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 construction lender with a prior-recorded deed of trust securing future advances does not have a legal duty to a materialman to ensure the materialman is paid before advancing further funds to the builder, even after receiving actual notice of the materialman's unpaid claim and subordinate lien.
Facts:
- First National Bank in Dallas made two loans to Goode Construction Company, Inc. for building houses on seven lots, secured by two deeds of trust recorded in May and June 1973.
- The deeds of trust secured the initial loan amounts and any future advances the bank might make to the construction company.
- After the bank's deeds of trust were filed, Coke Lumber & Manufacturing Company supplied construction materials to Goode Construction for the houses.
- Goode Construction failed to pay Coke Lumber for a portion of the materials delivered.
- On August 8, 1973, Coke Lumber filed a materialman's lien affidavit for the unpaid amount.
- On the same day, a representative of Coke Lumber telephoned an officer of the bank, informed them of the filed lien, and requested that future loan payments be made jointly to Goode Construction and Coke Lumber.
- The bank declined this request and subsequently advanced additional funds directly to Goode Construction under the original loan agreements.
- Later, Goode Construction defaulted on its loans, and the bank foreclosed on all seven properties, purchasing them at the trustee's sale.
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, rendered a judgment for Coke Lumber against Goode Construction but denied any recovery for Coke Lumber against First National Bank.
- Coke Lumber, as appellant, appealed the trial court's judgment in favor of the bank, as appellee, to the Texas Court of Civil Appeals.
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Issue:
Does a construction lender, whose deed of trust secures future advances and is recorded before a materialman's lien attaches, have a duty to withhold funds from the builder and pay the materialman directly after receiving actual notice of the materialman's unpaid claim and subordinate lien?
Opinions:
Majority - Guittard, Justice
No. A construction lender with a prior-recorded deed of trust has no duty to protect a materialman by withholding funds from a builder after receiving notice of a subordinate lien. The court found no legal basis for imposing the duty of a trustee on the lender. Coke Lumber had notice of the bank's superior lien and was responsible for protecting its own interests, such as by demanding cash on delivery from the builder. The court reasoned that imposing such a duty would burden the lender with evaluating disputed claims, which is outside the scope of its agreement to advance funds to the builder. Furthermore, the bank's deed of trust, being filed before Coke Lumber delivered materials, has priority over the materialman's lien for all advances made under it, including those made after receiving notice of the subordinate lien. The court held that actual notice of the lien gives the materialman no greater rights than the constructive notice provided by filing the lien.
Analysis:
This decision solidifies the superior legal position of construction lenders in Texas whose liens are recorded before materials are furnished. It firmly rejects the idea that a lender acts as a trustee for subcontractors and suppliers, placing the burden of risk management squarely on the suppliers themselves. The ruling reinforces the "first in time, first in right" principle for recorded liens regarding future advances, clarifying that a lender's knowledge of junior liens does not subordinate its priority. This provides certainty for lenders but serves as a caution to materialmen, who cannot rely on the lender to ensure their payment and must use other means, like contractual protections, to secure payment.
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