Future advances.1

    If a lender makes a series of loans to a borrower, each of which is to be secured by the collateral that secures the first in the series of loans, the parties may execute a security agreement or deed of trust, as the case may be, each time funds are advanced, and record the security instrument each time. Less effort, less paper, and less chance of error is involved if the parties simply agree in the first security instrument that the collateral will serve as security not only for the loan first made but also for any future advance (i.e. an advance subsequent to the first loan) made by the lender to the borrower. Such an agreement in the first security instrument is referred to as a "future advances clause." Two common uses of a future advance clause in the real estate context are home equity loans and construction loans.  In the case of a home equity loan, the lender agrees to honor checks drawn by the borrower to a specified amount.  In the case of a construction loan, the lender agrees to advance funds (sometimes through the use of vouchers) to the borrower for use in paying contractors as construction progresses.  In both such cases the future advances are"obligatory," i.e. the lender agrees to make advances to a specified amount under stated conditions. 

     The phrase "dragnet clause" is sometimes used as a synonym for future advances clause, but often "dragnet clause" is used to describe a clause that secures any future indebtedness by the original collateral, whether or not the future indebtedness is a consensual future advance and whether or not the future indebtedness, even if consensual, is to fund the same kind of activity as the initial advance. Does our sample security agreement contain a future advances clause? What kinds of future indebtedness do they drag along?

     By saving effort, paper, and error, a future advances clause serves a useful commercial function. Yet a provision that captures any future indebtedness, however created and for whatever purpose, has the potential to overreach. Thus, even though statutes explicitly permit the use of future advances clauses (see, e.g., U.C.C. 9-204(c) and Cal. Civ. Code 2884), judicial treatment of such clauses is not always sympathetic.  The drafters of Revised Article 9 have slightly revised the language of Article 9 that permits the use of future advance clauses with the apparent intention of rejecting some case law that has narrowed the reach of future advance clauses.  Compare former U.C.C. 9-204(3) with Revised U.C.C. 9-204(c).   They have also stated in Official Comment 5 to Revised U.C.C. 9-204: 

[t]he parties are free to agree that a security interest secures any obligation whatsoever.  Determining the obligations secured by collateral is solely a matter of construing the parties' agreement under applicable law.  This Article rejects the holdings of cases decided under former Article 9 that applied other tests, such as whether a future advance or other subsequently incurred obligation was of the same or a similar type or class as earlier advances and obligations secured by the collateral. 

Whether or not this Comment eliminates or softens judicial hostility to far reaching future advance clauses remains to be seen. 

     Disputes about the meaning or enforceability of future advances clauses can arise in at least three contexts: (1) the borrower disputes that a particular debt is secured by an earlier security instrument; (2) a second in time secured creditor claims that it takes collateral free of the claims of a first in time secured creditor for advances made by the first in time secured creditor after the second in time secured creditor became secured; (3) a buyer of the collateral claims that it takes collateral free of a security interest for advances made by the secured creditor after the buyer's purchase of the collateral. We explore each of these types of disputes in Problem.Future Advances.