Walter Walker executed a security deed to First Community Bank of Tifton. The security deed contained a “dragnet” or “open-end” clause: it secured, in addition to a specific promissory note in the principal amount of $12,803, all other current and future indebtedness of Walker to the bank. Walker later conveyed the mortgaged property to the Lampkins. The warranty deed stated that it was subject to the security deed and that the Lampkins agreed to pay the secured indebtedness. Five years after the sale, the bank threatened foreclosure. The Lampkins’ attorney sent a letter to the bank acknowledging the assumption of the specific promissory note and asking for confirmation of the amount required to pay it in full. The bank never responded. On June 2, 2008, the Lampkins filed suit for fraud and to enjoin the pending foreclosure. The bank was the high bidder at the foreclosure sale on June 3, at a price of $25,906.49. Walker owed the bank more than $203,000 at the time. In their suit, the Lampkins asserted, without dispute from the bank, that they never received notice of any indebtedness of Walker other than the promissory note. The trial court granted summary judgment to the bank and the Lampkins appealed.
The Court of Appeals found controlling the Georgia Supreme Court case of Commercial Bank v. Readd, 240 Ga. 519, 242 S.E.2d 25 (1978), in which, as in this case, the plaintiffs “clearly assumed the indebtedness of the grantor secured by an unambiguous ‘open-end’ security deed.” The Court, upholding the trial court, rejected for two reasons the Lampkins’ argument that the bank’s failure to respond to their attorney’s letter estopped it from claiming a secured indebtedness other than the note. First, the attorney’s letter requested only the payoff amount for the note and did not inquire into any additional indebtedness. Second, as in Readd, the plaintiffs’ ignorance of other indebtedness was irrelevant. Lampkin v. First Community Bank of Tifton, No. A10A0493 (Ga. App. May 27, 2010).
This circumstance might have been addressed up front. A careful reading of the security deed would have disclosed the open-end clause. Having discovered it, the Lampkins should have asked Walker if there were any other debts. If there were, the Lampkins would have had opportunity to address them appropriately, whether by approaching the bank to amend the security deed or reaching an acceptable agreement with Walker to deal with the obligations. As for subsequent debts that Walker might incur with the bank, the Lampkins could have, pursuant to O.C.G.A. § 44-14-2 (b), given the bank notice of the property transfer and “cut off” the open-end provision. Thereafter, no subsequent indebtedness incurred by Walker would have encumbered the property. Of course, the transfer of the property to the Walkers may have violated transfer restrictions in the security deed, so the parties may have been disinclined to give the statutory notice to the bank. This case illustrates the risk.