by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
MORTGAGES; FORECLOSURE; INSURANCE: A second mortgagee who bids the full amount of his secured debt at a foreclosure sale retains an insurable interest in the property, and thus is entitled to proceeds from a fire insurance policy covering the subject property.
Wilson v. Glancy, 913 P.2d 286 (Okla. 1995).
After commencement of a foreclosure proceeding on a second mortgage, the property suffered insured fire damage of approximately $43,000. The mortgagor attempted to stop the foreclosure sale, arguing that the insurance proceeds would be sufficient to pay both the first and second mortgages. The second mortgagee successfully resisted this argument, and proceeded to foreclosure, bidding its entire debt.
Later, the mortgagor argued that the mortgagor, and not the mortgagee, was entitled to insurance proceeds in excess of the amount necessary to pay the first mortgagee.
At trial, the court directed the carrier to pay the mortgagee the amount of his bid, approximately $10,000, and to remit the balance to the owner. The lender appealed, contending that the relevant policy terms amounted to a "standard" or "union" mortgage clause, which amounted to a contract between the carrier and the mortgagee, entitling the mortgagee to all proceeds from the policy as a direct beneficiary. The Supreme Court agreed, distinguishing the policy's mortgage clause from a "loss payable" clause, in which the mortgagee's interest in the proceeds is treated as security for his debt, and which ceases when the debt is extinguished. If the policy contained a loss payable clause, the trial court would have been correct, because the act of purchasing the property at a sheriff's sale would have extinguished the debt. The Supreme Court additionally held that the owner had no right to any of the proceeds because the redemption period had expired and the foreclosure bid confirmed.
Comment: This case is a complete mystery to the editor. The principle cases the court cites deal with situations in which the foreclosure sale occurred prior to the damage. In such cases, indeed, the mortgagee under a "union" mortgage clause would be entitled to continued coverage by insurance for which premiums have already been paid.
But here the mortgagee bid at the sale after the damage had been incurred. To hold that it could bid in its debt and also obtain insurance proceeds gives it an impossible advantage over all other bidders, placing the validity of the sale into question. No other foreclosure sale purchaser would have the benefit of insurance proceeds relating to pre-existing damage. Why should the mortgagee?
When a mortgagee bids in its debt, its entire interest has been satisfied. The purpose of the insurance of its interest is realized. There is no point in recognizing any further insurable interest in the mortgagee. The situation might be different where parties bidding at the sale were unaware of the damage to the property. That manifestly was not the case here.
For a better articulation of the principles, on facts not precisely like those here, see Chrysler First Financial. Serv. Corp. v. Bolling, 608 So. 2d 734, 737 (Ala. 1992). Also, see Section III of the editor's draft article: Issues Concerning Mortgagee's Casualty Insurance Interests, which is posted on the DIRT website. http://cctr.umkc.edu/www/w3/dept/dirt
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