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In re Woodruff

December 14, 1959


Author: Knoch

Before MAJOR, PARKINSON*fn* and KNOCH, Circuit Judges.

KNOCH, Circuit Judge.

The appellee, The National City Bank of Evansville, Indiana, filed its claim in these bankruptcy proceedings seeking, inter alia, to establish a secured claim for a $46,000 promissory note executed by the bankrupts on November 24, 1956, as covered by the real estate mortgage given to the Bank by the bankrupts on October 5, 1951, to secure the payment of a $16,000 promissory note of the same date, by virtue of paragraph 14 of the said mortgage which reads as follows:

"14. This mortgage shall also secure any and all renewals of said promissory note or any part thereof. It is further agreed that this mortgage shall secure the payment to mortgagee of any other indebtedness which mortgagors may from time to time, while this mortgage is in effect, owe the mortgagee."

The Referee denied the claim as a secured claim. On review the District Court reversed. This appeal by the Trustee in Bankruptcy followed.

The agreed facts are that on November 22, 1957, Floyd and Dolly Woodruff were adjudicated bankrupts on a voluntary petition. Prior thereto, on October 5, 1951, the Bank lent them $16,000. They executed their promissory note therefor and gave the Bank a mortgage on their real estate (containing paragraph 14 quoted above) to secure the payment of that note. The mortgage was duly recorded in Vanderburgh County, Indiana, the county in which the real estate was located. Claim for the unpaid balance of this note was allowed as a secured claim. It is not involved in this appeal.

On November 24, 1956, while the mortgage was in effect, the Bank lent the Woodruffs $46,000, for which they gave the Bank their promissory note.

On December 6, 1956, the Bank, acting by and through its Vice-President, Kenneth O. Henke, executed an affidavit giving notice that the said $46,000 indebtedness was intended to be secured by the aforesaid mortgage. The affidavit was duly recorded in Vanderburgh County, Indiana.

As the facts have been stipulated, we have before us a question of law, which the parties agree is to be determined under the law of the State of Indiana: whether the mortgage is or is not valid security for the $46,000 indebtedness to the Bank, incurred by the Woodruffs subsequent to execution of the mortgage and while it was in effect.

Open-end provisions in a mortgage are valid in Indiana. A mortgage may be taken and held as security for future advances when a provision that such future advances will be covered by the lien, is made a constituent part of the original agreement.Brinkmeyer v. Browneller, 1876, 55 Ind. 487, 494. The Trustee contends that there is no valid mortgage for future advances here because the parties to the mortgage have not in clear, unambiguous and positive manner disclosed their intent that any further advances are comprehended by the mortgage and come within its coverage.

The Trustee argues that paragraph 14, instead of applying to future loans or advances, implements other provisions of the mortgage giving the Bank a further lien for any payments made by it for taxes, etc., upon the failure of the Woodruffs so to do. However, paragraph 7 of the mortgage provides:

"7. In the event of the failure of the mortgagor to keep the buildings on said premises and those to be erected on said premises, or improvements thereon, in good repair, said mortgagee may pay such taxes, assessments, mortgage and hazard insurance, make such repairs as in its discretion it may deem necessary properly to preserve the property and any sums so paid shall be a further lien on such premises under this mortgage, payable forthwith, with interest at the rate of six per centum (6%) per annum until paid." and requires no implementation.

The Trustee also contends that "where there is no obligation on the mortgagee, to make advances, or incur liabilities, which are, nevertheless, comprehended by the original agreement, and constitute a constituent part thereof, but are optional with the mortgagee, the liabilities or obligations must, nevertheless, have been made on the faith of the security of the mortgage, in order to come within its coverage."

In support of this theory, the Trustee cites Brinkmeyer v. Browneller, supra; Bowen v. Ratcliff, 1895, 140 Ind. 393, 39 N.E. 860; Schmidt v. Zahrndt, 1897, 148 Ind. 447, 47 N.E. 335; and ...

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