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Whitney Bank v. Triangle Construction Co. Inc.

Supreme Court of Mississippi, En Banc

October 5, 2017

WHITNEY BANK f/k/a HANCOCK BANK, A MISSISSIPPI STATE CHARTERED BANK d/b/a HANCOCK BANK
v.
TRIANGLE CONSTRUCTION COMPANY, INC.

          DATE OF JUDGMENT: 04/28/2016

         HARRISON COUNTY CHANCERY COURT, HON. SANFORD R. STECKLER TRIAL JUDGE.

          ATTORNEY FOR APPELLANT: DEREK ANDREW HENDERSON.

          ATTORNEYS FOR APPELLEE: D. RONALD MUSGROVE MICHAEL SHELTON SMITH, II MACY DERALD HANSON.

          TRIAL COURT ATTORNEYS: DEREK ANDREW HENDERSON JEFFREY MONROE WILLIAMS MACY DERALD HANSON MICHAEL SHELTON SMITH, II D. RONALD MUSGROVE JEFFREY MATTHEW GRAVES CHAD MICHAEL KNIGHT JOHN G. CORLEW JOY LAMBERT PHILLIPS.

          KING, JUSTICE.

         ¶1. In this lien priority case, a property owner defaulted on his obligations, and the construction lender foreclosed the property. The general contractor had a materialman's lien on the property. At the foreclosure sale, the purchase price for the property was significantly lower than the total amounts owed. The sole issue before the chancery court was which lien had priority - that of the construction lender, or that of the contractor. The chancery court found that the contractor's lien had priority. Because the chancery court did not abuse its discretion, this Court affirms.

         FACTS AND PROCEDURAL HISTORY[1]

         ¶2. Knight Properties purchased a piece of property on which it planned to build a residential development. In February 2007, Hancock Bank issued a line of credit[2] to Knight Properties in the amount of $2.25 million. In gathering information to approve the loan, Hancock obtained the contract between Knight Properties and Triangle Construction Company, Inc., entered into on February 12, 2007, for Triangle to be the contractor on the project. Before approving the loan, Hancock checked Triangle's contractor's license to ensure it possessed a valid one. Hancock and Knight executed a promissory note and a deed of trust on the property. Later in 2007, Knight conveyed the property to Reunion of Biloxi Development LLC, a conveyance that was essentially a name change. Reunion assumed Knight's debt to Hancock and a new promissory note in the amount of approximately $1.9 million was signed.

         ¶3. The first draw on the loan was made on February 19, 2007, in the amount of $966, 872.71, and was used to pay off the balance of the existing purchase loan on the land. Hancock Bank had financed the original purchase of the property, so it used the line of credit to pay off the existing balance to itself. The remaining draws occurred sporadically through May 11, 2009, with Hancock distributing a total of nine draws, in the total amount of $1, 704, 660.42. For each distribution, Hancock's attorney, George Murphy, checked the chancery court for liens on the property and obtained an owner and/or contractor affidavit from Chad Knight. The affidavit attested that all subcontractors, materialmen, and other such laborers had been paid in full any amounts owed. The affidavit also had the contractor waive any claim to a lien and affirmed that "[t]he owner has no interest or ownership in the contracting firm or firms and the contractor has no interest in the real property described above[.]" Chad Knight then signed each affidavit twice for Reunion, as both the owner and the contractor. Murphy testified that Hancock had not informed him that Triangle was the contractor, and that information would have changed the way he did things in that he "certainly" would have had the contractor sign the affidavit. Hancock asserted that the information that Triangle was the contractor was sent to Murphy at some point via fax. Hancock also had the site inspected by an engineer to ensure that the progress matched the requested disbursement amount.

         ¶4. On March 31, 2008, Reunion and Triangle entered into a contract for Triangle to be the contractor on the project.[3] It provided that Triangle "agrees to furnish all materials and perform all work necessary to complete Reunion Place Subdivision . . . . The scope of work to achieve completion is further described as Site Improvements, Water Improvements, Sewer Improvements, Storm Drainage Improvements. The project will be constructed based on the plans drawn by [the engineer.]" It also provided that all subcontracts were subject to the approval of both the owner and the engineer. The contract stated that the contractor would submit an invoice to the owner and the engineer on the twenty-fifth of every month and that the invoice was payable by the tenth of the following month. It provided that work on the project would cease if the invoice was not paid in full by the fifteenth of the following month. Work commenced on the project. Financial problems then arose for Chad Knight. Some time around October 2008, Triangle pulled off the work site for nonpayment, but it eventually returned.

         ¶5. In December 2008, Henry Knue and Donna Smith, Hancock Bank employees assigned to the Reunion loan, had a conversation about Triangle. Knue emailed Chad Knight with a subject line "Draw Pending - Triangle Construction" and stated "Please email or fax invoice due Triangle construction so that I may accurately instruct attorney for disbursement." Chad Knight replied that he was faxing the invoice, "However, I'm not sure what you mean regarding the disbursement instructions to the attorney. The draw needs to be disbursed to Reunion Development as all draws have been. We will pay our contractors and vendors." Knue forwarded this to Smith as an "fyi, " and Smith responded that "All of our attorney letters that support the disbursement instruct the attorney to disburse any outstanding invoices, etc. that may be out there. I know he is aware of this." Knue replied that the fax he had received from Knight was not a Triangle invoice, but a Reunion invoice. He stated that he "delivered the check so as not to delay the draw given the urgency in posting before end of day on Wednesday. Attorney has historically disbursed to them and executing an affidavit stating no outstanding invoices. Maybe we can address this in Tuesday's meeting with them as well?" Smith replied that "I think that is fine . . . . As long as there are no liens outstanding to Triangle and they are continuing to do the work, then we should be fine. But be sure that your instructions letter to the attorney states that any outstanding liens are paid for."

         ¶6. On April 27, 2009, Chad Knight emailed Smith with a draw request, and stated "FYI, we plan to send payment from this draw and our funds directly to the subcontractor (Warren Paving), as our last payment to the Triangle construction apparently did not end reach the sub. We've taken steps to protect against this happening again."[4] On April 28, 2009, Carla Roy from Hancock emailed George Murphy's paralegal and asked her to update Reunion's title in anticipation of a "progress draw." On May 5, 2009, the paralegal informed Roy that the update was complete. Roy responded "Great, I will schedule the draw with you as soon as we have everything in place on our end. Thanks for the update." Smith, who was copied on this email chain, then emailed Roy, stating "I have a call into Chad to discuss the draw amount, no work on the property since the contractor called and stated he pulled off the property and also the Erosion issues that I inspected this morning!! I will let you know when I hear from him!!" Smith described her inspection of the property, noting that "the roads like caving in and it look [sic] delapidated [sic] basically, like nothing had been going on for several weeks. There was no movement on the property." Yet Hancock distributed a draw to Reunion on May 9, 2009. Additionally, during the majority of this time period, Hancock was aware that Reunion was having financial difficulties. One Hancock document noted that "[t[here have been some issues with the contractor on the job and payment issues with him being paid which both sides state are being taken care of however, this has caused the contractor to pull off the job site for more than 8 weeks now and no work has been complted [sic]."

         ¶7. Triangle filed a construction and materialmen's lien on the property on December 16, 2009, in the amount of $214, 314.18. After Reunion defaulted on the construction loan, Hancock filed a complaint against Chad Knight, Reunion, and Triangle, among others, and also moved for foreclosure. The chancery court authorized Hancock to foreclose on the property. A third party purchased the property at the foreclosure sale for $800, 000. Triangle filed a counterclaim against Hancock for the $214, 314.18 it was owed. Hancock filed a motion for summary judgment as to Triangle, which the chancery court denied.

         ¶8. After a bench trial on the matter, [5] the chancery court found that Triangle's lien had priority over Hancock's claims. The chancery court specifically found that Triangle was the general contractor on the project and that Hancock failed to use reasonable diligence in disbursing the construction loan. It thus ruled that Triangle's lien had priority over Hancock's deed of trust, and that Triangle must be paid first out of the foreclosure proceeds. The chancery court awarded Triangle attorneys' fees in the amount of $106, 350.48 and awarded Triangle pre- and post-judgment interest at the rate of eight percent. Hancock appeals, arguing that 1) the chancery court erred in its determination that the loan funds did not go into the project because the first portion of the loan funds went to pay off an existing loan on the property; 2) the chancery court erred by determining that Hancock did not use reasonable diligence in disbursing the loan; 3) the chancery court erred in awarding Triangle pre- and post-judgment interest at the rate of eight percent; and 4) the chancery court erred in awarding Triangle attorney's fees and expenses.

         ANALYSIS

         1. Standard of Review

         ¶9. "Findings of fact made by a chancellor may not be disturbed or set aside on appeal unless manifestly wrong." Cotton v. McConnell, 435 So.2d 683, 685 (Miss. 1983). "This is so whether the facts found be characterized as ultimate facts or as mere evidentiary facts." Id. This Court "must consider the evidence in the light most favorable to the party in whose favor the fact findings were made. [This Court] must also give that party the benefit of all reasonable inferences which may be drawn from the evidence. If when [this Court does] this [it] find[s] that there is substantial evidence which supports the finding of fact made by the chancellor, [it] must affirm." Peoples Bank & Trust Co. and Bank of Miss. v. L & T Developers, Inc., 434 So.2d 699, 704-05 (Miss. 1983). Furthermore, this Court must "assume that the chancellor resolved in favor of appellees all conflicts in the evidence on fact issues with respect to which the chancellor made no findings of fact." Id. at 705. Thus, this Court employs an abuse of discretion standard for review of a chancellor's decisions. McNeil v. Hester, 753 So.2d 1057, 1063 (Miss. 2000). Questions of law, however, are reviewed de novo. Id.

         2. Lien Law

         ¶10. "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." Guaranty Mortg. Co. of Nashville v. Seitz, 367 So.2d 438, 441 (Miss. 1979). Thus, to the extent Hancock can show that its funds actually went into the construction or that it used reasonable diligence in disbursing the loan, its lien holds priority over Triangle's lien.

         3. Whether the funds went into the construction.

         ¶11. Hancock argues that because the first disbursement went to pay off itself for the existing loan on the land, those funds actually went into the construction, because construction is impossible without the land, a so-called "purchase-money" rule within the construction funds test. The chancellor rejected this argument. Triangle argues that money advanced to purchase undeveloped land is clearly not money that went into the construction project.

         ¶12. This Court has noted that "'[a] lender advancing construction funds must use reasonable diligence to see that these funds are actually used in payment for materials or other cost of construction. Such a construction mortgagee has preference over materialmen and laborers only to the extent that its funds actually go into the construction.'" Deposit Guaranty Nat'l Bank v. E.Q. Smith Plumbing & Heating, Inc., 392 So.2d 208, 211 (Miss. 1980) (emphasis added) (quoting Wortman & Mann, Inc. v. Frierson Bldg. Supply Co., 184 So.2d 857 (Miss. 1966)). The intent is clearly that where a construction lender has actually contributed to the construction, such as materials or labor, (or used reasonable diligence to ensure that it is actually contributing to the construction), then its lien takes priority over other parties who have contributed to the construction. See Peoples Bank, 434 So.2d at 707. What is less clear is whether the purchase price of property is a cost of construction. We recognize that some of our cases have, without discussion, separated the purchase money price and the costs of construction, while others have, without discussion, combined the two. See Wortmann & Mann, 184 So.2d at 858 (purchase price of land advanced by construction lender not included in costs of construction); Deposit Guaranty, 392 So.2d at 209-10 (purchase price of land included in amount that received priority as a construction loan). The dissent correctly notes that in Wortmann & Mann, "this language is merely a recapitulation of the testimony given at the trial court level. In its analysis, the opinion does not set forth how the purchase money should have been treated." Dis. Op. at ¶ 31. Yet, the dissent inexplicably treats the same recapitulation of trial testimony in the Deposit Guaranty and Virden cases as "dispositive" and "on point." Dis. Op. at ¶ 27. The entirety of the language in Virden was that the trial court "declared a first lien on these funds in favor of the Bank for $7, 315.76, " that "[o]nly $7, 315.76 of the money advanced by the Bank actually went into the purchase of the lots and the construction of the houses, " and that "only $7, 315.76 of its money actually went into the project." Virden, 45 So.2d at 270. In its analysis, the opinion does not discuss how the purchase money should have been treated, as this particular finding was not challenged, and the Court merely affirms those findings. Peoples Bank , however, provides more clarity and discussion on this issue. L&T Developers, Inc., financed Bruce Homes, Inc.'s purchase of three tracts of undeveloped land. Peoples Bank, 434 So.2d at 703. Bruce Homes was a speculative builder and planned to build a residence on each of the three tracts. Id. After L&T financed the purchase, Bruce Homes obtained three secured construction loans from two different banks. Id. Materialmen then provided goods and services to the project. Id. at 704. Bruce Homes then defaulted on all its obligations and the properties were foreclosed. Id. The liens of L&T, the materialmen, and the construction lenders were all valid, so the issue was priority among the valid liens. Id. at 714.

         ¶13. As to the priority of construction lender versus materialmen, the Court noted the principle that the ...


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