Collier v. Dillon

Judge Cammack Reversing. This case involved the priority of a second mortgage held by the appellants and a mechanic’s lien asserted by the appellee, Da,vid Dillon, on a lot and a partially completed house thereon. The appeal is from a judgment granting the mechanic’s lien priority. The controversy may be better understood by a brief review of the facts leading up to the filing of the action. The property in question was Lot 14 in Meadow View Estates Subdivision, which belonged to Mr. and Mrs. Marvin Alford. In August, 1947, Dillon began the construction of a house on the lot. Under the plans and specifications he was to submit a detailed estimate on the value of the materials placed in permanent position and the work performed on the second day of each month. This amount, less 10 per cent, was to be paid to [246] him by the 10th of each month. In October, 1947, the Al-fords obtained a commitment for a $14,000 construction loan from the Greater Louisville First Federal Savings '& Loan Association to help finance the construction of .the house. A first'mortgage was given the Association and $4,500 was advanced to the Alfords. Dillon received $2,500 of that amount and the remaining $2,000 was paid to a third party with Dillon’s express consent and approval. By the end of 1947 the Alfords fvere $7,000 in arrears in their payments to Dillon. However, Dillon had taken no steps to assert a mechhanic’s lien, under KRS 376.010(2). . During the latter part of December, 1947, the Colliers made a contract with the Alfords to purchase the completed house on Lot 14 for $26,000. T)iey made a down payment of $5,000. This amount was represented by the purchase price of another lot which the Colliers had purchased from the Alfords, the title to which was imperfect, and a cash payment of $1,500. On February 2, 1948, the contract between the Alfords and the Colliers was recorded. In order to protect the down payment the Alfords gave the Colliers a mortage on Lot 14. rThis mortgage was recorded February 7th. In March, 1948, the Alfords and Dillon applied to the Association for a further advance of $2,500 on the construction loan which was to be paid to Dillon. The Association declined to make the advance unless the Colliers subordinated their rights to those of the Association to the extent of the advance. The Colliers executed a subordination contract for the .$2,500 advanced. Dillon received ‘this money on March 25th. In September, 1948, it became ‘known to all parties that the Alfords, who owned and were holding for sale most of the lots in the Meadow Yiew Estates Subdivision, would be unable to pay for the completion of the house. Dillon ceased work on it. On October 21, 1948, Dillon gave written notice to the Alfords and the Colliers of his intention to assert a mechanic’s lien. In March, 1949, the Colliers rescinded their sales agreement with the Alfords by reason of the latter’s default and sued to recover their $5,000 down payment and to foreclose the mortgage. On March 18th, Dillon finally filed his mechanic’s lien. The Association was made a party defendant by the Colliers. It set up its $7,000 ,first mortgage which was allowed, and which is not in question in this proceeding. [247] The case falls squarely within the provisions of subsection 2 of KRS 376.010. The first part of this subsection follows: “(2) The lien shall not take precedence over a mortgage or other contract lien or bona fide conveyance for value without notice, duly recorded or lodged for record according to law, unless the person claiming the prior lien shall, before the recording of the mortgage or other contract lien or conveyance, file in the office of the clerk of the county court of the county wherein he has furnished or expects to furnish labor or materials, a statement showing that he has furnished or expects to furnish labor or materials, and the amount in full thereof. * * *” It is not disputed that the Colliers knew Dillon was building the house on Lot 14 for the Alfords. Likewise they knew the manner in which he was to be paid for his work. On the other hand, they knew that arrangements had been made by the Alfords with the Association to finance a major part of the cost of the construction. All parties were fully apprised of the condition under which the Association made the further advance of $2,500 in March, 1948. It is undisputed that at no time prior to October, 1948, did Dillon give any indication that he planned to file a lien. The question is, Were the Colliers apprised of sufficient facts to put them on notice that Dillon intended to assert a lien? We have pointed out frequently that the mechanic’s lien statute, KRS 376.010, was designed to protect materialmen and contractors, and these liens have been upheld consistently where subsequent claimants or mortgagees had knowledge of their existence, or that they were about to be asserted. Likewise, it has been held that, where the mortgagee knows there aire unpaid claims, and that the owner is unable to pay them, he is charged with such notice as to come within the meaning of the statute. Kentucky Lumber & Mill Work Co. v. Kentucky Title Savings Bank & Trust Co., 184 Ky. 244, 211 S. W. 765, 5 A.L.R. 391. See also Ideal Supplies Co. v. Underhill, 213 Ky. 741, 281 S.W. 988. In the Kentucky Lumber Case it was held that, where the Bank advanced money to build a house after construction had been started, and with the specific understanding that it was to be applied to the costs of construction, it could not apply a balance of the amount loaned the owner to defeat the materialman’s lien, even though the lien was [248] not filed until after tfie Bank’s mortgage fiad been recorded. In tfie Ideal Supplies Company Case it was field that tfie bolder of a mortgage, taken while materials were being furnished to construct a house, and with knowledge that tfie money was being borrowed to apply on tfie construction and before a materialman’s lien had been asserted, was not charged with such notice as to permit tfie materialman’s claim to take precedence over his mortgage. It was pointed out also that, since tfie property owner’s reputation was not attacked, and there was no showing that he was not paying the claims as they accrued, or that fie was unable to do so, there was no more burden on tfie mortgagee than upon tfie materialman to protect tfie rights of tfie latter. In commenting upon tfie Kentucky Lumber Case in tfie Ideal Supplies Company Case, it was pointed out that tfie facts in tfie two cases were distinguishable, and that it was not tfie intent of tfie Court in tfie Kentucky Lumber Case to depart from tfie ruling in tfie case of Foushee v. Grigsby, 75 Ky. (12 Bush.) 75., In tfie Fousfiee Case it was field that the mere fact that work was being done on tfie property did not charge tfie mortgagee with actual notice of the existence of tfie lien. We think tfie facts in tfie case at bar distinguish it from tfie Kentucky Lumber Case, and that it comes under tfie doctrine discussed in tfie Ideal Supplies Company Case. Clearly tfie Colliers knew that tfie house was being built. They knew also that monthly payments were to fie paid to Dillon by tfie Alfords. It was not shown, however, that they knew these monthly payments were not being made. We think it is significant also that, upon one occasion, they assisted tfie Alfords in obtaining $2,500 from tfie Association which was to fie paid to Dillon. This took place, even after the execution of tfie Colliers’ mortgage. Apparently, Dillon was not raising question as to tfie payment of a,ny balance then due him. A situation somewhat analogous to that presented in tfie Kentucky Lumber Case would have existed fiad tfie Association attempted to apply to its own mortgage tfie $2,500 which tfie Colliers helped tfie Al-fords secure from it. For tfie reasons given we think tfie judgment should fie and it is reversed, with directions to set it aside and for entry of a judgment consistent with, this opinion.