In this case, the debtor executed a promissory note and security agreement granting Continental Bank a security interest in certain collateral which would also secure future advances.

The agreement provides, in pertinent part:

To secure payment of all loans made and to be made by the bank to borrower and to secure all other indebtedness of borrower to bank now in existence or hereafter arising.

The agreement further provided a security interest in debtor’s accounts receivable and various other items.

Several years after the above note was executed, the debtor borrowed additional sums from the bank and paid off the original note. Debtor now maintains that the original note with the “dragnet clause” above was extinguished when the original debt was paid off.

The court ruled that the original promissory note containing the “dragnet clause” did carry over to secure subsequent loans, even though the original note with the “dragnet clause” was previously paid off and the subsequent loan documentation did not contain a similar provision.

Hence, the bank’s security interest was upheld and debtor’s objections to application of the “dragnet clause” were overruled.  In re Cara Corp., 148 B.R. 779.

EDITOR’S COMMENT

“Dragnet Clauses” are utilized to secure other loans at the credit union which would have otherwise been unsecured. The “dragnet clause” could also result in securing credit card debts issued by the credit union. If your credit union is considering inserting a “dragnet clause” in its loan documentation, please consult your attorney for advice on precise wording and effectiveness for your loans.

Author: Charles R. Harroun, Attorney at Law