Opinion ID: 1925557
Heading Depth: 2
Heading Rank: 3

Heading: Validity of the Dragnet Clause

Text: ¶ 50. Having determined that the parties intended the Mortgage to secure antecedent debt and that the Bank proved the existence of such antecedent debt, the final question we address is whether the dragnet clause purporting to secure the antecedent debt, is, as a matter of law, enforceable in Wisconsin, such that the Mortgage actually secured the prior debt in this case. Whether a mortgage containing a dragnet clause is enforceable in Wisconsin is a question of law which we shall decide independently without deference to the decision of the trial court. Badger State, 122 Wis. 2d at 723. ¶ 51. Schanke argues that in order for a dragnet clause to be valid, it must clearly state that it secures antecedent debt and must also either specifically list the individual debts or the total amount of antecedent debt secured by the dragnet clause. In contrast, the Bank contends that in antecedent debt cases, a dragnet clause is valid if the mortgage clearly and unambiguously states that it secures antecedent debt; it is not necessary to list the specific amount of each debt secured. The amicus curiae, the Wisconsin Bankers Association (WBA), maintains that a dragnet clause securing antecedent debt is valid as long as the relation between the debt and the security for the debt is not wholly unclear. Both the Bank and the WBA are partially correct. We hold that a dragnet clause securing antecedent debt is enforceable in Wisconsin if the mortgage clearly states that it secures antecedent debt and the relation between the debt and the security for the debt is not wholly unclear. ¶ 52. The first case interpreting the validity of dragnet clauses in Wisconsin was Capocasa v. First National Bank, 36 Wis. 2d 714, 154 N.W.2d 271 (1967). In Capocasa, a husband and wife had executed a joint mortgage containing a dragnet clause that purported to secure all future indebtedness of the parties. The question before the court was whether the dragnet clause would allow the husband to encumber his wife's interest in the property by virtue of his unilateral subsequent borrowings. Id. at 716-20. The court noted that dragnet clauses are looked upon with disfavor by the courts . . . and `should be closely scrutinized.' Id. at 721 (citations omitted). ¶ 53. The court also noted that under one view, the contemplation of the parties test, the security will not be extended as to antecedent debts unless the instrument so provides and identifies those intended to be secured in clear terms, and, to be extended to cover debts subsequently incurred, these must be of the same class and so related to the primary debt secured that the assent of the mortgagor will be inferred. Id. at 723-24 (internal citations & quotations omitted). The court ultimately rejected the contemplation of the parties test in the context of joint mortgagors, noting: There seems to be no good reason for one who has executed a mortgage with [a] dragnet clause to be permitted to escape its consequences for his personal borrowing merely because subjectively it was not within his contemplation (contrary to the words of the written instrument) that an additional obligation to the same creditor would subject his property to the dragnet feature of the mortgage. Id. at 724. ¶ 54. The court in Capocasa went on to hold that: [W]hen a dragnet clause is made part of a mortgage executed by joint tenants, each mortgagor pledges his undivided interest in the mortgaged property to secure (1) the joint indebtedness or other indebtedness specifically named in the instrument, and any existing or future joint indebtedness of the mortgagors to the mortgagee; (2) any existing or future individual indebtedness to the mortgagee . . . . Id. at 726-27 (emphasis added). Notably the court did not state that the existing indebtedness had to be specifically named. Under Capocasa, a dragnet clause will secure indebtedness specifically named in the instrument, and any existing . . . indebtedness. Id. (emphasis added). ¶ 55. The court in John Miller Supply Co. v. Western State Bank, 55 Wis. 2d 385, 390, 199 N.W.2d 161 (1972), also addressed the validity of a dragnet clause purporting to secure debts incurred subsequent to the execution of a mortgage. The court considered whether the common law relating to dragnet clauses survived the adoption of the Uniform Commercial Code, Article 9. Id. at 393-94. The court ruled that the common law remained the same since the adoption of Article 9 of the Uniform Commercial Code: Where [the other indebtedness] is antecedent it must be identified in clear terms, and where it is subsequent, it must be of the same class as the primary obligation secured by the instrument and so related to it that the consent of the debtor to its inclusion may be inferred. Id. at 394 (citations omitted). ¶ 56. The court ultimately concluded the dragnet clause at issue was not valid under the contemplation of the parties test because the future obligations were not within the clear contemplation . . . of the parties . . . and . . . not of the same nature or related to the types of indebtedness involved in the original financing agreement. Id. at 394. But see Capocasa, 36 Wis. 2d at 724-27 (explicitly rejecting the contemplation of the parties test for subsequent debts secured by a mortgage executed by joint mortgagors). ¶ 57. The court of appeals in Schmitz specifically addressed the validity of a dragnet clause securing antecedent debt (the type of dragnet clause at issue in the case at bar). The court summarized the law in relation to dragnet clauses as follows: Debts antecedent and debts subsequent to dragnet clauses in security devices require different analyses. In both cases, the policy is no big surprises. However, in antecedent debt cases, the parties have knowledge of the debt and the security, and the question is whether the two are so wholly unrelated or unclear that as a matter of public policy a court will refuse to enforce the clause as to specific security. Debts subsequent to dragnet clauses are unknown to the parties when the mortgage is given, though a future course of conduct may be contemplated. The similarity between future debts contemplated and future debts incurred is what a court scrutinizes when analyzing subsequent debt cases. Schmitz, 141 Wis. 2d at 874-75. ¶ 58. Synthesizing the law from these cases, under Wisconsin law, a mortgage with a dragnet clause may properly secure antecedent debts only if the mortgage clearly identifies that it secures antecedent debt, and the relation between the debt and security is not so wholly unclear that as a matter of public policy a court will refuse to enforce the dragnet clause. The parties in the case before us dispute what the phrase clearly identified means. Schanke, relying on Badger State, contends that this phrase means the specific antecedent debt must be clearly identified, that is, listed on the face of the mortgage in dollar amounts. The Bank argues that clearly identified merely means that the dragnet clause must unambiguously state that it secures all prior debt. ¶ 59. In this respect, the Schmitz decision is enlightening. The dragnet clause in Schmitz was part of a Real Estate Security Agreement (RESA) that provided: 'Customer . . . grants lender a . . . lien . . . to secure . . . debts . . . arising out of credit previously granted.' Id. at 871. The debtor in that case, through the RESA, gave the bank a lien on his farm in exchange for a $9,000 loan. Id. at 869. The debtor had also taken out substantial previous loans for his farm operation that were secured with personal property. Id. The court first concluded that the language in the RESA unambiguously secured previously granted obligations. Id. at 871-72. The court then went on to uphold the dragnet clause within the RESA, in a factual scenario not dissimilar to our own, stating: Though the prior loans were secured by personal property, the additional . . . credit made the total debt substantial, and in the absence of a RESA, the $9,000 would have been unsecured. . . . [Both the bank and the debtor] knew that . . . [the debtor] was increasing his indebtedness for the third consecutive year. The previously pledged collateral was one or two years older. There is no surprise in either the bank's request to become secured or in [the debtor's] accession to that request. Id. at 875-76 (emphasis added). ¶ 60. Thus, even though the RESA in Schmitz did not state the specific amount of antecedent debt secured by the dragnet clause, the court nonetheless enforced the dragnet clause because the language stating that the lien `secure[ed] . . . debts . . . arising out of credit previously granted,' id. at 871, clearly indicated that the RESA secured the prior debt. Further, the nature of the prior debtor-creditor relationship between the parties was such that allowing the lien to secure the past debt would come as no surprise to the parties. Id. at 875-76. ¶ 61. Schanke argues that Badger State stands for the opposite proposition, as the court there stated: We conclude that because the amount of debt was stated in the mortgage and is identifiable from the mortgage documents, the mortgage is enforceable. Badger State, 122 Wis. 2d at 721. This is the precise language the court of appeals below used to posit the obvious corollary that if the amount of debt is not both stated in the mortgage and identifiable from the mortgage documents, the mortgage is not enforceable. Mitchell Bank, 257 Wis. 2d 723, ¶ 27. However, this interpretation is a misreading of the holding of Badger State because the court in Badger State merely held that stating the dollar amount of the antecedent debt was sufficient, but not necessary, to render the dragnet clause enforceable. Badger State, 122 Wis. 2d at 724. ¶ 62. The junior interest holder in Badger State made the same argument Schanke is making in this case: [A] mortgage containing a dragnet clause for antecedent debts which does not specifically identify the underlying debt is not enforceable in Wisconsin. Id. at 724. The Badger State court did not accept this argument, noting that this court in Capocasa held: [A] dragnet clause in a mortgage may secure `any existing or future individual indebtedness to the mortgagee . . . .' Id. (quoting Capocasa, 36 Wis. 2d at 727). The court in Badger State, 122 Wis. 2d at 724, concluded: [A] dragnet clause may cover any specifically named debt and any existing debt.  (Emphasis added.) Notably, like Capocasa, the Badger State court did not say that a dragnet clause covers only specifically named debt and specifically named existing debt. ¶ 63. The Badger State court went on to find that [i]n this case, the amount of indebtedness . . . is plainly stated on the face of the mortgage. . . . We conclude, therefore, that [the] mortgage is enforceable. Id. The Badger State court did not state that existing debt had to be specifically named for a dragnet clause to be valid. It merely held that when the amount of the antecedent debt is specifically stated on the face of the mortgage, this is sufficient to render the antecedent debt clearly identified, such that the dragnet clause is enforceable. ¶ 64. In other words, under Badger State, it is sufficient if the amount of the debt is specifically stated on the face of the mortgage, but Badger State cannot be read for the proposition that it is necessary for the amount of debt to be specifically stated on the face of the mortgage in order for a dragnet clause to be enforceable. Thus, the court of appeals' obvious corollary is, in fact, a logical fallacy. This conclusion is buttressed by the fact that the Schmitz decision came two years after Badger State, and in its exhaustive summary of Wisconsin dragnet clause law, the court in Schmitz came to the exact opposite conclusion than that advanced by Schanke. ¶ 65. In the case before us, the Mortgage clearly states that it secures all obligations. Further, it states: The term  Obligations  as used herein shall include, without limitation, all of the debts, notes, guaranties, obligations and liabilities of whatever nature or amount (and any extension, renewals or modification thereof) arising out of credit or other financial accommodation previously granted, contemporaneously granted or granted in the future by Mortgagee to or at the request of any Obligor . . . . (Emphasis added.) This language clearly states that all prior debts are secured by the Mortgage. Under the rationale of Schmitz, a dragnet clause securing all `debts . . . arising out of credit previously granted' was sufficiently clear to enforce the clause. Schmitz, 141 Wis. 2d at 871. Here, the Mortgage secures any obligations, defined in the dragnet clause as credit . . . previously granted, contemporaneously granted or granted in the future. Thus, the pertinent language in the dragnet clause here is virtually identical to the operative language in the dragnet clause in Schmitz. [21] ¶ 66. Schanke's contention that the individual antecedent debts must be specifically listed is in accord with the contemplation of the parties test. See Capocasa, 36 Wis. 2d at 724 (noting that the `contemplation of the parties' cases deny any coverage under the `dragnet' clause unless the obligation to be blanketed in is specifically mentioned . . .). Yet, this test was specifically rejected in Capocasa when dealing with joint mortgagors. Id. at 724-25 (rejecting the contemplation of the parties test in favor of the Iowa approach). But see John Miller Supply Co., 55 Wis. 2d at 392 (incorrectly stating that Capocasa adopted the contemplation of the parties test). Also, this was not the test utilized by Badger State or Schmitz. Simply put, not a single Wisconsin court addressing antecedent debt secured by a dragnet clause has required the antecedent debt to be specifically listed in dollar amounts in the mortgage in order for the mortgage to be enforceable. ¶ 67. In addition, the WBA has brought to our attention the fact that a RESA, the type of security agreement in Schmitz, by its nature does not list the precise amount of debt on the face of the instrument. See Schmitz, 141 Wis. 2d at 870 (noting that a RESA does not show the sum of money it secures). While the security agreement before us is a mortgage and not a RESA, both contain almost identical language, and if we were to accept Schanke's argument that a dragnet clause must specifically list the amount of antecedent debt, we would, in effect be overruling Schmitz. ¶ 68. More importantly, were we to agree with Schanke, we would essentially invalidate all RESAs. Schanke himself argues in his supplemental brief, [t]he RESA may be a flawed instrument as well. (Resp't Supplemental Br., 18). Thus, Schanke at least implicitly concedes that his position is contrary to the Schmitz decision. While it may be the better practice for a mortgagee to specifically list the specific amount of debt secured in a mortgage via a dragnet clause, the above authorities clearly demonstrate this is not required under Wisconsin law. ¶ 69. The decisions in Capocasa, Badger State, and Schmitz make clear that as long as the dragnet clause clearly states that it secures all past or antecedent debt, the dragnet clause is presumptively valid. However, as the Schmitz court recognized, the determination as to whether a dragnet clause is valid turns not only upon the language used in the mortgage, but also upon whether, the debt and the security are so wholly unrelated or unclear that as a matter of public policy a court will refuse to enforce the clause as to specific security. Schmitz, 141 Wis. 2d at 874-75. The court of appeals in Schmitz correctly recognized that ultimately, the decision to enforce a dragnet clause is a policy decision, dependent on the case specific circumstances. Id. at 874-76. ¶ 70. Thus, the Schmitz court analyzed the particular relationship between the debtor and creditor to determine whether the relation between the debt and the security was wholly unrelated or unclear. Id. The court reasoned that while the debtor's initial obligation was secured, the subsequent borrowings of the debtor made his total debt substantial and were it not for the dragnet clause, a significant amount of his debt would have been unsecured. Id. at 875-76. The court further noted that the original collateral was a few years older than the recent debt and the debtor had consistently increased his indebtedness since pledging the initial security. Id. at 876. The court concluded that based on this relationship [t]here is no surprise in either the bank's request to become secured or in [the debtor's] accession to that request. Id. ¶ 71. Here, the business notes themselves establish the relationship between the prior debt and the Mortgage. The September 4, 1986, $50,000 note clearly states on its face: This Note is secured by all existing and future security agreements and mortgages between Bank and Maker, between Bank and any indorser or guarantor of this Note, and between Bank and any other person providing collateral security for Maker's obligations . . . . (Emphasis added.) The March 3, 1987, renewal note, renewing this $50,000 obligation, contains the same language, as do the Gary Butler notes, the Miracle Shield International note, and the Universal Graphics notes, of which Waltke was guarantor. By signing the Mortgage, Mrs. Waltke pledged her interest in the Genesee property as security for this debt. Thus, Mrs. Waltke constitutes a person providing collateral security for [the] Maker's obligations. ¶ 72. Like the debtor in Schmitz, 141 Wis. 2d at 875-76, the Waltkes owed the Bank a substantial amount of previous unpaid debt. As in Schmitz, it cannot seriously be argued in this case that the fact the Mortgage secured all outstanding Waltke obligations came as a big surprise to Waltke. At the time the Mortgage was executed, the Waltkes were fast approaching insolvency, if not already de facto insolvent. Given the amount of indebtedness and frequency with which Waltke was taking and guarantying loans in 1986 and 1987, it is fair to say that he was a relatively sophisticated businessman. If Waltke possessed enough financial prowess to secure multiple loans for his business interests, he certainly can be charged with knowledge of the plain language of the notes. See Deminsky v. Arlington Plastics Mach., 2003 WI 15, ¶¶ 29-30, 259 Wis. 2d 587, 657 N.W.2d 411. ¶ 73. Finally, the title report on the Genesee property describes the Mortgage as securing the originally stated indebtedness of $50,000 and any other amounts payable under the terms thereof[.]  (Emphasis added.) In light of the amount of outstanding obligations Waltke owed to the Bank, it is not at all surprising that the Mortgage would secure these obligations. Given the language of the Mortgage clearly identifying credit previously granted as being secured under the Mortgage and the nature and extent of the Waltkes' prior indebtedness with the Bank, it could not come as any surprise or be wholly unclear to the Waltkes that the Mortgage executed May 7, 1987, secured all previous indebtedness. ¶ 74. Yet, the case before us is more complicated than Schmitz, as both Mr. and Mrs. Waltke signed the Mortgage and the Bank is seeking to foreclose upon property in which Mrs. Waltke has an undivided one-half interest. [22] One could argue that it is inequitable to allow the Bank to proceed on Mrs. Waltke's interest in the mortgaged property when the debts secured by the Mortgage are those of her husband. [23] However, Capocasa set forth the standard for what debts a dragnet clause may properly secure when a mortgage is jointly executed: We conclude therefore that, when a dragnet clause is made a part of a mortgage executed by joint tenants, each mortgagor pledges his undivided interest in the mortgaged property to secure (1) the joint indebtedness or other indebtedness specifically named in the instrument, and any existing or future joint indebtedness of the mortgagors to the mortgagee; (2) any existing or future individual indebtedness to the mortgagee; and (3) any future debt of his comortgagor which is known to him and to which he consents to be a lien upon his interest; provided (4), in addition, that whenever the proceeds or the benefits derived from the other mortgagor's contracting a further obligation inure to the enhancement of his interest, the dragnet clause will be construed to cover such indebtedness to the extent of that enhancement notwithstanding the fact that the mortgagor did not know of or consent to the indebtedness. Capocasa, 36 Wis. 2d at 726-27 (emphasis added). ¶ 75. Capocasa involved the individual indebtedness of one spouse, unknown to the other, incurred subsequent to the execution of the mortgage. Id. at 716-17. Thus, the Capocasa court applied the fourth factor to conclude that while the husband's interest in the mortgaged property was subject to the dragnet clause, his wife's interest was not, as the subsequent indebtedness did not benefit the wife's interest in the property. Id. at 727. Under Capocasa, one spouse's knowledge of debts incurred by the other spouse is not controlling in determining whether the dragnet clause is valid. See id. ¶ 76. The court of appeals in Schmidt v. Waukesha State Bank, 204 Wis. 2d 426, 438, 555 N.W.2d 655 (Ct. App. 1996), confirmed the vitality of Capocasa, but noted that changes in marital property law since Capocasa was decided would affect the application of the rule it set forth. Id. at 441-43. While, Schmidt, like Capocasa, involved debt incurred subsequent to the execution of the mortgage, Schmidt, 204 Wis. 2d at 430, the court of appeals specifically noted that Wisconsin's marital property law could affect the ability of a dragnet clause to secure existing indebtedness because [a]fter all . . . the very concept of `individual indebtedness' would certainly be affected by the marital property law's modern view of whether, and under what circumstances a spouse may incur an indebtedness that is strictly `individual.' Id. at 441. ¶ 77. Schmidt noted that under Wis. Stat. § 766.55(2)(b),  an obligation incurred by a spouse in the interest of the marriage or the family may be satisfied only from all marital property and all other property of the incurring spouse. . . . [However, Wis. Stat. § 766.55(2)(d) provides] that any other obligation incurred by a spouse during marriage, including one attributable to an act or omission during a marriage, may be satisfied only from property of that spouse that is not marital property and from that spouse's interest in marital property, in that order. Thus, the issue is whether [the loans of one spouse] were obligations incurred . . . in the interest of the marriage, under § 766.55(2)(b), or other obligations, under § 766.55(2)(d). Schmidt, 204 Wis. 2d at 441-42 (emphasis in original). The court in Schmidt also noted that under Wis. Stat. § 766.55(1), an 'obligation incurred by a spouse during marriage, including one attributable to an act or omission during marriage, is presumed to be incurred in the interest of the marriage of the family.' Id. at 442 (emphasis in original). ¶ 78. The debt in Schmidt fell under the fourth factor articulated in Capocasa. Id. at 442. Nonetheless, the court of appeals' discussion of marital property law as it relates to the enforceability of a dragnet clause contained in a mortgage executed by spouses is pertinent to the resolution of the case at bar. Schmidt recognized that under the presumption created by § 766.55(1), once the bank established the basic fact that the loans to Larson were incurred during the marriage, it became Schmidt's burden to prove by a preponderance of the evidence that the loans to Larson under consideration were not incurred in the interest of the marriage or the family. Id. at 443. ¶ 79. Therefore, under Wis. Stat. § 766.55 (1985-86), the debts of Mr. Waltke are presumed to have been incurred in the interest of the marriage, as Mrs. Waltke did not testify to the contrary. [24] As such, Mr. Waltke's debts are property considered existing joint indebtedness. Under the second Capocasa factor, a mortgage jointly executed with a dragnet clause properly secures any existing or future joint indebtedness of the mortgagors to the mortgagee. Capocasa, 36 Wis. 2d at 727 (emphasis in original). ¶ 80. We therefore hold that the dragnet clause in the May 7, 1987, Mortgage is valid and enforceable under Wisconsin law because the Mortgage clearly states that it secures antecedent debt and the relation between the debt and security are not so wholly unrelated or unclear. As such, the dragnet clause properly secured the existing indebtedness of the Waltkes at the time it was executed. ¶ 81. Thus, the circuit court's factual finding that the Bank did not prove the existence and terms of the missing Note is immaterial and non-determinative to the outcome of this case, because the circuit court improperly failed to consider the Bank's proof of the antecedent debt that the Mortgage secured. Because we determine that the parties in this case did intend for the Mortgage to secure antecedent debt and that the dragnet clause is enforceable, we reverse the court of appeals' determination that the Mortgage is invalid because the Bank failed to prove the existence of debt underlying the Mortgage.