Emporia State Bank & Trust Co. v. Mounkes

• Decision Date: 02 March 1974
• Docket Number: No. 47166,47166
• Citation: 214 Kan. 178,519 P.2d 618
• Parties: EMPORIA STATE BANK AND TRUST COMPANY, Appellees, v. Harold L. MOUNKES and Betty L. Mounkes, Appellants.
• Court: Kansas Supreme Court

Page 618

519 P.2d 618

214 Kan. 178

EMPORIA STATE BANK AND TRUST COMPANY, Appellees, v. Harold L. MOUNKES and Betty L. Mounkes, Appellants.

No. 47166.

Supreme Court of Kansas.

March 2, 1974.

Syllabus by the Court

1. A mortgage containing a clause securing future advances, which is sometimes known as a dragent clause, may provide a useful and convenient tool in facilitating business and commercial transactions involving frequent or continuing advancement of funds and extensions of credit.

2. In general, courts have held that future advances made pursuant to a dragnet clause fall within the contemplation of the parties and are secured under the mortgage containing such clause.

3. Dragnet clauses are not, however, highly regarded in equity and should be carefully scrutinized and strictly construed.

4. When the construction of a mortgage is brought into issue the primary question for decision is what was the intention of the parties, and in determining this matter all the circumstances attending the excution of the mortgage and the nature of the transaction are to be taken into consideration as well as the wording of the instrument.

5. Where a mortgage is given to secure a debt specifically named, the security will not ordinarily be extended to cover debts subsequently incurred unless they be of the same class or character and so related to the primary debt secured that the assent of the mortgagor can be inferred.

6. In the absence of clear evidence of a contrary intention, a mortgage containing a dragnet type provision will not be extended to cover subsequent advance or loans unless they be of the same kind and quality or relate to the same transaction or series of transactions or unless the document evidencing the same refers to the mortgage as providing security therefor.

C. Bruce Works, Topeka, argued the cause and was on the brief for appellants.

James W. Putnam, Putnam & Mankin, Emporia, argued the cause and was on the brief for appellees.

FONTRON, Justice:

The Emporia State Bank and Trust Company brings this action to foreclose a real estate mortgage. The defendants, Mr. and Mrs. Mounkes, filed an answer and cross petition. The court rendered personal judgment against the defendants for $1651.51 and a judgment in rem for $5911.53. The mortgage was foreclosed as to both sums. Judgments was also entered in favor of the bank on the defendants' cross petition. Mr. and Mrs. Mounkes have appealed.

No dispute exists concerning the facts. On February 13, 1963, Mr. and Mrs. Mounkes executed their promissory note to the bank in the amount of $12,500, and secured the same by a mortgage on an Emporia property which was their homestead. The face of the note indicates that monthly payments were started April 1, 1963. When the present proceedings were commenced the indebtedness had been reduced to $1573.57.

On February 27, 1971, some eight years after the mortgage was given, Mr. Mounkes executed his personal note to the bank for $5100. We were advised on oral argument that this loan was procured by Mr. Mounkes to assist a son in starting a restaurant business. A third note in the amount of $3711 was executed by Mr. Mounkes August 6, 1971. This loan was secured by a security agreement covering a 1970 Ford car and had been paid down to some $529 by the time the present action was filed.

To complete the factual picture, Mr. and Mrs. Mounkes were adjudicated bankrupts August 25, 1971, and both were duly discharged January 19, 1972.

In its petition the bank prayed for the foreclosure of its mortgage not only as to the balance due on the original note executed by Mr. and Mrs. Mounkes in 1963, but also as to the amounts alleged to be unpaid on the two subsequent notes signed by Mr. Mounkes in 1971. The bank's contention in such regard was and is predicated on a so-called dragnet provision contained in the mortgage. It reads as follows:

'This mortgage is given to secure payment of the sum of Twelve Thousand Five Hundred & no/100 Dollars ($12,500.00) and interest thereon, according to the terms of promissory note/s this day executed and subsequently to be executed by the mortgagros to the mortgagee, and all other sums which may hereafter be owing to the mortgagee by the mortgagors or any of them, however evidence; it being understood and agreed that the mortgagee may from time to time make loans and advances to the mortgagors or any of them and that all such loans and advances and the interest thereon will be secured by this mortgage: provided that the aggregate principal amount of the loans and advances hereunder shall at no time exceed the amount hereinbefore stated.'

The trial court agreed with the bank's position so far as the $5100 note was concerned and decreed that the balance due thereon as well as the balance due on the original note be made a lien on the mortgaged property. The court further ordered the mortgage foreclosed as to both amounts, which then totaled $7563.10. In so doing, the court forebore to enter personal judgment on the $5100 note signed by Mr. Mounkes, but granted judgment in rem against the real estate for the face amount thereof, plus interest. No judgment appears to have been rendered on the third note secured by the Ford car.

We should say at this point the defendants concede that the unpaid balance of the priginal note is secured by their mortgage of February 13, 1963. However, they take a quite different position with respect to the Subsequent note signed by Mr. Mounkes on February 27, 1971, and they rely heavily on our opinion in Stockyards National Bank v. Capitol Steel & Iron Co., 201 Kan. 429, 441 P.2d 301. Before examining that decision in depth, we pause for a look at some guiding principles.

The dragent syndrome is not a stranger in banking circles. Indeed, it has long found legislative recognition in what is now K.S.A.1973 Supp. 9-1101(4). Moreover, we apprehend that a future advances clause in a mortgage may provide an extremely useful and practical tool in facilitating many business and commercial type operations which involve frequent or continuing advancement of funds and extension of credits. (First Nat. Bank of Guntersville v. Bain, 237 Ala. 580, 188 So. 64.) One example, among others which come redily to mind, is found in the construction or building trade where the open end or dollar mortgage serves as a convenient device in facilitating the flow of funds at minimal expense. (See Potwin State Bank v. Ward, 183 Kan. 475, 327 P.2d 1091.) Some of the advantages which accrue both to the lender and to the borrower are pointed out by Professor Blackburn in Mortgages to Secure Future Advances, 21 Mo.Law Review 209.

In the great majority of cases where the question has arisen, the courts have held that future advancements made pursuant to a dragent or open end type of mortgage came within the contemplation of the parties and were thus secured thereby. Cases to this general effect are to be found among our own reports. (State Bank v. Tinker, 131 Kan. 525, 292 P. 748; Union State Bank v. Chapman, 124 Kan. 315, 259 P. 681.)

Despite recognition by both judicial and legislative bodies that the dragnet mortgage fills a contemporary need in the complex world of business, it is not a favorite of the law and is subject to interpretation and construction. As the Iowa Supreme Court so aptly observed in First v. Byrne, 238 Iowa 712, 28 N.W.2d 509, 172 A.L.R. 1072, "Dragnet' clauses are not highly regarded in equity. They should be 'carefully scrutinized and strictly construed." (pp. 715, 716, 28 N.W.2d p. 511.) This view was mirrored in Berger v. Fuller, 180 Ark. 372, 377, 21 S.W.2d 419, 421, where the Supreme Court of Arkansas, in speaking of a mortgage having a future advancements clause, said:

'. . . Mortgages of this character have been denominated 'anaconda mortgages' and are well named thus, as by their broad and general terms they enwrap the unsuspecting debtor in the folds of indebtedness embraced and secured in the mortgage which he did not contemplate, and to extend them further than has already been done would, in our opinion, be dangerous and unwise . . ..'

Where the construction of a mortgage is brought in issue the primary question for determination is what was the intention of the parties. In arriving at a decision of the matter, all the circumstances attending the execution of the mortgage and the nature of the transaction are to be considered as well as the language of the instrument iself. (Hendrickson v. Farmers' Bk. & Trust Co., 189 Ark. 423, 433, 73 S.W.2d 725.) In the Hendrickson case the court stated that...