IR THE: SIJPREMF; COIJR?' OF' THE STATE OF MODJTANA 

AMERICAN FEDERAL SAVINGS AND LOAN 

ASSOCIATION, 

PI-aintiff and Appellant, 

-VSDENNIS SCHENK; PHYLLIS DIEHL; JOHN JEPSON; 

TOWNSEND ELECTRIC INC. , UN J1'E;D STATES DEPARTMENT 

OF TREASURY, INTERNAII REVENUE; SERVICE; STATE OF 

MONTANA, DEPARTMENT OF LABOR AND INDUSTRY, 

UNEMPLOYMENT' INSURANCE DIVISION; and STATE OF 

MONTANA, DEPARTMENT OF REVENUE, 

Defendants and Respondents. 

APPEAL FROM: District Court of the First Judicial District, 

In and for the County of Broadwater, 

The Honorable Henry Loble, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Jock 0. Anderson argued; Gough, Shanahan, Johnson & 

Waterman, Helena, Montana 

For Respondent: 

John T. Flynn argued, Townsend, Montana 

R. Bruce McGinnis, Dept. of Revenue, Helena, Montana 

David Scott, Dept. of Labor & Industry, Helena, Montana 

Kris A. McLean, Asst. U.S. Atty., Helena, Montana 

Charles A. Graveley, Helena, Montana 

L 

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Submitted: January 11, 1990 

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." I Beck 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. TriCounty 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-county the 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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vf ices