Court Opinion

ID: 9668101
Source: CourtListenerOpinion
Date Created: 2023-08-24 02:02:25.768547+00
Date Added: 2024-06-11T18:15:43.013526
License: Public Domain

KILGARLIN, Justice,
dissenting.
I respectfully dissent. Although I would reverse the judgments of the courts below, I strenuously believe that Texas should adhere to the concept that in every contract there is an implied covenant of good faith and fair dealing that neither party will do anything which injures the right of the other party to receive the benefits of the agreement. It is only because I believe that the trial court’s instruction as to what constitutes good faith and fair dealing was erroneous that I would reverse the judgments below. However, instead of rendering judgment against the Fischers as the majority does, I would remand the case for another trial with the proper instruction.
The majority would have us believe that the concept of good faith and fair dealing is a novel theory of law, enunciated only by California courts. Surely the majority is cognizant of the Restatement (Second) of Contracts § 205 (1979), which states:
§ 205 Duty of Good Faith and Fair Dealing
Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.
Likewise, I would assume that the majority is equally familiar with Tex.Bus. & Com. Code Ann. § 1.203 (Tex.U.C.C.), which similarly states, “[ejvery contract or duty within this title imposes an obligation of good faith in its performance or enforcement.”
While the granting of damages for a breach of the implied covenant of good faith and fair dealing may be new to Texas law, the concept of how to distribute insurance proceeds is certainly not.
In Naquin v. Texas Savings and Real Estate Investment Assoc., 95 Tex. 313, 67 S.W. 85 (1902), this Court stated:
Under the circumstances of the case, it was the duty of the appellee (the investment association) to use the fund for the best interest of both parties, which were best served by rebuilding the house, whereby the security was preserved intact for the indemnity of both.
67 S.W. at 87. Because of this pronouncement, the majority must attempt to distinguish Naquin from the case at bar. I see scant difference in the language in the Na-quin deed of trust that the improvements on said property be kept insured for the benefit of the association and the language here that the property be kept fully insured and that the loss is payable to Mrs. English.
It is true that California courts have been active in applying the concept of good faith and fair dealing in contract cases. The California Supreme Court in Comunale v. Traders & General Insurance Co., 50 Cal.2d 654, 658, 328 P.2d 198, 200 (1958), held that “[tjhere is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement.” That principle was followed by another California Supreme Court in Crisci v. The Security Insurance Company of New Haven, Connecticut, 66 Cal.2d 425, 58 Cal.Rptr. 13, 426 P.2d 173 (1967).
Moreover, the concept of good faith and fair dealing in situations such as the one at *526bar has been supported by at least one leading commentator, who states:
At least in the absence of mortgage provisions to the contrary, it would seem that in the modern standard mortgage policy context where the mortgage is not in default, the mortgagor normally should be able, where rebuilding is practical, to insist upon the application of the insurance proceeds to rebuild the premises. To be sure, to permit the mortgagor to defeat the mortgagee’s right to recovery by rebuilding may force the mortgagee to litigate the extent and sufficiency of repairs. On the other hand, it is almost always the mortgagor who is paying the premiums on the casualty insurance policy. Moreover, while permitting the mortgagee to utilize the insurance proceeds to pay the mortgage debt presumably benefits the mortgagor by rendering the property free from the mortgage lien to the extent of the loss, in many cases the mortgagor probably cannot afford to rebuild or is unable to obtain new mortgage financing for that purpose. Thus, on balance, it would seem more equitable in most cases to permit the mortgagor to rebuild and have the insurance applied to that purpose.
Osbourne, Nelson and Whitman, Real Estate Finance Law (3d ed. 1979), § 4.15 at 150.
In this regard, it should be pointed out that at the time of the fire the Fischers were not in default on their mortgage payment. Moreover, it is uncontroverted that while the Fischers still owed Mrs. English $57,187.26 at the time of the fire the value of the property, even in its damaged state, was some $10,000 in excess of that amount owed. Therefore, there can be no question that Mrs. English was well protected.
The holding in Naquin is entirely consistent with the posture of most other jurisdictions. In a case involving damaged tugboats, Maryland’s highest court in Cottman Co. v. Continental Trust Co., 169 Md. 595, 182 A. 551 (1936), cited Naquin as authority in its decision. The Court observed that few cases have reached appellate courts where the use of insurance money for the repair and restoration of the security has been combated by the recipient mortgagee. The court stated:
The theory of insurance, however, does not contemplate a resulting profit to the insured, or his mortgagee or other creditor. The interest of the mortgagee is to maintain the equilibrium of debt and security; and if, by the application of the insurance money to the upkeep of the security, that parity would be continued, it is not inequitable to require the payee of the fund to transfer the same to the debtor for the purpose, upon properly safeguarding its application to that end.
182 A. at 554. In Cottman, as here, the mortgage did not specifically provide for the application of the proceeds of such insurance after payment to the trustee. Unlike the case at bar, Cottman, the tugboat owner, was able to pay for the repair from separate funds, and had requested the trustee to pay the insurance proceeds as reimbursement. The trust company refused to pay over the money, claiming the right to hold the insurance proceeds as a part of a fund for retirement of Cottman’s debt. Cottman prevailed and the funds were ordered paid over to it.
In Fergus v. Wilmarth, 117 Ill. 542, 7 N.E. 508 (1886), as in Cottman and the case at bar, the mortgagor was not in default on the payment of the note. Fergus’ property had been destroyed in the great Chicago fire, and his creditor, Wilmarth, wanted the insurance money credited to Fergus’ indebtedness; Fergus wanted to acquire the money to rebuild. The Illinois Supreme Court concluded that the trustee should hold the insurance proceeds “until the new building should have progressed far enough to justify an expenditure of the fund and liquidating the cost of its erection.” 7 N.E. at 510.
Schoolcraft v. Ross, 81 Cal.App.3d 75,146 Cal.Rptr. 57 (Cal.App.1978) applied the concept of good faith and fair dealing to a situation exactly as the one before us. In Schoolcraft, the noteholder, Ross, had refused to sign over the insurance check to Schoolcraft, who desired to rebuild the *527burned down premises. The California court stated, “[t]o the extent the security was not impaired, defendant Ross had no right to the funds.” 146 Cal.Rptr. at 60. In a case closely resembling the one at bar, a New Jersey court adopted the good faith and fair dealing concept. Starkman v. Sigmond, 446 A.2d 1249, 184 N.J.Super. 600 (Ch.1982) citing Schoolcraft, supra, Fergus, supra, Gottman Co., supra, and the Osbourne treatise, supra, as precedent. It ruled that the mortgagee, Sigmond, was not entitled to receipt of the funds in order to pay off the outstanding indebtedness.
I therefore submit that rather than being a novel theory of law enunciated only by California courts, the principle that in every contract there is an implied covenant of good faith and fair dealing that neither party will do anything which injures the right of the other to receive the benefits of the agreement is now well established in American jurisprudence.
Having concluded that Mrs. English did owe the obligation of good faith and fair dealing to the Fischers, I would submit that nevertheless the judgments of the trial court and court of appeals should be reversed, but remanded for another trial. My reasoning is that I am of the opinion that special issue number four (the good faith and fair dealing issue) was erroneously submitted. That special issue reads as follows:
Do you find from a preponderance of the evidence that Sarah Jane (Rylee) English, by refusing to endorse the insurance check (P-X 15) over to the Fischers, breached the implied warranty of good faith and fair dealing as hereinafter defined?
You are instructed that the “implied warranty” of “good faith and fair dealing,” as used herein, requires that the mortgagee cooperate with the mortgagor so that any insurance funds would be used not to serve the sole interest of the mortgagee, but be used for the best interests of both the mortgagee and the mortgagor.
Answer “We do” or “We do not.”
Answer: We do
I would first observe that the use of the word “warranty” was improper. “Covenant” would have been correct. More importantly, the instruction imposes a much greater burden upon English than good faith and fair dealing. It requires her cooperation with the Fischers to the extent that the insurance proceeds be used for the best interest of both. Texas Business and Commerce Code section 1.201, defines “good faith” as meaning “honesty in fact in the conduct or transaction concerned.” Section 2.103 of the Code defines “good faith” in the case of a merchant as meaning “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.” Our courts, in construing the good faith requirement of the Code, have required a finding of bad faith before imposing liability. See Richardson Go. v. First National Bank, 504 S.W.2d 812 (Tex.Civ.App.—Tyler 1974, writ ref’d n.r.e.); Riley v. First State Bank, Spearman, 469 S.W.2d 812 (Tex.Civ.App.—Amarillo 1971, writ ref’d n.r.e.). Both of these cases have as authority a pre-Code case, Quanah, A & P Ry. Co. v. Wichita State Bank and Trust Co., 127 Tex. 407, 93 S.W.2d 701 (1936). English’s proffered instruction that she did not honestly believe she had a right to retain the insurance proceeds as payment on the debt would amount to such a bad faith test.
I would submit that should there be a retrial of this case, English’s good faith and fair dealing should be measured by whether she honestly believed she had a right to retain the insurance proceeds. I hasten to note, however, that this standard should be for the determination of whether English is subject to consequential damages. Under the facts of this case, English had no right to retain the insurance proceeds and such should have been surrendered immediately to the Fischers, even though English was the named payee under the terms of the deed of trust.
Rather than being an iconoclast and destroying one hundred fifty years of Texas law, as portrayed by the majority, I would submit that I am only extending Naquin to *528its logical consequences and adopting the modem, and majority, view of the law.
RAY, J., joins in this dissent.