Opinion ID: 475306
Heading Depth: 2
Heading Rank: 2

Heading: Right of Recovery After Full Credit Bid

Text: 14 We turn next to the issue of whether the entry of a full credit bid at a foreclosure sale bars recovery under a casualty insurance policy. The district court found that 15 [o]nce the debt was extinguished at the time of the bid, so was the plaintiff's insurable interest.... In addition, ... plaintiff had the ability to secure its interest by gaining entry to the premises prior to making its bid. Yet plaintiff failed to exercise this legal right. Therefore it is inappropriate here to embrace plaintiff's proposed exception to the California rule on the impact of the full credit bid. Accordingly, this court finds that there is no genuine issue of material fact and that defendant is entitled to judgment as a matter of law. 16 We review de novo the district court's grant of summary judgment in favor of Prudential. Grigsby v. CMI Corp., 765 F.2d 1369, 1373 (9th Cir.1985). 17 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. Rosenbaum v. Funcannon, 308 F.2d 680, 684 (9th Cir.1962) (citing with approval Reynolds v. London & Lancashire Fire Insurance Co., 128 Cal. 16, 60 P. 467 (1900) and Power Building & Loan Association v. Ajax Fire Insurance Co., 110 N.J. Law 256, 164 A. 410 (1933)). Universal seeks an exception to this rule, asserting that when the loss payable mortgagee has no actual or constructive knowledge of a loss at the time of a full credit bid, the mortgagee should not be precluded from recovering. 18 The district court, however, explained that 19 examination of the controlling authority reveals that actual or constructive knowledge is irrelevant to the policy or application of the rule. Neither the true value of the subject property, nor the conduct of the beneficiary controls the impact of a full credit bid. Once the debt was extinguished at the time of the bid, so was plaintiff's insurable interest. 20 In Reynolds, a mortgagee entered a full credit bid at a foreclosure sale before any damage to the insured property occurred. The court determined that a mortgagee named in the insurance policy could not recover after making such a bid because the mortgagee's interest on the policy was limited to the lien or debt. Once the lien or debt was fully extinguished by the full credit bid, so was the insurable interest. Reynolds, 128 Cal. at 20-21, 60 P. at 469. 21 Similarly, in Rosenbaum, we clarified that the loss-payees may recover on an insurance policy after the deed of trust is extinguished at a trustee's sale as long as a portion of the debt remains. If, however, the debt is fully extinguished either prior or subsequent to the loss, then recovery by the loss-payee is precluded. Rosenbaum, 308 F.2d at 684 (where damage occurred prior to full bid at trustee's sale, recovery from insurance company is nonetheless precluded because the debt is extinguished); see also Cornelison v. Kornbluth, 15 Cal.3d 590, 606, 125 Cal.Rptr. 557, 568, 542 P.2d 981, 992 (1975) (where plaintiff causes property to be sold at a trustee's sale and purchases it by full credit bid, plaintiff cannot establish impairment of the security, by which damages for waste would be measured, because his lien has been extinguished by his full credit bid and all his security interest in the property is thereby nullified). 22 Whether the loss occurs after the trustee's sale as in Reynolds or before the trustee's sale as in Rosenbaum, the California rule of law remains the same, that a full credit bid precludes any recovery by a mortgagee under an insurance policy. Actual or constructive knowledge of property damage prior to a full credit bid is irrelevant because the full credit bid, once made, extinguishes the debt secured by the insurance policy. 23 Universal relies on Cornelison to support its contention that the entry of a full credit bid at a foreclosure sale does not bar the recovery of insurance proceeds where the mortgagees had no actual or constructive notice of the damage. Universal's reliance on Cornelison, however, is misplaced. The case provides support for just the opposite: 24 Where an indebtedness secured by a deed of trust covering real property has been satisfied by the trustee's sale of the property on foreclosure for the full amount of the underlying obligation owing to the beneficiary, the lien on the real property is extinguished. In such event, the creditor cannot subsequently recover insurance proceeds payable for damage to the property.... 25 Cornelison, 15 Cal.3d at 606, 125 Cal.Rptr. at 568, 542 P.2d at 992 (citations omitted). 26 Thus there is no basis for an exception to the California rule that entry of a full credit bid at a foreclosure sale bars recovery under a casualty insurance policy, and the district court's grant of summary judgment for Prudential is affirmed. 27 AFFIRMED.