Bankers Trust Company v. Rishty

A-1386-98T1 (N.J. Super. App. Div. 1999) (Unpublished)
  • Opinion Date: July 22, 1999

MORTGAGES; FORECLOSURE; INSURANCE—The failure of a lender, as mortgagee, to file a fire insurance claim is not a defense to a foreclosure action.

A borrower was in default pursuant to a note and mortgage. The lender commenced foreclosure proceedings. The borrower asserted several defenses, including the lender’s unclean hands and unconscionable actions, estoppel, and the lender’s refusal to file a timely “proof of loss” with the borrower’s homeowner’s insurance company for a fire at the premises. The lender claimed it had no duty to file a proof of loss. Following the fire, the borrower submitted two “Sworn Statements in Proof of Loss” to its insurance company. Because the borrower was involved in an investigation of suspicious fires at other properties, she was initially unwilling to submit to examinations under oath. Consequently, the borrower requested that the lender file an independent proof of claim which, according to the borrower, would give the lender an immediate right to payment notwithstanding any dispute between the borrower and its insurance company. Following a tortured procedural and substantive history, a substantial amount of interest accrued. The lender eventually filed a claim, and the carrier paid some monies to the lender in return for a partial assignment of the mortgage. Even then, the carrier required the lender to continue the foreclosure proceeding and to place the proceeds from that proceeding into escrow until such time as the insurance company resolved its insured’s claim. The borrower was entirely unsuccessful before the lower court and argued on appeal, that the lower court erred by failing to: (1) require the lender to pursue an independent claim against the insurance carrier; (2) credit it with the amount of the insurance proceeds; (3) direct that the insurance proceeds be used to repair the house; and (4) stay the foreclosure pending resolution of a separate action in the Law Division. First, the borrower argued that the lender’s refusal to promptly pursue a claim against the insurance company constituted a breach of its covenant of good faith and fair dealing. According to the borrower, the lender had an independent right to coverage under the insurance policy. The Court conceded that the borrower was correct that a “standard mortgage clause” in an insurance policy “is an independent agreement between the insurer and the mortgagee.” Nonetheless, the Court pointed out that a mortgagee does not have an independent claim in all situations. In this case, the policy excluded coverage for the mortgagee if “the loss results from the fraudulent acts or omissions” of the mortgagor. In particular, the insurance company suspected that the fire was “incendiary in nature and not accidental.” That is why the insurance company required the lender to prosecute the foreclosure action and place in escrow an amount of the proceeds from the sale of the property equal to its payment, “pending a determination of the rights by [the lender and the homeowner].” The insurance policy provided that there was no right on the part of the lender to make an application for proceeds until its borrower’s claim was definitively denied. This never occurred. Further, neither the lender’s refusal to pursue a claim against the insurance company nor its breach of promise to pursue such a claim, if there was one, constituted a defense to a foreclosure action. “The only material issues in a foreclosure action are the validity of the mortgage, the amount of the indebtedness, and the rights of the mortgagee to resort to the mortgaged premises.” While it is true that “foreclosure is a discretionary remedy,” and in proper circumstances, a court will not allow one to go forward, in this case, the borrower was held not have behaved equitably and that any delay in processing the insurance claim was of its own making. As to the allegation that the lender breached its duty of good faith and fair dealing by accepting an insufficient amount on the claim, the Court found that the borrower provided no evidence that the amount accepted was inadequate compensation for the damage or even that no negotiations took place. The borrower contended that had the lender negotiated, and received, a higher amount from the insurance company, the amount announced as owing at the Sheriff’s Sale would have encouraged greater competitive bidding. The Court, however, held that the borrower cited no factual or legal authority to support the proposition that the amount due would affect competitive bidding. In fact, it believed that regardless of the amount of the judgment, “[b]idders will bid to the assumed value of the property.” With respect to the borrower’s demand that the insurance proceeds be utilized to repair the house, the Court found that the lender had been made insecure, and remained insecure by the borrower’s failure to make payments of principal and interest. Thus, under the mortgage, the lender was not bound to apply the insurance proceeds to repair the house. Finally, the Court recited law to the effect that when a mortgagor is in default, a court will not stay a foreclosure pending the outcome of a related case.