In 2005, Randall F. Chambers and Cindy L. Chambers as Trustees of the Chambers 2002 Trust wished to purchase the subject property and subdivide it into an eight lot subdivision. Mr. Chambers contacted  Tri-Counties Bank in order to obtain a loan for the purpose of purchasing the Property and doing site improvements in order to get a final subdivision map on the Property. Bank agreed to lend $520,000. 00 to the 2002 Chamber Trust.  Said loan is evidenced by: 1) A Promissory Note dated October 5, 2005 naming 2002 Chambers Trust as borrower and Bank as lender, and 2) A Construction Loan Agreement dated October 5, 2005 naming 2002 Chambers Trust as borrower and Bank as lender.  The Promissory Note specifically states that “This loan is unsecured.”
On October 5, 2005, Bank also had Mr. and Mrs. Chambers, as individuals, each execute: 1) A Commercial Guaranty, and 2) A Construction Deed of Trust purportedly secured by the Property.  The Commercial Guaranties specifically stated that “This Guaranty is secured by a Deed of Trust dated October 5, 2005.”  The Construction Deed of Trust dated October 5, 2005 specifically states that “This deed of trust, including the assignment of rents and the security interest in the rents and personal property, is given to secure (A) Performance of a guaranty from trustor to lender, and does not directly secure the obligations due lender under the note and (B) Performance of any and all obligations under this deed of trust.” More than fifty percent (50%) of the loan proceeds were used to purchase the Property.
On July 7, 2006, Mr. Chambers, as a contractor for the 2002 Chambers Trust, executed a contract with Axner Excavating, Inc. for the performance of site work on the Property in order to obtain a final subdivision map. On July 10, 2006, within 20 days of Axner’s starting of work on the Property, Axner served the Chambers 2002 Trust, Mr. Chambers and Bank with a California Preliminary Notice.  Between July 7, 2006 and November 13 2006, Axner provided equipment, labor, services, and materials in performing all of the site work on the Property that was called for under the contract.  After performing the work, Axner was not paid in full for the work it had performed.  In order to protect its lien rights, on December 27, 2006, Axner recorded its mechanics’ lien against the Property.
Subsequently, on April 16, 2007, Mr. and Mrs. Chambers, as Trustees for the Chambers 2002 Trust, executed a Change in Terms Agreement with Bank.  Said agreement extended the loan repayment date and secured the loan with two deeds of trust on two separate properties as additional collateral.  Both deeds of trust were recorded on April 20, 2007.
On March 23, 2007,  Axner perfected its recorded mechanic’s lien by filing the instant lawsuit.  Said suit, among other things, stated a cause of action for foreclosure of Axner’s mechanics’ lien and claimed priority over the Bank’s deed of trust based upon Civil Code section 3137.  A Bench trial was held on September 29-30, 2009.
The Court determined that 1) pursuant to Civil Code section 3137, Axner’s mechanics’ lien had priority over Bank’s deed of trust, and 2) Bank’s deed of trust was invalid as an encumbrance against the Property.
In determining that Axner’s mechanics’ lien had priority over Bank’s deed of trust, which was recorded over a year prior to the mechanics’ lien, the Court cited the liberal construction of the mechanics’ lien statutes; Cal.Const., Art. XIV, Section 3; Connolly Development, Inc. v. Superior Court (1976) 17 Cal.3d 803, 826-827; Civil Code section 3137; and the seminal case concerning 3137, Schmitt v. Tri-Counties Bank (1999) 70 Cal.App.4th 1234.
The Court first determined that the Bank’s recorded deed of trust was given for the “primary purpose” of financing site improvements because Mr. Chambers had testified that the transaction was primarily for the purpose of purchasing the Property and doing the site improvement in order to get a final subdivision map, the deed of trust and loan agreement were entitled “construction” (Ruth v. Lytton Savings & Loan Association of Northern California (1968) 266 Cal.App.2d 831, 841), the Bank itself identified the transaction documents by using the term “construction,” and the only documents that were available for the claimant to review, the recorded deed of trust, gave no indication that the funds were to be used for any purpose other than “construction.”
The Court, following the Schmitt case, found that the Bank did not use “good faith” efforts to assure that Axner had been paid prior to releasing loan funds to the Chambers. It was determined that loan funds were disbursed, not only to the Chambers, but that said funds went directly to parties other than site improvers, including the County, the title company, and design professionals.  In releasing the funds to the Chambers without making efforts to determine that Axner had been paid, the Court ruled that Bank had actively facilitated the very actions that Civil Code section 3137 was designed to prevent.

On the second issue, the Court held that the Bank’s deed of trust was not secured by the Property because the owner of the Property was not the party that executed the deed of trust, citing Hoppe v. Hoppe (1894) 104 Cal. 94, 100-101; Hawkins v. Harlan (1885) 68 Cal.236, 237; and California Mortgages, Deeds of Trust, and Foreclosure Litigation (4th Ed. Cal. CEB 2009) Vol. 1, Chpt. 1, Sec. 1.39, Pg 35.  The Court determined that title to the Property was clearly held by a trust and the Bank’s deed of trust that purportedly encumbered the Property was clearly in the name of the individuals.  Further, the Court noted that the promissory note, deeds of trust, guarantees and other pertinent documents were drafted by the Bank, therefore any ambiguity in the documents should be construed against the Bank and in favor of Axner, the innocent party.
The Court then determined that, even if it were determined that the trust and the individuals were one in the same, Bank’s deed of trust would still be invalid encumbrance on the Property as a party cannot guarantee its own debt, citing Henley v. Hotaling (1871) 41 Cal. 22;  Civil Code Sections 2787, 2872, 2909, 2920;  Everts v. Matteson (1942) 21 Cal.2d 437, 444-446; and Torry Pines Bank v. Hoffman (1990) 231 Cal.App.3d 308, 318. The Court reasoned that a guarantor is a party that promises to answer for the debt of another, but if the trust and the individual were one in the same, then the guarantor was, in reality, the principal obligor and could not guarantee his own debt.  As such, the Commercial Guaranty(ies) executed by the Chambers added nothing to the original obligation and were void.  As the Bank’s deed of trust was specifically identified as security for the guaranty(ies), then the security was invalid also.
The final Court Judgment granted Axner’s foreclosure request against the Property, granted Axner’s mechanics’ lien priority over Bank’s deed of trust, declared Bank’s deed of trust void and determined the foreclosing amount on Axner’s mechanics’ lien was $220,679.60, plus costs.