by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

MORTGAGES; FUTURE ADVANCES: "Future advances" language in a deed of trust, without more, cannot satisfy the statute of frauds so as to constitute a valid, enforceable credit agreement, binding mortgagee to advance an additional loan in the amount of future advances provided. American Realty Trust v. First Bank, 902 S.W.2d 884 (Mo. App. W.D. 1995).

A Missouri statute (RMS 432.045.2) provides that a debtor may not sue a creditor to fund a credit agreement unless the agreement is in a writing which provides for the payment of interest or other consideration and sets forth the relevant terms and conditions thereof. In the present case, the deed of trust given by the borrower provided that the deed of trust secured future advances of up to $1 million plus other amounts (including costs of completion of construction) provided for in the Missouri future advances statute. Borrower argued that by so providing for future advances the lender "carved out" $1 million in security that prevented any other lender from providing the necessary funds.

Held: The future advances language in no way constituted a credit agreement, because there were no credit terms in writing, no provision for the payment of interest or other consideration and no explication of the relevant terms and conditions. Missouri's future advances statute, RMS 441.055, clearly contemplates that any future advances secured by a deed of trust should be represented by a separate note or other credit agreement except for the special statutorily allowed "priority advances" such as advances to protect security.

Comment: The court's conclusion here is correct, but points to the possible "lender tyranny" that can occur when future advances provisions give automatic priority, as provided in the Missouri statutes, whether they are "optional" or "obligatory."

Here, the borrower offerred to prove that the parties knew that there would be an additional $1 million needed to renovate the security property, and that it agreed to the future advances provision specifically in contemplation of this additional loan. The court held that the borrower could not show promissory estoppel because the final loan documents provided expressly that the lender was not committed to make any other loans.

Although the lender thus is freed of responsibility for the additional loan, shouldn't it nevertheless have some obligation to "let go" of the security that it acquired for purposes of securing that loan? Otherwise, the borrower may be "locked out" of the credit market. In this case, where the $1 million was necessary in order to renew a Holiday Inn franchise at the subject property, the lack of access to the new loan money might have been a factor leading directly to default on the first loan. Could the borrower, in response to a foreclosure or otherwise, argue a breach of good faith and fair dealing if the lender refused to release the $1 million it has frozen?

Dale Whitman and Grant Nelson, reporters of the proposed Restatement on Land Security, have abandoned the "optional/obligatory test as a common law rule and substituted a priority rule similar to that given in the Missouri statute. The Uniform Land Security Interest Act preserves the "optional/obligatory" test except for advances to protect security.

The optional/obligatory test certainly has its detractors, particularly those who point to the inherent uncertainty as to what constitutes an "obligatory" obligation in the context of modern construction lending. What are the experiences of DIRT readers regarding the test?

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