General G.M.C. Sales, Inc. v. Passarella

• Decision Date: 29 August 1984
• Citation: 481 A.2d 307,195 N.J.Super. 614
• Parties: GENERAL G.M.C. SALES, INC., a corporation of the state of New Jersey, Plaintiff-Respondent, Cross-Appellant, v. Roger S. PASSARELLA, Claire Passarella and Russell Passarella, Defendants- Appellants, Cross-Respondents.
• Court: New Jersey Superior Court — Appellate Division

Page 614

195 N.J.Super. 614

481 A.2d 307

GENERAL G.M.C. SALES, INC., a corporation of the state of

New Jersey, Plaintiff-Respondent, Cross-Appellant, v. Roger S. PASSARELLA, Claire Passarella and Russell

Passarella, Defendants- Appellants, Cross-Respondents.

Superior Court of New Jersey

Appellate Division.

Argued Feb. 28, 1984.

Decided Aug. 29, 1984.

Robert A. Goodsell, Roseland, for defendants-appellants, cross-respondents. (Irwin, Post & Rosen, Roseland, attorneys; Robert A. Goodsell, on brief).

Andrew J. Wilson, Ocean Grove, for plaintiff-respondent, cross-appellant (Laird & Wilson, Ocean Grove, attorneys; Andrew J. Wilson, on brief).

Before Judges BOTTER, PRESSLER and O'BRIEN.

The opinion of the court was delivered by

BOTTER, P.J.A.D.

The principal issue on this appeal is whether plaintiff, a mortgagee, is entitled to have the balance of its mortgage debt paid in full out of fire insurance proceeds or whether the defendants, property owners, have the right to use the insurance proceeds to rebuild buildings which were substantially destroyed by fire, thus preserving the mortgage security. The trial judge ordered that a portion of the fund in dispute, $145,000, be used to reduce the mortgage debt to $50,000, which he found to be the value of the land, on the theory that the land would continue to serve as security for that amount of debt, and the balance of the fund was awarded to defendants. Defendants appealed from this judgment, and plaintiff cross-appealed. We now reverse, holding that plaintiff was entitled to proceeds from the fund sufficient to pay the entire remaining mortgage debt.

Plaintiff sold the property in question to defendants in September 1979 for $180,000, taking back a fifteen year purchase money mortgage for $145,000 bearing interest at 10 percent. The property is located at 1110 Main Street in Bradley Beach and is designated on the tax map as lots 24 through 28 in Block 7. There were two attached buildings on the property. The front building on lot 24 measured approximately 50 feet by 90 feet and was built in the early 1930's. It consisted primarily of a showroom, with an office and other space on the first floor and two apartments on the second floor. Attached to the rear of the first building was a second building approximately 90 feet by 145 feet, and 18 feet in height, which was constructed in 1949. It had been used for storing and servicing trucks. It had a thick concrete floor and a high roof supported by steel trusses. Lots 27 [481 A.2d 309] and 28, immediately behind this building, were used for parking vehicles. Lots 25 through 28 were placed in a residential zone, making the garage building a nonconforming use.

The fire occurred on November 23, 1980. The front building was completely destroyed. Three walls of the rear building remained, but there was testimony that there were cracks in the walls and several of the roof trusses were bent or warped. A real estate expert called by plaintiff assigned no value to the remaining portions of that building and valued the lots at $48,000 in the aggregate. A real estate expert called by defendants valued the front lot at $16,400 and valued lots 25 through 28 with the remaining portions of the damaged building at $177,000, making an aggregate value of $193,400. In his opinion, the non-residential use could be continued because he felt that less than one-half of the garage building had been destroyed.

Defendants operated a limousine service. After purchasing the property, repairs and renovations were made at a cost of $132,000 according to the testimony of one of the defendants. They operated the business out of this location from early 1980 until the time of the fire. The property was insured for $465,000. After the fire the damage claim was settled for $390,000. Of this amount, $145,000 was paid by the insurance company to plaintiff and defendants jointly because of their conflicting claims and interests under the policy. This sum was placed in a joint interest-bearing account pending the outcome of this litigation. Plaintiff commenced this action to claim its share as mortgagee, and defendants counterclaimed seeking an order that would permit the use of the proceeds in rebuilding the remaining damaged structure. Defendants continued to pay plaintiff the monthly mortgage installments of principal and interest in the sum of $1,558.28. The balance due on the mortgage at the time of the fire was approximately $140,000.

In his oral opinion, the trial judge found that the fire substantially destroyed the buildings and greatly impaired the mortgagee's security. He rejected the value attributed by defendants' expert to the damaged structure that remained. However, he stated that the mortgagee was simply entitled to security for its mortgage debt and was not entitled to acceleration in payment of the full balance of its 15 year mortgage. In the trial judge's view, this was not a result which the parties "intended." He found that the mortgagee was entitled to security "now" and ought not be forced to become "a partner" in the construction process and disbursement of funds for restoring the property. Thus, he concluded that only the land should serve as security for a portion of the mortgage debt. Defendants' expert valued the land alone at $60,000. Choosing conservatively between the opinions of both experts, the trial judge found its value to be $50,000. He then ordered part of the retained proceeds to be used to reduce the balance of the mortgage loan to $50,000, with the mortgage continuing "as before." ¹

The mortgage note required the owners to keep the buildings insured "for the benefit of" plaintiff against damage or loss by fire or other hazards in amounts approved by plaintiff and to deliver the insurance policy to plaintiff. It also required the owners to keep the buildings and other structures in good repair and to make such repairs as required by plaintiff within 30 days of written notice. It provided for acceleration of the full obligation for default of these conditions. The mortgage provided that the mortgagors' failure to keep the buildings and improvements in good repair would constitute a default. It also called for insurance coverage and an assignment of the policy and certificates to the mortgagee. The insurance policy provided for payment of the "loss" on the building items to plaintiff as mortgagee to the extent of its interest. In the course of the sale of the property the parties did not discuss how the insurance proceeds would be applied in case the buildings were damaged or destroyed. Nor was there any discussion concerning defendants' reconstruction rights in that event.

N.J.S.A. 17:36-5.20 prescribes certain standard provisions that must be included in a fire insurance policy issued in this state. Certain terms relate to a policy which makes the "loss ... payable, in whole or in part, to a designated mortgagee." The terms relate to cancellation of such a policy and to the right of the mortgagee to file a proof of loss. If the insurer denies liability to the mortgagor or owner, "it shall, to the extent of payment of loss to the mortgagee, be subrogated to all the mortgagee's rights of recovery ... or it may pay off the mortgage debt and require an assignment thereof and of the mortgage. Other provisions relating to the interests and obligations of such mortgagee may be added hereto by agreement in writing."

Facially these provisions appear to contemplate that, unless otherwise provided, fire insurance proceeds will be paid to a mortgagee as his interest may appear. The parties made no contrary agreement. The provision in the mortgage note that the insurance shall be for the "benefit" of the mortgagee is consistent with the right of the mortgagee to receive the insurance proceeds to the extent of the balance due on the mortgage debt in the event a fire loss impairs the mortgagee's security. On the other hand, defendants contend that they should be able to use the fund in dispute in reconstructing the property. This would continue the mortgagee's security and would allow the mortgage to run its full term in accordance with the parties' bargain and expectations. A different result would encourage a mortgagee to commit arson, defendants say, in order to have the mortgage paid off early. But we need not speculate about motives for arson, since anyone who commits arson runs the risk of criminal prosecution and the loss of insurance coverage. One could argue that an owner would have a greater motive to commit arson if the insurance proceeds are given to him for use in rebuilding an old building rather than to the mortgagee in payment of the mortgage debt.

It has long been the rule in New Jersey that the standard mortgagee clause "is an independent agreement between the insurer and the mortgagee." 495 Corp. v. N.J. Ins. Underwriting Ass'n, 86 N.J. 159, 163, 430 A.2d 203 (1981). See also Reed v. Firemen's Ins. Co., 81 N.J.L. 523, 526, 80 A. 462 (E. & A. 1910) (holding that an insurer's defenses against the mortgagor could not be asserted against the mortgagee); Luparelli v. United States Fire Ins. Co., 117 N.J.L. 342, 344-345, 188 A. 451 (Sup.Ct.1936), aff'd on opinion below, 118 N.J.L. 565, 194 A. 185 (E. & A. 1937) (holding that the insurer was entitled to credit against the owner's claim in the amount paid to the mortgagee); Martin v. Franklin Fire Ins. Co., 38 N.J.L. 140, 142 (Sup.Ct.1875) (referring to the clause in a policy making the loss payable to a mortgagee "a direction in advance as to the mode of payment" assented to by the insured). An insured's interest in property is fixed at the time of the loss. 495 Corp., supra, 86 N.J. at 163, 430 A.2d 203; P.R. DeBellis v. Lumbermen's Mut. Casualty Co., 77 N.J. 428, 435, 390 A.2d 1171 (1978); Wolf v. Home Ins. Co., 100 N.J.Super. 27, 241 A.2d 28 (Law Div.), aff'd on opinion below 103 N.J.Super. 357, 247 A.2d 345 (App.Div.1968). If we looked only to...