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Alabama Supreme Court changes course on validity of future-advance mortgages

In September 2018, the Alabama Supreme Court issued an opinion in GHB Constr. and Dev. Co., Inc. v. West Alabama Bank and Trust, No. 1170484, that caused considerable concern for Alabama lenders. The Court held that future-advance mortgages do not come into existence until funds are actually advanced regardless of when the mortgage was recorded. Last Friday, the Alabama Supreme Court reversed its September 2018 opinion and held that the priority of a future-advance mortgage is based on the date of recording, not when the lender advances funds. A link to the March 2019 decision can be located here. This decision should ease the uncertainty created by the Court’s September 2018 decision.

In GHB Construction, Penny Guin hired GHB Construction & Development Co. Inc. to build a house. To finance the construction, she entered into a future-advance mortgage with West Alabama Bank and Trust. The mortgage was recorded only a few days after it was signed. Several months later, GHB began construction. West Alabama did not actually advance any funds until several months after that.

Later, GHB then sought a declaration that its materialman’s lien had priority over West Alabama’s mortgage.  GHB’s theory was that it had started work before West Alabama made any advances and, therefore, its lien should have priority. The trial court granted West Alabama’s motion to dismiss and GHB appealed.

In its original opinion released in September 2018, the Alabama Supreme Court reversed, holding that West Alabama’s mortgage had not come into existence until the first advance was made. Because that was after GHB had started work on the house, GHB’s materialman’s lien had priority. On application for rehearing, the Court withdrew its original opinion reversing the trial court and affirmed. The Court reasoned that, under Alabama Code § 35-4-34, a mortgage does not require consideration to be legally valid. As such, West Alabama’s mortgage was valid the date it executed and obtained priority upon recording. Because that date was prior to the start of construction, West Alabama’s mortgage had priority over the materialman’s lien.

The Alabama Bankers Association, Alabama Land Title Association, the League of Southeastern Credit Unions & Affiliates, the Mortgage Bankers Association of Alabama, Inc., and the Credit Union Coalition of Alabama filed a joint amicus brief in support of rehearing.