First Inv. Co. v. Allstate Ins. Co.

• Decision Date: 12 August 1994
• Citation: 917 S.W.2d 229
• Parties: FIRST INVESTMENT COMPANY, Plaintiff/Appellee, v. ALLSTATE INSURANCE COMPANY, Defendant/Appellant. .
• Court: Tennessee Court of Appeals

Page 229

917 S.W.2d 229

FIRST INVESTMENT COMPANY, Plaintiff/Appellee, v. ALLSTATE INSURANCE COMPANY, Defendant/Appellant.

Court of Appeals of Tennessee,

Middle Section, at Nashville.

.

Aug. 12, 1994.

Application for Permission to Appeal

Denied by Supreme Court

Oct. 2, 1995.

David M. Waldrop, John M. Bryant, Jr., Brewer, Krause & Brooks, Nashville, for defendant/appellant.

James D. Kay, Jr., Nashville, for plaintiff/appellee.

OPINION

KOCH, Judge.

This appeal involves a mortgagee's efforts to recover against its mortgagors' insurance policy after a fire damaged the mortgaged property. The mortgagee bid in the property at foreclosure and then sued the mortgagor's insurer in the Chancery Court for Davidson County after the insurer refused to pay its claim. The trial court granted the mortgagee's motion for summary judgment and awarded it $27,119. The insurer has appealed. We reverse the summary judgment because the mortgagee had no insurable interest under the mortgagor's insurance policy after it purchased the property at the foreclosure sale for the remaining amount of the mortgage.

I.

Chester and Mary Powers purchased a duplex on Gina Brook Drive in Hermitage. They financed the purchase with a mortgage loan from First Investment Company ("First Investment") that was insured by the United States Department of Housing and Urban Development ("HUD"). Since they planned to rent out the duplex, Mr. and Mrs. Powers obtained a landlord's package policy from Allstate Insurance Company ("Allstate"). Allstate's policy named First Investment as a loss payee, and therefore, in the event of a covered loss, First Investment was entitled to insurance proceeds up to the amount of the underlying mortgage debt.

Fire partially destroyed the property on December 16, 1990. First Investment estimated the damages to be $30,855, but Allstate's damage estimate was approximately $5,000 lower. The Powers defaulted on their loan, and First Investment foreclosed on the property in September 1991, even though its insurance claim remained unresolved. First Investment purchased the property at the foreclosure sale for $57,794--the full amount of the remaining debt and other HUD-approved charges. It notified Allstate not only of the foreclosure proceedings but also of its purchase of the property at the foreclosure sale.

In November 1991, Allstate offered to pay First Investment $25,922 to resolve the insurance claim. Allstate later withdrew its offer and in March 1992 denied First Investment's claim on the ground that First Investment no longer had an insurable interest in the property following the foreclosure sale. First Investment filed suit against Allstate, and both parties sought a summary judgment because they agreed on all the material facts. Even though the trial court recognized that mortgagees lose their status as loss payees after a foreclosure extinguishes the mortgage indebtedness, it determined that the general rule was inapplicable in this case because HUD had deducted the estimated cost of repairing the damage from its mortgage insurance payment to First Investment. ¹ Accordingly, the trial court directed Allstate to pay First Investment the difference between the property's price at the foreclosure sale and the mortgage insurance payments First Investment received from HUD.

II.

Our role on an appeal from a summary judgment is to determine whether the requirements of Tenn.R.Civ.P. 56 have been met. Cowden v. Sovran Bank/Central South, 816 S.W.2d 741, 744 (Tenn.1991); Mansfield v. Colonial Freight Sys., 862 S.W.2d 527, 530 (Tenn.Ct.App.1993). Tenn.R.Civ.P. 56.03 permits summary judgments when there are no genuine material factual disputes and when the moving party is entitled to a judgment as a matter of law.

Since the parties agree on the material facts, we need only concern ourselves with whether First Investment was entitled to a judgment against Allstate as a matter of law. The trial court's resolution of this issue is not entitled to a presumption of correctness because it involves only a question of law, not a question of fact. Cowden v. Sovran Bank/Central South, 816 S.W.2d at 744; Gonzales v. Alman Constr. Co., 857 S.W.2d 42, 44 (Tenn.Ct.App.1993); Winn v. Tucker Corp., 848 S.W.2d 64, 67 (Tenn.Ct.App.1992).

III.

A mortgagee has an insurable interest in the mortgaged property. Philadelphia Fire & Marine Ins. Co. v. Fields, 13 Tenn.App. 485, 491 (1931); National Liberty Ins. Co. v. Rogers, 2 Tenn.App. 253, 257 (1926). Its rights under an insurance policy are generally fixed at the time of the loss and are based on the amount of the mortgage. National Union Fire Ins. Co. v. Davis, 54 Tenn.App. 255, 260-61, 389 S.W.2d 941, 943-44 (1965). The mortgagee's rights may, however, be extinguished if the mortgage debt has been extinguished at the foreclosure sale. National Union Fire Ins. Co. v. Davis, 54 Tenn.App. at 260-61, 389 S.W.2d at 943-44.

The rule recognized in National Union Fire Ins. Co. v. Davis is in accord with the majority rule that a mortgagee may recover as a loss payee under an insurance policy covering the mortgaged property only to the extent that it remains a creditor following the foreclosure sale. Calvert Fire Ins. Co. v. Environs Dev. Corp., 601 F.2d 851, 856 (5th Cir.1979) (applying Georgia law); Nationwide Mut. Fire Ins. Co. v. Wilborn, 291 Ala. 193, 279 So.2d 460, 463-64 (1973); Imperial Mortgage Corp. v. Travelers Indem. Co., 43 Colo.App. 74, 599 P.2d 276, 278 (1979); Burritt Mut. Sav. Bank v. Transamerica Ins. Co., 180 Conn. 71, 428 A.2d 333, 338 (1980); Partel, Inc. v. Harris Trust & Sav. Bank, 106 Ill.App.3d 962, 63 Ill.Dec. 303, 305-06, 437 N.E.2d 1225, 1227-28 (1982); and Smith v. General Mortgage Corp., 402 Mich. 125, 261 N.W.2d 710, 712 (1978).

Foreclosure proceedings extinguish the mortgage debt when the proceeds of the foreclosure sale equal or exceed the debt and related costs. Accordingly, a mortgagee who bids in the full amount of the debt at the foreclosure sale accepts the property itself in full payment of the underlying debt, while a mortgagee who bids in less than the full amount of the debt retains its status as a creditor with regard to the deficiency. Farmers & Merchants Sav. Bank v. Farm Bureau Mut. Ins. Co., 405 N.W.2d 834, 837 (Iowa 1987); Whitestone Sav. & Loan Ass'n v. Allstate Ins. Co., 28 N.Y.2d 332, 321 N.Y.S.2d 862, 864-65, 270 N.E.2d 694, 696 (1971).

Property should bring its fair market value at foreclosure sales. Mortgagees who bid in the property for the full amount of the debt must have determined that the property was worth at least as much as the debt since reasonably prudent lenders would not purchase property for more than its fair market value and would not imprudently relinquish their right to pursue a deficiency against the mortgagor. Allowing mortgagees who purchase property for the full amount of the debt to assert that the property is actually worth less than their bid undermines the integrity of the foreclosure sale itself and creates the possibility of fraud or of a double recovery when the mortgagee seeks the proceeds of any insurance on the property. Whitestone Sav. & Loan Ass'n v. Allstate Ins. Co., 321 N.Y.S.2d at 865-67, 270 N.E.2d at 697.

First Investment does not challenge the validity of the rule that the complete...