Louisiana Law Review Volume 49 | Number 1 September 1988 The olC lateral Mortgage: Logic and Experience Max Nathan Jr. Anthony P. Dunbar Repository Citation Max Nathan Jr. and Anthony P. Dunbar, The Collateral Mortgage: Logic and Experience, 49 La. L. Rev. (1988) Available at: https://digitalcommons.law.lsu.edu/lalrev/vol49/iss1/4 This Article is brought to you for free and open access by the Law Reviews and Journals at LSU Law Digital Commons. It has been accepted for inclusion in Louisiana Law Review by an authorized editor of LSU Law Digital Commons. For more information, please contact [email protected]. THE COLLATERAL MORTGAGE: LOGIC AND EXPERIENCE Max Nathan, Jr.* Anthony P. Dunbar** The life of the law has not been logic: it has been experience. -Justice Oliver Wendell Holmes, Jr., The Common Law In the decade and more since the publication of Nathan and Mar- shall's article' and their forum juridicum postscript 2 on the collateral mortgage, litigation involving collateral mortgages has burst like a super- nova, lighting the jurisprudential sky. On balance, the explosion of reported decisions has illuminated many of the more obscure areas of collateral mortgage law, clarifying and resolving certain problems, and highlighting others that still must be solved. The emerging jurisprudence has reinforced the fundamental analysis contained in those earlier articles, although a significant recent decision portends a major departure from the logic and the pragmatism of the trend. The authors believe that an examination of the trends and the portents is needed and hope that critical commentary and positive suggestions will be helpful to judges and lawyers alike. To return to basics: the form and mechanics of the collateral mortgage "package" remain intact. The package consists of an act of mortgage, a collateral mortgage note (the "ne varietur" note), and a pledge of the ne varietur note to secure an indebtedness, usually represented by a hand note.' The package continues to be a hybrid security device, combining Copyright 1988, by LOUISIANA LAW REVIEW. * Professor of Law, Tulane University Law School; Member, Sessions, Fishman, Rosenson, Boisfontaine, Nathan & Winn; Tulane University Law School (J.D., 1960); Northwestern University (B.A., 1956). ** Associate, Sessions, Fishman, Rosenson, Boisfontaine, Nathan & Winn; Tulane University Law School (J.D., 1985); Brandeis University (B.A., 1972). 1. Nathan & Marshall, The Collateral Mortgage, 33 La. L. Rev. 497 (1973) [hereinafter Nathan & Marshall, The Collateral Mortgage]. 2. Nathan & Marshall, The Collateral Mortgage: A Reassessment and Postscript, 36 La. L. Rev. 973 (1975) [hereinafter Nathan & Marshall, Postscript]. 3. Nathan & Marshall, The Collateral Mortgage, supra note 1, at 499, 502. A hand note merely evidences the underlying debt; it is not required. See Mingledorff v. American Bank & Trust Co., 420 So. 2d 463, 469 (La. App. 2d Cir. 1982). Cf. First Guaranty Bank v. Alford, 366 So. 2d 1299, 1302 (La. 1978), which states that a collateral mortgage consists of three documents. Actually, only two documents are required: the mortgage and the ne varietur note. A written pledge agreement is not necessary, although it is certainly becoming customary. La. Civ. Code art. 3158; Wallace v. Fidelity Nat'l Bank, 219 So. 2d 342 (La. App. 1st Cir. 1969). See infra note 8. LOUISIANA LAW REVIEW [Vol. 49 the elements of both pledge and mortgage. The essential function and operation of the collateral mortgage package have not been impaired, and indeed there have been several constructive changes in the law that make the device function more smoothly by deflecting technical attacks 4 based on minor documentary imperfections. On a substantive level, an updated outline comparing the law today with that of a decade ago with respect to the fundamental elements of the collateral mortgage package looks like this: 1. Act of Mortgage. Basically there has been no change in the formal requisites of the act of mortgage itself. All of the material in the original articles, therefore, remains applicable.5 2. Ne Varietur Note. New cases have enhanced the importance of the ne varietur note as an element of the collateral mortgage package and also as a separate legal obligation. As part of the package, it may increase the security of the creditor because of the interest accruing on the note, which daily increases the amount of the collateral for which the creditor is secured. As a separate legal obligation, independent of the mortgage, the ne varietur note may afford the creditor recourse against the maker per- sonally, a remedy beyond foreclosing upon the property itself. Both of these developments will be explored below. 3. Act of Pledge. The pledge has taken on considerable im- 4. For example, La. R.S. 9:2728 was added by 1987 La. Acts No. 750, to provide, among other things, that the misspelling of the mortgagor's name will not cause a mortgage to lose its rank. Article 2635 of the Louisiana Code of Civil Procedure was amended in 1981 and 1982 by La. Acts Nos. 210 and 259, respectively, to remove the risk of losing executory process because of a variance between the collateral mortgage itself and the ne varietur note regarding the obligation to pay attorney's fees, and to provide that the plaintiff may prove his right to use executory process for movable property with authentic evidence of an authentic act or a private act duly acknowledged. Article 2636 of the Louisiana Code of Civil Procedure was amended by 1982 La. Acts No. 185, § 1, to provide that a certified copy of a contract of partnership authorizing the execution of an act of mortgage filed for registry with the Secretary of State shall be deemed to be authentic evidence for the purpose of executory process. Another statute, La. R.S. 13:4102 (Supp. 1988), enacted by 1982 La. Acts No. 178, provides, among other things, that the holder of a promissory note secured by a mortgage need not submit authentic evidence of the negotiation of the note in order to proceed by executory process. Article 2637 of the Louisiana Code of Civil Procedure was amended in 1982 and 1983 by La. Acts Nos. 260 and 185, respectively, to provide that for executory process, evidence of any agreement to extend or modify the obligation to pay or written notification of default or of the breach or occurrence of a condition of the act of mortgage need not be by authentic evidence, and that if the mortgage sought to be enforced is a collateral mortgage, the existence of the actual indebtedness "may" be proved by verified petition with the hand note or other evidence. 5. See infra notes 49-57 and accompanying text for a discussion of the effect of community property law on the requisites of the mortgage. 19881 COLLATERAL MORTGAGE portance in the past decade, as dramatically illustrated by two Louisiana Supreme Court decisions. In First Guaranty Bank v. Alford,6 the mortgagor was not liable for subsequent advances because the act of pledge was restricted to a specific debt. In Texas Bank of Beaumont v. Bozorg, 7 the court implied that the act of pledge is critical in order to obtain retroactive ranking. We will discuss both of these cases shortly.8 4. Retroactive Ranking. The Louisiana Supreme Court filled in one of the areas left undecided by New Orleans Silversmiths v. Toups9 when, in Acadiana Bank v. Foreman,10 it held that even though the principal debt is extinguished (by being paid), the creditor may make subsequent advances without a "reissuance" and will thereby retain the original "issuance" ranking date. Questions and answers regarding retroactive ranking have been raised in other cases, too, and these will be discussed further in the text. Building upon these basic elements, the courts have dealt in recent years with many of the complexities of the ne varietur note, the act of pledge, and the operatiori of retroactive ranking. Nevertheless, courts are still on occasion presented with security arrangements so perplexing on their face that even jurists must return to basics and rethink the nature of the collateral mortgage. THE NE VARIETUR NOTE: INCREASED IMPORTANCE It is now quite clear that the ne varietur note is not a meaningless piece of paper. The note is indeed an enforceable obligation even though it does not represent the indebtedness of the borrower. No primary obligation is brought into existence by the mere execution of a collateral mortgage and a ne varietur note. The enforceability as well as the ranking 6. 366 So. 2d 1299 (La. 1978). 7. 457 So. 2d 667 (La. 1984). 8. To make the collateral mortgage work, there must be a pledge, and in search of the pledge courts sometimes take a flexible approach. For example, in First United Bank v. Tabor, 499 So. 2d 513 (La. App. 2d Cir. 1986), Tabor executed a $500,000 "Continuing Guarantee" form by which he guaranteed his own debt to the bank up to $500,000 (an arguably meaningless obligation extinguished by confusion). Tabor had previously executed a collateral mortgage and, evidently, a ne varietur note, which he had pledged to secure a hand note. On the back of the form, Tabor listed the "collateral pledged" as the collateral mortgage previously executed and several other collateral mortgages Tabor later executed. The question was whether the ne varietur notes had been pledged to secure the continuing guarantee or whether the language on the back of the guarantee form was a pledge of all the collateral mortgage notes to secure the hand note. The court held that this continuing guarantee itself was a valid act of pledge that had accomplished its purpose. 9. 261 So. 2d 252 (La. App. 4th Cir. 1972).