First Funding Corp. v. Birge

• Decision Date: 30 August 1979
• Docket Number: 771341,Nos. 771340,s. 771340
• Citation: First Funding Corp. v. Birge, 220 Va. 326, 257 S.E.2d 861 (1979)
• Court: Virginia Supreme Court
• Parties: FIRST FUNDING CORPORATION et al. v. Warren R. BIRGE, Jr. Record

Page 861

257 S.E.2d 861

220 Va. 326

FIRST FUNDING CORPORATION et al. v. Warren R. BIRGE, Jr.

Record Nos. 771340, 771341.

Supreme Court of Virginia.

Aug. 30, 1979.

L. Lee Bean, Arlington (Bean & Hylton, Arlington, on brief), for appellants.

Henry C. Mackall, Fairfax (Glenn H. Silver, Mackall, Mackall & Walker, Fairfax, on brief), for appellee.

Before I'ANSON, C. J., and CARRICO, COCHRAN, HARMAN, POFF and COMPTON, JJ.

COMPTON, Justice.

In this creditors' rights suit seeking to establish priorities of liens on real estate the main issue is whether, considering the language of the subordination clause in this case, the lien of a purchase money deed of trust on one parcel of land properly may be subordinated to the lien of a deed of trust securing a construction loan on the subject parcel and another parcel.

In February of 1974, plaintiff Warren R. Birge, Jr., executed two separate contracts to sell to defendant W. H. Quatmann Associates, Incorporated, two unimproved parcels of land designated as Lot 3 and Lot 48 in Parkview Hills, a residential subdivision in Fairfax County. Quatmann planned to construct a residence on each lot. The lots did not adjoin but were situated diagonally across the street from each other.

The contract for Lot 3 provided for a sale price of $34,500 with a purchase money note for $26,500; the contract for Lot 48 was for $37,500 with a purchase money note of $29,500. Each contract provided that the note was to be secured by a deed of trust on the property described in that contract. Each contract carried the following pre-printed language on page one:

Said deed of trust and note shall contain a provision requiring and directing the trustees under said deed of trust, without the necessity of obtaining the prior consent or joinder of the deed of trust note holder, to subordinate the said deed of trust to any bona fide construction and/or permanent loan or loans placed from time to time upon the subject property or any portion or portions thereof, without curtailment and at no cost to Purchaser.

Page two of each contract contained the following provision, which had been inserted by typewriter in the printed form contracts:

Seller also agrees to subordinate to a Construction Loan issued by an authorised (Sic ) lending institution.

Purchaser Quatmann employed the law firm of Kelly, Louk, Lawson, Swinburne & Dixon to examine the title. Richard T. Horan, an attorney employed by the firm, did the work and supervised the closing of the transaction which was held in the firm's office in June of 1974. The two lots were conveyed by one deed and Birge received the two purchase money notes.

The notes were secured by separate recorded purchase money deeds of trust conveying the respective lots from Quatmann to defendants Robert C. Swinburne and Robert B. Hood, Jr., trustees. They were partner and employee, respectively, of the Kelly law firm. Each of the two deeds of trust, in referring to the individual note which it secured, recited that the entire principal balance, plus accrued interest, was to become due on a day certain in June of 1976, "or upon the sale of the house to be constructed on the hereinbefore described property, whichever first occurs." Immediately following that provision, the deeds of trust contained the following language upon which, as we shall see, the decision of this case turns:

The parties hereto agree that the lien of this deed of trust may be subordinated to any bona fide construction loan placed with a reputable lending institution without the necessity of joinder by the holder of the note.

Subsequently, Quatmann obtained a loan for construction of the two houses from defendant First Funding Corporation. In August of 1974, Quatmann executed a promissory note payable to the order of First Funding in the principal sum of $160,000. This note was secured by one recorded deed of trust conveying Lots 3 and 48 to Arthur M. Pomponio and Joseph DuBois, trustees. Horan prepared this note and deed of trust, acting on written instructions from First Funding. In connection with the closing of that transaction, Horan had Swinburne and Hood execute two deeds of subordination, and recorded the same, which purported to subordinate the liens of the two separate purchase money deeds of trust to the lien of the one deed of trust securing the First Funding note. Birge was not consulted about the subordinations nor did he consent to them.

Later, and when construction of the buildings on the two lots had been partially completed, Quatmann defaulted on its payments under the several notes to Birge and First Funding. In May of 1975, preliminary to foreclosure by First Funding, defendant Robert J. Madigan, an attorney-at-law, was substituted as trustee for Pomponio and DuBois under the deed of trust securing the construction loan. After efforts by Birge, Quatmann and First Funding had failed to settle the controversy stemming from Quatmann's default. First Funding, acting through Madigan, began foreclosure proceedings.

This suit was filed by Birge in the forenoon of July 3, 1975, prior to commencement of the foreclosure sale held later that same day. Madigan received and reviewed a copy of the suit papers prior to supervising the sale.

In his bill of complaint naming Quatmann, First Funding, Madigan, Swinburne and Hood as parties defendant, plaintiff relied on the foregoing basic facts. In addition, he alleged that Quatmann improperly put the construction loan advances to personal use, also asserting that First Funding was not a reputable lending institution. Plaintiff also alleged that Madigan had full knowledge of the fact that there was a "genuine dispute as to the number and priority of the liens" upon the two lots, that Madigan had informed plaintiff that the lots would be sold at foreclosure, and that plaintiff was "unable to take intelligent action to protect his interest at any such sale." In the prayer of the bill, plaintiff asked "that the liens binding on (the subject) properties and their priorities be established" by the trial court. Plaintiff did not seek to enjoin the foreclosure sale.

At the sale, the two parcels, offered together and not separately, were sold at public auction to the only bidder, First Funding, for $110,000. Later, Madigan delivered a deed dated in December of 1975 to the two lots to First Funding. Madigan's report and accounting subsequently filed with the commissioner of accounts stated that First Funding had a first trust on both properties, and proceeds of the sale were thus distributed.

The evidence in this suit was heard Ore tenus by the chancellor in 1977. Birge, Horan, Swinburne, Hood, Madigan and the Chief Loan Officer of First Funding testified. In addition, Swinburne and Hood called an expert witness in construction loan financing who testified that the loan by First Funding to Quatmann was a "bona fide construction loan."

Plaintiff called attorney F. Shield McCandlish who testified "as an expert in the field of real estate law in general, and specifically with respect to problems surrounding subordination documents." McCandlish stated that the subordination provisions in the instant purchase money deeds of trust contained "standard language." He also stated that it was "uncommon practice to have a construction loan (deed of trust) cover more property than the (deed of trust) being subordinated covered." He noted that in the case of a subdivision, however, one construction loan often "covered" construction on a number of lots, but the construction loan "would generally be broken down into a number of notes which would be separately and exclusively secured on one particular lot" so that "the entire construction loan (would) not (be) a lien on any one lot."

McCandlish was asked to describe "the effect on the holder of the two purchase money notes secured by the two purchase money deeds of trust in a hypothetical situation if they were subordinated to a single deed of trust (covering both properties) securing a construction loan?" He responded:

Well, it would put the note holder in a very disadvantageous position in many situations if the construction lender were to foreclose as in this case. I believe there was a construction loan of $160,000 which would be a lien on each lot. And, if (the purchase money noteholder) had one note in default and one not in default, for instance, and tried to foreclose on one of those lots, he would be unable to bid it in himself because he would have to bid more than $160,000 just on one lot. There is (here) no breakdown as to the amount of the construction loan which is secured exclusively on a separate lot. The note holder of the purchase money trust is at a terrible disadvantage. He would also have a problem in negotiating his notes for that particular reason. If the prospective buyer of the note knew the entire situation, it's very unlikely he would be able to negotiate the note, and he would have trouble in foreclosing his own trust or protecting himself in the event the construction lender were to foreclose.

McCandlish stated that under the circumstances of this case he, as trustee under the purchase money deeds of trust, would not have executed the respective deeds of subordination without the consent of the noteholder.

After considering the evidence and memoranda of law, the chancellor decided by written opinion that Swinburne and Hood as trustees did not have the authority to subordinate the two individual purchase money deeds of trust on the two separate lots to First Funding's one deed of trust covering both lots. While finding from the evidence that Quatmann had obtained a "bona fide construction loan" and that First Funding was "a reputable lending institution," the court declared the respective subordinations invalid and void Ab initio, ruling that the liens of Birge's deeds of trust were "first trusts on each of the respective lots."

First Funding on the one hand and...