Lasalle Bank Nat. Ass'n v. White

• Citation: 246 S.W.3d 616
• Decision Date: 21 December 2007
• Docket Number: No. 06-1016.,06-1016.
• Parties: LASALLE BANK NATIONAL ASSOCIATION, a/k/a Lasalle National Bank, as Trustee and Lasalle National Bank, as Trustee Under the Pooling and Servicing Agreement Dated June 1, 1999, Series 1999-2, Petitioners, v. Lorae WHITE and Gerald Geistweidt, Respondents.
• Court: Texas Supreme Court

246 S.W.3d 616

LASALLE BANK NATIONAL ASSOCIATION, a/k/a Lasalle National Bank, as Trustee and Lasalle National Bank, as Trustee Under the Pooling and Servicing Agreement Dated June 1, 1999, Series 1999-2, Petitioners, v. Lorae WHITE and Gerald Geistweidt, Respondents.

No. 06-1016.

Supreme Court of Texas.

December 21, 2007.

Rehearing Denied March 28, 2008.

L. Frank Oliver, Lindsay Lee Lambert, Marc O. Knisely, Henry A. Jakob and Louis Andrew Oliver, for Lasalle Bank National Association.

A. Gerald Geistweidt, for Lorae White.

Rebekah Marie Geistweidt, for Gerald Geistweidt.

PER CURIAM.

The Texas Constitution prohibits homestead property designated for agricultural use from being pledged to secure a home-equity loan, and mandates forfeiture of all principal and interest for loans so secured. In this case, a borrower obtained a home-equity loan secured by agricultural homestead property, disbursed a portion of the proceeds at closing to pay off constitutionally permissible purchase-money and tax liens (the "refinance portion"), and kept the remaining balance (the "cash-out portion"). The debtor defaulted on the note, and the trial court declared the entire debt, and the bank's lien, invalid. A divided court of appeals affirmed. 217 S.W.3d 573, 579. We hold that the forfeiture penalty does not preclude the lender's recovery of the refinance portion of the loan proceeds that were used to pay the debtor's constitutionally permissible pre-existing debt because the lender was equitably subrogated to the prior lienholders' interests. Accordingly, we affirm in part, and reverse in part, the court of appeals' judgment.

Lorae White executed a home-equity note, later assigned to LaSalle Bank,¹ in the principal amount of $260,000. The note recited that the transaction was an "extension of credit," as defined by article XVI, section 50(a)(6) of the Texas Constitution. The note was secured by a lien against 10.147 acres of White's 53.722-acre homestead property. At the time of disbursement, the lender used $185,010.51 of the loan proceeds to pay off the valid purchase-money lien against the total acreage, and another $9,410.96 to pay a state property-tax lien (the "refinance portion"). The remainder after closing costs, $57,518.50, was paid directly to White (the "cash-out portion"). White failed to make her first payment on the loan, paid only five of the monthly payments due during the first year, and thereafter stopped making payments altogether. When LaSalle filed an application for a home-equity loan foreclosure, White filed this suit seeking a declaratory judgment that the bank had forfeited all principal and interest because the loan violated the Texas Constitution.²

After a bench trial, the trial court found that the debt was secured by homestead property designated for agricultural use in violation of the Texas Constitution and signed a judgment quieting title free and clear of any liens or claims asserted by LaSalle. The court of appeals affirmed, holding that the Constitution mandated forfeiture of the prohibited loan and prohibited equitable subrogation for the refinance portion of the loan proceeds used to pay White's pre-existing homestead debt. Id. We disagree that the Constitution abrogates lenders' equitable subrogation rights under the common law.

For over 175 years, Texas has carefully protected the family homestead from foreclosure by limiting the types of liens that can be placed upon homestead property. Texas became the last state in the nation to permit home-equity loans when constitutional amendments voted on by referendum took effect in 1997. Such loans permit homeowners to use the equity in their home as collateral to refinance the terms of prior debt and secure additional loans at rates more favorable than those for consumer loans. Although home-equity lending is now constitutionally permissible, article XIV, section 50(a)(6) of the Texas Constitution still places a number of limitations on such lending. Relevant to this appeal, the Constitution prohibits home-equity loans from being "secured by homestead property designated for agricultural use." TEX. CONST. art. XVI, § 50(a)(6)(I).

LaSalle does not here dispute the agricultural designation of White's homestead property or that its home-equity loan to White violated the constitutional prohibition. Nor, for purposes of this appeal, does LaSalle challenge its forfeiture of principal, interest, and liens related to the cash-out portion of the loan.³ LaSalle does contend, however, that it is entitled to an equitable lien on White's homestead for money that it disbursed to pay constitutionally valid indebtedness.

Texas has long recognized a lienholder's common law right to equitable subrogation. See Benchmark Bank v. Crowder, 919 S.W.2d 657, 661 (Tex.1996); Faires v. Cockrill, 88 Tex. 428, 31 S.W 190, 194 (1895); Oury v. Saunders, 77 Tex. 278, 13 S.W. 1030, 1031 (1890). The doctrine allows a third party who discharges a lien upon the property of another to step into the original lienholder's shoes and assume the lienholder's right to the security interest against the debtor. First Nat'l Bank of Kerrville v. O'Dell, 856 S.W.2d 410, 415 (Tex.1993) (citing Faires, 31 S.W. at 194). The doctrine of equitable subrogation has been repeatedly applied to preserve lien rights on homestead property. See, e.g., Benchmark, 919 S.W.2d at 661; Farm & Home Sav. & Loan Ass'n v. Martin, 126 Tex. 417, 88 S.W.2d 459, 469-70 (1935). If applied in this case, LaSalle's payment of the balance of the purchase-money mortgage and the accrued taxes on White's property would entitle it to assume those lienholders' security interests in the homestead. White contends, though, and the court of appeals held, that article XVI, section 50(e) of the Texas Constitution abrogates all equitable subrogation rights, including those that arise from payment of constitutionally valid debts. 217 S.W.3d at 578-79. We disagree.

Article XVI, section 50(e), in its entirety, provides:

A refinance of debt secured by a homestead and described by any subsection under Subsections (a)(1)-(a)(5) that includes the advance of additional funds may not be secured by a valid lien against the homestead unless:

(1) the refinance of the debt is an extension of credit described by Subsection (a)(6) of this section; or

(2) the advance of all the additional funds is for reasonable costs necessary to refinance such debt or for a purpose described by Subsection (a)(2), (a)(3), or (a)(5) of this section.

TEX. CONST. art. XVI, § 50(e). When interpreting the Texas Constitution, we "rely heavily on its literal text and must give effect to its plain language." Stringer v. Cendant Mortgage Corp., 23 S.W.3d 353, 355 (Tex.2000); Republican Party of Tex. v. Dietz, 940 S.W.2d 86, 89 (Tex.1997). Section 50(e) contains no language that would indicate displacement of equitable common law remedies was intended, and we decline to engraft such a prohibition onto the constitutional language. LaSalle's equitable subrogation claim does not derive from its contractually refinanced debt and accompanying lien, for which section 50(e) mandates forfeiture. Instead, LaSalle's claim arises in equity from its prior discharge of constitutionally valid purchase-money and tax liens. By definition, equitable remedies apply only when there is no remedy at law, and the legal forfeiture that article 50(e) imposes does not destroy the well-established principle of equitable subrogation.

We have honored equitable subrogation claims against homestead property when a refinance, even though unconstitutional, was used to pay off valid liens. See Benchmark, 919 S.W.2d at 661. In Benchmark, the homeowners borrowed money from Benchmark Bank's predecessor to pay federal taxes and signed a note giving the bank a deed of trust that purported to create a lien against the homestead. When the homeowners defaulted and the bank sought to foreclose the lien, the homeowners claimed the lien was invalid because the then-existing version of article XVI, section 50 did not specifically identify federal tax liens as a valid indebtedness against homestead property. We held that, under the Supremacy Clause of the United States Constitution, the IRS could obtain and...