Opinion ID: 1353789
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Heading Rank: 2

Heading: Columbia Wood Products, Inc., Vis-a-vis The National Bank of Washington

Text: Columbia Wood Products, Inc., furnished lumber for the apartment house project, commencing deliveries to the site May 26, 1969, and continuing to about August 5, 1969. As earlier noted, it received partial payment, but when construction came to a halt there was still due and unpaid the sum of $119,672 for material sold, delivered and utilized in the nearly completed buildings. The trial court awarded Columbia Wood Products, Inc., a judgment of $119,672.26 on this unpaid bill, with 12 percent accrued interest from September 5, 1969, in the amount of $28,721.34, and statutory costs. The court decreed, however, that Columbia Wood Products' judgment lien be subordinate and junior to the lien of National Bank of Washington's deed of trust to the extent of all advances made by that bank on its loan for the construction of the apartment house complex. Columbia Wood Products appeals that part of the judgment and decree which rendered its materialman's lien inferior and junior to the bank's total secured loan advanced for the construction. Columbia Wood Products' lien was declared inferior to the entire amount of the bank's advances on a theory that the National Bank of Washington possessed a prior and superior deed of trust lien in effect before and continuing during the delivery of the lumber. According to the bank's theory, its priority was established as of about May 9, 1969, when Transamerica filed the trust deed of Equity Investors, a limited partnership, naming the National Bank of Washington as beneficiary, securing a promissory note in the amount of $1,850,000  all in accordance with a construction loan agreement of May 7, 1969, between the National Bank of Washington as lender and Equity Investors as borrower. As work on the project progressed, the bank advanced the funds. On May 8, 1969, the bank delivered in escrow $211,000 to Transamerica Title Insurance Company for disbursement according to the bank's escrow instructions and as agreed upon by Equity Investors and the Macdonald group. Under the various agreements, the bank paid out the loan funds in segments or advances as the construction progressed until it had reached a total loan of $1,742,678.63, nearly the agreed maximum. Columbia Wood Products began deliveries of lumber to the project on May 26, 1969, and continued supplying material until August 5, 1969, but with the last delivery there was, as earlier noted, still due and unpaid on the lumber bill some $119,672. Its claim of a lien superior in part to that of the National Bank of Washington is based on the contention that the advances made by the bank under the construction loan agreement as the work progressed were optional advances and could not have been legally enforced against the bank. The issue, we think, is appropriately stated by respondent bank in its brief, as follows: The issue raised on appeal by Columbia Wood Products, Inc. is whether or not the loan advances made by respondents National Bank of Washington and General Mortgage Investments (referred to herein as respondents or lenders) to the borrower, Equity Investors, were entitled to priority as against appellant's materialman's lien claim. Appellant contends that respondents' loan advances were optional and not obligatory and that the advances were entitled to priority only as of the date on which they were made. Respondents contend, and the trial court ruled, that the advances were obligatory under the Construction Loan Agreement between respondents and Equity Investors and that the advances were entitled to priority as of the recording date of the Deed of Trust from Equity Investors to respondents. Were the advances as made by the National Bank of Washington optional? Or, could the bank have been compelled by the courts to make them? If they were optional, then under the principles adopted by this court, Columbia Wood Products' lien for lumber delivered and utilized in the apartment house project should be superior to that of the bank's deed of trust insofar as advances made subsequent to the materialman's perfected lien are concerned. If the bank, however, under the construction loan agreement could have been compelled in the courts to advance the moneys on the loan, then its lien is totally superior and prior to that of Columbia Wood Products. [1, 2] We think that Columbia Wood Products' contention is sound and that for the purpose of determining lien priorities the advances were in law optional. In the construction loan agreement, the bank made such explicit reservations for the disbursement of the loan as, in our judgment, render the advances of $1,750,000 optional and not obligatory at law. Although such reservation of discretionary authority appears to be a sound banking practice and designed to protect the financial interests of the party to the project which would wind up with the greater sum of money in it, these protective reservations operated, in law, we think, to subordinate the bank's lien for undelivered advances to those of the materialmen and workmen whose work, services and materials went into the project to enhance the bank's security. It has, we realize, long been the rule in this jurisdiction that a mortgage to secure future advances takes priority over mechanics' and materialmen's liens accruing after recordation of the mortgage ( Home Sav. & Loan Ass'n v. Burton, 20 Wash. 688, 56 P. 940 (1899)), but there is a well-established corollary to the rule that, if under the contract the advances are optional and not obligatory, then the lien priority for the advances is determined as of the time the advances are actually made. What made the advances optional in law rather than obligatory? The very terms of the construction loan agreement gave the bank discretion as to which of the subcontractor materialmen would be paid from the advances. The construction loan agreement contained a promise to lend Equity Investors the $1,750,000 upon the terms and conditions set forth below. This agreement provided that, after deducting all fees, charges and expenses agreed to by the borrower, the remaining proceeds of the loan would be credited to the borrower's construction loan account in the lending bank. Thus, the advances were not to be delivered over to the borrower but would remain on deposit in the lending bank as the contract stated to finance the construction of apartment buildings on property described in the Deed of Trust. The construction loan agreement specified that, prior to the first advance of construction funds, the bank was to be supplied with a current appraisal satisfactory to it; that all loan funds must be used for payment of material and labor; and that the loan proceeds were to be assigned by the borrower to the bank for that purpose. The borrower, according to this agreement, had to retain an architect satisfactory to the bank, and this approved architect had to supply the bank with periodic progress of construction reports, and before each advance of loaned money certify that satisfactory progress had been made and in the future would be made in keeping with the remainder of the unexpended loan. The construction loan agreement left the loan moneys largely under the control and dominion of the bank,  to be advanced at such times and in such amounts as the Lender shall determine.  It provided, too, that  No advance shall be due unless, in the judgment of the Lender  all work for which the advance had been made had been done in a good and workmanlike manner, and unless the construction be approved by the architect. The lender, at his option, could advance and pay the loan installments before they became due, if he deemed it advisable to do so  but all such advances were to be treated as a performance of the agreement and not a modification of it. Also, according to the construction loan agreement, the lender was not obligated to disburse more than 90 percent of the loan until the construction was completed and the property free of liens and claims of all kinds except the lender's lien. There were other provisions in the construction loan agreement, giving control over the funds to the bank, including: If the construction of said building be at any time discontinued or not carried on with sufficient dispatch in the judgment of the Lender to protect the building from depredation or the weather, said Lender may purchase materials and employ workmen to protect the building so that the same will not suffer from depredation or the weather, or to complete said building, so that it may be used for the purposes for which it was designed under the said plans and specifications. Accordingly, the disbursements of funds by the bank under an agreement placing discretionary controls in the lender over the disbursement of the loan funds with an additional reservation that the loan is to be advanced at such times and in such amounts as the Lender shall determine, we think left so wide an area of discretion in the bank as to render the amounts to be advanced and the intervals of their advancing optional rather than compulsory as a matter of law. Had the borrowers sought a decree to overcome these reservations and to compel the advances, or to override the bank's discretionary power to advance or withhold the loan funds, they would have met with nearly insuperable obstacles at law. So broad and yet so specific were the bank's discretionary powers under the contract as to the times and amounts of the advances, a court could not properly override such discretion without abrogating the contract. Although in a given case there may be difficulty in ascertaining from the circumstances and the language of the mortgage and loan papers covering the whole agreement whether the advances are to be regarded as optional or mandatory, we think that the contractual reservations giving the lender the broad discretion of deciding when and in what amounts, or if at all, he must advance the money render the advances optional rather than obligatory where the purpose is to decide construction lien priorities arising after the initial filing for record of the lender's security documents. As a means of protecting its security, the lender retained broad discretionary powers to determine under what circumstances it would advance the money, to withhold the advances any time that it believed its security in jeopardy or doubted the sufficiency or quality of the construction work or felt that an impending insolvency on the borrower's part would threaten the completion of the project or repayment of the loan. There was no hard and fast commitment to deliver the loan money over to the borrower at a given and stated time, nor to advance the money at more or less fixed intervals and in stated amounts. The lender, in reserving such broad protective discretion, thereby rendered the advances optional rather than obligatory for the purpose of determining the priority of liens. Thus, we are adhering to what we perceive to be the weight of authority embodied in the rule that, where the advances of promised loan moneys are, under an agreement to lend money, largely optional, that is, where the time and the amount of the moneys to be advanced are largely discretionary in the lender, the legal effect of such provisions is to bring the transaction under the rule for optional advances rather than the rule governing mandatory advances for the purpose of determining lien priorities. Optional advances under a construction loan agreement attach when the advances are actually made. Any liens attaching prior to an optional advance would thus be superior to it, and attaching afterwards, junior to it. Elmendorf-Anthony Co. v. Dunn, 10 Wn.2d 29, 116 P.2d 253, 138 A.L.R. 558 (1941); Kimmel v. Batty, 168 Colo. 431, 451 P.2d 751 (1969); Peterson v. John J. Reilly, Inc., 105 N.H. 340, 200 A.2d 21 (1964); Lyman Lamb Co. v. Union Bank, 237 Ark. 629, 374 S.W.2d 820 (1964). A contrary rule on that point would allow a lender, having power to allocate the loan moneys in such a way as to insure that those whose work, materials and efforts serve to enhance the value of the security, to sit idly by and watch his security grow, while at the same time potentially leaving the materialmen, subcontractors and workmen in the position of doing their work and supplying materials for little or nothing. The rule here contended for by lender would lead to an inevitable unjust enrichment, enabling the lender to withhold or apply the loan money as he saw fit, all the while knowing that putative lien claimants were furnishing valuable materials and doing valuable work to the enhancement of his security. The bank here had the option of withholding its advances on the loan from the borrower, and the right to apply the money to the account of Columbia Wood Products in payment of the lumber that company was delivering to the construction project. The rule of optional loan advances for the resolution of construction and security and lien priorities has classic application here, and we would, therefore, apply the principles of Elmendorf-Anthony Co. v. Dunn, supra . This court referred to Elmendorf and adhered to this rule in Cedar v. W.E. Roche Fruit Co., 16 Wn.2d 652, 134 P.2d 437 (1943). In Cedar, we affirmed the principle of optional advances, but found it inapplicable to a contract to finance and make future advances to be expended in planting, growing and harvesting a fruit crop. In that case, while recognizing the distinction between obligatory and optional advances, we held the advances promised were not, under the agreement, optional but rather were obligatory. In the instant case, however, the lending bank's duty to make the advances was dependent to such a degree upon so many conditions, the occurrence of which lay within its judgment, that it had the option throughout the construction either to pay the materialmen, mechanics and subcontractors from the loan funds or to retain the loan funds within its control, or to deliver the loan funds over to the borrower. The advances being thus optional, they became subject to intervening liens accruing with the lender's knowledge and acquiescence. Elmendorf-Anthony Co. v. Dunn, supra ; Cedar v. W.E. Roche Fruit Co., supra . Accord, Keltch, Inc. v. Don Hoyt, Inc., 4 Wn. App. 580, 483 P.2d 135 (1971). See also, in support of this principle, Home Sav. & Loan Ass'n v. Sullivan, 140 Okla. 300, 284 P. 30 (1929), and Akron Sav. & Loan Co. v. Ronson Homes, Inc., 15 Ohio St.2d 6, 238 N.E.2d 760, 80 A.L.R.2d 179 (1968). Accordingly, the judgment and decree of the trial court on the claim of Columbia Wood Products, Inc. is reversed.