Opinion ID: 1721223
Heading Depth: 2
Heading Rank: 2

Heading: The Priority of the Construction Lender's Deed of Trust vs. the Materialmen's Liens

Text: Against this backdrop, we emphasize the established facts in this case (a) that none of the construction loan funds advanced by either construction lender went into any of the three lots in question, (b) that neither construction lender exercised due diligence to assure that the loan proceeds went into the three lots in question, or any of them, and (c) that each of the two construction lienors here, The Wickes Corporation and Joe L. Arick, d/b/a A & H Electrical & Refrigeration, established that its respective goods and services did in fact go into the lots in question. More particularly, the evidence established that the materials furnished by Wickes were in fact used by Bruce Homes, Inc. in the construction of Tract Nos. I and II. The amount of the lien allowed in favor of Wickes with respect to Tract No. I was $5,030.89 while the amount allowed against Tract No. II was $2,387.77. Arick performed all of the electrical, heating and air conditioning installation on the home being constructed on Tract No. I. Without serious dispute the value of such work was $3,200.00. Under these circumstances wherein the equities certainly favor Arick and Wickes, we would affirm the chancellor's holding in favor of the materialmen and against the construction lenders, absent some rule of the positive law requiring a contrary result. As will be explained below, this is an instance in which the law follows and embodies the equities. Because we are concerned with a question of relative priorities among conflicting, perfected liens, we must also keep in mind the chronology. TRACT NO. I October 8, 1981 - Arick files Notice of Construction Lien against Tract No. I. TRACT NO. I October 21, 1981 - Wickes files Notice of Construction Lien against Tract No. I. December 22, 1981 - Bank of Mississippi conducts Power of Sale Foreclosure on Tract No. I. TRACT NO. II October 21, 1981 - Wickes files Notice of Construction Lien against Tract No. II. December 8, 1981 - Peoples Bank conducts Power of Sale Foreclosure on Tract No. II. Both Arick and Wickes perfected their liens against the tracts in question effective the date they filed their Construction Lien Notices. Section 85-7-131, Miss. Code Ann. (1972) provides in pertinent part: Such lien shall take effect as to purchasers or encumbrancers for a valuable consideration without notice thereof, only from the time of commencing suit to enforce the lien, or from the time of filing the contract under which the lien arose, or notice thereof, in the office of the Clerk of the Chancery Court, ... [Emphasis added]. The statute does provide alternative means for perfecting the construction lien of the mechanic and materialmen, of the contractor and the subcontractor, and establishing its priority. [2] One of those means is filing notice of the lien in the office of the Chancery Clerk. [3] This was done by Arick on October 8, 1981, and by Wickes on October 21, 1981. On and from these dates the liens of Arick and Wickes stood perfected against all improvements on the two tracts. What is before this court, however, is the challenge of construction lenders to the chancellor's holding giving these materialmen rights in the two tracts having priority over the rights of the two construction lenders. First, the construction lenders claim that the liens of their respective deeds of trust became perfected in March of 1981 at the time of filing and are prior in right to the construction liens of the materialmen perfected in October of 1981 because they are prior in time of filing. Second, the construction lenders argue that, in any event, the power of sale foreclosures conducted in December of 1981 operated to extinguish all liens to the property and to transfer same to the proceeds of the foreclosure sales. We will first consider the relative priorities of the parties under the deeds of trust vis-a-vis the construction liens. Our seminal decision here is First National Bank of Greenville v. Virden, 208 Miss. 679, 45 So.2d 268 (1950). In that case this Court recognized that materialmen and other construction lienors have at the time they supply materials or render services constructive notice of the construction lender's deed of trust and that it is contemplated that the lien of the construction lender's deed of trust should be paramount. The Court went on to hold that the construction lender's lien should not be extended any further than its equities require, and therefore should not be given priority, except to the extent that the money secured thereby was actually used in paying for the construction of the building. 208 Miss. at 685, 45 So.2d at 270. [Emphasis in original.] The Court concluded by stating that the construction lender should advance the proceeds with reasonable diligence in order that the holders of statutory liens may not be unjustly defeated in their claims. It is simple justice that such mortgagee [construction lender] shall have preference only to the extent that its funds actually went into the construction. 208 Miss. at 685, 45 So.2d at 270-271. The rule has been fine tuned in many cases over the years. Recently in Guaranty Mortgage Co. of Nashville v. Seitz, 367 So.2d 438 (Miss. 1979) the Court summarized the present state of the law as follows: The lien of a deed of trust securing a construction loan has priority over mechanics' and materialmen's liens only to the extent that: (a) the funds disbursed actually went into the construction, or (b) to the extent that the construction lender used reasonable diligence in disbursing the construction loan. 367 So.2d at 441. [Emphasis added] A fair distillation of our cases on the subject runs something like this. The construction lender has a lien on the lot and all improvements by virtue of the deed of trust. The existence of the lien and its status as a perfected lien are wholly the function of the execution, delivery and recording of the deed of trust in accordance with our statutes pertaining thereto. The lien of the deed of trust exists and remains perfected even though not as much as one penny of the loan proceeds actually goes into the construction project. The priority of the lien of the construction lender's deed of trust vis-a-vis materialmen, etc. is another matter. The construction lender holding a deed of trust, perfected prior in time to the perfection of the materialman's construction lien, has priority over the latter lien to the extent that the construction lender's funds actually go into the construction. As a prerequisite to its being accorded priority over materialmen, etc. to the extent of any additional funds disbursed but not going into the construction project, the construction lender must show that it has used reasonable diligence to see that these funds were actually used in payment for labor, materials or other costs of construction. See, e.g., Guaranty Mortgage Co. of Nashville v. Seitz, 367 So.2d 438, 441 (Miss. 1979); Deposit Guaranty National Bank v. E.Q. Smith Plumbing & Heating, Inc., 392 So.2d 208, 212 (Miss. 1981). We must apply these principles to the facts of this case. We reiterate that the chancellor found as a fact (a) that none of the funds disbursed by the construction lenders actually went into the construction and (b) that neither construction lender used reasonable diligence to assure that the funds disbursed were actually going into the construction. On the other hand, the chancellor found that Arick's and Wickes' services and materials did go into the two tracts. On this point, accordingly, the decision in favor of Arick and Wickes and against the construction lenders must be affirmed.