West Suburban Bank of Darien v. Badger Mut. Ins. Co.

• Decision Date: 30 April 1998
• Docket Number: No. 96-3682,96-3682
• Parties: WEST SUBURBAN BANK OF DARIEN, Plaintiff-Appellant, v. BADGER MUTUAL INSURANCE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 720

141 F.3d 720

WEST SUBURBAN BANK OF DARIEN, Plaintiff-Appellant, v. BADGER MUTUAL INSURANCE COMPANY, Defendant-Appellee.

No. 96-3682.

United States Court of Appeals Seventh Circuit.

Argued May 13, 1997.

Decided April 9, 1998.

Rehearing Denied April 30, 1998.

Mark F. Kalina (argued), Guerard, Kalina & Butkus, Wheaton, IL, for Plaintiff-Appellant.

Richard D. Heytow (argued), Jeffrey L. Warnick, Crystal, Heyton & Warnick, Chicago, IL, Defendant-Appellee.

Before COFFEY, EASTERBROOK and KANNE, Circuit Judges.

COFFEY, Circuit Judge.

The plaintiff-appellant, West Suburban Bank of Darien ("West Suburban"), sued the defendant-appellee, Badger Mutual Insurance Company ("Badger"), for recovery under the provisions of a fire insurance policy after fire destroyed a restaurant located in Bolingbrook, Illinois, insured by Badger. ¹ West Suburban held two loans on the destroyed building and its contents: the first was secured with a mortgage on the property, and the second was secured through a collateral assignment of beneficial interest in a land trust which held title to the property. After the fire, and after the sale of the land, the funds realized were insufficient to satisfy West Suburban's interest on the two loans. West Suburban brought suit after Badger refused to make good on the loan covering the beneficial interest in the land trust holding title to the property. The district court denied West Suburban's claim that it was entitled to recover for the loan secured by the beneficial interest under the provisions of the fire insurance policy and entered summary judgment in favor of Badger, holding that the provisions of Badger's insurance policy did not cover the collateral assignment of beneficial interests in the land trust. We affirm.

I. BACKGROUND

Theodore and Frances Somenek were the president and vice president, respectively, of Dough, Inc. ("Dough"), owner of Aurelio's Family Pizzeria ("the Pizzeria") in Bolingbrook. On February 10, 1988, West Suburban loaned Dough $580,000. As collateral for the loan, Dough and West Suburban executed two promissory notes, a mortgage and a security assignment of the beneficial interest in a land trust which was the owner of the Pizzeria property. One promissory note for $315,000 was secured by a mortgage on the Pizzeria. The other promissory note obligated Dough for $265,000 and was secured by the Someneks' assignment of their beneficial interest in the land trust to West Suburban. The assigning instrument stated that in the event of default by either Dough or the Someneks, West Suburban would have all rights and remedies "respecting the sale or other disposition of said beneficial interest." The assigning instrument did not make any mention of the underlying property, or res, in which Dough conducted its pizza business.

On April 28, 1994, Badger issued a commercial insurance policy to Dough. Among other coverages, the contract insured against loss to the Bolingbrook business premises and commercial property in the event of fire. The policy named and referred to Dough as the insured party and West Suburban as the mortgagee. The policy provided in relevant part:

If mortgagee (mortgage holder) is named in this policy, loss to buildings shall be paid to the mortgagee and you [i.e., Dough, the named insured] as interest appears....

The insurance for the mortgagee continues in effect even when your insurance may be void because of your acts, neglect, or failure to comply with the coverage terms.

This provision protected West Suburban against the risk of fire loss by guaranteeing payment on the mortgage debt secured by the insured premises.

As stated earlier, on July 5, 1994, fire destroyed the Pizzeria and its contents. At the time of the fire, the $315,000 note (secured by the mortgage) had an unpaid balance of $233,082.96, and the $265,000 note (secured by the beneficial interest in the land trust) had an unpaid balance of $148,309.90. In order to effectuate the property's sale, West Suburban released its mortgage lien on the property after the fire. The proceeds from the sale totaled $315,000, an amount insufficient to cover the balance due on both loans. West Suburban placed the $315,000 in an escrow account, and after Dough filed a proof of loss with Badger, West Suburban filed a claim under the insurance policy as mortgagee, demanding payment.

After Badger repeatedly failed to respond to West Suburban's requests for payment, West Suburban filed suit against Badger on April 6, 1995. West Suburban then filed a motion for summary judgment, contending that as the insured mortgagee under the policy, it was entitled to recover the unpaid balance plus accrued interest on both notes, which, less the proceeds from the property's sale, amounted to $106,197.74. Badger filed a cross-motion for summary judgment, arguing that West Suburban should not be permitted to recover insurance proceeds for either note because: (1) West Suburban, by selling the property, had released its lien; and (2) an assignment of a beneficial interest is not a "mortgage" because a beneficial interest is only an interest in personal property, not an interest in land. On September 25, 1996, the district court granted summary judgment in favor of Badger, concluding that Badger owed West Suburban nothing for the assigned trust interest. Specifically, the district judge ruled that West Suburban was not a "mortgagee" because West Suburban's beneficial interest was merely an interest in personal property and not an interest in real property. The court also ruled that West Suburban could not recover under the mortgage note because it had extinguished the debt underlying the mortgage when it sold the property and released its mortgage. ²

II. ISSUE

On appeal, West Suburban contends that the district court committed error in concluding that West Suburban was precluded from collecting insurance proceeds from Badger because the assignment of the beneficial interest in an Illinois land trust is distinct from a mortgage. West Suburban claims that its beneficial interest, a secured personal property interest, falls within the definition of "mortgage," and therefore, West Suburban should be permitted to collect proceeds from Badger.

III. DISCUSSION

" 'The construction of an insurance policy and a determination of the rights and obligations thereunder are questions of law for the court which are appropriate subjects for disposition by way of summary judgment.' " Hurst-Rosche Eng's., Inc. v. Commercial Union Ins., 51 F.3d 1336, 1342 (7th Cir.1995) (quoting Crum & Forster Managers Corp. v. Resolution Trust Corp., 156 Ill.2d 384, 391, 189 Ill.Dec. 756, 760, 620 N.E.2d 1073, 1077 (1993)). We review the decision of the district court in granting summary judgment to Badger de novo. See Ill. Conf. of Teamsters and Employers Welfare Fund v. Steve Gilbert Trucking, 71 F.3d 1361, 1364 (7th Cir.1995). A grant of summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); see Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986).

We next consider which state's law governs the interpretation of the insurance policy at issue. A federal court exercising diversity jurisdiction must consult the choice-of-law rules of the state in which the court sits to determine which state's substantive law should apply. See GATX Leasing Corp. v. National Union Fire Ins. Co., 64 F.3d 1112, 1114 (7th Cir.1995). In dealing with choice-of-law issues in the area of contract law, the Illinois Supreme Court applies a "most significant contacts" test. Id. at 1115. Under this test,

[a]bsent an express choice of law, insurance policy provisions are generally governed by the location of the subject matter, the place of delivery of the contract, the domicile of the insured or of the insurer, the place of the last act to give rise to a valid contract, the place of performance, or other place bearing a rational relationship to the general contract.

Lapham-Hickey Steel Corp. v. Protection Mut. Ins. Co., 166 Ill.2d 520, 526-27, 211 Ill.Dec. 459, 462, 655 N.E.2d 842, 845 (1995) (citation and internal quotation omitted). In the case of fire insurance contracts, the laws of the state in which the insured property principally lies will usually govern. GATX, 64 F.3d at 1115. Because the Pizzeria was located in Illinois, that state's substantive insurance law applies.

Under Illinois law, an insurance policy is construed so as to give effect to the intention of the parties as expressed in the contract. See Bull v. Sun Life Assur. Co. of Canada, 141 F.2d 456, 457 (7th Cir.1944). "Illinois courts apply the rule that any ambiguities in the provisions of an insurance policy will be construed against the drafter of the instrument, the insurer, and in favor of the insured...." Heller v. Equitable Life Assur. Soc. of U.S., 833 F.2d 1253, 1256 (7th Cir.1987) (citations omitted). However, this Court must not create ambiguity where none exists; "where ... there is no ambiguity, [the courts] will not ignore the very plain language of the policy." Id. (citation omitted). In determining if an ambiguity exists in a policy, this Court "should consider the subject matter of the contract, the facts surrounding its execution, the situation of the parties, and the predominant purpose of the contract which is to indemnify the insured." State Farm Fire & Cas. Co. v. Moore, 103 Ill.App.3d 250, 256, 58 Ill.Dec. 609, 614, 430 N.E.2d 641, 646 (2d Dist.1981) (citing Dora Township v. Indiana Ins. Co., 78 Ill.2d 376, 36 Ill.Dec. 341, 342, 400 N.E.2d 921, 922 (1980)).

Based on the terms of Badger's insurance policy and Illinois case law concerning the rights of holders of beneficial...