Louisiana Law Review Volume 33 | Number 4 ABA Minimum Standards for Criminal Justice - A Student Symposium Summer 1973 The olC lateral Mortgage Max Nathan Jr. Repository Citation Max Nathan Jr., The Collateral Mortgage, 33 La. L. Rev. (1973) Available at: https://digitalcommons.law.lsu.edu/lalrev/vol33/iss4/3 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 Max Nathan, Jr.* and H. Gayle Marshall** Mortgage is one of the most desirable and powerful security interests that can be granted creditors, conferring as it does the power to have the mortgaged property seized and sold and the proceeds of the sale applied to satisfy the debt with preference and priority over other creditors.1 Properly handled, the mort- gage not only confers priority as to the proceeds of sale but the mortgagee can pursue the property and preserve his rights even if ownership is transferred to a third person.m 2 Lacking the disadvantage of pledge, namely dispossession of the debtor, and having the advantage of very stable security such as im- movables,8 mortgage is a security device favored by borrowers and lenders alike. Although the Louisiana Civil Code describes mortgages as being either conventional, legal or judicial,4 there are in fact several kinds of conventional mortgages. The Code itself rec- ognizes the ordinary conventional mortgage," granted for a spe- cific debt, and the mortgage to secure future advances.0 In both instances, the mortgage is an accessorial obligation, dependent upon an underlying valid principal obligation for its existence.7 Both the ordinary conventional mortgage and the mortgage to secure future advances, of course, are special forms of conven- tional mortgages8 and arise only by contract. * Associate Professor of Law, Tulane University; Member, New Orleans Bar. ** Member, Lake Charles Bar. 1. Lo. Civ. CoDa art. 3278. 2. See generally LA. CODE CIv. P. arts. 1092, 2335-43, 2371-81, 2643, 372148, 5154. 3. The collateral mortgage may be used in the mortgage of chattels also. See generally TA. R.S. 9:5351-56 (1950). 4. LA. CIv. CODE art. 3287. 5. LA. Civ. CoDS arts. 3290-91. 6. LA. CiV. COos arts. 3292-93. See also LA. R.S. 9:4801 which subordinates private works privileges to mortgages for future advances when "the mort- gage has been recorded and the note delivered to the lender before any work or labor has begun . .. 7. LA. Civ. Com art. 3284. 8. The legal mortgage and the judicial mortgage are general mortgages, which means that they do not require a description of particular property but apply to all immovables of the debtor, then owned or thereafter acquired. LA. CIV. CoD arts. 3320, 3328. They do not arise by contract, but by operation of law. Conventional mortgages, however, can only arise by contract and, being special mortgages, can only cover particular property described in the act of mortgage. LA. Civ. CoD arts. 8305-06. [497] LOUISIANA LAW REVIEW [Vol. 33 The Louisiana jurisprudence has spawned a third kind of conventional mortgage, the "collateral mortgage," described most succinctly by Professor Harry Sachse as "the strange alchemy of the pledge of a mortgage created by the pledgor."9 Histori- cally, the ordinary conventional mortgage that secures a stated present advance was the first mortgage-type security device to be utilized in Louisiana legal and banking practice.10 In response to the needs of a society rapidly developing into a commercial state, faced with the limited commercial possibilities of the ordinary conventional mortgage, and as a concession to the com- mercial establishment, the redactors of the Louisiana Civil Code of 1825 drafted two new articles sanctioning a mortgage that would secure future advances." To overcome certain limitations of this codal mortgage to secure future advances, however, Lou- isiana practitioners developed the collateral mortgage. 2 As its very name implies, the collateral mortgage is not designed directly to secure an existing debt, like the ordinary conven- tional mortgage, nor necessarily to secure advances to be made, like the mortgage to secure future advances, but instead to create a mortgage note that can be pledged as collateral secu- rity for either a pre-existing debt, or for a debt created con- temporaneously with the mortgage, or for a future debt or debts, or even for a series of debts. Because the collateral mortgage departs from recognized mortgage concepts, but at the same time relies upon mortgage concepts; because it is used for specific present debts and for unspecified future debts; but mostly be- cause of the weird blend of pledge and mortgage, drawing upon both for its efficacy but not fully on either, the collateral mort- gage has been a source of unfortunate confusion and bizarre litigation. Consequently, despite its extraordinary commercial importance and utility, the collateral mortgage has been and is frequently misunderstood. The authors believe that familiarity 9. Sachse, Report to the Louisiwna Law InUsttute on Article Nine of the Uniform Commercial Code, 41 TUL. L. Rzv. 785, 799 (1967). 10. See Code Napoleon arts. 2114-20 (1804); 2 M. PLANIOL & G. RWmT, Treatise on the Civtl Law nos. 2308-22, 2645, 2656-61 (11th ed. La. St. L. Inst. transl. 1959). 11. LA. Crv. CODs arts. 3259-60 (1825). These two articles were carried into the Civil Code of 1870 as articles 3292 and 3293, respectively. 12. The collateral mortgage was recognized in the following early cases: Levy v. Ford, 41 La. Ann. 873, 6 So. 671 (1880); Merchants' Mut. Ins. Co. v. Jamison, 25 La. Ann. 364 (1873); Succession of Dolhande, 21 La. Ann. 3 (1869). 1973] THE COLLATERAL MORTGAGE with the device will breed clarity, not contempt, and hope by this article to dispel some of the unnecessary confusion. MECHANICS FOR CREATION OF COLLATERAL MORTGAGE Act of Mortgage The first step in the creation and granting of a collateral mortgage is for the mortgagor to execute an act of mortgage, acknowledging an indebtedness in the act of mortgage, and stating that he intends to use the "mortgage note" to raise funds. The mortgage is drawn in favor of any future holder or holders of the "mortgage note," who are represented in the act of mort- gage by a nominal mortgagee. For illustration, the following language, while not sacrosanct, may be found in many col- lateral mortgages: "Which said appearer declared unto me, Notary, that desir- ing to secure funds from any person, firm or corporation willing to loan same, and for such purpose said Mortgagor does by these presents declare and acknowledge a debt in the sum of ONE MILLION ONE HUNDRED THOUSAND AND NO/100 ($1,100,000.00) DOLLARS, and to evidence such indebtedness has executed under date of these presents one (1) certain promissory note for the said sum of ONE MILLION ONE HUNDRED THOUSAND AND NO/100 ($1,100,000.00) DOLLARS, made payable to the order of BEARER, on demand, at 1010 Common Street, New Orleans, Louisiana, which said note stipulates to bear interest at the rate of eight (8%) per cent per annum from date until paid, which said note after having been paraphed "ne varietur" by me, Notary, for identification herewith, was delivered to the said Mortgagor, who acknowledged receipt thereof, and said Mortgagor further declared that said note would be negotiated for the purpose of raising funds as here- tofore stated, and said mortgagor does by these presents acknowledge to be indebted unto any future holder or holders of said note in the full amount thereof, together with interest, attorney's fees, insurance premiums, taxes and costs, if any should accrue."' 3 13. Some practitioners use the following language in the preparation of collateral mortgages: "And here the said mortgagor declared that this mortgage is executed and granted for the equal benefit and security of LOUISIANA LAW REVIEW [Vol. 33 Although the ranking of the collateral mortgage is not deter- mined by date of filing or recordation in the parish mortgage records, as will be discussed later, it goes without saying that the act of mortgage must be recorded in order to affect third parties. 4 Recordation is generally made as promptly as possible after execution of the act of mortgage. "Ne Varietur" Note In conjunction with the act of mortgage, the mortgagor executes a promissory note that is generally payable to "Bearer," although it may be payable to his own order and endorsed by him. 5 The promissory note is then paraphed "ne varietur" by the notary public for identification with the act of collateral mortgage. Although all practitioners will understand the phrase "paraphed 'ne varietur,"' many students have had difficulty with the concept of paraphing a note, as well as the use of the term "ne varietur." The words "ne varietur" come from Latin and simply mean "it must not be altered." Paraphing means that the notary public signs the promissory note with his official signature, thereby certifying its genuineness, and marks or writes on it an inscription similar to the following: "Ne Varietur for identification with an Act of Collateral Mortgage passed before me this day of ,19 s/ Notary Public Paraphing, then, is nothing more than the Notary's act of signing any and all future holder or holders of the hereinabove described note at whatever period or for whatever cause or for any reason whatsoever said note may be issued or reissued, the purpose of the present act being to enable said mortgagor to pledge, pawn, hypothecate and deliver, on such terms as said mortgagor may deem advisable and proper, the said note as collateral security to secure such loan or loans as said mortgagor may from time to time desire to make.