In this interpleader action, Fireman's Fund Mortgage Corporation (Fireman's Fund) and First National Bank of Anchorage (First National) each claim $28,175 which was interpled by Allstate Insurance Company.
I. FACTS & PROCEEDINGS
Fireman's Fund administered a deed of trust for Alaska Housing Finance Corporation (AHFC) on property located in Fairbanks. First National held a second deed of trust on the property securing a loan in the amount of $147,000. At all relevant times, the title owner of the property was Marjorie Severance-Hoover.
Due to a default on the loan secured by its first deed of trust, Fireman's Fund began non-judicial foreclosure proceedings by recording a Notice of Default in April 1989. A foreclosure sale occurred on August 3, 1989. At the time of the sale, the principal owing on the Fireman's Fund loan was $93,996.56 (not including accrued interest and foreclosure fees). Fireman's Fund bought the property on behalf of AHFC with an offset bid of $75,486.15. Several days later, Fireman's Fund discovered for the first time that the house on the property had been virtually destroyed by fire just a few hours before the start of the sale.
The trust deeds required Ms. Severance to maintain fire insurance on the property for its "full insurable value." Two fire insurance policies covered the property at the time of the fire: one issued by Allstate
First National was not named as a loss payee in either policy. However, Allstate has admitted, and Fireman's Fund does not contest, that First National has a lender's interest in the subject property making it a loss payee under the policy.
After the fire, the two insurers ordered an appraisal of the property. The appraiser determined that the market value of the property in its undamaged state was $86,000. The appraiser then estimated that the fire had reduced the property's value by $58,000 and placed its post-fire market value at $28,000 for land and undamaged site improvements.
Based on this appraisal, the two insurers pro-rated their liability under the policies. American Bankers Insurance paid its pro-rated share directly to Fireman's Fund. Allstate initially tendered a check for $28,175.00 payable jointly to Ms. Severance and Fireman's Fund as full settlement for its pro-rated share. However in December 1989, after the Severance estate
In February 1990, Allstate deposited the $28,175 with the clerk of the court. First National moved for summary judgment seeking not only the amount interpled by Allstate but a sum representing the entire amount of the loss. After a cross-motion for summary judgment by Fireman's Fund, the superior court granted First National's motion and awarded it the interpled funds plus interest. The trial judge only offered two citations without text or explanation to support his decision: Bohn v. Louisiana Farm Bureau Mutual Ins. Co., 482 So.2d 843, 851 (La. App. 1986) and Stormont v. Weatherby, 4FA-86-01771 Civ. (Alaska Super., 4th Dist., Fairbanks, April 20, 1987) (Decision of Superior Court Judge Jay Hodges). This appeal followed.
The question presented in this case is one of first impression for this court.
1. Alaska Statute 34.20.100 does not operate to extinguish a secured debt upon foreclosure as a matter of law.
As a preliminary matter, we note that the authority cited by the trial judge may be distinguished on the facts and therefore fails to support the court's decision. In Stormont, the superior court held that a non-judicial foreclosure sale subsequent to a fire loss extinguishes the underlying mortgage and therefore divests the mortgagee of the right to collect insurance proceeds. Stormont, slip op. at 3. However, this holding was explicitly based on the fact that the mortgagee had bid the full amount due on the mortgage at the foreclosure sale. The trial judge observed: "since [the mortgagee] has been paid-in-full, he is not entitled to the insurance proceeds." Id. (emphasis added).
In Bohn, a mortgagee, who was named as loss payee under a "standard" mortgagee clause, sought fire insurance proceeds for a fire damaged property which it purchased at its own foreclosure sale subsequent to the fire's occurrence. Bohn, 482 So.2d at 844-46. The mortgagor sought the same proceeds. Id. The Bohn court first noted that Louisiana's antideficiency statute provides that if a mortgagee elects to satisfy its debt through a foreclosure sale without the benefit of an appraisal and the sale proceeds are insufficient to satisfy the debt, "the debt nevertheless shall stand fully satisfied and discharged in so far as it constitutes a personal obligation of the debtor." La. Rev. Stat. Ann. § 13:4106; Id. at 848. The court then reasoned that:
Id. at 851 (emphasis added).
The holding in Bohn supports the proposition that a mortgagor may, under Louisiana's antideficiency act, recover fire insurance proceeds if a mortgagee forecloses without appraisal subsequent to a fire loss. However, both the language of Louisiana's statute and the rationale of the Bohn opinion indicate that a second mortgagee may not simply step into the mortgagor's shoes and recover the proceeds following a foreclosure by the first mortgagee. In other words, it does not follow that a second mortgagee is afforded the same statutory protections as the mortgagor, nor does it follow that a first mortgagee's interest in the insurance proceeds is extinguished as to all claimants.
Furthermore, Fireman's Fund persuasively argues that Alaska's antideficiency statute, AS 34.20.100, is fundamentally different than Louisiana's statute in that it does not operate to extinguish the underlying debt but merely eliminates certain
In Hull v. Alaska Federal Sav. & Loan Ass'n, 658 P.2d 122 (Alaska 1983), we held that although the antideficiency statute:
Id. at 125. While we recognize that Hull is not precisely on point because fire insurance proceeds are generally considered substitute security rather than additional security, the case supports Fireman's Fund's view that a non-judicial foreclosure sale does not operate to extinguish the underlying debt.
It is also significant that the competing claimants in the present case are first and second mortgagees rather than a mortgagor and a mortgagee as in Hull.
In Hull, we stated that the "Alaska anti-deficiency statute, like the post-depression enactments of many other states, was aimed at relieving the plight of debtors whose obligations were secured by mortgages or other security interests in land." Id. at 124 n. 3 (emphasis added). The protections of this statute are aimed at the mortgagor and may not be invoked by a junior lienor who knowingly took a lesser security interest. We have stated that "[t]he effect of the trustee's sale was to discharge all [the mortgagor's] obligations under the note." Smith v. Shortall, 732 P.2d 548, 549 (Alaska 1987). However, the fact that the mortgagor's obligation is discharged does not mean that the underlying debt is extinguished for all purposes.
Finally, the statute's plain language supports the conclusion that the loan obligation is not completely extinguished as a matter of law at the time of a non-judicial foreclosure sale. The statute contemplates the survival of a loan "obligation" following the sale, but precludes the lender from seeking any "deficiency" on this obligation either from the debtor or from the debtor's guarantor.
2. Fireman's Fund is bound by its offset bid but may seek reformation of the sales contract given the equities of this case.
Fireman's Fund was protected by a "standard" mortgagee clause in the two fire insurance policies. A standard mortgagee clause in an insurance contract provides a mortgagee with much greater protection than a "simple" loss payee clause which merely designates the mortgagee as an alternative payee under the policy. Under a standard mortgagee clause, a mortgagor's breach of the insurance contract will not bar recovery by the mortgagee. Bohn, 482 So.2d at 850 (quoting Couch on Insurance Law § 42:694 (2d ed. 1963)). The standard clause constitutes a separate and independent contract between the mortgagee and the insurance company which is "measured by the terms of the mortgage clause itself."
Calvert Fire Ins. Co. v. Environs Development Corp., 601 F.2d 851, 856 (5th Cir.1979).
Although not specifically discussing "standard" mortgagee clauses or the effect of subsequent foreclosure, we have made a similar observation in Moran v. Kenai Towing & Salvage, Inc., 523 P.2d 1237, 1239-40 (Alaska 1974):
Moran, 523 P.2d at 1239-40. Clearly, the rationale behind these cases is the desire to prevent a double recovery. Thus Fireman's Fund is prohibited, under the rationale in Moran, from receiving more insurance proceeds than required to satisfy its outstanding debt.
The next issue which must be resolved is the amount of Fireman's Fund's outstanding debt following the foreclosure
We recognize the validity of Fireman's Fund's economic argument and have some reservations about holding it to an offset bid made in ignorance of the property's condition merely to preserve what is essentially a legal fiction (i.e. that the offset bid represents a mortgagee's actual payment for the property).
Fireman's Fund had a contractual right to the insurance proceeds which vested at the time of the fire. See Atlas Assurance Co. v. Mistic, 822 P.2d 897, 903 (Alaska 1991); see also Corbin v. Aetna Life & Cas. Co. 447 F.Supp. 646, 650 (N.D.Ga. 1978). The subsequent foreclosure did not change this contractual right. However, at the foreclosure sale a few hours later, Fireman's Fund essentially "spent" $75,486.15 of its total indebtedness in making its offset bid. This offset bid left Fireman's Fund with an outstanding indebtedness of approximately $18,500 plus interest and
Nonetheless, our holding today does not mean that Fireman's Fund is left without legal recourse to avoid this result. Given the facts of this case,
The best solution is to allow Fireman's Fund to seek reformation of the foreclosure sales contract to replace the $75,486.15 purchase price with a price more reflective of the actual market value of the property at the time of sale. Traditionally, reformation is a tool courts use to correct what are essentially errors in the drafting of a contract so as to conform the written agreement to the "clear intention of the parties." See Oaksmith v. Brusich, 774 P.2d 191, 197 (Alaska 1989). We have also held that "[r]eformation is appropriate where, by reason of mutual mistake, the written agreement does not accurately reflect the bargain intended by the parties." Riley v. Northern Commercial Co., Mach. Div., 648 P.2d 961, 969 (Alaska 1982).
However, we have also recognized a more expansive use of the tool of reformation to allow our courts to alter the terms of a contract when the interests of justice so require. In Vockner v. Erickson, 712 P.2d 379 (Alaska 1986), we upheld a superior court's reformation of a land sales contract based on the finding of unconscionability. Id. at 383. We noted that "the aim of reformation in these circumstances is to bring the contract in conformity with minimal standards of conscionability." Id. at 384.
The present case falls somewhere between the traditional use of reformation and its more expansive use based on an examination of the equities involved. On the one hand, all parties to the foreclosure sale were operating under the belief that the subject property was undamaged at the time of sale. Fireman's Fund's bid was therefore based on a mutual mistake as to the condition of the property. Fireman's Fund was bargaining for an undamaged property and did not obtain the benefit of its bargain. Reformation of the sales price is therefore appropriate. Also, from an equity standpoint, it is significant that this was a foreclosure sale in which the mortgagee operating the sale purchased the foreclosed property. Fireman's Fund was, in essence, both the buyer and seller in the transaction.
The somewhat unusual features of this case make reformation a sensible remedy. We therefore conclude that Fireman's Fund may seek reformation upon remand of this case to the superior court. Even so, Fireman's Fund has the burden of showing by clear and convincing evidence that reformation is warranted. See Oaksmith, 774 P.2d at 197. At this proceeding, all interested parties should be allowed to present evidence as to Fireman's Fund's knowledge of the condition of the property at the time of sale and any other related matters.
On the undisputed facts presented, we hold that Fireman's Fund is not precluded by AS 34.20.100 (1990) from satisfying its outstanding debt from available insurance proceeds even though it purchased the fire-damaged property at its own foreclosure
REVERSED and REMANDED for further proceedings consistent with this opinion.
10A Charles A. Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 2720 at 20 (1983). Therefore, as a strictly procedural matter, First National has not waived its right to contest this issue. However, the undisputed facts disclosed in the record appear capable of supporting only one conclusion; that Fireman's Fund made its offset bid with no knowledge of the fire.
However, in the present case, Allstate acknowledges its obligation under the contract and the dispute is between competing claimants to the proceeds. It is the equitable relationship between the parties that is at issue not an interpretation of the contract provisions. See Moran v. Kenai Towing and Salvage, Inc. 523 P.2d 1237, 1240 n. 2 (Alaska 1974) (in a dispute involving a mortgagor and a mortgagee's competing claims to insurance proceeds, we concluded that the statute governing insurance contracts was not directly relevant; instead we focused on the equitable relationship between the parties). Therefore, Fireman's Fund's argument on this point has little merit.
Tech Land Dev. v. South Carolina Ins., 57 N.C. App. 566, 291 S.E.2d 821, 823-24 (1982) (quoting Malvaney v. Yager, 101 Mont. 331, 54 P.2d 135, 139 (1936) (citations omitted, emphasis in original). Here, the fire occurred only hours before the sale, and Fireman's Fund had no actual or constructive notice of the damage. These unusual facts make a straightforward application of the traditional rule problematic.
Id. (quoting the district court). The Connecticut Supreme Court takes an approach more reflective of economic reality. See Burritt Mut. Sav. Bank v. Transamerica Ins., 180 Conn. 71, 428 A.2d 333 (1980). The court first recognized that "inequitable results may be produced if a court regards the debt as wholly satisfied when the mortgagee has in fact received less than full payment." Id. at 338 (quoting Keeton, Basic Text on Insurance Law 188, n. 4 (1971)). Since the record failed to disclose the actual value of the damaged property at the time the mortgagee acquired the deed through strict foreclosure, the court remanded the case for a determination whether "the appropriation by strict foreclosure of the mortgaged property has equitably satisfied the mortgage debt." Id. 428 A.2d at 339.