Lender Must Elect To Take Insurance Proceeds

If Lender Approves Use of Insurance Funds to Repair It Cannot Claim it was

Barry Zalma

May 13, 2024

Transcript

BACKGROUND

This foreclosure case involves three main actors:

1 CG Tides LLC, et al., which are the mortgagors that borrowed the money and granted the Mortgage at issue.
2 The original lender, Ocean Bank.
SHEDDF3 VNB, LLC (the “Note Holder”), which purchased the Note from 3 Ocean Bank and brought the foreclosure action.

The trial court granted summary judgment and entered a total foreclosure judgment of $82,169,522, which included principal of $41,793,694, miscellaneous costs, and prejudgment default interest of $40,167,725. No surprise, the borrower appealed.

THE LOAN

In October 2014, the Borrowers obtained a $45,000,000 loan from Ocean Bank and granted a mortgage in the Tides Hotel on Miami Beach. To simplify greatly, the Note provided for the payment of interest only during the term of the loan and the payment of the entire principal on a set date, unless the parties exercised an option to convert the loan to a more traditional 25-year loan. The parties extended the due date for payment of the principal several times.

THE HURRICANE

In September 2017, the Hotel was seriously damaged by Hurricane Irma and was closed for over a year. The Mortgage authorized Ocean Bank to direct the Hotel’s insurance company to pay any insurance proceeds directly to Ocean Bank and provided that Ocean Bank could sign any draft as the Borrowers’ attorney. However, under the Note and Mortgage, Ocean Bank had the “sole but reasonable discretion not to use the proceeds to repair.” Except in certain, limited circumstances when the proceeds had to be used to repair the Hotel. The Borrowers, on the other hand, were obliged to repair the Hotel even if the proceeds were not available for that purpose.

Despite the Mortgage’s terms, and although aware of the insurance claim, Ocean Bank never exercised the option to have the insurance proceeds sent directly to it. In November 2017, the Borrowers received $2,000,000 in insurance proceeds. The Borrowers spent at least $7,728,367 ($5.5 million more than the insurance proceeds to repair and renovate the Hotel after the hurricane).

Among other things, the Note Holder relied on the affidavit of an Ocean Bank vice president so testifying and on Ocean Bank emails inquiring about the insurance proceeds.

On the other hand, the Borrowers maintained the opposite. Ocean Bank “approved” a document from the Borrowers. A related memorandum in the file regarding construction at the Hotel also stated the Borrowers intended to use the insurance proceeds “to perform renovations” in light of “damage during Hurricane Irma.”

Ocean Bank sold the loan to the Note Holder. The Note was sold at par for the principal owed, $41,793,694. According to the managing director of the Note Holder, its business model is to acquire pre-existing, non-performing loans so that it can “mine the loan histories” to “exploit” opportunities to obtain “retroactive default interest.”

Ultimately, the Note Holder filed the underlying foreclosure action. The Borrowers counterclaimed for breach of contract and various other remedies. The Note Holder obtained summary judgment.

DISCUSSION

The Borrowers argued an issue of fact existed whether the Borrowers’ use of the insurance proceeds to repair the hurricane damage breached the loan contract and triggered a default. The borrower claimed Ocean Bank knew and approved of the Borrowers’ use of the insurance proceeds to repair the hurricane damage to the Hotel. On one hand, a vice president of Ocean Bank denied this fact under oath.

When interpreted in a light most favorable to the non-moving party, other evidence in the summary judgment indicates that Ocean Bank knew of the hurricane damage, knew of the insurance claim, did not exercise its right under the Mortgage to direct the insurance company to pay the proceeds solely to itself, received a copy of the Borrowers’ tax return reflecting receipt of the insurance proceeds at issue, verbally approved the use of the proceeds for repair and renovation, and approved this use in writing in its own internal records.

The Court of Appeals concluded that the point was that the evidence and inferences therefrom conflict. A factfinder could reach different results depending on what evidence it credited and what reasonable inferences it draws from the evidence credited. Given the state of the record, summary judgment should not have been entered on this issue and the judgment was reversed and remanded to the trial court.

ZALMA OPINION

Summary judgment is not appropriate when there are disputed issues of fact. In most property insurance policies, when there is a mortgage, an insurance policy naming a mortgagee requires payment to both the named insured and the mortgagee. In common practice the borrower could only use the insurance funds to repair if the mortgagee agreed. There was conflicting evidence because it appears the lender agreed and the new note holder, created conflicting evidence and attempted to profit from the hurricane and the monies paid by the hotel owners to repair the building while foreclosing. The court of appeals refused to allow the summary judgment to stand because there were issues of fact remaining to be established by the trier of fact.