## Facts

- Property sellers took an $8,000 promissory note from the buyers, secured by a second deed of trust on the property.
- The buyers obtained a $39,000 construction loan from a savings and loan association, secured by a first deed of trust.
- The parties agreed the construction lender’s deed of trust would be a first lien and the sellers’ deed of trust a second lien; the instruments were recorded in that order.
- The loan agreement contemplated progress payments as construction proceeded and gave the lender the right, upon unsatisfactory progress or breach, to declare a default and discontinue further advances.
- The lender recorded a notice of default while approximately $27,919 remained undisbursed, then withdrew the default and continued making progress payments until it advanced the full $39,000 (and no more).
- Construction was not completed; the lender later recorded a new notice of default.
- The sellers sought declaratory relief, claiming advances made after the first recorded default were “optional” and therefore subordinate to their second deed of trust.

## Issues

1. Whether a senior construction lender’s advances made after a recorded default (later withdrawn) lose first priority as “optional advances” when the lender could have stopped funding under the loan agreement.
2. Whether advances made after such a default remain secured with first priority when they are within the original face amount and made under the original construction-loan arrangement known to the junior lienholder.

## Decision

- The appellate court affirmed judgment for the lender.
- The first deed of trust had priority for the entire $39,000 construction loan, including advances made after the initial default was declared and withdrawn.
- The sellers’ second deed of trust remained junior to the full amount secured by the first deed of trust.
- The court rejected applying an “optional advances are junior” theory to re-rank priorities where the junior lienholder knowingly accepted a second position behind a stated construction loan and the senior lender did not increase the secured debt beyond that amount.

## Legal Principles

- A senior deed of trust securing a construction loan retains first priority for all advances made pursuant to the original loan commitment up to the stated principal amount when the junior lienholder took with knowledge and agreement that the senior lien would be first.
- Advances are not subordinated merely because the lender, after declaring a default, had a contractual right to stop funding but later continued funding under the original agreement.
- Priority disputes involving “optional advances” do not justify subordination when the senior lender does not enlarge the debt secured by the first deed of trust and the junior lien was contemplated and expressly subordinated from the outset.

## Conclusion

The court held that a construction lender that advances funds up to the original loan amount under its recorded first deed of trust keeps first priority even for advances made after a declared and withdrawn default, where the junior lienholder knowingly accepted a subordinate lien behind the stated construction loan.


Turner v. Lytton Sav. & Loan Ass'n, 242 Cal. App. 2d 457 (Ct. App. 1966)