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 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." 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

is usually relied upon where the advances are for relatively small amounts.

In several of these states where there is little or no litigation on the subject, our first suggestion is a test case to determine the present law. If it is held that optional future advances under a properly drafted openend mortgage are superior to intervening liens, this should settle the matter. If it is held to the contrary, then we suggest legislation on the subject (for which see suggestion on page 110). The states in this group

THE MINORITY OR 'MICHIGAN' RULE A small but important group of states hold to the minority view that the lien of an optional advance is inferior to subsequent incumbrances, even though it is made without actual notice of the intervening interest. For priority purposes, the optional advance is treated as if it were a new mortgage taken as of the time of the advance, the lien attaching as of the time of the advance and not relating back to the date of the parent instrument as in the majority group of states. Here the matter of record notice comes into full play: since each new advance is treated as a new mortgage, the advancer must make certain that there have been no "prior" liens placed

against the property since the original mortgage date. A second mortgage, properly recorded after the recording of the first mortgage, would thereby be "prior" to an advance made thereafter under the first mortgage. A title search before the making of each advance is unavoidable in these states, although again, if the amount is nominal, an affidavit is often taken as a calculated risk.

In this minority group, the courts when dealing with optional advances apparently close their eyes to the fact of notice to subsequent incumbrancers of the expressed terms of a recorded instrument. In Illinois, for example, although it has been repeatedly held that later incumbrancers are chargeable with notice of what was apparent of record with regard to prior trust deeds and mortgages,1 47 such protection is denied to even the most clearlyexpressed open-end clause. Equitably (and according to the majority rule), it would appear that a subsequent incumbrancer examining a prior mortgage should be charged with notice of the clear and unambiguous terms of a clause providing for optional future advances, and be thereby put on inquiry as to the extent if any of the advances already made. Yet the courts allow the second mortgagee in the fact of such notice to blithely record the second mortgage and thereby take precedence over later advances made by the first mortgagee according to the expressed terms of his prior mortgage, the terms of which were recorded as notice to the world.48

This results in apparently inconsistent holdings, because, except for the unfortunate theory that each op

tional advance rates as a new mortgage, the minority courts ordinarily decide notice questions in accordance with the majority. Again in Illinois, it was held that "the record of a subsequent deed or mortgage is not notice to the prior mortgagee; nor is [he] required to search the records from time to time for subsequent incumbrances; and [a] subsequent purchaser, mortgagee, or lienor, wishing to protect himself, must bring home to the first mortgage actual notice of his equities."49

It seems little to ask that a subsequent incumbrancer, wishing to prevent further advances from being made to his own prejudice, be required to give the prior mortgagee actual notice of the later incumbrance. It is to be hoped that the underlying theory of optional future advances will be reexamined by these courts:

Illinois

Michigan

Ohio

Pennsylvania

The Law, State by State

We set out the following capsule resume of what we believe to be the law in the 49 jurisdictions. In every state, an open-end mortgage is good between the parties. A warranty deed, if given to secure a debt or obligation, is ordinarily treated as a mortgage in all states, and it is an openend mortgage. In all cases, we advise that open-end mortgages be clearly drafted so as to indicate what is secured by the mortgage, including the maximum amount to be secured thereby. (See Forms, Part IV.) Even where the statute or court decisions appear to permit the advancement of moneys after actual notice of an intervening lien or claim, we advise against additional optional advances after actual notice, in all cases.

ALABAMA-MAJORITY RULE

By decision. The ruling case is Farmers' Union Warehouse Co. v. Barnett Bros., 223 Ala. 435, 137 So. 176: "There is no disagreement that, when the mortgage provides for such additional advances, the mortgagee, though not obligated to do so, may make them on the security of the mortgage in priority over the rights of a second mortgagee with notice, provided, at the time of making the additional advance, the first mortgagee had no notice of the rights of the second mortgagee." The court went on to state that "the record of the later mortgage is not notice to the prior mortgagee." That notice to the prior mortgagee must be something more than record notice is supported in Bank of Oakman v. Thompson et al., 224 Ala. 89: "While the record of a second mortgage is not notice to a first mortgagee, and may not affect its priority by a renewal, it is notice to the extent that a new debt is created to which the first mortgage made no reference."

In the latter case, as well as in the Farmers' Union case, the point is made that specific provision for future advances must be contained in the mortgage, although the exact amount need not be set out. Again in Boger v. Jones Cotton Co., 238 Ala. 180, 189 So. 737, the court said, "There is no question now of the validity of a mortgage to secure future advances, though uncertain in amount.” ARIZONA-PROBABLY MAJORITY RULE The case on the subject is Griffith v. State Mutual Bank and Trust Association, 51 P (2d) 246, 46 Ariz. 359, where the court said: "It is the unquestioned rule that a mortgage may be given to secure not only money loaned at the time of the mortgage, but also any amount which is to be

advanced in the future, and that such a provision is good as against all subsequent encumbrancers and purchasers having notice of the mortgage, for all advances made before they have acquired their rights, while many cases hold it is good for later advances also." A top limit apparently need not be set out in the mortgage, but the clear intent of the parties to secure future advances should be set out, as in the noted case.

The decision left the actual v. record notice question open, inasmuch as it was determined that the advance had been made in point of time before the second lien had attached. (See Section 71-426, Arizona Code, to the effect that the record shall be constructive notice to all persons.) ARKANSAS-PROBABLY MAJORITY RULE

By decision. The validity of mortgages covering optional future advances has been upheld repeatedly. Jarratt v. McDaniel, 32 Ark. 598; Brewster v. Clamfit, 33 Ark. 72; Patterson v. Ogles, 238 SW 598, 152 Ark. 395; American Bank and Trust Co. v. First National Bank, 43 SW (2d) 248, 184 Ark. 689. Although the early case of Tompkins v. Little Rock & Ft. S. Ry., 15 F 6, upheld the minority rule to the effect that "each [optional] advance is as upon a new mortgage," the later case of Superior Lumber Co. v. National Bank of Commerce, 176 Ark. 300, 2 SW (2d) 1093 (1928), laid down the rule: "Mortgages to secure future advances are valid; but, where it is entirely optional with the mortgagee whether to make future advances or not, advances made after notice of a subsequent incumbrance, such as a lien for materials furnished, are inferior to the materialman's lien. In other words, the general rule is that, if the amount for which the mortgage shall stand is wholly optional with the mortgagee, he cannot, after notice that a subsequent lien has attached, deplete the value of the equity to the disparagement of its lienors by advances which, if refused,

would not have been in force." From the language in the Superior Lumber case, together with the holding in Pillow v. Sentelle, 49 Ark. 430, where it was held that such advances "should stand on the same footing as the original debt," and the case of Birnie v. Main, 29 Ark. 251, to the effect that the recording of a second mortgage will not give constructive notice to the prior mortgagee, it would lead us to believe the Arkansas courts favor the majority rule.

The intent to secure future advances must "clearly appear from the instrument and will not be presumed," Patterson v. Ogles, supra, and it is essential that the agreement in the mortgage be "unequivocal," although the maximum amount of such advances need not be stated. Moore v. Terry, 66 Ark. 393, 50 SW 998; Jones v. Dowel, 176 Ark. 986, 4 SW (2d) 949; Brewster v. Clamfit, 33 Ark. 72. Optional advances made after maturity are not valid charges against the land: Dempsey v. Portis Mercantile Co., 119 SW (2d) 915, 196 Ark. 751 (1951). Also not valid security for debts owing by mortgagor's transferee unless specifically provided: Walter v. Whitmore, 165 Ark. 276, 262 SW 678. CALIFORNIA-MAJORITY RULE

By decision. The rule as set out in Oaks v. Weingartner, supra, was repeated in the 1953 case of Imhoff v. Title Insurance and Trust Co., 247 P (2d) 851, where the court also specifically held that the lien of a trust deed does not operate to secure optional advances which are made under the trust deed, after the beneficiary has acquired actual notice of an incumbrance subsequent in point of time to the trust deed, and does not defeat or impair the rights of the subsequent incumbrancer.

No limit to amount of future advances. This rule, repeated in the Oaks case, was originally set out in the leading case of Tapia v. Demartini, 19 P 641, 11 Am. St. 288, where the court said, "If the mortgage dis

closes upon its face that it is to stand as security for future advancements, the amount of the advances to be made need not be set out. It is sufficiently definite to put subsequent incumbrancers on inquiry, and they must ascertain the extent of the lien or suffer the consequences." (Italics ours.)

COLORADO-MAJORITY RULE

By decision. The majority rule was adopted by the court in the ruling case of Du Bois v. First National Bank, 43 Col. 400, 96 P 169: "No question is made concerning the validity of the mortgage to cover future advances . . . The position of the [mortgagee] is that, until [the intervening lienor] gave to it actual notice of the acquisition of her interest in the property, it might continue to make advances to the mortgagor even after maturity of the mortgage notes, since the mortgage did not restrict the time within which the advances were to be made, which would be protected by the mortgage as to the entire property . . . it would seem from the authorities that such advances are within the lien of the mortgage." The case was cited as authority in Ferguson v. Mueller, 115 Col. 139, 169 P (2d) 610 (1946). In Clay v. Atencio, 74 Col. 17, 218 P 906, the court said that the recording statute provided that a conveyance "may be recorded" and "from and after the filing thereof for record . . . and not before... shall take effect as to subsequent bona fide purchasers." Apparently, filing is constructive notice only as to subsequent purchasers and incumbrancers, but no further; see Colorado Digest, Key 154, Mortgages.

The intent to secure future advances must be set out: "The lien of a deed of trust cannot be extended to secure a subsequent debt or obligation in the absence of a written agreement to that effect." Jones v. Sturgis, 118 Col. 579, 199 P (2d) 646 (1948). As to description of the debt, the latest pronouncement was in Smith v.

Haertel, 126 Col., 244 P (2d) 377 (1952): "In order to constitute a valid mortgage . . it is necessary that . . . this indebtedness be recited in the mortgage; and the nature and amount of the indebtedness secured by the mortgage must be so expressed that subsequent purchasers and attaching creditors need not look beyond the mortgage itself to ascertain both the existence and amount of the debt." It is recommended therefore that a maximum limit be specified in the mortgage.

Note on the Savings and Loan Statute-Section 14 (3) of Chapter 25 provides that "Any association may invest any portion of its funds in loans to its members, secured by first lien trust deeds or mortgages upon improved real estate, provided that additional loans or advances on the same property shall be deemed to be first liens for the purposes of this chapter, unless intervening lien or liens have been recorded, and upon [shares, etc.]." (Italics ours.) The italicized portion of the statute appears to be interpretative in character rather than limiting. The statute grants savings and loan associations the power to make certain loans if they are secured by a first lien. The italicized language merely sets out that in the absence of recorded intervening liens, additional loans or advances shall be deemed to be such first liens. In our opinion this does not preclude an advance where, under the law of the state, a first lien can be obtained in the absence of actual notice even though record of an intervening lien does exist. CONNECTICUT-MAJORITY RULE By statute and decision. 5894 (h), as amended in 1951, provides that savings and loan associations may make future advances which "shall be a part of the mortgage debt .. provided such advancements shall not exceed the difference between the indebtedness at the time of the advancement and the original mortgage

Section