IN THE SUPREME = COURT OF TEXAS

IN THE SUPREME COURT OF TEXAS

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No. 06-1016

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LaSalle Bank = National=20 Association, a/k/a LaSalle National Bank, as Trustee and LaSalle = National Bank,=20 as Trustee Under the Pooling and Servicing Agreement Dated June 1, 1999, = Series=20 1999=962, Petitioners,

Lorae White and Gerald = Geistweidt, Respondents

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On Petition for Review from = the

Court of Appeals for the Fourth = District of=20 Texas

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PER = CURIAM

=20 =20 =20 =20 =20 =20 =20 =20

The = Texas=20 Constitution prohibits homestead property designated for agricultural = use from=20 being pledged to secure a home-equity loan, and mandates forfeiture of = all=20 principal and interest for loans so secured. In this case, a borrower = obtained a=20 home-equity loan secured by agricultural homestead property, disbursed a portion of the proceeds at closing to = pay off=20 constitutionally permissible purchase-money and tax liens (the = =93refinance=20 portion=94), and kept the remaining balance (the =93cash-out = portion=94). The debtor=20 defaulted on the note, and the trial court declared the entire debt, and = the=20 bank=92s lien, invalid. A divided court of appeals affirmed. 217=20 S.W.3d 573, 579. We hold that the forfeiture penalty does not = preclude=20 the lender=92s recovery of the refinance portion of the loan proceeds = that were=20 used to pay the debtor=92s constitutionally permissible pre-existing = debt because=20 the lender was equitably subrogated to the prior lienholders=92 interests. Accordingly, we affirm = in part, and=20 reverse in part, the court of appeals=92 judgment.

=20 Lorae White executed a home-equity = note, later=20 assigned to LaSalle Bank,[1] in the principal amount of = $260,000. The=20 note recited that the transaction was an =93extension of credit,=94 as = defined by=20 article XVI, section 50(a)(6) of the Texas=20 Constitution. The note was secured by a lien against 10.147 acres of = White=92s=20 53.722-acre homestead property. At the time of disbursement, the lender = used=20 $185,010.51 of the loan proceeds to pay off the valid purchase-money = lien=20 against the total acreage, and another $9,410.96 to pay a state = property-tax=20 lien (the =93refinance portion=94). The remainder after closing costs, = $57,518.50,=20 was paid directly to White (the =93cash-out portion=94). White failed to = make her=20 first payment on the loan, paid only five of the monthly payments due = during the=20 first year, and thereafter stopped making payments altogether. When = LaSalle=20 filed an application for a home-equity loan foreclosure, White filed = this suit=20 seeking a declaratory judgment that the bank had forfeited all principal = and=20 interest because the loan violated the Texas Constitution.[2]

=20 After a bench trial, the trial court found that the debt was = secured by=20 homestead property designated for agricultural use in violation of the = Texas=20 Constitution and signed a judgment quieting title free and clear of any = liens or=20 claims asserted by LaSalle. The court of appeals affirmed, holding that = the=20 Constitution mandated forfeiture of the prohibited loan and prohibited = equitable=20 subrogation for the refinance portion of the loan proceeds used to pay = White=92s=20 pre-existing homestead debt. Id. We disagree that the = Constitution=20 abrogates lenders=92 equitable subrogation rights under the common = law.

=20 For over 175 years, Texas has carefully protected the = family=20 homestead from foreclosure by limiting the types of liens that can be = placed=20 upon homestead property. Texas became the last state in the = nation to=20 permit home-equity loans when constitutional amendments voted on by = referendum=20 took effect in 1997. Such loans permit homeowners to use the equity in = their=20 home as collateral to refinance the terms of prior debt and secure = additional=20 loans at rates more favorable than those for consumer loans. Although=20 home-equity lending is now constitutionally permissible, article XIV, = section=20 50(a)(6) of the Texas Constitution still = places a=20 number of limitations on such lending. Relevant to this appeal, the = Constitution=20 prohibits home-equity loans from being =93secured by homestead property = designated=20 for agricultural use.=94 Tex. = Const. art.=20 XVI, =A7 50(a)(6)(I).

=20 LaSalle does not here dispute the agricultural designation of = White=92s=20 homestead property or that its home-equity loan to White violated the=20 constitutional prohibition. Nor, for purposes of this appeal, does = LaSalle=20 challenge its forfeiture of principal, interest, and liens related to = the=20 cash-out portion of the loan.[3] LaSalle does contend, however, = that it is=20 entitled to an equitable lien on White=92s homestead for money that it = disbursed=20 to pay constitutionally valid indebtedness.

=20 Texas=20 has long recognized a lienholder=92s common = law right to=20 equitable subrogation. See Benchmark Bank v. = Crowder,=20 919 S.W.2d 657, 661 (Tex. 1996); = Faires v. Cockrill, 31 S.W.=20 190, 194 (Tex. 1895); Oury v. Sanders, 13 S.W. 1030, 1031=20 (Tex.=20 1890). The doctrine allows a third party who discharges a lien = upon the=20 property of another to step into the original lienholder=92s shoes and assume the lienholder=92s right to the security interest = against the=20 debtor. First Nat=92l Bank of Kerrville v. O=92Dell, 856 S.W.2d = 410, 415=20 (Tex. 1993)=20 (citing Faires, 31 S.W. at 194). The = doctrine=20 of equitable subrogation has been repeatedly applied to preserve lien = rights on=20 homestead property. See, e.g., = Benchmark, 919=20 S.W.2d at 661; Farm & Home Sav.=20 & Loan Ass=92n v. = Martin, 88 S.W.2d 459, 469=9670 (Tex.=20 1935). If applied in this case, LaSalle=92s payment of = the=20 balance of the purchase-money mortgage and the accrued taxes on = White=92s property=20 would entitle it to assume those lienholders=92 security=20 interests in the homestead. White contends, though, and the court of = appeals=20 held, that article XVI, section 50(e) of the Texas Constitution = abrogates all=20 equitable subrogation rights, including those that arise from payment of = constitutionally valid debts. 217 S.W.3d at = 578=9679. We=20 disagree.

=20 Article XVI, section 50(e), in its entirety, provides:

A=20 refinance of debt secured by a homestead and described by any subsection = under=20 Subsections (a)(1)=96(a)(5) that includes the = advance of=20 additional funds may not be secured by a valid lien against the = homestead=20 unless:

(1) =20 the refinance of the debt is an extension of = credit=20 described by Subsection (a)(6) of this section; or

(2) =20 the advance of all the additional funds is for reasonable costs = necessary to=20 refinance such debt or for a purpose described by Subsection (a)(2), = (a)(3), or=20 (a)(5) of this section.

Tex. Const. art. XVI, =A7=20 50(e). When interpreting the Texas Constitution, we =93rely = heavily on its=20 literal text and must give effect to its plain language.=94 Stringer v. Cendant Mortgage Corp., 23 S.W.3d 353, = 355=20 (Tex. 2000); Republican Party of = Tex. v. Dietz, 940 S.W.2d 86, 89 (Tex. = 1997).=20 Section 50(e) contains no language that would indicate displacement of = equitable=20 common law remedies was intended, and we decline to engraft such a = prohibition=20 onto the constitutional language. LaSalle=92s equitable subrogation = claim does not=20 derive from its contractually refinanced debt and accompanying lien, for = which=20 section 50(e) mandates forfeiture. Instead, LaSalle=92s claim arises in = equity=20 from its prior discharge of constitutionally valid purchase-money and = tax liens.=20 By definition, equitable remedies apply only when there is no remedy at = law, and the legal forfeiture that article 50(e) = imposes does=20 not destroy the well-established principle of equitable subrogation.

=20 We have honored equitable subrogation claims against homestead = property=20 when a refinance, even though unconstitutional, was used to pay off = valid liens.=20 See Benchmark, 919 S.W.2d at 661. In=20 Benchmark, the homeowners borrowed money from Benchmark = Bank=92s=20 predecessor to pay federal taxes and signed a note giving the bank a = deed of=20 trust that purported to create a lien against the homestead. When the = homeowners=20 defaulted and the bank sought to foreclose the lien, the homeowners = claimed the=20 lien was invalid because the then-existing version of article XVI, = section 50=20 did not specifically identify federal tax liens as a valid indebtedness = against=20 homestead property. We held that, under the Supremacy Clause of the = United=20 States Constitution, the IRS could obtain and enforce a federal tax lien = against=20 Texas=20 homestead property. Id. at=20 660. We further held that Benchmark was equitably subrogated to = the=20 federal tax lien against the homestead, even though the Texas = Constitution did=20 not recognize the validity of a federal tax lien against the property = and the=20 Supremacy Clause did not require us to do so when the IRS no longer held = the=20 lien. Id. at=20 661. We emphasized that, =93[o]nce = valid, the=20 lien does not become invalid against the homestead simply because the = original=20 debt has been refinanced.=94 Id. To hold otherwise, we = said, would=20 defeat the purpose of homestead protection: =93Homestead owners must have the = ability to=20 renew, rearrange, and readjust the encumbering obligation to prevent a = loss of=20 the homestead through foreclosure.=94 Id.=20 (citing Machicek v. Barcak, 170 S.W.2d 715, 717 (Tex. = 1943)).

=20 White contends Benchmark is inapposite to this case = because it was=20 based on the Texas Constitution as it existed before passage of the = home-equity=20 amendment in 1997. If section 50(e) is to have any meaning whatsoever, = White=20 argues, it must operate to change the law surrounding the forfeiture of = liens.=20 In effect, White contends article XVI, section 50(e) overrules = Benchmark.=20 But as we have noted, section 50(e) does not discuss equitable remedies. = And=20 section 50(e) need not be read to prohibit equitable subrogation of = valid liens=20 in order to have meaning. The contractual loan transaction between = LaSalle and=20 White involved an =93extension of credit=94 under section 50(e), which = the bank here=20 concedes was forfeited by securing the debt with property designated for = agricultural use. LaSalle=92s equitable subrogation claim, though, = arises not from=20 the extension-of-credit transaction but from its payment of the = pre-existing,=20 constitutionally valid liens, which allowed the bank to step into the = shoes of=20 the prior lienholders. See Oury, 13 S.W. at 1031. Thus, section = 50(e)=20 operates here to invalidate any liens related to the cash-out portion of = the=20 loan.

=20 Invalidation of a contractual lien does not preclude equitable=20 subrogation. In Texas Land & Loan Co. v. Blalock, we held = that,=20 although a home-equity loan was invalid under the Texas Constitution, = the lender=20 was entitled to equitable subrogation to the extent of the prior valid=20 purchase-money lien that the loan had been used to discharge. 13 S.W. 12, 13=9614 (Tex. 1890). In Faires, too, we stated that =93[o]ne who = discharges the=20 vendor=92s lien upon lands, even the homestead, either by paying = as surety,=20 or at the request of the debtor, or at a judicial sale, which, for=20 irregularities in the process, fails to convey the title, is entitled to = be=20 subrogated to the lien of the creditor to the extent of the payment so = made.=94 31=20 S.W. at 194 (emphasis added). And again in Martin, we reiterated = that the=20 refinancing lender which discharged a valid mechanic=92s lien was = entitled to=20 equitable subrogation, even though such a lien on the homestead would = otherwise=20 violate the constitution. Martin, 88 S.W.2d = at=20 469=9670. Throughout our jurisprudence, we have stressed that the = doctrine=20 of equitable subrogation works to protect homestead property. Without = equitable=20 subrogation, lenders would be hesitant to refinance homestead property = due to=20 increased risk that they might be forced to forfeit their liens. The = ability to=20 refinance provides homeowners the flexibility to rearrange debt and = avoid=20 foreclosure. Benchmark, 919 S.W.2d at = 661;=20 Machicek, 170 S.W.2d at 717. Article = XVI, section=20 50(e) does not abrogate this longstanding common law principle or = preclude=20 LaSalle Bank=92s entitlement to equitable subrogation for the refinance = portion of=20 the loan proceeds that were used to extinguish White=92s = constitutionally=20 permissible purchase-money and property-tax liens.

=20 Accordingly, without hearing oral argument, we grant the petition = for=20 review, reverse the court of appeals=92 judgment in part, affirm in = part, and=20 remand to the trial court for further proceedings consistent with this = opinion.=20 See Tex. R. App. P.=20 59.1.

Opinion=20 Delivered: December 21, 2007

^[1]=20 We refer to the petitioner, LaSalle Bank National Association, a/k/a = LaSalle=20 National Bank, as Trustee and LaSalle National Bank, as Trustee Under = the=20 Pooling and Servicing Agreement dated June 1, 1999, Series 1999=962, as = =93LaSalle=20 Bank.=94

^[2]=20 Respondent Gerald Geistweidt was added to = the suit=20 after White conveyed an interest in the property to him.

^[3]=20 When a home-equity loan violates the terms of section 50(a)(6), section 50(a)(6)(Q)(x) provides that the = lender=20 forfeits the principal and interest, while section 50(e) discusses = forfeiture of=20 liens.