Case Title: FHLMC v. Transamerica Ins. Co.

Citation: 969 P.2d 1275

Docket Number: 

State: hawaii

Court: Hawaii Supreme Court

Date: 1998-12-30T00:00:00Z

Document:
969 P.2d 1275 (1998) 89 Hawai`i 157 FEDERAL HOME LOAN MORTGAGE CORPORATION; and Source One Mortgage Services Corporation, Plaintiffs-Appellants, v. TRANSAMERICA INSURANCE CO.; Tig Insurance Co., Associates Financial Services Co. of Hawaii, Inc.; Lydia R. Swenson; Deanna Eihua Kupihea; Defendants-Appellees, and John Does 1-10; Jane Does 1-10; Doe Partnerships 1-10; Doe Corporations 1-10; and Doe Entities 1-10, Defendants. No. 20691. Supreme Court of Hawai`i. December 30, 1998. *1276 Peter W. Olson and Maria B. Mazzeo (of Cades Schutte Fleming & Wright) on the briefs, for plaintiffs-appellants Federal Home Loan Mortgage Services Corporation and Source One Mortgage Services Corporation. Randall Y. Yamamoto, James Kawashima, George B. Apter, and Brian A. Kang (of Watanabe Ing & Kawashima) on the briefs, for defendants-appellees Transamerica Insurance Co. and TIG Insurance Co. Kevin W. Herring (of Shigemura & Harakal) on the briefs, for defendant-appellee Associates Financial Services Co. of Hawai`i, Inc. Leonard R. Gouveia, Jr., Wayne S. Sakamoto, J. Patrick Gallagher, Joelle Segawa Kane, and Lili A. Young (of Gallagher and Sakamoto) on the briefs, for defendants-appellees Deanna Leihua Kupihea and Lydia R. Swenson. MOON, C.J., and KLEIN, LEVINSON, NAKAYAMA and RAMIL, JJ. LEVINSON, J. The plaintiffs-appellants Federal Home Loan Mortgage Corporation and Source One Mortgage Services Corporation (collectively, FHLMC) appeal from (1) the order denying their motion for partial summary judgment and granting the cross-motion of the defendants-appellees Transamerica Insurance Company and TIG Insurance Company (collectively, Transamerica) for summary judgment, (2) the order denying FHLMC's motion for leave to file first amended complaint, and (3) the judgment entered in favor of Transamerica, the defendant-appellee Associates Financial Services of Hawaii, Inc. (Associates), and the defendants-appellees Lydia R. Swenson and Deanna Leihua Kupihea and against FHLMC. On appeal, FHLMC contends that the circuit court committed reversible error when it: (1) failed to conclude that Transamerica was obligated to pay FHLMC for the full mortgage debt that FHLMC alleged was owed by Swenson and Kupihea at the time of the destruction of the dwelling securing Swenson and Kupihea's mortgage with FHLMC; (2) concluded that (a) the foreclosure sale of the property to FHLMC, which occurred before the destruction of the dwelling, extinguished a portion of Swenson and Kupihea's debt, thereby reducing FHLMC's insurable interest in the property, (b) "[b]y proceeding to obtain the order confirming the sale, FHLMC sought to satisfy or extinguish the mortgage debt to the extent of the amount bid at the sale," (c) FHLMC should have attempted "to rescind its bid or otherwise delay confirmation of the sale based on the fire damage to the property," and (d) Transamerica did not breach its insurance contract by paying FHLMC only the amount of Swenson and Kupihea's debt that was not extinguished by the proceeds of the foreclosure sale; (3) failed to apply the doctrine of equitable estoppel; and (4) denied FHLMC's motion to amend its claims for equitable reformation and equitable estoppel. *1277 FHLMC's points of error on appeal are without merit. Accordingly, we affirm the orders and judgment of the circuit court from which the present appeal is taken. On July 29, 1989, Swenson and Kupihea executed a purchase money mortgage note in favor of Imco Realty Services, Inc., in the amount of $210,000.00. The note was secured by a first mortgage on the property located at 59-052 Kupaoa Place, in Hale`iwa (the property). On March 15, 1991, Imco assigned the note and mortgage to FHLMC. On August 26, 1993, after Swenson and Kupihea defaulted on the note, FHLMC filed a complaint in the first circuit court to foreclose on the note and mortgage. On May 13, 1994, a decree of foreclosure was entered. The foreclosure order appointed Dale Ho as commissioner and provided that Ho "shall henceforth hold all equitable and legal title to said property, and is hereby authorized ... to sell the property on foreclosure sale to the highest bidder at public commissioner's sale by auction." The order also provided that "Lydia R. Swenson and Deanna Leihua Kupihea and all persons claiming by, through or under them are hereby perpetually barred of and from any and all right, title and interest in the said mortgaged property or any part thereof." On June 24, 1994, FHLMC purchased the property at a public auction for $247,530.49. FHLMC took the property subject to a lien in the amount, inter alia, of Associates' second mortgage on the property, the interest owing thereon, and Associates' attorney's fees in the foreclosure action. FHLMC moved to confirm the sale. At a hearing held on July 21, 1994, the motion to confirm was orally granted. At some point during the foreclosure proceedings, Ho entered into a rental agreement for the property with Bernice Wintermantel, who, in turn, was subletting it to other people. On August 9, 1994, Michael Kersey, one of Wintermantel's tenants, is believed to have set the house on fire following an argument with Wintermantel. On August 24, 1994, FHLMC's mortgage servicing agent deemed the structure a total loss. Swenson and Kupihea had purchased a homeowner's insurance policy covering the property from Transamerica, which named FHLMC as the first mortgage holder and Associates as the second mortgage holder. The policy insured the dwelling for $233,000.00 and included a "Mortgage Clause," which provided that "[i]f a mortgagee is named in this policy, any loss payable under coverage A or B will be paid to the mortgagee and you, as interests appear. If more than one mortgage is named, the order of payment will be the same as the order or precedence of the mortgages." Additionally, a "LENDER'S LOSS PAYABLE CLAUSE" provided in pertinent part: Accordingly, on or about August 24, 1994, FHLMC made a fire loss claim with Transamerica. Notwithstanding the fire damage to the property, however, FHLMC submitted its written order confirming the sale of the property for $247,530.49 for the court's signature. *1278 On October 11, 1994, the order of confirmation was signed and filed. On November 8, 1994, Transamerica's counsel contacted FHLMC, stating: Transamerica made further inquiries as to FHLMC's plans for rebuilding the house on the property on January 13, 1995 and February 22, 1995. In its February 22 letter to FHLMC, Transamerica also sought to determine whether a deficiency judgment had been entered in favor of FHLMC and, if so, its amount. On or about February 22, 1995, FHLMC authorized Prudential Asset Recovery to demolish the burned house. On March 20, 1995, a deficiency judgment was entered against Swenson and Kupihea in the amount of $13,246.85. Subsequently, pursuant to the actual cash value limit provisions of the policy, Transamerica tendered $13,246.85 to FHLMC in satisfaction of the deficiency judgment against Swenson and Kupihea (which, Transamerica asserted, represented FHLMC's remaining insurable interest), $148,045.87 to Associates in satisfaction of its second mortgage against the property, and the remaining balance of $38,324.01 to Swenson and Kupihea. The cleared property was placed on the market in July 1995 at an asking price of $199,900.00. The property eventually sold for $90,000.00, and, after payment of the expenses of the sale, FHLMC netted $79,616.65. On December 28, 1995, FHLMC filed the instant action (1) seeking a declaratory judgment that it was entitled to full payment of the policy limits for the destruction of the dwelling on the property (Count I) and (2) alleging (a) breach of contract (Count II), (b) breach of covenant of good faith and fair dealing (Count III), and (c) unfair claim settlement practices (Count IV). On January 27, 1997, FHLMC filed a motion for partial summary judgment against Transamerica on Counts I and II. On February 21, 1997, Transamerica filed a cross-motion for summary judgment. On March 13, 1997, a stipulation for dismissal without prejudice was entered as to Count IV of the complaint. On April 1, 1997, FHLMC moved for leave to file a first amended complaint, seeking to add counts for equitable reformation and equitable estoppel. On April 10, 1997, the circuit court filed an order denying FHLMC's motion for partial summary judgment and granting Transamerica's motion for summary judgment. The order provided in pertinent part: Following a hearing on April 30, 1997, the circuit court denied FHLMC's motion for leave to file a first amended complaint, stating that its ruling was based on its earlier order granting Transamerica's motion for summary judgment. On May 14, 1997, the written order denying FHLMC's motion to file a first amended complaint and the judgment in favor of Transamerica, Associates, Swenson, and Kupihea and against FHLMC were entered. This timely appeal followed. State Farm Mut. Auto Ins. Co. v. Murata, 88 Hawai`i 284, 287-88, 965 P.2d 1284, 1287-88 (1998) (quoting Estate of Doe v. Paul Revere Ins. Group, 86 Hawai`i 262, 269-70, 948 P.2d 1103, 1110-11 (1997)) (brackets in original). "We have said that the grant or denial of leave to amend under [Hawai`i Rules of Civil Procedure (HRCP)] Rule 15(a) [(1996)] is within the discretion of the trial court." Associated Eng'rs & Contractors v. State, 58 Haw. 187, 218, 567 P.2d 397, 417 (1977) (quoting Bishop Trust Co., Ltd. v. Kamokila Dev. Corp., 57 Haw. 330, 555 P.2d 1193 (1976)). Id. at 218-19, 567 P.2d at 417. However, in interpreting the analogous federal rule,[1] the federal courts have observed that "[a] motion for leave to amend is not a vehicle to circumvent summary judgment." Schlacter-Jones v. General Tel., 936 F.2d 435, 443 (9th Cir. 1991); see also Coplin v. Conejo Valley Unified School Dist., 903 F. Supp. 1377, 1388 (C.D.Cal.1995) ("It is generally inappropriate to grant leave to amend a complaint while summary judgment is pending." (citing Schlacter, supra)); Felde v. City of San Jose, 839 F. Supp. 708, 711 (N.D.Cal.1994) ("[T]he city has a pending dispositive motion before this court. To add a cause of action at this point would delay without sufficient justification the final resolution of this case." (citing Schlacter, supra)). FHLMC asserts that "[t]he circuit court's determination that [FHLMC's] recovery is limited to the amount of the deficiency judgment rather than the full amount of the unpaid mortgage debt at the time of the loss is contrary to the better reasoned case authority." The "better reasoned" cases cited in support of its position by FHLMC "hold that when a fire loss occurs during the pendency of foreclosure proceedings, the amount of the mortgagee's recovery under a fire insurance policy turns on the sequence of two events: the fire loss and the foreclosure sale." Admittedly, in cases such as City of Chicago v. Maynur, 28 Ill.App.3d 751, 329 N.E.2d 312 (Ill.Ct.App.1975), courts of other jurisdictions have held that where a loss follows a foreclosure sale, a mortgagee who purchased the foreclosed property was entitled to full recovery of the mortgage indebtedness *1281 at the time of the sale. However, these cases are distinguishable from the matter before us inasmuch as they arise in states whose mortgage foreclosure statutes differ from those of Hawai`i in one critical respectthey recognize a right of redemption. As explained by the Illinois Appellate Court: Great-West Life Assurance Co. v. General Accident Fire & Life Assurance Corp., 116 Ill.App.3d 921, 72 Ill.Dec. 297, 452 N.E.2d 550, 556-57 (Ill.App.Ct.1983) (some brackets and emphases in original and some added). See also Estate of Brindisi v. State Farm Ins. Co., 149 Misc.2d 390, 564 N.Y.S.2d 985, 987 (N.Y.Sup.Ct.1991) (holding that mortgagee was entitled to full insurance proceeds when fire occurred between foreclosure sale and delivery of deed because (1) "[i]t [was] not clear if the mortgagee has any right to rescind the sale or move to abate the purchase price" and (2) "[w]hile the equity of redemption of the defendants ... was not technically extinguished until the referee's deed was delivered, the defendants ... did not exercise the equity of redemption at any *1282 time[.]"); Tech Land Development, Inc. v. South Carolina Ins. Co., 57 N.C.App. 566, 291 S.E.2d 821, 824 (N.C.Ct.App.1982) ("Where the damage occurs after approval of the fire sale and before expiration of the mortgagor's right to redeem, courts have allowed the purchasing mortgagee to recover all the insurance proceeds should the mortgagor fail to redeem within the time period." (Emphases in original.)). From the reasoning set forth in the above-cited decisions, two principles emerge: (1) satisfaction of the debt terminates a mortgagee's insurable interest; and (2) the insurable interest of a "purchasing" mortgagee will continue until the expiration of the statutory period of redemption. No such redemptive period is recognized in the Hawai`i Revised Statutes (HRS). Transamerica's argument that Hawai`i has long recognized an equitable right of redemption is irrelevant here. Hawai`i law is based on the lien theory of mortgages. See HRS § 506-1 (1993) ("Every transfer of an interest in real property or fixtures made as security for the performance of a another act or subject to defeasance upon the payment of an obligation, whether the transfer is made in trust or otherwise, is to be deemed a mortgage and shall create a lien only as a security for the obligation and shall not be deemed to pass title."); see also Adair v. Kona Corp., 51 Haw. 104, 110, 452 P.2d 449, 453 (1969) ("Hawaii has espoused the lien theory of mortgages since 1939[.]").[2] As the New Jersey Supreme Court explained in Chase Manhattan Bank v. Josephson, 135 N.J. 209, 638 A.2d 1301 (N.J.1994), in a lien theory state, the equitable right of redemption is terminated upon an order of foreclosure: Id. at 1305. In some states, a statutory right of redemption extends the mortgagor's right to redeem for a period following the foreclosure sale. See, e.g., Federal Home Loan Mortgage Corp. v. Bates, 644 So. 2d 925, 927 (Ala. 1994) ("The right to redeem property after foreclosure is conferred exclusively by statute."); Buell v. White, 908 P.2d 1175, 1177 (Colo.App.1995) ("The right of redemption must be exercised in strict compliance with the statutory terms and depends entirely upon the provisions of the statute creating the right.") (Citing Johnson v. Smith, 675 P.2d 307 (Colo.Ct.1984).); West Des Moines State Bank v. Pameco, 501 N.W.2d 555, 557 (Iowa Ct.App.1993) ("After the foreclosure sale, the mortgage debtor has the right of redemption if the statute so provides. The right to redeem is purely statutory." (Citing First National Bank v. Matt Bauer Farms Corp., 408 N.W.2d 51, 53 (Iowa 1987).)). Other states empower a court to establish the terms under which a mortgagor may redeem in the foreclosure judgment. See, e.g., Emanuel v. Bankers Trust Co., N.A., 655 So. 2d 247, 249 (Fla.Dist.Ct.App.1995) ("[S]ection 45.0315, Florida Statutes (1993), explicitly empowers a court in the final judgment of foreclosure to fix the terms in which the mortgagor may redeem.") The HRS, *1283 however, contain no statute authorizing a post-foreclosure right of redemption. Furthermore, in the matter before us, the foreclosure order entered by the circuit court on May 13, 1994 expressly divested Swenson and Kupihea "and all persons claiming by, through or under them" of "any and all right, title and interest in the said mortgaged property or any part thereof." Accordingly, the first principle that emerges from Maynur, Great-West Life, Brindisi, and Tech Land is controlling, and we hold as follows: FHLMC may recover only the amount of Swenson and Kupihea's debt that was not extinguished by FHLMC's successful bid at the foreclosure sale. The validity of our holding is reinforced by the fact that, at any time between the occurrence of the fire on August 9, 1994 and entry of the written order on October 11, 1994 FHLMC could have moved to rescind or reform its bid or set aside the foreclosure sale. It did none of these things. Instead, it submitted its written order confirming the salewhich expressly provided that "the sale of the subject property to FEDERAL HOME LOAN MORTGAGE CORPORATION [for] $247,530.49 is fair and equitable"to the circuit court for signature. Moreover, FHLMC set the asking price for the property after demolition and clearing of the burned dwelling at $199,000.00, which evidences FHLMC's belief, at the time it sought entry of the written order confirming the sale, that, even after destruction of the structure, the land alone was worth approximately eighty percent of the amount bid by FHLMC at the foreclosure sale. Finally, limiting FHLMC's recovery from Transamerica to the amount of the deficiency judgment entered against Kupihea and Swenson is consistent with case law from other states that, like Hawai`i, do not afford mortgagors a statutory right of redemption upon foreclosure. For example, in Universal Mortgage Co., Inc. v. Prudential Insurance Co., 799 F.2d 458, 460 (9th Cir.1986), the United States Court of Appeals for the Ninth Circuit, interpreting California law, observed that "[a] full or partial extinguishment of a mortgage debt, whether prior or subsequent to loss, precludes, to the extent thereof, any recovery on a loss by the loss payable mortgagee." (Emphasis in original.) The Universal Mortgage court based its conclusion on the reasoning of Reynolds v. London & Lancashire Fire Insurance Co., 128 Cal. 16, 60 P. 467, 469 (1900), noting that, Universal Mortgage Co., 799 F.2d at 460 (emphasis added). See also Fireman's Fund Mortgage Corp. v. Allstate Ins. Co., 838 P.2d 790, 796-97 (Alaska 1992) ("Fireman's Fund argues that we should disregard its offset bid because the bid was made in ignorance of the property's damaged condition.... However, we believe it would be a mistake to simply disregard the offset bid in this situation.... Fireman's Fund had a contractual right to the insurance proceeds which vested at the time of the fire. The subsequent foreclosure did not change this contractual right. However, at the foreclosure sale a few hours later, Fireman's Fund essentially `spent' $75,486.15 of its total indebtedness in making its offset bid. This offset bid left Fireman's Fund with an outstanding indebtedness of approximately $18,500[.00].... Under ... the great weight of authority, Fireman's Fund is only entitled to recover an amount of the insurance proceeds sufficient to satisfy this outstanding debt." (Citations omitted.)); Minnesota Fed. Sav. & Loan Ass'n v. Iowa Nat'l Mut. Ins. Co., 372 N.W.2d 763, 767 (Minn.Ct.App.1985) (holding that mortgagee, who failed to make insurance payments pursuant to terms of an escrow agreement with mortgagor, causing policy to lapse, and who entered into cash settlement with mortgagor in addition to cancellation of outstanding mortgage, in satisfaction of the mortgagor's claims, was entitled to recover only the amount of outstanding debt at time of loss, rather than total value of loss to property, because "[t]he amount payable as `interests *1284 may appear' under the mortgage clause of an insurance contract is measured by the indebtedness which the mortgagor owes under his note and mortgage"). Next, FHLMC claims that the circuit court erred in failing to apply the doctrine of equitable estoppel to preclude Transamerica from paying less than the actual cash value of the property to it, inasmuch as, in letters dated November 8, 1994 and after, Transamerica's counsel "represented that FHLMC would at least be paid the actual cash value for the dwelling. "FHLMC's argument is not persuasive. A party seeking to invoke equitable estoppel must show that it has detrimentally relied on the representation of the party sought to be estopped and that the reliance was reasonable. See State Farm Mut. Auto. Ins. Co. v. GTE Hawaiian Tel. Co., 81 Hawai`i 235, 244, 915 P.2d 1336, 1345 (1996). As FHLMC acknowledges, the first correspondence from Transamerica allegedly representing that it would pay FHLMC the actual cash value of the property did not occur until November 8, 1994approximately four weeks after entry of the written order confirming the sale. FHLMC does not offer an explanation as to how, a month before they were made, it relied on these statements in making its decision not to seek to rescind its bid or delay confirmation of the sale. Furthermore, assuming reliance arguendo, the element of detriment is questionable here. FHLMC bought the property at the foreclosure sale subject to Associates' second mortgage. Inasmuch as the insurance proceeds were used to satisfy the second mortgage, FHLMC gained through the insurance proceeds a property free and clear of all other liens. Finally, the record is not clear that Transamerica's statements to FHLMC affirmatively represented that Transamerica would pay the full cash value under the policy to FHLMC, inasmuch as all of the statements were made in the context of communications requesting more information in order to determine precisely what proceeds were owing to FHLMC under the policy. Finally, FHLMC argues that "[t]he circuit court abused its discretion when it denied Plaintiff's motion to amend the Complaint to assert counts of equitable reformation and equitable estoppel." While HRCP Rule 15(a) provides that leave to amend the pleadings should be "freely given when justice so requires," the trial court does not abuse its discretion in refusing leave to amend where such an amendment would be futile. As discussed in section III.B, supra, FHLMC cannot make out a claim for equitable estoppel. As for FHLMC's request to add a count for equitable reformation to its complaint, the circuit court ruled: On the facts in this record, the circuit court's ruling did not constitute an abuse of discretion. For the reasons outlined above, we affirm the orders and judgment of the circuit court. [1] Rule 15(a) of the Federal Rules of Civil Procedure is functionally identical to Rule 15(a) of the HRCP. "`Where a Hawai`i rule of civil procedure is identical to the federal rule, the interpretation of this rule by federal courts is highly persuasive.'" Wong v. Takeuchi, 87 Hawai`i 320, 329, 955 P.2d 593, 602 (1998) (quoting Collins v. South Seas Jeep Eagle, 87 Hawai`i 86, 88, 952 P.2d 374, 376 (1997) (citation and internal quotation marks omitted)). [2] Until 1972, the common law remedy of foreclosure by entry and possession was recognized by HRS § 667-11 (1968). HRS § 667-13 (1968) and its precursors recognized a one-year redemption period in connection with that practice. However, HRS § 667-13 was repealed in 1972, when the concomitant repeal of HRS § 667-11 put an end to foreclosure by entry and possession in this state. See 1972 Haw. Sess. L. Act 90, § 10, at 363; Hse. Stand. Comm. Rep. No. 330-72, in 1972 House Journal, at 772; Hse. Spec. Comm. Rep. No. 9, in 1972 House Journal, at 1116; Report of the committee on Coordination of Rules and Statutes, § 667.