Steiny and Company Inc. v. Citicorp Real Estate Inc.

STEINY AND COMPANY, INC., Plaintiff and Appellant, v. CITICORP REAL ESTATE, INC., Defendant and Appellant.
No. A075133 (San Francisco County Super. Ct. Consolidated Case No. 935776) California Court of Appeal First Appellate District Division Three Filed May 18, 1999
CERTIFIED FOR PARTIAL PUBLICATION*
        Under California's stop notice laws, must a construction lender make available to a stop notice claimant those amounts the lender has already disbursed to itself for previously accrued interest on the construction loan? The trial court, following Familian Corp. v. Imperial Bank (1989) 213 Cal.App.3d 681 (Familian), held that it must. The court so instructed the jury, which rendered a verdict in favor of the stop notice claimant, respondent Steiny and Company, Inc. (Steiny), and against the lender, appellant Citicorp Real Estate, Inc. (CREI). We disagree with Familian, and reverse. In the unpublished portion of the opinion we discuss Steiny's cross-appeal and request for attorney fees.

I. CREI'S APPEAL A. Facts Relevant to the Appeal         In 1987 a consortium of banks, with CREI as lead bank, ¹ agreed to loan $95 million to Fillmore Center Associates (FCA) for the construction of a residential and commercial development in San Francisco known as the Fillmore Center. Additional funding for the project came from tax exempt bonds and revenue generated by the project.
        The construction loan agreement between CREI and FCA provided for the lender's periodic deposits of the loan proceeds into a construction account "sufficient (i) to pay all of the direct and indirect costs of completing the Work in accordance with the Plans and Specifications, (ii) to satisfy the interest obligations created by and under the Note, and (iii) to pay all costs of operations and maintenance of the Property and the Improvements, including, but not limited to, interest on the Loan, at all times until the Loan is paid in full." The loan agreement further provided that funds deposited in the construction account would be disbursed according to a specified order of priority, unless paid by the borrower from other funds. Disbursement would first pay amounts outstanding under a line of credit loan and related fees and second, would pay monthly interest to the lender as it accrued under the note. ² According to FCA's chief financial officer on the project, provision for the payment of loan interest from the loan proceeds is customary in the construction loan industry. Each month, FCA would prepare a "draw book" summarizing all of the project costs for the month, including both hard construction costs and soft costs, such as interest. These draw books served as the basis for CREI's monthly disbursements into the construction fund.
The construction loan closed in 1987 and construction began in 1988. FCA encountered numerous cost overruns, which ultimately resulted in restructuring of the construction loan in 1989. Both before and after restructuring, FCA and Steiny, the electrical subcontractor, had disputes regarding the project. Steiny claimed its costs were higher than originally anticipated because of delays and inefficiencies on the project caused by FCA and the project manager. Eventually, in December 1990, Steiny served stop notices and mechanic's liens on CREI and FCA claiming it was owed $7.8 million for unpaid amounts under its contract, approved and unapproved change orders, and delay and impact damages. There is no dispute that at the time Steiny served its stop notice, only $717,000 of the original $95 million remained in the construction loan fund. As required by the stop notice laws, CREI set aside this remaining amount to satisfy the stop notice.
        On December 26, 1990, Steiny, CREI and FCA met to discuss resolution of Steiny's claims. Further negotiations resulted in a settlement agreement between FCA and Steiny which included the following provision, proposed by counsel for Steiny: "FCA hereby represents to STEINY . . . that the construction loan from CREI in the approximate amount of $95,000,000 has been fully funded with the exception of approximately $717,000 which has been held by CREI on account of certain stop notices including the stop notice of STEINY. This representation has been confirmed by letter from CREI to STEINY, attached hereto as Exhibit A." The settlement agreement further provided for Steiny to receive $1.3 million for work already completed, for $600,000 to be placed in a separate account to be paid to Steiny for future electrical work on the project and for Steiny to release its stop notice and refrain from filing others until the project was complete. On January 22, 1991, CREI issued the required certification letter confirming that "in connection with our $95,000,000 construction loan to Fillmore Center Associates, a California limited partnership, the sum of $94,283,000 has been disbursed prior to the date hereof and the sum of $717,000 is being held pursuant to bonded stop notices served on us by Architectural Glass and Steiny and Company, Inc." Steiny and FCA complied with the settlement agreement's remaining provisions.
        Finally, when in 1991 it became clear that FCA could not meet its loan obligations and was unable to obtain additional financing to complete the project, CREI recorded a notice of default on the project and initiated foreclosure proceedings. FCA filed for bankruptcy in November 1991 and under the plan of reorganization CREI acquired the project for $108.5 million.
        Steiny, claiming it was owed additional sums for electrical work on the project, filed an action to foreclose on its mechanic's lien. In subsequent amendments to its complaint, Steiny asserted various fraud theories against CREI. In its third amended complaint, ³ Steiny claimed that CREI's January 22, 1991, letter certifying $717,000 as the amount of funds remaining in the construction account was fraudulent because it failed to disclose that CREI had paid itself $6.9 million in accrued interest out of the construction loan funds prior to the time of Steiny's stop notice.
        On the subject of CREI's duty to disclose interest payments made from loan proceeds prior to service of Steiny's stop notice, the trial court instructed the jury before and after trial that "[u]nder California law, when determining the amount to withhold pursuant to a valid bonded stop notice, a lender who receives such stop notice must take into account not only funds remaining in the construction loan account, but also the amount of any fees and interest it has been paid from the construction loan. [¶] Steiny through its counsel inquired as to the amount of money reached by its stop notice. The court has ruled that Citicorp Real Estate had an obligation to either advise Steiny that it was withholding an amount that included the interest and fees or advise Steiny that the amount Citicorp Real Estate said it was holding did not include such interest and fees." The trial court's instruction was premised upon its conclusion that Familian disposed of the issue. The jury found that CREI had defrauded Steiny and awarded Steiny $5 million in compensatory damages but declined to award punitive damages.

B. Discussion         1. Stop Notice Law
        California's stop notice laws ⁴ allow subcontractors, laborers and suppliers of materials the right to serve a stop notice on the owner of a project or on the construction lender. (§§ 3158, 3159.) When served with a bonded stop notice, the lender is required to withhold from the unexpended balance of the loan fund an amount sufficient to pay the stop notice claimant. (§ 3162.) Thus, by serving a stop notice the claimant acquires, in essence, a lien against the unexpended balance of the loan fund. Furthermore, the stop notice claimant obtains priority over any assignment of the construction loan funds, whether the assignment is made before or after a stop notice is served. (§ 3166.) ⁵ In this way, an owner or lender is prevented from circumventing the stop notice claimant's lien rights, because unexpended amounts in the fund will remain available to satisfy the claim. It is this provision prohibiting assignment of funds in order to avoid responsibility under a stop notice which was of concern to the court in Familian and to the court below. It now concerns us as well.

        2. Familian v. Imperial Bank
        In Familian, a construction lender loaned $3.8 million to finance construction of condominium units. (Familian, supra, 213 Cal.App.3d at p. 683.) The loan was secured by a deed of trust on the subject property. (Ibid.) During the course of construction, the lender paid itself interest, fees and expenses totaling $528,000 out of a segregated "preallocated" reserve account. (Id. at pp. 683, 686-687.) With approximately $188,000 remaining in unexpended construction funds, the lender received bonded stop notices for $105,000 and foreclosed on the property. Thereafter, it received additional stop notices totaling $427,000. It interpled the unexpended $105,000, contending that the stop notice claimants were entitled to a pro rata recovery of the fund. (Id. at p. 683.)
        Familian had supplied plumbing materials on the project and was one of the bonded stop notice claimants. It moved for summary judgment contending that it was improper for the construction lender to maintain a preallocation reserve to pay the costs of the construction loan, to disburse payment to itself from the loan proceeds, to obtain through foreclosure property rendered more valuable because of Familian's supplies, and to then assert it could not pay for the work and materials because the construction funds had already been spent. The trial court granted summary judgment for Familian. (Familian, supra, 213 Cal.App.3d at p. 683.) In affirming on appeal the entry of judgment for Familian, the court made, essentially, two holdings, one with which we agree, and the other with which we do not. It is this second holding upon which the trial court's jury instruction rested here and which, in our view, requires reversal of the judgment entered for Steiny.
        Based upon section 3166 (see fn. 5, ante), the court in Familian held that the lender's attempt to preallocate a portion of the construction loan fund for the payment of loan interest and fees was ineffective as against the stop notice. (Familian, supra, 213 Cal.App.3d at pp. 685-688.) It held, and with this we agree, that the preallocation and segregation of funds to pay unearned loan fees, interest and other "soft" costs constituted an assignment of funds and could not take priority over a stop notice claim. The court went on, however, to a second unsupportable conclusion. It held further that disbursements already paid to the lender for loan fees, points and interest already earned also constituted an assignment within the meaning of section 3166 and could be recaptured to pay stop notice claimants. (Id. at p. 688 ["We hold that . . . periodic disbursements to the lender are assignments within the meaning of section 3166."].)
        To state that an amount already disbursed to pay an accrued debt can be characterized as an "assignment" goes contrary to the meaning ordinarily given that word, that is, a transfer of a right to something that has not yet become property in possession. (See 7 Cal.Jur.3d, Assignments, § 1 (1989) p. 7; Estate of Beffa (1921) 54 Cal.App. 186, 189-190.) Yet Familian offers no explanation for its extension of the definition; it simply fails to explain how payment of amounts due and owing can constitute an assignment. ⁶
        The only assignment at issue in the case before us also does not assist respondent. Immediately preceding the provision in the construction loan agreement specifying the manner and priority of funds disbursement, the agreement contains the following provision: "The Borrower irrevocably assigns to the Lender as security for the due performance of this Agreement all of its right, title and interest in and to the Construction Account and the monies placed therein to be held pursuant to the terms hereof." (Italics added.) This omnibus assignment provision does nothing to bring the construction fund within Familian's holding. The assignment of the entire construction account provided additional security for FCA's performance under the loan agreement. It did not supply the legal basis for CREI's periodic disbursement of money into the construction fund to cover all expenses, including interest payments and direct costs of construction. Rather, such payments were made on a regular basis pursuant to the terms of the loan agreement and in response to the monthly draw books submitted by FCA to CREI which specified the current amount of FCA's debt. Thereafter, also pursuant to the provisions of the loan agreement, FCA was under a contractual obligation to pay its construction related debts out of the available loan proceeds. Once funds were paid pursuant to the loan terms, they were no longer a part of the construction account, and were, therefore, not subject to the assignment. If Familian were carried to its [il]logical conclusion then all amounts paid out of this account, allegedly created by virtue of the assignment in the construction loan agreement, would be subject to recapture and made available to pay the stop notice claimant, including those amounts already paid to the claimant from periodic disbursement of the fund.
        As a reason for its decision the court in Familian stated: "A construction lender would need only to deduct its profits at the inception of the loan to assure a double recovery at the expense of those who enhance the value of the property by supplying labor and materials." (Familian, supra, 213 Cal.App.3d at p. 687.) This comment suggests to us that the Familian court failed to draw a crucial distinction between funds actually paid on accrued debt and funds made the subject of an assignment for purposes of securing the debt. If the deducted profits referred to are amounts actually paid out to the lender, that is, if they are in fact placed in the lender's possession and control, then they cannot also be the subject of an assignment, which implies a future, anticipated right to possession. Therein lies the essential flaw in Familian's reasoning: an amount paid is not an amount assigned.
        In conclusion, we hold that Familian does not withstand careful scrutiny. Payments for interest and loan fees legitimately incurred and disbursed prior to service of a stop notice do not constitute an assignment within the meaning of section 3166. Because we disagree with the holding in Familian, we hold that the trial court erred in concluding that under Familian CREI had a duty to disclose to Steiny that it had previously paid itself earned interest in the amount of $6.9 million. ⁷ We therefore reverse the judgment entered in favor of Steiny which was premised on the jury's finding that CREI acted fraudulently in concealing that fact from Steiny. Given our holding regarding Familian's inapplicability and resulting reversal, we do not reach CREI's remaining grounds for appeal.

[This Part Is Not Certified for Publication]
II. STEINY'S CROSS-APPEAL*         Steiny has filed a cross-appeal, contending the trial court erred in several respects. It claims the court made evidentiary rulings which prejudiced it by keeping from the jury evidence supporting an award of punitive damages. It also contends, with regard to damages, that the trial court erred in holding that under Business and Professions Code section 17200 profits could not be considered in awarding restitution. We do not address these grounds for appeal because we have held that the award in favor of Steiny was premised on conduct by CREI that was not fraudulent and must be reversed. ⁸ Steiny further appeals rulings on demurrers and motions to strike which removed from its pleadings allegations of fraud concerning a letter written by CREI on November 2, 1989, regarding the state of financing on the project. We affirm these rulings. Finally, Steiny claims the trial court erred in ruling that CREI's deed of trust securing the construction loan had priority over Steiny's mechanic's lien. Again, we affirm.

        A. Trial Court Rulings Regarding Fraud Allegations Concerning 11/2/1989 Letter
        In its third and fourth amended complaints Steiny alleged fraudulent conduct by CREI involving a November 2, 1989, letter signed by CREI vice president John Sertich and sent to FCA with copies to all contractors on the Fillmore Center Project. ⁹ The letter stated as follows: "Re: Evidence of Financing . . . [¶] This letter serves as notice to you, the contractors and suppliers that the default has been cured on the Fillmore Center Project and that the undersigned is making advances under the construction loan pursuant to the terms of the Second Amended and Restated Construction Loan Agreement dated October 31, 1989 between ourselves and Fillmore Center Associates. [¶] As of this date, $27,819,751.24 has been funded from the $95,000,000. Construction Loan."
        Steiny alleged that by virtue of having provided this information to it and other contractors, a continuing duty was imposed on CREI to thereafter keep them informed of the project's financial situation. Steiny alleged that CREI acted fraudulently by failing, seven months later, to inform the contractors of changed financial circumstances, namely, that CREI had informed FCA that it was "technically" in default on the construction loan because of cost overruns and lower than expected revenues. Steiny alleged that it had relied to its detriment on the November 2, 1989, letter because it continued working on the project without taking "steps to protect [its] own financial interests."
        The trial court sustained with leave to amend CREI's demurrer to the allegations in the third amended complaint, holding that "all statements contained [in the 11/2/89 letter] were true at the time they were made . . . ," ¹⁰ and "CREI had no continuing duty to disclose to contractors working at the Fillmore Center Project . . . developments or additional information regarding statements contained in the November 2, 1989 letter, project financing or CREI's loan to FCA." In granting a motion to strike similar allegations in Steiny's fourth amended complaint and denying a motion for reconsideration, the trial court stated: "The . . . November 2nd, 1989 letter gave rise to no duty, whether or not it was privy of contract between CREI and Steiny to keep Steiny informed of circumstances as they developed and changed later on, taking into account all of the facts pleaded by Steiny . . . as true."
        Steiny contends the trial court rulings were erroneous because they disregarded the assertedly well-established legal principle that one who makes a true statement, and who subsequently acquires information rendering the previously made statement false, has a duty to disclose the new information to anyone still acting on the previously provided information. Cross-appellant cites several cases for the asserted proposition. These, however, are not persuasive authorities for the present situation.
        First, as we will explain in more detail below, none of the cases cited by Steiny involve factual situations similar to the one before us. By contrast, Nibbi Brothers, Inc. v. Home Federal Sav. & Loan Assn. (1988) 205 Cal.App.3d 1415 (Nibbi), is factually comparable and therefore more persuasive. In Nibbi, a general contractor who had supplied labor and materials on a construction project, filed a complaint against the construction lender, alleging negligent misrepresentation. Plaintiff alleged that after having filed a notice of default on the construction loan, the lender, at Nibbi's request, assured Nibbi that it would be paid for work performed. The action was dismissed after a demurrer was sustained without leave to amend.         In affirming the dismissal, the court held that plaintiff had failed to state a cause of action for fraud because the complaint did not allege that the lender had made any actionable representation of fact. Rather, Nibbi was given "no more than a generally worded assurance that it would be paid" (id. at p. 1425) in the future by the developer, which amounted only to a "nonactionable expression of opinion." (Id. at p.1423.) These assurances encouraged Nibbi to provide the work, but "refrain[ed] from making promises or factual representations" thereby failing to support a valid cause of action. (Id. at pp. 1425-1426.) Thus, whereas the court in Nibbi allowed that a duty of disclosure can arise when a statement of fact is misleading when presented without additional or qualifying information, the court held that a general assurance that a subcontractor would be paid did not give rise to such a duty. (Ibid.)
        The court further held that under section 3264 ¹¹ the lender had no duty to disclose facts to the plaintiff regarding the developer's default. Section 3264 abolished a supplier's or laborer's right to impose an equitable lien on construction loan funds, leaving only the remedies available by way of mechanic's lien or stop notice laws and thereby "impliedly negat[ing] any duty that the lender may owe to the supplier." (Nibbi, supra, 205 Cal.App.3d at p. 1424.) "If the lender's duties to the supplier survived section 3264, the supplier would retain the right to bring an action against the lender based on its activities in establishing and administering the construction loan fund. This is precisely the kind of right that section 3264 was intended to abolish." (Ibid.)
        In light of Nibbi we examine the representations made by CREI in the November 2, 1989, letter. If the "generalized assurance" in Nibbi that plaintiff would be paid for its work did not constitute a representation of fact sufficient to impose a further duty of disclosure of then known adverse facts, then surely the representations to Steiny of present and accurate facts regarding the state of project financing at the present point in time imposed no continuing duty to apprise it of a different financial state in the future. Let us consider, exactly, what the letter communicated: It informed Steiny and others that (1) the default on the Fillmore Center Project was cured; (2) that CREI was making advances under the construction loan as agreed to in the second amended and restated construction loan agreement dated October 31, 1989; and (3) that as of the letter's date approximately $28 million of the $95 million loan had been funded. Let us also consider what the letter did not communicate: It did not provide assurances or information regarding payments to the suppliers and laborers then or at any time in the future, nor did it promise to apprise recipients of future adverse financial developments. Absent such representations, under Nibbi no continuing duty can be imposed without running afoul of section 3264. ¹²
        The cases relied upon by Steiny do not compel a different conclusion in this case. None stands for the proposition that a construction lender has a continuing duty to update laborers and suppliers of materials concerning changed circumstances with regard to earlier truthful assertions. While each case concluded that the defendant had a duty of disclosure, compelling factors were present in each that are not present here. The cases fall into three categories, with some falling into more than one. Some of the cases relied upon by plaintiff involve representations made by fiduciaries, some involve representations made to induce the closing of a real estate or business deal, which would not have closed had earlier provided information been corrected or amended, and some involve representations that were false when made.
        In Lacher v. Superior Court (1991) 230 Cal.App.3d 1038 (Lacher), a demurrer was sustained without leave to amend to plaintiffs' fraud and negligent misrepresentation causes of action. Plaintiffs alleged they were fraudulently induced to support a development near their home based upon the developer's representation that the view from their home would not be obstructed. The court reversed, holding that a party who undertakes to speak must do so fully and truthfully. Therefore, the developer who undertook to tell the plaintiffs about the development project had a duty to do so truthfully. Because the plaintiffs in Lacher alleged that the developer's representations were false when made, they had stated a cause of action. (Id. at p. 1045.) Likewise, Wilkenson v. Linnecke (1967) 251 Cal.App.2d 291 involved a false promise made by defendant to plaintiff. There, the defendant promised plaintiff he would perfect an assignment of the proceeds of an estate which had been provided as security for a loan made by the plaintiff. Defendant never perfected the assignment and plaintiff sued for fraud. The court affirmed judgment for plaintiff finding the promise by defendant to have been false when made. (Id. at pp. 292-293.) These cases differ significantly from the matter before us, which concerns statements that were true when made, and Steiny's assertion that CREI had a duty to provide information almost a year later regarding changed circumstances.
        In Stevens v. Marco (1956) 147 Cal.App.2d 357 (Stevens), and Black v. Shearson, Hammill & Co. (1968) 266 Cal.App.2d 362 (Black), continuing duties of disclosure were found to exist where the plaintiffs and defendants were in a fiduciary relationship. In Stevens, plaintiff and defendant were joint venturers in the development and patent of an invention. Defendant was also the licensee of plaintiff's patent rights. Defendant misrepresented to plaintiff that the invention was unpatentable, obtained a release from the plaintiff, and eventually obtained a patent without the plaintiff's knowledge. Defendant admitted that at the time he obtained the release he no longer believed the invention to be unpatentable. The court held that because of their business and fiduciary relationship, the defendant was required to disclose the changed circumstances to plaintiff. (Stevens, supra, 147 Cal.App.2d at pp. 372-376, 378.)
        In Black, the defendant stockbroker urged his clients to invest in a company on which he sat as a board member by representing the company's expected profitable future. It was clear from the evidence that the representations made to induce the investments were false at the time the clients invested, but the evidence also suggested that the representations were also false when made. As noted by Steiny, the court in Black commented that "irrespective of whether [defendant] knew that each of the statements was false when made, the evidence is clear that he permitted them to stand after he learned the truth and before respondents relied on them." (Black, supra, 266 Cal.App.2d at p. 367.) This statement, read in context, was made to support the court's finding of scienter. It held that defendant, who owed a fiduciary duty to his clients, engaged in a continuing course of fraudulent conduct. (Ibid.)
        The last three cases relied upon by Steiny, Southern Cal. etc. Assemblies of God v. Shepherd of Hills etc. Church (1978) 77 Cal.App.3d 951, Koch v. Williams (1961) 193 Cal.App.2d 537, and Kretzschmar v. Janss Investment Co. (1932) 126 Cal.App. 698, involved representations made by sellers of real property to prospective buyers during the time the real estate transaction was pending, and which were relied upon by the buyers in deciding to enter into the agreement and in proceeding to consummation of the purchase. In each case, the defendant's own conduct rendered the previously represented fact to no longer be true, yet the changed circumstance, brought about by defendant, was not communicated to the plaintiff. (Southern Cal. etc. Assemblies of God v. Shepherd of Hills etc. Church, supra, 77 Cal.App.3d 951 [while sale was pending and after having represented that access would always be available, seller eliminated access right across neighboring property without informing plaintiff]; Koch v. Williams, supra, 193 Cal.App.2d 537 [seller told buyer no easement existed across property, then granted an easement prior to close of escrow without informing buyer]; Kretzschmar v. Janss Investment Co., supra, 126 Cal.App. 698 [seller conveyed a right of way across lot while sale was pending without informing buyer].) The relationship and circumstances justifying the courts' holdings in these cases are not present in the matter before us. Steiny and CREI were not involved in a soon to be consummated business relationship, nor were they in a fiduciary relationship.
        Finally, we address Steiny's contention that it was in privity of contract with CREI, by virtue of which CREI was subject to a continuing duty of disclosure. The contract in question, entitled "Contractor's Consent and Certification," was executed on October 26, 1989, by representatives of CREI and Steiny. The agreement provided that if at some time in the future there was a default under the loan agreement and if CREI so requested, Steiny would continue performance under the construction contract and CREI would pay it. First, as acknowledged by Steiny, CREI never invoked its rights under the agreement, so that the potential relationship between the two parties never came to pass. Second, no authority has been provided to suggest that had CREI been placed in the owner position, with Steiny as its contractor, CREI would have owed a continuing duty to apprise Steiny of its financial condition. To impose such a duty would be unreasonable and without legal basis.
        For these reasons we conclude the trial court acted properly in sustaining CREI's demurrers and granting it motions to strike fraud allegations involving the November 2, 1989, letter.

        B. Trial Court Rulings Regarding Lien Priority
        Steiny and CREI each asserted lien priority over the other, Steiny by virtue of its mechanic's lien and CREI by virtue of its first deed of trust. On the motions for summary adjudication, the trial court found that CREI had priority ¹³ and sustained CREI's demurrers to lien priority allegations made by Steiny in subsequent pleadings. Steiny asserts the trial court erred because: (1) CREI lost the priority of its first deed of trust by canceling the original construction loan secured by the first deed of trust and issuing a new loan after Steiny had filed its mechanic's lien; (2) CREI allowed FCA to borrow, repay and reborrow, which was not required by the loan agreement; and (3) CREI made nonobligatory advances for purposes not subject to lien priority.
        The following facts are relevant to this portion of the cross-appeal: In July 1987 CREI agreed to extend a $95 million construction loan to FCA. The loan was secured by a first deed of trust on the subject property, which was recorded on July 16, 1987, prior to the start of construction. In the first year of construction, CREI advanced $14,748,221.18 in loan funds, but on August 29, 1988, because of construction cost overruns, CREI declared a default. From that point until May 1989 CREI advanced almost $50 million in addition funds for construction. These funds, referred to by the parties as "interim advances" were secured by the first deed of trust and by guarantees from FCA's parent corporation, Integrated Resources, Inc. (Integrated), with the guarantees secured by letters of credit and cash collateral. In June 1989, Integrated announced that it would cease making debt service payments, whereupon CREI drew on the letters of credit and called in the cash collateral to repay the full $50 million in interim advances, leaving only the nearly $15 million of advanced funds as the full amount owing.
        Subsequently, in October 1989, the parties executed a second amended and restated construction loan agreement in order to cure FCA's default. The loan documents provided for the restructuring of the loan; the loan was evidenced by an amended and restated promissory note secured by the first deed of trust. Under the restructured loan CREI resumed making advances on the project, eventually disbursing an additional $79.5 million.
        By November 1990, when just over $700,000 of the $95 million loan had been disbursed, it became apparent that additional financing would be needed if the construction was to be completed. In December 1990 CREI served a notice of default on the first deed of trust and in January 1991 it agreed to give FCA a $13.5 million "bridge loan" secured by a third deed of trust. In May 1991, when it became clear FCA could not obtain the additional financing needed for repayment of the bridge loan and completion of the project, CREI recorded a notice of default on the bridge loan. In November 1991 FCA filed for bankruptcy. Under the provisions of the bankruptcy plan of reorganization, Steiny and other mechanic's lien claimants retained the right to litigate "the validity, extent and priority of [their mechanic's liens] as against the liens of CREI's pre-petition deeds of trust . . . ."

                1. Effect of Second Amended and Restated Construction Loan Agreement
        Steiny contends that the original loan secured by a first deed of trust was canceled in July 1989 with a new loan made in November 1989. This new loan, Steiny asserts, does not have priority superior to its mechanic's lien. In ruling on the parties' cross-motions for summary adjudication of the lien priority question, the trial court found that the loan was restructured and did not lose priority under the first deed of trust.
        As support for its contention that CREI did lose priority, Steiny refers to deposition testimony by CREI vice president John Sertich, who, in explaining the history of lending on the project, stated that upon FCA's default in July 1989 the bank had "no commitment" on the original loan. He repeated this comment in various forms throughout his testimony, explaining that at that point the bank had advanced approximately $15 million, and had no commitment to loan any more because of FCA's default. Steiny also relies on bank documents from that time period which were amended to reflect the $15 million as the amount loaned, with no further amount required for disbursal. It insists that these statements and notations are admissions by CREI and demonstrate its intention to terminate the first loan and to make an entirely new loan in November 1989.
        We review de novo the evidence presented in support of and opposition to the motions for summary adjudication to determine whether there exists a triable issue of material fact, or whether, there being none, the moving party is entitled to judgment as a matter of law. (Saldana v. Globe-Weis Systems Co. (1991) 233 Cal.App.3d 1505, 1514.) Our independent review fully supports the trial court's conclusion that CREI maintained its priority position. When read in context, the deposition testimony by Sertich indicates only that the bank was not required, under the terms of the loan agreement, to advance additional sums to FCA when it was in default. As such, the bank was not "committed," i.e., contractually bound, to loaning any additional sums. This interpretation not only makes sense in context, it reflects the actual contractual language which conditions the lender's obligation to make loan disbursements on the absence of default by the borrower. Also, the second amended and restated loan document itself establishes that the loan was restructured after FCA's default in order to allow the default to be cured. It states: "The Borrower has requested that the Lender agree to restructure the Loan so as to enable the Borrower to cure the Event of Default and complete the construction of the Improvements at its increased actual cost. . . . [¶] The Borrower and the Lender now desire to amend and restate the Prior Loan Agreement in accordance with the terms hereof." ¹⁴

        Effect of Interim Advances on CREI's Lien Priority
        Steiny contends that, at a minimum, its mechanic's lien is senior in priority to $50 million of CREI's loan funds, representing the amount of the loaned and repaid interim advances. Steiny reasons as follows: Taking into account the $95 million advanced under the construction loan agreement and the $50 million in interim advances, CREI made advances totaling $145 million on a $95 million loan. Because under the loan agreement CREI was only obligated to loan $95 million, the $50 million interim advances constituted nonobligatory advances exceeding the original commitment and are therefore not subject to lien priority under section 3136. ¹⁵
        Steiny's conclusion rests upon assumptions which do not withstand scrutiny. First, it asserts that CREI was not required under the loan agreement to accept prepayment of the loan amount, or to re-lend $50 million after accepting repayment of that sum from Integrated, so that the second loan of that amount can only be seen as nonobligatory. Also, it points to clauses in the agreement providing that the lender "shall not be obligated to make Advances in an aggregate amount" greater than $95 million, again suggesting that the additional sums loaned after repayment of the interim advances were nonobligatory advances. What Steiny fails to explain or support with persuasive authority is its assumption that advances which at no point in time exceeded the amount of the lender's $95 million commitment can be viewed as exceeding "the original obligatory commitment of the lender as shown in such mortgage or deed of trust." (§ 3136.) While it is true that under the loan agreement CREI was not required to allow prepayment and to re-lend up to the $95 million commitment, it was permitted to do so as long as its total advances did not exceed the commitment. As we have seen, they never did. ¹⁶

        2. Interim Advances Were Utilized to Pay "Costs of the Work of Improvement"
        Finally, Steiny claims to have senior lien priority as to advances made after FCA's default in 1989, because the original construction loan agreement did not require CREI to resume lending to FCA after the default was cured. Thus, it claims, these subsequent advances were nonobligatory. Steiny concedes that under the provisions of section 3136 (see fn. 15, ante) even these nonobligatory advances retain their priority status if they were used "in payment of costs of the work of improvement." It contends, however, that a substantial portion of these advances (in the neighborhood of $10 million) was used to pay project expenses that were not "costs of the work of improvement." Specifically, it alleges these amounts were used to pay interest, insurance, legal and accounting fees, property management fees, marketing fees, title company fees, permit fees, taxes, inspection fees, job administration expenses and owner items. The question we must answer is whether these and other related fees are "payment of costs of the work of improvement" within the meaning of section 3136. No case of which we are aware has addressed this exact issue.
        Though we have earlier quoted section 3136 in a footnote, we set it out again here for ease of reference: "A mortgage or deed of trust which would be prior to the [mechanic's] liens provided for in this chapter to the extent of obligatory advances made thereunder in accordance with the commitment of the lender shall also be prior to the liens provided for in this chapter as to any other advances, secured by such mortgage or deed of trust, which are used in payment of any claim of lien which is recorded at the date or dates of such other advances and thereafter in payment of costs of the work of improvement. Such priority shall not, however, exceed the original obligatory commitment of the lender as shown in such mortgage or deed of trust." (Italics added.)
        Steiny suggests (without much fervor) that the term "costs of the work of improvement" must be understood to encompass only those categories of costs for which a mechanic's lien could be recorded, that is, essentially, costs of labor, materials and equipment. It finds support for this claim in the fact that the same sentence contains a reference to "payment of any claim of lien" and provides that these payments also maintain priority, even if made from nonobligatory advances. We reject Steiny's interpretation for three reasons.
        First, it asks us to read a qualifying term into the statute that is not clear from the face of the provision. " 'In construing the statutory provisions a court is not authorized to insert qualifying provisions not included and may not rewrite the statute to conform to an assumed intention which does not appear from its language.' [Citations.]" (Napa Valley Wine Train, Inc. v. Public Utilities Com. (1990) 50 Cal.3d 370, 381.) The Legislature did not qualify the phrase in question by limiting costs to those that could be recovered by way of mechanic's lien. We are not at liberty to insert the limitation urged by Steiny.
        Second, we find support for a broader reading of the subject phrase in the statutory scheme governing liens on works of improvement. The mechanic's liens laws, including section 3136, comprise a portion of a broader scheme governing liens on works of improvement. (§§ 3082-3267.) Contained within that framework is section 3106 which defines "work of improvement" as follows: " 'Work of improvement' includes but is not restricted to the construction, alteration, addition to, or repair, in whole or in part, of any building, wharf, bridge, ditch, flume, aqueduct, well, tunnel, fence, machinery, railroad, or road, the seeding, sodding, or planting of any lot or tract of land for landscaping purposes, the filling, leveling, or grading of any lot or tract of land, the demolition of buildings, and the removal of buildings. Except as otherwise provided in this title, 'work of improvement' means the entire structure or scheme of improvement as a whole." (Italics added.) The "entire scheme of improvement as a whole" broadens the definition, to make clear that a work of improvement is to be viewed expansively for purposes of the title. The ordinary meaning of "entire scheme of improvement as a whole" suggests that everything related to improvement, from inception to termination of a project must be considered. We think it beyond real dispute that project financing, and the many fees and costs associated with undertaking a large construction project, what are often referred to as "soft" or "indirect" costs, ¹⁷ are an integral and legitimate part of the entire scheme of improvement as a whole. (See Mortgage Guar. Co. v. Hammond Lbr. Co. (1936) 13 Cal.App.2d 538, 544.) We hold that the payment of these costs falls within the meaning of section 3136.
        We reach this conclusion for one final reason. Again, the holding makes sense in the practical realm of the construction industry. Lenders lend so owners can build. It is a foregone conclusion that there will be significant soft costs associated with both the issuance of the loan and the development of the project. It is also reasonably foreseeable that large (and even small) projects will sometimes experience financial difficulties which may result in default, then cure and loan reinstatement. If lenders know that under section 3136 they will not have priority for any subsequent amounts advanced to pay soft costs, they will, quite possibly, decline to make those advances, thereby exacerbating the project's financial instability. In short, it is good business for all concerned that these soft costs be paid, so that projects can be completed.
        In conclusion, we find no error in the trial court's rulings raised in Steiny's cross-appeal, and affirm. CREI to recover costs on cross-appeal.

        III. STEINY'S APPEAL FROM ORDER DENYING ATTORNEY FEES*
        Steiny appeals the trial court's posttrial order denying its request for an award of attorney fees by reason of CREI's asserted failure to admit five separate categories of requests for admission propounded during pretrial discovery. Steiny contends the trial court did not "properly evaluate Steiny's motion for attorney fees" in that it did not follow the provisions of Code of Civil Procedure section 2033, subdivision (o), frequently basing its conclusions on whether CREI's responses "were justified by trial tactics" and on whether the requests for admissions "involved a core issue in the case." Steiny further asserts the trial court ignored the statutory requirement that CREI make reasonable inquiry and admit so much of the matter involved in the request as is true. Lastly, Steiny asserts the court erred in not relating its ruling to the specific exceptions set forth in section 2033, subdivision (o).

A. The Standard of Review         In determining whether the trial court erred in denying attorney fees as authorized by Code of Civil Procedure section 2033, subdivision (o), we apply the abuse of discretion standard. Under this standard, we will not disturb discretionary trial court rulings unless a showing has been made of "a clear case of abuse" and "a miscarriage of justice." (Blank v. Kirwan (1985) 39 Cal.3d 311, 331; Denham v. Superior Court (1970) 2 Cal.3d 557, 566.) Steiny contends, however, that because the court's rulings rested on errors of law, this court may independently review the legal basis relied on by the trial court, citing Bussey v. Affleck (1990) 225 Cal.App.3d 1162, 1165. The court in Bussey, after acknowledging an award of attorney fees is within the sound discretion of the trial court and absent a manifest abuse of discretion the determination of the trial court will not be disturbed, holds that independent review is appropriate where the trial court determined that certain disbursements claimed as costs could not be awarded "as a matter of law." In other words, the reviewing court may independently assess the trial court's decision where it did not exercise its discretion and based its conclusion solely on the understanding that the law did not permit the award of certain categories of claimed costs. (Id. at p. 1165.) Here, however, the trial court evaluated the applicability of Code of Civil Procedure section 2033, subdivision (o), exercised its discretion and predicated its ruling upon a finding that there were good reasons for CREI's failure to admit. We apply the abuse of discretion standard in reviewing the decision of the trial court denying Steiny's request for attorney fees.

B. Discussion
        1. The Legal Principles to be Applied
        Code of Civil Procedure section 2033, subdivision (o) provides: "If a party fails to admit . . . the truth of any matter when requested to do so under this section, and if the party requesting that admission thereafter proves . . . the truth of that matter, the party requesting the admission may move the court for an order requiring the party to whom the request was directed to pay the reasonable expenses incurred in making that proof, including reasonable attorney's fees." Thus, the moving party has the burden of showing (1) that it sought admissions regarding certain facts, (2) that the responding party failed to admit those facts, (3) that the requesting party thereafter proved those facts at trial, and (4) that the requesting party incurred attorney fees and expenses related to the proof of those facts. (Garcia v. Hyster Co. (1994) 28 Cal.App.4th 724, 735-737.)
        After establishing the general rule the Legislature carved out several exceptions to the mandated award of attorney fees, stating: "The court shall make this order unless it finds that (1) an objection to the request was sustained or a response to it was waived . . . , (2) the admission sought was of no substantial importance, (3) the party failing to make the admission had reasonable ground to believe that that party would prevail on the matter, or (4) there was other good reason for the failure to admit." (Code Civ. Proc., § 2033, subd. (o), italics added.)
        In Brooks v. American Broadcasting Co. (1986) 179 Cal.App.3d 500, 509 (Brooks), this district examined the factors to be considered in determining whether a request for admission is " 'of substantial importance.' " We held, consistent with prior federal court authority, that a request for admission had substantial importance when the matter requested for admission was "central to disposition of the case." (Id. at p. 509.) We relied upon Campbell v. Spectrum Automation Co. (6th Cir. 1979) 601 F.2d 246, 253 ["The admission sought . . . was clearly of substantial importance since it was dispositive of [plaintiff's] claim . . . ."] and Bradshaw v. Thompson (6th Cir. 1972) 454 F.2d 75, 81; Boyle v. Leviton Mfg. Co. (S.D.Ind. 1981) 94 F.R.D. 33, 36 ["[T]he requested admissions were dispositive of the lawsuit as indicated by the summary judgment."]. (Id. at p. 509.) We further stated that "[a]lthough circumstances may occur in some future case where a request for admission might be of substantial importance even though it is not at least partially outcome determinative, as a general rule a request for admission should have at least some direct relationship to one of the central issues in the case, i.e., an issue which, if not proven, would have altered the results of the case." (Id. at p. 509, fn. omitted.) We thus determine the issue of "substantial importance" in light of the impact the matter sought to be admitted has upon the result or outcome of the case.
        In Brooks we likewise analyzed the factors to be reviewed by the court in determining whether there was a "good reason" for the denial. Without attempting to absolutely define the limit of the relevant factors, we stated the court should consider (1) whether at the time the request was denied the party making the denial may have reasonably viewed the subject of the requested admission to have been relatively trivial in light of the central issues as then developed by the parties, (2) the degree to which the party making the denial had attempted in good faith to reach a reasonable resolution of the matters involved with opposing counsel, (3) whether the denial should be reconsidered in light of subsequently acquired facts, and (4) whether at the time the denial was made the party making it held a reasonably entertained good faith belief that the party would prevail on that issue at trial. (179 Cal.App.3d at pp. 509-511.)
        We distill from our holding in Brooks the principle that a responding party should not be sanctioned where that party had some reasonable legal or factual basis for contesting the issue, even though the request went to the very heart of the action, was hotly contested, or difficult to resolve.

        2. The Applicability of Code of Civil Procedure Section 2033, Subdivision (o), to the Five Categories of Issues Raised by the Requests for Admissions
        CREI concedes that the predicate requirements for an award of attorney fees exist: that admissions were sought which responding party failed to admit and which were thereafter proven at trial resulting in attorney fees and costs. It argues, however, that the trial court did not err because its failure to admit falls within the exceptions to the rule. Thus, in reviewing the trial court's denial of monetary sanctions for an abuse of discretion, we will consider separately each of the five categories for requests for admissions that CREI failed to admit in light of the statutory exceptions.

                a. CREI's Awareness of Familian
        Steiny requested that CREI, its agents, and attorneys admit "awareness" on or before January 22, 1991, of Familian, supra, 213 Cal.App.3d 681 (request for admission Nos. 43 to 45). CREI initially objected on the grounds that the answer would violate attorney-client privilege and the work product doctrine. Following the court's order compelling further responses, CREI reasserted the privilege and filed a declaration signed by its vice-president, Patricia Theophilos (Theophilos), establishing the factual basis upon which the privilege was claimed. The trial court, in ruling upon Steiny's request for sanctions, referred to the claim of attorney-client privilege and declined to award any fees based upon its finding that CREI had been reasonable in its response.
        Steiny argues that "[t]he Trial Court's concern about CREI's attorney-client privilege objection was misplaced," because at trial Theophilos and her attorneys admitted knowing about Familian on or before January 22, 1991, concluding that CREI "simply chose to delay waiving [the] attorney-client privilege until trial, thereby causing Steiny to incur the cost of proof at trial and substantial pre-trial expense as well." This argument, however, ignores the fact that CREI had a reasonable basis for asserting the attorney-client privilege at the time it was claimed in its reply to the requests for admissions. It was only later as trial approached, when the court ruled that the crime-fraud exception to the attorney-client privilege applied, that CREI made a tactical decision to present an "advice of counsel" defense and to testify about communications with its attorneys on the subject of Familian.
        There is no question that CREI's knowledge of the Familian holding was of substantial importance to the outcome of the case. The fact that under Familian CREI would not be able to retain the interest it had paid itself was directly relevant to establishing a duty to disclose this fact when representing the "reach" of the stop notice. Indeed, the jury found that as a result of the nondisclosure CREI had committed fraud.
        CREI's knowledge of Familian and its legal effect was obtained through communications with its attorneys, thus falling directly within the protection of the attorney-client privilege. Furthermore, the evaluation of the validity of the case was peculiarly within the ambit of legal interpretation by the attorneys and thus their work product. Certainly CREI, on the advice of counsel, could and did assert at trial the unsoundness of the Familian holding [which position we have confirmed by this opinion]. Because the factual issue of knowledge of the holding is inextricably bound to the legal issue of the validity of Familian, we conclude the invocation of both privileges was proper. Thus, at the time the response was made the invocation of the privilege was appropriate and was a good reason for the refusal to admit within the meaning of Code of Civil Procedure section 2033, subdivision (o). (Brooks, supra, 179 Cal.App.3d at pp. 509-510.)
        We hold the court did not abuse its discretion in refusing to grant monetary sanctions by way of attorney fees for CREI's properly claimed attorney-client and work product privileges with respect to the subject matter of the request for admission. ¹⁸

                b. Intent to Induce Release of Bonded Stop Notice by the Letter of January 22, 1991
        Steiny propounded to CREI the following request for admission: "NO. 41: [¶] Do you admit that the THEOPHILOS LETTER was intended by you to induce or influence Steiny to release the bonded stop notice that it had served on you in December 1990? (For purposes of these Requests for Admission, the 'THEOPHILOS LETTER' means the January 22, 1991, letter signed by CREI Vice President Patricia Theophilos and attached as Exhibit B.)" ¹⁹ In response CREI denied the request and stated: "The Theophilos Letter was provided at the request of the borrower."
        In ruling upon the motion the court stated: "True. Miss Theophilos I don't think ever admitted what she intended except to comply with a request made by Steiny as a condition, although you are correct that -- what's his name? [¶] [Counsel]: Mr. Gantz, Your Honor. [¶] The Court: Mr. Gantz did say, and I remembered that, that he understood that it would be relied upon by Steiny in deciding whether to release the bonded stop notice. The question was not put to Mr. Gantz. [¶] Moreover, this question is wound so tight it's ready to blow up. If I were getting a case ready for trial and someone asked the client what -- if not the $64 question, at least the $32 question, I believe my response would have been the same, particularly when it was answered relying in part on the signing on advice of counsel. [¶] So, I am not going to allow any -- I don't find the response unreasonable, I am not going to allow any fees in pursuit of it at trial."
        Although not entirely clear, Steiny claims there were several flaws in the trial court's reasoning upon which the denial of sanctions was based. Steiny faults the trial court for focusing on whether Theophilos admitted at trial that she intended to induce Steiny's reliance. Steiny argues that CREI's intentions were within its knowledge; "[i]ts intentions were admitted at trial by its agent and the intentions were proven to the jury." At best these arguments simply set forth the required basis for an award of sanctions and totally avoid analyzing whether CREI had a reasonable ground to believe it would prevail on the cause of action alleging fraud and, specifically on the issue of CREI's intent. This issue was vigorously disputed at trial and was the subject of extensive and conflicting testimony. Theophilos testified she signed the letter because it had been requested by Steiny in connection with the release of the stop notice, and further that she was unqualifiedly advised by counsel to sign it. We agree with Steiny that because an issue is "hotly contested" or that it "cuts too close to the quick of the case," the responding party is not excused from admitting the request. Where there is, however, some reasonable basis for contesting the issue in question sanctions can be avoided. (Brooks, supra, 179 Cal.App.3d at p. 511.)
        We conclude from the statement of the trial court that it found the response to be reasonable and answered in reliance upon the advice of counsel. Holding the statement of the trial court in ruling on the motion to the scrutiny of an abuse of discretion standard, we cannot say the trial court exceeded the bounds of reason.

                c. The Accuracy of the Numainville Declaration and Facts Contained Therein
        By request for admission Nos. 57 and 58, CREI was requested to admit the accuracy of the breakdown of advances from the construction loan by cost category and time period set out in a declaration, including exhibits, provided by FCA's chief financial officer Thomas Numainville, and that the same declaration was accurate in stating that the cost breakdown therein contained could have been prepared on the basis of information contained in FCA's monthly draw request to CREI.
        In its initial response, CREI objected to the request on the grounds that it called for speculation as to the amounts and categories determined by Numainville as set forth in his declaration. CREI further answered that, subject to the objection and to the best of its present belief, "the amounts set forth in the categories identified in the Numainville Declaration (other than the interest amounts) appear to be correct." Following the granting of the motion to compel further answers to these requests for admission, CREI, in its supplemental response, denied the request stating that after reasonable inquiry, it lacked sufficient information and belief upon which it could either admit or deny the request.
        The trial court denied the request for sanctions with respect to these two interrogatories reasoning that because the question went to the legitimacy of the cost breakdown the response was not unreasonable stating: "[I]t seems to me it asks whether someone else, to wit, Mr. Numainville, is capable of preparing a declaration on the basis of information contained in the FCA, again not CREI, monthly draw requests. It's just not the kind of thing that CREI ought to have to admit. You are requesting from the wrong people."
        Steiny argues that it was within CREI's power to acknowledge the accuracy of Mr. Numainville's breakdowns because they were based upon the very same cost categories used in loan advance applications submitted to CREI every month by FCA. CREI counters that it did not have sufficient information and by making a reasonable investigation could not have obtained information "of how much of its various loan disbursements FCA had expended on each of the dozens of advances and categories of cost contained in the breakdown, and would have had to obtain an accounting of FCA's records to verify FCA's figures." In making this argument, CREI misconstrues the thrust of the request for admission. Steiny was not asking what FCA had "expended" but simply whether the advances made by CREI from its own construction loan fund were accurately set forth in the breakdowns contained in Mr. Numainville's declaration. This information is clearly within its knowledge as it presumptively has records showing disbursements made on the construction loan account including interest payments made to itself that were accruing during the construction period. The request for admission did not ask that CREI admit the accuracy of FCA's cost breakdowns but merely whether the summary prepared by Mr. Numainville accurately set forth advances from CREI's construction loan.
        That portion of the request relating to the accuracy of the interest paid to CREI to itself is clearly of substantial importance. This amount was directly relevant to establishing the representation made by CREI regarding the "reach" of the stop notice and thus was central to the disposition of the case. With respect to request for admission No. 57 we hold that the trial court erred in denying the request for sanctions since CREI was not asked to verify the accuracy in representations made to it by FCA, but simply asked to acknowledge the accuracy of the amounts set forth in the Numainville declaration as compared to the loan advances it had made.
        Likewise request for admission No. 58 inquired as to the accuracy of the Numainville declaration as compared to FCA's monthly draw request to CREI. Certainly CREI had the monthly draw request from FCA and could either admit or deny the accuracy as compared to those contained in the Numainville declaration. Again the information was within the knowledge of CREI and the request for admission could have been either directly admitted or denied.
        The question remains, however, whether the fact sought to be admitted was of substantial importance within the meaning of Code of Civil Procedure section 2033, subdivision (o). Whether the cost breakdown contained in Numainville's declaration could have been prepared by reference to FCA's records is certainly not a fact that would have altered the results or outcome of the case. The trial court did not err in refusing sanctions as to request for admission No. 58.

                d. The Genuineness of the Letter of May 23, 1990, With the Attached Report, and its Status as a Business Record
        CREI was asked by request for admission No. B22 to admit the genuineness of a report prepared by Project Management Associates (PMA), a consulting firm hired by CREI to monitor construction costs. The report dated May 23, 1990, disclosed that expected costs of completing the Fillmore Center project could be greater than the original budgeted amount. In a related request for admission [No. 74], CREI was asked whether the report together with the letter of transmittal of May 23, 1990, to Theophilos were business records within the meaning of Evidence Code sections 1270 et seq.
        CREI objected to request for admission No. 74 on the grounds that it called for a legal conclusion and denied the request on the basis that it had insufficient information to admit or deny because CREI had not "prepared" the document. Likewise, CREI objected to the request for admission relative to the genuineness of the report of May 23, 1990, prepared by PMA because it was not prepared by CREI and appeared to be an incomplete document. Further, CREI denied the request on the basis that after making reasonable inquiry, it lacked sufficient information upon which to admit or deny the request. On the basis that the letter had been prepared by someone else and not by Theophilos, the court denied sanctions for the denial of the request seeking to establish that the letter and its attachments were business records.
        Steiny argues, however, that the court overlooked the provisions of Code of Civil Procedure section 2033, subdivision (f)(1), that require that the "response shall be as complete and straightforward as the information reasonably available to the responding party permits." Thus CREI could have easily asked its agent about the genuineness of the document and either admitted or denied the request on that basis. CREI, on the other hand, contends the trial court correctly found it lacked the knowledge or ability to determine the requisite foundational elements contained in Evidence Code section 1271 and concludes that the request does not go to a matter that was "central to the disposition of the case."
        We hold that the court did not err in its refusal to award sanctions based upon CREI's refusal to admit that the May 23, 1990, letter and report were business records. First, as the court pointed out, there was ambiguity as to whose business record the request referred to. On its face it was not CREI's business record and thus the request for admission must be construed as inquiring as to its status as a business record of CREI's consultant PMA. CREI, not having prepared the record, would have no direct knowledge of the facts necessary to determine the applicability of the criteria established by Evidence Code section 1271. The question remains, however, whether the responding party had an obligation to make inquiry, obtain the information and thus answer the request directly by making an admission or denial.
        Code of Civil Procedure section 2033, subdivision (f)(1), requires that "[e]ach answer in the response shall be as complete and straightforward as the information reasonably available to the responding party permits." It is well established that requests for admissions need not be limited to matters within the responding party's personal knowledge. CREI was under a duty to make a reasonable investigation before responding to the request. (Chodos v. Superior Court (1963) 215 Cal.App.2d 318, 323; Cohen v. Superior Court (1976) 63 Cal.App.3d 184, 187.)
        The court, rather than focusing on CREI's duty to inquire and obtain facts necessary to respond to the request for admission simply found the response not to be unreasonable because the letter had been prepared by a third party. The request inquired as to whether the letter and attachments were business records. The establishment of this fact (status as business records) was only necessary to bring the documents within an exception to the hearsay rule and thus insure their admissibility at trial. The status of these documents as business records would not be determinative of the outcome of the case and thus is not of substantial importance. For this reason alone the court did not err in denying sanctions to request for admission No. 74.
        In the related request for admission No. B22, CREI was asked to admit the genuineness of the letter dated May 23, 1990, together with its attachments. CREI responded by objecting to the request on the grounds that the letter and its attachments were not prepared by CREI and further denied the request upon lack of information and belief following a reasonable inquiry. The trial court found the response was "not unreasonable," observing that "Miss Theophilos cannot say under oath that [the document is genuine] because it's not her letter [but was] prepared by someone else."
        A document is genuine if it is actually made or signed by the person who appears as the maker. (2 Witkin, Cal. Evidence (3d ed. 1986) Documentary Evidence, § 904, p. 870.) It would have been a simple matter for CREI to comply with its duty of inquiry and determine from its consultant PMA the facts necessary to establish the genuineness of the document. Thus CREI should not be excused from making a direct admission or denial predicated upon its asserted lack of knowledge. It had the obligation to inquire of its own consultant regarding the document's genuineness and based upon that inquiry could have easily determined the facts necessary to admit or deny the request for admission.
        The question remains, however, whether the facts contained in the document are of substantial importance to the case. The knowledge of CREI as to cost overruns in the project as of May 23, 1990, although material to the fraud issues in the case is certainly not determinative of its outcome. The court did not err in refusing sanctions as to request for admission No. B22.

                e. The Ability of FCA to Raise $7 Million to Cover Budget Overruns and Rental Income Underruns on August 6, 1990
        By request for admission No. 50 CREI was asked: "Do you admit that Fillmore Center Associates was unable to raise an additional $7 million to cover budget overruns and rental income underruns by August 6, 1990, for construction of the Fillmore Center Project?" In its response CREI initially objected on the grounds that the request was "vague, ambiguous and unintelligible." However, following the court's order requiring supplemental responses, CREI denied the request based upon lack of information and belief following reasonable inquiry.
        The trial court, in denying Steiny's request for attorney fees stated: "There, again, you are asking something, when you really analyze it, CREI really doesn't know. I am not saying they gave that excuse, it's an excuse I might have given, or the reason for an objection or refusal to answer, which is basically what this is. It says we don't know and deny it on that basis. [¶] And I think that's, broadly read, exactly what I've just said that they don't know."
        Steiny argues that CREI must have known of FCA's inability to raise an additional $7 million since it admitted that FCA did not provide the additional funding within the time deadline it had imposed. CREI, on the other hand, contends that such an argument makes an unsupported leap from CREI's admitted knowledge of its own demands to FCA to the conclusion that it had knowledge of the facts regarding FCA's ability or inability to raise $7 million of additional funding by a certain date. We agree with CREI. Although it might be inferred from FCA's failure to provide additional funding within the time limit imposed by CREI that it was unable to raise the requested funds, CREI has no obligation to draw such a conclusion. The trial court was correct, CREI could not confirm or deny a request relating to the ability of FCA in raising an additional $7 million simply because it had no knowledge of that fact.
        Furthermore, it would have been impracticable if not impossible for CREI to have made a reasonable inquiry of FCA regarding its ability to raise these funds because they were adverse parties in the case. This inquiry would have had to have been accomplished by way of further discovery on CREI's part which would have been unreasonable. Lastly, it is also difficult to conclude that FCA's ability to raise funds to cover a shortfall in the construction account as of August 1990 was of "substantial importance" that is, central to the disposition of the case. (Brooks, supra, 179 Cal.App.3d at pp. 509-510.) The trial court did not err in refusing sanctions with respect to request for admission No. 50.
        In conclusion, we reverse the trial court's ruling with respect to request for admission No. 57 and affirm as to all others. The matter is remanded for determination of attorney fees to be awarded under Code of Civil Procedure section 2033, subdivision (o). Each side to bear its own costs on this appeal.

[End of Part Not Certified for Publication]
IV. SUMMARY OF HOLDINGS         On CREI's appeal we reverse the judgment entered for Steiny. On Steiny's cross-appeal we affirm in all respects. CREI shall recover its costs on the appeal and cross-appeal. As to Steiny's appeal from the trial court's denial of attorney fees, we reverse as to request for admission No. 57 and affirm in all other respects. The matter is remanded to the trial court for a determination of the amount of attorney fees to be awarded Steiny under Code of Civil Procedure section 2033, subdivision (o). On this last appeal, each side shall bear its own costs.


We concur:
        CORRIGAN, Acting P. J.
        PARRILLI, J.


Trial Court:
        The Superior Court of San Francisco County

Trial Judge:
        Laurence D. Kay

Counsel for Plaintiff and
Appellant:
        Thelen, Marrin, Johnson & Bridges
        Stephen V. O'Neal
        Paul W. Berning

Counsel for Defendant and
Appellant:
        Howard, Rice, Nemerovski, Canady,
        Falk & Rabkin
        Jerome B. Falk, Jr.
        Therese M. Stewart
        Linda Q. Foy

Counsel for Amici Curiae on behalf
of California Bankers Association:
        California Bankers Association
        Christopher E. Chenoweth
        Shearman & Sterling
        Richard B. Kendall


* Pursuant to California Rules of Court, rules 976(b) and 976.1, this opinion is certified for publication with the exception of parts II and III.
¹  The other banks included Bank of Nova Scotia, Sumitomo Trust and Banking Company, Limited, Dai-Ichi Kangyo Bank, Limited, and Sanwa Bank, Ltd.
²  The sixth disbursement priority was to pay appropriately documented direct costs on the project.
³  At the time of trial a fourth amended complaint had been filed containing essentially the same allegations.
⁴  California's stop notice laws are contained in Civil Code sections 3156-3267. Unless otherwise specified, all further statutory references will be to the Civil Code.
⁵  Section 3166 states: "No assignment by the owner or contractor of construction loan funds, whether made before or after a stop notice or bonded stop notice is given to a construction lender, shall be held to take priority over the stop notice or bonded stop notice, and such assignment shall have no effect insofar as the rights of claimants who give the stop notice or bonded stop notice are concerned."
⁶  None of the cases relied upon by the Familian court and cited by respondent here considered the issue now before us. Calhoun v. Huntington Park First Sav. & Loan Assn. (1960) 186 Cal.App.2d 451 held that a construction lender may not invalidate the effect of service of a stop notice by thereafter transferring construction loan funds to other creditors or using them to advance their own interests. (Id. at pp. 459-460.) The case did not involve or discuss the effect of a stop notice on funds disbursed prior to its service. Rossman Mill & Lbr. Co. v. Fullerton S. & L. Assn. (1963) 221 Cal.App.2d 705 also did not discuss the propriety of pre-stop notice disbursements. It held that the lender and borrower could not set up a building fund to control disbursements according to their private agreement, thereby nullifying the stop notice provisions. (Id. at pp. 709-710.) Similarly, Miller v. Mountain View Sav. & L. Assn. (1965) 238 Cal.App.2d 644 and A-1 Door & Materials Co. v. Fresno Guar. Sav. & Loan Assn. (1964) 61 Cal.2d 728 (A-1 Door) did not hold that pre-stop notice disbursements could be recaptured to pay stop notice claimants. In A-1 Door the owners had assigned the loan fund to the lender, who agreed to use the fund to make periodic payments. After a substantial portion of the fund had been disbursed construction ceased. (Id. at p. 731.) The lender retained the unexpended funds and contended it had the right to apply those undisbursed funds to reduce the owner's debt or complete construction without regard to stop notice claims. (Id. at pp. 731-732.) The court held that once the stop notice claims were filed the lender was required to withhold from the undisbursed funds amounts sufficient to pay the claims. (Id. at p. 734.)
⁷  We do not fault the trial judge for his ruling. He was, of course, bound to follow the law as it existed at the time the issue was presented to him. We, however, are not constrained to follow an appellate decision which we consider to be poorly reasoned. (McCallum v. McCallum (1987) 190 Cal.App.3d 308, 315-316, fn. 4.)
* Part II of this opinion is not certified for publication. (See fn., ante)
⁸  Steiny's 16th cause of action was for unfair business practices in violation of Business and Professions Code section 17200. The trial court held that the same conduct which constituted fraud on the part of CREI also constituted unfair business practices. The court declined to award Steiny damages under the Business and Professions Code because the fraud damages awarded exceeded any restitutionary remedy under that section. Steiny has not appealed the trial court's findings with regard to unfair business practices except to the extent of damages that it contends should have been awarded. Because the trial court's only finding regarding unfair business practices was that CREI engaged in fraud premised on Familian, a finding we have reversed, we do not reach the question of the types of damages available under section 17200.
⁹ . Allegations regarding this letter were also contained in earlier pleadings. These earlier pleadings are not at issue here.
¹⁰  Steiny does not dispute that the statements in the letter were true at the time they were made.
¹¹          Section 3264 provides: "The rights of all persons furnishing labor, services, equipment, or materials for any work of improvement, with respect to any fund for payment of construction costs, are governed exclusively by Chapters 3 (commencing with Section 3156) and 4 (commencing with Section 3179) of this title, and no person may assert any legal or equitable right with respect to such fund, other than a right created by direct written contract between such person and the person holding the fund, except pursuant to the provisions of such chapters."
¹²  We also question Steiny's assertion of reasonable detrimental reliance on the letter. As an experienced contractor it surely would have been aware of the great potential for continued financial problems on a project already so plagued with difficulties and cost overruns and of the need to protect itself financially.
¹³  Notwithstanding its finding in favor of CREI on this issue the trial court denied the motion for summary adjudication pending resolution of Steiny's claim that CREI was equitably estopped from asserting priority because of fraudulent conduct under Familian and with respect to the 11/2/1989 letter. After trial the court found in favor of CREI on the estoppel issue. Steiny appeals the trial court's pretrial rulings with regard to priority.
¹⁴  Aside from the obvious meaning of Sertich's testimony and the parallel contractual language, it makes practical sense that the existing loan would be restructured rather than terminated in favor of a brand new loan that would stand in line behind other security interests on the property. The scenario suggested by Steiny would, when put into actual practice, precipitate quick declarations of default and foreclosures by the lender who did not want to lose its secured position. There would exist no incentive to work toward curing the default and finishing the project. Such an outcome would obviously not be in the best interest of any of the parties involved.
¹⁵  Section 3136 provides: "A mortgage or deed of trust which would be prior to the [mechanic's] liens provided for in this chapter to the extent of obligatory advances made thereunder in accordance with the commitment of the lender shall also be prior to the liens provided for in this chapter as to any other advances, secured by such mortgage or deed of trust, which are used in payment of any claim of lien which is recorded at the date or dates of such other advances and thereafter in payment of costs of the work of improvement. Such priority shall not, however, exceed the original obligatory commitment of the lender as shown in such mortgage or deed of trust."
¹⁶  Again, practical considerations similar to those discussed in footnote 15 weaken Steiny's argument considerably. It is in the best interest of all parties to a construction project-owners, lenders, and contractors/suppliers--to encourage flexibility in financing options, including allowing the owner to pay down the indebtedness or cure a default in order to again be able to draw advances. If lenders were required to subordinate renewed advances to other liens, they would have no incentive to loan additional funds, and troubled projects would have less chance of being completed.
¹⁷  Indirect costs can include, among other fees, architecture, engineering, legal, and accounting fees, financing fees, interest, building permit fees, property taxes, and inspection fees. Within FCA's construction budget, $47,312,000 was allocated for indirect costs. These costs were provided for in the loan fund.
* Part III of this opinion is not certified for publication. (See fn., ante)
¹⁸  Steiny asserts that the trial court excused CREI from responding to this request for admission "because a truthful response would have put CREI on the spot." This statement, however, mischaracterizes the court's actual reason for denying sanctions, that is on the basis of the claimed privilege.
¹⁹  This was the letter prepared in conjunction with the settlement between Steiny and CREI regarding Steiny's stop notice, in which CREI asserted that $717,000 remained in the construction loan fund but made no reference to previously disbursed interest payments. It was this letter upon which Steiny's fraud cause of action was predicated.