State Farm Fire and Cas. Co. v. Andrews

• Decision Date: 23 June 2005
• Docket Number: No. 04-1336.,04-1336.
• Citation: 210 S.W.3d 896
• Parties: STATE FARM FIRE & CASUALTY COMPANY, Appellant, v. Sadie ANDREWS, Appellee.
• Court: Arkansas Supreme Court

210 S.W.3d 896

STATE FARM FIRE & CASUALTY COMPANY, Appellant, v. Sadie ANDREWS, Appellee.

No. 04-1336.

Supreme Court of Arkansas.

June 23, 2005.

Snellgrove, Langley, Lovett & Culpepper, by: Todd Williams, Jonesboro, for appellant.

Henry Law Firm, PLC, by: Troy Henry, Jonesboro, for appellee.

Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C., by: Blair Evans and Bradley E. Trammell, Memphis, TN, for amicus curiae Wells Fargo Home Mortgage.

DONALD L. CORBIN, Justice.

Appellant State Farm Fire and Casualty Company appeals the order of the Craighead County Circuit Court granting summary judgment to Appellee Sadie Andrews in her suit against State Farm for a loss sustained to her home as a result of a fire. For reversal, State Farm argues that the trial court erred in determining that Andrews was entitled to the proceeds of the policy even though she no longer had any ownership in the home following a foreclosure sale. It argues that it satisfied its obligation to pay under the policy when it tendered a check payable to Andrews and her mortgagee, Wells Fargo Bank. State Farm also argues that the trial court erred in awarding Andrews attorney's fees and penalty, pursuant to Ark.Code Ann. § 23-79-208 (Repl.2004). Jurisdiction of this appeal is pursuant to Ark. Sup.Ct. R. 1-2(b)(1), as it raises issues of first impression. We affirm the grant of summary judgment, but reverse the award of attorney's fees and penalty.

The following facts are not in dispute. Andrews purchased a home located at 2205 Clover Drive in Jonesboro in September 2001. The mortgage on the home was owned by Wells Fargo Bank. Insurance on the home was purchased by Andrews from State Farm. Sometime in late January or early February 2003, Wells Fargo began foreclosure proceedings on Andrews's home, because Andrews was in default on her mortgage payments. On March 5, 2003, Andrews's home was damaged by fire. She immediately made a claim under her homeowner's insurance with State Farm. State Farm began to process her claim, but before it completed an estimate of the costs to repair the damage, Wells Fargo foreclosed on the property. The foreclosure sale took place on March 28, 2003, and Wells Fargo was the highest bidder. It paid the full amount of the mortgage for the property, and a mortgagee's deed was issued to it that same date.

State Farm had no knowledge of the foreclosure, and on May 2, 2003, it tendered to Andrews a check payable to Andrews and Wells Fargo, in the amount of $33,903.84. On June 5, 2003, Andrews, via her attorney, returned the check to State Farm, stating that the amount was insufficient to cover the loss. Her letter reflected that she had obtained three different repair estimates, all of which exceeded $60,000.00. She thus sought the policy limits of $46,500.00.

On June 9, 2003, State Farm discovered that Wells Fargo had instituted foreclosure proceedings on the Andrews home. Its claims representative notified Andrews's attorney of this fact. On July 3, 2003, Andrews filed suit against State Farm for the full amount of the policy. State Farm answered and tendered a check in the amount of $43,065.52, based on a revised estimate it had done after consulting with the contractor that Andrews had selected. The check was made payable to both Andrews and Wells Fargo. Andrews again rejected the tender, insisting that she was due the full amount of the policy.

State Farm was subsequently informed that Wells Fargo had employed a contractor to make repairs to the home and that such repairs were already underway. Wells Fargo indicated that the repairs could be done for the amount of State Farm's first estimate, $33,903.84. Pursuant to its communication with Wells Fargo, on October 20, 2003, State Farm tendered a check payable to Wells Fargo and Andrews in the amount of $33,903.84. Wells Fargo negotiated the check without Andrews's signature. State Farm explained to the trial court that it had tendered payment to Wells Fargo based on representations made by the bank that the March 28, 2003, foreclosure was not valid, because Wells Fargo did not know that the home had been damaged by fire prior to its bidding on the property for the full amount of the indebtedness. To this end, on October 8, 2003, Wells Fargo filed a complaint asking the circuit court to void the foreclosure sale of March 28. For reasons unknown, however, Wells Fargo later sought and was granted a voluntary dismissal of that complaint.

On December 1, 2003, State Farm filed a motion for summary judgment on the ground that its payment of $33,903.84 had paid for the repairs to the property and that the foreclosure had extinguished Andrews's interest in the home. The trial court denied State Farm's motion on January 9, 2004.

Thereafter, on March 4, 2004, State Farm filed a third-party complaint against Wells Fargo, alleging that Wells Fargo had misled State Farm as to the date and validity of the foreclosure. State Farm also alleged that any claim that Andrews had was more properly addressed to Wells Fargo, since the bank had negotiated the check without Andrews's signature or permission. State Farm asserted that it should not be forced to pay for the loss twice, and that if it should be found liable to Andrews, Wells Fargo should have to refund the money previously paid by State Farm. State Farm's claims against Wells Fargo were later severed on Andrews's motion, and they are still pending before the trial court.¹

On March 26, 2004, Andrews filed a motion for partial summary judgment. The motion reflected that the pertinent facts were not in dispute, namely that Andrews suffered a loss due to fire on March 5, 2003, and that Wells Fargo foreclosed on her home on March 28, 2003, and the property sold for an amount sufficient to pay off the mortgage. She asserted that she was entitled to the insurance proceeds as a matter of law, on the theory that once the mortgage indebtedness was satisfied, Wells Fargo had no interest in the insurance proceeds. Andrews relied solely on the court of appeals' decision in Arkansas Teacher Retirement Sys. v. Coronado Properties, Ltd., 33 Ark.App. 17, 801 S.W.2d 50 (1990) ("ATRS"). In that case, the court of appeals recognized the general rule that a mortgagee forfeits its right to the proceeds from an insurance policy when the loss occurs prior to the foreclosure and the amount bid at the foreclosure sale is sufficient to satisfy the mortgagee's debt. This rule is known as the "foreclosure after loss" rule. The court of appeals pointed out that the rule is based on the theory that when a loss occurs prior to foreclosure, the mortgagee has a choice whether to seek the insurance proceeds or pursue foreclosure sale of the mortgaged property.

State Farm argued that the court of appeals' decision was not dispositive of this case, because Wells Fargo was not made aware by Andrews that the fire had occurred. Thus, State Farm contended that Wells Fargo's decision to pursue foreclosure was not an election of remedies. It argued that without knowledge of the fire, Wells Fargo could not have known that it had a choice in this instance. State Farm relied on cases from other jurisdictions that have carved out an exception to the "foreclosure after loss" rule where the mortgagee lacks knowledge of the loss. Additionally, State Farm argued that Andrews would be unjustly enriched if the trial court granted summary judgment to her, because she no longer had any interest in the property and the repairs had already been made by Wells Fargo.

On July 20, 2004, the day of trial, the trial court granted Andrews motion for partial summary judgment. Relying on the court of appeals' decision in ATRS, 33 Ark.App. 17, 801 S.W.2d 50, the trial court ruled that the mortgage agreement was effectively terminated by the foreclosure. The court explained: "I'm ruling that at the time [Wells Fargo] elected to foreclose — and assuming the election was made without knowledge that the fire existed — that is just — they didn't protect their own interest by examining the property before they proceeded to a foreclosure." The trial court ruled that the effect of the foreclosure was that it terminated any interest Wells Fargo had in the property. The trial court did rule that it would allow State Farm to pursue its theory of unjust enrichment. However, in the written order granting partial summary judgment, entered on August 6, 2004, the trial court found that Andrews was entitled to the proceeds for the insurance loss and that the only issue for the jury to decide was the amount of the loss.

Thereafter, a jury was empaneled to hear testimony about the amount of the loss. Andrews presented evidence of the three estimates she obtained to repair the house, all of which exceeded $60,000.00. She also presented testimony from the contractor that she had selected as to the amount of the damage. State Farm then presented evidence that the damage amounted to $43,065.52, which was the amount that State Farm had tendered with its answer and which was rejected by Andrews. The jury returned a verdict that reflected the amount offered by State Farm, $43,065.52. Following the jury's verdict, the trial court awarded attorney's fees and penalty to Andrews, pursuant to section 23-79-208. This appeal followed.

For its first point on appeal, State Farm argues that the trial court erred in granting partial summary judgment to Andrews under the "foreclosure after loss" rule. It acknowledges the general rule, but asserts that an exception to that rule should be applied in this case based on Wells Fargo's lack of knowledge of the fire prior to its successful bid on the property at foreclosure sale. It contends that to apply the rule in this case results in an unjust enrichment to Andrews.

This court has not heretofore determined whether to recognize such exceptions to the general rule. Nevertheless, we decline to reach the merits of this issue, as we conclude that Wells Fargo's alleged...