Lyda Swinerton Builders, Inc. v. Cathay Bank

• Decision Date: 13 August 2013
• Docket Number: No. 14–12–00163–CV.,14–12–00163–CV.
• Citation: 409 S.W.3d 221
• Parties: LYDA SWINERTON BUILDERS, INC, Appellant v. CATHAY BANK, Appellee.
• Court: Texas Court of Appeals

409 S.W.3d 221

LYDA SWINERTON BUILDERS, INC, Appellant

v.CATHAY BANK, Appellee.

No. 14–12–00163–CV.

Court of Appeals of Texas,

Houston (14th Dist.).

Aug. 13, 2013.

Anthony Todd Golz, Houston, for Appellant.

Paul J. McConnell, III, Ben A. Baring, Jr., Vijay Arthur D'Cruz, Houston, Barbara M. Ellis, Austin, for Appellee.

Panel consists of Chief Justice HEDGES and Justices BROWN and BUSBY.

MAJORITY OPINION

J. BRETT BUSBY, Justice.

This lien priority case comes to us on appeal from the trial court's rulings on cross-motions for final summary judgment. The appeal presents two issues involving two special types of real property liens.

We first address the scope of a builder's release of its mechanic's lien. See generally Tex. Prop.Code Ann. Ch. 53 (West 2007 & Supp.2012). We conclude that the release at issue here did exactly what it purported to do: it released a previous mechanic's lien on one of the tracts of land at issue. The release did not mention the underlying debt or the filing of future liens, so we conclude that with one exception, it did not affect the builder's entitlement to the unpaid portion of its debt or its ability to file new liens. Nonetheless, there are fact questions regarding whether the liens that the builder filed after releasing its initial lien comply with the applicable statutes. These fact questions largely preclude summary judgment on the validity of the post-release liens.

Next, we apply subrogation doctrines to a tax lien. Subrogation gives someone who pays a debt the lien priority of the creditor paid. Normally, subrogation is permissible because it does not alter the rights of junior lienholders; it merely alters the party to whom they are junior. When a party satisfies a tax lien, however, allowing subrogation to the taxing authority's priority position may inequitably circumvent notice and foreclosure requirements that would otherwise apply. Fact issues preclude us from resolving the equities on this record. Therefore, with one exception described below, we reverse the trial court's summary judgment and remand the case for further proceedings.

Background

Lyda Swinerton Builders, Inc. (the builder) agreed to improve real property owned by Park 8 Place, L.P. (the developer), but the improvements never progressed very far. This case began when the builder sued the developer, but the developer filed for bankruptcy protection and is no longer a party. The only parties remaining are two of the developer's unpaid creditors: the builder and Cathay Bank. Both claim a priority interest in portions of the property that the developer planned to develop. We refer to these disputed tracts as “Parcel A” and “Parcel B.” ¹ Our task is to determine priority as between the builder (which claims priority based upon its mechanic's liens) and the bank (which claims priority based upon deeds of trust and a tax lien that it satisfied).

The builder began work on the project in February 2007.² Over the next several months, the builder completed “dirt,” utility, and foundation work. During the same period, the bank lent the developer approximately $800,000 secured by a deed of trust on Parcel B and approximately $500,000 secured by a deed of trust encumbering the entire property.³

In October 2007, work ceased due to “payment issues” and never resumed. That month, the builder filed its first mechanic's lien affidavit. The affidavit reflected a lien of approximately $3.2 million and only encumbered Parcel A. Generally, mechanic's liens like this one relate back to the start of work for priority purposes, regardless of when the mechanic files its lien affidavit. See Diversified Mortg. Investors v. Lloyd D. Blaylock Gen. Contractor, Inc., 576 S.W.2d 794, 800 (Tex.1978). Thus, although the builder filed its affidavit after the bank had obtained its deed of trust liens, the builder's lien nonetheless had priority because it related back to the start of work in February 2007.

On October 31, 2007, shortly after the builder filed its first lien affidavit, the bank lent the developer approximately $1.9 million. A deed of trust encumbering both Parcels A and B secured the bank's loan. The builder was paid $1.5 million of the loan proceeds against the developer's outstanding debt.⁴ The builder then filed a lien release. We will discuss the release in detail later, but for now it suffices to say that the document recited the receipt of $1.5 million and purported to release the builder's $3.2 million lien.

On the same day that the builder signed its release, the bank used a portion of the loan to satisfy outstanding tax liens against the property. By statute, these tax liens are automatically senior to most other real property liens. SeeTex. Tax Code Ann. § 32.05(b). The bank later claimed that the principle of subrogation entitled it to the taxing authority's lien position for the portion of the loan used to pay taxes. See generally Smart v. Tower Land & Inv. Co., 597 S.W.2d 333 (Tex.1980).

On November 13, 2007, soon after filing its release, the builder filed an “[a]mended” lien affidavit reciting a debt of approximately $2.9 million. This sum included both the unpaid portion of the developer's pre-release debt (approximately $1.7 million) and amounts for post-release expenses that the builder had since incurred. Like the builder's first lien affidavit, this one covered only Parcel A.

The builder contends this post-release affidavit, as a mechanic's lien, related back to the start of work in February 2007. As a result, according to the builder, it now had a $2.9 million lien that was senior to the bank's deeds of trust, notwithstanding the lien release it had just filed.

Although the builder stated in its lien affidavit that it had incurred post-release expenses, no post-release work had occurred on the property. The builder contends that even though it had stopped working, it remained on the site at the developer's request. The post-release expenses reflected in the affidavit were “administrative and equipment rental costs related to maintaining the site at an estimated $200,000 per month.”

Over the ensuing months, the developer made at least one partial payment, but the developer's payment did not keep pace with the builder's continually accruing expenses. In May 2008, the builder sent the developer a letter stating that if the developer failed to cure its debt, the builder would leave the project site and terminate the contract. The developer did not cure its debt, but the builder nonetheless remained on the site.

Indeed, after sending this termination letter, the builder “continued to maintain its office facilities at the Project, continued to store materials and equipment at the Project, and maintained water, sewer, power, phones and data connections at the office complex.” It also continued to bill the developer for these expenses and to file lien affidavits to secure payment. Each new amended affidavit reflected the current total owed and each encumbered both Parcel A and Parcel B.

While still on the property accruing expenses (allegedly still at the developer's request), the builder sued the developer in October 2008. The bank intervened shortly thereafter, claiming a superior interest in the property. The trial court eventually severed this lien priority dispute from the builder's action against the developer.

With all this litigation pending, the builder filed its final lien affidavit in January 2009. This was over a year after the builder's last work on the project, six months after its termination letter, and three months after filing its lawsuit. The final amended affidavit reflected a lien on Parcels A and B in the amount of $6.75 million, representing the builder's total expenses. As a mechanic's lien, the builder contends this lien related back to the start of work—almost two years earlier—and was therefore senior to the bank's deed of trust liens on Parcels A and B. After filing this final lien, the builder remained on the property for another thirteen months.

Shortly after the builder finally decamped from the property in March 2010, the bank foreclosed on its October 31, 2007 deed of trust. The builder received notice of the trustee's sale, but contends it was unaware that the bank intended to foreclose on a senior tax lien. The builder contends that, “had [it] known that [the bank] was foreclosing ... transferred tax liens, [it] could have ... bid on the property at the foreclosure sale to preserve its interest.”

But the builder did not bid at the foreclosure sale. Instead, the bank purchased the property for $10,000. Because this amount was less than the bank's alleged senior tax lien, the bank contends its foreclosure extinguished all junior liens—including the builder's. See I–10 Colony, Inc. v. Chao Kuan Lee, 393 S.W.3d 467, 472 (Tex.App.-Houston [14th Dist.] 2012, pet. filed) (“It is well settled in Texas that a valid foreclosure on a senior lien ... extinguishes a junior lien ... if there are not sufficient excess proceeds from the foreclosure sale to satisfy the junior lien.”). The bank thus argues that, as a result of this sale, it owned the property outright.

In the severed lien priority litigation, the parties filed cross-motions for final summary judgment. The builder argued that because its lien related back to February 2007, it was senior to the bank's. Thus, the builder argued that the bank's purchase of the property at its own foreclosure sale was subject to the builder's senior lien.

The bank contended that it was entitled to the property for two reasons. First, the bank argued that the builder's release fully terminated any interest it had in the property and prevented it from filing new liens. Second, the bank contended that its foreclosure of a senior tax lien extinguished the builder's interest in the property.

The trial court granted the bank's motion and denied the builder's. It held that the bank owned the property “free and clear” of the builder's...