The opinion
Melvin Mayfield, Judge, dissenting. The majority opinion in this case is bad news for anyone in Arkansas who has ever sold a house with a mortgage on it. The opinion holds that where the owner of a house that is mortgaged sells it to another person who assumes the mortgage and insures the house for his and the mortgage company’s benefit, the seller will still be liable for the amount due on the mortgage if the purchaser is unable to collect on the insurance, even though the mortgage company collects from the insurance company for the full amount of the indebtedness secured by the mortgage. I do not think that this is or should be the law and I dissent from the holding of the majority opinion.
In Sureck v. United States Fidelity & Guaranty Co., 353 F. Supp. 807 (W.D. Ark. 1973), the court said:
It is well established law in Arkansas that where a mortgage requires the mortgagor to keep the premises insured for the protection of the mortgagee, and where the policies issued to the mortgagor contain loss payable clauses in favor of the mortgagee and mortgage clauses such as the ones involved in this case, the parties have effected a pre-appropriation of insurance proceeds to payment of the mortgage debt, and such proceeds cannot be used for any other purpose without the consent of both parties. Price v. Harris, 1972, 251 Ark. 793 , 475 S.W.2d 162 ; Sharp v. Pease, 1936, 193 Ark. 352 , 99 S.W.2d 588 ; Kissire v. Plunkett-Jarrell Grocer Co., 1912, 103 Ark. 473 , 145 S.W. 567 , Bonham v. Johnson, 1911, 98 Ark. 459 , 136 S.W. 191 ; Consolidated Underwriters of South Carolina Insurance Co. v. Bradshaw, W.D. Ark., 1955, 136 F.Supp. 395 . As is sometimes said, where the property is destroyed by fire, the insurance proceeds stand in place of the property and are in effect an equitable conversion of it. Kissire v. Plunkett-Jarrell Grocer Co., supra, 103 Ark. at 480 , 145 S.W. at 570 .
More recent cases to the same effect are: Rea v. Ruff, 265 Ark. 678 , 580 S.W.2d 471 (1979); Farm Bureau Mutual Ins. Co. v. Shaw, 269 Ark. 757 , 600 S.W.2d 432 (Ark. App. 1980). See also United Stores of America, Inc. v. Fireman’s Fund Ins. Co., 420 F.2d 337 (8th Cir. 1970), where the court said:
In our view, the essential question presented here is simply whether the insurance policies were procured for the benefit of the lessor-mortgagor. If so, Mercantile, as mortgagee, upon receipt of the insurance proceeds, became obligated to apply those funds to the mortgage note, as it in fact did, and no right of subrogation survives to the insurer. (Citations omitted.)
In the instant case, it is undisputed that the appellees, Rex Rogers and Terrance Buchanan, purchased property that had a mortgage on it and that they assumed that mortgage. It is also undisputed that they sold the house to Mr. and Mrs. Mark Gayman who assumed the mortgage; that the Gaymans obtained an insurance policy on the property which insured their interest and the interest of the mortgage holder; that the house on the property was partially destroyed by fire; and that the insurance company refused to pay the Gaymans, apparently because the company thought the Gaymans caused the fire. Also without dispute is the fact that the Gaymans sued the insurance company and lost, and that the company then paid the mortgage holder the entire amount due on the mortgage and received an assignment of the mortgage and note which it secured. Regardless of these undisputed facts and the law quoted above, the majority opinion finds Rogers and Buchanan liable to the insurance company for what the insurance company paid the mortgage company.
The majority opinion suggests that, since there was a valid defense against the Gaymans, the mortgage holder did not have to credit the insurance proceeds on the mortgage debt because (1) the insurance company’s contract was between itself, the Gaymans and the mortgage holder, and Rogers and Buchanan were not parties thereto, and (2) the Gaymans should not be allowed to benefit indirectly by having their mortgage indebtedness paid when they could not recover directly from the insurance company.
I recognize the general rule set out in the majority opinion, from 59 C.J.S. Mortgages § 328 at 453 (1949), that if the insurer has no liability to the mortgagor, the proceeds of the insurance on the mortgaged property, when paid to the mortgagee, need not be applied in reduction of the mortgaged debt. However, the cases cited in support of this statement in C.J.S., both in the main volume and in the cumulative pocket part, give no reason for the rule other than to state that the mortgagee’s insurance coverage, in the event there is no liability to the mortgagor, is in the nature of a separate contract. I do not find this reasoning very persuasive; and in any event, it would not apply in this case because here it is undisputed that the Gaymans obtained insurance for the benefit of the mortgage holder, and it is clear that contracts made for the benefit of third parties are actionable. Howell v. Worth James Construction Co., 259 Ark. 627 , 535 S.W.2d 826 (1976); Baker v. Bank of Northeast Arkansas, 271 Ark. 948 , 611 S.W.2d 783 (Ark. App. 1981).
The other reason suggested by the majority opinion to support its conclusion that the mortgage holder should not have to credit the insurance proceeds on the mortgage debt in this case is that the Gaymans should not benefit indirectly by having their mortgage indebtedness paid when they could not recover directly from the insurance company. I fully agree with that reasoning and I suspect that it is the real reason for the general rule that the mortgage holder does not have to apply the insurance proceeds in reduction of the mortgage debt when the insurer has no liability to the mortgagor. Therefore, in the instant case, I would hold that the insurance obtained by the Gaymans, which also insured the mortgage holder’s interest, would have to be applied to the payment of the mortgage on the property except as to the liability of the Gaymans. I would allow the insurance company to be subrogated to the mortgage holder’s claim against the Gaymans since subrogation is an equitable doctrine having for its basis the doing of complete and perfect justice between the parties without regard to form, and its purpose and object being to prevent injustice. See Baker v. Leigh, 238 Ark. 918 , 385 S.W.2d 790 (1965); see also Crone v. Johnson, 240 Ark. 1029 , 403 S.W.2d 738 (1966) (the Arkansas Supreme Court said “principles of justice” permitted a court of equity to require a mortgage holder to apply insurance proceeds to monthly payments in order to prevent a default on the mortgage resulting in an “inequitable” acceleration of the maturity of the debt).
Based on the same equitable principles, I would not allow the insurance company to get its money back from Rogers and Buchanan who are not guilty of any wrongdoing and who should not have to repay the insurance company for the loss it was paid a premium to insure. No case allowing judgment against an innocent grantor under circumstances like those in the instant case has been cited by the parties or by the majority opinion, and I respectfully dissent in this one.