Dragnet Clause Doesnt Revive Obsolete Mortgage Mortgage voided by statute 5 years after payable date By Eric T.

Berkman February 13, 2014 A dragnet provision did not prevent a mortgage from being discharged under the Obsolete Mortgage Statute five years after its payable date, a Land Court judge has ruled in a case of first impression. The mortgage, which was granted by the defendant purchasers of property in 1986 to secure a $100,000 promissory note to the seller, stated that it was payable in July 1987. But the mortgage also contained a so-called dragnet clause stating that it was intended as security for payment of all other obligations of the borrower to the lender that either existed at the time or that might hereafter arise. The plaintiff mortgage holder, who had been assigned the mortgage in 2012 and then sought to execute upon it, contended that, because of the dragnet clause, the mortgage had no stated term. Accordingly, the plaintiff argued, the mortgage would not be considered discharged under the Obsolete Mortgage Statute, G.L.c. 260, 33, until July 2021, or 35 years after its 1986 recording date. But Judge Robert B. Foster disagreed, ruling that the mortgage did have a stated term and was thus discharged in July 1992, five years after its payable date. Massachusetts courts have imposed narrow construction on dragnet clauses in an effort to prevent [their] oppressive and fraudulent use, Foster wrote, quoting the Appeals Courts 2004 decision in NAB Asset Venture III, L.P. v. Brockton Credit Union. [A mortgage] cannot be exempted from the [Obsolete Mortgage Statutes] five-year repose period upon nothing more than a claim that a dragnet clause, buried in the seventh page of the mortgage instrument, might hypothetically secure some possible future mortgage obligation. Foster also found that the Obsolete Mortgage Statute can void a mortgage even when the underlying obligation has not been paid off. The 17-page decision is Ry-Co International, Ltd. v. VonIderstein, et al., Lawyers Weekly No. 14-003-14. The full text of the ruling can be ordered at masslawyersweekly.com.

Better know your documents Defense counsel David J. Fine of Rubin, Hay & Gould in Framingham called the ruling rigorous and consistent with common sense. First, Fine said, the judge persuasively rejected the plaintiffs argument that the Legislature intended the Obsolete Mortgage Statute to apply only to mortgages that have been paid in full. More significantly, he said, the judge ruled for the first time that simply including a dragnet clause in a mortgage instrument with no evidence of any existing additional obligation secured by such a clause is not enough to protect the mortgage from Section 33s five-year repose period. Both Judge Fosters conclusion and the analysis by which he arrives at it should be helpful to practitioners in their interpretation and application of the Obsolete Mortgage Statute, Fine said. Nicholas J. Nesgos of Posternak, Blankstein & Lund in Boston, who has handled cases involving Section 33, agreed. The decision illustrates again that courts are willing to apply the plain language of the Obsolete Mortgage Statute without regard to considerations of equity, said Nesgos, who was not involved in the case. [T]he mortgage will be automatically discharged five years after the term or maturity date stated in the mortgage, unless the mortgage holder records an extension or an affidavit stating that the mortgage has not been paid. Jeffrey B. Loeb of Rich May in Boston also handles cases involving the Obsolete Mortgage Statute. He said the decision sends a strong message to mortgage holders that if the mortgage has a due date in it, they had better act within five years or record an extension. If youre the secured party, youd better know your documents, he said. Loeb, who was not involved in the suit, further noted that the plaintiff has moved for reconsideration and entered a pleading docketed as a suggestion of unconstitutionality. Im assuming [the plaintiff] is challenging the retroactive impact of the legislation, Loeb said, referring to the Legislatures 2006 amendments to the Obsolete Mortgage Statute, which made Section 33 self-executing. However, Land Court Judge Harry M. Grossman already addressed the issue in his 2010Gandolfo v. Graham decision, in which Loeb represented one of the parties. He said theres no constitutional violation, Loeb said. Of course, its a Land Court decision, and I dont know if anyones gone up to the appellate courts on that. Neil Kreuzer of Boston represented the plaintiff. He could not be reached for comment prior to deadline. Obsolete mortgage? On or about July 1, 1986, defendants Douglas and Linda VonIderstein purchased property in Duxbury from sellers Thomas and Concetta Riley. As part of the

consideration of the purchase, the defendants gave the Rileys a $100,000 promissory note. The defendants also gave the Rileys a mortgage to secure the note. The mortgage stated that the note was payable in July 1987, though it did not specify the day in July that it was to come due. On Oct. 20, 1986, the Rileys assigned their interest in the mortgage to Massachusetts Bank and Trust. The bank registered the assignment with the Plymouth County Registry District of the Land Court that week. The Rileys executed a discharge of the mortgage on Jan. 5, 1987, which they registered on March 10, 1987, even though they had already assigned the mortgage to the bank several months earlier. On July 31, 1992, the bank failed and was placed into the receivership of the Federal Deposit Insurance Corp. The FDIC allegedly assigned the mortgage to plaintiff Ry-Co International Ltd. in April 2012. On Jan. 13, 2013, the plaintiff filed a petition in Land Court to enforce the mortgage and related assignments. The defendants moved to dismiss, arguing that the mortgage was discharged under the Obsolete Mortgage Statute in 1992, five years after its payable date. Avoiding the dragnet Addressing the defendants motion, Foster noted that there was a dispute as to whether the mortgage was actually paid off, since the defendants made their purported payment of the note to the Rileys after the mortgage had been transferred to Massachusetts Bank and Trust. However, the judge pointed out that that was immaterial since the Obsolete Mortgage Statutes application is not limited to mortgages that have been paid off in the first place. There is no reference in Sec. 3, as amended, to any requirement that a mortgage be paid off before the time limit shall apply, Foster said. The amended statute instead protects the interests of mortgagees holding unpaid mortgages by giving them the opportunity to extend the mortgage for a five-year period beyond the expiration date by recording an extension or an affidavit stating that the mortgage has not been paid. That is intended to keep old mortgages from clouding titles by giving mortgagees the incentive to enforce their mortgages or see them discharged, the judge continued. Foster also rejected the plaintiffs argument that the simple inclusion of the clause was enough to remove the mortgage from the five-year repose period. Dragnet clauses are intended to make real estate security for other, typically unspecified debts that the mortgagor might already owe or might owe the mortgagee in the future, he said.

However, he said, in many cases a lender will insert dragnet clauses that have not been subject to negotiation into documents without the borrower understanding the implications or even realizing it is there. Accordingly, such clauses easily can be abused, which is why Massachusetts courts have construed them narrowly, he said. A future obligation purported to be secured by a dragnet clause will not be secured unless it is of the same kind and quality as the original obligation; sufficiently related to the original indebtedness such that consent of the debtor can be inferred; the new obligation incurred refers to the mortgage; or security of the new obligation by the mortgage was contemplated by the parties, he said. With such principles in mind, the dragnet clause does not subject the mortgage in Ry-Co to the 35-year repose period for mortgages with no stated term, Foster said. The maturity date for the mortgage was clearly stated on the first page. There is no allegation, and no reasonable inference, that a new obligation has or will arise between the VonIdersteins and the Rileys, sufficiently related to the original indebtedness to have the 1986 mortgage secure this new obligation, the judge said, concluding that the defendants motion to dismiss should be granted. CASE: Ry-Co International, Ltd. v. VonIderstein, et al., Lawyers Weekly No. 14-003-14 COURT: Land Court ISSUE: Did a dragnet provision prevent a mortgage from being discharged under the Obsolete Mortgage Statute five years after its payable date? DECISION: No