Opinion ID: 9029
Heading Depth: 3
Heading Rank: 1

Heading: contractual rights and assignment

Text: 34 Palma, by virtue of her status as a third-party beneficiary, is a borrower who has contractual rights. See Temple Eastex, Inc. v. Old Orchard Creek Partners, Ltd., 848 S.W.2d 724, 730 (Tex.App.--Dallas 1992, writ denied). She is entitled to enforce the conditions contained in the insurance policy that affect her. See id. (the third-party beneficiary ... is entitled to rely upon and to enforce all of the contract's provisions.). Although the trial court erroneously found that Palma was not entitled to enforce the conditions contained in the contract for insurance, it proceeded to interpret the conditions contained in the contract for insurance in order to determine the amount of the deficiency that Verex was entitled to collect. 35 In finding of fact number five, the trial court found that Palma was entitled to a credit of $30,800--the amount of proceeds received at foreclosure. In finding of fact number six, the trial court found that the deficiency debt due and owing, after applying all lawful and proper credits, is $115,825.14. This is the amount that the trial court determined that City Federal was entitled to collect from Palma--the same amount that was ultimately assigned to Verex. The trial court classified these findings as findings of fact, but they were based upon the trial court's interpretation of conditions contained in the contract for insurance. Consequently, we conduct a de novo review in order to determine if the trial court erred when it determined the amount of the deficiency due and owing by Palma. See Harbor Ins. Co., 990 F.2d at 199. 36
37 When City Federal elected to collect mortgage insurance proceeds, the contract for insurance imposed bidding requirements upon City Federal. These bidding requirements therefore impacted the amount that might remain as a deficiency after foreclosure on Palma's property. The relevant conditions of the policy form read as follows: 38 10. PROCEDURE UNDER FAULT ... The Insured shall also furnish to the Company, at least (15) days prior to the foreclosure sale, if any, a statement indicating the amount anticipated to be due, at the time of sale, to the Insured under the terms of the policy and shall be required to bid, at the sale, the amount due to the Insured under the terms of the policy (emphasis added).... 39 11. COMPUTATION OF LOSS--The amount of loss payable to the Insured shall be limited to the principal balance due pursuant to the mortgage agreement, accumulated interest computed through the date of the tender of conveyance, as hereinafter set forth (penalty interest excluded), real estate taxes and hazard insurance premiums necessarily advanced. 40 13. OPTION TO PAY A PERCENTAGE OF THE AMOUNT DUE--In lieu of conveyance of the title to the mortgage premises and payment in accordance with Condition 11, the Company shall have the option of paying the percentage of the amount due to the Insured in accordance with the amount of coverage selected and paid for as indicated on the face of the Certificate, or subsequent Certificate amendments, and shall have no claim to said real estate, such payment to be full and final discharge of the Company's liability. 41 Palma contends that under the provisions quoted above, if City Federal intended to collect the mortgage insurance proceeds it was required to bid the total amount of the debt due at foreclosure, thereby eliminating the deficiency balance on the note. 42 The trial court considered Palma's full-debt bid argument but rejected it. In finding of fact number one the court found that Condition 10 did not require the lender to pay as its bid at foreclosure sale the full amount of the loan. However, the trial court did not specify what Condition 10 did require of City Federal. 43
44 If City Federal intended to collect the proceeds of the mortgage insurance policy after foreclosure, Condition 10 required it to bid the amount due to [City Federal] under the terms of the policy. Palma contends that the amount due under the terms of the policy is to be determined by looking at the language contained in Condition 11, entitled Computation of Loss. If we were to adopt the reasoning preferred by Palma, we would be requiring lenders who entered into contracts prior to February 24, 1984, 6 to bid the entire amount due under the terms of the mortgage if they intended to collect mortgage proceeds after foreclosure. 45 The approach urged by Palma is contrary to the law as it existed at the time in question. If a debtor wanted to challenge the amount bid by the lender at foreclosure the law in Texas required the debtor to establish: (1) that the amount of proceeds received from sale at foreclosure was grossly inadequate, and (2) an irregularity in the foreclosure sale. Only after a finding of both gross inadequacy and irregularity would the court prohibit the proceeds from being used in calculating the deficiency. Thompson v. Chrysler First Business Credit Corp., 840 S.W.2d 25, 33 (Tex.App.--Dallas 1992, no writ). Although this approach was amended by statute in early 1991, 7 the amendment does not affect our decision concerning what amount the lender was legally obligated to bid prior to the statutory change. 46 Condition 10 requires the lender to bid either: (1) the full amount of the balance due on the note, as defined in Condition 11, or (2) no less than twenty-five percent of the balance. Either of these approaches was permitted under the terms of the contract for insurance, as long as the amount bid was not grossly inadequate and there had been no irregularity in the foreclosure sale. 47 By requiring the lender to bid a minimum of twenty-five percent of the total amount due before being entitled to collect insurance proceeds, the borrower was afforded some degree of assurance that he would be receiving a fair credit on his deficiency balance. The lender still had to bid an amount that complied with Texas law, and this amount might be more than the minimum twenty-five percent, but in no event should it have been less. The lender could also bid an amount that was both less than twenty-five percent and not violative of Texas law, as long as he did not intend to collect mortgage guaranty insurance proceeds. Only when the lender intended to collect insurance proceeds would he be obligated under the terms of the contract to bid a minimum of twenty-five percent, assuming that this amount was neither grossly inadequate nor the result of an irregularity in the foreclosure sale. 48 In the instant case, City Federal purchased the property at foreclosure for $30,800. 8 This amount was then credited against Palma's deficiency balance. The trial court found that the amount bid by City Federal was not grossly inadequate. It is not necessary for us to determine whether the trial court erred when it found that the amount bid by City Federal was not grossly inadequate because it is clear that the trial court erred when it found that there had been no violation of Condition 10 of the contract. 49 If the trial court had interpreted Condition 10 as written, it would have found that City Federal was required to submit a minimum bid of twenty-five percent, or $37,139.72. 9 The trial court's error in interpreting Condition 10 was compounded when it failed to properly credit the deficiency balance that would have remained after foreclosure. Palma was entitled to a credit of $37,139.72 in proceeds from the sale at foreclosure, leaving a deficiency balance of $111,447.16. 10 As discussed below the trial court further erred when it failed to credit this deficiency with the insurance proceeds received by City Federal. 50
51 Condition 15 waived Verex's rights to pursue Palma for any loss paid to the insured pursuant to this policy. The amount paid to City Federal was $51,122.47. It is clear that Palma was entitled to enforce the waiver of subrogation rights present in Condition 15, which entitled her to a credit of $51,122.47 on the amount assigned by City Federal to Verex. 11 The trial court should have properly credited the deficiency balance owed by Palma with the amount paid by Verex to City Federal. If it had done so it would have found that the deficiency assignable to Verex was $60,326.69. 12 52 The errors commited by the trial court in determining the amount of the deficiency balance caused it to further err in finding of fact number eight. In finding of fact number eight the trial court stated that Verex is the assignee of the deficiency claimed, and has the right to recover it under the lawful assignment agreement. This finding is erroneous because the assignment agreement violated the express terms of the contract, thereby violating Palma's rights as a third-party beneficiary. As a result of the errors present in the trial court's finding of facts, we must reverse the judgment of the trial court.