Creditor Not Entitled To Insurance Proceeds In Missouri

Creditor has no right to insurance proceeds in Missouri

In Re: CLARENCE ROGERS NEWBY and CATHY CHRISTINE NEWBY, Debtors.

Case Law
Case No. 04-31294
UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF MISSOURI
344 B.R. 597; 2006 Bankr. LEXIS 1135

June 5, 2006, Decided

Facts: After debtors filed for bankruptcy relief, creditor obtained relief from the automatic stay and foreclosed its mortgage on debtor's residence. Before the foreclosure sale, unbeknownst to creditor, the property was destroyed. Creditor was the successful bidder at the foreclosure sale. Later, debtors received an insurance check as payment for the lost property. Debtors turned the check over to the Trustee, who obtained an order reopening debtors' bankruptcy case. Creditor moved to compel turnover of the insurance proceeds.

Issue: Is the creditor entitled to the proceeds?

Ruling: Creditor was entitled to receive only the amount of debtors' outstanding debt to creditor, minus the amount creditor bid at the foreclosure sale. The sale reduced the amount of the outstanding debt and, thus, it also reduced creditor’s interest in the security for the debt--the mortgaged property. Caveat emptor applied to foreclosure sales, and the court would not protect creditor from that rule or from creditor's failure to exercise due diligence before making a bid at the foreclosure sale. However, because the insurance proceeds exceeded the amount remaining due, creditor was an over secured creditor and was entitled to interest per 11 U.S.C.S. § 506(b). A mortgagee's interest is limited to the amount of the mortgage debt and is reduced (or eliminated) by the mortgagee's bid at the foreclosure sale.

Lesson Learned:The insurable interest of a mortgagee in property extends only to the amount of the mortgage debt, and a mortgagee purchasing at foreclosure subsequent to a loss has no right to any proceeds over the amount necessary to satisfy his or her mortgage.

Written by Kevin Levonas and Jerry L.