89 Hawai'i 157, Federal Home Loan Mortg. Corp. v. Transamerica Ins. Co.

• Decision Date: 30 December 1998
• Docket Number: No. 20691,20691
• Parties: 89 Hawai'i 157 FEDERAL HOME LOAN MORTGAGE CORPORATION; and Source One Mortgage Services Corporation, Plaintiffs-Appellants, v. TRANSAMERICA INSURANCE CO.; Tig Insurance Co., Associates Financial Services Co. of Hawaii, Inc.; Lydia R. Swenson; Deanna Eihua Kupihea; Defendants-Appellees, and John Does 1-10; Jane Does 1-10; Doe Partnerships 1-10; Doe Corporations 1-10; and Doe Entities 1-10, Defendants.
• Court: Hawaii Supreme Court

Page 1275

969 P.2d 1275

89 Hawai'i 157

FEDERAL HOME LOAN MORTGAGE CORPORATION; and Source One Mortgage Services Corporation, Plaintiffs-Appellants, v. TRANSAMERICA INSURANCE CO.; Tig Insurance Co., Associates Financial Services Co. of Hawaii, Inc.; Lydia R. Swenson Deanna Eihua Kupihea; Defendants-Appellees, and John Does 1-10; Jane Does 1-10; Doe Partnerships 1-10; Doe Corporations 1-10; and Doe Entities 1-10, Defendants.

No. 20691.

Supreme Court of Hawai'i.

Dec. 30, 1998.

Peter W. Olson and Maria B. Mazzeo (of Cades Schutte Fleming & Wright) on the briefs, for plaintiffs-appellants Federal Home Loan Mortgage Services Corporation and Source One Mortgage Services Corporation.

Randall Y. Yamamoto, James Kawashima, George B. Apter, and Brian A. Kang (of Watanabe Ing & Kawashima) on the briefs, for defendants-appellees Transamerica Insurance Co. and TIG Insurance Co.

Kevin W. Herring (of Shigemura & Harakal) on the briefs, for defendant-appellee Associates Financial Services Co. of Hawai'i, Inc.

Leonard R. Gouveia, Jr., Wayne S. Sakamoto, J. Patrick Gallagher, Joelle Segawa Kane, and Lili A. Young (of Gallagher and Sakamoto) on the briefs, for defendants-appellees Deanna Leihua Kupihea and Lydia R. Swenson.

MOON, C.J., and KLEIN, LEVINSON, NAKAYAMA and RAMIL, JJ.

LEVINSON, J.

The plaintiffs-appellants Federal Home Loan Mortgage Corporation and Source One Mortgage Services Corporation (collectively, FHLMC) appeal from (1) the order denying their motion for partial summary judgment and granting the cross-motion of the defendants-appellees Transamerica Insurance Company and TIG Insurance Company (collectively, Transamerica) for summary judgment, (2) the order denying FHLMC's motion for leave to file first amended complaint, and (3) the judgment entered in favor of Transamerica, the defendant-appellee Associates Financial Services of Hawaii, Inc. (Associates), and the defendants-appellees Lydia R. Swenson and Deanna Leihua Kupihea and against FHLMC. On appeal, FHLMC contends that the circuit court committed reversible error when it: (1) failed to conclude that Transamerica was obligated to pay FHLMC for the full mortgage debt that FHLMC alleged was owed by Swenson and Kupihea at the time of the destruction of the dwelling securing Swenson and Kupihea's mortgage with FHLMC; (2) concluded that (a) the foreclosure sale of the property to FHLMC, which occurred before the destruction of the dwelling, extinguished a portion of Swenson and Kupihea's debt, thereby reducing FHLMC's insurable interest in the property, (b) "[b]y proceeding to obtain the order confirming the sale, FHLMC sought to satisfy or extinguish the mortgage debt to the extent of the amount bid at the sale," (c) FHLMC should have attempted "to rescind its bid or otherwise delay confirmation of the sale based on the fire damage to the property," and (d) Transamerica did not breach its insurance contract by paying FHLMC only the amount of Swenson and Kupihea's debt that was not extinguished by the proceeds of the foreclosure sale; (3) failed to apply the doctrine of equitable estoppel; and (4) denied FHLMC's motion to amend its claims for equitable reformation and equitable estoppel. FHLMC's points of error on appeal are without merit. Accordingly, we affirm the orders and judgment of the circuit court from which the present appeal is taken.

I. BACKGROUND

On July 29, 1989, Swenson and Kupihea executed a purchase money mortgage note in favor of Imco Realty Services, Inc., in the amount of $210,000.00. The note was secured by a first mortgage on the property located at 59-052 Kupaoa Place, in Hale'iwa (the property). On March 15, 1991, Imco assigned the note and mortgage to FHLMC. On August 26, 1993, after Swenson and Kupihea defaulted on the note, FHLMC filed a complaint in the first circuit court to foreclose on the note and mortgage. On May 13, 1994, a decree of foreclosure was entered. The foreclosure order appointed Dale Ho as commissioner and provided that Ho "shall henceforth hold all equitable and legal title to said property, and is hereby authorized ... to sell the property on foreclosure sale to the highest bidder at public commissioner's sale by auction." The order also provided that "Lydia R. Swenson and Deanna Leihua Kupihea and all persons claiming by, through or under them are hereby perpetually barred of and from any and all right, title and interest in the said mortgaged property or any part thereof." On June 24, 1994, FHLMC purchased the property at a public auction for $247,530.49. FHLMC took the property subject to a lien in the amount, inter alia, of Associates' second mortgage on the property, the interest owing thereon, and Associates' attorney's fees in the foreclosure action. FHLMC moved to confirm the sale. At a hearing held on July 21, 1994, the motion to confirm was orally granted.

At some point during the foreclosure proceedings, Ho entered into a rental agreement for the property with Bernice Wintermantel, who, in turn, was subletting it to other people. On August 9, 1994, Michael Kersey, one of Wintermantel's tenants, is believed to have set the house on fire following an argument with Wintermantel. On August 24, 1994, FHLMC's mortgage servicing agent deemed the structure a total loss.

Swenson and Kupihea had purchased a homeowner's insurance policy covering the property from Transamerica, which named FHLMC as the first mortgage holder and Associates as the second mortgage holder. The policy insured the dwelling for $233,000.00 and included a "Mortgage Clause," which provided that "[i]f a mortgagee is named in this policy, any loss payable under coverage A or B will be paid to the mortgagee and you, as interests appear. If more than one mortgage is named, the order of payment will be the same as the order or precedence of the mortgages." Additionally, a "LENDER'S LOSS PAYABLE CLAUSE" provided in pertinent part:

If so indicated in the Declarations and in consideration of the premium at which this policy is written, this policy is amended as follows:

1. Loss or damage, if any, under this policy, shall be paid to the Payee named on the Declarations, its successors and assigns, hereinafter referred to as "the Lender" in whatever form or capacity its interests may appear and whether said interest be vested in said Lender in its individual or in its disclosed or undisclosed fiduciary or representative capacity, or otherwise vested in a nominee or trustee of said Lender.

2. The insurance under this policy, or any rider or endorsement attached thereto, as to the interest only of the Lender, its successors and assigns, shall not be invalidated nor suspended:

a. by an error, omission, or change respecting the ownership, description, possession, or location of the subject of the insurance or the interest therein, or the title thereto;

b. by the commencement of foreclosure proceedings or the giving of notice of sale of any of the property covered by this policy, by virtue of any mortgage or trust deed[.]

Accordingly, on or about August 24, 1994, FHLMC made a fire loss claim with Transamerica. Notwithstanding the fire damage to the property, however, FHLMC submitted its written order confirming the sale of the property for $247,530.49 for the court's signature.. On October 11, 1994, the order of confirmation was signed and filed.

On November 8, 1994, Transamerica's counsel contacted FHLMC, stating:

Transamerica/TIG wants to proceed with resolution of the claimed fire loss. In order to do so, it needs to know if [FHLMC] intends to rebuild the damaged dwelling. Payment under the policy for a covered loss to the dwelling is on a replacement cost value basis. The insureds, or in this case, the mortgagee, has the option of being paid the actual cash value with any balance for replacement cost value coverage paid upon completion of the dwelling, provided there is written notice of a claim for replacement cost value coverage per the terms of the policy. If the dwelling is not to be rebuilt, then the insurer's obligation is to pay on an actual cash value basis only.

Transamerica made further inquiries as to FHLMC's plans for rebuilding the house on the property on January 13, 1995 and February 22, 1995. In its February 22 letter to FHLMC, Transamerica also sought to determine whether a deficiency judgment had been entered in favor of FHLMC and, if so, its amount. On or about February 22, 1995, FHLMC authorized Prudential Asset Recovery to demolish the burned house.

On March 20, 1995, a deficiency judgment was entered against Swenson and Kupihea in the amount of $13,246.85. Subsequently, pursuant to the actual cash value limit provisions of the policy, Transamerica tendered $13,246.85 to FHLMC in satisfaction of the deficiency judgment against Swenson and Kupihea (which, Transamerica asserted, represented FHLMC's remaining insurable interest), $148,045.87 to Associates in satisfaction of its second mortgage against the property, and the remaining balance of $38,324.01 to Swenson and Kupihea. The cleared property was placed on the market in July 1995 at an asking price of $199,900.00. The property eventually sold for $90,000.00, and, after payment of the expenses of the sale, FHLMC netted $79,616.65.

On December 28, 1995, FHLMC filed the instant action (1) seeking a declaratory judgment that it was entitled to full payment of the policy limits for the destruction of the dwelling on the property (Count I) and (2) alleging (a) breach of contract (Count II), (b) breach of covenant of good faith and fair dealing (Count III), and (c) unfair claim settlement practices (Count IV). On January 27, 1997, FHLMC filed a motion for partial summary judgment against Transamerica on Counts I and II. On February 21, 1997, Transamerica filed a cross-motion for summary judgment. On March 13, 1997, a stipulation for dismissal without prejudice was entered as to Count IV of the complaint.

On April 1, 1997, FHLMC moved for leave to file a...