project began in May 2006 and continued
intermittently through January 2007. The
pre-Loan Agreement construction work consisted of tearing down the north side
of the restaurant building after a fire occurred, removing trees that were
affected by the fire, demolition of curb and gutter, installing a
two-and-one-half-inch water line, demolition of a gate and pilasters, watering
the site for dust control, and “potholing†to ascertain the location of utility
lines.
The
parties stipulated on the record that the Commonwealth Land Title Insurance
Company file did not contain a title inspection report, i.e., there had been no
inspection of the property. Sometime in
mid-October or early November 2006, at least two to three months before the
construction trust deed recorded, the bank, through Johnson, made its only
pre-loan visit to the site. At no time
prior to the recordation of the loan had anyone from the bank asked Hall if he
had performed any work at the site.
Additionally, Lender’s inspector, Randy Banuelos, did not inspect the
property for the first time until February 17, 2007, at least two weeks
after the construction trust deed had recorded.
During the visit, Banuelos did not enter every area of the site.
About
January 25, 2007, Borrower, HJH and California Fund Control, Inc. (CFC)
entered into a fund control agreement setting forth specific provisions
regarding the fund control process. The
starting point for the process was a construction cost breakdown, or a form
setting forth the budget for the Project by particular cost categories. In mid-January 2007, Borrower submitted a
completed and signed construction cost breakdown to Lender.
Pursuant
to the fund control agreement, Borrower submitted payment requests to CFC
stating the requested amount, an allocation of the amounts to the construction
cost breakdown’s various cost categories, the payees’ names, and the amount to
be disbursed to each payee. HJH retained
receipts or invoices for the work and materials provided in order to support
its payment requests.
Upon
receipt of a payment request, CFC provided Lender with a computer-generated
inspection report summarizing the payment request and reflecting past
disbursements by cost category. Lender
reviewed CFC’s report and determined whether to approve the disbursement
application. Upon approval, Lender
deposited the exact amount of approved funds with CFC, and CFC issued the exact
amount to the payees, leaving a zero balance in the CFC account.
If
a particular construction cost category was in jeopardy of running over budget,
Lender had the discretion to approve reallocations. Thus, from time to time, Borrower submitted
reallocation requests to Lender, many of which Lender approved. However, on multiple occasions Borrower and
HJH also secretly reallocated HJH’s alleged costs from one line item to another
before submitting payment requests.
Borrower’s
monthly interest payments were made via a transfer from an “interest reserveâ€
built into the loan as one of the Project’s budgeted costs so that Borrower
would not have to go out of pocket to make monthly interest payments. The interest reserve’s budget amount
($1,408,570) was determined in the loan underwriting process as an amount
likely to cover interest that would accrue on Lender’s potential future
advances. As interest payments came due,
Lender reduced the interest reserve’s budget by the amount owed, which
effectively reduced by that same sum the maximum potential amount that could be
disbursed over the Loan Agreement’s term.
Lender
applied interest charges to the interest reserve line item from February 2007
to April 2008, with the last application occurring on April 21, 2008. However, in April 2008, Borrower defaulted
under the Loan Agreement by failing to repay the amounts advanced by Lender
upon maturity. On May 5, 2008, a
pre-workout agreement was signed by Lender, Borrower and the loan guarantors. Borrower and guarantors also executed an
Agreement Regarding Protective Advances
(Protective Advance Agreement). Under
the Protective Advance Agreement, Borrower and guarantors acknowledged
Borrower’s default and their request that the Lender “make additional advances
under the Loan from time to time in order to protect and preserve the
collateral, including without limitation, for the payment of certain safety,
security, maintenance, development and construction costs for the
Project.†On May 6, 2008, the
Lender served a notice of default and election to sell under deed of trust,
which was recorded on May 9. As of
May 2008, approximately $5 million was still available to be disbursed under
the loan.
Between
May and August 2008, while Lender and Borrower discussed potential solutions to
Borrower’s default, Lender made certain post default construction disbursements
under the Protective Advance Agreement.
These construction disbursements occurred on June 6, June 13,
June 18, July 15, and August 1, 2008, with the final advance
being made on August 29, 2008.
About September 26, 2008, Lender’s representatives met with
Borrower’s representative, Jones, to discuss issues relating to Borrower’s
default. One issue discussed was that
the Project was facing approximately $1 million in cost overruns. Lender informed Jones that it would assess
the information provided. The Lender
then proposed that Borrower deposit $1.7 million with Lender to pay outstanding
and future interest payments and to cover cost overruns, and that Lender would
thereafter advance the requested $348,543.10.
However, as Borrower was not able to come up with the additional $1.7
million, Lender neither approved nor disbursed the requested $348,543.10
advance.
While
Borrower attempted to cure its default and salvage the Project, it also
consulted with bankruptcy counsel and was contemplating filing for bankruptcy
during the summer of 2008. During this
period, Jones was in regular contact with HJH about Borrower’s default and his
attempts to negotiate a workout, as well as Lender’s position. Although Lender allowed HJH to continue
working and made post default protective advances under the Protective Advance
Agreement, at no time did Lender promise Borrower that it would make further
advances or pay for post default work performed at the Project.
By
October 2008, it was clear to Borrower that Lender was not going to approve
further advances, and sometime that month Jones informed HJH that as a result,
work on the Project should stop. At that
time, the loan had fully matured and was in default, and Lender was trying to
foreclose on the property.
On
October 2, 2008, HJH recorded a mechanic’s lien in the total amount of
$744,371.43 for services and materials furnished by it. Borrower filed bankruptcy in late October to
stay the foreclosure. And on
October 31, HJH filed its complaint alleging breach of contract and common
counts against Borrower, and a cause of action for foreclosure of mechanic’s
lien against the Lender and Borrower. On
November 4, HJH recorded an amended mechanic’s lien against the property
in the amount of $786,790.98.
On
January 30, 2009, approximately five months after Lender’s final post
default protective advance and three months after Borrower’s bankruptcy filing,
HJH issued a bonded stop notice to Lender, claiming $782,300.91 due to it for
labor and materials furnished for the Project.
Lender received the stop notice on February 2, 2009. On February 18, HJH filed a first
amended complaint adding a fifth cause of action for foreclosure of stop notice
against Lender. At the time Lender
received the bonded stop notice, its internal accounting records stated there
were “Construction Funds—Undisburs[ed]†in the sum of $1,443,406.19. This internal bank record also states Lender
actually segregated the amount of $977,877 to provide for the “Bonded Stop
Notice—HJH Con†claim. This “Budget
Listing†document is dated February 6, 2009, approximately seven days
after HJH had served Lender with the bonded stop notice. Lender’s “Project Budget Listing†dated March 30,
2009, not only shows the bonded stop notice of HJH in the sum of $977,877, but
also that another amount identified as being a bonded stop notice for “Roquet
Inc.†had been deducted from the undisbursed loan funds, which were in the sum
of $1,362,521.19.
Lender
nonjudicially foreclosed on the property through a trustee’s sale on
March 25, 2009. Its offer of $7.38
million was the highest bid at the foreclosure sale.
On
September 13, 2010, a court trial commenced.
Lender argued that the remaining portion of the construction loan was
not available for the stop notice of HJH.
However, the evidence shows there were undisbursed proceeds from the
loan available, and the Loan Agreement characterizes the entire loan as “a
fund,†wherein Borrower applies for advances and/or payments based on adequate
proof of satisfactory completion of work.
Thus, “loan funds†means the undisbursed proceeds of the loan, together
with any equity funds or other deposits required from Borrower.
By
November 1, 2010, the court issued its Statement of Decision finding for HJH on
both of its claims. With respect to the
stop notice claim, the court concluded “there were undisbursed construction
loan funds within the possession of [Lender],†and that the “total amount of
projected loan funds were not expended at the time [HJH] filed and served its
bonded stop notice.†The court based
this conclusion on three things: (1) its
understanding of a February 2009 computer printout; (2) Johnson’s testimony,
which the court characterized as indicating that “the funds allocated for the
. . . project were in the nature of a ‘reserve fund’â€; and
(3) its conclusion that Familian
Corp. v. Imperial Bank (1989) 213 Cal.App.3d 681 (Familian) was “directly applicable to the nature of [the Lender’s]
construction loan to [Borrower] and the fund control arrangement.†Regarding the mechanic’s lien, the court
found that HJH commenced a work of improvement in November 2006, and thus, the
lien attached before the Lender’s deed of trust was recorded.
The
same amount of damages, $690,719.98 plus costs and interest, was awarded on
both claims. HJH was also awarded its
attorney fees with respect to the stop notice claim. Judgment was entered on March 11, 2011,
in favor of HJH.
II. WAS LENDER LIABLE ON HJH’S STOP NOTICE?
“A
mechanic’s lien is a claim against the real property upon which a claimant has
bestowed labor or furnished materials and is founded in California
Constitution, article XIV, section 3.
The lien is effected by the filing of a claim of lien within certain
time limitations [citations] and by meeting other statutory requirements. Because of the unique constitutional command
establishing mechanics’ liens, ‘the courts have uniformly classified the
mechanics’ lien laws as remedial legislation, to be liberally construed for the
protection of laborers and materialmen.’
[Citation.]†(
Cal.App.4th 849, 854.) “The purpose of a
mechanics’ lien is to prevent unjust enrichment of a property owner at the
expense of laborers or material suppliers.
[Citation.]†(
Ehsanipour (1999) 70 Cal.App.4th 1480, 1483.)
“A
stop payment notice (sometimes called a stop notice or notice to withhold in
case law and in the industry) is a statutory
remedy designed to reach unexpended construction funds in the owner’s or
construction lender’s hands . . . .†(Cal. Mechanics’ Liens and Related
Construction Remedies (Cont.Ed.Bar 4th ed. 2012) § 2.95, p. 133; Civ. Code,
§ 8500 et seq.)
name="_ftnref2" title="">[2] The statutory scheme that encompasses the
stop notice law also encompasses mechanic’s liens and offers protection to
materialmen, laborers, contractors, and subcontractors who furnish labor and
materials at a construction project. (
(1976) 17 Cal.3d 803, 808 (Connolly).) By serving a stop notice on a construction
lender, the claimant creates a lien on the construction loan funds for his/her
benefit. (Id. at p. 813.)
Here,
after it was clear that Borrower would not be able to escape from default, HJH
recorded a mechanic’s lien in the total amount of $744,371.43 for services and
materials furnished by it. It also
initiated this action and issued a bonded stop notice to the Lender. Following a court trial, the court concluded
“there were undisbursed construction loan funds within the possession of
[Lender],†and that the “total amount of projected loan funds were not expended
at the time [HJH] filed and served its bonded stop notice.†The court’s conclusion was based on
(1) the February 2009 data system printout entitled “Westin and Muir
system,†(2) Johnson’s testimony indicating that “the funds allocated for
the . . . project were in the nature of a ‘reserve fund,’†and
(3) the case of Familian,
On
appeal, Lender contends the trial court’s “conclusion that there was a
construction fund held by [it] containing undisbursed funds committed to
Borrower when HJH issued its Stop Notice was founded on an erroneous interpretation
and application of the Loan Agreement and of California’s stop notice
law.†Citing the applicable statute
(Civ. Code, former § 3162, see now §§ 8536, 8538, 8542), Lender’s
sole issue relating to the stop notice is whether there actually was a construction
fund that contained funds that it “‘may be obligated to pay.’â€
According to Lender, it did not
agree to loan Borrower a specific sum of money or continue to approve and pay
Borrower’s payment requests. Rather, the
Loan Agreement conditioned Lender’s obligation to make advances on Borrower
remaining current on its payment obligations to Lender. Because Borrower was not current on its
payment obligations at the time Lender received the stop notice, Lender maintains
it “simply had no construction fund containing unexpended amounts that [it] was
obligated to pay for the project.â€
Further, Lender argues there were no “unexpended construction funds from
amounts previously disbursed by [it] . . . [because] it deposited
with CFC only the exact amount to cover the approved request, which was then
disbursed to the payees, leaving a zero balance.â€
In
response, HJH criticizes Lender’s argument for primarily relying on the loan
documents and the construction contract, neither of which HJH was party
to. According to HJH, Lender’s generated
documents pertain only to Lender and Borrower, while “the mechanics’ lien law
is there solely to protect the contractor and to provide that contractor with
certain inalienable rights under our Constitution.†Pointing out that “the trial court made a
factual finding that [Lender’s] funds were undisbursed loan funds subject
to the stop notice no matter how it characterized it†(underlining in
original), HJH argues this case is similar to the case in Familian, supra, 213 Cal.App.3d
681. We agree with HJH.
As
both parties point out, the trial court found the Lender’s funds were
undisbursed loan funds subject to the stop notice, regardless of how Lender
characterized them. Such finding is
supported by the evidence: (1) Lender’s
internal accounting records, which state there were “Construction
Funds—Undisburs[ed]†in the sum of $1,443,406.19; (2) the same internal
bank record, which also states the bank actually segregated the amount of
$977,877 to provide for the “Bonded Stop Notice—HJH Con†claim; (3) the
same internal bank record, which is dated February 6, 2009, approximately
seven days after HJH had served Lender with the bonded stop notice; and
(4) Lender’s “Project Budget Listing†dated March 30, 2009, which not
only showed the bonded stop notice of HJH in the sum of $977,877, but also that
another amount identified as also being bonded stop notice for “Roquet Inc.â€
had been deducted from the undisbursed loan funds that were in the sum of
$1,362,521.19.
Lender
argues the trial court misinterpreted the Loan Agreement because it expressly
provides that its obligation to make advances is subject to approximately 20
conditions precedent, including that Borrower remain current on its payment
obligations to Lender. Thus, according
to Lender, it “did not agree to loan Borrower a set, specific amount of money,
nor did it promise to continue to approve and pay Borrower’s payment
requests.†We disagree. The Loan Agreement defines “Loan Fund†as
meaning “the undisbursed proceeds of the Loan under this Agreement together
with any equity funds or other deposits required from Borrower under this
Agreement.†The amount of the Loan was
set at $15,180,000. Once Lender created
a loan fund, the entire fund is subject to the bonded stop notice. (Civ. Code, former § 3162.)
As
HJH points out, for years lenders have attempted to circumvent the mandate of
Civil Code, former section 3162, subdivision (a), which in relevant part
provided: “Upon receipt of a stop notice
pursuant to [former] Section 3159, the construction lender may, and upon
receipt of a bonded stop notice the construction lender shall, except as provided in this section,
person to whom it or the owner may be obligated to make payments or advancement
out of the construction fund,
claim of lien that may be recorded therefor. The construction lender shall be subject to
the following: [¶] (1) The construction lender shall withhold
funds pursuant to a bonded stop notice filed by an original contractor,
regardless of whether a payment bond has previously been recorded in the office
of the county recorder where the site is located in accordance with [former]
Section 3235. . . .â€
(Italics added.) Despite lenders’
attempts to draft loan documents around this statutory mandate, courts have
continually made it clear that lenders may not deprive a contractor of its stop
notice rights on the entire loan fund.
In
A-1 Door & Materials Co. v. Fresno
Guar. Sav. & Loan Assn. (1964) 61 Cal.2d 728, our state’s highest court
rejected the lender’s claimed right to use its undisbursed funds to reduce the
borrower’s debt or to complete the buildings as provided in the loan
agreement. The court held that
“Subsection (h) [of Civil Code former section 1190.1, which was replaced with
Civil Code former section 3162, subdivision (a),] requires that funds earmarked
for construction purposes be used to pay suppliers of labor and materials who
file claims under the subsection and therefore supersedes the private
arrangements of borrower and lender.†(
provides further guidance on lenders’ attempts to circumvent stop notices;
however, Lender faults the trial court for relying on that case.
In Familian, a
lender loaned $ 3.8 million to finance construction of condominium
units. (Familian, supra, 213
Cal.App.3d at p. 683.) The loan was
secured by a deed of trust on the real property. (Ibid.) As a condition, the lender required that a
portion of the loan funds be segregated into a preallocated interest reserve
account. (Id. at pp. 686-687.) During
the course of construction, the lender paid itself interest, fees and expenses
totaling $528,000 out of this account. (
unexpended loan funds, the lender received bonded stop notices for $105,000 and
foreclosed on the trust deed. Later, it
received additional stop notices totaling $427,000. It interpled the unexpended $105,000 with the
trial court and argued that the stop notice claimants were entitled to a pro
rata recovery of that amount only. (
Familian
Corp. had supplied plumbing materials on the project and was one of the bonded
stop notice claimants. It moved for
summary judgment, contending it was improper for the construction lender to
maintain a preallocation reserve to pay the costs of the construction loan, to
disburse payment to itself from the loan proceeds, to obtain through
foreclosure property rendered more valuable because of Familian’s supplies, and
to then assert it could not pay for the work and materials because the
construction funds had already been spent.
(Familian,
Familian, holding that the preallocation and segregation of funds to pay
unearned loan fees, interest and costs constituted an assignment within the
meaning of Civil Code former section 3166 that could not take priority over a
stop notice claim. (Familian, supra, at pp.
685-688.)
The
notice laws were intended to protect laborers and materialmen, whose “‘“credit
risks are not as diffused as those of other creditors,â€â€™â€ who “‘“extend a
bigger block of credit, . . . have more riding on one transaction,
. . . have more people vitally dependent upon eventual payment [and]
have much more to lose in the event of default.â€â€™â€ (Familian,
supra, 213 Cal.App.3d at p.
687.) In contrast, a secured
construction lender is protected not only by a first prior encumbrance on the
property that has increased in value as a result of the claimant’s labor and
materials, but also by the terms of a loan agreement that allows it full
control of the loan funds, including the establishment of whatever reserves or
other devices necessary to protect its interests. (Id.
at pp. 687-688.) Given the remedial
purposes of the statute, Familian
stated that Civil Code former section 3166 “‘must be liberally construed to
effect its objects and to promote justice.
[Citations.]’†(
The
analysis of the underlying policy of the law concerning lender agreements and
loan funds as applied to stop notices and mechanic’s liens, which we find
applicable to the facts in this case.
Although the situation in Familian
involved the lender prepaying itself more than $500,000 of preallocated
construction loan expenses, including interest, here Lender merely reserved a
portion of the loan funds for construction interest. However, regardless of the reserved
construction interest portion, there were sufficient funds available to pay
HJH. Thus, there was no disgorgement of
funds already paid to Lender. Even if a
lender were required to disgorge funds previously paid to it in order to pay
stop notice claimants, the Familian
court reasoned that such requirement would prevent lenders from structuring
their loans to enable them to obtain an unjust double recovery. “A construction lender would need only to
deduct its profits at the inception of the loan to assure a double recovery at
the expense of those who enhance the value of the property by supplying labor
and materials.†(Familian, supra, 213
Cal.App.3d at p. 687.)
Notwithstanding
the above, Lender challenges the evidence the trial court relied upon. It contends the Westin and Muir document,
which identified the budgeted amount, the amount paid, the amount allocated to
a particular item and the amount available, was misinterpreted by the trial
court. According to Lender and its representatives,
“the amount reflected in the ‘Amt. Avail.’ column did not reflect the amount of money available to Borrower in February
2009, because the [Lender’s] obligation to advance additional funds never arose
due to Borrower’s prior default, and because the Westin and Muir system is
merely an internal tracking system.†As
we have already stated, we reject any claim that the loan documents allowed
Lender to circumvent the stop notice statute.
More importantly, the court heard and considered the testimony of Sean
Johnson, Lender’s former executive vice-president. According to Johnson, upon approval of the
loan, Lender earmarked the loan amount, i.e., $15,180,000, and then as
disbursements were advanced against the loan, the amount available was reduced. While Lender argues that Johnson’s testimony
establishes that Lender did not create a separate account or transfer money
anywhere, we agree with the trial court’s interpretation that the documents
showed the amount available for disbursements at the time of receipt of the
stop notice. Lender’s attempt to shield
the undisbursed balance of the loan fund from claimants such as HJH by arguing
there was no balance if Borrower failed to fulfill any conditions precedent is
merely an attempt to circumvent the mandate of Civil Code former section 3162.
Based
on the above, the trial court correctly found that Lender was liable on HJH’s
stop notice claim.
name="_ftnref3" title="">[3]
III. PRIORITY OF HJH’S MECHANIC’S LIEN
The
trial court found that by demolishing part of a fire-damaged building on the
Property in November 2006, HJH commenced work of improvement before Lender
recorded its deed of trust. Lender
contends the trial court erred in granting priority to HJH’s mechanic’s lien
over Lender’s construction deed of trust, because “any alleged work was legally
insufficient to constitute the commencement of a work of improvement and
provide constructive notice that such work had commenced, particularly here
where HJH and Borrower represented to [Lender] that construction had not commenced.â€
Lender
acknowledges that HJH did perform work on the Property prior to the recordation
of the Lender’s deed of trust;
constitute the commencement of a work of improvement.†Lender argues it had inspected the Property
before agreeing to provide financing and did not notice any signs of
construction or improvements. More
importantly, it points out that “Borrower never informed [Lender] that HJH had
commenced construction at the Property.â€
Rather, Borrower and HJH represented that work would commence on a date
to be “‘determined upon approvals from all governmental agencies,’†which were
not issued until March 2007. Moreover,
Lender notes that, (1) according to the Loan Agreement, Borrower stated it would
not permit any work or materials to be used in connection with the Project
until Lender had recorded its deed of trust, and (2) on January 27, 2007,
Borrower described the current stage of construction as “‘not yet started’†in
answer to a title insurance company’s questionnaires.
In
response, HJH argues there were two types of improvements to the property
entitled to mechanic’s lien rights, namely, site improvement and actual work of
improvement. Site improvement is
defined, in relevant part, as “the demolishing or removing of improvements,
trees, or other vegetation located thereon, or drilling test holes or the
grading, filling, or otherwise improving of any lot or tract of land
. . . or constructing or installing sewers or other public utilities
therein, or constructing any areas, vaults, cellars or rooms under said
sidewalks or making any improvement thereon.â€
(Civ. Code, former § 3102.)
Actual work of improvement, in relevant part, “includes but is not
restricted to the construction, alteration, addition to, or repair, in whole or
in part, of any building, . . . the filling, leveling, or
grading of any lot or tract of land, the demolition of buildings, and the
removal of buildings. . . .â€
(Civ. Code, former § 3106.)
According
to HJH, California courts “have taken a very liberal and expansive view of the
term ‘work of improvement’ and ‘commencement’ of work of improvement.†“In English
v. Olympic Auditorium, Inc. [(1933)] 217 Cal. 631 . . . it was
held that the digging of a test hole and hauling of lumber on the premises were
sufficient to constitute work commencement.
That case in turn cited Simons
Brick Co. v. Hetzel [(1925)] 72 Cal.App. 1 . . . where the
excavation of a trench was held sufficient even though no tools or materials or
other evidence of building of any description had been brought on the
premises.†(Jay Bailey Const. Co. v. Berry Hotel Corp. (1963) 221 Cal.App.2d
135, 138.) In Notle v. Smith (1961) 189 Cal.App.2d 140, 148, the court held that
the installation of underground boundary markers constituted a work of
improvement and was in and of itself sufficient to give rise to a claim of
lien. In contrast, courts have rejected
mechanic’s lien priority claims where the claimant’s work was not sufficiently
visible. (See also Tracy Price Assoc. v. Hebard (1968) 266 Cal.App.2d 778, 781 [Fourth
Dist., Div. Two] [work only involved preparation of plans and specifications by
an engineer along with a visit to the site with portable equipment in
connection therewith]; D’Orsay Internat.
Partners v. Superior Court (2004) 123 Cal.App.4th 836, 838, 844 [lien for
building design related services worth approximately $850,000 not entitled to
priority where no physical visible construction commenced].) Thus, HJH argues that, along with its
potholing, its “demolition of a major portion of a large structure and adjacent
trees . . . clearly is within the statute.â€
We agree.
“It
is a question of fact whether improvement has been commenced. [Citation.]â€
(Arthur B. Siri, Inc. v. Bridges
(1961) 189 Cal.App.2d 599, 601-602.) In
the instant case, the facts disclose that after Borrower had purchased the
Property it entered into a handshake agreement with HJH in which HJH would act
as general contractor on the Project, HJH began work as early as May 2006 and
continuing up until Lender recorded its deed of trust, and HJH was not paid
prior to February 2007. Thus, the trial
court properly found that “demolition of the fire-damaged building by HJH in
November 2006 was a work of improvement to the project within the meaning of
[Civil Code former] Section 3106 [because t]his building was scheduled to be
demolished during one of the phases of the project, and the demolition was
advanced to November 2006 because the building constituted a safety hazard.†Likewise, the trial court was correct in
finding that the demolition was a work of improvement because (1) “HJH’s only
purpose in removing the building was in contemplation of its duties as the
General Contractor on the project[, and (2)] HJH was not paid before February
2007 for the demolition of the fire-damaged building.†The fact that Lender failed to discover the
work that HJH had already performed is not the fault of HJH or Borrower, but
rather Lender’s own failure to act more diligently in its inspection of the
Property.
IV. DAMAGES AWARD
HJH
was awarded $690,719.98 as the reasonable value of its work and the amount due
under its contract with Borrower. This
amount was less than the amount HJH claimed.
In support of its claim for damages, HJH submitted Exhibit 20, which
consists of four master invoices prepared by HJH. Each invoice identifies the work performed,
the name of the subcontractor, the amount billed, and the invoice number. Attached to each master invoice were invoices
from the various subcontractors that provided the backup documentation for each
item/costs listed on the master invoice.
At trial, Lender objected to the admission of the subcontractor-prepared
backup documentation on hearsay and foundational grounds. The trial court overruled the objection and
admitted the master invoices and backup documentations into evidence. Although the trial court found the
subcontractor-prepared backup documentation to be hearsay, it admitted the
evidence “for the limited purpose of corroborating [Hall’s] testimony.†The court relied on Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co. (1968) 69
Cal.2d 33 (Pacific Gas)
for dental services was authenticated by its contents, “contrary inferences
flowing from the facts that the bill was handwritten, not on official
stationery, and signed by a student were issues going to the weight of the
evidence . . . .â€); Imperial
Cattle Co. v. Imperial Irrigation Dist. (1985) 167 Cal.App.3d 263, 272,
(condemnation certificates prepared by veterinarians employed by the federal
government fall within the “official records†exception to the hearsay rule),
disapproved in part on other grounds in Bunch
v. Coachella Valley Water Dist. (1997) 15 Cal.4th 432; and
Cal.App.4th 301, 316 (“documents containing operative facts, such as the words
forming an agreement, are not hearsayâ€).
On
appeal, Lender claims the evidence was insufficient to establish the award of
damages. Specifically, it contends the
material and subcontractor invoices submitted by HJH in support of its claim
constituted inadmissible hearsay, lacking foundation. Even if the subcontractor invoices were
properly admitted for the limited purpose of corroborating Hall’s testimony,
Lender maintains that, because they reflect “labor and materials provided by
the third-party subcontractors, not HJH[,] and the third-party subcontractors
prepared such invoices,†the trial court erred in not requiring the
subcontractors to testify that the invoices accurately reflected their
work. We disagree.
“The
lien claimant has the burden of establishing the validity of the lien
[citation], including that the labor, services and/or materials were actually
used in the construction, the reasonable value of the work and/or materials,
and the date of completion or cessation of work. [Citation.]
The actual amount due on the lien presents a question of fact for the
trial court [citation], regardless of whether that question is resolved by motion
or requires full trial. But the lien
claimant is entitled to utilize the statutory procedure to recover that amount
actually owed.†(Basic Modular Facilities, Inc., v. Ehsanipour, supra, 70 Cal.App.4th at p. 1485.)
In
addition to Exhibit 20, HJH offered the testimonies of Hall and Jones. Hall, the general contractor, testified that
HJH was paid $50,000 per month for supervision of the Project. He made sure the “materials that were to be
delivered to the site were, in fact, delivered.†He reviewed the invoices to make certain they
“reflected the work that was actually done,†and that “the materials that were
invoiced were, in fact, used for that project.â€
If HJH received invoices or bills that did not comport with Hall’s
recollection of the work done, such invoices or bills were pulled out of the
order. He had to compare the work
performed against the invoices because he “had several different types of
inspections.†He went on to state, “[W]e
had the city giving me the inspection for the building permit portion. I had the wrap insurance inspector coming in
to make sure that we were installing everything correctly. I had the bank inspector coming in giving me
inspections for . . . work that had been completed. And I had [Jones] there at least twice a week
to make sure that the work was getting done and we were moving forward, not
sitting on our hands.†Hall was present
on the job every day and saw the work that had been performed. He knew exactly what was done by each
subcontractor, and there was always a comparison made between the invoices and
materials received/work performed. Such
comparison was in the ordinary course of HJH’s business. Based on Hall’s training, experience, and
observations, HJH’s claim of $786,790.98 represents the “reasonable value for
the services performed and the materials used in the works of improvement for
that project.â€
name="_ftnref6" title="">[6] Jones testified as to the reasonable value of
the Property, which included the work product represented in HJH’s claim. Jones was experienced in developing projects
of a similar nature.
The
trial court properly admitted Exhibit 20 for the purpose of corroborating
Hall’s testimony. In
defendant contested on hearsay grounds the admissibility of a dental bill to
prove medical expenses incurred as damages.
The court rejected defendant’s objection stating: “In the circumstances of this case this
contention lacks merit. Plaintiff
testified that the dental services were performed, that he received a bill for
them, and that he paid the bill. It has
been held that under such circumstances the bill, which ordinarily would
constitute inadmissible hearsay, is nevertheless admissible for the limited
purpose of corroborating plaintiff’s testimony and showing that the charges
were reasonable. [Citations.]†(Ibid.)
In
Dist., supra, 167 Cal.App.3d at
p. 272, the plaintiff was allowed, over defendant’s hearsay objection, to
introduce evidence of USDA cattle condemnation certificates in order to
establish the number of its cattle that had contracted disease as the result of
defendant’s negligence. Rejecting
defendant’s challenge on appeal, our colleagues in Division One of this
district held: “The condemnation certificates
appear to fall clearly within the ‘official records’ exception to the hearsay
rule. . . . The record
demonstrates that condemnation certificates are prepared by veterinarians
employed by the federal government following an inspection of each cattle
carcass if the veterinarian determines that the meat is infected with
measles. Such evidence not only
satisfies the first two predicates to the invocation of [Evidence Code] section
1280 but also indicates the basic trustworthiness of the documents.†(Ibid.)
Given
the nature of the contractor/subcontractor working relationship and the record
before this court, we conclude the trial court correctly applied the case law
and admitted Exhibit 20 into evidence.
Hall testified that he had personal knowledge of the materials
supplied/work performed by the subcontractors and that their invoices attached
to HJH’s master invoice accurately reflected the materials supplied and/or the
work performed on the Project.
V. ATTORNEY FEES AND COSTS
The
trial court award attorney fees and costs to HJH pursuant to Civil Code former
section 3176 (see now § 8558). In
determining the amount of the award, the trial court chose to award 80 percent
of the amount requested on the grounds that while HJH could recover its fees on
its stop notice claim, it could not on its mechanic’s lien, and given the fact
that there was some overlapping of HJH’s litigation of both claims, 80 percent
seemed a fair compromise. On appeal, HJH
faults the trial court for apportioning the attorney fee claim between the stop
notice and the mechanic’s lien causes of action. It requests this court to “award [HJH] its
entire attorney’s fees incurred in defending this appeal as well as costs†on
the grounds that its counsel’s non-fee claim (mechanic’s lien) is “so closely
related to the work on the fee claim[ (stop notice)] that an apportionment is
impossible . . . .â€
We disagree.
“Where
fees are authorized for some causes of action in a complaint but not for
others, allocation is a matter within the trial court’s discretion. [Citation.]
A trial court’s exercise of discretion is abused only when its ruling
‘“‘“exceeds the bounds of reason, all of the circumstances before it being
considered.â€â€™â€â€™ [Citations.]†(Amtower
v. Photon Dynamics, Inc. (2008) 158 Cal.App.4th 1582, 1604.) Given the causes of action and the record
before this court, we conclude the trial court acted within its discretion in
awarding 80 percent of the amount requested.
VI. DISPOSITION
The
judgment is affirmed, as is the award of attorney fees and costs. HJH is awarded its costs on appeal, including
attorney fees, and the matter is remanded to the trial court to determine the
reasonable amount of those fees and costs.
NOT
TO BE PUBLISHED IN OFFICIAL REPORTS
HOLLENHORST
Acting P. J.
We concur:
KING
J.
MILLER
J.
name="_ftn1" title=""> [1] Sometimes Jones is referred to as “Scott†in
the reporter’s transcript.
name="_ftn2" title=""> [2] Civil Code sections 3264 through 3267 were
replaced by sections 8000 through 9566 effective July 1, 2012 (see Stats.
2010, ch. 697). Because this case was
tried and the appeal was briefed prior to the effective date, we will refer to
the former sections.
