Sixteen deals with the same builder. One contract they knew about. $91,000 lost
A construction lender just learned the hard way that having documents in your file means you actually have to read them.
First State Bank of the Southeast thought it had done everything right. It made a construction loan to a builder, recorded its mortgage at the county clerk's office, and sat back as the first lienholder. But on February 6, 2026, the Kentucky Court of Appeals handed down a decision that should make every construction lender take a second look at what is sitting in their loan files.
Here’s what happened. On May 14, 2021, Sudharssan Jagannathan and Sujatha Santhanam signed a contract with Maynard Builders to construct a home on a lot at 2425 Lorenzo Way. The twist was that Maynard did not even own the lot yet. The total price for everything came to $760,811.
Jagannathan sent Maynard two checks totaling $91,297 right after signing the contract. The original contract said "earnest money," but someone crossed that out and wrote "cash advance" instead. Jagannathan wrote "earnest cash advance" on the checks themselves.
Two months later in July 2021, First State Bank stepped in with a construction loan for Maynard and promptly recorded its mortgage. The bank had already done sixteen deals with this builder, so this was familiar territory. But here is the kicker: the bank had a copy of the contract between Maynard and Jagannathan sitting in its files. The bank knew Jagannathan had already handed over more than ninety thousand dollars.
Construction started but stalled at the halfway point. Jagannathan sent another check for $14,574 in April 2022 for a change order. Then Maynard fell apart completely, abandoning this project and everything else. The builder became a regular in foreclosure court.
First State Bank foreclosed on the property. In June 2024, the court-ordered sale brought in $452,550. The bank took $343,264.53 off the top, but everyone agreed to hold back the remaining $105,872 while they fought over who got what. The bank was still short about $95,000 from its original loan.
Jagannathan argued he had an equitable lien on the property that came before the bank's mortgage, even though he never recorded anything until 2023. The trial court agreed and gave him all the remaining proceeds.
The bank appealed, insisting it should win because it recorded first. Not so fast, said the Court of Appeals.
Kentucky follows what lawyers call a race-notice system, but the appeals court made clear this does not mean whoever gets to the courthouse first automatically wins. If you know about someone else's claim before you record your mortgage, that earlier claim can beat you even without being recorded.
The court pointed to a 1997 Kentucky Supreme Court case called Tile House that dealt with almost the same situation. In that case, homeowners had paid money to a builder, the bank knew about it, and the homeowners' equitable interest won out over the bank's recorded mortgage.
The appeals court said the contract in the bank's possession told the whole story. Jagannathan had given Maynard nearly $92,000, and the contract said that money was going toward buying and improving the property. That meant Maynard was essentially holding the property in trust for Jagannathan. The bank knew all this before it recorded its mortgage.
But the court drew a line. That additional $14,574 Jagannathan paid in April 2022 came months after the bank recorded its mortgage in July 2021. The bank could not have known about money that had not been paid yet. So the court reversed that part of the trial court's decision and sent the case back with instructions to give the bank that $14,574.
The bottom line for lenders is pretty straightforward. You cannot just collect paperwork to check a box and then ignore what it says. If you review a buyer-builder contract during underwriting and it shows the buyer has already paid money to the builder, you are on notice. That buyer might have an equitable interest that will jump ahead of your mortgage, even if you race to the courthouse and record first.
