East Atlanta Bank v. Limbert

1. A petition by a subcontractor to foreclose a claim of lien for labor and material furnished, in a joint suit against the contractor and the owner, is not subject to general demurrer because it seeks recovery of a gross sum for work and materials, and fails to disclose what part of the sum is for materials furnished and what part is for labor.

2. Where land is sold under a power of sale contained in a security deed, and the sale produces a sum in excess of the debt secured by the deed, such surplus funds retain the character of real estate in so far as junior lienholders whose liens were divested by the sale are concerned; and a materialman may maintain a suit against the contractor, the owner of the property improved, and such holder of surplus funds, to foreclose his claim of lien and subject the surplus funds thereto.

3. An amendment to a petition to foreclose a lien in equity, designated as a new count, in which the petitioner seeks to recover damages sustained by reason of the fraud of defendants, alleges a new and distinct cause of action, and should be dismissed on demurrer.

No. 13542. JANUARY 16, 1941. Don A. Limbert, trading as Don A. Limbert Heating Plumbing Company, filed his petition against Ralph Morgan, M. L. Spratlin Company Inc., and the East Atlanta Bank, seeking to perfect and enforce a materialman's lien against certain funds alleged to be in the possession of that bank. The facts as alleged are substantially as follows: On February 18, 1939, Ralph Morgan conveyed to the bank two lots of land located in a subdivision known as Emory Acres, by separate loan deeds, each being given to secure the sum of $1254. Thereafter Morgan contracted with M. L. Spratlin Company for the construction of a residence on each lot. The plaintiff contracted with the M. L. Spratlin Company to install the heating and plumbing equipment in the houses for $290 each. He installed the equipment according to his contract, and within ninety days thereafter had his claim of lien against the two lots filed and recorded in the office of the clerk of the DeKalb superior court. M. L. Spratlin Company completed the houses, and each house and lot had a market value of $4500 or more, or approximately $2000 more than the actual cost of the construction. Morgan failed to sell and dispose of the houses, and the bank exercised the power of sale in the security deeds and sold the property. One of the houses was sold for $3090.14, and the other was sold for $3179.74, a total of $6269.88. At the time of the sale the indebtedness of Morgan to the bank was approximately $2508. After deducting this amount, there remained in the hands of the bank a balance of approximately $3761.88. After deducting the expenses of the sale there should have remained in the hands of the bank, as attorney in fact, approximately $3700; and said sum, or a substantial part thereof, is now in the hands of the bank. At the time of the foreclosure sales the plaintiff's lien was of record, and the bank had actual notice of this lien and of the fact that the plaintiff had not been paid. He charges on information and belief that the M. L. Spratlin Company is insolvent. In view of the facts, the lien was divested from the real estate by the sale under the loan deeds, and in equity attached to the surplus fund which came into the hands of the bank from the sales; and the plaintiff is entitled to payment of his claim from such surplus fund. He prayed for judgment of $580 against M. L. Spratlin Company, and that it be decreed that such judgment is a lien on the fund in the hands of the bank from the foreclosure sales, over and above the amounts due the bank under the loan deeds, and that such lien be established and foreclosed.

By an amendment designated as count 2 the plaintiff alleged substantially the same facts as before stated, and made the following additional allegations. The loan deeds from Morgan to the bank were made for the purpose of securing money advanced by the bank for meeting the pay-roll for labor in the construction of houses on the lots, which were unimproved at the time of the execution of the loan deeds. Before October 7, 1939, the bank had advanced to Morgan a total of $2129 on one of the lots and $2304 on the other. Some of the material used in the construction of the houses was purchased by M. L. Spratlin Company from Williams Brothers Lumber Company. Morgan gave notes to the lumber company for the amount of the material used; and this company failed to file its lien against the real estate within the time allowed by law. The lumber company was a customer of the bank during the time the houses were being built and during the month of October, 1939. On or about October 7, 1939. Ralph Morgan and East Atlanta Bank and Williams Brothers Lumber Company conspired and entered into an unlawful agreement whereby the bank was to advance to Morgan a total of $1654.39 on the two lots described in the security deeds, which amount was to be deposited in the bank to the credit of Morgan and to be paid out by the bank on two checks signed by Morgan, payable to the lumber company, dated August 22, 1939. The funds were so advanced to Morgan and paid out to the lumber company on October 7, 1939. The bank intended to institute foreclosure proceedings at the time the funds were so advanced, and the funds were advanced for the purpose of preventing the lumber company from sustaining a loss. The effect of the agreement was that the lumber company received payment for its material for which it had no lien, whereas in the absence of such agreement the funds would have been subject to an action by the plaintiff to collect the amount due him. The acts of defendants and Williams Brothers Lumber Company were a fraud upon the plaintiff. Morgan is insolvent. The plaintiff prayed that he "have judgment against the defendants, East Atlanta Bank and Ralph Morgan for the amount he has been damaged as a result of the agreement hereinabove set forth, namely the sum of $590, and for such other and further relief as to the court may seem proper." Copies of the security deeds from Morgan to the bank showed that each was given to secure a debt of $1254, "or any other present or future indebtedness or liability" of Morgan to the bank.

The East Atlanta Bank demurred to the petition, on the grounds, that it set out no cause of action against the bank; that there was a misjoinder of parties defendant; and that the plaintiff had an adequate remedy at law. It demurred specially to certain paragraphs of the petition, and to the amendment, on the ground, among others, that it set up a new and distinct cause of action, "in that this defendant was made a party defendant in the first suit on an idea of equitable garnishment, and the new cause sets out fraud which would be an action ex delicto." The court overruled the demurrers, and the defendant excepted. 1. The plaintiff in error contends that the petition is fatally defective and should have been dismissed on general demurrer, because it appears therefrom that the petitioner's claim of lien arose by virtue of his being a subcontractor. The cases of Cartter v. Rome CarrolltonConstruction Co., 89 Ga. 158 (15 S.E. 36), and Smith v.Van Hoose, 110 Ga. 633 (36 S.E. 77), are cited in support of this contention. In those cases it was held that petitions by subcontractors to foreclose liens for labor and materials were subject to special demurrer on the ground that the claims for labor and materials furnished were combined in a lump-sum demand. It was held that a subcontractor has no such contractual relationship with the owner as to entitle him to a lien for his contract price under our lien laws. These decisions did not hold that a subcontractor has no lien for work done or material furnished for the improvement of real estate "upon the employment of a contractor," as provided by the Code, § 67-2001(2), but recognized the right to such a lien. In theCartter case it was stated that the subcontractor was entitled to a lien for the amount of the material furnished; but it was held that it was not entitled to a lien for procuring the work to be done on its own account. In the instant case there was no special demurrer to the portion of the petition alleging a gross sum as due for work done and material furnished under the subcontract. Since the petitioner was at least entitled to a lien for so much of the gross sum as represented the materials furnished, the petition was not fatally defective because it combined the claim for materials furnished with the claim for work done. In the claim of lien filed by the plaintiff the amount of the lien claimed "for labor and material" was not stated. Cf.Wager v. Carrollton Bank, 156 Ga. 783 (120 S.E. 116). Therefore it is not defective as stating in a gross sum the amount due for work done and material furnished.

2. After the plaintiff's claim of lien arose, the property of the owner was sold under powers of sale contained in prior security deeds; and the sales are alleged to have brought a sum in excess of the debt secured by the deeds. This surplus is alleged to be in the hands of the security-deed holder, or attorney in fact, who sold the property. In this suit against the contractor, the owner, and the attorney in fact, the petitioner seeks to foreclose his lien in equity and have it decreed to be a lien on the surplus fund in the hands of the attorney in fact. It is contended that surplus funds retains the character of real estate in so far as junior lienholders are concerned, and that such lienholders may proceed in equity against such funds as if they were real estate. Numerous decisions of other jurisdictions are cited in support of this position. In Markey v. Langley,92 U.S. 142 (23 L. ed. 701), where realty was sold under a power of sale contained in a mortgage, it was said: "The liens of the mortgages and the mechanics' lien attached to the proceeds of the sales in the same manner, in the same order, and with the same effect, as they bound the premises before the sales were made." In Morris v. Glaser, 106 N.J. Eq. 585 (151 A. 766), it was said: "Surplus moneys arising on foreclosure stand in place of the land itself as to the liens thereon or vested rights therein. . . The theory upon which such surplus proceeds are held to be land is that the surplus usually arises because more land is sold than is necessary, in one case, to pay the debts of decedent; in another (foreclosure), than is necessary to satisfy the mortgage debt; and in partition, because the land is impossible of division and for practical purpose it has been converted into money. But in each case the money stands for the land, and the rights therein are determined as though the court were dealing with the land itself. Upon an application for distribution of such surplus moneys, the division amongst those entitled is, in effect, an equitable partition of the land for which the money stands. The excess, though in the form of money, remains, as before, impressed with the character of the land." See also LaCentra v. Jackson, 245 Mass. 14 (139 N.E. 429); Zelley v. Zelley, 101 N.J. Eq. 37 (136 A. 738); Roy v. Roy, 233 Ala. 440 (4) (172 So. 253).

The theory of transferring liens divested by sales to the proceeds is not new in this State. It is true in cases of sales by administrators and executors. Code, § 113-1709; Middleton v.Westmoreland, 164 Ga. 324 (138 S.E. 852). Where property subject to a lien is sold under judicial process, the lien is divested from the property and attaches to the proceeds of the same, upon proper notice by the party claiming the lien to the officer to hold the money. Code, § 67-2301 (3). We know of no reason why the same rule should not apply to liens against property sold under power of sale contained in a security deed as applies in cases of other types of sales. The sale effectively divests all inferior liens. The surplus funds represent the equity of the owner in the real estate, and until the attorney in fact has paid these funds to a person entitled thereto there is no reason why equity should not take jurisdiction to impress liens upon them. The decision in Middleton v. Westmoreland, supra, is authority for holding that petitioner is entitled to come into equity and foreclose his lien and have the surplus proceeds of the sale impressed with that lien. That case involved a foreclosure of an attorney's lien against property which had been previously sold by an executor. It was held that the lien could be foreclosed and impressed upon the proceeds of the sale. Reasoning by analogy, it is clear that under that authority the court did not err in overruling the demurrers to the petition.

3. Was the amendment adding a new count to the petition subject to demurrer on the ground that it alleged a new and distinct cause of action? The security deeds involved recited that they were given to secure a stated sum "or any other present or future indebtedness or liability" of the grantor to the grantee. In the amendment it was alleged that the parties fraudulently took advantage of this provision of the deed by entering into an agreement whereby the grantee advanced to the grantor certain sums with which to pay another materialman who had no lien upon the houses and lots. The additional amounts so advanced increased the indebtedness of the grantor to an amount equal to that brought by the sale of the property, thus leaving no fund against which to assert the plaintiff's lien. By amendment he prayed for judgment of damages in the amount of his claim of lien. The cause of action stated in the amendment is one sounding in tort, in that the fraud of the defendants is the basis of the recovery sought. The cause of action alleged in the original petition is in its nature ex contractu, the statute establishing the lien sought to be foreclosed having been upheld on the ground that the lien is based upon the implied assent of the owner. See Prince v. Neal-Millard Co., 124 Ga. 884 (53 S.E. 761, 4 Ann. Cas. 615). It is therefore plain that the amendment sought to add a new and distinct cause of action, and should have been stricken on demurrer. Long v. Bullard,59 Ga. 355; Sharpe v. Columbus Iron Works Co., 136 Ga. 483 (71 S.E. 787); Griffith v. Moore, 185 Ga. 120 (5) (194 S.E. 551); Wardlaw v. Wardlaw, 185 Ga. 181 (2) (194 S.E. 187).

Judgment affirmed in part, and reversed in part. All theJustices concur.