Judge Jams Foreclosing Lender's Improper Grab For Excess Insurance Cash On Fire-Destroyed Home
A mortgage lender, who claimed was owed about $134,800 on a loan in default, foreclosed on a Missouri home. At the foreclosure sale, the lender was the winning bidder, entering a "credit bid" of $99,700. Unbeknownst to the lender, however, the home was destroyed by fire about one month before the foreclosure sale. A couple of months after the sale, the homeowners received the proceeds from the fire insurance policy in the form of a check from the insurance company (made out to the homeowner and the lender) for $164,400, which the homeowners promptly turned over to the bankruptcy Trustee (the homeowners had filed bankruptcy during the course of the foreclosure proceedings).
Even though it already had acquired title to the property (sans improvements) by bidding $99,700 at the sale, the lender nevertheless demanded $134,800 of the insurance proceeds, the full amount of the debt it claimed was owed to them by the homeowners (and without reduction for its $99,700 bid). Conversely, the Trustee and the homeowners claimed that the lender was only entitled to the amount of its secured debt, reduced by the "credit bid" of $99,700.
The bankruptcy judge agreed with the Trustee and the homeowners, saying that the debt owed to the lender must be reduced by the amount that it bid for the home at the foreclosure sale, and the fact that the lender was clueless that the home went up in smoke a month before the sale was the lender's tough luck. Among other things, the judge stated in his decision:
Even though it already had acquired title to the property (sans improvements) by bidding $99,700 at the sale, the lender nevertheless demanded $134,800 of the insurance proceeds, the full amount of the debt it claimed was owed to them by the homeowners (and without reduction for its $99,700 bid). Conversely, the Trustee and the homeowners claimed that the lender was only entitled to the amount of its secured debt, reduced by the "credit bid" of $99,700.
The bankruptcy judge agreed with the Trustee and the homeowners, saying that the debt owed to the lender must be reduced by the amount that it bid for the home at the foreclosure sale, and the fact that the lender was clueless that the home went up in smoke a month before the sale was the lender's tough luck. Among other things, the judge stated in his decision:
- [T]he Bank here elected to foreclose, bidding $99,771.17 for the property, even though it could have pursued the insurance proceeds instead. It is unfortunate that the Bank did not know that the Property had been destroyed by a fire when the Bank foreclosed, but the rule of caveat emptor applies to foreclosure sales, and the Court cannot protect the Bank from the consequences of that rule or the Bank’s failure to conduct even the slightest due diligence before it bid at the foreclosure sale.
To view the Federal bankruptcy judge's entire decision, see
posted by Home Equity Theft Reporter at 8:07 AM
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