Opinion ID: 1149701
Heading Depth: 1
Heading Rank: 2

Heading: future-advances clause of security agreement

Text: Having established the validity of the Bank's priority status, we must next determine [1] whether the security agreement contained language sufficient to cover future advances and [2] if so, whether the Debtor's overdraft in his business bank account may be considered as a future advance under the security agreement. The validity of a future-advances clause in security agreements has been recognized. Texas Kenworth Co. v. First National Bank of Bethany, Okl., 564 P.2d 222, 225 [1977]. The Code, in § 9-204(5), provides that [o]bligations covered by a security agreement include future advances or other value whether or not the advances or value are given pursuant to commitment. When the security agreement clearly indicates that the debtor's obligation includes future advances, the collateral pledged will stand as security for future advances. [17] In Texas Kenworth we found that the reference therein to all other indebtedness would not include post-agreement loans. [18] The relevant portion of the Bank's security agreement with the Debtor provides: This security agreement is given to secure: (1) Payment of a note dated 7-11-75 executed and delivered by Debtor to Bank in the principal sum of $12,000.00, payable as to principal and interest as therein provided; (2) future advances to be evidenced by like notes to be made by Bank to debtor at Bank's option; (3) all expenditures by Bank for taxes, insurance, repairs to and maintenance of the collateral and all costs and expenses incurred by Bank in the collection and enforcement of the note and other indebtedness of Debtor; and (4) all liabilities of Debtor to Bank now existing or hereafter incurred, matured or unmatured, direct or contingent, and any renewals and extensions thereof and substitutions therefor. [Emphasis added] The phrase all liabilities ... now existing or hereafter incurred indicates that the collateral was intended to serve as security for future as well as present debts. We hence hold that the language used is sufficient to secure future advances. The test most generally applied to determine whether future liabilities fall within a security agreement's future-advances clause is whether the debts are of the same class as the primary obligation [19] and in contemplation of the parties at the time the agreement was executed. [20] Although this test was not expressly applied in Texas Kenworth, we said there that if the security agreement subjected the collateral to future advances, the creditor (Kenworth) would be entitled to first priority because the debts arising out of subsequent transactions of the same type remain unsatisfied. [21] We deem this test to be appropriate for application in the instant case and next pass to determine whether the overdraft on Debtor's business bank account may be viewed as being of the same class or type as the primary obligation and was so contemplated by the parties at the time the security agreement was executed. A post-agreement extension of business credit by a lender to a borrower has been held a future indebtedness within reasonable contemplation of the future-advances clause of the security agreement. [22] Different loans intended to provide a debtor with working capital have also been held to be all of the same class within the meaning of this test. [23] In the instant case, an affidavit of the Bank's officer indicated the original loan was requested as operating monies for maintenance of Debtor's dental practice. According to the undisputed answer of the Debtor, the proceeds of the original loan were used for the purchase of office furnishings and related miscellaneous expenses. The record as a whole is consistent with an inference that the overdrawn funds in question were spent to pay practice-related expenses. In support of its position the Bank cites two cases in which overdrafts by a debtor were determined to be covered by the security agreement. [24] In those cases the court's decision was reached without stating whether or how the overdrafts came to be related to the original obligation. [25] Dentsply refers us to a case in which overdrafts were held not included in the obligation covered by the security agreement. [26] The facts in that case are distinguishable from the case at bar. There, the court determined that a certain section of the security agreement set forth all the obligations  i.e. loans, evidenced by notes, interest and certain expenses  secured by the agreement. It was silent as to future or any other indebtedness. There was also no indication the parties ever intended by their agreement to include an addition of overdrafts to the obligation secured by the collateral. Those factors  not present here  were decisive in the appellate court's determination that the overdraft debts were not included in the obligation covered by the agreement. We hold that the amount of Debtor's post-agreement business-account overdraft, which the Bank had covered for him, represented a further extension of credit within the contemplation of the security agreement. The overdraft obligation was not so unrelated as to be in a class different from that of the Debtor's primary indebtedness. It is hence includable in the total obligation for which the collateral stands as security under the future-advances clause. AFFIRMED. LAVENDER, C.J., IRWIN, V.C.J., and WILLIAMS, HODGES, SIMMS, DOOLIN and HARGRAVE, JJ., concur.