No. 83-419
IN THE SUPREME COURT OF THE STATE OF MONTAhiA
1984
HOME INTERIORS, INC., a Montana
Gorp. I
Plaintiff and Appellant,
R0BER.T E. HENDRICKSON, an individual,
and SECURITY PACIFIC MORTGAGE CORP.,
a Colorado corp.,
Defendants and Respondents,
and
PIERCE FLOORING, a Montana corp.,
Defendant and Appellant.
APPEAL FROM: District Court of the Fourth Judicial District,
In and for the County of Missoula,
The Honorable Douglas G. Harkin, Judge presidinq.
COUNSEL OF RECORD:
For Appellant:
Snavely & Phillips; Donald V. Snavely argued for Home
Interiors, Missoula, Montana
Worden, Thane & Haines; Patrick G. Frank argued for
Pierce Flooring, Missoula, Montana
For Respondent:
Hendrickson & Everson; Mark E. Noenning argued for
Hendrickson and Security Pacific Mortgaqe Corp.,
Billings, Montana
Submitted: October 9, 1984
Decided: December 21, 1984
Filed: DL[; 2 1I984
a
Clerk
Mr. Justice John Con.way Harrison delivered. the Opinion of the
Court.
This appeal involves the question of priority between a
trust indenture and subsequent mechanics' liens. Appellants
claim their mechanics' liens should be given priority over
respondents' trust indenture and assert error in the District
Court's grant of summary judgment in favor of respondents and
in the award of attorney's fees and costs to respondents.
We reverse the judgment of the District Court.
Issues
(1) Whether the lien claimants take precedence over a
prior recorded trust indenture under section 71-3-502, MCA.
(2) Whether the District Court erred in ruling there
exist no issues of material fact in view of the question of
severability of the lienholders' improvements.
(3) Whether the District Court erred in its award of
fees, or in the alternative, in the amount of fees awarded.
Facts
Rodney and Titut Jones were in the business of buying
old homes, remodeling them, and then selling them for profit.
On July 26, 1979, the Joneses entered into a buy/sell
agreement with Purdon Anderson for the purchase of an older
residence at 2223 South 3rd West in Missoula. Among other
things the buy/sell pravided for a purchase price of $50,000,
the Joneses to obtain an FHA insured loan in the amount of
$48,950 to fund the purchase price and a provision that
Anderson would loan back to the Joneses $19,000 of the
purchase price for the purpose of constructing improvements
on the property.
After execution of the buy/sell agreement, the Joneses
zpplied to Charter First, an Oregon mortgage company, for a
$48,950 loan. The loan with Charter First was closed on
October 18, 1979 and to secure the loan the Joneses executed
a first trust indenture against the house in favor of Charter
First. One day a.fter closing the loan, Charter First
assigned the subject note and first trust indenture to
Security Pacific, respondent herein.
The Joneses contracted with Home Interiors Inc.,
appellants herein, for installation of carpet and pad for a
cost of $1,106. The Joneses also contracted vrith Pierce
Flooring, defendant/appellant herein, for installation of
subflooring and linoleum for a cost of $657.75. The Joneses
paid nothing to Home Interiors and on April 15, 1980, Home
Interiors filed a mechanics' lien against the house. The
Joneses paid only $100 to Pierce Flooring so Pierce filed a
mechanics' lien on March 25, 1980.
About a year after closing the Charter First loan, the
Joneses defaulted. On December 12, 1980, Security Pacific
requested the trustee, Hendrickson, to record Notice of
Trustee's Sale setting a public foreclosure sale for April
22, 1981, at the Missoula County Courthouse.
On January 12, 1981, counsel for Home Interiors advised
Security Pacific by letter of its mechanics' lien. By that
same letter Security Pacific was also advised that Home
Interiors claimed priority of its mechanics' lien over the
trust indenture, and that Home Interiors expected to be paid
from the foreclosure sale proceeds for its lien.
At the time of the foreclosure sale, counsel for Home
Interiors served Hendrickson with the summons and complaint
in this action. Security Pacific purchased the house at the
foreclosure sale, bidding the amount still owing by the
Joneses.
The District Court found Security Pacific's trust
indenture took priority over the mechanics' liens and the
foreclosure sale eliminated those liens from the property.
The District Court also held Security Pacific was entitled to
recover its attorneys fees and awarded $7,378.66 to Security
Pacific .
Priority
Title 71, Chapter 3, Part 5 of the Montana Code
Annotated is devoted to mechanics' liens. More specifically
section 71-3-502(4), MCA addresses the issue of priority of a
mechanics' lien in preference to prior liens or encumbrances:
" (4) The liens attach to the buildings,
structures, or improvements for which
they were furnished or the work was done
in preference to any prior lien,
encumbrance, or mortgage upon the land
upon which sairbuildings, structures, or
improvements are erected; and any person
enforcing such lien may sell the same
under execution, and the purchaser may
remove the property sold within a
reasonable time thereafter." (Emphasis
added. 1
In this case we are dealing with the issue of whether a
mechanics' lien may take priority over a trust indenture.
Section 71-1-305, MCA reads as follows:
"A trust indenture is deemed to be a
mortgage on real property and is subject
to all laws relating to mortgages on real
property except to the extent that such
laws are inconsistent with the provisions
of this part, in which event the
provisions of this part shall control.
For the purpose of applying the mortgage
laws, the grantor in a trust indenture is
deemed the mortgagor and the beneficiary
is deemed the mortgagee."
Appellants and respondents agree the appropriate
interpretation of these two statutes is found in Beck v.
Hansen (1979), 180 Mont. 82, 589 P.2d 141. In Beck, a
builder gave two trust indentures as security for money
borrowed to finance construction of two duplexes on
unimproved. land. Beck was a subcontractor on the project
and, along with the other subcontractors, was not paid for
his material or labor and as a result filed a mechanics' lien
against the property. The builder also failed to pay the
bank and consequently the bank started the process of
foreclosure on the trust indentures. At the foreclosure sale
the bank purchased the property for the amount of the
builder's outstanding indebtedness. Beck's attorney appeared
a.t the sale to serve the bank with notice of the pending suit
to foreclose the mechanics' liens. The bank then moved to
dismiss the suit contending its trust indenture had priority
over the subsequent mechanics' liens. The district court
eventually ruled the mechanics' liens were a prior secured
interest in the realty to the extent tha.t material and labor
were furnished by the lien claimants for the construction of
the improvements upon the property. The bank appealed and
this Court affirmed.
The statutes involved in the Beck case were identical
to those involved in the instant case. Justice Shea, writing
for the majority, held "that a mechanics' lien for
improvements constructed after the grant of a trust indenture
has priority over the interest of a purchaser at trustee's
foreclosure sale. " Beck, supra at 144. Justice Shea argued.
the bank was in the better position to protect itself either
"by withholding funds to the extent of the contemplated
improvements or by requiring the grantor to obtain lien
waivers from mechanics or materials." Finally, Justice Shea
reasoned: "this result does not . . . portend disaster for
the beneficiary of a prior secured trust indenture; it
merely requires the beneficiary to exercise ordinary business
prudence where construction is contemplated."
We find no reason to distinguish the Beck case from the
situation at hand. In both instances the holder of the trust
indenture seeks to take a.dvantage of the improvements
provided by the lien claimants without compensation. We
agree with appellants' reasoning that:
'I. . .the mortgage and mechanic each
take priority as to the property relied
upon or credited by them, that is, the
mortgage takes priority as to the
improvements existing at the time the
mortgage was taken. The mechanic takes
priority as to the improvements
constructed thereafter and upon which the
mortgagee did not rely."
We therefore hold the party having the greatest ability
to protect its interests has the burden of exercising due
care to prevent overreaching by an interested party. In this
case respondent was in the best position to protect against
non-payment by the landowner by either withholding funds to
the extent of the contemplated improvements or by requiring
the landowner to obtain lien waivers from the mechanics. We
find no merit in respondents' argument that section
71-3-502(4) should be construed strictly to pivot on the
words "upon the land." Such a narrow interpretation would.
.
defeat the purpose of the statute. We hold appellants' liens
take priority over respond-ents' trust indenture.
Severability
Since we have reversed the District Court as to the
priority issue, we need not discuss the severability issue.
Attorney Fees
The District Court awarded attorney fees to respondents
relying on section 7 1 - 3 - 1 2 4 , MCA. We have reversed the
District Court on the issue of priority and we also reverse
on attorney fees. Appellants have established the validity
and the priority of their liens and accordingly shall recover
costs and attorney fees pursuant to section 7 1 - 3 - 1 2 4 , MCA.
We remand for determination of fees.
We concur:
L'