Summary of a Recent
Judicial Development in
Secured Transactions

Equitable Subrogation of Lien is Not Prohibited by Texas Constitution

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In LaSalle Bank National Association v. White, 246 S.W.3d 616 (Tex. 2007), the Supreme Court of Texas reversed the ruling of the appellate court and held that the Texas Constitution did not preclude equitable subrogation of an otherwise unconstitutional home equity loan secured by property designated for agricultural use.

Background

Lorae White executed a Texas Home Equity Note in favor of LaSalle Bank, secured by a parcel of her real property. Id. at 617. White used part of the loan to pay off purchase money and tax liens (the refinance portion), and kept the remainder (the cash-out portion). Id. LaSalle Bank subsequently filed for foreclosure, and White brought suit seeking a declaratory judgment that the Bank had forfeited all principal and interest because the loan violated the Texas Constitution and that its lien was invalId. Id at 618. The trial court ruled that the property was designated for agricultural use and, therefore, the Constitution prohibited it from being used as security for a home equity loan. Id. The appellate court affirmed and held that the Constitution mandated forfeiture of the lien and prohibited equitable subrogation, and LaSalle Bank appealed. Id.

Arguments

LaSalle Bank argued that although the loan failed to comply with the constitutional requirements, it was equitably subrogated to the liens held by the third parties who received the refinance portion of the loan, and so it was entitled to an equitable lien on White's homestead for that portion. Id.

White argued that Article XVI, § 50(e) of the Texas Constitution bars any lien based upon equitable subrogation, including those that arise from payment of constitutionally valid debts. Id. at 619.

Analysis and Holdings

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. Id. After examining the plain language of Article XVI, § 50(e), however, the court found nothing that indicated that abrogation of equitable common law remedies was intended. Id. The court noted that it had previously honored equitable subrogation claims against homestead property when a refinance, even though unconstitutional, was used to pay off valid liens. Id. The court therefore reversed the ruling of the appellate court and held that the Texas Constitution did not preclude LaSalle Bank's entitlement to equitable subrogation for the refinance portion of the loan proceeds that were used to extinguish White's constitutionally permissible purchase-money and property-tax liens. Id. at 620.

The case was decided on December 21, 2007.