Liberty Insurance Corporation v. Shaw

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ALABAMA

EASTERN DIVISION

LIBERTY INSURANCE )

CORPORATION )

)

Plaintiff, ) CIVIL ACTION NO:

) 1:19-CV-01397-CLM

v. )

)

ARNOLD O. SHAW, et al., )

)

Defendants. )

MEMORANDUM OPINION

Plaintiff Liberty Insurance Corporation (“Liberty”) asks the court to distribute

$94,247.34 in insurance policy proceeds. Three candidates have emerged. Defendant

Arnold Shaw (“Shaw”) believes he is entitled to the entire sum. Defendants Caliber

Home Loans, Inc. (“Caliber”) and U.S. Bank Trust, N.A. (“U.S. Bank”) (collectively

“U.S. Bank”) argue that they are collectively entitled to $43,295.11, with Shaw to

receive the remaining $50,952.23. For the reasons stated within, Shaw is entitled to

all the proceeds. So the court will GRANT Shaw’s motion for summary judgment

and DENY U.S. Bank’s motion for summary judgment.

STATEMENT OF THE FACTS

This case involves a mortgage, a fire, and a foreclosure. The parties mostly

agree on the facts.

Shaw had a home in Sylacauga. Shaw executed a mortgage in favor of MBNA

America, N.A. to secure debt on the home. Some months later, MBNA assigned the

mortgage to HSBC.

Liberty issued an insurance policy that covered Shaw’s home. After Liberty

issued the policy, Shaw’s property caught fire, causing a total loss. Shaw notified

Liberty and HSBC of the fire and submitted a claim to Liberty, who issued a check

of $94,247.34 jointly to Shaw and HSBC. Neither Shaw or HSBC cashed the check,

so Liberty re-issued it.

After the fire, Caliber began servicing Shaw’s mortgage, and HSBC assigned

the mortgage to U.S. Bank. Caliber sent a third party to inspect Shaw’s property.

The report from this inspection said the property was in “poor” condition, confirmed

the fire damage with photographs, and described the home as a “candidate for

demolition.” Caliber sent a second group to inspect; and that group came to similar

conclusions, sent Caliber more photographs, and quoted Caliber an as-is price of

$12,000, with a quick sale price of $8,000.

Throughout this time, and beginning before the fire, Shaw fell behind on his

loan payments. So U.S. Bank foreclosed on the known-to-be damaged property.

Shaw owed $50,795.11 on the loan at the time of the foreclosure. U.S. Bank bought

the property at the foreclosure sale using a credit bid worth the same amount as what

Shaw owed on the loan: $50,795.11. U.S. Bank later sold the property for $7,500.

During all that time, the insurance check went uncashed. So Liberty filed this

Complaint for Interpleader, asking this court to determine who is entitled to the

unclaimed insurance proceeds.

STANDARD OF REVIEW

Summary judgment is appropriate only when the moving party shows there is

no genuine issue of material fact and the moving party is entitled to judgment as a

matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). A fact is material

if it is one that might affect the outcome of the case. Anderson v. Liberty Lobby, Inc.,

477 U.S. 242, 248 (1986). In turn, to avoid summary judgment, the nonmoving party

must go beyond mere allegations to offer specific facts creating a genuine issue for

trial. Id. at 324. Moreover, all evidence must be viewed and inferences drawn in the

light most favorable to the nonmoving party. Centurion Air Cargo, Inc. v. United

Parcel Serv. Co., 420 F.3d 1146, 1149 (11th Cir.2005). When no genuine issue of

material fact exists, the moving party is entitled to judgment as a matter of law. Fed.

R. Civ. P. 56(c).

ANALYSIS

U.S. Bank and Shaw agree that Shaw should receive some of the insurance

proceeds. The question is: how much?

Shaw argues that he gets it all. U.S. Bank, though, believes it should recoup

the $50,795.11 it spent at the foreclosure sale to buy the property, minus the $7,500

it made by selling the property to a third party. In other words: $43,295.11.

A. Legal Entitlement

Only two documents might entitle U.S. Bank to some of the proceeds: (a) the

insurance policy and (b) the mortgage. But U.S. Bank concedes that it has no rights

under the insurance policy because, under Alabama law (which governs here), U.S.

Bank’s use of a full credit bid to purchase Shaw’s property eliminated the debt Shaw

owed to U.S. Bank, thereby triggering the policy’s so-called New York Standard

Mortgage clause. Nationwide Mut. Fire Ins. Co. v. Wilborn, 279 So.2d 460, 465

(Ala. 1973) (holding that a mortgagee may not recover insurance proceeds under a

policy containing a New York Standard Mortgage clause when the mortgage debt

has already been satisfied). Because U.S. Bank has no right under the insurance

policy, U.S. Bank admits that the policy entitles Shaw to the entire amount.

U.S. Bank instead argues that Shaw assigned a portion of his rights under the

insurance policy to U.S. Bank in Paragraph 5 of the mortgage:

If under paragraph 16 the Property is acquired by Lender,

Borrower’s rights 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.

Doc. 32-3, p. 2. According to U.S. Bank, Paragraph 5 dictates that, once U.S. Bank

bought the property using the Paragraph 16 foreclosure clause, Shaw relinquished

his right to $50,795.11 of the insurance proceeds—i.e., the “extent of the sums

secured by this Security Instrument immediately prior to the acquisition.” U.S. Bank

is willing to give Shaw a $7,500 credit for the monies U.S. Bank made by later

selling the property, even though Paragraph 5 doesn’t require any credit.

In other words, U.S. Bank argues that, when Shaw signed the mortgage, he

signed away application of Alabama’s full credit bid (aka foreclosure after loss) rule,

thereby allowing U.S. Bank to exploit full credit bidding and recoup its full credit

bid by dipping into Shaw’s insurance policy. The parties admit that Alabama courts

have yet to decide whether a mortgagor can sign away application of the full credit

bid rule. But the courts that have decided the issue say ‘no’. See Rodriquez v. First

Union Nat’l Bank, 810 N.E. 2d 1282 (Mass. App. Ct. 2004) (finding that the

mortgagee’s full credit bid extinguished any assignment of rights); Emmons v. Lake

States Ins. Co., 484 N.W. 2d 712, 714 (Mich. Ct. App. 1992) (finding that a full

credit purchase extinguished the mortgagor’s debt and thus a similar assignment

clause “secured nothing”). The Third Restatement of Property (Mortgages) says the

same thing:

[I]f the mortgagee chooses to foreclose and the foreclosure bid is at

least equal to the mortgage obligation, that obligation is fully satisfied

and the mortgagee shall have no additional recourse against the

insurance carrier. . . . [T]his result … is not altered by the fact that the

mortgage contains language that, in the event of foreclosure, the

mortgagor’s rights in casualty insurance policies pass to the foreclosure

sale purchaser.

Id. § 4.8.

Thankfully, this federal court needn’t speculate whether Alabama state courts

would adopt the same rule because it is dictated by the plain language of the

mortgage. Again, Paragraph 5 assigned Shaw’s rights to insurance proceeds after

U.S. Bank bought the property at foreclosure under Paragraph 16. Paragraph 16

allowed U.S. Bank to foreclose on Shaw’s property and buy it at the foreclosure sale.

Paragraph 16 then dictated that the proceeds of the sale “be applied in the following

order: (a) to all expenses of the sale, including but not limited to, reasonable

attorney’s fees; (b) to all sums secured by the Security Instrument, and (c) any

excess to the person or persons legally entitled to it.” Doc. 32-3 at 5 (emphasis

added). As U.S. Bank acknowledge at oral argument, its payment of $50,795.11

covered the expenses and “all sums secured by the Security Instrument.” Id.

U.S. Bank’s receipt of all sums secured triggered Paragraph 18: “Upon

payment of all sums secured by this Security Instrument, Lender shall release this

Security Instrument without charge to Borrower.” Id. (emphasis added). Once U.S.

Bank received payment of “all sums secured by the Security Instrument,” the

Security Instrument (i.e., the mortgage) became ineffective. That means Shaw’s

post-sale assignment of rights to insurance proceeds also became ineffective, as the

plain language of the mortgage says that “[t]his security instrument secures to

Lender: … (c) the performance of Borrower’s covenants and agreements[.]” Id. at

2. In short, once there was no debt, there was no mortgage. And if there is no

mortgage, there is no assignment of rights to insurance proceeds.

This plain reading of the mortgage mirrors Alabama common law. As the

Alabama Supreme Court has often said, “[i]f there is no debt there is no mortgage.”

Cottingham v. Citizens Bank, 859 So.2d 414, 420 (Ala. 2003) (citing Jarrett v.

Hagedorn, 185 So. 2d 401, 402 (1938)). That is, once the debt disappears—as

through a full credit bid in a foreclosure sale—the mortgage no longer binds the

parties. Interpreting nearly the same language as contained in Paragraph 18, the

Alabama Supreme Court has held that “the rule, well-nigh universal, is that, when a

debt secured by a mortgage has been paid, the mortgage becomes functus officio,

and it cannot be made to stand as security for a new or different debt between the

parties.” Cottingham, 859 So.2d at 420 (citing Hammock v. Oakley, 154 So. 906,

908 (1934). The Eleventh Circuit has also endorsed this view, stating that when “the

foreclosure and sale of the property [bring] the full amount of the debt, the note and

mortgage would be extinguished.” Allstate Ins. Co. v. James, 779 F.2d 1536, 1539

(11th Cir. 1986).

In sum, both the mortgage’s plain language and Alabama law say that U.S.

Bank cannot claim Shaw’s rights under Paragraph 5 because the mortgage is null.

B. Equitable Entitlement

U.S. Bank also argues that, if Shaw is legally entitled to the entire amount of

the insurance proceeds, equity demands that U.S. Bank receive a portion because

Shaw was delinquent in his mortgage payments. In fact, Shaw didn’t make a single

payment to Caliber or U.S. Bank once they obtained his mortgage.

The court rejects this equitable argument for two reasons. First and foremost,

Alabama law doesn’t allow equity to trump the plain language of a mortgage or

insurance policy. In fact, that was U.S. Bank’s position in the briefs: “‘Under

Alabama law, this Court, when interpreting a contract, must follow the plain

language of the contract.’ This is all that Caliber and U.S. Bank Trust are requesting

from the Court: follow the plain language of Paragraph 5.” Doc. 35 at 4 (quoting

Pub. Bldg. Auth. Of City of Huntsville v. St. Paul Fire & Marine Ins. Co., 80 So.3d

171, 180 (Ala. 2010)). When the court confronted U.S. Bank with Paragraph 18 at

oral argument, U.S. Bank conceded that it could cite no Alabama case that would

allow this court to ignore Paragraph 18’s plain language and rule in equity.

Second, the court would not find that the equities tip in favor of U.S. Bank

even if the court could rule in equity. U.S. Bank received written reports and

photographs from two inspections of Shaw’s burned-out property that put U.S. Bank

on notice that the property was nearly worthless. And the court says “nearly” because

one inspector told Caliber that it might make $8,000 in a quick sale—a number very

close to the $7,500 that the bank ultimately received.

Yet, U.S. Bank still decided to put a full credit bid of $50,795.11 to purchase

the property. Why? The court can only speculate. The least charitable view would

be that U.S. Bank offered the bid to discourage other well-meaning bidders from

purchasing the property, knowing full well that no one would pay over $50,000 for

the charred remains of a house. U.S. Bank could then turn around and sell the

property for whatever it was worth (which it did), pocket that amount, and then go

after the insurance proceeds under Paragraph 5 of the mortgage—which the bank

believed (hoped) was operative.

The more charitable view is that U.S. Bank simply erred. Despite a century’s

worth of precedent about full credit bidding, and a growing amount of third-party

warnings against the practice—including one from the American Association of

Private Lenders—U.S. Bank decided to place a full credit bid on property worth

nowhere near that amount. See Edward Brown, Best Practices for Credit Bidding at

Foreclosure, AMERICAN ASSOCIATION OF PRIVATE LENDERS (Aug. 19, 2019),

https://aaplonline.com/best-practices-for-credit-bidding-at-foreclosure/ (advising

lenders that they may have “no recourse” when seeking insurance proceeds after

using a full credit bid to purchase property at a foreclosure sale). U.S. Bank thought

the mortgage might offer a reprieve. It didn’t. And that’s not Shaw’s fault.

No matter why it placed a full credit bid, U.S. Bank is not blameless. That

Shaw also has unclean hands simply means that the balance of equities tips in no

one’s favor. Nor does it matter; the plain language controls. And it says Shaw wins.

CONCLUSION

For the reasons stated above, Shaw’s motion for summary judgment (doc. 26)

is due to be GRANTED and U.S. Bank’s motion for summary judgment (doc. 31)

is due to be DENIED. So the court will enter a separate order granting and denying

the respective motions and dismissing this case with prejudice.

DONE this 10th day of February, 2021.

Lavegl Me te

COREYLZMAZE

UNITED STATES DISTRICT JUDGE