Luther borrows money from the First Bank. First Bank enters into a safety agreement and perfects a safety stake in Luther`s tractors. Luther later took out loans from the Second Bank and the Third Bank. Both banks enter into security agreements for all of Luther`s assets. Luther was also subject to a commitment. Plagued by money problems, Luther sold the tractor without notifying his creditors. Soon after, First Bank made a future foray into Luther, secured by the tractor. Which creditor security, if any, takes precedence over the security right? What additional information do we need to answer this question? If a future advance is required (i.e. the lender is contractually bound to the mortgage or an instrument executed at the same time as the mortgage and has no discretion in granting the advance), then the advance refers to the date on which the mortgage is taken. 735 ILCS 5/15-1302(b). In addition, advances made under a reverse mortgage or revolving credit agreement secured by a mortgage are included in the mortgage lien. 735 ILCS 5/15-1302(b)(2) and (3). In addition, any interest accrued or added to the amount of the principal in accordance with the terms of the mortgage constitutes a lien from the time the mortgage is registered.
735 ILCS 5/15-1302(b)(4). Finally, funds submitted by the hypothecary creditor in accordance with the terms of the mortgage to maintain or restore the mortgaged property, to maintain the lien of the mortgage or its primacy, or to enforce the mortgage, also constitute a lien from the moment the mortgage is registered. 735 ILCS 5/15-1302(b)(5). If a future advance does not meet one of the legal exceptions and the advance is made more than 18 months after the date of registration, it comes into force at the time of the advance and does not refer to the date on which the mortgage is reserved. 735 ILCS 5/15-1302. The trend in recent case law and in the revised UCC is to maintain an arm`s length contract with a clear future clause. Only when a court concludes that a future advance clause is ambiguous should it delve into the unclear world of determining the parties` intent by considering whether (1) the advances were of the same category and type, (2) the parties were the same, or (3) the renewal of the loan was mandatory. Lenders and their lawyers should familiarize themselves with the laws and jurisprudence of their state. Article 9-204 also allows “dragnet” or “cross-collateral” clauses. Official Comment 2 to 810 ILCS 5/9-204. The Dragnet Clauses act as both retrospectively acquired ownership clauses and future advance clauses by providing that the guarantee acquired at any time guarantees all advances, regardless of when they are made. Official Comment 2 to 810 ILCS 5/9-204.
Although grid search clauses are not preferred under Illinois law, these clauses are maintained when there is no ambiguity and are interpreted according to the language used. Stannish v. Community Bank of Homewood-Flossmoor, 24 B.R. 761 (Bankr. N.D. Ill. 1982) (Illinois Law Enforcement); Metropolitan Life Ins. Co. v American Nat. Bank and Trust Co., 682 N.E.2d 72 (1st Dist. 1997).
However, if a grid search clause is too general or vague, it is considered inadequate. In re Swanson, 104 B.R. 1 (Bankr.C.D. Ill. 1989) (Illinois Law Enforcement). Overall, “the previous debt can only be secured by a mortgage that includes a grid search clause if the previous debts are clearly identified in the mortgage.” With regard to the octagonal roof, 124 B.R. 522, 528 (Bankr. N.D. Ill.
1991) (Illinois Law Enforcement) citing First Natl. Bank & Trust Co.c. Lygrisse, 647 p.2d 1268, 1271 (Kan. 1982). If there is an ambiguity between a grid clause and another provision concerning the same subject matter, that ambiguity could be interpreted against the application of the grid search clause. See Farmers & Mechanics Bank v. Davies, 422 N.E.2d 864 (3rd Dist. 1981). 1 See In re Natale, 508 B.R. 790, 801-02 (Bankr. D.
Mass.; 2014). 2 See In re Duckworth, 2012 WL 986766, at *6 (Bankr.C.D. Ill.; 22 March 2012). 3 See Kimbell Foods Inc.c. Republic Nat`l Bank of Dallas, at p. 557; F.2d 491, 495 (5. Cir. 1977); aff`d, sub nom., United States;v Kimbell Foods Inc., 440 U.S.
715, 99 P. Ct. 1448, 59 L. Ed.; 2d 711 (1979). 4 As regards Den Trinity Meadows Raceway, 252 B.R. 660, 666 (Bankr.; N.D. Tex. 2000). 5 See §9-204:99; “What Is Not a Covered Future Advance: Unrelated Debt”, 8A Part II, Anderson U.C.C. § 9-204:99 (3d.ed.) (citing Heath Tecna Corp.c. Zions First Nat`l Bank, 609 P.2d 1334, 1337 (Utah 1980)).
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