Coke Lumber & Manufacturing Co. v. First National Bank in Dallas
529 S.W.2d 612, 1975 Tex. App. LEXIS 3148 (1975)
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Rule of Law:
A lender's prior-filed deed of trust securing future advances maintains priority over a subsequently filed materialman's lien, even for funds advanced after the lender receives actual notice of the materialman's lien. A lender does not owe a trustee-like duty to material suppliers to ensure they are paid by the builder.
Facts:
- First National Bank in Dallas (Bank) extended loans to Goode Construction Company, Inc. (Goode) to build houses on seven lots.
- The loans were secured by two deeds of trust, filed on May 8 and June 7, 1973, which covered all seven lots and contained clauses securing all future advances the Bank might make to Goode.
- After the deeds of trust were filed, Coke Lumber & Manufacturing Company (Coke) supplied construction materials to Goode for the houses on credit.
- Goode failed to pay Coke for the materials, resulting in an unpaid balance of $4,409.07.
- On August 8, 1973, Coke filed an affidavit for a materialman's lien to secure its claim against the properties.
- On the same day, a representative from Coke telephoned a Bank officer, notified them of the filed lien, and requested that future loan payments be made jointly to Goode and Coke.
- The Bank declined Coke's request and subsequently advanced over $15,000 in additional funds directly to Goode under the original loan agreements.
- Goode ultimately defaulted on its loans, and the Bank foreclosed on all seven properties.
Procedural Posture:
- Coke Lumber & Manufacturing Company sued Goode Construction Company, Inc. and First National Bank in Dallas in a Texas trial court.
- The trial court, sitting without a jury, entered judgment for Coke against Goode Construction.
- The trial court denied any recovery for Coke against the First National Bank in Dallas.
- Coke Lumber & Manufacturing Company, as appellant, appealed the trial court's judgment in favor of the Bank to the Texas Court of Civil Appeals.
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Issue:
Does an interim construction lender, whose deed of trust securing future advances is filed before materials are supplied, have a duty to a materialman to withhold funds from a builder after receiving notice of the materialman's lien, or does the lender's lien maintain priority for subsequent advances?
Opinions:
Majority - Guittard, Justice
No. An interim lender does not have a duty to a materialman, and the lender's prior-filed deed of trust securing future advances maintains its priority for subsequent advances made even after notice of the materialman's lien. The court found no legal basis to impose the duty of a trustee upon the lender, as the lender's only obligation was to advance funds to the builder as agreed. Coke had notice of the Bank's superior lien and assumed the risk by extending credit to Goode; it was not justified in relying on the Bank to protect its interests. Under the established 'first in time, first in right' principle, the Bank's deeds of trust were filed before Coke delivered materials or filed its lien, giving the Bank's lien priority. The court held that actual notice of Coke's junior lien did not alter this priority, as actual notice confers no greater rights than the constructive notice provided by filing the lien. Finally, the court upheld the foreclosure sale, finding that a broad 'dragnet' clause in the deed of trust allowed the Bank to accelerate the debt and foreclose based on Goode's default on other obligations to the Bank.
Analysis:
This case solidifies the 'first in time, first in right' principle for deeds of trust with future advance clauses in the context of construction lending. It clarifies that a lender's priority is not jeopardized by making subsequent advances after gaining knowledge of a junior lien, thereby protecting the lender's security interest for the full, committed loan amount. The decision squarely places the risk of a builder's non-payment on material suppliers and subcontractors, compelling them to use self-protection measures like demanding cash on delivery or perfecting their own security interests rather than relying on the construction lender to police payments. This reinforces the contractual relationship between lender and borrower, shielding lenders from unsolicited duties to third parties.
