In re Avans, No. 07-14202 (Bankr. E.D. Tenn. 6/16/2008), 07-14202.
| Decision Date | 16 June 2008 |
| Docket Number | No. 07-14202.,Adv. No. 08-1054.,07-14202. |
| Parties | In re: Ruby Kathy Avans, Chapter 13, Debtor Regions Bank Plaintiff v. Ruby Kathy Avans Defendant |
| Court | U.S. Bankruptcy Court — Eastern District of Tennessee |
This adversary proceeding is before the court on a motion for summary judgment filed by the plaintiff. The court has reviewed the motion, the supporting and responsive briefs, the statement of undisputed facts and response, and the supporting and opposing affidavits and exhibits. For the reasons stated below, the court will grant the motion.
The court finds that there is no genuine issue as to the following material facts. On or about February 4, 2002, the plaintiff made a loan to the defendant in the amount of $36,259.50. The defendant signed a promissory note and a Security Deed to secure repayment of the loan. The face of the Security Deed describes the collateral as follows:
See Exhibit "A", which is attached to this Security Deed and made a part of this Security Deed as if fully set forth herein.
. . . .
The Real Property or its address is commonly known as 35 FERGUSON ST, TRENTON, GA 30752-2100.
The legal description set forth on Exhibit "A" is the description of a mobile home lot, also owned by the defendant, which is located at 15345 Highway 11 North, Lot 9, Trenton, Georgia. At the time the loan was made, a house was located on the Ferguson Street property. The house was insured by State Farm Insurance Company and the policy named the plaintiff as a loss payee. On February 1, 2004, the defendant conveyed the Highway 11 lot to Dwayne and Norma Carroll by general warranty deed, with no exception for the plaintiff's Security Deed.
On June 6, 2002, March 26, 2003, February 20, 2004, and March 31, 2005, the defendant filed voluntary petitions for relief under chapter 13 of the Bankruptcy Code. The schedules of liabilities accompanying the first three petitions listed the plaintiff as a secured creditor holding a security interest in the Ferguson Street property.
On June 4, 2005, the house on the Ferguson Street property was destroyed by fire. On July 5, 2005, the plaintiff exercised the power of sale under the Security Deed. On August 5, 2005, State Farm issued a check for the fire loss in the amount of $65,121.07, payable jointly to the order of Select Portfolio Servicing, Inc., the plaintiff, and the defendant.
On October 3, 2007, the defendant filed a fifth chapter 13 petition. On October 16, 2007, the plaintiff filed a proof of claim, asserting an unsecured, nonpriority claim in the amount of $40,416.47.1 On January 16, 2008, Select Portfolio Servicing filed a proof of claim in the amount of $ 43,033.98 and asserted a security interest in the Ferguson Street property. On February 18, 2008, the plaintiff amended the proof of claim to change the claim from unsecured to secured, identifying the collateral as "Insurance proceeds check for house fire" valued at $65,121.07. On February 28, 2008, the defendant filed an objection to the amended proof of claim, asserting that the plaintiff's claim has been satisfied by virtue of its failure to seek confirmation of the foreclosure within 30 days as provided by Section 44-14-161 of the Official Code of Georgia Annotated.2
On April 11, 2008, the court entered an agreed order in the defendant's chapter 13 case, authorizing the standing chapter 13 trustee to endorse the insurance check, deposit the funds into his general trust account, satisfy the secured claim of Select Portfolio Servicing, and retain the remainder of the funds until further order of the court. Thereafter, the drawee bank dishonored the check as stale and State Farm issued a replacement check, also payable jointly to the plaintiff, the defendant, and Select Portfolio Servicing. On May 27, 2008, an amended agreed order was entered in the chapter 13 case, authorizing the trustee to endorse the replacement check, deposit the funds into his general trust account, satisfy the secured claim of Select Portfolio Servicing, and retain the remainder of the funds until further order of the court.3
On May 12, 2008, the plaintiff filed the complaint initiating this adversary proceeding, which seeks a declaratory judgment that it holds a perfected security interest in the proceeds of the insurance check and an order that its claim be paid from those proceeds. The defendant filed an answer to the complaint, and thereafter the plaintiff filed its motion for summary judgment.
In its motion for summary judgment, the plaintiff argues that it is entitled to have its claim satisfied from the proceeds of the insurance check because it was named as a loss payee under the insurance contract, and State Farm issued the insurance check jointly payable to the plaintiff as a loss payee, to the defendant, and to Select Portfolio Servicing as the other loss payee. The defendant contends that the plaintiff cannot satisfy its claim out of the insurance proceeds because the wrong legal description of the real estate was attached to the Security Deed thus invalidating the plaintiff's security interest in the Ferguson Street property. The defendant argues that without a valid security interest in the property, the plaintiff had no insurable interest in the property and thus the plaintiff cannot receive the insurance proceeds as a loss payee.
There may or may not be an issue as to whether the plaintiff held a valid, enforceable security interest in the Ferguson Street property: the security interest may have been valid since the Security Deed recited the property's street address; or it may have been invalid since the wrong legal description was attached. In either event, however, the plaintiff was the loss payee under the fire insurance policy. The plaintiff's rights as a loss payee are independent of the Security Deed. For example, in Rick Taylor Timber Co. v. Orix Credit Alliance, Inc. (In re Rick Taylor Timber Co.), No. 92-5038, 1993 WL 13003868 (Bankr. S.D. Ga. June 14, 1993), two creditors were asserting claims to the insurance proceeds with respect to a piece of equipment that was destroyed by fire. First National Bank of Alma held a perfected security interest in the collateral (and its proceeds) but was not named as a loss payee, and Orix Credit Alliance held an unper-fected security interest in the collateral but was named as a loss payee. The court held that Orix had a prior claim to the proceeds:
In this case Orix has an "original" interest in the insurance policy arising out of its having been named loss payee and as such, the validity of its interest is not subject to Article 9. . . .
. . . . Orix' failure to perfect its security interest is not fatal because its interest as loss payee is not governed by Article 9.
. . . . Orix obtained a contractual promise from Debtor's predecessor in interest to keep the collateral insured. Debtor assumed the obligation and kept the promise by maintaining the required insurance and naming Orix as loss payee. The insurance company issued a certificate of insurance naming Orix as loss payee on the feller buncher. I conclude that Orix, named as loss payee, has a superior claim upon the insurance proceeds.
Id., 1993 WL 13003868, at *7-*8; see Palmer v. Mitchell County Fed. Sav. & Loan Ass'n, 377 S.E.2d 4, 6 (Ga. Ct. App. 1988) (); see also CIT Group/Equip. Fin., Inc. v. Northbrook Prop. & Cas. Ins. Co., 515 S.E.2d 845, 846 (Ga. Ct. App. 1999) () (emphasis added). Thus, the plaintiff has rights in the insurance proceeds as a loss payee even if it has no such rights under the Security Deed.
The defendant asserts, however, that the plaintiff is not a loss payee on the fire insurance policy because it did not have an insurable interest in the Ferguson Street property. Section 33-24-4 of the Official Code of Georgia Annotated provides:
(a) As used in this Code section, "insurable interest" means any actual, lawful, and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage or impairment.
(b) No insurance contract on property or of any interest therein or arising therefrom shall be enforceable except for the benefit of persons having, at the time of the loss, an insurable interest in the things insured.
(c) The measure of an insurable interest in property is the extent to which the insured might be damnified by loss, injury, or impairment of such interest in such property.
The plaintiff may well have had an insurable interest in the Ferguson Street property despite the attachment of the wrong legal description to the Security Deed because the Security Deed on its face identified the collateral as being the property located at 35 Ferguson St, Trenton, GA, 30752-2100, and the parties intended that the Ferguson Street property be the collateral for the debt.4 However, the court need not determine whether or not the plaintiff had an insurable interest in the Ferguson Street property in light of the defect in the Security Deed. The purpose of the requirement of an insurable interest is to "safeguard[] the insurer against the risk that arises if one who will receive the monetary benefit from loss of the insured property (or life, as it may be) has no interest in the property not being destroyed." Woods v. Indep. Fire Ins. Co., 749 F.2d 1493, 1496 (11th Cir. 1985). Thus, a lack of an insurable interest merely renders the insurance policy "unenforceable ...
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