security, independently of the will of the mortgagor; and (3) where future advances may or may not be made, depending on the future agreement of the parties. We will not deal extensively with the first, inasmuch as the law appears to be uniform throughout the country: where the lender is contractually obligated to make certain advances, the advances if properly made take precedence over any lien or incumbrance arising after the date of recording of the mortgage, 24 and usually even where the prior mortgagee has actual notice of the intervening incumbrance. An example is the construction loan, where in many instances the lender is obligated to disburse funds as the building progresses. In holding that an obligatory advance is a part of the original debt and that the lien relates back to the date the "entire debt" was created, the courts reason that it would be manifestly unsound to hold that even actual notice of a subsequent lien would deprive the mortgagee of his lien for advances which he is compelled to make.25 Neither will we consider extensively the second type of advance, where, by the terms of the mortgage, the mortgagee reserves the right to make further advances or expenditures which are necessary to protect the security or the priority of the mortgage, whether or not the borrower shall request or desire the same. The situation could arise, for example, in a construction loan where the mortgagor has abandoned the work, the mortgagee having the right to protect his interests by making additional expenditures to complete the structure and to have a lien therefor which is superior to intervening incumbrances. Payment of delinquent taxes and assessments and the making of essential repairs often fall within such cases.2 26 Although the matter has been little litigated, it is clear that in such cases there is a contractual interest which is as entitled to protection as an option to purchase. When such an interest is put on record there is little reason to believe that a subsequent incumbrancer could impair it, irrespective of the mortgagee's notice thereof.27 "Where a mortgagee is obligated, by contract with the mortgagor, to advance funds to be secured by the mortgage, such mortgage will be a valid lien from the time of its recording, as against all subsequent incumbrances, even though the mortgage money is paid to the mortgagor after such subsequent incumbrances have attached to the mortgaged land. This holds true even though the mortgagee is actually aware of the existence of the subsequent incumbrances at the time he pays out the mortgage money. Land Title & Trust Co. v. Schoemaker, 257 Pa. 213, 101 A 335. Because of the mortgagee's obligation to pay out the money, the mortgage debt is regarded as being in existence from the very beginning." Kratovil, Real Estate Law, Sec. 332. 35"A mortgage, duly recorded, given for definite future advances which the mortgagee is obligated to make, is entitled to priority for the full amount of such advances over a subsequent mortgage, recorded after the former one, though prior to the making of such future advances." Connecticut General Life Insurance Co., 101 NE (2d) 408 (Ohio 1950), quoting Kuhn v. Southern Ohio Loan and Trust Co.. 101 Ohio St. 34, 126 NE 820. In Schaeppi v. Glade, 195 Ill. 62, the court said, ". ... where the mortgagee is bound to make the advances, the lien relates back to the date of the mortgage recordation, and is superior to any subsequent lien or conveyance." Other cases upholding the priority of "obligatory" future advances, even where the mortgagor has actual notice: Peaslee v. Evans, 82 N.H. 313, 133 A 448; Brinkmeyer v. Browneller, et al., 55 Ind. 487; Guaranteed Title & Trust Co. v. Thompson, 93 Fla. 983; Chartz v. Cardelli, 52 Nev. 1, 279 P 761; Omaha Coal, Coke & Lime Co. v. Suess, 74 NW 620, 54 Neb. 379; Gerrity v. Warham Bank, 202 Mass. 214; Boise Payette Lumber Co. v. Winward, 47 Idaho 485, 276 P 971; Antrim Lumber Co. v. Claremore Federal Savings and Loan Association, (Okla. 1951) 230 P (2d) 274 (LEGAL BULLETIN, May, 1953); Cedar v. Roche Fruit Co., 16 Wash. 2d) 652, 134 P (2d) 437 (1943); Elmendorf-Anthony Co. v. Dunn, 10 Wash. (2d) 29, 116 P (2d) 253, 138 ALR 558; Hance Hardware Co. v. Denbigh Hall, Inc., 17 Del. Ch. 234, 152 A 130; Land Title & Trust Co. v. Schoemaker, 257 Pa. 213, 101 A 335; Anglo-American Savings and Loan Association v. Campbell, 13 App. D.C. 581; and other cases listed below in table of approximate state positions. In many instances provision for such advances has been made by statute. See, for example, Sec. 14(3) Colorado B&L Act. "An association may pay taxes, special assessments, insurance premiums, repairs and other similar charges for the protection of its real estate loans. All such payments may .. be added to the unpaid balance of the loan and shall be equally secured by the first lien on the property." See also Sec. 45-54, S.C. Code, where the law uses the words "[Such advances] shall be secured by the mortgage and have the same rank and priority as the principal debt secured thereby..." "One of the most excellently reasoned cases on this subject is Cedar v. Roche Fruit Co., 16 Wash. (2d) 663, 134 P (2d) 437 (1943): Whether advances made under a mortgage are obligatory or optional usually depends upon whether or not the mortgagee is contractually bound to make them; however, 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 advances are considered obligatory when the mortgagee is obliged to make them for his own security. "We believe the advances made can be said to have been obligatory in the sense that they were necessary to protect the previous loans and advances made." Court held that even actual notice of intervening liens would not jeopardize the priority of later advances. See Lidster v. Poole, 122 Ill. App. 227. See also 1, Jones on Chattel Mortgages. Sec. 97: "Advances made by a mortgagee after he has actual notice that others have acquired rights in the property will be postponed to the rights acquired by such other persons, unless the mortgagee be under a binding contract to make the advances, or it be essential to his own security to complete the advances contemplated by the mortgage." (Italics ours.) See Bellamy & Sons v. Cathcard, 72 Iowa 207, 33 NW 636, where such right to advance was upheld, because even though bondsmen had not obligated themselves to advance money to complete a bridge, they had the right to do so upon threatened default by the contractor for their own protection. Also Rowan v. Sharp's Rifle Mfg. Co., 28 Conn. 282; Hyman v. Hauff, 138 N.Y. 48, 33 NE 735; Hamilton v. Rhodes, 72 Ark. 625, 83 SW 351; Tolson v. Pyramid Life Insurance Co., 254 SW (2d) 53 (Ark. 1953). Elmendorf-Anthony Co. v. Dunn, 10 Wash. (2d) 29, 116 P (2d) 253, 138 ALR 558. 20"A mortgage for future advances was recognized as vaild by the common law. It is believed they are held valid throughout the United States except where forbidden by the local law." Jones v. New York Guaranty Co., 101 U.S. 622. In Leeds v. Cameron, 3 Sumn. 492, Mr. Justice Story declared, "Nothing can be more clear, both upon principle and authority, than that at the common law a mortgage, bona fide made, may be for future advances by the mortgagee, as well as for present debts and liabilities." See also Lawrence v. Tucker, 23 How. 14, 16 L. Ed. 474. "Jones states the general rule somewhat more strongly-with the warning, however, that it is "subject to qualification": "The rule that a recorded mortgage expressed to cover future advances has priority 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 in all cases over subsequent conveyances and encumbrances, has full support in recent discussions, and must now be regarded as a settled rule of law. Notwithstanding all the distinctions and refinements which have been introduced into the law on this subject by the many conflicting adjudications upon it, there is strong reason and authority for the rule that a mortgage to secure future advances, which on its face gives information enough as to the extent and purpose of the contract, so that anyone interested may by ordinary diligence ascertain the extent of the encumbrance, whether the extent of the contemplated advances be limited or not, and whether the mortgagee be bound to make the advances or not, will prevail over the supervening claims of purchasers or creditors, as to all advances made within the terms of such mortgage, whether made before or after the claims of such purchasers or creditors arose or before or after the mortgagee had notice of them..." Jones on Mortgages, Sec. 457. $2 Jones on Mortgages, Vol. 1, Sec. 450 (8th ed.): "Future liabilities intended to be secured should be described with reasonable certainty. If the nature and amount of the encumbrance is so described that it may be ascertained by the exercise of ordinary discretion and diligence, that is all that is required." Sec. 457: "... even though no specific sum be named in the mortgage as to what future advances it was intended to secure, if the instrument on its face gives information as to the extent and purpose of the contract between the parties, that it is to stand as security for future advances, it will be sufficient to put a subsequent incumbrancer on notice of probable future dealings between the parties affecting the mortgaged property, and the duty of investigating the extent of liability that may attach to the property by reason of the mortgage devolves upon such incumbrancer." Corn Belt Trust & Savings Bank v. May, 197 Iowa 54, 196 NW 735. "In re Shapiro, 34 F. Supp. 737, affirming 118 F (2d) 348. See Annotation, 81 ALR 631. 38 B. E. First v. Byrne, 28 NW (2d) 509; see Annotation of this case where the subject of "dragnet" clauses is fully discussed and the cases set out therein, 172 ALR 1079 (1948). 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.88 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 statute— for 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.1 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 That the liens of the trust deed and the mortgage date from the time they were filed for record or the [later] parties had actual notice thereof, notwithstanding that the money was advanced after the work was commenced, is too obvious to call for discussion." Mutual Reserve Association v. Zeran, 152 Wash. 342, 277 P 984. The minority view was set out by the Michigan court in Ladue v. Detroit, etc., 13 Mich. 880, 87 An. Dec. 759: "The instrument can only take effect as a mortgage or encumbrance from the time when some debt or liability shall be created, or some binding contract is made, which is to be secured by it. Until this takes place, neither the land, nor the parties, nor third persons, are bound by it. It constitutes, of itself, no binding contract. Either party may disregard or repudiate it at his pleasure." #1 Wiltsie on Mortgage Foreclosure, p. 178, Sec. 95 (5th ed.): "When a mortgage in terms secures future advances, the sum named as the consideration is of no importance, because as between the parties it will be security for the money actually advanced upon it, and for nothing more." " *See LEGAL BULLETIN, March, 1953, p. 35, noting First Federal Savings and Loan Association of Miami v. Fisher, 60 So. (2d) 496 (Fla., 1952). "In regard to what constitutes actual notice, it seems that any information of the existence of the subsequent incumbrance is sufficient to charge a prior mortgagee with the legal effect of making future advances with knowledge. Notice of the fact of the existence of the subsequent incumbrance, called to the attention of the prior mortgagee by the subsequent incumbrancer, in such a manner that the prior mortgagee, as a prudent and reasonable man of business, is bound to remember that such subsequent incumbrance on the premises has been given, and to regulate his conduct accordingly, seems to be all that can be required in such cases in order that the parties giving and receiving the notice may thereafter have the rights and duties which arise from notice." Sec. 212, 19 Ruling Case Law 429. Ackerman v. Hunsicker, 85 N.Y. 43; Union National Bank v. Moline, 7 N.D. 201, 73 NW 527; Schmidt v. Zahrndt, 148 Ind. 447, 47 NE 335, and other cases cited infra in the tabulation of state positions. 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 lien 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 recording 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 Rochester Lumber Co. v. Dygert, 240 N.Y.S. 580, and other cases cited infra in the tabulation of state positions. Pomeroy, Equity Jurisprudence, Sec. 1199 (3rd ed.). |