## Facts

- A developer (Equity Investors) planned a large apartment project on two parcels originally owned by a group of individuals, who agreed to transfer title and take a deed of trust.
- The individuals recorded their deed of trust but agreed to subordinate their interest to the construction lender.
- A bank (National Bank of Washington) made a construction loan of about $1.85 million secured by a deed of trust recorded with the intent to be first priority.
- The loan documents contemplated future advances and gave the bank broad discretion over whether, when, and to whom construction funds would be disbursed.
- A lumber supplier (Columbia Wood Products) began delivering materials after the bank’s deed of trust was recorded; the materials were incorporated into the project.
- Columbia later perfected a materialman’s lien for unpaid amounts (about $119,000).
- Cost overruns made the loan insufficient to complete the project; the bank continued making advances while retaining control over disbursements.
- The trial court gave the bank priority over Columbia for all advances under the deed of trust; Columbia appealed on priority of the bank’s later advances.

## Issues

1. Whether a deed of trust securing future advances has priority from recordation for the full stated amount, or only as each advance is made, depending on whether advances are obligatory or optional.
2. Whether the construction loan’s disbursement provisions made the bank’s advances optional rather than obligatory, such that intervening materialman’s liens take priority over later advances.
3. What fiduciary and performance duties an escrow holder owes to the principals in a complex closing and whether strict compliance is required.
4. Whether a party may repudiate a voluntarily and knowingly executed contract absent fraud, deceit, or coercion.
5. Whether a lender-inducing guaranty/indemnity is invalid under Washington’s construction anti-indemnity statute, RCW 4.24.115.
6. Whether a construction lender owes duties to nonborrower project participants beyond contract terms, and if so, the scope of those duties.

## Decision

- The Supreme Court of Washington reversed in part and remanded.
- The court held that obligatory future-advance security relates back to recording and is senior to later encumbrances, but optional advances gain priority only when made and are junior to intervening encumbrances.
- The bank’s future advances were optional because the loan documents gave the bank broad discretion over disbursements; therefore, the bank was senior only for advances made before Columbia’s lien attached, and junior for advances made after.
- The court reaffirmed that an escrow holder is a fiduciary agent owing an absolute duty of honesty, reasonable skill and care, and strict compliance with escrow instructions.
- The court held that a party cannot repudiate a contract voluntarily and knowingly made absent fraud, deceit, or coercion.
- The court upheld the guaranty/indemnity given to induce the bank’s loan, concluding it was not a construction contract within RCW 4.24.115 and was not void under that statute.
- The court held the construction lender owed, beyond contractual obligations, only a duty to act in good faith in managing the loan, rejecting broader tort or fiduciary duties to other project participants.

## Legal Principles

- A security instrument for obligatory future advances has priority for the full obligated amount from the time of recordation against later encumbrances.
- Where future advances are optional (left to the lender’s discretion), each advance is treated as a separate lien arising when made; intervening liens take priority over later advances.
- Broad lender discretion over timing, amount, payees, and conditions of disbursement indicates optional, not obligatory, advances for priority analysis.
- A materialman’s lien may take priority over a lender’s later optional advances if the lien attaches before those advances are made.
- An escrow holder is a fiduciary to the principals and must act with absolute honesty, reasonable care, and strict compliance with escrow instructions.
- Contracts voluntarily and knowingly executed are enforceable absent fraud, deceit, or coercion.
- A lender-oriented guaranty/indemnity given as consideration for financing is not necessarily a construction contract subject to RCW 4.24.115.
- A construction lender’s extra-contractual duty to other participants is limited to good-faith administration of the loan.

## Conclusion

The court required priority to be recalculated because the bank’s discretionary construction advances were optional and therefore subordinate to Columbia’s intervening materialman’s lien as to advances made after the lien attached, while also reaffirming strict escrow-fiduciary duties, enforcing voluntarily made agreements, sustaining the loan-inducing guaranty against a statutory challenge, and limiting lender duties to good-faith loan management beyond the contract.


National Bank of Wash. v. Equity Invs., 506 P.2d 20 (Wash. 1973)