Opinion ID: 1142462
Heading Depth: 1
Heading Rank: 4

Heading: whether first columbus national bank surrendered its right to recover from national farmers union.

Text: National Farmers asserts two theories by which it attempts to bar recovery by First Columbus. First, it contends that First Columbus surrendered its right to recover by foreclosing on the property, and thus, satisfying the debt owed it. Secondly, it claims that First Columbus materially breached the insurance contract by destroying National Farmers' subrogation rights. Each theory is without merit according to the general principles of law and earlier opinions of this Court. The theories are plead in the alternative and each will be discussed separately below.
The specific question before the Court is whether a foreclosure by a mortgagee upon the insured property after a loss impairs the mortgagee's right to proceeds under the insurance policy. The initial inquiry must begin with the private law between the parties themselves, the insurance policy. Cauthen v. National Bankers Life Insurance Co., 228 Miss. 411, 88 So.2d 103 (1956). The insurance policy in the case at bar contains a standard union mortgage clause pursuant to Miss. Code Ann. § 83-13-9 (1972). It specifically provides as follows: The mortgage holder has the right to receive loss payment even if the mortgage holder has started foreclosure or similar action on the building or structure. (emphasis added) Thus, the policy itself contemplated that the mortgagee might foreclose on the insured property after a loss. However, as the policy states it will not affect the right to receive loss payments, First Columbus properly began foreclosure proceedings upon the insured property and in no way was contrary to the insurance policy itself. Correspondingly, Mississippi statutory law authorizes foreclosure by the mortgagee. Miss. Code Ann. § 83-13-9 (1972). The text in full reads as follows: Each fire insurance policy on buildings taken out or renewed on or after July 1, 1989, by a mortgagor or grantor in a deed of trust shall have attached or shall contain substantially the following mortgagee clause, viz: Loss or damage, if any, under this policy, shall be payable to (here insert the name of the party), as ____ mortgagee (or trustee), as ____ interest may appear, and this insurance, as to the interest of the mortgagee (or trustee) only therein, shall not be invalidated by any act or neglect of the mortgagor or owner of the within described property, nor by any foreclosure or other proceedings or notice of sale relating to the property, nor by any change in the title or ownership of the property, nor by the occupation of the premises for purposes more hazardous than are permitted by this policy; and in case the mortgagor or owner shall neglect to pay any premium due under this policy, the mortgagee (or trustee) shall, on demand, pay the same. The mortgagee (or trustee) shall notify this company of any change of ownership or occupancy or increase of hazard which shall come to the knowledge of said mortgagee (or trustee) and, unless permitted by this policy, it shall be noted thereon and the mortgagee (or trustee) shall, on demand, pay the premium for such increased hazard for the term of the use thereof; otherwise this policy shall be null and void. This company reserves the right to cancel this policy at any time as provided by its terms, but in such case this policy shall continue in force for the benefit only of the mortgagee (or trustee) for thirty (30) days after notice to the mortgagee (or trustee) of such cancellation and shall then cease, and this company shall have the right on like notice to cancel this agreement. In case of any other insurance upon the within described property, this company shall not be liable under this policy for a greater proportion of any loss or damage sustained than the sum hereby insured bears to the whole amount of insurance on said property issued to or held by any party or parties having an insurable interest therein, whether as owner, mortgagee, or otherwise. Whenever this company shall pay the mortgagee (or trustee) any sum for loss or damage under this policy and shall claim that, as to the mortgagor or owner, no liability therefor existed, this company shall, to the extent of such payment, be thereupon legally subrogated to all the rights of the party to whom such payment shall be made, under all security held as collateral to the mortgage debt, or may, at its option, pay to the mortgagee (or trustee) the whole principal due or to grow due on the mortgage with interest, and shall thereupon receive a full assignment and transfer of the mortgage and of all such other securities; but no subrogation shall impair the right of the mortgagee (or trustee) to recover the full amount of ____ claim. Nothing in the foregoing prescribed form shall be construed to in any manner modify the provisions of Section 83-13-5. Id. (emphasis added). The legislature clearly anticipated foreclosure on the insured property and provided that such actions would not invalidate the insurance. The policy behind National Farmers's argument is that the mortgagee should not be doubly rewarded. National Farmers contends that First Columbus satisfied in full its debt through the foreclosure. Thus, allowing First Columbus to receive insurance proceeds would be unjustly enriching. However, First Columbus did not even come close to satisfying the debt from the foreclosure sale. The facts are undisputed that First Columbus foreclosed on the insured property and bid the amount of $2,065.30 at the foreclosure sale, and that the amount owing on the debt at that time was $50,996.21. After applying the amount received from the foreclosure sale to the debt owed First Columbus, Stewart still owed First Columbus well in excess of the policy limits. Hence, First Columbus did not fully satisfy the debt at the foreclosure sale. This specific question is a case of first impression in Mississippi and analogous case law from other jurisdictions is helpful. National Farmers cites Aetna Ins. Co. v. Baldwin County Bldg. and Loan Ass'n, 231 Ala. 102, 163 So. 604 (1935), as persuasive authority. This case, however, is factually distinguishable from the case at bar. In Baldwin County, the bank purchased the insured property after a fire loss at a foreclosure sale. The purchase price was the full amount of the debt. Baldwin County, 163 So. at 605-06. Clearly, in that situation, the bank should be precluded from receiving the insurance proceeds because it had fully satisfied the debt. Here, First Columbus satisfied less than ten percent of the debt. To apply the same result in Baldwin County to the case at hand would prove to be a great injustice. The Alabama Supreme Court has addressed the issue of when the foreclosure does not fully satisfy the mortgage debt, and we now adopt their rule. In Nationwide Mut. Fire Ins. Co. v. Wilborn, 291 Ala. 193, 279 So.2d 460 (1973), the Alabama Supreme Court stated that when the loss precedes the foreclosure the mortgagee has two different means by which he may satisfy the mortgage. He may look to the insurance company for payment as mortgagee under the [standard union] [m]ortgage clause and may recover, up to the limits of the policy, the full amount of the mortgage debt at the time of the loss. In this event he would have no additional recourse against the mortgagor for the reason that his debt has been fully satisfied. The second alternative available to the mortgagee is satisfaction of the mortgage debt by foreclosure. If the mortgagee elects to pursue this latter option, and the foreclosure sale does not bring the full amount of the mortgage debt at the time of the loss, he may recover the balance due under the insurance policy as owner. If the foreclosure does fully satisfy the mortgage debt, he, of course, has no additional recourse against the insurance company, as his debt has been fully satisfied. Wilborn, 279 So.2d at 463 (citations omitted) (emphasis added). Applying this rule of law, First Columbus should be allowed to recover the proceeds from the insurance policy up to the balance due on the debt. It is undisputed that the debt was in excess of $50,000.00 and the foreclosure sale resulted in a little over $2,000.00. Applying the rule in Wilborn, First Columbus should be awarded the policy limits ($20,000) minus the amount received from the foreclosure sale ($2,065.30). This is exactly what the court below determined in granting summary judgment in the amount of $17,934.70. The majority of courts which have addressed this issue are in accord with the above stated rule. See, e.g., Fireman's Fund Mortgage Corp. v. Allstate Ins. Co., 838 P.2d 790 (Alaska 1992); Arkansas Teacher Retirement System v. Coronado Properties, Ltd., 33 Ark. App. 17, 801 S.W.2d 50 (1990); Lutheran Brotherhood v. Hooten, 237 So.2d 23, cert. denied, 240 So.2d 641 (Fla. 1970); Georgia Farm Bureau Mut. Ins. Co. v. Brewer, 202 Ga. App. 127, 413 S.E.2d 770 (1991), cert. denied, (April 9, 1992); Western Employers Ins. v. Bank of Ravenswood, 159 Ill. App.3d 22, 111 Ill.Dec. 105, 512 N.E.2d 9 (1987), appeal denied, 117 Ill.2d 555, 115 Ill.Dec. 411, 517 N.E.2d 1097 (1987); Farmers & Merchants Sav. Bank v. Farm Bureau Mut. Ins. Co., 405 N.W.2d 834 (Iowa 1987); Rollins v. Bravos, 80 Md. App. 617, 565 A.2d 382 (1989), cert. denied, 318 Md. 515, 569 A.2d 644 (1990); 495 Corp. v. New Jersey Ins. Underwriting Ass'n, 173 N.J. Super. 114, 413 A.2d 630 (1980), aff'd, 86 N.J. 159, 430 A.2d 203 (1981); and Tech Land Dev., Inc. v. South Carolina Ins. Co., 57 N.C. App. 566, 291 S.E.2d 821 (1982). See also, 5A J. Appleman, Insurance Law and Practice, § 3403 (1970) (Furthermore, it has been held that the fact that a mortgagee purchasing the property upon foreclosure for less than the mortgage debt later resold it at a profit would not bar his recovery of the deficiency out of the insurance proceeds.). In sum, the policy itself, the statute, and the persuasive case law all agree that First Columbus had the right to proceed with the foreclosure without impairing its rights to recover under the insurance policy. Thus, the lower court was correct in granting First Columbus summary judgment for the difference between the amount realized at the foreclosure and the amount due on the note plus interest. Accordingly, no error is found.
National Farmers' second theory to bar recovery by First Columbus asserts that First Columbus impaired the subrogation rights of National Farmers in violation of the policy itself and Mississippi statutory law. In formulating its argument, National Farmers correctly states that First Columbus is a party to the contract of insurance through the standard mortgage clause. This Court in Weems v. American Sec. Ins. Co., held that this clause is a separate contract of insurance entered into between the mortgagee and the insuror. Weems v. American Sec. Ins. Co., 450 So.2d 431, 436 (Miss. 1984). National Farmers also recognized that this contract provided that any payments made by National Farmers under the policy to First Columbus would entitle National Farmers to have the rights of First Columbus transferred to it. McGory v. Allstate Ins. Co., 527 So.2d 632 (Miss. 1988) (where insurer is not liable to insured mortgagor but, nevertheless, pays mortgagee, insurer is subrogated to all the rights of the mortgagee). Although National Farmers recites the correct law it fails to properly apply such law. The language of the policy itself and the statute demonstrate the order in which events must occur before the insurer will be subrogated to the mortgagee's interest. The pertinent part of the policy reads as follows: If we pay the mortgage holder for any loss or damage and deny payment to you because of your acts or because you have failed to comply with the terms of this Coverage Part: (1) The mortgage holder's rights under the mortgage will be transferred to us to the extent of the amount we pay. (emphasis added). The statute in pertinent part reads as follows: Whenever this company shall pay the mortgagee (or trustee) any sum for loss or damage under this policy and shall claim that, as to the mortgagor or owner, no liability therefor existed, this company shall, to the extent of such payment, be thereupon legally subrogated to all the rights of the party to whom such payment shall be made, under all security held as collateral to the mortgage debt, or may, at its option, pay to the mortgagee (or trustee) the whole principal due or to grow due on the mortgage with interest, and shall thereupon receive a full assignment and transfer of the mortgage and of all such other securities; but no subrogation shall impair the right of the mortgagee (or trustee) to recover the full amount of ____ claim. Miss. Code Ann. § 83-13-9 (1972) (emphasis added). The language found in the policy and in the statute make it apparent that the insurance company must first pay the mortgagee before it can subrogate the rights of the mortgagee. In fact, the amount of such payment dictates the extent of the subrogation. Payment is a necessary condition precedent to subrogation rights. This rule of law was recognized by this Court in Great American Ins. Co. v. Smith, 252 Miss. 62, 172 So.2d 558 (1965). In Smith, the appellant asserted that the lower court erred in not directing subrogation of the mortgagee's rights under the deed of trust pursuant to Miss. Code Ann. § 5695 (1956) (now Miss. Code Ann. § 83-13-9). Smith, 172 So.2d at 559. However, the appellant had not paid the mortgagee under the policy and this Court held that subrogation follows as a matter of law when, but not before, appellant makes payment to the mortgagee. Id. (emphasis added). The holding in Smith is consistent with the language of the policy itself and the controlling statute. Thus, until National Farmers pays First Columbus under the policy, it cannot allege violations of rights which are not yet vested. [1]