Daily Development for Monday, July 26, 1999

Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

MORTGAGES; FUTURE ADVANCES; VALIDITY: Florida court denies application of mortgage future advance clause to subsequent loan that was separately secured and lacked any documentation linking it to the original clause.

Gardner v. Guldi, 724 So.2d 186 (Fla. 5th DCA 1999).

A bank's assignee instituted a foreclosure proceeding against debtors. The primary issue was whether a second transaction between the bank and the debtors constituted a future advance under the prior mortgage.

The lender loaned $50,000 to borrower and took a mortgage on some land with a future advances clause that was quite specific as to its coverage of all future loans, whether or not obligator, within the next following fifteen years. The total amount so covered could not exceed twice the face amount of the note (with adjustments).

A year later, the lender loaned $60,000 to the borrower. According to the borrower's testimony (but presumably not the lender's), the borrower attempted to use the land as collateral again but the bank insisted on other security as well. The parties used other collateral and there was nothing in the documents referring back to the future advance paragraph in the mortgage of one year before.

Five years later, borrower defaulted on both loans. The parties exercised a cross collateralization agreement at this time, but the priority of that agreement apparently did not suffice to take care of the bank's problems, so it sought enforcement of the future advances clause to establish that the whole debt was secured by the land.

The appellate court held that it was not. The court emphasized the fact that the parties, at the time of the second advance, apparently did not intend to collateralize the second advance with the first mortgage. It indicated that there was no evidence of such intent and borrower's testimony suggested that, in fact, a different form of security was required.

The court ran through the traditional indicia that the courts require in order to uphold a future advances clause. As indicated, there was no "reference over." On the other hand, the two loans were relatively close together. The court then turned to the question of whether the two loans related to the "same transaction." It concluded that the two loans did not relate to the same transactions because they used separate collateral.

Comment 1: In general, the court's opinion is consistent with the tough stance being taken by many courts (and recommended by the new Restatement) with regard to future advance mortgages. But there are some inconsistencies here worth probing.

First, unlike other cases, in this case the borrowers clearly had in mind using the land to secure the second loan. Although the bank required additional security, it may well have concluded that it needed both the land and the additional security to justify the new advance. A requirement for additional security in and of itself is not very telling. But perhaps the bottom line here is that it was up to the bank to explain the issue.

Second, the fact that the two loans were very close in time suggests a relationship. The court says they were not the same transaction, but tells us nothing of the planned expenditures of the proceeds from either loan. Instead, it uses extraordinarily circular reasoning. The second loan is not secured by the land because the two transactions are separate. The two transactions are separate because the second loan is not secured by the land. Whooops!!!

Comment 2: The real lesson to be learned is that counsel must drill their client lender's loan officers not to rely upon future advance clause without documentation contemporaneous with each advance. Any other procedure is inviting trouble, especially where, as here, the borrowers are close to consumer borrowers or where the borrowers are farmers.

Comment 3: Although we lack sufficient facts, it appears from the court's brief recitation that the second advance exceeded the amount of the original loan. Thus, it appears that very terms of the future advance clause would preclude application of the clause to the new loan. The parties were only authorized to use the clause for an amount no more than double the original amount. Was it error by the bank to limit its future advance clause in this way? Probably not, since most states require that the arrangement have some cap on it.

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