## Facts

- Thirteen subdivision lots were encumbered first by purchase-money deeds of trust securing loans of about $806.45 per lot; each included a subordination provision whose effect was disputed.
- More than a year later, the owners obtained construction loans from Sacramento Savings and Loan Association totaling about $143,900 (about $11,000–$12,000 per lot), evidenced by installment notes.
- The construction notes required monthly payments and contained a due-on-sale clause permitting the lender to accelerate on any sale by the borrower.
- Sacramento Savings instructed the original title company/trustee to “secure subordination,” but the title company demanded additional executed subordination agreements before insuring; Sacramento Savings changed escrow/title companies and recorded its construction deeds of trust without obtaining any additional subordination agreements beyond the original purchase-money deed language.
- Both the purchase-money and construction loans became delinquent; Jones acquired the purchase-money notes and foreclosed under the purchase-money deeds of trust, purchasing at trustee’s sales conducted in compliance with Civil Code § 2924.
- Sacramento Savings also foreclosed under its construction deeds of trust and purchased at its own trustee’s sales; neither party bid at the other’s sales.
- Jones sued to quiet title; the trial court quieted title in Jones and denied Sacramento Savings’ title claim, and Sacramento Savings appealed.

## Issues

1. Whether the purchase-money deeds of trust subordinated to Sacramento Savings’ construction deeds of trust, giving the construction lender contractual priority.
2. If contractual priority was absent, whether equity required imposing an equitable lien in favor of Sacramento Savings to prevent unjust enrichment from improvements funded by its construction loans.

## Decision

- The court held Sacramento Savings did not obtain contractual priority because its construction loans did not meet the subordination clause’s conditions as construed by the court.
- The court held Sacramento Savings was entitled to an equitable lien to prevent Jones from retaining the benefit of improvements financed with Sacramento Savings’ funds without compensation.
- The judgment quieting title free of Sacramento Savings’ interest was reversed; the matter was remanded with directions to quiet title in Jones subject to an equitable lien in favor of Sacramento Savings and to conduct further proceedings to implement that relief.
- The purported appeal from the order denying a new trial was dismissed as taken from a nonappealable order.

## Legal Principles

- Subordination provisions in deeds of trust are construed according to their terms; a later lender claiming priority under such provisions must show substantial compliance with the stated conditions.
- A financing arrangement materially different from that contemplated by the subordination provision (including terms inconsistent with stable, long-term financing, such as acceleration on sale) may fail to qualify for contractual subordination.
- Even when record priority favors a purchase-money lienholder, a court may impose an equitable lien where a subsequent lender’s funds improved the property and the prior lienholder would otherwise receive those benefits without payment.
- Equitable liens may be used to adjust the parties’ interests after competing foreclosures to prevent unjust enrichment while respecting established legal priorities.

## Conclusion

The court rejected the construction lender’s claim that a subordination clause automatically elevated its deeds of trust over the purchase-money security, but imposed an equitable lien for the value of improvements funded by the construction lender so the party who foreclosed the purchase-money interest could not retain the improved property without compensating for those benefits.


Jones v. Sacramento Sav. & Loan Ass’n, 248 Cal. App. 2d 522, 56 Cal. Rptr. 741 (Cal. Ct. App. 1967)