Northern Security Ins. Co. v. Federal National Mortgage Assn

• Court: Superior Court of Maine
• Decided: November 26, 2014
• Docket: CUMcv-13-167
• Status: Unpublished

Opinion

ENTERED DEC 0 5;;;;

STATE OF MAINE SUPERIOR COURT CUMBERLAND, ss CMLACTION DOCKET NO. CV-13-167

NORTHERN SECURITY JAw-~-~~-~-11+ INSURANCE COMPANY, INC., Plaintiff, ORDER ON MOTION v. FOR SUMMARY

FEDERAL NATIONAL JUDGME~OF~NE MORTGAGE ASSOCIATION, C ss, crerrs Office Defendant. NOV 2 4lo/q

Before the court is the defendant Federal National MortgBDMt.D ("Fannie Mae")'s motion for summary judgment and Northern Security

Insurance Company, Inc. ("Northem")'s cross-motion for summary judgment.

BACKGROUND 1 In 1987, Donato Corsetti purchased property at 447 Gray Road in

Windham, Maine that was secured by a mortgage in favor of Option One

Mortgage Company ("OOMC"). (Def.'s Supp. S.M.F.

assigned the mortgage to Green Tree Servicing, LLC ("Green Tree"). (Def.'s

Supp. S.M.F.

September 2006. (Def.'s Supp. S.M.F.

insurance policy to cover the property from plaintiff Northern Security Insurance

Company, Inc. ("Northern"). (Def.'s Supp. S.M.F.

named OOMC as the mortgagee. (Def.'s Supp. S.M.F.

mortgageholder and its successors and assigns to the extent of their interest,

1 Defendant's statement of material facts state that the property is located at 449 Gray Road. The mortgage and foreclosure judgment, however, state that the address is 447. provided the terms of the policy have been fulfilled. (Def.'s Supp. S.M.F. «[ 8, as

qualified.)

In 2011, Green Tree commenced foreclosure proceedings against Corsetti

in the Superior Court. (Pl.'s Add. S.M.F. «[ 17.) Following a bench trial on June 18,

2012, Green Tree was granted judgment on July 16, 2012. (Pl.'s Add. S.M.F. «[ 18.)

The redemption period expired on October 14, 2012. (Pl.'s Add. S.M.F. «[ 19.)

Green Tree purchased the property on behalf of Fannie Mae at a public sale on

November 29, 2012. (Pl.'s Add. S.M.F. «[ 20.) Northern was not notified of the

foreclosure proceedings, the judgment, or the eventual sale to Green Tree. (Pl.'s

Add. S.M.F. «[ 23.) Green Tree recorded the foreclosure deed granting title to

Fannie Mae on December 12, 2012. (Def.'s Supp. S.M.F. «[ 12.)

On December 7, 2012, a fire caused extensive damage to the property, 2 which Fannie Mae values at approximately $230,000. (Def.'s Supp. S.M.F. «[ 11;

Def.'s Supp. S.M.F. «[ 13.) Northern denied coverage under the policy on the

grounds that it was not notified about the change in ownership from Corsetti to

Green Tree. (Def.'s Supp. S.M.F. «[ 14.) After denying coverage, Northern filed

this declaratory judgment action. Fannie Mae counterclaimed seeking judgment

that Northern must cover the fire loss under the Corsetti policy.

DISCUSSION

1. Standard of Review

"Summary judgment is appropriate if the record reflects that there is no

genuine issue of material fact and the movant is entitled to judgment as a matter

of law." Dussault v. RRE Coach Lantern Holdings, LLC, 2014 ME 8, «[ 12, 86 A.3d 52

2 Northern challenges the evidence of damages. (Pl.'s Opp. S.M.F. CJ[ 13.)

2 (quoting F.R. Carroll, Inc. v. TD Bank, N.A., 2010 ME 115,

material fact is one that can affect the outcome of the case, and there is a genuine

issue when there is sufficient evidence for a fact-finder to choose between

competing versions of the fact." Mcilroy v. Gibson's Apple Orchard, 2012 ME 59,

7, 43 A.3d 948 (quoting N. E. Ins. Co. v. Young, 2011 ME 89,

"Even when one party's version of the facts appears more credible and

persuasive to the court, any genuine factual dispute must be resolved through

fact-finding, regardless of the nonmoving party's likelihood of success." Lewis v.

Concord Gen. Mut. Ins. Co., 2014 ME 34,

but nevertheless capable of supporting conflicting, plausible inferences, "the

choice between those inferences is not for the court on summary judgment." Id.

"Cross motions for summary judgment neither alter the basic Rule 56 standard,

nor warrant the grant of summary judgment per se." F.R. Carroll, Inc. v. TD Bank,

N.A., 2010 ME 115,

2. Policy Coverage

Northern argues that it has no obligation to pay for the fire loss to Fannie

Mae because it was not notified of the foreclosure proceedings and the change in

ownership of the property as required by the policy. Northern further argues

that the change in ownership from Corestti to Green Tree amounted to a

"substantial change in risk" requiring notice to Northern. Fannie Mae argues that

the language of the policy and supporting case law demonstrate that the

mortgagee is covered notwithstanding foreclosure. According to Fannie Mae,

because its interest in the property only increased upon foreclosure, it was not

required to give notice of a change in ownership. The parties agree that this case

presents a question of law that can be decided on summary judgment.

3 The parties focus their attention on Hartford Fire Insurance Company v.

Merrimack Mutual Fire Insurance Co., 457 A.2d 410 (Me. 1983). In that case,

Merrimack issued an insurancepolicy to the owners of a barn that included, "a

standard mortgage clause providing for payment upon fire loss" to the

mortgagee bank. Hartford, 457 A.2d at 411. The bank eventually foreclosed on the

barn and put the property up for sale. Id. After the foreclosure, the property

remained vacant until a fire destroyed the barn. Id. The court noted that

Merrimack challenged recovery on three bases: "(1) The bank's increase in

interest from mortgagee to owner; (2) the Bank's failure to notify Merrimack of

the vacancy; and (3) the Bank's failure to notify Merrimack of the foreclosure." Id.

at 415.

The court rejected all three of Merrimack's arguments. On the first issue,

the bank's increase in interest, the court found: "That the mortgagee no longer

has the status of mortgagee because it has foreclosed on the mortgage does not

alone bar it from recovery." Id. at 412. The majority of the court's opinion

discusses the second issue: the bank's failure to notify Merrimack of the vacancy.

On that issue, the court first determined that the policy permitted unlimited

vacancy. Id. at 413-14. The court then concluded that because the vacancy was

not a breach of the policy, notice of the vacancy was not required. Id. at 414.

Finally, on the issue of notice of the foreclosure, the court quoted the following

from a leading treatise on insurance law:

A provision that the mortgagee shall give notice of any change of ownership known to him ordinarily applies only to transfers by the mortgagor to third persons. Accordingly, the mortgagee under an independent mortgage clause requiring him to notify the insurer 'of any change of ownership' is not required to give notice of the purchase of the insured property by himself at foreclosure during the period of redemption. This conclusion is based upon the theory

4 that the conveyance or transfer contemplated by the policy is one to a person, who, by the terms of the policy, is not himself already insured thereby.

Id. at 415-16 (quoting lOA Couch on Insurance§ 42:764 (M. Rhodes rev. 2d ed.

1982)).

Northern argues that this case is distinguishable because the policy

language is different than the policy at issue in Hartford. In Hartford, the policy

provided:

Loss, if any, under this policy, shall be payable to the aforesaid as mortgagee (or trustee) as interest may appear under all present or future mortgages upon the property herein described in which the aforesaid may have an interest as mortgagee (or trustee) in order of precedence of said mortgages, and this insurance, as to the interest of the mortgagee (or trustee) only therein, shall not be invalidated by any act or neglect of the mortgagor or owner of the within described property nor by any foreclosure or other proceedings or notice of sale relating to the property, nor by any change in the title of ownership of the property, nor by the occupation of the premises for purposes more hazardous than permitted by this policy; provided, that in case the mortgagor or owner shall neglect to pay any premium due under this policy the mortgagee (or trustee) shall, on demand pay the same.

Id. at 411 (emphasis added). The policy also required notice to the insurance

company:

Provided, also, that the mortgagee (or trustee) shall notify this Company of any change of ownership or occupancy or increase of hazard which shall come to the knowledge of said mortgagee (or trustee) and, unless permitted by this policy, it shall be noted thereon and the mortgagee (or trustee) shall, on demand pay the premium for such increased hazard for the term of the use thereof; otherwise this policy shall be null and void.

Id. at 412. In this case, the relevant policy language reads: 3

3 It appears that the page containing this language was inadvertently omitted from the summary judgment record. The court found this page as an attachment to a previous motion. The parties do not object to the court considering the full policy for this order.

5 2. Mortgageholders

a. The term "mortgageholder" includes trustee

b. We will pay for covered loss of or damage to buildings or structures to each mortgageholder shown in the Declarations in their order of precedence, as interests may appear.

c. The mortgageholder has the right to receive loss payment even if the mortgageholder has started foreclosure or similar action on the building or structure

d. If we deny your claim because of your acts or because you have failed to comply with the terms of this policy, the mortgageholder will still have the right to receive loss payment if the mortgageholder:

(1) Pays any premium due under this policy at our request if you have failed to do so;

(2) Submits a signed, sworn proof of loss within 60 days after receiving notice from us of your failure to do so; and

(3) Has notified us of any change in ownership, occupancy or substantial change in risk known to the mortgageholder

(Def.'s Supp. S.M.F.

Hartford and this case is that the policy in this case states that the mortgagee has

the right to payment even if it has "started" foreclosure or similar proceedings

whereas the policy in Hartford stated that the policy would not be invalidated

"by any foreclosure proceedings or notice of sale relating to the property."

Northern claims the differences in this language are critical and compel a result

contrary to Hartford.

The Hartford court made clear that a provision requiring notice of any

change in ownership did not apply to a mortgagee that purchased the property.

Hartford, 457 A.2d at 415. Although some courts do not extend this rule past the

period of redemption, see Consolidated Mortgage Corp. v. American Security

6 4 Insurance Co., 244 N.W.2d 434, 438 (Mich. Ct. App. 1976), the majority of

jurisdictions appear to apply it regardless of the period of redemption. See

Citizens Mortgage Corp. v. Mich. Basic Prop. Ins. Ass'n, 314 N.W.2d 635, 637 (Mich.

Ct. App. 1981); 495 Corp. v. N.J. Ins. Underwriting Ass'n, 430 A.2d 203, 208 (N.J.

1981). In Hartford, the redemption period had expired. Hartford, 457 A.2d at 412.

Therefore, Northern cannot rely on the "change in ownership" clause in its

policy in this case.

Northern relies on Ideal Financial Services, Inc. v. Zichelle, 750 N.E.2d 508

(Mass. App. Ct. 2001). In that case, the Massachusetts Court of Appeals

concluded that a mortgagee ceased to be a mortgagee under the policy when it

acquired ownership of the property pursuant to a foreclosure sale. Id. at 521

Accordingly, the former mortgagee was not covered under the policy, which

only extended coverage to mortgagees. Id. at 517. The court did not reach the

relevant issue in this case: notice. Id. at 520 n.12. As discussed above, the Hartford

court rejected the idea that the "increase in interest" of a mortgagee alone bars

recovery. Hartford, 457 A.2d at 412 ("That the mortgagee no longer has the status

of mortgagee because it has foreclosed on the mortgage does not alone bar it

from recovery.").

Nevertheless, Northern may prevail if a foreclosure and purchase of the

property at foreclosure sale constitute a substantial change in risk. In Hartford,

the court found that Merrimack was obligated to provide coverage after

foreclosure in the event of vacancy because the policy "grant[ed] unqualified

permission for unlimited vacancy and waive[d] the policy condition suspending

4 The Hartford court noted the existence of the Consolidated Mortgage Corp. decision as contrary authority.

7 the insurance while the hazard [was] increased." Hartford, 457 A.2d at 414. There

is not a similar provision in Northern's policy. Thus, if Northern can demonstrate

that Fannie Mae was aware of a substantial change in risk and failed to notify

Northern, Northern would not be liable in the absence of a policy term waiving

notice of that risk.

The issue before this court then is whether a foreclosure or purchase of the

property by the mortgagee at a foreclosure sale constitutes a substantial increase

in risk that would require notice under Northern's policy. Courts that have

addressed this question have found that acquisition of the property by the

mortgageholder does not automatically increase the risk to the insurer. 495 Corp.,

430 A.2d at 280 ("[A]cquisition by the mortgagee in itself does not increase the

risks for the insurer in any way that the parties did not originally contemplate.");

Shores v. Rabon, 112 S.E.2d 556, 561 (N.C. 1960) ("[It is inconceivable that vesting

of title in the wife increased the hazard."); see also U.S. Bank, N.A. v. Tenn. Farmers

Mut. Ins. Co., 277 S.W.3d 381, 390 (Tenn. 2009) ("We do not agree that by its plain

meaning the phrase 'increase in hazard' includes the commencement of

foreclosure proceedings ...."); Anderson v. Ky. Growers Ins. Co., Inc., 105 S.W.3d

462, 466 (Ky. Ct. App. 2003). The court will follow the weight of authority, which

holds that a foreclosure by the mortgagee is not an automatic increase in risk to

the insurer. Because Northern has failed to raise any evidence of an increase in

risk other than the foreclosure and sale itself, Northern is liable under its policy.

The court observes that Northern must be aware of the judicial

interpretations of standard mortgage clauses, including the Hartford decision in

Maine. Although the court agrees with Northern that the language is different in

Northern's policy than some of the other policies interpreted by the courts,

8 Northern could have explicitly required notice of foreclosure and sale in its

policy. Having failed to do so, Northern cannot rely on the minor changes to its

policy language to avoid liability in this case. See Cambridge Mut. Fire Ins. Co. v.

Vallee, 687 A.2d 956, 957 (Me. 1996) ("It is well-established that ambiguities in an

insurance policy are resolved against the insurer, . . . and that a liability

insurance policy must be construed to resolve all ambiguities in favor of

coverage.").

3. Damages

Northern objects to Fannie Mae's statement regarding damages and the

court agrees that the evidence of damages, an affidavit from Elonda Crockett, is

inadmissible. From reviewing the summary judgment record, the court cannot

evaluate whether Crockett is a qualified witness to testify regarding the business

records, cannot determine whether Crockett is a qualified expert, and does not

have the records that Crockett's estimate is based on. Accordingly, summary 5 judgment is denied on the issue of damages.

The entry is:

Defendant's motion for summary judgment is GRANTED. Plaintiff Northern Security Insurance Company, Inc. is liable for the fire damage to the property under the insurance policy. Summary judgment is denied on the issue of damages. This matter will be set for a damages hearing at the next available date.

Plaintiff's motion for summary judgment is DENIED.

Dated: November 26, 2014 o e A. Wheeler Justice, Superior Court

5 The court does not address Fannie Mae's unfair claims settlement practices claim because Fannie Mae's motion to amend its counterclaim was denied. (8/5/14 Order).

9 Plaintiff-James Poliquin Esq Defendant-Patricia Lehtola Esq.(visiting attorney) Local Counsel-Deborah Mann Esq