Summary of a Recent
Judicial Development in
Secured Transactions

Equitable Subrogation Does Not Trump
Constitutional Penalty of Forfeiture

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In LaSalle Bank National Association v. White, 217 S.W.3d 573 (Tex. App. 2006), the Texas Court of Appeals, San Antonio, held that a creditor had forfeited its interest in certain real property because its home equity loan violated the Texas Constitution, and the constitutionally-mandated penalty of forfeiture was not trumped by the doctrine of equitable subrogation.

Background

Lorae White executed a Texas Home Equity Note in favor of LaSalle Bank, secured by a parcel of her real property. Id. at 575. At the time of execution a third party, Joe Di Sebastiano, held a valid purchase money lien against all of her real property. Id. White used part of the home equity loan to pay off her debt to Di Sebastiano and her outstanding property taxes. 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. The trial court found that the property was designated for agricultural use and, therefore, the Constitution prohibited it from being used as security for a home equity loan, and LaSalle Bank appealed. Id.

Arguments

LaSalle Bank argued that the constitutional bar applied only to land designated for agricultural use under Texas Tax Code chapter 23, subchapter C, and because it was undisputed that White's property was designated under subchapter D, the bar did not apply. Id. Alternatively, the Bank argued that if the loan failed to comply with the constitutional requirements, then it was equitably subrogated to the liens held by the third parties who were paid the balance of the existing purchase money lien, and so the Bank had not forfeited its rights with regard to that portion of the loan. Id. at 577-78.

Analysis and Holdings

Article XVI, § 50(a)(6)(I) of the Texas Constitution prohibits homestead property "designated for agricultural use as provided by statutes governing property tax" from being pledged to secure a home equity loan (unless the property is used primarily for the production of milk, which is not applicable in this case). Id. The court interpreted the phrase "designated for agricultural use as provided by statutes governing property tax" to include land put to an agricultural use as defined by and assessed for tax purposes under both subchapters C and D of the Tax Code. Id. at 577. White's property was designated under subchapter D, and thus could not be used as security for a home equity loan. Id. Regarding the Bank's alternative argument, the majority held that Article XVI, § 50(e) of the Texas Constitution bars any lien based upon equitable subrogation. Id. at 578. The court therefore held that the Bank's lien was invalId. Id. at 579. The dissenting justice agreed that the Bank's lien was in violation of the Texas Constitution, but opined that equitable subrogation should trump the constitutionally-mandated penalty of forfeiture. Id.

The case was decided on October 11, 2006.