Is a claim on property insurance proceeds a deficiency claim?
whitm...@gmail.com
In Celink v. Estate of Pyle, 2023 WL 4782784 (Md. App. July 27, 2023), Mr. Pyle’s house burned down. He had a reverse mortgage on the property and an insurance policy covering the fire. As is typical with reverse mortgages, there was a clause in his mortgage prohibiting the secured lender from obtaining a deficiency judgment in the event of foreclosure. (Maryland ordinarily permits deficiency judgments, but such a judgment must be obtained in the foreclosure proceeding, and not in a separate action.)
As a result of Mr. Pyle’s death in the fire, the loan came due and was foreclosed by Celink, the mortgage servicer. The lender bid $175,000, which left a deficiency of more than $200,000 below the balance due on the note. The issue before the court was whether the insurance proceeds should be distributed to the lender and applied toward the deficiency, or whether the estate of Mr. Pyle was entitled to them. The estate argued that it should get the insurance proceeds because they were, in effect, a deficiency payment to the lender, and the original deed of trust had prohibited the lender from collection of a deficiency in the event of foreclosure. Moreover, the servicer had not taken the necessary procedural steps to obtain a deficiency in the foreclosure proceeding.
The court concluded that these arguments were irrelevant because the lender’s claim was not a deficiency claim at all. It noted that the fire loss had taken place before the foreclosure. Hence, the covenant in the deed of trust requiring the borrower to carry the insurance was for the lender’s benefit. Since the real estate had been sold, the insurance could no longer be used to restore the damage to it, but the insurance proceeds were still subject to the lender’s equity, as a sort of substitute res to which the lender’s lien attached. The lender was therefore entitled to assert its lien against the insurance proceeds.
The court’s position is in agreement with the Mortgages Restatement. § 4.8 states in relevant part:
Effect of Foreclosure on Mortgagee’s Right to Insurance and Eminent Domain Proceeds
(a) Where a mortgagee has a right to foreclose a mortgage because the mortgage obligation is fully due and payable and the mortgagee has a right to casualty insurance or eminent domain proceeds under § 4.7, the mortgagee may either:
(1) recover from the insurance proceeds ...; or
(2) foreclose on the mortgaged real estate and, to the extent that doing so does not satisfy the mortgage obligation, recover the balance from the insurance proceeds or from the eminent domain award.
Thus, the lender’s recovery was not a deficiency judgment, but was an aspect of its recovery under its mortgage lien. Its waiver of its deficiency claim did not impair its rights, nor did its failure to perfect a deficiency claim in the foreclosure proceeding.
Dale
Dale Whitman
Professor of Law Emeritus, University of Missouri
David Reich
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Bruce Leuzzi
Certainly consider Mark A. Frankel, mfra...@bfklaw.com, (212) 593-1100.
Bruce Leuzzi, Esq.
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Gregory W. Carman Jr.
Where is the petition being filed?
Gregory W. Carman, Jr., Esq.
Carman, Callahan & Ingham, LLP
266 Main Street
Farmingdale, NY 11735
(516) 370-5515 dd
(516) 249-3782 fax
(516) 359-3897 cell
From: nyclar...@googlegroups.com <nyclar...@googlegroups.com>
On Behalf Of David Reich
Sent: Thursday, January 18, 2024 12:22 PM
To: nyclar...@googlegroups.com
Subject: Re: [nyclarealprop] Is a claim on property insurance proceeds a deficiency claim?
Dear Group,
To view this discussion on the web visit https://groups.google.com/d/msgid/nyclarealprop/CAGACGK0pQwH5T%3DSVOjveaqD6wYsG0Ai%2B_41xRVJGCC7u7ksj6A%40mail.gmail.com.
Michael Brofman
We can certainly handle that for you. Please give me a call and I’ll give you a free primer on what might happen in a bankruptcy.
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From: nyclar...@googlegroups.com <nyclar...@googlegroups.com>
On Behalf Of David Reich
Sent: Thursday, January 18, 2024 12:22 PM
To: nyclar...@googlegroups.com
Subject: Re: [nyclarealprop] Is a claim on property insurance proceeds a deficiency claim?
Dear Group,
To view this discussion on the web visit https://groups.google.com/d/msgid/nyclarealprop/CAGACGK0pQwH5T%3DSVOjveaqD6wYsG0Ai%2B_41xRVJGCC7u7ksj6A%40mail.gmail.com.
David Reich
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David Reich
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