Opinion ID: 509575
Heading Depth: 2
Heading Rank: 1

Heading: Equitable Lien; Equitable Reformation

Text: 12 On March 27, 1985, FmHA wrote a letter to appellants requiring them to obtain insurance on dwelling and assign it to FmHA. All of the mortgages between the United States and appellants contained a clause requiring the mortgage security to be properly insured for the benefit of the mortgagee. Nevertheless, FmHA was not listed as mortgagee on appellants' fire insurance policy with American General, the policy was not assigned to FmHA, and there was no loss payee clause in the policy in favor of FmHA when the fire occurred on April 26, 1986. 13 The district court found that these facts invoked the doctrine of equitable lien under Louisiana law as set out in Wheeler v. Insurance Company, 101 U.S. 439, 442, 25 L.Ed. 1055 (1880). 14 [I]t is settled by many decisions in this country, that if the mortgagor is bound by covenant or otherwise to insure the mortgaged premises for the better security of the mortgagee, the latter will have an equitable lien upon the money due on a policy taken out by the mortgagor to the extent of the mortgagee's interest in the property destroyed. [Citations omitted]. The equitable doctrine upon which the appellants' claim is founded undoubtedly obtains in Louisiana. It is derived from the principles of the civil law, which is the basis of the civil code of that State; and it is supported by the authorities cited from the Louisiana reports. [Citations omitted.] 15 The district court held that Wheeler is still recognized authority in Louisiana courts, citing Davis v. Aetna Casualty & Surety Company, 329 So.2d 868, 872 (La.App.1975), writ refused, 333 So.2d 233 (La.1976). 16 It is not clear from Davis, however, whether Wheeler still is the law in Louisiana. The Davis court merely stated, we are cognizant of the equitable lien theory enunciated in Wheeler, but then went on to resolve the issue before it (penalties and attorney's fees) on the basis of La.R.S. 22:658. Id. No recent cases cited by the district court or by the parties refer to Wheeler. 5 Of course, the general law in Louisiana is that where an insurance policy is taken out by a mortgagor for the benefit of a mortgagee, the mortgagee is entitled to the proceeds of the policy to the extent of the mortgage debt due at the time of loss. Durbin v. Allstate Insurance Co., 267 So.2d 779, 781 (La.App.1972); Adams v. Allen, 19 So.2d 578, 580 (La.App.1944). Particularly applicable to the case before us are the recent Louisiana cases holding that this principle of law is properly applied where the mortgagee is unnamed in the policy. The legal theory in these cases is that an equitable reformation of the insurance contract for the benefit of a previously unnamed mortgagee is justified in order to prevent unjust enrichment. Leon A. Minsky, Inc. v. Providence Fashions, Inc., 404 So.2d 1275, 1278-79 (La.App.), writ denied, Y407 So.2d 731 (La.1981); Taylor v. Audubon Insurance Co., 357 So.2d 912, 914-15 (La.App.), writ denied, 359 So.2d 1307 (La.1978); Diaz v. Cherokee Insurance Co., 275 So.2d 922, 924-25 (La.App.1973). 17 Under Louisiana jurisprudence, reformation is an equitable remedy whereby a court may reform a contract so as to reflect the intentions of the parties. An insurance policy may be reformed where, because of error or mistake, the policy does not conform to the original intention of the parties. Pacific Insurance Co. v. Quarles Drilling Corp., 850 F.2d 1087, 1088-89 (5th Cir.1988). Clearly, the Louisiana doctrine of equitable reformation articulated in Minsky, Taylor, and Diaz is applicable to prevent unjust enrichment in the present case. Appellants had agreed to maintain insurance on their home for the benefit of FmHA as a condition for receiving crop insurance loans worth substantially more than the value of their home. It must be assumed that the debtors intended to carry out their legally contracted obligation. Minsky, 404 So.2d at 1278. They cannot now claim the proceeds of that insurance for themselves on the basis of their own failure to name FmHA as mortgagee or loss payee in their policy. 18 The district court held that the government is entitled to the insurance proceeds on the theory that an equitable lien was created in favor of the FmHA at the time of the fire. The same result would obtain on either the equitable lien or the equitable reformation theory. We are not certain, however, whether the equitable lien doctrine continues to exist in Louisiana, and it is unnecessary to decide that question to resolve this case. Thus we affirm the district court's holding that the government was entitled to the insurance proceeds on the theory of equitable reformation. In Louisiana, an appellate court has authority to render any judgment which is just, legal and proper based on the record on appeal, irrespective of whether the particular legal theory on which it makes the judgment has been advanced before, or considered by, the trial court. LA. CODE CIV.PROC.ANN. art. 2164 (West 1961); Givens v. Richland-Morris Agency, Inc., 369 So.2d 1184, 1185 (La.App.1979); McMorris v. Pepperdene, 292 So.2d 892, 893-94 (La.App.), writ denied, 294 So.2d 840 (La.1974); Diaz, 275 So.2d at 926. 19 We therefore reform the insurance contract to name FmHA as the loss payee in accordance with the Reeses' prior obligation under the mortgages it granted in return for the crop production loans. This equitable reformation is effective as of the date the insurance policy was issued, and concurrent with the policy during its term. See Diaz, 275 So.2d at 925. Thus FmHA was properly the loss payee under the insurance policy both at the time it was issued, and at the time of the fire. 20