National Bank of Washington v. Equity Investors

Equity Investors (borrowers) (defendant) executed a deed of trust with National Bank of Washington (the Bank) (plaintiff) on May 9, 1969, to loan $1,850,000 for an apartment-construction project. The loan agreement stated that $1,750,000 of the funds would be dispersed to the borrowers and placed into a construction-loan account in the lending bank. The agreement stated that the funds would be dispersed to contractors if the architect agreed that the contractor’s work was sufficient and if the lender agreed that the work was completed in a good and workmanlike manner. The agreement also provided the lender with control to use the borrower’s funds to purchase work and materials to protect the property from weather or waste. The Bank had total discretion to fund additional advances. The Bank began advancing funds for the project, and Columbia Wood Products, Inc. (Columbia) delivered wood to the project beginning on May 26. Columbia’s wood was used to construct the buildings. By August 5, construction on the project had stopped, and the borrowers still owed Columbia $119,672. Columbia sued the borrowers. Although the trial court awarded Columbia a judgment for the amount they were owed, the court held that the Bank had a senior security interest because the original loan was executed before Columbia started delivering lumber. Columbia appealed, arguing that the Bank’s later advances were junior security interests because the advances were optional and therefore secured on the later date they were made.