Also known as:dragnet provisions · dragnet clause · dragnet clauses
Written by attorneys · grounded in primary & secondary sources — see below
A clause included in a mortgage or deed of trust that extends the security interest to future advances made by the mortgagee to the mortgagor or to other debts owed by the mortgagor. The clause is construed narrowly against the mortgagee. Validity and priority of the secured advances turn on the mortgage language, any stated maximum amount, whether advances are optional or obligatory, and whether the mortgagee had notice of intervening liens at the time of the advance.
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Common Law
Restatements
Study Supplements
How it applies
Common Examples
2
Capped Advance Loses Priority
Dominic Drake borrowed five million dollars from Dillon Energy to purchase a warehouse and granted a recorded mortgage that secured the loan plus future advances up to a stated maximum of five million dollars. After the mortgage was recorded, Drake leased equipment from Drake Logistics and the lessor recorded a lien on the warehouse. Dillon Energy then advanced Drake an additional one million dollars. In foreclosure the court held that Dillon Energy retained priority only for the original five million dollars because the later advance exceeded the mortgage cap.
Unrelated Loan Falls Outside Clause
Doris Duffy executed a deed of trust on her farm to secure a construction loan from Dominion Capital. The deed contained a dragnet clause covering all future credit extended by the same lender. After a tax lien attached to the farm, Dominion Capital made a separate acquisition loan to Duffy for an unrelated business. The court ruled that the acquisition loan was not secured by the deed of trust because it financed a transaction wholly different in character from the original mortgage.
Kelso v. McGowan604 So. 2d 726 (Miss. 1992)
Common questions
Frequently Asked
4
Does a dragnet clause secure preexisting debts owed by the mortgagor?+
No. A dragnet clause has only prospective effect. Even if the clause refers in general terms to preexisting indebtedness, the mortgage will not secure that indebtedness unless the debt is specifically identified in the mortgage or a concurrent agreement.
Supporting sources
What limits the scope of advances covered by a broadly worded dragnet clause?+
When a dragnet clause describes future advances only in general terms, the mortgage generally secures only advances made in transactions similar in character to the original mortgage transaction. An advance arising from a wholly different type of transaction falls outside the clause even if the literal language would cover it.
How does actual knowledge of an intervening lien affect priority of a later advance under a dragnet clause?+
In jurisdictions that condition priority on lack of notice, an optional advance made after the mortgagee receives actual notice of an intervening lien loses the benefit of the original recording date and is subordinate to the intervening lien. The mortgage still retains priority for advances made before notice and within any stated maximum.
Supporting sources
What happens to the priority of a future advance that exceeds a stated maximum amount in the mortgage?+
The mortgage retains its original priority only up to the stated maximum. Any amount advanced beyond the cap is either unsecured or junior to intervening liens recorded after the mortgage but before the excess advance.
Supporting sources
Real PropertyMortgages/security devices · ForeclosureUBEFoundational