First Sec. Bank of Utah v. Shiew

• Decision Date: 13 March 1980
• Docket Number: No. 16261,16261
• Parties: FIRST SECURITY BANK OF UTAH, a National Association, Plaintiff and Respondent, v. Bill SHIEW, Linda Shiew, and Utah Farm Bureau Insurance Company, a Utah Corporation, Defendants and Appellant.
• Court: Utah Supreme Court

Page 952

609 P.2d 952

FIRST SECURITY BANK OF UTAH, a National Association, Plaintiff and Respondent, v. Bill SHIEW, Linda Shiew, and Utah Farm Bureau Insurance

Company, a Utah Corporation, Defendants and

Appellant.

No. 16261.

Supreme Court of Utah.

March 13, 1980.

G. Blaine Davis of Morgan, Scalley, Lunt & Kimble, Salt Lake City, for Utah Farm.

Eric Swenson, Mexican Hat, for Shiew.

Don Allen, James W. Gilson of Ray, Quinney & Nebeker, Salt Lake City, for plaintiff and respondent.

MAUGHAN, Justice:

Utah Farm Bureau Insurance Company appeals from a judgment of the District Court awarding to First Security Bank of Utah the sum of $4,369.25, plus interest and costs, for the wrongful disbursement of fire insurance proceeds. The bank's claim is contingent on whether the insured premises were security by reason of a dragnet clause in a mortgage thereon for a subsequent, unrelated business transaction of the mortgagors. The judgment is reversed, and the cause is remanded with an order to enter judgment in favor of the insurance company.

In 1972, Bill and Linda Shiew purchased a home in Monticello, Utah. Plaintiff's branch in Monticello, Utah, loaned $6,342.48 to the Shiews; this loan was secured by a mortgage on the home. A standard printed provision in the mortgage recited it was "to secure the payment of any and all claims or demands now due or to become due now or hereafter contracted or incurred which the said mortgagee or the holder hereof, from time to time, may have or hold against the mortgagors or either of them, whether as maker, surety, guarantor, partner or otherwise, and whether contracted directly with or purchased by the holder hereof: . . ."

In 1974, in connection with a cattle-raising venture, the Shiews obtained a loan of $8,900.00 from plaintiff's branch in Price, Utah. The parties entered into a security agreement (Farm Products Chattel Mortgage) to secure this loan. The recited security was certain specified cattle and feed as well as all after acquired cattle and feed. The security agreement made no reference to the mortgage on the debtor's home as additional security. In fact, the security agreement recited: "This agreement constitutes the entire agreement between the parties."

In 1975, the Shiews were divorced, and Linda Shiew was awarded the home in Monticello. In April 1976, plaintiff filed an action against the Shiews in connection with the cattle business transaction. Plaintiff alleged that the security for payment of the note had all been disposed of in accordance with the terms of the security agreement, and the collateral was totally exhausted. Plaintiff claimed a deficiency of $4,369.25 and demanded judgment for that amount, plus interest and attorneys fees. It is significant that at the time of filing this action plaintiff did not claim the loan was further secured by a mortgage on the home in Monticello. Further, if the cattle loan were secured by the real estate mortgage as later claimed by plaintiff, under Section 78-37-1 (the single action rule), plaintiff would have been compelled to foreclose the real estate mortgage and exhaust that security rather than attempting to recover the debt directly by a money judgment.

Linda Shiew answered the complaint, but a judgment by default was entered against Bill Shiew on September 1, 1976. This judgment recited the facts concerning the loan transaction in 1974 in Price, Utah, and reiterated that the collateral securing the loan had been exhausted and a deficiency of $4,369.25 remained, and judgment against Bill Shiew was awarded in this amount to plaintiff.

Subsequently, on October 14, 1976, plaintiff filed a motion for leave to file an amended complaint and for an order making Utah Farm Bureau Insurance Company a defendant. This motion was granted.

The home in Monticello had been destroyed by fire in 1976. Plaintiff was a loss payee under the insurance policy. The insurance company issued a check payable to Linda Shiew and plaintiff in the sum of $10,000. The plaintiff requested Mrs. Shiew's endorsement so that it could satisfy the outstanding balance due on both the Price and Monticello loans. Mrs. Shiew refused to pay off the Price loan out of the fire insurance proceeds. Plaintiff notified the insurance company of this dispute.

On May 11, 1976, the insurance company issued two separate checks. One was payable to plaintiff in the amount of $2,843.80, the unpaid balance on the loan on the home in Monticello. The other check, payable to Linda Shiew, was in the amount of $7,156.20.

On November 10, 1976, plaintiff filed an amended complaint. In the first cause of action, plaintiff alleged the same facts and pleaded for a judgment against the Shiews, jointly and severally for the deficiency. In the second cause of action, plaintiff for the first time asserted that the dragnet provision in the mortgage on the home in Monticello made the mortgage security for any other indebtedness of Shiews. Plaintiff alleged that the insurance policy issued on the home contained a mortgage clause, and the house and its contents were destroyed by fire. Plaintiff alleged that the insurance company wrongfully paid the proceeds of the insurance to Linda Shiew, while Shiews were indebted to plaintiff in the sum of $4,369.25, together with interest and costs; plaintiff demanded judgment against the insurance company.

Upon trial before the court, plaintiff was awarded judgment against the insurance company and Linda Shiew. The insurance company alone appeals therefrom.

The primary issue submitted by defendant to the trial court and then to this Court concerns the proper interpretation of a dragnet clause in a mortgage. Defendant vigorously urged the dragnet clause should be interpreted according to the Kansas ¹ Hawaiian ² rule, which provides:

". . . in the absence of clear, supportive evidence of a contrary intention a mortgage containing a dragnet type clause will not be extended to cover future advances unless the advances are of the same kind and quality or relate to the same transaction or series of transactions as the principal obligation secured or unless the document evidencing the subsequent advance refers to the mortgage as providing security therefor. . . ." ³

This Court has not previously undertaken a definitive interpretation of dragnet clauses in mortgages.

In Osborne, Nelson, Whitman, Real Estate Finance Law (1979), Section 12.8, p. 772, a dragnet clause is described as a mortgage provision which purports to make the real estate security for other, usually unspecified debts which the mortgagor may already owe or may owe in the future to the mortgagee. The lender usually has no particular future advances in mind and merely includes the clause for its potential future utility. Frequently, as in this case, the clause is included in the printed language of mortgages drafted by the mortgagee. These clauses are seldom the subject of negotiation and may go entirely unnoticed by the mortgagor until the mortgagee asserts them.

Osborne explains: ⁴

". . . Dragnet clauses are generally upheld, but because their apparent coverage is so broad, and because the mortgagor is often unaware of their presence or implications, the courts tend to construe them narrowly against the mortgagee. Generalizations are difficult, since the language of the particular clause may be a decisive factor. However, the following illustrations show numerous ways in which the courts have narrowed the application of dragnet clauses. Sometimes such holdings are said to be based on the intention of the parties, but in reality they usually represent the court's conceptions of fairness and equity. These illustrations are not intended to represent any majority rule, as there are many conflicting or contrary cases. They merely show the sort of judicial treatment dragnet clauses often receive.

"1. The mortgage will only secure advances made or debts incurred in the future. If the mortgagor already owes debts to the mortgagee at the time the mortgage is executed, it would supposedly be easy to identify those existing debts specifically; if they are not so identified, it is assumed that the parties did not intend to secure them.

"2. Only debts of the same type or character as the original debt are secured by the mortgage. For example, if the original loan is for home repairs, a future loan or advance for more repairs would be secured by the mortgage but a loan for an automobile purchase would not. It is easy to imagine grey areas in such a test. For example, what if the second loan were for adding a room to the house? The resolution of the matter is made easier if the documents on the second loan state that it is to be secured under the dragnet clause of the existing mortgage.

"3. As an extension of the foregoing concept, it is sometimes held that the dragnet clause will cover future debts only if the documents evidencing those debts specifically refer back to the clause.

"4. If the future debt is separately secured, whether by another mortgage or by a personal property security agreement, it may be assumed that the parties did not intend that it also be secured by the dragnet mortgage.

"5. The clause is inapplicable to debts which were originally owed by the mortgagor to third parties, and which were assigned to or purchased by the mortgagee.

"6. If there are several joint mortgagors, only future debts on which all of the mortgagors are obligated (or at least of which all were aware) will be covered by the dragnet clause.

"7. Once the original debt has been fully discharged, the mortgage is extinguished and cannot secure future loans.

"8. If the real estate is transferred by the mortgagor to a third party, any debts which the original mortgagor incurs thereafter are not secured by the mortgage. . . ."

Osborne further admonishes:

"While the dragnet clause is usually regarded as advantageous to mortgagees, that is not necessarily the case. One reason is that the...