Trying to reconcile and apply Mississippi cases regarding future advance and dragnet clauses is a challenge. A 2017 bankruptcy court decision helps to correct one misapprehension that has added to the challenge.
In Shutze v. Credithrift of America, Inc., 607 So. 2d 55 (Miss. 1992)(en banc), the Mississippi Supreme Court upheld the priority of a future advance over an intervening judgment lien. The court gave a strong endorsement to the enforceability of dragnet clauses generally and future advance clauses in particular. Justice Robertson wrote, in relevant part, that “for priority purposes, the lien securing the future advance takes its date from the recording of the original deed of trust and by operation of law reaches forward to secure the advance made after intervening rights became perfected.” 607 So. 2d at 63.
In Merchants National Bank v. Stewart, 608 So. 2d 1120 (Miss. 1992)(en banc), the Mississippi Supreme Court held that an existing or antecedent debt was not encompassed by the dragnet clause in a bank’s deed of trust. The court used a four-part test to determine that the dragnet clause did not encompass the other debt: was the dragnet clause “boilerplate”, was the other debt different in kind than the debt in the deed of trust, was the other debt listed in the deed of trust, and was the other debt otherwise fully secured? 608 So. 2d at 1126.
In In re Crosby, 185 B. R. 28 (Bankr. S.D. Miss. 1993), Judge Ellington discussed Credithrift and Stewart, and determined that, since the Mississippi Supreme Court did not mention Credithrift in the Stewart case, that Stewart impliedly limited Credithrift. 185 B.R. at 32. In In re Smink, 276 B.R. 156 (Bankr. N.D. Miss. 2001), Judge Houston agreed with Judge Ellington that Credithrift had been impliedly limited by Stewart. 276 B.R. at 158-64.
In In re Windham, 568 B.R. 263 (Bankr. N.D. Miss. 2017), Judge Woodard wrote that Judge Ellington’s analysis in Crosby was based on the mistaken assumption that Stewart was decided after Credithrift. In fact, writes Judge Woodard, while Stewart was published after Credithrift, the Mississippi Supreme Court decided Credithrift after it decided the Stewart case. Stewart was decided on April 1, 1992 but a petition for rehearing was filed, and the Stewart opinion was not published until after the petition for rehearing was resolved on November 19, 1992. The Credithrift case cites the Stewart case for the general proposition that dragnet clauses are valid and enforceable, which couldn’t be the case if Stewart was decided after Credithrift. 607 So. 2d at 59. See generally In re Windham, 568 B.R. 263, 269-70 and n. 3.
The significance of this is that the strong endorsement of future advance clauses in Credithrift was not impliedly limited by Stewart, as mistakenly assumed by the courts in Crosby and Smink. This is important because Stewart and another case that followed Stewart, Wallace v. United Mississippi Bank, 726 So. 2d 578 (Miss. 1998), only addressed whether the antecedent debt was secured by the dragnet clause, not future advances. Credithrift dealt with future advances. Arguably the Stewart tests should be applied only in cases involving antecedent debt, and Credithrift should be the controlling case as to future advances.