Hampton v. Gulf Federal Sav. & Loan Ass'n

• Decision Date: 24 June 1971
• Docket Number: 4 Div. 339
• Citation: 287 Ala. 172,249 So.2d 829
• Parties: James B. HAMPTON et al. v. GULF FEDERAL SAVINGS & LOAN ASSOCIATION.
• Court: Alabama Supreme Court

Page 829

249 So.2d 829

287 Ala. 172

James B. HAMPTON et al. v. GULF FEDERAL SAVINGS & LOAN ASSOCIATION.

4 Div. 339.

Supreme Court of Alabama.

June 24, 1971.

Powell & Sikes, Andalusia, for appellants James B. Hampton and Martha Posey Hampton.

W. H. Baldwith, Andalusia, for appellant Elva M. Posey.

James M. Prestwood, Andalusia and Barrow & Holley, Crestview, Fla., for appellee.

PER CURIAM.

This is an appeal from a decree of the Circuit Court of Covington County, in Equity, foreclosing a mortgage executed by James B. Hampton and wife to Gulf Federal Savings & Loan Association (hereinafter called Gulf Federal).

The suit was filed by Gulf Federal against the Hamptons but against Mrs. Elva M. Posey, who held a second mortgage on the mortgaged property.

As between Gulf Federal and the Hamptons, there was one principal issue. The mortgaged property consisted of a lot and a two-story hotel building situated thereon. The building burned after foreclosure proceedings had been instituted. The Hamptons took the position that the building was not insured in the proper amount at the time it burned as a result of the failure or negligence of Gulf Federal, the mortgagee, to keep the building adequately insured.

The trial court found that Gulf Federal '* * * was not under any duty to keep insurance in full force and effect as to protect the interest of the mortgagors * * *' The trial court's decree was in accordance with that finding.

The Hamptons have appealed and argue their assignment of error that 'the Trial Court erred in relieving the appellee, Gulf Federal Savings & Loan Association, of its negligence in failing to properly insure the property covered by its mortgage.'

The evidence shows that on July 27, 1963, James Hampton and wife executed a note to Gulf Federal in the amount of $20,000 and gave a mortgage to Gulf Federal on the property to which we have referred above as security for the loan. The property described in the mortgage executed by the Hamptons to Gulf Federal was not at the time of the execution of the mortgage owned by the Hamptons. That property was not conveyed to the Hamptons until August 16, 1963, on which date James F. and Elva M. Posey conveyed the property to the Hamptons. At that time the Hamptons executed a note to the Poseys in the sum of $10,000, secured by a purchase-money mortgage.

On June 14, 1965, the Hamptons executed another note to Gulf Federal, which note was in the sum of $3,500, and the debt evidenced by that note was purported to be secured by the mortgage of July 27, 1963, under the future advance clause of the last-mentioned mortgage. The note in the amount of $3,500 contained language to the effect that it was secured by the mortgage of July 27, 1963, and was made subject to the terms and conditions thereof.

The mortgage of July 27, 1963, to which we will sometimes hereinafter refer as the Gulf Federal mortgage, provided that in the event of loss the insurance proceeds were to be paid directly to the mortgagee. The mortgage obligated the mortgagors, the Hamptons, to maintain insurance under the following clause:

'3. To continuously maintain hazard insurance, of such type or types and Amounts as Mortgagee may from time to time require, on the improvements now or hereafter on said premises, and Except when payment for all such premiums has heretofore been made under paragraph 2 hereof to pay promptly when due any premiums therefor. All insurance shall be carried in companies approved by Mortgagee * * *. Failure of the mortgagors to effect said insurance, or to pay the premiums therefor, * * * shall give the mortgagee the right and option to declare the entire principal balance, * * * due and payable with the further option of immediately foreclosing the mortgage for the nonpayment thereof.' (Emphasis supplied)

Under paragraph two of the mortgage, the mortgagors were required to make certain payments to the mortgagee as follows:

'(a) A sum equal to the ground rents, if any, next due, plus the Premiums that will next become due and payable on policies of fire and other hazard insurance Required to cover the mortgaged property, * * * such sums to be held by Mortgagee In escrow to pay said ground rents, Premiums, taxes, and special assessments.' (Emphasis supplied)

The Hamptons originally handled the matter of hazard insurance on the hotel in compliance with the mortgage. They selected as their insurance agent Wallace Smith, who did general insurance business in Florala under the name of Smith Insurance Agency. The insurance coverage was originally for $25,000, for which a premium of $300 was charged. The premium increased over a period of time and the Hamptons went to another insurance agency, but the company with which this other insurance agency obtained coverage cancelled the policy.

In October, 1965, by mutual authorization from Gulf Federal and the Hamptons, the Smith Insurance Agency again insured the property but the coverage was for only $20,000. The $20,000 coverage was divided into two policies with two different companies, in the amount of $10,000 each. One company cancelled its policy in December, 1965, and Smith Insurance Agency obtained a replacement company for this coverage.

The Hamptons were in bad financial condition and over a period of the life of the loan, more than thirty checks from the Hamptons were returned by a bank for insufficient funds. The hotel business proved to be a bad financial investment and the Hamptons fell further and further behind in regard to their obligations to Gulf Federal under their notes and the mortgage.

In the summer of 1966, the Hamptons stated that they were ready to give up and wanted Gulf Federal to take over and operate the hotel. Gulf Federal told them that it did not want to operate the hotel and didn't want the property, but wanted to help them some way or another to save the property.

On August 30, 1966, foreclosure proceedings were instituted. Immediately thereafter, the Hamptons were served with notice of foreclosure proceedings. Without notifying Gulf Federal, the Hamptons closed the hotel down and left Alabama on September 15, 1966.

Mr. Wallace Smith, the insurance agent, notified Gulf Federal that the property was vacant and if it remained vacant for sixty days the insurance would not be valid. A Gulf Federal witness stated that it looked for the Hamptons and asked about their whereabouts in many places without success. The witness also stated that Gulf Federal had many inquiries concerning where the Hamptons could be found. Gulf Federal arranged to have the water and lights reconnected and to have a policeman live in the building to prevent the insurance from becoming invalid because of the sixty-day unoccupied clause of the policy.

Mrs. Hampton testified that they left for North Carolina on September 16, 1966, without notifying Gulf Federal and she did not know at that time whether they would ever return to Florala. She also testified that at that time she knew that if the property was unoccupied for sixty days the policy would be null and void, but stated that she thought Gulf Federal would take over the hotel in two weeks from the date of their departure.

Insurance agent Smith notified his companies about the status of this property and the circumstances of the Hamptons. In October, 1966, when the renewal came upon these policies, the proposed premiums for $20,000 coverage were $1,050 a year. At that time there was only $475 in the escrow account of the Hamptons with Gulf Federal. Gulf Federal decided to reduce the insurance coverage down to $10,000, paying $525 premium for such coverage.

Gulf Federal did not notify the Hamptons of the reduction in the insurance to $10,000 in writing or otherwise, contending that it did not know their whereabouts. The hotel building burned on October 27, 1966. Following the fire, Gulf Federal received a letter from Mr. Hampton, dated October 20, 1966, from Raleigh, North Carolina, in which Mr. Hampton admitted that they had acted very badly in leaving so suddenly and without notice. Mr. Hampton, in effect, apologized for not have written sooner, but stated that they had been trying to find jobs and a place to live. The real purpose of the letter was to inquire about who bought the place at the foreclosure sale.

Insurance agent Smith testified, in substance, that the facts that the Hamptons had been delinquent in their mortgage payments; that the property had been vacated; and that the property was of a class known as a 'White Elephant,' caused the risk to accelerate to the point of almost making insurance prohibitive.

Gulf Federal received $9,900 of the insurance proceeds which it credited to the outstanding loan balance of $21,373.15. The trial court determined that the remaining unpaid balance with interest and late charges was $14,901.43 at the time of the trial. The trial court also awarded the amount of $2,500 as a reasonable attorneys' fee to Gulf Federal's counsel.

Appellants contend Gulf Federal should be charged with the $10,000 reduction of insurance and that the mortgage indebtedness owed by the Hamptons should be reduced by such amount. In support of their position, the appellants cite Wade v. Robinson, 216 Ala. 383, 113 So. 246, for the principle that a mortgagee who assumes the duty of handling insurance on mortgaged property must act in good faith and must use reasonable care. In that case, the vendor under a contract to sell real property, who had the option of handling insurance matters, exercised said option and took out fire insurance on the property being sold to the vendee, but failed to adequately describe the interest of the parties, thereby rendering the policy uncollectible. The vendor was held liable. For the same principle, the appellant also cites Boyce v. Union Dime Permanent Loan Association, 218 Pa. 494, 67 A. 766, and Warrener v. Federal Land Bank, 266 Ky. 668, 99 S.W.2d 817.

In the Boyce case, Supra, originally the...