BEFORE PATTERSON, C.J., ROY NOBLE LEE AND ROBERTSON
ROBERTSON, JUSTICE, FOR THE COURT:
This civil action arises from a residential construction fiasco in Clay County, Mississippi. In the salvage operation that has followed, the original landowner, holder of a subordinated purchase money deed of trust, is battling two construction lenders and two construction lienors, one a contractor and the other a materialman. The objects of the controversy are three tracts of land, two of which contain partially completed houses and the other of which is still unimproved.
The matter was heard in the Chancery Court of Clay County. After receiving the post-trial submissions of the parties, the learned chancellor made extensive findings of facts and then decreed first priority in favor of the perfected liens of two
construction lienors and second priority to the original landowner. A third priority, no doubt of minimal value, was given the two banks who served as construction lenders. The chancellor found that the proceeds of the construction loans never made their way into the improvements on any of the three tracts, and, moreover, that the banks had failed to exercise reasonable diligence to assure that the loan funds were used as all intended.
Having seen the priority of what they had thought were first deeds of trust evaporate, the construction lender banks are understandably miffed. They have appealed to this Court, seeking a holding that their liens have the first priority at the expense of both the materialmen and the purchase money deed of trust holder.
For the reasons set out below, we affirm.
The cast of characters in this civil action includes:
(1) L & T Developers, Inc. a corporation organized, chartered and existing under the laws of the State of Mississippi having its principal place of business and domicile in Clay County, Mississippi. At all times relevant hereto, Herman M. Shirley was president of L & T, which is sometimes hereafter referred to as" Landowner ". L & T was a plaintiff below and is one of the appellees here.
(2) Bruce Homes, Inc. was and is a corporation organized, chartered and existing under the laws of the State of Mississippi having its principal place of business and domicile in Clay County, Mississippi. At all times relevant hereto, William R. Bruce was president of Bruce Homes, Inc. Bruce Homes, Inc. is sometimes hereafter referred to as" Builder ". Bruce was a defendant below but is not a party to this appeal.
(3) Bank of Mississippi is a banking association organized, chartered and existing under the laws of the State of Mississippi, having its principal place of business and domicile in Tupelo, Lee County, Mississippi. Bank of Mississippi is one of the construction lenders involved in this case and is sometimes hereafter referred to as" Construction Lender ". Bank of Mississippi was a defendant below and is one of the appellants here.
(4) The Peoples Bank and Trust Company is also a banking association organized, chartered and existing under the laws of the State of Mississippi. Peoples Bank has its
domicile and principal place of business in Lee County, Mississippi, but in this case was doing business through its Clay County branch. Peoples Bank is the other construction lender in this case and is sometimes hereinafter referred to as such. Peoples Bank was a defendant below and is one of the appellants here.
(5) Joe L. Arick is an adult resident citizen of West Point, Clay County, Mississippi. For present purposes, Arick does business as a sole proprietor operating under the trade name of A & H Electrical and Refrigeration. Arick is a contractor/construction lienor here and is sometimes hereinafter referred to as such. Arick was a defendant below and is one of the appellees here.
(6) The Wickes Corporation is a corporation organized, chartered and existing under the laws of the State of Mississippi having its principal place of business and domicile at Tupelo, Lee County, Mississippi. The Wickes Corporation is a materialman/construction lienor in this case and is sometimes hereinafter referred to as such. *fn1 Wickes was a defendant below and is one of the appellees here.
Prior to March 13, 1981, L & T Developers, Inc. was the owner of a substantial number of residential lots in the Shirley Subdivision in Clay County, Mississippi. Each of these tracts was slightly more than one and one-half acres in size. On that date, March 13, 1981, L & T executed and delivered unto Bruce Homes, Inc. a warranty deed by which it conveyed these three tracts to Bruce Homes, Inc.
As consideration for the conveyance of these lots and contemporaneous with the execution and delivery of the warranty deed, Bruce Homes, Inc. executed in favor of L & T Developers, Inc. a promissory note in the principal sum of $24,000, representing a sales price of $8,000 per tract. In order to secure the payment of this note, and again on March 13, 1981, Bruce Homes, Inc. executed a purchase money deed of trust wherein these three lots, denominated Tracts Nos. I, II and III, were conveyed to James C. Helveston, as trustee for L & T Developers, Inc.
Bruce Homes, Inc. was a speculative builder. It planned to build a residential dwelling on each of the three tracts in question and, in due course, to sell each completed home and lot to a third party purchaser. The project was substantially undertaken on credit. Bruce persuaded L & T to finance the purchase of the three tracts. It then went to two banks, the Bank of Mississippi and the Peoples Bank, for loans to finance the construction of the three planned residential dwellings. Bruce Homes, Inc. negotiated three secured construction loans
representing estimated 80 percent of the fair market value of the completed house and lot. Deeds of trust securing these loans were duly executed and properly placed of record. Bank of Mississippi was the construction lender for Tract No. I. Peoples Bank was the construction lender for Tract Nos. II and III. What happens after March 13 is essentially the same for each construction lender.
At this point in time, the lien of the purchase money deed of trust held by L & T Developers, Inc. was prior in right to the liens of each of the three deeds of trust in favor of the construction lenders. Shortly thereafter, L & T Developers, Inc. executed three subordination agreements wherein it agreed and provided that," in accordance with our agreement in said deed of trust ", the lien of its March 13, 1981, deed of trust was subordinated in favor of the construction lenders.
Nothing in any of the three subordination agreements, nor anything in any of the three deeds of trust, makes any express reference to the question of who will bear the risk of loss if the funds advanced under the construction loans were not used to construct the contemplated residential dwelling. Similarly, there is no express provision allocating the loss, if any, caused by the failure of either construction lender to use reasonable diligence to assure that the loan proceeds are used for their intended purposes.
The following summarizes the three loans:
Construction Lender: Bank of Mississippi
Amount of Loan: $ 32,000.00
Deed of Trust Filed for Record: March 27, 1981
Subordination Agreement Filed For Record: April 6, 1981
Construction Lender: Peoples Bank & Trust Co.
Amount of Loan: $ 31,845.00
Deed of Trust Filed for Record: March 20, 1981
Subordination Agreement Filed for Record: March 23, 1981
Construction Lender: Peoples Bank & Trust Co.
Amount of Loan: $ 31,605.00
Deed of Trust Filed for Record: March 27, 1981
Subordination Agreement Filed for Record: April 6, 1981
On Tract No. I, the Bank of Mississippi proceeded to make periodic advances to Bruce, reaching the $32,000 mark by April 20, 1981. An additional advance of $5,000 was made on August 10, 1981. Because Bruce diverted these monies to other purposes, the home had not been completed by the time of trial. The estimated value of what had been erected was $30,000, plus the value of the land.
Similarly, the Peoples Bank made advances on Tract Nos. II and III. The last advance was made on April 21, 1981. The house on Tract No. II was never completed. At trial it was established that the fair market value of what had been done was $13,500, plus the value of the land. No construction was ever begun on Tract No. III.
During the spring and early summer of 1981 Bruce Homes, Inc. was experiencing financial difficulties. Debts unrelated to the three tracts in question were pressing. These construction monies were diverted. The chancellor found as a fact that none of the loan proceeds disbursed by the two construction lenders between March and April of 1981 actually went into the construction of improvements on any of the three tracts. The chancellor further found as a fact that neither construction lender had exercised reasonable diligence to assure that the monies advanced were used by Bruce in the construction of improvements on any of the three tracts.
Arick performed all of the electrical, heating and air conditioning installation for Bruce on Tract No. I. The reasonable value of work done by Arick was $3,200.00. On October 8, 1981, Arick duly filed his Notice of Construction Lien in the office of the Chancery Clerk of Clay County, Mississippi, claiming a mechanic's and materialman's lien against the uncompleted dwelling on Tract No. I.
The Wickes Corporation provided materials and supplies that went into the uncompleted dwelling on Tract No. I, the reasonable value of which was $5,030.89. Wickes similarly provided materials and supplies that went into Tract No. II, the reasonable value of which was $2,387.77. On October 21, 1981, Wickes filed its Notice of Construction Liens in the
office of the Chancery Clerk of Clay County, Mississippi.
Bruce, of course, defaulted on all of its obligations. It has not paid the $24,000 due L & T Developers on this lot, nor has it paid any part of the three construction loans, nor has it paid the two construction lienors. Presumably, Bruce is insolvent, both hopelessly and permanently so.
On November 3, 1981, L & T Developers, Inc. filed a civil action in the Chancery Court of Clay County, Mississippi, naming the Bank of Mississippi, Peoples Bank and Bruce Homes, Inc. as defendants. L & T sought an adjudication that the lien of its deed of trust would be deemed prior in right to that held by the construction lenders. At the same time L & T had a lis pendens notice placed against all three tracts. L & T filed a separate bill of complaint to foreclose lien on November 25, 1981. This time L & T joined not only the builder and the two construction lenders, but also a number of purported materialmen, mechanics and construction lienors. In this action L & T retraced much of the same ground as in the original suit and then asked a judicial foreclosure of its purchase money deed of trust on the three tracts of land.
On December 8, 1981, Peoples Bank conducted power of sale foreclosures on Tract Nos. II and III. Peoples Bank thereupon bid in and purchased both, the Trustee's Deeds reciting a sales price of $1,000 on Tract No. II and $500 on Tract No. III.
On December 22, 1981, Bank of Mississippi conducted a similar power of sale foreclosure and bid in Tract No. I for $1,000.
Two critical fact questions were hotly litigated in the Chancery Court. First, were the proceeds of the two construction loans, or any part thereof, in fact used by Bruce Homes, Inc. in connection with the construction of residential dwellings on the three tracts in question, or were these monies used by Bruce for other purposes? Second, did the two construction lenders, or either of them, exercise reasonable diligence to assure that the proceeds of the construction loan were used to build the contemplated residences? On each of these issues the chancellor made clear findings of fact against the construction lenders.
Our scope of review of findings of fact made by a chancery court is, as all well know, quite limited. We must consider the evidence in the light most favorable to the party in whose favor the fact findings were made. We must also give that party the benefit of all reasonable favorable inferences
which may be drawn from the evidence. If when we do this we find that there is substantial evidence which supports the finding of fact made by the chancellor, we must affirm.
These principles are too well established to require extensive citation of authority. See, e.g., Blakeney v. Blakeney, 244 So. 2d 3, 4 (Miss. 1971); Culbreath v. Johnson, 427 So. 2d 705, 707-708 (Miss. 1983); and Griffith, Mississippi Chancery Practice (2d ed. 1950) 674.
There is a corollary principle which should also be kept in mind as we proceed. It arises with respect to issues with respect to which the chancellor made no specific finding of fact. We are required by our prior decisions and by sound institutional considerations to assume that the chancellor resolved in favor of appellees all conflicts in the evidence on fact issues with respect to which the chancellor ...