I R THE: SIJPREMF; COIJR?' OF' THE S T A T E O F MODJTANA
AMERICAN F E D E R A L S A V I N G S AND LOAN
ASSOCIATION,
P I - a i n t i f f and A p p e l l a n t ,
-VS-
D E N N I S SCHENK; P H Y L L I S D I E H L ; J O H N J E P S O N ;
TOWNSEND E L E C T R I C I N C . , UN J1'E;D S T A T E S DEPARTMENT
O F T R E A S U R Y , I N T E R N A I I REVENUE; S E R V I C E ; S T A T E O F
MONTANA, DEPARTMENT O F LABOR AND I N D U S T R Y ,
UNEMPLOYMENT' I N S U R A N C E D I V I S I O N ; a n d S T A T E O F
MONTANA, DEPARTMENT O F R E V E N U E ,
D e f e n d a n t s and R e s p o n d e n t s .
A P P E A L FROM: D i s t r i c t C o u r t of t h e F i r s t J u d i c i a l D i s t r i c t ,
I n and f o r t h e C o u n t y of B r o a d w a t e r ,
T h e H o n o r a b l e H e n r y L o b l e , Judge presiding.
C O U N S E L O F RECORD:
For A p p e l l a n t :
Jock 0 . A n d e r s o n a r g u e d ; G o u g h , S h a n a h a n , Johnson &
Waterman, Helena, Montana
For R e s p o n d e n t :
John T . Flynn argued, T o w n s e n d , M o n t a n a
R. B r u c e M c G i n n i s , D e p t . o f R e v e n u e , H e l e n a , M o n t a n a
D a v i d S c o t t , D e p t . of L a b o r & I n d u s t r y , H e l e n a , M o n t a n a
K r i s A. M c L e a n , A s s t . U.S. A t t y . , H e l e n a , M o n t a n a
C h a r l e s A. G r a v e l e y , H e l e n a , M o n t a n a
L
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Submitted: J a n u a r y 11, 1 9 9 0
Decided: January
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Justice Diane G. Barz delivered the Opinion of the Court.
American Federal Savings and Loan Association appeals from an
order of the District Court for the First Judicial District,
Broadwater County, granting summary judgment in favor of Townsend
Electric, Inc. We reverse and remand.
Dennis Schenk borrowed $80,000 from appellant American Federal
Savings and Loan to purchase the Commercial Bar in Townsend.
Schenk executed a promissory note secured by a deed of trust
recorded February 28, 1984, in favor of appellant. Subsequent to
its completion of remodeling and electrical work on the Commercial
Bar, respondent Townsend Electric perfected a mechanic's lien on
April 26, 1985. None of the proceeds of appellant Is loan were used
as payment for respondent's improvements.
Appellant filed its complaint on November 27, 1987, seeking,
among other things, foreclosure of the deed of trust. Respondent
asserted as an affirmative defense the priority of its mechanic's
lien. Both appellant and respondent moved for summary judgment and
after hearing on May 19, 1989, the District Court entered judgment
in favor of respondent on June 22, 1989. Appellant raises the
following dispositive issue on appeal: Did the District Court
erroneously conclude that respondent's mechanic's lien has priority
over appellant's prior recorded deed of trust?
Appellant contends that mechanic's liens have priority over
mortgages only when improvements are severable from real property
citing as authority for its contention Interstate Lumber Co. v.
Rider (1933), 93 Mont. 489, 19 P.2d 644 and 5 71-3-502(4), MCA
(1985). Rider borrowed funds with which to renovate a building
located on real property owned by him. Interstate Lumber, 19 P.2d
at 645. First and second mortgages secured the loans. Interstate
Lumber, 19 P.2d at 645. Interstate Lumber, from whom Rider
obtained building supplies, attempted to foreclose on its
materialman's lien when Rider failed to pay any part of his bill.
Interstate Lumber, 19 P.2d at 645.
Although the materialman's lien statute was broadly
interpreted and this Court found the remedy thereby provided
equitable in nature, it held that the lien gave priority to the
materialman only so far as the structure was concerned and did not
extend to the land. Interstate Lumber, 19 P.2d at 646-47.
Furthermore, unless the improvements were severable without
"material damage" to the existing structure, the prior recorded
mortgage still prevailed over the materialman's lien. Interstate
Lumber, 19 P.2d at 647.
The recorded mortgage gives to the materialman
constructive notice of the existence of the
lien, and he deals with the owner with
knowledge that the house, as well as the land,
is pledged as security for the payment of the
mortgage debt.
Interstate Lumber, 19 P.2d at 647. The arguments propounded by the
parties in this case presume the nonseverability of respondent's
improvements.
Both appellant and respondent cite a trio of cases in support
of their arguments. The first of the so called I1trilogy" is Beck
v. Hanson (1979), 180 Mont. 82, 589 P.2d 141. In Beck, the
landowner obtained a loan secured by two trust indentures, the
proceeds of which were to be used to construct duplexes on a
previously unimproved lot. Beck, 589 P.2d at 142. Neither the
plaintiffs, who performed masonry work on the lot, nor the lender
nor any other materialmen were paid. Beck, 589 P.2d at 142. In
the subsequent foreclosure action, the lender moved for summary
judgment claiming the previously recorded trust indentures had
priority while the materialmen sought to enforce their mechanic's
liens. Beck, 589 P.2d at 142. This Court affirmed the District
Court's ruling that the mechanic's liens were ' a prior secured
'
interest in the real property . . . to the extent that material
and labor were furnished by the [materialmen] for the construction
of the improvements upon the property." IBeck 589 P.2d at 142.
Appellant contends Beck does not alter the rule set forth in
Interstate Lumber: That a mechanic's lien has priority only to the
extent of severable improvements.
Respondent on the other hand, contends that Beck stands for
the proposition that a mechanic's lien takes priority over all the
purchaser's rights at a trust indenture foreclosure sale thus
giving the mechanic's lien priority over all encumbrances.
Additionally, respondent argues a mechanic's lien is prior in right
not only as to the severable improvements, but also as to
concurrently erected structures and the ownerst interest in the
real property itself.
Balancing the competing policies behind the Small Tract
Financing Act and the mechanic's lien statutes, this Court found
the beneficiary of the prior recorded trust indenture better
equipped than the material supplier to protect its rights. Beck,
589 P.2d at 144. This Court upheld "the District Court's judgment
that a mechanic's 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, 589 P.2d at 144.
The second case in the trilogy is Home Interiors, Inc. v.
Henderson (1984), 214 Mont. 194, 692 P.2d 1229. Buyers in that
case, who customarily resold homes they had remodeled and improved,
bought a home with proceeds of a loan secured by a trust indenture.
Home Interiors, 692 P.2d at 1230. Subsequently, buyers engaged two
materialmen to install carpet, linoleum and sub-flooring. Home
Interiors, 692 P.2d at 1230. Buyers paid a minimal amount to one
supplier, nothing to the other and defaulted on the loan one year
later. Home Interiors, 692 P.2d at 1230. The District Court held
the mechanic's liens lacked priority over the trust indenture and
were thus eliminated by the foreclosure sale. Home Interiors, 692
P.2d at 1231. Reversing the lower court ruling, this Court found
no reason to distinguish Home Interiors from Beck and:
[Tlherefore [held] 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 [lender] 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. [It found] no merit in [lender's]
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. [The Court
held] appellants' liens [took] priority over
respondentst trust indenture.
Home Interiors, 692 P.2d at 1232.
Where the plaintiff-materialman filed suit to foreclose its
mechanic's lien naming the lender as defendant by virtue of its
mortgage on improved real property, the Court upheld Home Interiors
and rejected the rule that only mechanic's liens filed as to new
structures have priority over other prior encumbrances. Tri-
County Plumbing & Heating, Inc. v. Levee Restorations, Inc. (1986),
221 Mont. 403, 417-18, 720 P.2d 247, 256. Appellant advances the
same argument as did lender in Tri-County. Respondent contends
Tri-Countv affords priority to mechanic's liens regardless of the
nature of the work performed on the real property.
We find the instant case readily distinguishable from the trio
of cases set forth above. Appellant and Schenk entered into the
loan agreement almost a year prior to the commencement of
improvements to the Commercial Bar. Appellant lacked any resource
with which to determine that Schenk would commence a remodeling and
improvement project at a date far removed from that on which it
made the loan. Appellant could not withhold funds intended for
construction as Schenk used the loan proceeds to purchase, not
remodel, the Commercial Bar. Schenk was under no obligation to
notify appellant of the remodeling and related expenditures. Even
had Schenk given notice, appellant had no legal means available to
further secure its lien position.
In Beck, Home Interiors, and ~ri-countythe lenders knew or
had reason to believe the borrowers would incur additional
obligations in improving the property encumbered when making the
loans. In each case the Court found the party with the least
ability to protect its financial interest should have priority over
other prior recorded liens. In the case at hand, respondent could
easily have determined that appellant had a prior recorded security
interest. The result in the instant case is consistent with 5 71-
3-542, MCA, the current priority statute. We therefore reverse the
order of the District Court granting respondent's motion for
summary judgment and remand for entry of judgment in appellant's
favor . /
We concur:
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v fices