Dragnet Clauses in Florida
What do the commercial fishing and banking industries have in common? They both use dragnets. Based on the following review and analysis of Florida jurisprudence, it appears that commercial fishermen have been more successful in their use of dragnets than have Florida’s bankers.
The commercial fishing industry literally applies the maxim of casting as wide a net as possible in order to maximize profits. Dragnets are one such device, one type of trawling net used by fishermen. However, there are known drawbacks to their use, their collateral damage. These include turtles, marine mammals, and other unintended sea life captured and killed in the nets. Legislation and regulations have been passed that require the commercial fishing industry to use excluder devices, modifications to the nets that permit these protected species to escape the dragnets.
Bankers, too, have their own ways to cast wide nets in their secured transactions. Dragnet clauses are one such device. A dragnet clause purports to encumber the mortgaged property with other debts both already owed or to be owed in the future, beyond the specific debt secured by the mortgage or security agreement. Edrisi v. Sarnoff, 715 So.2d 1124 (Fla. 3rd DCA 1998). If given its literal effect, a dragnet clause contained in loan documents operates to encumber the pledged property with all indebtedness of the borrower, both antecedent and subsequent to the instant transaction.
It has been said that “the dragnet clause is also known as the ‘anaconda’ clause because of its propensity to ‘enwrap the unsuspecting debtor in the folds of indebtedness embraced and secured in the mortgage which he did not contemplate’” United Nat. Bank v. Tellam, 644 So.2d 97, at 98 (Fla. 3rd DCA 1994) (quoting Berger v. Fuller, 180 Ark. 372, 21 S.W.2d 419 (1929).
The use of dragnet clauses has been the subject of criticism for mis- and overuse, with resultant collateral damage (to borrowers and third parties). See generally, Milton Roberts, Annotation, Debts included in provision of mortgage purporting to cover all future and existing debts (Dragnet Clause) –modern status, 3 A.L.R. 4th 690 (1981).
This article reviews the primary excluder devices used by attorneys for dragnet clauses — litigation! Florida court decisions have imposed limitations on the literal application of dragnet clauses to prevent borrowers’ other debts from being caught up and captured by the dragnet clause and thereby included within the debt secured by the mortgage in order to protect borrowers and certain third parties.
St. Lucie County Bank & Trust Co. v. Aylin, 94 Fla. 528, 114 So. 438 (1927) is the earliest Florida case as well as the only reported Florida Supreme Court case involving a dragnet clause. The case involves the construction and enforceability of a dragnet clause contained in a chattel mortgage (pledging marketable securities as collateral for a loan). In ruling for the borrower, the Court held that the dragnet clause in question would not be construed in a way that would bring within its ambit antecedent and past due obligations owed by the borrower to a third party which had been acquired by the secured lender by purchase or assignment. In so doing, the Florida Supreme Court applied what is nowadays a familiar rule of contractual construction and interpretation to dragnet clauses:
“What everybody knows the courts are assumed to know, and of such matters may take judicial cognizance. It is a matter of common knowledge that banking institutions, in transactions wherein they advance money with or without security, dictate the terms upon which such money will be loaned or advanced, and the borrower in such cases must agree to the terms and conditions stated and made by the bank in order to procure the loan. Therefore the court may legally presume that the bank dictated the terms and conditions under which the sum of $2,312 was procured by Aylin from the bank, and the terms and conditions under which the other notes were deposited by Aylin with the bank as collateral security. When this presumption is indulged in, as it was evidently indulged in by the chancellor, then the rule that one of the parties to a contract, having chosen the language applied and being responsible for any alleged uncertainty and ambiguity, must suffer the result of having such language construed against him, may be invoked.” 94 Fla. at 534, 535.
Since the Aylin case in 1927 only the 1st, 3rd, and 4th Florida Districts have weighed in on dragnet clauses with opinions. The conclusion ultimately to draw is generally consistent with the views expressed by the federal bench in summarizing and applying Florida’s substantive law concerning dragnet clauses. Namely, “It is well established in this State [Florida] that ‘dragnet clauses’ which purport to secure all debts, past, present and future, between the parties to a security agreement, are generally disfavored and must be strictly construed.” In re Peterson, 27 B.R. 95,97 (Bankr.M.D.Fla. 1983). Accord, In re Continental Country Club, Inc., 108 B.R. 327 (Bankr.M.D.Fla. 1989). In fact, this conclusion may well be an understatement for the following reason. Of all published decisions (Federal and State) with opinions applying Florida’s law concerning dragnet clauses only one has been found ruling in favor of the lender in whose favor the dragnet clause was given! (Robert C. Roy Agency, Inc. v. Sun First Nat. Bank of Palm Beach, 468 So.2d 399 (Fla. 4th D. C. A. 1985), review denied, 480 So.2d 1295 (Fla. 1985).)
The next Florida dragnet clause case was a state court mortgage foreclosure that had been removed to federal court. In United States v. American National Bank of Jacksonville, 255 F.2d 504 (5th Cir. 1958), cert. denied, 358 U.S. 835 (1958), the Court of Appeals interpreted whether the following dragnet clause contained in a mortgage executed by both spouses and encumbering a Florida residence owned by a married couple as tenants by the entirety would serve as security for pre-existing and subsequent obligations owed by the husband to the mortgagee and for which the wife was not otherwise liable.
“The Mortgagors hereby agree that the lien of this mortgage shall, in addition to the note hereby secured, secure all sums of money which may now be due or may hereafter become due to the Mortgagee from the Mortgagors. This additional security provision shall remain in effect for so long as the promissory note hereby secured remains unpaid.”
In reaching its decision the Court noted that the mortgage also contained language that the term Mortgagor should be construed as both plural and singular. Nonetheless the Court held that the mortgage did not secure either the antecedent or subsequent obligations owed by the husband, because they were not liabilities he owed in his individual and personal capacity, but rather were owed by virtue of his status as a partner in a business and as an endorser to the partnership’s obligations to the bank. The Court reasoned that the draftsmanship of the dragnet clause was insufficient to bring such other indebtedness within the lien of the mortgage. In addition, the Court noted that the subsequent obligations should be excluded from the application of the dragnet clause because to rule otherwise “…would authorize a husband to so increase the extent of a mortgage lien upon an estate by the entireties without the wife’s knowledge as to extinguish the remaining interest in the mortgaged property. Such a construction should not be adopted.” 255 F.2d at 509
The first time any of the District Courts of Appeal weighed in on dragnet clauses with a published opinion was Boyette v. Carden, 347 So.2d 759 (Fla. 1st DCA 1977). In this opinion which involves a dragnet clause contained in a mortgage transaction, the court directly stated that dragnet clauses contained in a mortgage “should be strictly construed against the party preparing the instrument” 347 So.2d at 761. The Court construed the dragnet clause in the context of the ongoing business transactions between the borrowers and the lender. These transactions eventually included a mortgage being given on the borrowers’ farm, and the court concluded that the parties’ intent was to limit the security provided by the mortgage only to the new funds advanced at the time the mortgage was given and not either antecedent or subsequent indebtedness.
In 1985, the Fourth District Court of Appeals became the first Florida and thus far only appellate court to render an opinion enforcing a dragnet clause in favor of the lender. Robert C. Roy Agency, Inc. v. Sun First Nat. Bank of Palm Beach, 468 So.2d 399 (Fla. 4th D. C. A. 1985), review denied, 480 So.2d 1295 (Fla. 1985). In order to better understand the court’s decision, it is helpful to review the dragnet clause’s typed verbiage before considering the other case facts:
“The collateral is also pledged as security for all other liabilities (primary, secondary, direct, contingent, sole, joint or several) due or to become due or which may be hereafter contracted or acquired of each maker (including each maker and any other person) to Bank.” 468 So.2d at 400.
The convoluted facts may be summarized as follows. The bank entered into a series of personal and business loan transactions with the borrowers and their incorporated business. Eventually one personal loan to the married borrowers was secured by a mortgage on their home. Another loan to their incorporated business was secured by a coin collection. The business’ chattel loan documents for the coin collection contained the afore-mentioned dragnet clause. The business ultimately paid off the primary loan secured by the coin collection but the bank declined to return the collection due to the dragnet clause. The borrower’s personal mortgage loan had gone into default and foreclosure leaving amounts due and owing the bank. The bank claimed that the deficiency was now secured by the coin collection. The trial court ruled in favor of the bank, upholding the validity of the dragnet clause. The borrowers appealed.
In affirming the trial judge’s decision, the Court distinguished the Aylin case not only on the basis of the specificity of the dragnet clause in the instant case but also because the promissory notes containing the dragnet clause (original and renewal) “also specifically mention the residential mortgage.” 468 So.2d at 401. The court found the dragnet clause language to be clear and unambiguous and that the parties’ intent could be derived from the four corners of the document.
Strictly speaking, the Roy case does not interpret a dragnet clause contained in a real property mortgage, because the clause was contained in the loan documents for the chattel mortgage. However, it is an important Florida case for at least three reasons. First, it is unusual in that it upholds enforceability in favor of the lender. Second, the 4th District Court of Appeals includes in its opinion a survey of cases from around the country concerning the enforceability and applicability, or not, of dragnet clauses. Third, Judge Barkett dissents in a separate opinion in which she argues the need to consider whether a dragnet clause was the subject of specific negotiation between the parties (in which case it should be enforced) or was “really just a side agreement in the main transaction and are subject to being totally overlooked in the excessive boilerplate verbiage of the loan documents … and that it had probably never come to the maker’s attention until it was sought to be enforced” (in which case it should not be enforced). 468 So.2d at 405.
The 3rd District Court of Appeals has decided two cases involving dragnet clauses that have imposed new requirements for their enforceability in Florida. The first dealt with antecedent borrower debts (United Nat. Bank v. Tellam, 644 So.2d 97 (Fla. 3rd DCA 1994)). The second dealt with subsequent borrower indebtedness (Garrote v. Ocean Bank, 713 So.2d 1095 (Fla. 3rd DCA 1998), review denied 728 So.2d 203 (1998)).
In Tellam a married couple executed a note and real property mortgage that contained the dragnet clause described below. At the time the mortgage loan was closed, the husband was already indebted to the mortgagee in connection with loans made to him and a partner in connection with their business. The mortgage note was paid in full, the couple demanded satisfaction of the mortgage, and the mortgagee refused on the basis of the dragnet clause and outstanding antecedent indebtedness owed by the husband. The mortgagee instituted a declaratory judgment proceeding to determine the enforceability of the dragnet clause. The trial court granted summary final judgment in favor of the borrowers and the bank appealed. The dragnet clause in question read as follows:
“Obligations” shall refer to the indebtedness represented by this note and all renewals and substitutions hereof and claims of every nature and description of the Holder against the Obligors whether present or future, contracted with or acquired by the Holder, and whether joint, several, absolute, contingent, matured, unmatured, liquidated, unliquidated, or any of them, direct or indirect.” 644 So.2d at 98.
The 3rd District Court of Appeals affirmed the trial court’s decision denying the lender a recovery, and confirmed the continued viability in Florida of the strict construction principle applicable to dragnet clauses announced in Boyette, supra. For the first time, a Florida court imposed a new requirement for dragnet clauses to be effective with respect to antecedent debts of the mortgagor. Antecedent debts of the borrower will not be covered within a dragnet clause, unless these debts are specifically identified in the mortgage. The Court reasoned that this holding would benefit not just the borrower but also third parties having business transactions involving the real property which would thereafter be subject to the effect of the dragnet provisions.
In Garrote a married couple executed a mortgage on their homestead property, which included not only a special clause typed onto the mortgage’s first page (“This is an open first mortgage in the amount of $130,00.00 given to secure any present or future obligations of Eugenio Rafael Garrote and Gladys Garrote, his wife” but also a dragnet clause in the body of the mortgage which provided that:
“In addition to the obligations described above (as evidenced by the PROMISSORY NOTE or otherwise), this Mortgage is given to secure any and all obligations of MORTGAGOR to BANK arising by virtue of any security agreement, Promissory Note or other agreement between MORTGAGOR and the BANK and for all obligations of MORTGAGOR to the BANK, contingent or absolute, direct or indirect, regardless of however or whenever created.” 713 So.2d at 1096.
After the mortgagors obtained the residential mortgage, both of them personally guaranteed business loans made by the mortgage lender to a corporation which later went into default. The lender sued the corporate borrower and the mortgagors as guarantors and obtained a judgment. The lender then sought to collect the amounts due pursuant to the mortgage’s dragnet clause via mortgage foreclosure. The trial judge granted foreclosure.
In reversing the trial judge, and thereby denying the lender a recovery, for the first time, a Florida court imposed a new requirement for dragnet clauses to be effective with respect to subsequent debts of the borrower. Subsequent debts of the borrower will be covered within a dragnet mortgage clause “only if the subsequent note specifically refers back to the mortgage’s dragnet clause as providing security for that advance; or when the obligations relate to the same transaction or are of the same kind or class.” 713 So.2d at 1097. The court reasoned that guarantees of business loans could not be transactions similar in character to the residential loan in question, and that nowhere in the promissory notes for the business loans was specific reference made to the dragnet clauses in the residential mortgage.
The last and most recent reported decision interpreting the enforceability of dragnet clauses in Florida mortgages emanated from the 4th District Court of Appeals in 2008. Starlines Intern. Corp. v. Union Planters Bank, N.A., 976 So. 2d 1172 (Fla. 4th DCA 2008).
In this case a mother and son had taken out business loans from a bank which were secured by a security agreement in the business assets along with a personal guaranty from the mother. Later, the mother took out another loan from the bank which was secured by a mortgage on real estate she owned and from which the business operated. The mortgage contained a future advance clause for up to twice the original principal amount of the loan in compliance with F.S. § 679.04 (2010). After this mortgage was recorded a third-party, Starlines, purchased a one-half interest in the real property, subject to the mortgage. Starlines was unaware of the dragnet provision in the promissory note and had been given information by the mother that the only outstanding indebtedness secured by the mortgage was the mortgage note. Starlines then began to operate its own business from the mortgaged premises, sharing it with the borrowers. The borrowers defaulted on the business loan, and the lender instituted foreclosure proceedings against the property naming Starlines as a non-obligor co-defendant. Starlines defended claiming it was a bona fide purchaser for value of the one-half interest in the property (BFP), and that therefore its interest was subordinate only to the mortgage loan amount and not the amounts incorporated via the dragnet clause. The trial judge rejected Starlines’ BFP argument as a matter of law and found via summary judgment that Starlines could not have been a BFP due to its constructive notice by virtue of the recorded mortgage making reference to the promissory note containing the dragnet clause. Starlines appealed.
The promissory note secured by the mortgage (but not the mortgage itself) contained the following dragnet clause:
“Security Interest. As security for the payment of this Note, and any renewals, extensions or modifications hereof, and any other liabilities, indebtedness or obligations of Borrower to Bank, however or whenever created, Borrower hereby grants to Bank a security interest in any and all collateral pledged to the Bank as set forth below and any and all collateral now or hereafter pledged to the Bank pursuant to a security agreement which provides for such security interest: (a) Florida Real Estate Mortgage, Assignment of Leases and Rents and Security Agreement (the “Mortgage”) of even date herewith executed by Borrower in favor of Bank encumbering real estate situate in Broward County, Florida, more particularly described on Schedule “A” attached hereto and by this reference made a part thereof … All such property and all other property securing Borrower’s liabilities to Bank will hereinafter be referred to as the “Collateral”. The Collateral shall also serve as security for all other liabilities (primary, secondary, direct, contingent, sole, joint or several) due or to become due which may be hereafter contracted or acquired, of each Obligor (as defined above) to Bank, whether such liabilities arise in the ordinary course of business or not ….” 976 So.2d at 1174.
The 4th District Court of Appeals reversed the trial judge and remanded for further proceedings holding that it was improper to decide by summary judgment that Starlines could not have been a BFP because the issue of implied actual notice of the preexisting indebtedness needed to be resolved by trial.
The Court effectively modified its previous holding in Roy by limiting its applicability to cases involving enforcement of a dragnet clause against the borrower, by holding:
“We believe that when confronted with the issue of enforcing a dragnet clause against someone other than the borrower, the better rule is that set forth in Tellam. As it relates to pre-existing debt, a dragnet clause will not be enforced against someone other than the borrower unless the dragnet clause specifically identifies the pre-existing debt to be included within its terms or unless it can be shown that the third party otherwise had notice that the specific pre-existing debt at issue was to be included within the grasp of the dragnet clause.” 976 So.2d at 1176.
It is important to note, however, that the 4th DCA did not go as far as the 3rd DCA did in Tellam. First, Starlines does not adopt the holding of Tellam in actions between the lender and borrower. Recall, Tellam requires that antecedent debt be specifically identified in the mortgage. Starlines does not make this requirement a condition to enforceability against either borrowers or third parties. Rather Starlines requires specific identification of the antecedent indebtedness only in the case of enforcement against third parties, and even then, specific identification is sufficient if contained in the dragnet clause itself, it need not be in the recorded mortgage.
To summarize, Florida lawyers have several excluder devices available to them when the feared anaconda rears its head and threatens to squeeze the life out of borrower-clients.
1. In all judicial districts except the fourth, dragnet clauses remain subject to the strict construction against the lender standard that has prevailed in Florida since the 1927 Florida Supreme Court Aylin decision.
2. In the third judicial district dragnet clauses will not be enforceable for antecedent borrower debts unless the antecedent debts were specifically identified in the mortgage instrument itself without regard to the location of the dragnet clause.
3. In the third judicial district dragnet clauses will not be enforceable for subsequent borrower debts unless the promissory note(s) evidencing the subsequent debts specifically refers back to the mortgage’s dragnet clause as providing security for that advance or when the subsequent debts relate to the same transaction or are of the same kind or class as the mortgage transaction itself.
4. In the fourth judicial district as between the lender and borrower dragnet clauses will be enforced without the necessity of specificity of indebtedness, provided the dragnet clause is otherwise clear and unambiguous.
5. In the fourth judicial district as between a lender and a third party, in order for the dragnet clause to be enforceable as to antecedent debts, the dragnet clause must specifically identify the pre-existing debt to be included within its terms or the lender must by some other way show that the third party otherwise had notice that the specific pre-existing debt was included within the grasp of the dragnet clause (for example by reciting the indebtedness in the mortgage).
6. The first and fifth judicial districts have rendered no published opinions concerning dragnet clauses. The second judicial district has rendered only one opinion, applying the strict construction principle.
Counsel representing lenders who wish to continue “fishing” using dragnets in Florida, are well advised to tighten their dragnet’s gage in light of the foregoing decisions by adopting the following practices: (a) always include the dragnet clause in the recorded mortgage; (b) since antecedent indebtedness is always known by the lender prior to the execution of the mortgage, specifically identify the antecedent indebtedness to be secured in the mortgage and have the borrower initial the margin next to the paragraphs containing the identification; (c) subsequent indebtedness if granted, by definition will be a future advance, therefore comply with the requirements of F.S. 697.04 and follow appropriate title insurance underwriting guidelines before making them; (d) in each promissory note that will be executed to evidence the subsequent indebtedness specifically identify the mortgage containing the dragnet provision which will secure the note and have the borrower initial the margin of the note where that identification occurs; (e) when the borrowers of subsequent indebtedness do not include all of the record owners who executed the mortgage containing the dragnet clause, special precautions are needed, because the requirements of Garrote will not be met as to the record owner(s) who do not execute the promissory note. A separate document executed by such record owner(s) acknowledging the future advance and expressly approving its inclusion within the dragnet provision of the mortgage is suggested as one possible solution.