Subordination agreements can be used to impact the priority of all lien holders, whether a bank or a contractor, on a project. In a recent decision, the Fourteenth Court of Appeals found a subordination agreement valid to subordinate an existing lien to one that had yet to be created.
In Brazoria 10.5 Ltd. v. Mac Edison, LLC, David J. Felt, Silver Scape Homes, LLC d/b/a Silver Key Homes, and Parker Apartments, LLC, Brazoria, a lender with a deed of trust, filed suit to declare its Subordination Agreement invalid, claiming its lien on a property had priority over others.
Silverkey Homes had a revolving line of credit through Patriot Bank. Silverkey needed additional collateral, so it directed a related company, Mac Edison, to purchase nine acres of land for $1.5 million from Brazoria. As part of the sale, Brazoria and Mac Edison executed a vendor’s lien, a deed of trust, and a promissory note. Brazoria also executed a “Subordination of Lien” agreement, wherein the parties agreed that Brazoria’s lien would be subordinated to any liens securing Silverkey’s debt to Patriot Bank. At the time of the Subordination Agreement’s execution, Patriot Bank had no such liens in existence. However, as further part of the sale, Mac Edison granted Patriot Bank a security interest in the nine-acre property and agreed that Mac Edison would not permit any lien superior or equal to Patriot Banks, attach to the property.
After Mac Edison defaulted on its debt to Brazoria, among other subsequent creditors, Brazoria filed suit against Silverkey, Mac Edison, and others. Mac Edison and Silverkey moved for, and the trial court granted, partial summary judgment on the grounds that the Subordination Agreement was enforceable and therefore Brazoria’s lien did not have priority.
Brazoria appealed and argued that the Subordination Agreement was not enforceable because it did not describe the indebtedness and the specific lien which Brazoria’s lien would be subordinated. The Court disagreed and held that the Subordination Agreement did not need to identify the specific lien that would be superior, and contracts only need a reasonable degree of definiteness as to its material and essential terms. The Court noted that requiring a subordination agreement to identify the specific superior lien would eliminate the practical effect of many subordination agreements, and that parties could agree to subordinate an existing lien to a lien that had yet to be created.
The Court further found the Subordination Agreement’s terms showed the parties did not intend to limit the amount of the superior lien or the length of the subrogation. The clear language of the Subordination Agreement made Brazoria’s liens on the property permanently inferior to a lien created to secure Silverkey’s debt to Patriot Bank, regardless of the amount. The Court reasoned that while the Subordination Agreement’s terms were “extremely broad,” they were not indefinite. The parties could have added such limitations, but they did not.
Accordingly, the Fourteenth Court of Appeals upheld the trial court’s partial summary judgment finding Brazoria’s lien to be inferior due to the Subordination Agreement.[1]
Subordination agreements are commonplace in the world of construction and real estate transactions. The Brazoria opinion highlights the need for parties to engage in due diligence to ensure their liens have priority as expected, and that the plain language of the negotiated documents reflect their intention.
[1] Brazoria also argued that the parties entered into a separate agreement limiting the amount and length of subordination. The Court held that subsequent email correspondence did not definitively alter the terms of the Subrogation Agreement. Finally, Brazoria argued that estoppel by deed precluded the Subordination Agreement’s enforcement. The Court held that the representations in the special warranty deed spoke only to circumstances existing when the deeds were executed, not later liens of higher priority.
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