## Facts

- On September 16, 1974, Howard Bloom executed a mortgage on his Illinois real property to Lakeshore Commercial Finance Corporation (Lakeshore) to secure a $30,000 loan.
- Lakeshore’s mortgage also contained a future-advances (dragnet) clause stating that the mortgage secured not only the $30,000 loan but also any other present or future indebtedness Bloom might owe Lakeshore.
- Lakeshore did not promptly record its mortgage.
- On October 4, 1974, Bloom executed a second mortgage on the same property to Northridge Bank (Northridge).
- Northridge asserted it had neither actual nor constructive notice of Lakeshore’s earlier, unrecorded mortgage when Northridge took its mortgage.
- Northridge’s mortgage was silent on its face as to the nature and amount of the debt it secured.
- Northridge recorded its mortgage on the morning of October 25, 1974; Lakeshore recorded its mortgage later that afternoon.
- The property’s value was insufficient to satisfy both mortgages. The parties proceeded to foreclosure, and the dispute turned on which lender had priority to the sale proceeds.
- Northridge filed an action for a declaratory judgment that its lien had priority. The trial court entered judgment for Northridge, and Lakeshore appealed.

## Issues

1. Under Illinois recording law, does a later-executed mortgage recorded first have priority over an earlier-executed but later-recorded mortgage when the later mortgagee took without notice of the earlier mortgage?
2. Does a recorded mortgage fail to provide effective notice or priority merely because it does not state the amount or describe the indebtedness it secures on its face?
3. Can an earlier mortgagee rely on a dragnet (future-advances) clause to obtain priority over an intervening mortgagee that recorded first without notice, including as to advances made after the intervening lien arose?

## Decision

- The Illinois Appellate Court affirmed the judgment for Northridge.
- Northridge’s mortgage had priority because it was recorded first and Lakeshore did not prove Northridge took with notice of Lakeshore’s unrecorded mortgage.
- Northridge’s mortgage was not deprived of effect as a recorded encumbrance simply because it did not state the debt amount or otherwise describe the obligation on the face of the instrument.
- Lakeshore could not use its dragnet clause to defeat Northridge’s intervening, first-recorded lien, particularly for later advances made after Northridge’s lien attached.

## Legal Principles

- Under Illinois’ recording statute, an unrecorded mortgage may be valid between the original parties but is ineffective against a subsequent mortgagee for value who takes without notice and records first.
- The party claiming that a subsequent mortgagee had notice bears the burden to show actual notice or facts sufficient to impose inquiry notice.
- A mortgage that is recorded and identifies the property as security can operate as a valid lien and provide constructive notice even if it is silent as to the nature or amount of the debt secured.
- Dragnet (future-advances) clauses may be enforceable between the original parties, but they are strictly construed when third-party rights intervene.
- Optional future advances made under a dragnet clause after an intervening lien attaches are generally subordinate to the intervening lien when the intervening lienholder recorded first without notice of the earlier mortgage.

## Conclusion

The court held that Northridge, as a mortgagee for value that recorded first without notice of Lakeshore’s earlier unrecorded mortgage, had priority to the foreclosure proceeds; Northridge’s recorded mortgage was not invalid or subordinated merely because it omitted debt details; and Lakeshore’s dragnet clause could not be applied to outrank Northridge’s intervening, first-recorded lien.


Northridge Bank v. Lakeshore Commercial Finance Corp., 365 N.E.2d 382 (1977)