NATASHA COOK v. SPRINGFIELD STATE BANK, JOHN PRICE, KASSANDRA COOK, AND FOSTER RAY COOK
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RENDERED: MAY 20, 2005; 2:00 P.M.
NOT TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
NO.
2004-CA-001225-MR
NATASHA COOK
v.
APPELLANT
APPEAL FROM MARION CIRCUIT COURT
HONORABLE DOUGHLAS M. GEORGE, JUDGE
ACTION NO. 03-CI-00210
SPRINGFIELD STATE BANK,
JOHN PRICE, KASSANDRA COOK,
AND FOSTER RAY COOK
APPELLEES
OPINION
AFFIRMING
** ** ** ** **
BEFORE:
KNOPF, TAYLOR, AND VANMETER, JUDGES.
KNOPF, JUDGE: Natasha Cook appeals from an order of the Marion
Circuit Court, entered May 17, 2004, distributing proceeds of a
foreclosure sale to Springfield State Bank.
Natasha contends
that the Bank’s share of the proceeds should have been limited
to about $200.00, not the nearly $5,500.00 it was awarded, and
that Natasha and her sister are entitled to the difference.
We
affirm.
The facts provided by the scant record are not in
dispute.
In October 1999, John Price borrowed $10,000.00 from
the bank, in exchange for which Price gave the bank a note in
that amount secured by a mortgage on a house and lots he owned
on Fairground Road in Lebanon.
The mortgage contained the
following future advance clause:
In addition to the indebtedness above
mentioned, this mortgage shall secure any
additional indebtedness, whether direct,
indirect, existing, future, contingent or
otherwise, including any additional sum or
sums of money advanced or loaned by the
Mortgagee to the Mortgagor at any time, not
to exceed the maximum additional
indebtedness of $10,000.00; provided,
however, the aggregate indebtedness of any
kind whatsoever at any time secured hereby
shall not exceed the sum of $20,000.00.
The mortgage was duly recorded in the Marion County property
records on or about October 30, 1999.
Although Price had agreed not to alienate the
Fairground Road collateral without the bank’s approval, on
December 9, 2000, he transferred it without the bank’s knowledge
but by duly recorded deed to Steve Cook.
The stated
consideration was primarily Cook’s assumption of the bank’s
mortgage “in the approximate sum of twenty thousand dollars.”
Steve Cook died intestate in early 2001, whereupon his interest
2
in the property passed to his three children: Natasha,
Kassandra, and Foster Ray.1
In October 2001, Price borrowed an additional
$30,612.00 from the bank.
Notwithstanding the transfer to Cook,
Price’s note recites that this amount is to be added to the
October 1999 mortgage on the Fairground Road realty.
The new
loan was also secured by two certificates of deposit.
Eventually Price defaulted on both notes.
In July 2003, the
bank brought the present action to recover principal balances of
$100.00 on the 1999 note and $29,958.90 on the 2001 note plus
interest and fees.
Apparently the bank applied the certificates
of deposit to the latter debt and obtained default judgments
against Price on both notes in the amounts of $106.07 and
$21,628.62 respectively.
Contending that the entire
indebtedness was secured by the Fairground Road mortgage, the
bank then sought to foreclose on the realty.
Natasha resisted the foreclosure.
She argued that
notwithstanding the future advance clause in the 1999 mortgage,
Price’s transfer of the property in 2000 precluded his adding to
the encumbrance in 2001.
The bank’s lien, therefore, extended
only to the amount still outstanding on the 1999 loan, which
Natasha was willing to pay.
The trial court rejected Natasha’s
1
Foster Ray has waived any interest in the property or its
proceeds; Kassandra has elected not to join in Natasha’s appeal.
3
argument and permitted the foreclosure.
auction for $9,000.00.
The property sold at
After deductions for taxes and other
costs, there remained net proceeds of about $5,500.00, which the
trial court awarded to the bank.
On appeal, Natasha, without
citing any supporting authority, reiterates her argument that no
part of the bank’s 2001 loan to Price could be secured by the
1999 mortgage because prior to the loan Price had transferred
his interest in the collateral.
Accordingly, Natasha asserts,
she and her sister, rather than the bank, are entitled to the
net proceeds from the sale.
We disagree.
Kentucky’s courts, like other courts throughout the
country, have long recognized the commercial utility and the
validity of mortgage clauses providing for the extension of a
given security to advances on a loan made, if and when needed,
after the loan and security were first established.2
The general
rule is that the initial security will be extended to future
advances if the original agreement clearly intended to cover
such advances and if the advance in question is of a type and
2
Taulbee v. First National Bank of Jackson, 279 Ky. 153, 130
S.W.2d 48 (1939); Kentucky Lumber & Mill Work Company v.
Kentucky Title Savings Bank & Trust Company, 184 Ky. 244, 211
S.W. 765 (1919); First Commonwealth Bank of Prestonsburg v.
West, 55 S.W.3d 829 (Ky.App. 2000); Shutze v. Credithrift of
America, Inc., 607 So.2d 55 (Miss. 1992); Milton Roberts, “Debts
Included in Provision of Mortgage Purporting to Cover All Future
and Existing Debts (Dragnet Clause)—Modern Status,” 3 ALR4th 690
(1981).
4
for a purpose within that original intention.3
Furthermore, as
the bank notes, KRS 382.385 provides for the extension of a
single mortgage to on-going “lines of credit” and “revolving
credit plans.”
Although the Bank’s agreement with Price clearly
was not a line of credit or a revolving credit plan, the statute
does indicate that mortgage clauses providing for future
advances are well established in Kentucky law.
KRS 382.520,
moreover, provides that real estate mortgages “may secure any
additional indebtedness, whether direct, indirect, existing,
future, contingent, or otherwise, to the extent expressly
authorized by the mortgage.”
The question then arises as to the effect of a duly
perfected future-advance clause when a subsequent equitable
interest, that of a second mortgagee, say, or, as in this case,
of a purchaser, intervenes between the original mortgage and the
advance.
KRS 382.520 address this situation as follows:
Except as provided in subsection (3) of this
section, the mortgage lien authorized by
this subsection shall be superior to any
liens or encumbrances of any kind created
after recordation of such mortgage, even to
the extent of sums advanced by a lender with
actual or constructive notice of a
subsequently created lien, provided,
however, any mortgagee upon receipt of a
written request of a mortgagor must release
of record the lien to secure additional
indebtedness as exceeds the balance of such
3
3 ALR4th 690 (1981); In re Smink, 276 B.R. 156 (N.D.Miss.
2001).
5
additional indebtedness at the time of the
request.
Although this statute refers to “liens and
encumbrances” and to “a subsequently created lien,” the bank
contends that it applies as well to subsequent conveyances such
as that between Price and Steve Cook.
We need not address that
question, because even if the statute does not apply, the
general rule, which would otherwise be consistent with Kentucky
law, is that a mortgagee, with a duly recorded mortgage and
without actual knowledge of an intervening purchaser
(constructive notice is not enough), may rely on a valid future
advance clause to extend additional credit to its mortgagor.
The lien arising under the future advance clause is superior to
the interest of the intervening purchaser.4
Natasha does not challenge the validity of the 1999
future advance clause, nor does she allege that the bank had
actual knowledge of the transfer from Price to her father.
Price and the bank clearly intended for that clause to apply to
4
Shutze v. Credithrift of America, Inc., supra (citing Whiteway
Finance Co., Inc. v. Green, 434 So.2d 1351 (Miss. 1983)).
Restatement of the Law (Third), Property, Mortgages, § 2.4
(1997) (“A mortgage may secure future advances that are not made
in connection with the transaction in which the mortgage is
given, and that are not specifically described in the mortgage
or other documents executed as part of that transaction, subject
to the following limitations: . . . (c) If mortgaged real
property is transferred, the mortgage will secure only advances
made prior to the mortgagee’s gaining actual knowledge of the
transfer.”).
6
the fullest extent possible to Price’s 2001 loan.
Price’s
fraud, if any, does not affect the bank’s rights vis-à-vis Cook.
The clause applied, therefore, at least to the first $10,000.00
of that loan,5
and, under the priority rule just mentioned, the
bank’s mortgage securing that amount was, to that extent,
superior to Cook’s interest notwithstanding the fact that Cook
acquired his interest before the bank extended the full amount
of its loan to Price.
The answer to Natasha’s assertion that Price could not
encumber property he no longer owned is that he did not.
The
encumbrance occurred, at least contingently, in 1999 when Price
gave the original mortgage.
Cook was on notice of that
mortgage, both actually, as evidenced by his deed, and
constructively because the mortgage was recorded.
If he wished
to protect his interest as transferee against future advances to
Price, he was obliged to notify the bank of the transfer.
trial court did not err by so ruling.
The
Accordingly, we affirm
the May 17, 2004, order of the Marion Circuit Court.
ALL CONCUR.
5
Because the net proceeds were less than $10,000.00, we need not
consider to what extent, if any, the bank’s mortgage covered
more than that amount of the 2001 loan.
7
BRIEF FOR APPELLANT:
BRIEF FOR APPELLEE:
Jonathan R. Spalding
Lebanon, Kentucky
Lisa K. Nally-Martin
Joseph H. Mattingly III, P.S.C.
Lebanon, Kentucky
8
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