National Bedding & Furniture Industries, Inc. v. Clark, 5--5889

• Decision Date: 12 June 1972
• Docket Number: No. 5--5889,5--5889
• Citation: 252 Ark. 780,481 S.W.2d 690
• Court: Arkansas Supreme Court
• Parties: , 11 UCC Rep.Serv. 206 NATIONAL BEDDING & FURNITURE INDUSTRIES, INC., et al., Appellants, v. Drew M. CLARK et al., Appellees.

Page 690

481 S.W.2d 690

252 Ark. 780, 11 UCC Rep.Serv. 206

NATIONAL BEDDING & FURNITURE INDUSTRIES, INC., et al., Appellants, v. Drew M. CLARK et al., Appellees.

No. 5--5889.

Supreme Court of Arkansas.

June 12, 1972.

Rehearing Denied July 17, 1972.

C. W. Knauts, Piggott, for appellants.

Burris & Berry, Pocahontas, for appellees.

HARRIS, Chief Justice.

This litigation relates to the question whether a mortgagee or judgment creditors are entitled to the proceeds of an insurance policy taken out by the mortgagor. In August, 1967, Drew Clark and Doris Clark, appellees herein, loaned their son, B. G. Clark, the sum of $14,615.53, and in addition co-signed a promissory note in favor of the Corning Bank. Young Clark used these funds to purchase an existing furniture store business situated in Corning. In connection with the loan, Clark executed to his parents a promissory note, and a financing statement and security agreement giving to them a first and paramount security interest in the furniture store and inventory assets. Thereafter a financing statement was filed in the county of the debtor's residence and with the Arkansas Secretary of State as a matter of perfecting the Clarks' security interest. B. G. Clark operated the store until January 6, 1971, when the building and all contents were destroyed by fire. The destroyed property was covered by insurance in the sum of $25,000 which the insurance company, Maryland Casualty, interpleaded into the registry of the court. The policy contained a loss payable clause in favor of Hupp Credit Company, and this company subsequently received payment of the indebtedness due it under a court decree of July 29, 1971, and is not a party to the present litigation. Appellants, nine judgment creditors of B. G. Clark, received an assignment on January 27, 1971, from B. G. Clark to the insurance proceeds in the total amount of $6,155.22 and Maryland Casualty Company was so notified. Following the filing of the bill of interpleader by Maryland, both appellants and appellees, among others, filed pleadings contending for the balance of the money, $15,798.92. The claim of appellees is based on a provision in the mortgage (security agreement) whereby young Clark agreed as follows:

'7. The Debtor will keep the collateral insured for the benefit of the Secured Party against fire, theft, (including extended coverage), collision, and such other hazards as the Secured Party may from time to time require, in such form and in such companies as the Secured Party shall approve and, if requested, will deliver the insurance policies to the Secured Party. The Debtor appoints the Secured Party the attorney for the Debtor in obtaining, adjusting and cancelling such insurance and endorsing settlement drafts and hereby assigns to the Secured Party all sums which become payable under such insurance, including return premiums and dividends, as additional security hereunder.'

Appellants depend upon the assignment heretoforementioned. On trial, the court ordered disposition of the proceeds, and as between mortgagees and judgment creditors, held for appellees Clark, such holding being based on the fact that their security instruments were prior in time to the assignment of appellants. ¹ From the decree so entered, appellants bring this appeal.

Let it first be stated that the Uniform Commercial Code does not apply to this litigation, for under specific provisions of Ark.Stat.Ann. § 85--9--104 (Add.1961) a transfer of an interest or claim in or under any policy of insurance is excluded from the provisions of the code. The priority provisions found in chapter 9 are only applicable to conflicting security interests in collateral. While appellees did have a perfected security interest in the inventory, as collateral for the note, the appellants only had a contractual right by assignment. Since the dispute as to priority is not between conflicting security interests, Ark.Stat.Ann. § 85--9--301 et seq. (Add.1961) do not apply.

Of course as pointed out in 46 C.J.S. Insurance § 1140 p. 19, which deals with insurance proceeds, the general rule is that insurance policies are personal contracts between the insured and the insurer, and not contracts running with the property. This view was expressed by the court in Langford v. Searcy College, 73 Ark. 211, 83 S.W. 994, where we held that a purchaser of realty was not allowed to sue upon an insurance policy issued to the vendor. Accordingly, generally speaking, it may be said that insurance proceeds are payable only to the person whose interest is covered by the policy, provided he has an insurable interest at the time of making the contract and at the time of the loss. However, in 46 C.J.S. Insurance § 1147 p. 27, it is stated:

'Where the insurance is taken out by the mortgagor for the benefit of the mortgagee, or is made payable to the mortgagee as his interest may appear, in the absence of a waiver or agreement between the mortgagor and the mortgagee, the mortgagee has a prior or superior right to the proceeds of the policy, to the extent of the mortgage debt, * * *. Under a standard mortgage clause the rights of the mortgagee are not affected by any act done by insured, and, where such policy is issued in pursuance of a stipulation therefor in the mortgage, the mortgagee is entitled to the proceeds, although he was not informed of the issuance of the policy and had no knowledge thereof until after the fire.'

It is further stated under sub-section b:

'Regardless of whether or not the policy is made payable to the mortgagee, if it is procured by the mortgagor under a covenant or binding agreement to insure for the mortgagee's benefit, the proceeds recovered by the mortgagor are held in trust for the mortgagee, who is deemed to have an equitable lien on the proceeds of the insurance for the satisfaction of his mortgage.'

The above authority is cited because appellants argue that there was no loss payable clause for the benefit of the mortgagees, but only for Hupp Credit Company, and that the insurance was not obtained by the mortgagor for their benefit; that in fact, such insurance was not obtained until over three years after the execution of the mortgage. We do not agree with the argument so advanced. In the Iowa case of Winneshiek Mutual Insurance Association v. Roach, 257 Iowa 354, 132 N.W.2d 436, in an opinion by Chief Justice Garfield, the Supreme Court said:

'The rule is that a mere mortgagee has no interest in an insurance policy issued to the mortgagor upon the mortgaged property unless such interest be created by some agreement between mortgagor and mortgagee in relation thereto. In the absence of such an agreement the insurance contract is strictly personal between the insurer and its patron. As a rule, however, the mortgagee has an equitable lien on proceeds of a fire insurance policy procured by the mortgagor pursuant to an agreement to insure for the mortgagee's benefit, although the policy is not made payable to the mortgagee.'

The court added that it was immaterial whether the policy existed at the time the mortgage was executed, or was subsequently obtained.

In the Texas case of Abilene White Truck Company v. Petrey, 384 S.W.2d 211, the Court of Civil Appeals of Texas (Fort Worth) held likewise, stating:

'Under the record in this case Petrey was charged with the duty of obtaining a policy of insurance with loss payable to the Abilene White Truck Company. The latter had a prior right to the proceeds of such policy when the property covered was destroyed while the debt was unpaid even though Petrey failed to provide that the loss be payable to it. This right was not affected by Petrey's subsequent attempt to assign the proceeds of the policy (our emphasis). Thus the assignees acquired no better right than that of Petrey. The proceeds in question are subject to an equitable lien in favor of the truck company.'

Writ of error was applied for but was denied by the Supreme Court of Texas which found no reversible error.

In the Florida case of Sumlin v. Colonial Fire Underwriters, etc., 158 Fla. 95, 27 So.2d 730, the Supreme Court stated:

'This court is committed to the doctrine that if a mortgagor covenants to protect his mortgagee the latter thereby is clothed with a lien on the policy to the extent of the mortgagee's interest, whether the policy carried a loss payable clause or not.'

Appellants argue that paragraph 7 of the mortgage, heretofore quoted in full, does not call for immediate obtainal of the insurance, the agreement stating that such insurance should be obtained as the secured party 'may from time to time require' and appellants italicize this phrase. However it will be noted that this phrase only refers to 'such other (our emphasis) hazards as the Secured Party' may require and that the agreement to keep the collateral insured against fire and theft is absolute. Not only does the instrument call for fire coverage on the collateral but the provision further states that the mortgagor 'Hereby assigns to the Secured Party all sums which become payable under such insurance (our emphasis).'

It will be remembered that the assignment for the benefit of the judgment creditors, appeallants herein, was not executed until three weeks after the fire had detroyed the collateral. We agree with the learned chancellor that the claim of appellees is entitled to priority over the claim of appellants.

Affirmed.

GEORGE ROSE SMITH, BROWN, and FOGLEMAN, JJ., dissent.

FOGLEMAN, Justice.

As I understand this case, the result actually turns upon whether appellees had an equitable lien on the insurance proceeds and, if so, whether it was prior and superior to the rights of appellants. I do not think they did. They could not have had any more than an equitable lien, since they were not named in the loss payable clause. The chancery court's decree was based, at least in part, upon a finding that the insurance money represented the...