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security, independently of the will of Neither will we consider extensively the mortgagor; and (3) where future the second type of advance, where, advances may or may not be made, by the terms of the mortgage, the depending on the future agreement of mortgagee reserves the right to make the parties. We will not deal exten- further advances expenditures sively with the first, inasmuch as the which are necessary to protect the selaw appears to be uniform through- curity or the priority of the mortout the country: where the lender gage, whether or not the borrower is contractually obligated to make cer- shall request or desire the same. The tain advances, the advances if properly situation could arise, for example, in made take precedence over any lien a construction loan where the mortor incumbrance arising after the date gagor has abandoned the work, the of recording of the mortgage 24 and mortgagee having the right to protect usually even where the prior mortga- his interests by making additional exgee has actual notice of the inter- penditures to complete the structure vening incumbrance. An example is and to have a lien therefor which is the construction loan, where in many superior to intervening incumbrances. instances the lender is obligated to Payment of delinquent taxes and a3disburse funds as the building pro- sessments and the making of essential gresses. In holding that an obligatory repairs often fall within such cases.26 advance is a part of the original debt Although the matter has been little and that the lien relates back to the litigated, it is clear that in such cases date the "entire debt” was created, there is a contractual interest which is the courts reason that it would be as entitled to protection as an option manifestly unsound to hold that even to purchase. When such an interest is actual notice of a subsequent lien put on record there is little reason to would deprive the mortgagee of his believe that a subsequent incumlien for advances which he is com- brancer could impair it, irrespective pelled to make.25
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. "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 (20) 408 (Ohio 1950), quoting Kuhn v. Southern Ohio Loan and Trust Co., 101 Ohio St. 84, 126 NE 820. In Schaeppi v. Glade, 195 III. 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., 65 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, 64 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. 1961) 230 P (2d) 274 (LEGAL BULLETIN, May, 1953); Cedar V. Roche Fruit Co., 16 Wash. 2d) 652, 134 P (28) 437 (1943); Elmendorf-Anthony Co. v. Dunn, 10 Wash. (20) 29, 116 P (20) 253, 138 ALR 658; Hance Hardware Co. v. Denbigh Hall, Inc., 17 Del. Ch. 284, 152 A 130; Land Title & Trust Co. v. Schoemaker, 257 Pa. 213, 101 A 335; Anglo-American Savings and Loan Association v.
Campbell, 18 App. D.C. 581; and other cases listed below in table of approximate state positions. min 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. (20)
663, 134 P (20) 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, 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.
The decisions on their facts covered contractual obligations and agreeherein contain little at variance with ments according to the stated terms, this view,28 although on occasion the and if a subsequent purchaser or incourts have mistakenly applied to this cumbrancer fails to take notice, he is type of advance the rules governing not entitled to protection. This would optional advances rather than the be the almost universal law today, more appropriate rules governing were it not that several states have obligatory advances.29
dealt with the matter by statute with It is with the third or optional fu- varying degrees of effectiveness.30 ture advance that we are primarily In an effort to form a general rule concerned, where the mortgage con- applicable in all state jurisdictions, it tains a provision that the mortgage may be said that a mortgage which shall stand as security for such sums by its own terms is given to secure as the mortgagor shall thereafter de- optional future advances is valid sire to borrow and the mortgagee everywhere as between the parties shall be willing to lend.
and, duly recorded, will prevail against Optional Future Advances
subsequent purchasers and incum
brancers if the mortgagee be without Under common law, it is clear that notice, actual or constructive, of such if first mortgages are properly draft- subsequent conveyance or incumed to secure original advances and if brance; and that in jurisdictions they properly describe optional future where the point is undecided, record advances up to a limit stated in the notice of such subsequent conveyance mortgage, such advances may be made or incumbrance might, and actual nosafely by the lender and remain se- tice thereof probably would, give to cured as a first lien until the mortgage the subsequent purchaser or the junis cancelled. It is sufficient that the ior lienor a prior claim as to admortgage clearly show a contract be- vances made after such notice.31 tween the parties that the mortgage
Problem of Specificity is to stand as security for both an original debt and such additional in- Most courts hold that for a mortdebtedness as may arise from future gage to stand validly as security for dealings between the parties. Provided optional future advances, a full exsuch mortgages are properly record- pression of the parties’ intention must ed, they are notice to the world of be set out in the mortgage, clear
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.)
wgee 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 Mfo. Co., 28 Conn. 282 ; Hyman v. Hauf, 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. (20) 29, 116 P (20) 253, 138 ALR 558.
30A 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 Surn. 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.
nJones 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 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, 80 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.
enough so that it will serve as notice spelled out but a maximum limit speto anyone exercising common pru- cified to the contemplated advances. dence and ordinary diligence, not It might be pointed out here that only of the parties' intent that the "dragnet” clauses (i.e., where the mortgage shall secure future optional mortgage purports to secure any and advances, but also of the upper limit all future indebtedness of unspecified or aggregate amount of the advances nature accruing from the grantors) contemplated.32 Cases have varied are not strictly within the scope of from one extreme, to the effect that this article. Most courts manifest a the mortgage need scarcely make such repugnance to this type of all-inclusive reference at all,38 to the other ex- clause, and, in the words of the Iowa treme, where it is held that the actual court, “construe this type of clause date and amount of each subsequent carefully and strictly."36 advance must be carefully spelled out
Problem of Notice in the mortgage (as in Maryland).34 As a matter of sound business policy, Although the general rule is well however, in addition to legal pru- established that the mortgage will dence, it is recommended that in all constitute a prior lien for all optional cases—even in the jurisdictions where advances made in accordance with its it has been clearly held that a max- terms before notice of an intervening imum limit need not be set out in the incumbrance, there has been some dimortgage that such a limit be spe- versity of opinion as to what kind of cified.36 Not only is the matter of notice will jeopardize the priority. moral fairness involved, but the avoid- The great majority of states hold that ance of possible later charges of in- only actual notice or knowledge will equity or lack of adequate notice on adversely affect the lien of the later the part of an intervening lienor. advances; a minority holds that, in Even though in many cases it might addition to actual notice, notice ariseasily be proved in court that such a ing by operation of the recording limit need not be specified, much need- statutes is sufficient. less litigation could be avoided in ad- Apparently the basis of disagreevance if not only is the clear intent ment between the majority rule and the dissenting courts is a differing son charged with notice had available theory as to when rights become vest- to him a means of discovery which ed under a mortgage securing option- he should have used.40 "Constructive" al future advances. The majority opin- notice is that type of notice imputed ion rests on the equitable maxim, to a person not having actual notice, "What has agreed to be done shall, and is solely a creature of statute for the advancement of justice, be re- for example, that type of notice progarded as done." Since the advances vided for by many recording statutes. have been provided for, the courts will In none of the cases that we have consider them as made, thus causing reviewed has there been an instance the lien for the whole sum to be ad- where the decision turned on "convanced to attach as of the time of structive” notice other than “record” the mortgage agreement, 37 and not as notice, and indeed many courts have a lien for each separate advance ex- specifically stated that "record” noisting only from the time of the tice shall not constitute even "conadvancement.88 Although there is structive” notice. 41 Therefore, for the common agreement that the right to purposes of this discussion and the enforce the collection of the advances tabulation of states and cases, we will can arise only after the making of use the terms "actual notice" and each advance,39 it is the majority "record notice," since those terms repopinion that since the lien to the resent the only real distinction made whole has already attached, the re- in any of the court decisions, although cordation of subsequent incumbrances in a few instances certain courts have does not affect the first mortgage. left the door open to some type of
22 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.
Min re Shapiro, 34 F. Supp. 737, affirming 118 F (20) 348.
** See Annotation, 81 ALR 631.
*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).
It is almost universally accepted constructive notice other than record that “actual notice or knowledge” of notice. an intervening lien on the part of the In order for the optional advances mortgagor will prejudice the priority to prevail, the intervening lienor, of of later optional advances. The term course, must have been legally charged “actual notice," of course, includes with notice of the existence of the not only express notice but implied mortgage securing future advances, notice as well, the latter being notice and usually of its terms. The recordinferred from the fact that the per- ing of the mortgage will accomplish such necessary notice as to the exist- quires an actual notice to cut off the llen ence of the mortgage. Whether or not
57"That the liens of the trust deed and the mortgage date from the time they were filled 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, 162 Wash. 342, 277 P 984.
*The minority view was set out by the Michigan court in Laduo v. Detroit, etc., 18 Mich. 880, 87 An. Dec. 769: "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 LEQAL BULLETIN, March, 1963, p. 36, noting First Federal Savings and Loan Association of Miami v. Fisher, 60 So. (20) 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 he prior mortgagee 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 627; Schmidt v. Zahrndt, 148 Ind. 447, 47 NE 836, and other cases cited infra in the tabulation of state positions.
44750 0454-pt. 1-51
of the prior mortgage; and the subsequent the terms have been sufficiently stated
encumbrancer may, by giving actual no
tice, at any time prevent further advances therein has been discussed above. The from being made to his own prejudice. recording statutes have in most states (Italics ours.) 43 been held to operate as notice forward to subsequent purchasers or creditors However, the wording of the reand not backward to prior parties, cording statutes in a few instances has whose rights are already fixed by the been held in effect to import notice previous record of their own mort. both forward and backward. See the gages.42 Chief Justice Redfield con- consideration infra of Ohio. sidered this matter, together with the problem of actual notice on the part
Tabulation of State Positions of the prior mortgagee, in an article We shall now set out what appears in 2 American Law Reg. (N.S.) 18:
to be the legal status of optional fu
ture advances as they stand today in The most important remaining inquiry is in regard to the extent and kind of
the 49 jurisdictions, both under the notice of the subsequent mortgage, which
mortgage laws and by court decision. it is requisite the first mortgagee should
In states where the common law or a have, in order to postpone his further variation or reaffirmance of the comadvances to such intervening security. As mon law doctrine is in force, addia general rule, it has been considered that the registry of the second mortgage will
tional advances have priority over an only be notice of its contents to future
intervening lien in the absence of acpurchasers and incumbrancers, and not to tual notice, and the lender can ordiprior incumbrancers, thus operating for- narily make an advance in safety withward and not backward ... The general out a title search. In states where view of the American courts, and the universal declaration of the English courts,
the advance does not have first prias far as we know, is that nothing short
ority in all cases, however, the lender, of notice in fact will have this effect even in the absence of actual notice, This may now be regarded as settled law, must make sure that no lien has been notwithstanding an occasional case seems placed of record against the property to require something more.
since the original mortgage date bePomeroy states the rule thus: fore he makes an advance. When a mortgage to secure future ad
In some of the states placed in the vances reasonably states the purposes for "Probable" column below, there is litwhich it is given, its record is a construc- tle or no authority on the subject of tive notice to subsequent purchasers and optional future advances, and in such encumbrancers; they are thereby put upon
states it is our opinion that properly an inquiry to ascertain what advances or liabilities have been made or incurred.
drafted and recorded contracts will The record of a subsequent mortgage or preserve the superior lien of the adconveyance, or the docketing of a subse- vances in the absence of actual notice. quent judgment, is not a constructive no
In some of the states, the decisions on tice of its eristence to such prior mort
the subject have been based upon gagee. The prior mortgage, therefore, duly recorded, has a preference over subsequent poorly or incompletely drafted conrecorded mortgages or conveyances, or tracts, and in many instances there subsequent docketed judgments, not only were disputes as to notice. Cases propfor advances previously made but also for erly presented, based on properly advances made after their recording or docketing without notice thereof. As the
drafted contracts, in many such states record of the second encumbrance does
would, in our opinion, result in upnot operate as a constructive notice, it re- holding 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.).