This memorandum will explore the secured transactions issues that arose in In re Omni Enterprises. In that case, the Bankruptcy Court in Alaska held that a bank may enforce the security interest of a prior loan that has already been repaid to cure a new loan that was in default. The prior loan was secured by the debtor’s deposit accounts, and contained a cross-collateralization clause and future advances clause; however, the new loan did not mention the deposit accounts at all. When the debtor defaulted on the new loan, the bank argued, among other things, that it continued to have a security interest in the deposit accounts because of the cross-collateralization clause and the future advances clause in the prior loan. The trustee for the debtor argued that holding for the bank’s interpretation would result in a “never ending future advances obligation.” Ultimately, the bankruptcy court held that despite the first loan having been paid off, the collateral on the first loan could be used to satisfy the debt on the second loan.
This decision was recently reversed in the District Court of Alaska. On March 8, 2017, almost one year after the initial decision, the District Court reversed the bankruptcy court’s decision, and held that the bank did not have a valid security interest in the deposit accounts. The District Court interpreted the two loan documents differently than the Bankruptcy Court, and stated that the prior loan was not within the realm of related documents with regards to the new loan. The District Court sought to interpret the loan documents in a way that gave “ordinary words their ordinary meaning” and that used an “objective standard.”
This memorandum seeks to explore two issues: (1) whether a dragnet clause (or cross-collateralization clause) can reach the collateral of a loan that has already been repaid; and (2) whether a future advances clause can halt the termination of a loan that has already been repaid. The District Court’s reversal of the Bankruptcy Court’s decision does not affect these issues because the District Court “assume[d], without deciding, that the 2009 Security Agreement remained in effect after Omni paid off the 2009 Loan . . . .” This memorandum will address the issues that were set to the side in the District Court’s decision.
This memorandum will take a twofold approach for each of the dragnet clause issue and the future advances clause issue. First, it will discuss the law as it stands for dragnet clauses, and then it will discuss how different courts have ruled with regards to cases that involve dragnet clauses and loans that have already been repaid. Then, it will do the same for future advances clauses. Finally, it will explore different ways a drafter can avoid the results of In re Omni Enterprises, and instead, create an agreement that accurately memorializes the result that each party desires.