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Click here for the full text of this decision FACTS:The Texas Constitution prohibits homestead property designated for agricultural use from being pledged to secure a home-equity loan. It also mandates forfeiture of all principal and interest for loans so secured. Lorae White executed a home-equity note, later assigned to LaSalle Bank, in the principal amount of $260,000. The note recited that the transaction was an “extension of credit,” as defined by Texas Constitution Art. XVI, �50(a)(6). The note was secured by a lien against 10.147 acres of White’s 53.722-acre homestead property. At the time of disbursement, the lender used $185,010.51 of the loan proceeds to pay off the valid purchase-money lien against the total acreage and another $9,410.96 to pay a state property-tax lien (the “refinance portion”). The remainder after closing costs, $57,518.50, was paid directly to White (the “cash-out portion”). White failed to make her first payment on the loan, paid only five of the monthly payments due during the first year, and thereafter stopped making payments altogether. When LaSalle filed an application for a home-equity loan foreclosure, White filed suit seeking a declaratory judgment that the bank had forfeited all principal and interest, because the loan violated the Texas Constitution. After a bench trial, the trial court found that the debt was secured by homestead property designated for agricultural use in violation of the Texas Constitution and signed a judgment quieting title free and clear of any liens or claims asserted by LaSalle. The 4th Court of Appeals affirmed, holding that the constitution mandated forfeiture of the prohibited loan and prohibited equitable subrogation for the refinance portion of the loan proceeds used to pay White’s pre-existing homestead debt. HOLDING:Affirmed in part, reversed and remanded in part. The court stated that it disagreed that the Texas Constitution abrogates lenders’ equitable subrogation rights under the common law. For more than 175 years, the court stated, “Texas has carefully protected the family homestead from foreclosure by limiting the types of liens that can be placed upon homestead property. Texas became the last state in the nation to permit home-equity loans when constitutional amendments voted on by referendum took effect in 1997. “Such loans permit homeowners to use the equity in their home as collateral to refinance the terms of prior debt and secure additional loans at rates more favorable than those for consumer loans. Although home-equity lending is now constitutionally permissible, article XIV, section 50(a)(6) of the Texas Constitution still places a number of limitations on such lending. Relevant to this appeal, the Constitution prohibits home-equity loans from being”secured by homestead property designated for agricultural use.’” LaSalle, the court stated, did not dispute the agricultural designation of White’s homestead property or that its home-equity loan to White violated the constitutional prohibition. Nor did LaSalle challenge its forfeiture of principal, interest and liens related to the cash-out portion of the loan. LaSalle contended, however, that it was entitled to an equitable lien on White’s homestead for money that it disbursed to pay constitutionally valid indebtedness. Texas, the court stated, has long recognized a lienholder’s common law right to equitable subrogation. The doctrine allows a third party who discharges a lien upon the property of another to step into the original lienholder’s shoes and assume the lienholder’s right to the security interest against the debtor. The court disagreed that Art. XVI, �50(e), of the Texas Constitution abrogated all equitable subrogation rights, including those that arise from payment of constitutionally valid debts. Section 50(e), the court stated, contains no language “that would indicate displacement of equitable common law remedies was intended.” LaSalle’s equitable subrogation claim, the court stated, arose not from the extension-of-credit transaction but from its payment of the pre-existing, constitutionally valid liens, which allowed the bank to step into the shoes of the prior lienholders. OPINION:Per curiam.

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