In re Jeter

• Decision Date: 14 January 1985
• Docket Number: Adv. No. 584-5014.,Bankruptcy No. 583-00145
• Citation: 48 BR 404
• Parties: In re Judy Gwen JETER, Debtor. Judy Gwen JETER, Plaintiff, v. SEMINOLE STATE NATIONAL BANK, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Texas

48 B.R. 404 (1985)

In re Judy Gwen JETER, Debtor Judy Gwen JETER, Plaintiff, v. SEMINOLE STATE NATIONAL BANK, Defendant.

Bankruptcy No. 583-00145, Adv. No. 584-5014.

United States Bankruptcy Court, N.D. Texas, Lubbock Division.

January 14, 1985.

COPYRIGHT MATERIAL OMITTED

James A. Walters, Lubbock, Tex., for plaintiff.

Harvey Morton, Lubbock, Tex., for FDIC.

MEMORANDUM AND ORDER

BILL H. BRISTER, Bankruptcy Judge.

Judy Gwen Jeter, debtor, challenged the validity of a lien against her homestead claimed by Seminole State National Bank ("Bank"). Federal Deposit Insurance Corporation ("FDIC"), in some capacity, has succeeded to the bank's interest. Among other arguments FDIC contends that certain defenses which might be available to debtor against the bank could not be used against it. The status of the property as homestead on the date of bankruptcy is not an issue and the jurisdiction of this Court to resolve the issues over objection of either party is suspect. However, no party has challenged the jurisdiction of the bankruptcy court to determine these "related to" issues¹ and the mandatory abstention provisions of the Bankruptcy Amendments and Federal Judgeship Act of 1984 were not effective when this adversary proceeding was filed.

On June 29, 1981, Mickey Ray executed a pool construction contract with "Pools West", a swimming pool construction company in Lubbock, Texas, for the construction of a swimming pool on the residential property. The agreement contained the plans and specifications and set out the times during construction when installments on the $20,900.00 contract would be paid by Mickey Ray. Actual costs approximated $24,000.00. The testimony at trial reflects that the hole was completed for the swimming pool and a fiberglass shell was installed, together with some swimming pool equipment, on July 14, 1981. The pool was completed on September 15, 1981. All of the installments were paid by the Rays prior to completion, excepting only $3,561.00 which was paid on October 15, 1981.² The record is silent whether the Rays executed a contractual mechanic's lien to "Pools West," but if such contractual lien existed it was not assigned to the bank and is not relevant to this memorandum.

On September 28, 1981, Mickey L. Ray executed a note to the bank in the amount of $30,000.00 with a notation on the bottom of the note reflecting "money advanced for home repairs and remodel." Three days later on October 1, 1981, both Mickey L. Ray and Judy Ray executed a note in the amount of $30,000.00 to LaDon Realty Inc. indicating that the note was given in part payment for the construction of improvements upon the residential lot. A mechanic's lien contract dated October 1, 1981 (but acknowledged on October 15, 1981) reflected that the purpose of the mechanic's lien was to "complete remodeling of house and complete swimming pool on hereinafter described property." An assignment of the note and lien to Seminole State Bank was dated October 12, 1981, and the mechanic's lien contract, together with the assignment, was recorded in the Office of the County Clerk of Gaines County, Texas, on October 15, 1981.

A divorce decree, after jury trial, was entered on the petition of Judy Gwen Ray one year later on November 29, 1982. The residential homestead was awarded to Judy Gwen Ray in the divorce decree, but Mickey L. Ray was ordered to assume and pay, and hold Judy Ray harmless from, the entire mortgage indebtedness on the property owed to Lamesa Federal Savings and Loan Association on two separate notes with balances approximating $47,995.55 and $20,307.00 respectively. Further, Ray was ordered to pay "the balance due on the short term note secured by the residence herein awarded to petitioner, owed to Seminole State National Bank and being in the approximate amount of $31,728.29." The mandate from the Texas Court of Appeals at El Paso, affirming the decree, issued January 11, 1984.

The debtor challenges the claim by FDIC that its alleged debt of $130,779.68 is secured, in part or in whole, against the residential homestead on four separate bases. An affirmative finding on any of the four contentions advanced by debtor could result in judgment being entered in debtor's favor. However, FDIC has advanced its theory the federal law designed to protect national banks and FDIC prevails over state homestead and other law. For that reason the memorandum will treat each of the four theories advanced by debtor and will consider how the FDIC claim impacts.

First, debtor contends that the mechanic's and materialmen's lien contract dated October 1, 1981, and acknowledged October 15, 1981, by Mickey L. Ray and Judy Ray was void when executed, because the improvements had been commenced before the debtor and her former husband had executed the note and the mechanic's lien. The evidence is undisputed that not only had the improvements been commenced before execution of the note and the mechanic's lien contract, but the swimming pool had been completed and payment for that construction substantially had been made. Under Texas law a written contract on homestead improvements must be executed by both spouses before materials are delivered and labor commenced. V.A.T.S. art. 5460 (in effect when the work was commenced) reads in relevant part:

". . . to fix and secure the lien upon the same homestead it shall be necessary for the person or persons who furnish the material or perform the labor, before such material is furnished or such labor performed, to make and enter into a contract in writing, setting forth the terms thereof, which shall be signed by the owner and his wife and privily acknowledged by her, as is required in making sale of homestead." (emphasis added)

The statute stems from the constitutional provisions regarding homesteads set forth in Article 16, § 50 of the Texas Constitution. As indicated above the mechanic's lien contract was not executed in this case until October 1, 1981, and was acknowledged fifteen days later on October 15, 1981 . . . at least one month after completion of the swimming pool on September 15, 1981. Under Texas law those circumstances mandate that the mechanic's lien contract be deemed ineffective against the homestead. See Kepley v. Zachry, 131 Tex. 554, 116 S.W.2d 699 (1938), Supplementary Opinion 121 S.W.2d 595 (Tex. 1938); Zeller v. University Savings Association, 580 S.W.2d 658 (Tex.Civ.App.— Houston 14th Dist. 1979, no writ); Hicks v. Wallis Lumber Company, 70 S.W.2d 440 (Tex.Civ.App.—San Antonio 1934, no writ) and Burton v. Schwartz, 36 S.W.2d 1066 (Tex.Civ.App.—Fort Worth 1931, writ dismd).

The second theory advanced by the debtor is that Mickey L. Ray had executed the September 28, 1981 note without the joinder of Judy Ray and that no lien was created against the homestead when Judy Ray ultimately joined in executing the mechanic's lien contract on October 1, 1981. To preserve the sanctity of the homestead provisions of the Texas Constitution, not only is it necessary that both spouses sign the mechanic's lien contracts for improvements on the homestead but it is required that both spouses confirm and consent to extensions and renewals of mechanic's or materialmen's liens for those improvements. Uvalde Rock Asphalt Company v. Hightower, 140 Tex. 200, 166 S.W.2d 681 (1942); Lewis v. Investors Savings Association, 411 S.W.2d 794, 797 (Tex.Civ.App.— Fort Worth 1967, no writ); Sudduth v. Du Bose, 42 Tex.Civ.App. 226, 93 S.W. 235 (Tex.Civ.App.1906, no writ); and San Antonio Real Estate Building and Loan Association v. Stewart, 27 Tex.Civ.App. 299, 65 S.W. 665 (1901, writ ref'd). The note dated September 28, 1981, executed on that date by Mickey Ray without the joinder of Judy Ray, was the note which was attempted to be renewed and extended by the October 1, 1981 transaction. The note and subsequent mechanic's lien contract were ineffective to create a lien against the homestead.

The third challenge advanced by the debtor is that the transaction with LaDon Realty was a sham contract and that the bank, as assignee of the so-called mechanic's and materialmen's lien, acquired no rights as a result thereof. The representatives of LaDon Realty testified at the trial that it furnished no materials nor labor and performed no services whatsoever for the debtor and Mickey L. Ray as a result of the mechanic's lien contract. Neither Mickey Ray nor Judy Ray borrowed any monies from LaDon Realty. When LaDon Realty transferred the note to Seminole State National Bank that bank paid nothing to LaDon Realty for the note and liens. The attorney for LaDon Realty also represented the bank. The LaDon Realty representative testified that the attorney told him that "the bank needed it." Thus, it appears that the transaction was designed to accomodate the bank. The attorney drafted the mechanic's lien contract and note, but the representative of LaDon Realty did not know whether those papers were drawn at the request of the bank or at the request of Mickey L. Ray. There was no testimony that any subsequent improvements were placed on the residential property. Reference is again made to V.A.T.S. art. 5460, which requires the person or persons who furnish the material or perform the labor, before the material is furnished or the labor performed, to make and enter into a contract in writing for the lien. In this case LaDon Realty furnished nothing. All of the material and all of the labor were furnished by "Pools West." No lien was acquired by LaDon Realty. See Burns International Detective Agency v. General Electric Supply Company, 413 S.W.2d 775 (Tex.Civ.App.—Texarkana 1967, no writ). Before Seminole State National Bank could properly be the assignee of the LaDon Realty note and lien, free of the defenses asserted by the debtor, the bank must have been a holder in due course. See Tex.Bus. & Comm.C. § 3.302(a), which defines a holder in due course as one who takes the note for value, in good faith, and...