Opened-End Mortgages in Rhode Island

By: Raymond C. Pelote | Partner

Open-end mortgages in Rhode Island are a useful security tool for creditors in an effort to secure any and all outstanding obligations a creditor may have with a commercial debtor.  Many times, creditors enter into commercial transactions with commercial debtors that are secured only by all-business-asset-liens.  Typically, an all-business-asset-lien loses value almost from the day of closing.  The value of computers, desks, chairs, or other similar equipment diminishes significantly over time.  To the contrary, real estate values generally appreciate over time providing more of a security blanket for creditors.  However, I am not suggesting that creditors avoid the use of all-business-asset-liens as security for commercial obligations as such liens do serve a purpose.  I am suggesting and recommending that creditors use open-end mortgages as an umbrella to further secure those commercial loans in the oft chance that the all-business-asset-lien is no longer valuable.

R.I.G.L. §§34-25-8 & 9 set forth the requirements by which open-end mortgages in Rhode Island become effective.  Simply, the face value of the mortgage is the principal limit to secure all outstanding commercial obligations due and owing to a creditor by a commercial debtor.  Notwithstanding the principal limitations of an open-end mortgage, §34-25-8 permits secured creditors to include interest, late charges and such other obligations of the debtors under any promissory notes or agreements, which may include legal fees and costs and other expenses associated with the commercial loan.

Recently, I represented a creditor in a case that had three (3) commercial loans with two (2) commercial entities and the individual owners of those commercial entities.  The first commercial loan was extended in 1998.  The debtor was one of the commercial entities and the owner of the commercial entity was a guarantor of the commercial obligation.  The second commercial loan was extended in 1999.  The debtors were the individual owners of the commercial entities with the commercial entities each becoming guarantors of the commercial obligation.  The third commercial loan was extended in 2002.  The second commercial entity was the debtor with the first commercial entity and the individuals all becoming guarantors of the commercial obligation.  The corporate obligations were secured by security interests in all-business-assets of said corporations.  The individuals’ obligation was secured by an open-end mortgage on commercial property.

The issue presented was whether the corporate obligation, which was extended in 1998, was covered by the open-end mortgage that was granted to the creditor in 1999.  §34-25-8 merely indicates that the open-end mortgage secures all mortgage debt, which theoretically would include any mortgage debt existing at the time.  In any event, the court found that the open-end mortgage secured the corporate obligation incurred in 2002.  However, the court did not address whether the open-end mortgage secured the corporate obligation incurred in1998.  There is case law that supports the proposition that the open-end mortgage covers all of the commercial obligations indicated above.  See Pride Hyundai, Inc. v. Chrysler Financial Company, LLP, 263 F.Supp.2d 374 (D.R.I. 2003).  Without boring you with the facts, this case distinctly stated that an open-end mortgage or a master security agreement which covers all obligations of the debtor or debtors covers all obligations of the debtor or debtors no matter when the commercial loans were extended.  Yet, in my case, since the subsequent obligation was covered by the open-end mortgage, the court did not get to whether the commercial obligation extended in 1998 was also covered by the open-end mortgage.

Nevertheless, given the strength of this extraordinary tool, an open-end mortgage could ultimately protect a creditor in instances where an all-business-asset-lien no longer has value sufficient to secure an obligation.  As such, given this highly probable outcome, it is important that each creditor, before extending any type of credit in a commercial setting, performs a company-wide search to determine what other commercial loans a debtor may have with a creditor before extending new credit.  While an all-business-asset lien provides some security, an open-end mortgage provides more security in the oft chance that the all-business-asset-lien is no longer valuable.

If you have any questions regarding open-end mortgages and would like assistance from an experienced attorney, please call Wynn & Wynn, P.C. 1.800.852.5211 or request a free consultation.