Dragnet clause

Certain Real Estate Mortgage Contract contains a blanket clause also called the “dragnet clause” which has been recognized as valid and legal. This case of a manufacturer and exporter of fuel products (EII) is an example of said clause.

In the operation of its business, EII obtained a loan from a bank (PBP) secured by a real estate mortgage of its six properties in Marikina covered by TCT Nos. N-68661 to N-68666. The real estate mortgage provides that said lands are transferred and conveyed by way of mortgage to secure the payment of “certain loans, overdrafts and/or other credit accommodations all of which is hereby fixed at P500,000 as well as those that the mortgagee may hereafter extend to the mortgagor including interests and expenses or any other obligation owing to the mortgagee”.

On the strength of said mortgage, EII was granted a loan in the form of bill discounted in the amount of P200,000 of which P110,000 was outstanding. Thereafter EII applied for a packing credit line or credit export advance supported by a Letter of Credit (L/C) issued by a Korean Bank through its correspondent bank, the BPI in the amount of $23,000 for the account of a Korean Commercial company which purchased EII’s fuel products. The original beneficiary of said L/C was TLW which transferred all its rights and obligations there-under in favor of EII.

On March 17, 1987, EII presented for negotiation to PBP the drafts drawn under the L/C and the corresponding export documents in consideration for its drawings in the amounts of $5,739.76 and $4,585.79. Thus PBP paid EII the amount for said drafts.

But on April 17, 1987 the Korean Bank notified PBP that the Korean buyer refused to pay EII’s export documents because of typographical discrepancies and thus returned the same to PBP. Despite EII’s efforts to have the Korean importer to honor the documents, the Korean Bank still returned the said documents on account of non-acceptance by said importer.

Hence PBP demanded from EII the payment of the peso equivalent of said documents amounting to P573,225.60. When EII failed to pay them, PBP foreclosed the mortgage for the total bid price of P752,074.63 including EII’s other outstanding loan accommodation in the form of bills discounted. The certificate of sale was registered on March 24, 1988 with PBP as highest bidder. On June 12, 1989, PBP consolidated ownership and obtained title to the property.

On November 17 EII instituted an action in the Regional Trial Court for the annulment of the extrajudicial foreclosure. It contended among others that the real estate mortgage only secured the loans already obtained up to P500,000 only. So it does not include the export advances according to EII. Was EII correct?

No. The Real Estate Mortgage executed by EII contains a blanket mortgage clause also known as a dragnet clause. It has been settled in a long line of cases that mortgages given to secure future advancements are valid and legal contracts and the amounts named as consideration in said contract do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness.

A dragnet clause is one which is specifically phrased to subsume all debts of past and future origins. Mortgage of this character enable the parties to provide continuous dealings, the nature and extent of which may not be known or anticipated at the time, and they avoid the expense and inconveniences of executing a new security on each transaction. It operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents thereby saving on costs, extralegal services, registration fees etc (Producers Bank vs. Excelsa Industries Inc. G.R. 1532071, May 8, 2009).

Note: Books containing compilation of my articles on Labor Law and Criminal Law (Vols. I and II) are now available. Call tel. 7249445.

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