The decisions on their facts covered herein contain little at variance with this view, 28 although on occasion the courts have mistakenly applied to this type of advance the rules governing optional advances rather than the more appropriate rules governing obligatory advances.29

It is with the third or optional future advance that we are primarily concerned, where the mortgage contains a provision that the mortgage shall stand as security for such sums as the mortgagor shall thereafter desire to borrow and the mortgagee shall be willing to lend.

Optional Future Advances

Under common law, it is clear that if first mortgages are properly drafted to secure original advances and if they properly describe optional future advances up to a limit stated in the mortgage, such advances may be made safely by the lender and remain secured as a first lien until the mortgage is cancelled. It is sufficient that the mortgage clearly show a contract between the parties that the mortgage is to stand as security for both an original debt and such additional indebtedness as may arise from future dealings between the parties. Provided such mortgages are properly recorded, they are notice to the world of

contractual obligations and agreements according to the stated terms, and if a subsequent purchaser or incumbrancer fails to take notice, he is not entitled to protection. This would be the almost universal law today, were it not that several states have dealt with the matter by statute with varying degrees of effectiveness.30

In an effort to form a general rule applicable in all state jurisdictions, it may be said that a mortgage which by its own terms is given to secure optional future advances is valid everywhere as between the parties and, duly recorded, will prevail against subsequent purchasers and incumbrancers if the mortgagee be without notice, actual or constructive, of such subsequent conveyance or incumbrance; and that in jurisdictions where the point is undecided, record notice of such subsequent conveyance or incumbrance might, and actual notice thereof probably would, give to the subsequent purchaser or the junior lienor a prior claim as to advances made after such notice.31

Problem of Specificity

Most courts hold that for a mortgage to stand validly as security for optional future advances, a full expression of the parties' intention must be set out in the mortgage, clear

enough so that it will serve as notice to anyone exercising common prudence and ordinary diligence, not only of the parties' intent that the mortgage shall secure future optional advances, but also of the upper limit or aggregate amount of the advances contemplated.32 Cases have varied from one extreme, to the effect that the mortgage need scarcely make such reference at all,33 to the other extreme, where it is held that the actual date and amount of each subsequent advance must be carefully spelled out in the mortgage (as in Maryland).34 As a matter of sound business policy, however, in addition to legal prudence, it is recommended that in all cases even in the jurisdictions where it has been clearly held that a maximum limit need not be set out in the mortgage that such a limit be specified.35 Not only is the matter of moral fairness involved, but the avoidance of possible later charges of inequity or lack of adequate notice on the part of an intervening lienor. Even though in many cases it might easily be proved in court that such a limit need not be specified, much needless litigation could be avoided in advance if not only is the clear intent

spelled out but a maximum limit specified to the contemplated advances.

It might be pointed out here that "dragnet" clauses (i.e., where the mortgage purports to secure any and all future indebtedness of unspecified nature accruing from the grantors) are not strictly within the scope of this article. Most courts manifest a repugnance to this type of all-inclusive clause, and, in the words of the Iowa court, "construe this type of clause carefully and strictly."36

Problem of Notice

Although the general rule is well established that the mortgage will constitute a prior lien for all optional advances made in accordance with its terms before notice of an intervening incumbrance, there has been some diversity of opinion as to what kind of notice will jeopardize the priority. The great majority of states hold that only actual notice or knowledge will adversely affect the lien of the later advances; a minority holds that, in addition to actual notice, notice arising by operation of the recording statutes is sufficient.

Apparently the basis of disagreement between the majority rule and

See Annotation, 81 ALR 631.

the dissenting courts is a differing theory as to when rights become vested under a mortgage securing optional future advances.The majority opinion rests on the equitable maxim, "What has agreed to be done shall, for the advancement of justice, be regarded as done." Since the advances have been provided for, the courts will consider them as made, thus causing the lien for the whole sum to be advanced to attach as of the time of the mortgage agreement,37 and not as a lien for each separate advance existing only from the time of the advancement.38 Although there is common agreement that the right to enforce the collection of the advances can arise only after the making of each advance,39 it is the majority opinion that since the lien to the whole has already attached, the recordation of subsequent incumbrances does not affect the first mortgage.

It is almost universally accepted that "actual notice or knowledge" of an intervening lien on the part of the mortgagor will prejudice the priority of later optional advances. The term "actual notice," of course, includes not only express notice but implied notice as well, the latter being notice inferred from the fact that the per

son charged with notice had available to him a means of discovery which he should have used.40 "Constructive" notice is that type of notice imputed to a person not having actual notice, and is solely a creature of statutefor example, that type of notice provided for by many recording statutes. In none of the cases that we have reviewed has there been an instance where the decision turned on "constructive" notice other than "record" notice, and indeed many courts have specifically stated that "record" notice shall not constitute even "constructive" notice.41 Therefore, for the purposes of this discussion and the tabulation of states and cases, we will use the terms "actual notice" and "record notice," since those terms represent the only real distinction made in any of the court decisions, although in a few instances certain courts have left the door open to some type of constructive notice other than record notice.

In order for the optional advances to prevail, the intervening lienor, of course, must have been legally charged with notice of the existence of the mortgage securing future advances, and usually of its terms. The recording of the mortgage will accomplish

44750 0-54-pt. 1-51

such necessary notice as to the existence of the mortgage. Whether or not the terms have been sufficiently stated therein has been discussed above. The recording statutes have in most states been held to operate as notice forward to subsequent purchasers or creditors and not backward to prior parties, whose rights are already fixed by the previous record of their own mortgages.4 42 Chief Justice Redfield considered this matter, together with the problem of actual notice on the part of the prior mortgagee, in an article in 2 American Law Reg. (N.S.) 18:

The most important remaining inquiry is in regard to the extent and kind of notice of the subsequent mortgage, which it is requisite the first mortgagee should have, in order to postpone his further advances to such intervening security. As a general rule, it has been considered that the registry of the second mortgage will only be notice of its contents to future purchasers and incumbrancers, and not to prior incumbrancers, thus operating forward and not backward . . . The general view of the American courts, and the universal declaration of the English courts, as far as we know, is that nothing short of notice in fact will have this effect. . . This may now be regarded as settled law, notwithstanding an occasional case seems to require something more.

Pomeroy states the rule thus:

When a mortgage to secure future advances reasonably states the purposes for which it is given, its record is a constructive notice to subsequent purchasers and encumbrancers; they are thereby put upon an inquiry to ascertain what advances or liabilities have been made or incurred. The record of a subsequent mortgage or conveyance, or the docketing of a subsequent judgment, is not a constructive notice of its existence to such prior mortgagee. The prior mortgage, therefore, duly recorded, has a preference over subsequent recorded mortgages or conveyances, or subsequent docketed judgments, not only for advances previously made but also for advances made after their recording or docketing without notice thereof. As the record of the second encumbrance does not operate as a constructive notice, it re

quires an actual notice to cut off the len of the prior mortgage; and the subsequent encumbrancer may, by giving actual notice, at any time prevent further advances from being made to his own prejudice. (Italics ours.) 43

However, the wording of the re cording statutes in a few instances has been held in effect to import notice both forward and backward. See the consideration infra of Ohio.

Tabulation of State Positions

We shall now set out what appears to be the legal status of optional future advances as they stand today in the 49 jurisdictions, both under the mortgage laws and by court decision. In states where the common law or a variation or reaffirmance of the common law doctrine is in force, additional advances have priority over an intervening lien in the absence of actual notice, and the lender can ordinarily make an advance in safety without a title search. In states where the advance does not have first priority in all cases, however, the lender, even in the absence of actual notice. must make sure that no lien has been placed of record against the property since the original mortgage date before he makes an advance.

In some of the states placed in the "Probable" column below, there is little or no authority on the subject of optional future advances, and in such states it is our opinion that properly drafted and recorded contracts will preserve the superior lien of the advances in the absence of actual notice. In some of the states, the decisions on the subject have been based upon poorly or incompletely drafted contracts, and in many instances there were disputes as to notice. Cases properly presented, based on properly drafted contracts, in many such states would, in our opinion, result in upholding the superior lien of the future

advances. We have placed in the "Minority" column only those states which have refused to recognize the superiority of the lien for optional advances under a properly drafted contract properly recorded and where there is no dispute as to absence of actual notice of an intervening lien or claim.

Although we set out the approximate position of each of the state jurisdictions, together with a brief discussion of the laws and leading cases, it is recommended that in those states where the law is not comprehensive or definitely formulated, mortgagees desiring to deal properly with this question should have a careful and authoritative study made of their own I state law, and a mortgage form clearly and properly drafted to secure described additional advances up to a stated limit.44

THE MAJORITY OR 'CALIFORNIA' RULE

The majority rule that an optional advance is superior to an intervening claim if the mortgagee has no actual notice or knowledge of the intervening lien was well enunciated by the court in the California case of Oaks v. Weingartner,45 decided in 1951:

Although the lien of a mortgage does not operate to secure optional advances made under the mortgage after the mortgagee has acquired actual notice of an encumbrance, subsequent in point of time to his mortgage so as to defeat or impair the rights of the subsequent encumbrancer, the mortgage does have priority over all liens subsequent to its execution and recording to the extent of advances made without actual notice.

It will be noted that the important distinction of the rule is the word "actual."46 In California and 31 other states, either the statutes provide or the courts have held that the only way

PROBABLY FOLLOW THE MAJORITY
OR 'CALIFORNIA' RULE

Although the decisions are few, inconclusive or incomplete in these states and many times based on poorly drafted contracts, it is our opinion that given a properly drawn open-end mortgage contract, the courts would uphold the priority of optional future advances in the absence of actual notice of intervening incumbrances. However, even though existing court decisions favor the superiority of the optional advance, many prudent lenders in this group of states will require a title search in the absence of a decision both clearly defined and directly in point, although an affidavit