Duhaime's Law Dictionary


Dragnet Clause Definition:

A clause in a credit agreement which purports to secure future liabilities.

A far-reaching security clause in a credit agreement.

For example, in Re Kimberley Shemwell, her credit agreement with the Commonwealth Credit Union of Kentucky:

"... secures payment of any liabilities, direct or indirect, absolute or contingent, now existing or hereafter arising, of debtor to Credit Union....

"The language used in the security agreement is more properly termed a dragnet clause....

"In the case at bar, the dragnet clauses in the security agreements were sufficiently broad, clear and unambiguous. They effectively put debtor on notice that the security agreement covered all of debtor's obligations with the Credit Union."

Dragnet clauses are not popular with the Courts. In Moss v Hipp, the Dragnet clause was rejected by the Supreme Court of Texas:

"The chattel mortgage contained a so-called dragnet clause providing, in effect, that it would also secure any other indebtedness then or thereafter owing to the holder of the note.....

"Provisions of this type apply only to indebtedness which was reasonably within the contemplation of the parties to the mortgage at the time it was made."

REFERENCES:

  • Capocasa v. First Nat. Bank, 36 Wis. 2d 714 (1967, Supreme Court of Wisconsin)
  • In re Shemwell, 378 BR 166 (2007, Justice Joan Lloyd of the United States Bankruptcy Court)
  • Moss v. Hipp, 387 SW 2d 656 (1965). Quoted with approval in Wood v. Parker Square State Bank, 400 SW 2d 898 (1966)

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