Summary
explaining that the primary rationale for the full credit bid rule is that it would be inequitable to permit a lender to choose to place such a bid, "thus cutting off other lower bidders," only to later argue that the property is worth less than the bid
Summary of this case from Lehman Bros. Holdings, Inc. v. BancorpOpinion
Argued February 22, 1971
Decided April 21, 1971
Appeal from the Appellate Division of the Supreme Court in the Second Judicial Department, THOMAS P. FARLEY, J.
John H. Munley for appellant. Abraham L. Shapiro and Abraham Schlissel for respondent.
The issue, on summary judgment, is whether a mortgagee who bid in the full amount of the secured debt at the foreclosure sale in order to obtain the mortgaged property, retains any insurable interest entitling it to sue on a fire insurance policy under a mortgagee loss payable clause. The answer by well-settled precedents in this State and elsewhere in the Nation is a unanimous negative, based on the legal and practical considerations which dictate that the owner-mortgagor, or subsequent lienors, if anyone, and not the mortgagee under a discharged mortgage are entitled to recover for the fire loss.
What seems to have caused confusion is the equally well-settled rule that the rights under a fire insurance policy are fixed both as to amount and standing to recover at the time of the fire loss. From this rule it has been further and improperly deduced that the mortgagee could do nothing to impair his rights thus fixed at the time of loss. And of course he could: by waiver, estoppel, assignment, or as here by discharge of the debt. Another conjectured circumstance, not presented anywhere in the record, is that perhaps the mortgagee in bidding in the whole debt to obtain the mortgaged property was not regarding the debt as having its face value and that, therefore, it should have another chance to show that the property it received was really not worth the amount of the bid. Needless to suggest, these approaches are novel, represent a deviation from not only the applicable rules of law, but their practical purposes as well.
Plaintiff Whitestone is the mortgagee and defendant Allstate is the insurer of dwelling premises owned by the Sandstroms. The Sandstroms are named defendants in this action but are not parties to the appeal and the record does not inform whether they have a viable cause of action on the fire insurance policy against the insurer. The premises were valued at $18,000, insured by the owners for $14,000, and mortgaged for $11,500. On April 17, 1967, a fire destroyed approximately 50% of the value of the premises. Concededly, at the time of the fire loss, under the mortgagee loss payable clause the mortgagee was entitled to recover for the loss on the fire insurance policy.
However, on April 16, 1968, in foreclosure sale under the mortgage, the mortgagee bid $13,116.61, the full amount of the balance then due on the mortgage for principal and interest. As a consequence, the mortgagee received the deed and title to the property. Under familiar rules this bid and taking of title constituted a satisfaction of the debt barring a deficiency judgment against the mortgagor and generally the termination of the mortgagee's insurable interest as a mortgagee (e.g., 2 Wiltsie, Mortgage Foreclosure [5th ed.], § 830).
Mingled into the case is the fact that before the mortgagee bid for the premises and after the fire the insurer had offered to settle the fire loss for $7,471. But this offer is of no moment in determining whether the mortgagee retained its insurable interest, or determined it by the taking of the property in satisfaction of the secured debt.
The applicable rules of law are simple. Because a mortgagee is entitled to one satisfaction of his debt and no more, the bidding in of the debt to purchase the mortgaged property, thus cutting off other lower bidders, has always constituted a satisfaction of the debt (cf. Lansing v. Goelet, 9 Cow. 346, 348-349, 352, 356; see 59 C.J.S., Mortgages, § 599, subd. b). For this purpose it is not necessary or useful to refer to attenuated traditional concepts to the effect that when the mortgagee acquires the title to the property there is a merger of the mortgage interest into that of the fee (e.g., Ann., Mortgagee Acquiring Fee — Effect on Debt, 95 A.L.R. 89, esp. pp. 102-103). The point is that the mortgagee has voluntarily converted the debt into the property and has done so by taking the property in satisfaction of the debt. It could have bid less, thus leaving a deficiency for which the mortgagor would be obligated and from which there would survive an insurable interest. It could have bid more, in which event there would have been a surplus in favor of the mortgagor or subsequent lienors but no insurable interest surviving in the mortgagee as mortgagee.
Perhaps the best example of how a mortgagee could lose his right to recover under the mortgagee loss payable clause would be assignment of the mortgage, and indeed for whatever consideration, after the fire loss. Obviously, the fixing of rights at the time of the loss does not extend to such a post-loss event. The satisfaction of the mortgage debt by the bidding in of the debt at the foreclosure sale is functionally equivalent. In either event the mortgagee has terminated his insurable interest.
As noted earlier, the authorities are unanimous to the effect that if subsequent to the fire the mortgagee has had its debt satisfied by purchase at foreclosure either by the mortgagee or a stranger, even by its bidding in of the outstanding debt, the mortgagee's rights under the policy are terminated (see, e.g., Heilbrunn v. German Alliance Ins. Co., 150 App. Div. 670, 672, app. dsmd. 206 N.Y. 683; Glen Cove Trust Co. v. Trypuc, 110 N.Y.S.2d 368, 371, affd. 281 App. Div. 1034; Power Bldg. Loan Assn. v. Ajax Fire Ins. Co., 110 N.J.L. 256; Lutheran Brotherhood v. Hooten, 237 So.2d 23 [Fla.]; Northwestern Nat. Ins. Co. v. Mildenberger, 359 S.W.2d 380 [Mo.]; Insurance Co. of North Amer. v. State Sav. Loan Assn., 425 F.2d 1180, 1182; Rosenbaum v. Funcannon, 308 F.2d 680, 683-685; 5A Appleman, Insurance Law and Practice [rev. ed., 1970], § 3403, pp. 301-302; 5 Couch, Insurance 2d, §§ 29.75-29.77; 38 N.Y. Jur., Mortgages and Deeds of Trust, § 143, pp. 277-278).
The rule was especially well expressed in Rosenbaum v. Funcannon ( supra), quoting the opinion below, as follows:
"`The rights of a loss-payable mortgagee are determined as of the time of the loss. Therefore, an extinguishment of a mortgage or deed of trust by foreclosure after the loss does not affect the liability of the insurance company to a loss-payable mortgagee. * * *
`It must be borne in mind, however, that extinguishment of a mortgage or deed of trust by sale of the property at foreclosure does not necessarily extinguish the debt itself. Only to the extent that the mortgagee receives payment upon the debt through the foreclosure is the debt itself extinguished. If the security property does not bring enough to pay the debt, the debt itself remains to the extent that it is unpaid, notwithstanding extinguishment of the mortgage as such by sale to third parties or acquisition by the mortgagee as bidder at foreclosure sale.
`It is in this sense that the rule is quite properly stated to the effect that extinguishment of the mortgage does not affect the liability of an insurance company to a loss-payable mortgagee.
`On the other hand, it is well settled that full or partial extinguishment of the debt itself, whether prior to the loss (Reynolds v. London [ L. Fire Ins. Co.], 128 Cal. 16, 60 P. 467 (1900)) or subsequent to the loss (Power Bldg. Loan Assn. v. Ajax Fire Ins. Co. [ 110 N.J.L. 256], 164 A. 410 (N.J. 1933)), precludes to the extent thereof, any recovery by the loss-payable mortgagee for the plain and sole reason that the debt, itself, has been to that extent extinguished.'" (308 F.2d, at p. 684).
Although the precise issue has not been previously considered by this court the supporting principles have been and are well settled. The theory of recovery by a mortgagee is indemnity. The risk insured against is an impairment of the mortgaged property which adversely affects the mortgagee's ability to resort to the property as a source for repayment. Where the debt has been satisfied in full subsequent to the fire, neither reason nor precedent suggest recovery on the policy by the mortgagee. The fact that a mortgagee may not recover on the insurance does not necessarily mean that an insurer will not be obligated to pay the mortgagor or other person entitled under the policy. Indeed, in the absence of defenses, it will be the mortgagor or his creditors who will recover.
The rule is not harsh and it is eminently practical. None disputes that the mortgagee is entitled to recover only his debt. Any surplus value belongs to others, namely, the mortgagor or subsequent lienors. Indeed, it is not conceivable that the mortgagee could recover a deficiency judgment against the mortgagor if it had bid in the full amount of the debt at foreclosure sale. To allow the mortgagee, after effectively cutting off or discouraging lower bidders, to take the property — and then establish that it was worth less than the bid — encourages fraud, creates uncertainty as to the mortgagor's rights, and most unfairly deprives the sale of whatever leaven comes from other bidders. Mortgagees have the obvious opportunity to bid only so much of the debt as equals the value of the property, and if someone else wishes to bid the same or more, so much the better for every other party concerned with the property. Yet it is conjectured that the mortgagee may have improvidently bid up to the amount of the debt. Moreover, this is the dissenting conclusion although there is not the slightest suggestion, let alone evidence, supplied to establish that the property was overbid. In fact, mortgagee's whole contention has been the legalistic and syllogistic one that if the time of loss fixes rights then the rights of the mortgagee to recover was fixed on April 17, 1967, the day of the fire, and nothing done thereafter could impair that right. The fallacy of that reasoning, of course, has already been demonstrated; it overlooks the power of the obligee to alter the obligation running in his favor.
Much is made of the case of Savarese v. Ohio Farmers Ins. Co. ( 260 N.Y. 45). The rule in that case stands simply for the proposition that a mortgagee under a mortgagee loss payable clause does not lose the right to recover or his insurable interest because the security has been restored in value or even increased beyond what it was worth just before the fire. And of course this is quite true; a secured creditor is never diminished in his rights to look to the security because it has been increased in value by way of repairs or otherwise. Hence, he is entitled to recover on the insurance although the proceeds are not necessary to restore the premises since repaired but to reduce the amount of the debt. The situation in the Savarese case and its rule has nothing to do with this case where the debt has been legally discharged by the results of the foreclosure sale.
Accordingly, the order of the Appellate Division should be affirmed, with costs.
I dissent and vote to modify.
We are called upon to consider the question of whether a mortgagee who bid in the full amount of the secured debt at a foreclosure sale, retains, as against the insurer alone, any insurable interest entitling it to sue on a fire insurance policy under a mortgagee loss payable clause. The answer, as proffered by the majority, categorically denies that right, in part because the right itself upon discharge of the debt more properly inures to the benefit of the mortgagor or some conjectured subsequent lienor.
Though it is true that the great weight of authority, commentators and the courts of sister States alike, hold that if subsequent to the loss the mortgagee has had its debt satisfied by purchase at a foreclosure sale, either by the mortgagee or a stranger, the mortgagee's rights under the policy are terminated ( Glen Cove Trust Co. v. Trypuc, 110 N.Y.S.2d 368, affd. 281 App. Div. 1034; Insurance Co. of North Amer. v. State Sav. Loan Assn., 425 F.2d 1180; Transport Realty Co. v. Commercial Union Ins. Co. of N.Y., 404 F.2d 892, 895; Rosenbaum v. Funcannon, 308 F.2d 680, 683-685; Lutheran Brotherhood v. Hooten, 237 So.2d 23 [Fla.]; Power Bldg. Loan Assn. v. Ajax Fire Ins. Co. 110 N.J.L. 256; 5A Appleman, Insurance Law and Practice [rev. ed., 1970], § 3403, pp. 301-302; 5 Couch, Insurance 2d, § 29.75-29.77; 38 N.Y. Jur., Mortgages and Deeds of Trust, § 143, pp. 277-278), that rule has most often been invoked in situations where the mortgagee seeks to recover on the policy to the exclusion of the mortgagor or subsequent lienors (see, e.g., Glen Cove Trust Co. v. Trypuc, 110 N.Y.S.2d 368, 371, affd. 281 App. Div. 1034, supra; Sea Isle Operating Corp. v. Hochberg, 198 So.2d 336 [ Fla.]; Northwestern Nat. Ins. Co. v. Mildenberger, 359 S.W.2d 380 [ Mo.]; Insurance Co. of North Amer. v. State Sav. Loan Assn., 425 F.2d 1180, supra; Rosenbaum v. Funcannon, 308 F.2d 680, supra), and should have no application to the situation before us, involving as it does only the respective rights and obligations of the mortgagee and the named insurer. Similarly, the right of a mortgagee to recover under a loss payable clause cannot be said to become immutably fixed at the time of the loss. Nevertheless, we do not have before us a question of waiver, estoppel or assignment, and the a priori assumption that the discharge of the debt similarly works to preclude recovery on the policy, is the question of law presently in issue. The majority effortlessly concludes that it does, and holds that summary judgment was proper. Presented with the allegation, which the majority seems to ignore, in the verified complaint that the mortgagee was induced by earlier representations to proceed with the foreclosure, the conclusion is irresistible that the bid itself was inflated by the proposed settlement of claim; and to that extent, the question of whether the debt was fully discharged was one of fact, thus precluding summary judgment. Assuming, however, that the debt was in fact fully discharged, there remains the question of whether satisfaction of the debt in the first instance terminates the mortgagee's rights under the policy.
It is conceded that a mortgagee is entitled to but one satisfaction of his debt. None would dispute, however, that payment should be made on the loss insured against. While the majority seeks assiduously to protect against a "double recovery," it chooses to ignore the fact that the defendant, having collected premiums on the policy, may never be called upon to answer for the loss. Indeed, it suggests that others, namely, the mortgagor or some subsequent lienor, may proceed under the policy, although we have no way of knowing whether that right, if it exists, will ever be exercised. Manifestly, the question reduces itself to just this: who, as between the mortgagee and the insurer, should reap the benefits of the policy? That at some remote date the mortgagor or another person entitled to proceed under the policy may seek to exercise their rights is, quite simply, besides the point.
Although it is generally true that foreclosure operates as a payment of the mortgage debt to the extent of the amount actually received as the sale price (2 Wiltsie, Mortgage Foreclosure [5th ed.], § 830), that rule has no application to the case before us, as pro tanto reduction of the debt on foreclosure relates only to the respective obligations subsisting between the mortgagor and mortgagee and cannot be asserted by a third party seeking to avoid liability on a lawful claim.
Under the mortgage clause the policy issued by the defendant insured the mortgagee's interest as fully and to the same extent as if it had taken out a policy directly with the insurance company ( Eddy v. London Assur. Corp., 143 N.Y. 311, 322; Goldstein v. National Liberty Ins. Co., 256 N.Y. 26, 32; Heilbrunn v. German Alliance Ins. Co., 140 App. Div. 557, 559, affd. 202 N.Y. 610). The plaintiff herein had an independent insurable interest in the premises and independent of the owner it could have procured a policy of insurance against loss by fire payable directly to it, and separate and distinct from any policies taken or held by the mortgagor ( Savarese v. Ohio Farmers Ins. Co., 260 N.Y. 45, 51-52; Goldstein v. National Liberty Ins. Co., 256 N.Y. 26, supra). A fire occurred and caused damage to the mortgaged property. Undoubtedly, the plaintiff had the right to insist upon the payment of the amount by which the property, which was subject to the lien was diminished ( Savarese v. Ohio Farmers Ins. Co., 260 N.Y. 45, supra); and that same rule would apply where the property, after damage, still furnished sufficient security for the payment of the debt. The question remains, therefore, whether the insurer could defeat the claim by its inaction where the mortgagee, prior to settlement, proceeds against the security. The answer to that question relates solely to a construction of the policy.
The policy, including the mortgagee clause, was intended as assurance against loss or damage to the property and thus, to furnish collateral security for payment of the debt ( Kernochan v. New York Bowery Fire Ins. Co., 17 N.Y. 428; Savarese v. Ohio Farmers Ins. Co., 260 N.Y. 45, 53, supra). It was intended to protect both the mortgagee's as well as the mortgagor's interest and any loss was payable, according to its terms, to the mortgagee as its interest might appear. By its terms, when a fire occurs, the insurance company must pay the mortgagee for damages sustained and, however it may affect equities between the mortgagee and mortgagor by reducing the debt, it does not affect the terms of the contract between the mortgagee and the insurer. The contingency having occurred against which the policy protected, it must be paid according to the status of the interest at that time, regardless of the effect of subsequent events on that status ( Savarese v. Ohio Farmers Ins. Co., 260 N.Y. 45, 53, supra). That the security remains sufficient to satisfy the debt "is not by the contract made of any importance; in either case it is insured against and the amount of it is to be paid" ( Kernochan v. New York Bowery Fire Ins. Co., supra, p. 435; Savarese v. Ohio Farmers Ins. Co., 260 N.Y. 45, 53, supra; Excelsior Fire Ins. Co. v. Royal Ins. Co., 55 N.Y. 343).
Nor do I agree with the defendant's efforts to limit our decision in Eddy v. London Assur. Corp. ( 143 N.Y. 311, supra) to instances where a deficiency remains after the foreclosure sale. To so hold would be to insure, at the expense of the mortgagee, the defendant's right to pro tanto subrogation and so to ignore the condition of the policy which provides that the insurer's right to subrogation shall not impair the mortgagee's right to recover the full amount of his claim. As we held in the Eddy case that clause is to be given effect, and "the right of subrogation [is] dependent upon the fact that its exercise shall not in any manner impair the right of the mortgagee to full payment of his claim" ( Eddy v. London Assur. Corp., 143 N.Y. 311, 320, supra). Thus, if the insurer desires immediate subrogation, as it might, pursuant to the terms of the contract, its remedy is to pay the whole debt and take an assignment of the bond and mortgage. In default of such action, the mortgagee's rights to proceed and to obtain full payment cannot be impaired ( id., at p. 319).
The policy issued by the defendant contained a provision that the insurance of the mortgagee's interest should not be invalidated by any act or neglect of the mortgagor or owner of the property, nor by any foreclosure or other proceedings or notice of sale relating to the property. Consequently, the mortgagee violated no contract on his part when it commenced the proceedings to foreclose the mortgage and thus, endeavor to collect the debt. Simply speaking, it was strictly within its legal rights in so doing and the foreclosure proceedings did not affect the exercise of those rights under the policy. This was expressly provided for and agreed to by the contracting parties.
Moreover, our decision in Savarese v. Ohio Farmers Ins. Co. ( 260 N.Y. 45, supra), demonstrates, contrary to the urgings of the defendants, that there is nothing remiss in allowing recovery on the policy of insurance, although the insured has retained the full benefits of the security. We held there, that where the policy obtained by the mortgagor provides that the loss or damage, if any, shall be payable to the mortgagee "as interest may appear," that the insurer must pay to the mortgagee the loss occasioned by the fire, despite the fact that the mortgagor has had the damage fully repaired ( Savarese v. Ohio Farmers Ins. Co., 260 N.Y. 45, supra). "The time of the fire * * * established the rights of the parties, and * * * the amount of the loss payable to the mortgagee became fixed as of that time" ( id., at p. 54, emphasis added). The defendant should not profit by the diligence of plaintiff in foreclosing the mortgage by avoiding payment of a just claim.
Accordingly, the order appealed from should be modified to the extent of striking the provision thereof awarding summary judgment in favor of defendant and dismissing the complaint, and the order of Special Term, denying the same, be reinstated.
Chief Judge FULD and Judges BERGAN, JASEN and GIBSON concur with Judge BREITEL; Judge SCILEPPI dissents and votes to modify in a separate opinion in which Judge BURKE concurs.
Order affirmed.