## Facts

- Thomas and Joanne Gates and Peter and Patricia Abell owned San Jose real property as tenants in common.
- Before any joint refinancing, the Abells owed the bank about $25,000 on a separate unsecured obligation; the Gateses were not liable on, and did not know of, this debt.
- The four co-owners later executed a promissory note to the bank (reported at about $60,000) and a deed of trust on the property to secure that note.
- The deed of trust contained a “dragnet” clause stating the security covered the note and other indebtedness owed to the bank by the trustors.
- The bank did not disclose to the Gateses the Abells’ existing unsecured debt when the deed of trust was executed.
- The property was sold; the sale paid the secured note and produced a surplus of roughly $28,000.
- The bank claimed about $25,000 of the surplus under the dragnet clause to satisfy the Abells’ earlier unsecured debt.
- The trial court found the Gateses were “totally ignorant” of the Abells’ prior debt but nonetheless enforced the dragnet clause for the bank; the Gateses appealed.

## Issues

1. Whether a dragnet clause in a deed of trust executed by tenants in common secures one co-owner’s separate, pre-existing, undisclosed unsecured debt against the other co-owners’ interest in the collateral or surplus sale proceeds.
2. Whether broad “all indebtedness” language may be enforced beyond the non-debtor co-owners’ reasonable expectations where the lender did not disclose the antecedent debt.

## Decision

- The Court of Appeal reversed the judgment for the bank.
- The dragnet clause was not enforceable to reach the Abells’ separate, antecedent unsecured debt as against the Gateses’ share of the surplus.
- The bank could not apply the sale surplus to the Abells’ prior unsecured obligation over the objection of the innocent co-owners.

## Legal Principles

- Dragnet (“all indebtedness” or “future advances”) clauses are not per se invalid but are strictly construed.
- A dragnet clause will not be construed to secure a co-owner’s separate, pre-existing indebtedness where securing that debt was not within the non-debtor co-owner’s reasonable contemplation when signing the security instrument.
- Nondisclosure by the lender of an antecedent debt weighs against extending the security to that debt, particularly where enforcement would impose an unexpected burden on an innocent co-owner.
- In a tenancy in common context, one co-owner’s separate debts will not be imposed on another co-owner’s distinct property interest absent informed consent reflected in the transaction’s objective context.

## Conclusion

The court held that, despite broad boilerplate language, the deed of trust could not be used to capture a co-owner’s undisclosed prior unsecured debt at the expense of innocent tenants in common, and it reversed the judgment allowing the bank to take the surplus proceeds for that purpose.


Gates v. Crocker-Anglo Nat'l Bank, 257 Cal. App. 2d 857 (Cal. Ct. App. 1968)