A dragnet clause is a clause in a trust deed that permits future liens to take precedence over other liens by attempting to get as much collateral and money as possible for the lender.
A dragnet clause is a clause in a trust deed that permits future liens to take precedence over other liens by attempting to get as much collateral and money as possible for the lender. In other words, dragnet clauses secure all the combined mortgage debt that a lender is owed. This means that the dragnet clause offers the maximum level of protection for lenders to recoup the debt they are owed by a borrower.
Types of Dragnet Clauses
There are various types of dragnet clauses, however the goals of all of them are to protect lenders to get the debt they are owed. The first type is to attach the borrower’s debt to such as a checking account to a property. In this example, if the borrower has an overdraft, the lender would collect the owed debt from the sale of the collateral being used to secure the debt. The second is to attach the debt of one property to the debt of the other so that in the event a lender is not paid for one property they have the right to get the balance from the sale of another property. Also, dragnet clauses can put a default on another property that a borrower is current on to make up for the debt they are behind on.
How the Law Views Dragnet Clauses
Oftentimes borrowers are not even aware of the presence of a dragnet clause because typically they are difficult to understand. For this reason courts do not view dragnet clauses favorably and in fact may rule against the enforcement of one because it dramatically affects the borrower’s financial situation by tying in one asset with one another. There are even instances when dragnet clauses are not enforceable.
Very few lenders use dragnet clauses. When they are used it is typically signed off on as a personal guarantee meaning the borrower personally guarantee’s that the lender will be paid back and will be subject to lose their asset if they do not repay the lender.
Legal Examples of Dragnet Clauses
In the case Fischer v. First Internat. Bank, 109 Cal. 4th 1433 (Cal. App. 4th Dist. 2003), the court held that broad dragnet clauses that attempt to encompass various assets of a borrower are in many instances not enforceable. The court had to use the language of the dragnet clause, whether the borrower was aware of the dragnet clause and if the bank used the clause for the specific purpose of relying on that clause as security.
We learn in the case United Nat’l Bank v. Tellam, 644 So.2d 97 (Fla. Dist. Ct. App. 3sd. 1994) that a dragnet clause can be used to secure a security interest in real property for current, past due, and future debts. The case shows us that lenders can in fact use real estate to collect past due payments from personal, car, or overdraft charges.
Case Law As It Relates to a Dragnet Clause
Case Review: Southwest Title Ins. Co. v. Northland Bldg. Corp. (1976)
The case, Southwest Title Ins. Co. v. Northland Bldg. Corp. (1976) 542 S.W.2d 436., involved a title insurance company that failed to disclose the presence of a dragnet clause in its preliminary title report.
A lender (Northland Investment) provided a second deed of trust to Dal-Rich Investments based on the belief that there were significant equity in the subject property. A title insurance company (Southwest Title Ins. Co.) provided a clear title report and estoppels letters for the funding of the loan. However, Dal-Rich stopped paying mortgage payments seven months after the start of the loan. Northland Investments subsequently discovered that there was considerably more mortgage debt than previously disclosed to Northland Investment by Southwest Title Ins. Co. Because of this, there was not enough equity to cover Northland Investment’s losses and they sued Southwest Title Ins. Co. for damages.
Northland Investment argued that Southwest Title Ins. Co. had provided an inaccurate title report that did not indicate that the first trust deed contained a dragnet clause. The Superior Court determined that it was the duty and responsibility of Southwest Title Ins. Co. to have found and disclosed all prior liens, as well as any dragnet clauses to the mortgagee. It held Southwest Title Ins. Co. liable.
