Legal Definitions - dragnet clause

A dragnet clause (also known as a cross-collateral clause or Mother Hubbard clause) is a provision often found in loan or security agreements. It states that the collateral pledged for a specific loan will also secure any other existing or future debts that the borrower owes to the same lender. Essentially, it "drags in" all other obligations, making a single piece of collateral responsible for multiple debts, even if those debts are unrelated to the original loan.

Here are a few examples to illustrate how a dragnet clause works:

• Example 1: Home Mortgage and Personal Loan

  Imagine Sarah takes out a mortgage with "First National Bank" to buy her house, and the mortgage agreement includes a dragnet clause. A few years later, she takes out a separate, unsecured personal loan from the *same* First National Bank to pay for a home renovation. If Sarah defaults on her personal loan, the dragnet clause in her mortgage agreement could allow First National Bank to use her house as collateral to recover the personal loan debt, even though the house was originally pledged only for the mortgage.

• Example 2: Business Equipment Loan and Line of Credit

  A small business, "Innovate Tech," secures a loan from "Community Credit Union" to purchase new manufacturing equipment, pledging the equipment itself as collateral. The loan agreement contains a dragnet clause. Later, Innovate Tech obtains a revolving line of credit from the *same* Community Credit Union to manage its operational cash flow. If Innovate Tech struggles and defaults on the line of credit, the dragnet clause could enable Community Credit Union to seize the manufacturing equipment (originally collateral for the equipment loan) to satisfy the outstanding debt on the line of credit.

• Example 3: Car Loan and Credit Card

  David finances a new car through "Apex Financial Services," and the car itself serves as collateral for the loan. The car loan contract includes a dragnet clause. Subsequently, David applies for and receives a credit card from the *same* Apex Financial Services. If David falls behind on his credit card payments and defaults, the dragnet clause might allow Apex Financial Services to repossess his car to cover the unpaid credit card balance, even though the car was initially only collateral for the car loan.