Opinion ID: 852654
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Heading: Dragnet Clauses

Text: Indiana law adheres to the principle that the assignee of a mortgage assumes the rights of the original mortgage holder as well as the obligations. 20 I.L.E. Mortgages § 72 (2001). See also Strafford v. Lane, 124 Ind. 592, 24 N.E. 683 (1890); Porter v. Bankers Trust Co. of California, 773 N.E.2d 901 (Ind.Ct.App. 2002). Phillips' assignment interest therefore depends on what rights the original mortgage holder (National City) possessed by virtue of the language of the mortgage, specifically the dragnet clause. Of all the mortgages National City assigned to Phillips, three contained dragnet clauses. Two of those mortgages secure the payment of any and all other notes or obligations of the Mortgagor to the Mortgagee, direct or indirect, due or to become due, now existing or hereafter contracted. . . . (Appellant's App. at 114, 312.) The third mortgage secure[s] the payment and performance of all present and future indebtedness, liabilities, obligations and covenants of Borrower or Mortgagor. . . to Lender. . . . (Appellant's App. at 315.) While dragnet clauses that create open-ended mortgages are valid, IND. CODE ANN. § 32-29-1-10 (West 2002), they are strictly construed against the drafting party. Citizens Bank & Trust Co. of Washington v. Gibson, 490 N.E.2d 728 (Ind.1986). The main consideration in construing dragnet clauses is the parties' intention. Merchs. Nat'l Bank & Trust Co. of Indianapolis v. H.L.C. Enters., Inc., 441 N.E.2d 509 (Ind.Ct.App.1982). More particularly, a debt not specifically described is secured by the mortgage if the parties intended it to be secured based on the surrounding circumstances and the mortgage language. Id. at 513. The mortgage language need not literally describe the debt, but the character of the debt and the extent of the encumbrance should be defined with such reasonable certainty as to preclude the parties from substituting other debts than those described, thereby making the mortgage a mere cover for the perpetration of fraud upon creditors. New v. Sailors, 114 Ind. 407, 410, 16 N.E. 609, 610 (1888). Phillips' interpretation of the dragnet clauses is that the parties' intention was to secure National City for any and all indebtedness, liabilities, or obligations owed by Summers. (Appellee's Br. at 15-16, 18.) This ignores plain language of the contract limiting the debts to those between the mortgagor and the mortgagee. Applying Phillips' rationale, the mortgages secured any debt owed by Summers to any creditor crafty enough to obtain an assignment of the mortgages. This simply cannot be. There is no indication whatsoever that National City and Summers contemplated that debts owing from Summers to third parties could be tacked on to the mortgages. The New v. Sailors holding thus prohibits the substituting of Summers' debt to Phillips for those debts described in the mortgages. While it is true that Phillips stepped into the shoes of the mortgagee, this entitled her to collect debts secured in accordance with the terms of the mortgages, not her judgment lien. The debts in this case were limited to the $375 short payment on the loan payoff and the $4700 overdrawn checking account, plus interest, collection costs, and attorney's fees. This conclusion finds support from other jurisdictions. Georgia passed a law in 1958 limiting debts included in dragnet mortgage clauses to contractual debts and obligations between the original parties to the security agreement. 1958 Ga. Laws. 655-56. Phillips' correctly points out that Indiana does not have this statutory limitation on dragnet mortgage clauses (Appellee's Br. at 20), but we nevertheless find this provision illuminating, as are some cases from other states. As for case law, in Republic Nat. Bank of Dallas v. Zesmer, the mortgagor granted three separate chattel mortgages with dragnet clauses on three different vehicles to Liberty State Bank. 187 S.W.2d 227, 228 (Tex.Civ.App.1945). The mortgagor then executed an unsecured promissory note to Republic National Bank. Id. After the mortgagor died, Republic acquired the three notes and mortgages from Liberty and attempted to claim a security interest in the vehicles for the amount of the three Liberty notes and Republic's note. Id. The Texas Court of Civil Appeals held that the mortgagor and Liberty did not contemplate that the chattel mortgages would also be security for subsequent debt of the mortgagor to Republic. Id. at 229. According to the court, subjecting mortgaged property to unsecured indebtedness through an assignment by the secured creditor would threaten the stability of secured indebtedness. Id. In Fin. Acceptance Corp. v. Garvey, the mortgagor, as an individual and president of a company, executed a first and second mortgage with dragnet clauses and two promissory notes to Coolidge Bank & Trust Co. in 1970. 6 Mass.App.Ct. 610, 380 N.E.2d 1332 (1978). In 1972, the mortgagor and bank cancelled these notes and executed new notes, this time with the mortgagor signing as a trustee, and endorsing as an individual. Id. at 611, 380 N.E.2d at 1334. In 1973, the mortgagor, as a trustee and individually, granted a third mortgage to Financial Acceptance Corporation on the same property. Id. at 612, 380 N.E.2d at 1334. During foreclosure proceedings, Financial argued that since the mortgagor was the maker of the earlier notes but endorser of the later notes, the new notes were unrelated to the old notes, and thus unsecured. Id. at 613, 380 N.E.2d at 1335. The court's test for determining if a debt not specifically described is secured by a dragnet clause is whether the debt is of the general kind of those specifically secured or sufficiently close in relationship, and whether the mortgagee relied on the security in making the loan. Id. The court found that though the mortgagor switched from maker to endorser, the notes were still of the same general kind of debt and that the mortgagee relied on the security in making the loan because this was just a renewal of notes that was all part of the same course of business dealings. Id. at 613-16, 380 N.E.2d at 1335-36. Phillips' judgment lien arose from litigation over misappropriation of a trade name. It thus hardly qualifies under dragnet language covering all other notes or obligations of the Mortgagor to the Mortgagee. Moreover, we cannot see how National City could possibly have relied on its dragnet mortgages to secure Summers' judgment debt to third party Phillips.