Mellon v. St. Louis Union Trust Co.

225 F. 693, 140 C.C.A. 567, 1915 U.S. App. LEXIS 2133

• Court: Court of Appeals for the Eighth Circuit
• Decided: July 7, 1915
• Docket: No. 4402
• Status: Published

Opinion

TRIEBER, District Judge

(after stating the facts as above). Learned counsel for appellant do not question the findings of facts made by the trial court, but challenge the conclusions of law in determining the claims of appellees superior liens to hers, and also declaring the mechanic’s lien claims to be liens on the fee of her lots. On behalf of the appellant it is claimed that the contractors and materialmen are not entitled to any liens, but, if they are, they are limited to the leasehold and building, and are inferior to her lien on these for the rent due and other expenditures made by her. She claims that the execution by Campbell & O’Keefe of the bonds estops them from claiming any liens, either for themselves or the subcontractors. It is further claimed for her that, as there are no allegations nor proof that the work on the building was commenced before the execution of the mortgage to the Trust Company, the liens of the contractors, if they have any,, are inferior to those of the Trust Company, as well as hers. On the part of the appellee it is contended, and the District Court so held, that the mechanics’ claims arc liens on the fee, as well as on the improvements, and are superior to the mortgage lien of the Trust Company, and that reserved by appellant in the lease.

[ 1 -3 j Mechanics’ liens, being unknown to the common law, are not for that reason to be strictly construed, but should be liberally construed, in order to carry out the intention of the lawmakers to protect workmen, contractors, and materialmen. Hooven-Owens & Rentschler Co. v. John Featherstone’s Sons, 111 Fed. 81, 92, 49 C. C. A. 229, 210; Russell v. Hayner, 130 Ted. 90, 64 C. C. A. 424. The liens being statutory, the national courts will follow the coftstruction placed upon the statute by the highest court of the stale, if they have been construed by it. It is therefore important, for the determination of the rights of the parties, to look to the Statute of Oklahoma. Section 3062 of the Revised Laws of Oklahoma of 1910 provides:

“Any person who shall, under oral or written contract with the owner oí any tract or piece of land, perform labor, or furnish material for the erection, alteration or repair of any building, improvement, or structure thereon; or who shall furnish material or perform labor in putting up any fixtures, machinery in, or attachment- to, any snch building, structure or improvements; or who shall plant any trees, vines, plants or hedge in or upon snch land ; or who shall build, alter, repair or furnish labor or material for building. altering, or repairing any fence or footwalk in or upon said land, or any sidewalk in any street abutting such land, shall have a lien upon the whole of said tract or piece of land, the buildings and appurtenances. If the title to the land is not in the person with whom such contract was made, but is leased and unimproved, the liens shall be allowed oil the buildings and improvements on sueli land separately from the real estate. Such liens shall be preferred to aU other liens or incumbrances which may attach to or upon such land, buildings or improvements or either of them, subsequent to the commencement of such building, the furnishing or putting up of such fixtures or machinery, the planting of such trees, vines, plants or hedges, the building of such i(mce, footwalk or sidewalks, or the making of any such repairs or improvements.”

This statute has never been construed by the Supreme Court of Oklahoma on the issues involved herein; but the language of the statute clearly shows that the mechanic’s Hen, when the realty is leased and unimproved, shall be allowed only on the buildings and improvements on such land, separately from the real estate. It was copied in its entirety from the statutes of the state of Kansas. The question involved in this case had not been construed by the Supreme Court of Kansas before its adoption by Oklahoma, but has since been. In Block v. Pearson, 19 Old. 422, 91 Pac. 714, the Supreme Court of Oklahoma, speaking of the construction of that statute by the Supreme Court of Kansas after its adoption by Oklahoma, said that the construction of this statue by the courts of Kansas was entitled to the highest consideration. The Supreme Court of Kansas has uniformly construed this statute as affecting the. interest of the lessee only, and not that of the lessor. In Huff v. Jolly, 41 Kan. 537, 21 Pac. 646, it was held:

“The lion is upon the realty, with the building attached, to the extent of the ownership of the one who contracted for the construction of the building, and no farther; and if there is no ownership, there is no lien.”

In Chicago Lumber Co. v. Schweiter, 45 Kan. 207, 25 Pac. 592, and in Getto v. Friend, 46 Kan. 24, 26 Pac. 473, it was held:

“For materials furnished for a building to one who held under an executory contract of purchase, a mechanic’s lien is confined to the equity of the purchaser under the executory contract.”

To the same effect is Johnson v. Badger Lumber Company, 8 Kan. App. 580, 55 Pac. 517.

Similar statutes in other states have received a like construction by practically all the courts. In Franklin Savings Bank v. Taylor, 131 Ill. 376, 23 N. E. 397, it was held that, where the deed provided that no contract creating a lien should be made, a mechanic’s lien could not affect the owner’s title. In Dutro v. Wilson, 4 Ohio St. 102, it was held:

“If the ownership is in fee, the lien is upon the fee; if it is of a less estate, the lien is upon such smaller estate [referring to a contract made by one not owning the fee].”

In Forbes v. Mosquito Fleet Yacht Club, 175 Mass. 432, 56 N. E. 615, the lease required the lessee to erect a building on the leased premises, and it was held that the mechanic’s lien only applied on the building and leasehold, but not the fee of the lessor. Among the many authorities to the same effect are McCarty v. Burnet, 84 Ind. 27; Benjamin v. Wilson, 34 Minn. 517, 26 N. W. 725; Salzer Lumber Company v. Claflin, 16 N. D. 601, 113 N. W. 1036; Springfield Foundry & Mchy. Co. v. Cole, 130 Mo. 1, 31 S. W. 922; Armstrong Cork Co. v. Merchants’ Refrigerating Co., 184 Fed. 199, 107 C. C. A. 93, decided by this court in an action arising under the statutes of Missouri. Many other authorities may be cited to the same effect.

Counsel for the Trust Company cite numerous cases in which the courts have held that a mechanic’s lien covers the fee of the lessor, although the contract for the improvements was made by the lessee; but a careful examination °of these cases shows that they arose either under statutes which are known as “consent or knowledge” statutes, or the facts upon which the decisions are based materially differ from those in the casé at bar.

The later Illinois cases cited are inapplicable, because, as was frankly admitted by counsel in his brief, as well in the oral argument, the statutes of that state, when those cases were decided, were “consent, permission, or knowledge” statutes. The Illinois statute gives a lien on the fee of “any person who shall by any contract with the owner of a lot or tract of land, or with whom such an owner has authorized, or knowingly permitted to improve,” etc. The New York statute is also a “consent” statute, and so is the Wisconsin statute. The Wisconsin statute provides that “the lien shall attach to and be a lien on the real property of any person on whose premises such improvements are made, such owner having knowledge thereof and consenting thereto.” Section 3314, R. S. Wisconsin. But by a special act of the Legislature' of Wisconsin (chapter 466, Laws of 1887) it is provided that the foregoing provision “shall not be construed as giving a lien where the relation of landlord and tenant exists.” In Bentley v. Adams, 92 Wis. 386, 66 N. W. 505, these statutes were considered by the court, and it was held that the special act does not apply to cases where the landowner’s contract with the person who constructed a building for him on the land, though coupled with an agreement that such person shall occupy the premises as a tenant for a definite term, and, being unable to pay for the building, surrendered the lease and building to the owner. The ground upon which the court placed its decision is:

“It [the contract between the lessor and lessee] contemplated the construction of a building by the so-called lessee on the land of the so-called lessors for their benefit. They were to become owners of the properly. If an owner can free himself from the operation of the lien law by merely making a contract having some of the agreements of a lease, strictly so called, designating the owner of the land as lessor and the contractor who is to build the building as lessee, a very convenient method would exist by menus of which such law can effectually be nullified. Chapter 466 was not intended to apply to a case where a person, contracts with another to build a building for such person on his land, though coupled with an agreement that such other shall occupy the premises as a tenant of such person.”

The court there construed the contract, not as a lease, but as a contract with a so-called lessee to erect the building for the benefit of the owner of the land. This is quite different from the contract in this case.

Tn Dougherty-Moss Lumber Company v. Churchill, 114 Mo. App. 578, 90 S. W. 405, the improvements, which practically changed the entire building, were to be made at the lessee’s expense, but under the “direction and supervision of an architect, chosen by the lessor, whose judgment and decision ‘as to what is necessary for the purpose of properly preserving the walls or roof of said premises or support the same, * * * shall be absolute and final upon both parties,’ ” and upon expiration of the lease the building was to become the property of the owner of the lot without any compensation to the lessee. The court said:

“From the record before us it appears that, the lessee was to use the premises for theater purposes alone. In their condition they were unsuited for such use, and when converted into a theater they could be used for nothing else. In effect, the lessor burdened the lessee with the obligation to make and pay for the necessary alterations. That it intended to derive a substantial benefit therefrom is evidenced by the fact that, instead of requiring, at the end of the tenancy, the restoration of the premises in the condition they were in when leased, the improvements were to pass to the landlord. It was to receive a theater for a hotel. Evidently the metamorphosis accomplished at such great exj>ense was for its benefit, as well as that of the termor.”

In Dierks & Sons Lumber Co. v. Morris, 170 Mo. App. 212, 156 S. W. 75, and Marty v. Hippodrome Amusement Co., 173 Mo. App. 707, 160 S. W. 26, the leases provided that “all the improvements which the lessee was compelled to place upon the premises, and which changed the building to an extent to make it practically a new building, were to pass to the lessor at the expiration of the lease without any compensation therefor,” and it was held that this provision gave the lessor a substantial and present benefit to the freehold.

In some of the other cases cited for appellee the contracts were for a sale and purchase, with conditions that the owner of the fee would advance money to enable the proposed purchaser to erect the improvements, but later these contracts were rescinded, and the property, with the improvements, surrendered to and taken possession of by the owner of the fee. Such were the facts in Henderson v. Connelley, 123 Ill. 98, 14 N. E. 1, 5 Am. St. Rep. 490.

In Iron Works v. Taylor, 12 Colo. App. 451, 55 Pac. 942, the lease contained an option to purchase. As a condition of the contract, tire proposed purchaser was required to place certain machinery on the premises. This was done, and later the option was forfeited, and the owner of the fee took possession of the property and the machinery, and the court held that the fee was, under those circumstances, subject to the mechanic’s lien.

In Whitcomb v. Gans, 90 Ark. 469, 119 S. W. 676, the lease expressly authorized the lessee to make the improvements at the cost of the lessor, to be deducted from the rents. It was held:

“She [the lessor] not only consented to the making of the improvements, but she bound the lessee to do so, and expressly agreed to pay for same by deducting the cost thereof from the rent.”

Without reviewing all the authorities cited by the able and diligent counsel for the Trust Company, it is sufficient to state that they have been carefully examined, and the facts found in all the cases cited are practically the same as those reviewed above. In the case at bar there is no option to purchase. The improvements are not to revert to the lessor; but, on the contrary, it is expressly provided that upon the expiration of the lease they are to be bought by the lessor at 75 per cent, of their value, and this sum, when ascertained in the manner provided in the lease, is to be a lien on the lots and improvements in the nature of a mortgage, if not paid by the lessee within one year.

But it is also claimed that the lessor received a present substantial benefit by reason of the high rental, which amounted to at least 15 per cent, per annum on the then value of the lot, which the evidence shows was $40,000, and free from all taxes and expenses. It is a sufficient answer to this contention that the rental' value of the lots was a matter between the parties to the lease. If either of them made a bad bargain, the courts cannot make a new contract for them, in the absence of fraud or mistake, and no such claim is made. In fact, neither of the parties to the lease complained of the rental. Aside from that, the fact that at the time this lease was made the value of the lot was only $40,000 does not mean that, in the contemplation of the parties, it would not increase within the 99 years, the life of the lease. It is a well-known fact, of which courts may well take judicial notice, that when a lease for such a long term is made, in a city increasing in population as rapidly as Oklahoma City, and where values of real estate increase so rapidly, those matters are taken into consideration when“the lease is for a fixed sum for the full period of 99 years, as is the case here. Some leases for long terms provide for revaluations at certain periods, and the rent to be fixed accordingly. But in this case the parties saw proper to agree on a fixed rental for the 99 years, and, of course, took, into consideration the increase of the value of the lots which could be reasonably expected from the experience of the past. If they made a mistake in being too optimistic, the courts are powerless to relieve them by making a new contract for them. The language of a statute which enables a lessee to improve liis lessor out oí his premises must be clear and free from amubigi/ily to justify a court of equity, and for that matter any court, to give it that construction. The statute of Oklahoma, in our opinion, expressly negatives such an intention on the part of the Legislature.

|4] The lien claimants are not entitled to any lien on the fee, but only on the leasehold and the improvements. Are these liens superior to that granted to Mrs. M,ellon by the lease? Clearly not. Assuming, without deciding, that the contractors began work before the lea.se was filed for record, a fact which they failed to establish by proper proof, and even assuming, without deciding, that their rights attached when the contract for the erection of the building was executed, which was before the lease was recorded, they would still not be entitled to priority over Mrs. Mellon’s lien reserved in the lease. This provision in the lease is clearly an equitable mortgage. Ketchum v. St. Louis, 101 U. S. 306, 316, 25 L. Ed. 999; Sheffield Furnace Co. v. Witherow, 149 U. S. 574, 578, 13 Sup. Ct. 936, 37 L. Ed. 853; Fourth Street Bank v. Yardley, 165 U. S. 634, 17 Sup. Ct. 439, 41 L. Ed. 855; Walker v. Brown, 165 U. S. 654, 664, 17 Sup. Ct. 453, 41 L. Ed. 865; Connolly v. Bouck, 174 Fed. 312, 98 C. C. A. 184. The contractors, Campbell & O’Keefe, knew at the time they made the conIract for the erection of the building that Miss Patterson was not the owner of the lots, but only a lessee of Mrs. Mellon. When they entered into the contract they were chargeable with notice, not only of all matters which they knew, or which were of record, but of all facts which by the exercise of reasonable diligence they could have ascertained. By inquiry of Mrs. Mellon, the lessor, they could have learned the terms of the lease before they entered into the contract. Coder v. McPherson, 152 Fed. 951, 82 C. C. A. 99; 2 Pomeroy’s Eq. Jurisprudence (3d Ed.) 597. Failing to' exercise reasonable diligence to ascertain that fact, they cannot appeal to the conscience of the chancellor and plead their failure to exercise reasonable diligence as an excuse. Ketclmm v. St. Louis, supra.

[5] The claim of the appellant that the contractors are estopped from claiming a lien on the leasehold and building by reason of the execution of the bond cannot be sustained. The authorities cited do not sustain the contention as they are not in point. There was no waiver of the lien by the execution of tlie bond, but only that, before they can claim payment, the building shall be free from all liens. In Spears v. Lawrence, 10 Wash. 368, 38 Pac. 1049, 45 Am. St. Rep. 789, the surety of the principal contractor claimed a lien on the property while there were still unpaid claims of other subcontractors which were liens, and it was held that, being a surety of the contractor, he could not recover. McHenry v. Knickerbacker, 128 Ind. 77, 27 N. E. 430, Interior Woodwork Co. v. Prasser, 108 Wis. 557, 84 N. W. 833, and Aikens v. Frank, 21 Mont. 192, 53 Pac. 538, like Spears v. Lawrence, are actions by the sureties of the principal contractor.

In the building contract Miss Patterson expressly reserved the right to pay off all lien claims and deduct the amounts thus paid out of the money due the contractors. As she owed the contractors more than the claims of. the subcontractors amounted to, she, or those standing in her shoes, cannot refuse to pay these claims, and also refuse to pay the principal contractors the money due them, and which they would be required to use for paying off all other liens due under the contract. It is her default that is the cause of Campbell & O’Keefe’s inability to pay the subcontractors, and one cannot, in a court of equity, plead his own default as a defense. Construing the contract and bond together, it is bejmnd question that the intention of the parties was that Miss Patterson should not be required to pay any more than was justly due from her under the contract with Campbell & O’Keefe; and that is all that is claimed, as in their lien claim they included all debts which can possibly become liens on the buildings—at least, there is no claim that any other liens are in existence. Whenever the amounts due Campbell & O’Keefe are paid, for themselves and the subcontractors, for whom they would act as trustees, the building will be free from all liens of the contractors, subcontractors, and materialmen, without Miss Patterson, or any other party in interest, being required to pay any greater sum than she is liable for under the contract. In that case the conditions of the bond would be fully satisfied. Harlan v. Texas Fuel & Supply Company (Tex. Civ. App.) 160 S. W. 1142; Pine Bluff Bodge of Elks v. Sanders, 86 Ark. 291, 111 S. W. 255.

[6, 7] Is the debt of the Trust Company secured by the mortgage •entitled to priority on the leasehold and building as against the claim of Mrs. Mellon? The Trust Company had actual knowledge of the contents of the lease, which was of record for some time before the execution of the mortgage. This being the case, the mortgage lien of the Trust Company is subject to Mrs. Mellon’s lien on the building, except as to the fee to the lots, which will be later determined in this opinion. As between the mechanics’ liens and the mortgage lien of the Trust Company, the mechanics’ liens are entitled to priority on the leasehold and building. Tile record shows that on April 1, 1911, the contractors had performed sufficient work on the building to entitle them to $1,500, as certified by the architects. On August 9, 1911, before the mortgage transaction with the Trust Company had been completed, or any of the money loaned paid to Miss Patterson, or even placed to her credit, the Trust Company had knowledge that the building was then in course of construction and that Miss Patterson had paid nearly $50,000 for the work done and materials furnished for the building up to that time. It therefore took the mortgage with notice of the mechanic’s lien claims, which entitles those claims to priority on the leasehold and improvements. The amounts due the Trust Company are liens on the leasehold and building, subject to Mrs. Mellon’s and the mechanic’s lien claims it purchased, and in addition thereto the mortgage claim is a lien on the fee of the lots in case the property has to be sold and the sums realized from a sale of the leasehold and building are insufficient to pay all of the liens.. In that event the Trust Company is entitled to have the fee to the lots sold for the balance due it.

[8, 9] The rents in the hands of the receiver should be paid to Mrs. Mellon and credited on her account. Pier lease gives her a lien on the rents for the money due her. The mechanic’s lien claimants have no claim on these rents, and make none; nor does the mortgage to the Trust Company give it a hen on the rents. Therefore it has no claim on the rents as against Mrs. Mellon, who, under the terms of the lease, way to have a first hen on the building and “upon the rents of, all buildings and improvements upon said premises at any time during said term.” Sage v Memphis, etc., R. R. Co., 125 U. S. 361, 8 Sup. Ct. 887, 31 L. Ed. 694, is decisive of this question.

The cause is reversed and remanded, with directions to enter a decree as follows:

Alter ascertaining the amounts due to Mrs. Mellon and the Trust Company, as assignee of the contractors, and as mortgagee, the liens shall be declared in the following order of priority:

First. The moneys in the hands of the receiver, realized from the rents, alter deducting the expense of the receivership, shall be applied to the indebtedness found due Mrs. Mellon, and for the balance, if any, she is to have a first lien on the leasehold and building.

Second. That the Trust Company has a lien on the leasehold and building, subject to that of Mrs. Mellon, for the claims of the contractors assigned to it; the amount to be limited to the sums it paid for them, with interest thereon.

Third. That the Trust Company has a lien on the leasehold and building for the sum due it as mortgagee, subject to the liens hereinbefore stated, and a first lien on the fee of the lots. That unless these sums are paid by a party in interest within a time fixed by the court, the special master shall sell the premises, barring the equity of redemption of all the parties to the action. Upon such sale he shall first sell the leasehold and building; but, if the proceeds of that sale are insufficient to pay all the liens, he shall sell the lots, and if there he any surplus from the sale of the lots, after paying all- sums due under the decree, such surplus shall he paid to Mrs. Mellon. In no event shall the lots be sold to satisfy the mechanic’s lien claims. In case Mrs. Mellon pays all liens as declared by the decree, she shall become the absolute owner of the lots and building, free from the terms of the lease, and the claims of all parties to this action, and those claiming under them since the institution of this action.

The costs in this court will he taxed against the appellee, the Trust Company. The costs of the court below will be taxed as the District Court may deem equitable.