Smith v. General Mortg. Corp.

• Citation: 402 Mich. 125,261 N.W.2d 710
• Decision Date: 23 January 1978
• Docket Number: No. 59699,59699
• Parties: Charles SMITH and Peggy Smith, Jointly and Severally, Plaintiffs-Appellants, v. GENERAL MORTGAGE CORPORATION, a Michigan Corporation, a mortgage service agent, and Federal National Mortgage Association, a Federal Corporation, Defendants- Appellees. 402 Mich. 125, 261 N.W.2d 710
• Court: Supreme Court of Michigan

Page 710

261 N.W.2d 710

Charles SMITH and Peggy Smith, Jointly and Severally, Plaintiffs-Appellants, v. GENERAL MORTGAGE CORPORATION, a Michigan Corporation, a

mortgage service agent, and Federal National

Mortgage Association, a Federal

Corporation,

Defendants-

Appellees.

No. 59699.

402 Mich. 125, 261 N.W.2d 710

Supreme Court of Michigan.

Jan. 23, 1978

Rosenbaum, Bloom, Kaufman, Appell & Moses, P. C., Detroit, for plaintiffs-appellants.

Frank P. Neaton, Detroit, for defendants-appellees.

PER CURIAM.

The question raised by the plaintiffs' application for leave to appeal is who, as between the mortgagor and mortgagee, is entitled to fire insurance proceeds when the fire occurred before the mortgage foreclosure at which the mortgagee bid in the property for the balance remaining due on the mortgage.

The mortgage was executed on January 4, 1969. Plaintiffs Charles Smith and Peggy Smith were the mortgagors. Defendant General Mortgage Corporation was the named mortgagee and servicing agent for defendant Federal National Mortgage Association [FNMA]. The mortgagee's interest was assigned by General Mortgage to FNMA. A clause in the mortgage created an insurable interest in the mortgagee. Plaintiff mortgagors were to pay for casualty insurance but payment in the event of loss was to be sent to the mortgagee to be applied to reduce the mortgage debt or to repair the property. The property was insured for $18,000.

On October 17, 1974, the mortgaged house was totally destroyed by fire. The balance due on the mortgage was approximately $13,000. The plaintiffs were in default on their mortgage payments and defendant General Mortgage began foreclosure proceedings on December 1, 1974. At a foreclosure sale held on January 7, 1975, defendant FNMA bid in the property for $13,961, the amount of the outstanding debt plus foreclosure costs and attorney fees.

The insurance company sent a check for $18,000 to defendant General Mortgage six months after the foreclosure sale. The payees named on the check were General Mortgage and plaintiffs Charles Smith and Peggy Smith. No agreement was reached by the payees on the allocation of the insurance proceeds. The plaintiffs brought an equity action to compel defendant General Mortgage to endorse the check or to obtain equitable relief preventing an unjust enrichment of the defendants. The plaintiffs argued that they were entitled to the insurance proceeds because the mortgage debt was extinguished when FNMA bid in the amount of the debt at the foreclosure sale. The defendants argued that since the property was almost worthless, they were entitled to the amount of the debt plus costs and attorney fees. The trial judge granted the defendants' motion for summary judgment and awarded approximately $14,000 of the insurance proceeds to the defendants and the remaining $4,000 to the plaintiffs.

The trial judge relied on Federal National Mortgage Ass'n v. Ohio Casualty Ins. Co., 46 Mich.App. 587, 208 N.W.2d 573 (1973), in granting summary judgment for the defendants. There, the fire occurred after the foreclosure sale. A clause in the mortgage stated that the mortgagee's rights in the insurance were not to be invalidated by any foreclosure or change in title. In such a case, the mortgagee's interest is covered by the policy at least until the mortgagor's equity of redemption expires. Consolidated Mortgage Corp. v. American Security Ins. Co., 69 Mich.App. 251, 244 N.W.2d 434 (1976).

Here, the loss occurred before the mortgage sale. Although the mortgagee was entitled to the insurance proceeds to reduce the debt or repair the property, it instead purchased the property at the foreclosure sale. After a review of cases from other jurisdictions, the Court of Appeals concluded that mortgagees in the defendants' position were not entitled to the insurance proceeds but declined to apply the rule to this case. 73 Mich.App. 720, 252 N.W.2d 551 (1977).

We agree that when the loss occurs before a foreclosure sale in which the mortgagee purchases the property for a bid which extinguishes the mortgage debt, the mortgagee is not entitled to the insurance proceeds. Whitestone Savings & Loan Ass'n v. Allstate Ins. Co., 28 N.Y.2d 332, 336-337, 321 N.Y.S.2d 862, 866, 270 N.E.2d 694, 697 (1971).

"The theory of recovery by a mortgagee is indemnity. The risk insured against is an impairment of the mortgaged property which adversely affects the mortgagee's ability to resort to the property as a source for repayment. Where the debt has been satisfied in full subsequent to the fire, neither reason nor precedent suggest recovery on the policy by the mortgagee.

"The rule is not harsh and it is eminently practical. None disputes that the mortgagee is entitled to recover only his debt. Any surplus value belongs to others, namely, the mortgagor or subsequent lienors. Indeed, it is not conceivable that the mortgagee could recover a deficiency judgment against the mortgagor if it had bid in the full amount of the debt at foreclosure sale. To allow the mortgagee, after effectively cutting off or discouraging lower bidders, to take the property and then establish that it was worth less than the bid encourages fraud, creates uncertainty as to the mortgagor's rights, and most unfairly deprives the sale of whatever leaven comes from other bidders."

See, also, Northwestern National Ins. Co. v. Mildenberger, 359 S.W.2d 380 (Mo.App.1962). The rights of the parties under the insurance policy were fixed at the time of the fire, Pink v. Smith, 281 Mich. 107, 274 N.W. 727 (1937), and the mortgagee's right to the proceeds terminated when the mortgage debt was satisfied.

The...