Court Opinion

ID: 2982030
Source: CourtListenerOpinion
Date Created: 2015-09-22 20:00:47.440127+00
Date Added: 2024-06-11T11:37:57.935538
License: Public Domain

NOT PRECEDENTIAL

         UNITED STATES COURT OF APPEALS
              FOR THE THIRD CIRCUIT
                  _______________

                       No. 14-4668
                    ________________

          LEXINGTON INSURANCE COMPANY

                             v.

3039 B STREET ASSOCIATES, INC; INVESTORS TRUST LLC;
           MARC J GROSSMAN ASSOCIATES,

               3039 B Street Associates, Inc.,
                                      Appellant

       On Appeal from the United States District Court
          for the Eastern District of Pennsylvania
                 (D.C. No. 2-12-cv-06810)

         District Judge: Honorable Joel H. Slomsky
                       _____________

                Argued: September 11, 2015

Before: VANASKIE, SLOVITER, and RENDELL Circuit Judges.

            (Opinion filed: September 22, 2015)
Steven F. Marino, Esq. [Argued]
Marino & Conroy
301 Wharton Street
Philadelphia, PA 19147

             Attorney for Appellant

Kevin F. Buckley, Esq.
Daniel M. O’Connell, Esq.
Philip C. Silverberg, Esq.
Mound, Cotton, Wollan & Greengrass
One New York Plaza
9th Floor
New York, NY 10004

Patricia A. Fecile-Moreland, Esq.
Marks, O’Neill, O’Brien, Doherty & Kelly
1800 John F. Kennedy Blvd.
Suite 1900
Philadelphia, PA 19103

             Attorneys for Appellee Lexington Insurance Company

Jonathan J. Bart, Esq. [Argued]
Daniel S. Bernheim, III, Esq.
Rachel C. Heinrich, Esq.
Wilentz, Goldman & Spitzer
Two Penn Center Plaza
Suite 910
Philadelphia, PA 19102

             Attorneys for Appellee Investors Trust LLC

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                                ______________________

                                       OPINION
                                ______________________

SLOVITER, Circuit Judge.

       This appeal concerns whether a mortgagor or mortgagee is entitled to hazard

insurance proceeds in excess of a deficiency judgment for damage that occurred to a

property prior to foreclosure. 3039 B Street Associates, Inc. (“3039 B”), a former

mortgagor, appeals from the District Court’s summary judgment order awarding

Investors Trust LLC (“Investors”), the mortgagee, proceeds of an insurance payout for

damage to a warehouse that 3039 B lost in foreclosure proceedings. For the following

reasons, we will reverse the District Court’s order to the extent that it awards Investors

the proceeds of the insurance policy in excess of the deficiency judgment it held against

3039 B, and remand for entry of an order awarding these proceeds to 3039 Barb.
I.

       3039 B previously owned real property consisting of a warehouse in Philadelphia.

Investors was the mortgagee of the property and held a note for $250,000. 3039 B was

required to maintain a hazard insurance policy on the property and it procured a policy


  This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not
constitute binding precedent.

                                           3
from the Lexington Insurance Company (“Lexington”). The relevant language of the

mortgage states:

              . . . In the event of loss, Borrower shall give prompt notice to
              the insurance carrier and Lender. . . .

              Unless Lender and Borrower otherwise agree in writing,
              insurance proceeds shall be applied to restoration or repair of
              the Property damaged . . . . If the restoration or repair is not
              economically feasible or Lender’s security would be lessened,
              the insurance proceeds shall be applied to the sums secured
              by this Security Instrument, whether or not then due, with any
              excess paid to Borrower. . . .

              . . . If . . . the Property is acquired by Lender, Borrower’s
              right to any insurance policies and proceeds resulting from
              damage to the Property prior to the acquisition shall pass to
              Lender to the extent of the sums secured by this Security
              Instrument immediately prior to the acquisition.

Dist. Ct. Doc. No. 7, Ex. B. The policy from Lexington included a standard mortgage

clause, which required Lexington to pay the proceeds of the policy to Investors, as

mortgagee, in the event of a loss.

       3039 B’s property was damaged by vandals in 2010. Lexington found that the

value of the loss claim was $206,349.72 and initially paid $66,507.74 to Investors, which

Investors applied to 3039 B’s note.

       Before Lexington issued the remainder of the insurance proceeds, 3039 B

defaulted on the mortgage and Investors initiated foreclosure proceedings. Investors

purchased the property at the sheriff’s sale and the state court determined, pursuant to

Pennsylvania’s Deficiency Judgment Act, 42 Pa. Cons. Stat. § 8103, that the fair market

value of the property was $250,000. The court determined that Investors’ damages were

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$287,410.571 and entered a deficiency judgment of $37,410.57 against 3039 B.

       Lexington agreed that it was obligated to pay $130,041.982 and filed an

interpleader action pursuant to Federal Rule of Civil Procedure 22 to determine whether

3039 B or Investors was entitled to the insurance proceeds.3 Both 3039 B and Investors

moved for summary judgment. The District Court ruled that 3039 B was not entitled to

the insurance proceeds because the foreclosure on the property terminated its interest in

the property. Thus, the court determined that Investors was entitled to the funds in excess

of the deficiency judgment. This timely appeal followed.

                                            II.4

                                            A.

       Our review of a district court’s grant or denial of summary judgment is plenary.

Brown v. J. Kaz, Inc., 581 F.3d 175, 179 (3d Cir. 2009). A “court shall grant summary

judgment if the movant shows that there is no genuine dispute as to any material fact and

the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a).

       As this case arises through diversity jurisdiction, we must apply Pennsylvania law

and “‘[i]n the absence of any clear precedent of the state’s highest court, we must predict

1
  These damages include the principal owed, interest, late fees, and attorneys’ fees.
2
  Lexington determined that $130,041.98 was due under the policy by subtracting the
already disbursed payments, $66,307.74, and the policy’s deductible, $10,000, from the
calculated damage amount of $206,349.72. The record, however, shows that the sum of
payments already disbursed by Lexington is $66,507.74.
3
  This action included several crossclaims between 3039 B, Investors, Lexington, and the
insurance adjuster. As the only issue on appeal concerns 3039 B and Investors, our
discussion is limited to which party is entitled to insurance proceeds from the 2010 loss.
4
  The District Court had jurisdiction pursuant to 28 U.S.C. § 1332. We exercise
jurisdiction pursuant to 28 U.S.C. § 1291.

                                      5
how that court would resolve the issue.’” Hunt v. U.S. Tobacco Co., 538 F.3d 217, 220-

21 (3d Cir. 2008) (alteration in original) (quoting Yurecka v. Zappala, 472 F.3d 59, 62

(3d Cir. 2006)). Intermediate state appellate court decisions are “a datum for ascertaining

state law which is not to be disregarded by a federal court unless it is convinced by

otherwise persuasive data that the highest court of the state would decide otherwise.”

Comm’r of Internal Revenue v. Bosch’s Estate, 387 U.S. 456, 465 (1976) (internal

quotation marks and citation omitted).

                                             B.

       The District Court correctly noted that “the Pennsylvania Supreme Court has yet

to determine the effect of foreclosure on a mortgagee’s right to claim insurance

proceeds,” and therefore, we must predict how the Supreme Court of Pennsylvania would

rule on this issue. App. at 35. The District Court relied on the Pennsylvania Superior

Court’s opinion in Laurel National Bank v. Mutual Benefit Ins. Co., 444 A.2d 130, 133

(Pa. Super. Ct. 1982) [hereinafter “Laurel”] for the proposition that 3039 B’s interest in

the insurance proceeds was extinguished by Investors’ foreclosure on the property.

Although we agree that Laurel is useful to predict how the Supreme Court of

Pennsylvania would rule, we do not agree on the opinion’s application to this case.

       In Laurel, the issue was whether the mortgagors, who held a homeowners’

insurance policy, or the mortgagee, were entitled to the proceeds from that policy for a

fire that occurred after the mortgagee foreclosed on and purchased the property at the

sheriff’s sale. 444 A.2d at 131. The Laurel court held that “[t]he mortgagor’s rights to

any insurance proceeds were cut off by foreclosure but the mortgagee’s rights to any

                                     6
insurance proceeds increased while remaining insured under the policy by the standard

mortgage clause.” Id. at 133. Importantly, the Laurel court noted

              that where the loss precedes the foreclosure, the rule is
              different since the mortgagee may satisfy the mortgage
              indebtedness by two different means. First he may recover up
              to the limits of the policy the full amount of the mortgage
              debt under the standard mortgage clause. The second
              alternative is to satisfy the mortgage debt through foreclosure
              and then recover the balance due, if there is any, under the
              insurance policy as owner.

Id. at 133-34 (citing Nationwide Mut. Fire Ins. Co v. Wilborn, 279 So. 2d 460 (Ala.

1973); Cont’l Ins. Co. of N.Y. v. Rotholz, 133 So. 587 (Ala. 1931)). Moreover, where the

loss precedes the foreclosure, the sheriff’s sale and the subsequent “‘satisfaction of the

debt takes into account the damaged conditions of the property at the time of the

foreclosure. [T]o allow recovery of insurance proceeds by the mortgagee after full

satisfaction of the debt would amount to [the] mortgagee’s unjust enrichment.’” Id. at

134 (quoting Wilborn, 279 So. 2d at 464) (first alteration in original).

       The principal difference between the mortgagee in Laurel and Investors is that the

mortgagee in Laurel assumed ownership of the property before the loss, and therefore its

“insurable interest was that of owner and not that of mortgagee.” 5 Id at 134 n.1.

Accordingly, Laurel supports our prediction that the Supreme Court of Pennsylvania

5
  Other jurisdictions have also concluded that a mortgagee may not recover more than the
amount of indebtedness for losses sustained prior to foreclosure. See, e.g., Lenart v.
Ocwen Fin. Corp., 869 So. 2d 588, 591 (Fla. Dist. Ct. App. 2004) (citing Wilborn and
holding that in a pre-foreclosure loss “[i]f the mortgagee elects to foreclose on the
property and the foreclosure sale does not bring the full amount of the mortgage debt,
then the mortgagee may recover the deficiency under the insurance policy as owner.”); W.
Employers Ins. v. Bank of Ravenswood, 512 N.E.2d 9, 10-11 (Ill. App. Ct. 1987) (same).

                                        7
would rule that where a loss precedes foreclosure, a mortgagee is entitled to insurance

proceeds to satisfy any deficiency still existing after foreclosure. However, we predict

that the Supreme Court would rule that a mortgagor is entitled to the proceeds in excess

of a deficiency judgment because the foreclosure sale of the property took into account

the condition of the property after the loss.

                                                C.

       Investors argues that the express language of the mortgage contract provides that

in the event of a foreclosure, 3039 B’s interest in any insurance proceeds resulting from

damage to the property prior to foreclosure shall be acquired by Investors after

foreclosure. Pennsylvania contract law principles require that we interpret a contract by

its express language when it is clear and unequivocal, and in a way that “give[s] effect to

all of the provisions therein.” Capek v. Devito, 767 A.2d 1047, 1050 (Pa. 2001) (internal

citation omitted). The parties have not cited, and we have not found, a Pennsylvania case

concerning the interpretation of this standard clause’s assignment of insurance rights after

foreclosure. However, other courts have considered this clause and determined that it is

“collateral security for the mortgage debt” and “[a]n assignment made as collateral

security for a debt gives the assignee only a qualified interest” up to the amount of

indebtedness, “even though the assignment is absolute on its face.” Emmons v. Lake

States Ins. Co., 484 N.W.2d 712, 714 (Mich. Ct. App. 1992); see also Fire Ins. Exch. v.

Bowers, 994 S.W.2d 110, 112-14 (Mo. Ct. App. 1999) (same and commenting that

“[h]ad the property brought less [than the amount of indebtedness upon foreclosure], the

claim of the bank would remain, but not exceeding the balance then owed.”).

                                         8
       We predict that the Supreme Court of Pennsylvania would interpret the language

of this clause to secure 3039 B’s debt owed with the insurance policy as collateral.

Accordingly, Investors could recover to the extent of the indebtedness from the insurance

policy, but not the insurance proceeds in excess of the deficiency judgment.

                                            III.

       For the foregoing reasons, the judgment of the District Court is reversed and

remanded with instructions to enter a judgment in the amount of $92,631.41 in favor of

3039 B.6

6
  Investors also urges that Horbal v. Moxham Nat’l Bank, 697 A.2d 577 (Pa. 1997), and
Option One Mortgage Corp v. Fitzgerald, 687 F. Supp. 2d 520 (M.D. Pa. 2009), control
this case and provide a theory whereby it should be entitled to the rest of the insurance
proceeds. We disagree. Horbal and Option One address the situation in which a
mortgagee forecloses on the subject property and does not bring a deficiency judgment
action. Those cases held that while the penalty for not doing so is the inability to proceed
against the personal assets of the debtor for the satisfaction of the debt, a CD and
insurance proceeds, respectively, were not vested in the debtor at the time of foreclosure
and therefore were not personal assets of the debtor. Thus, the mortgagee was entitled to
apply them to reduce the debt. Notably, the debt was the full amount owed at the time of
foreclosure, not reduced by a deficiency judgment. Here, the mortgagee, having
proceeded under the Deficiency Judgment Act, has had its debt reduced by the value of
the property and has no claim to any property once the $37,410.57 in remaining debt was
satisfied. Thus, Horbal and Option One address a totally different fact pattern and are
not relevant let alone controlling here.

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