Opinion
16-P-57
03-31-2017
MORTGAGE GUARANTY INSURANCE CORPORATION v. Kevin O'LEARY& another.
MEMORANDUM AND ORDER PURSUANT TO RULE 1:28
In 2013, the defendants Kevin and Kim O'Leary (the borrowers) lost their New Hampshire home to foreclosure. The high bid at the foreclosure sale did not cover all of the borrowers' remaining debt, leaving a deficiency. The borrowers had been paying the premium for a mortgage insurance policy (policy), as required by their original lender. The insurer, Mortgage Guaranty Insurance Corporation (MGIC), sued the borrowers (who now live in Massachusetts) to recover the deficiency. MGIC moved for summary judgment on a contractual subrogation theory; a Superior Court judge allowed the motion and directed entry of judgment against the borrowers for $41,742.09. The borrowers appeal, arguing that, given the lack of evidence of MGIC's compliance with two provisions of the insurance contract relevant to subrogation, there remains a genuine issue of material fact as to whether MGIC ever paid its insured so as to acquire any contractual subrogation rights against the borrowers. We agree, and we therefore vacate the judgment and remand the case for further proceedings.
The record indicates that the deficiency at the time of the foreclosure was $36,413.69. The remainder of the judgment comprised MGIC's attorney's fees and other costs ($1,328.40), plus statutory interest ($3,874.15) and statutory costs ($285).
1. MGIC's subrogation rights . Because MGIC's motion and the judge's decision were based solely on a contractual subrogation theory, we focus on the two provisions of the policy most relevant to subrogation. These are the provisions that define "Insured" and then set the terms under which MGIC becomes subrogated to the rights of an "Insured." These provisions are important because MGIC established only that it paid an (unidentified) "owner or servicer of the Note," not that that entity was an "Insured." "When an insurer pays an insured's claim under its insurance contract, the insurer succeeds to any right of action the insured may have against the parties allegedly responsible for the loss." Liberty Mut. Ins. Co . v. National Consol. Warehouses, Inc ., 34 Mass. App. Ct. 293, 296 (1993). But if MGIC made a payment to an entity other than an Insured, or a payment otherwise not required by the policy, MGIC would obtain no subrogation rights under the policy. "A volunteer has no rights of subrogation." United States Fid. & Guar. Co . v. N.J.B. Prime Investors , 6 Mass. App. Ct. 455, 460 (1978).
The two counts MGIC asserted in its complaint were entitled "Promissory Note 09/29/2006" (although the substance of the allegations was more consistent with a subrogation theory) and "Money Advanced." The borrowers' summary judgment opposition addressed both the contractual subrogation theory articulated in MGIC's motion and the "Money Advanced" count. The motion judge discussed only the contractual subrogation theory, and the judgment did not address or differentiate between the counts. At oral argument, MGIC was unable to explain the legal basis of the "Money Advanced" count and conceded that it was "not all that different from the other claim." We do not comment on the merits of the claims as labeled in MGIC's complaint, other than to observe, as to the "Promissory Note" count, that MGIC neither produced the original promissory note nor otherwise demonstrated that it was a "[p]erson entitled to enforce" the note as set forth in G. L. c. 106, § 3-301. See G. L. c. 106, § 3-309.
MGIC argues in its brief that the borrowers, who under policy Section 7.4 are neither parties to nor third-party beneficiaries of the policy, "may not assert any rights" under the policy. We do not view the borrowers as claiming any rights for themselves under the policy; they merely ask for proof of MGIC's claim that MGIC itself obtained, under the policy, the right to recover the deficiency from them. The borrowers' stated concern is that if MGIC has not acquired such a right, then the borrowers, even after paying MGIC, would remain exposed to a suit from whatever entity still holds that right, i.e., exposed to a double recovery.
Policy Section 1.13 defines an Insured as:
The relevant version of Section 1.13 appears in endorsement number 71-70284, listed on the policy's declaration page and attached to the policy.
"a. The Person designated on the face of this Policy;[ ][or]
"b. The initial or subsequent Owner of the Loan, upon the request by the Owner to become the Insured; [or]
"c. The initial or subsequent Servicer of the Loan, if the Owner is not the Insured, upon request by the Servicer to become the Insured or designation by the Owner of such Servicer as the Insured.
"If [MGIC] has not been notified in writing of a change of Insured, [MGIC's] sole obligation hereunder shall be to the named Insured, except as specifically provided in this Policy. [MGIC] may rely upon notice from a Person that it or its designee is the new Insured, but [MGIC] must provide notice of such change to the prior Insured."
The face of the policy designated MidCountry Bank of Vadnais Heights, Minnesota as the insured. MidCountry was the original payee designated on the borrowers' promissory note.
Second, policy Section 7.2(a) requires MGIC to "notify the Insured at least thirty (30) days before the foreclosure sale" if it "proposes to pursue a deficiency judgment, in whole or part for its account," after foreclosure. Section 7.2(a) further provides, "If [MGIC] does not so notify the Insured, the deficiency judgment, if established by the Insured, will be solely for the account of the Insured, and [MGIC] will not be subrogated to any rights to pursue the deficiency judgment." The policy's subrogation clause, Section 7.3, then states:
"Subject to Section 7.2(a), and only to the extent that [MGIC] is entitled under applicable law to pursue such deficiency rights, [MGIC] will be subrogated, upon payment of the Loss, in the amount thereof and with an equal priority to all of the Insured's rights of recovery against a Borrower and any other Person relating to the Loan or to the Property."
Section 7.3 continues: "The Insured must execute and deliver at the request of [MGIC] such Instruments and papers and undertake such actions as may be necessary to transfer, assign and secure such rights. The Insured shall refrain from any action, either before or after payment of a Loss, that prejudices such rights."
At summary judgment, MGIC submitted the affidavit of its employee, Joy Jokela, stating that MGIC had "paid a claim to the owner or servicer of the Note as a consequence of the failure of [the borrowers] to make payments due and owing according to the terms of the Note." But nothing in the Jokela affidavit states that that owner or servicer was an Insured as defined by policy Section 1.13, or that MGIC paid an Insured. Such payment is a prerequisite to MGIC acquiring subrogation rights under Sections 7.2(a) and 7.3.
Nor does the summary judgment record otherwise establish that MGIC paid an Insured. As noted above, the Insured designated on the face of the policy is MidCountry Bank, the original payee designated on the borrowers' promissory note. But the record reflects, at a minimum, a significant question as to whether MidCountry remained the Insured as of the time of MGIC's payment. The record includes a copy of the borrowers' promissory note that includes the special indorsement of MidCountry making the note payable to AmTrust Bank, followed by the blank indorsement of AmTrust Bank. These indorsements plainly indicate that the promissory note changed hands, and the record is silent as to who currently holds it. And the Jokela affidavit states only that MGIC paid "the owner or servicer of the Note," without saying that MidCountry was that entity (or, if not, who was).
The Jokela affidavit stated, "MGIC is not given physical possession of the original promissory note from the lender or servicer at or after the time a loss is paid. MGIC is therefore unable to file the original Note with [the Superior] Court." At oral argument before us, counsel for MGIC stated that the note, having last been indorsed in blank, is "bearer paper." This lends some support to the borrowers' concern that, absent evidence that the note holder or servicer is an Insured, a judgment requiring the borrowers to pay MGIC would not prevent whoever holds the note from bringing a separate lawsuit against the borrowers to recover the deficiency.
An entity other than MidCountry could qualify as an Insured under policy Section 1.13, provided it were either an "Owner" or a "Servicer" of the "Loan." An "Owner" is defined by policy Section 1.16 as "the Person who owns a Loan and of whom [MGIC] is notified in accordance with this Policy." A "Servicer" is defined by policy Section 1.24, in pertinent part, as the person acting on behalf of the Owner "to service the Loan and of whom [MGIC] has been notified." In accordance with Section 1.13, an Owner may become the Insured upon request; if the Owner is not the Insured, a Servicer may become the Insured upon request or by designation by the Owner.
"Loan" is defined by policy Section 1.14 to include, in pertinent part, "any note, bond, or other evidence of indebtedness secured by a mortgage."
But here, nothing in the summary judgment record shows that MGIC received any notice or request from an Owner or Servicer of the Loan that would operate to change the identity of its Insured. Nor does the record show that MGIC waived those requirements for an Owner or Servicer to become an Insured. In short, MGIC failed to establish that it paid an Insured and consequently failed to establish that it acquired subrogation rights against the borrowers.
Although MGIC's complaint alleges that it is the subrogee of Federal National Mortgage Association (Fannie Mae), the complaint does not allege, nor does the record establish, that Fannie Mae was the Owner or Servicer of the Loan, was paid by MGIC, or was MGIC's Insured. The record does indicate that Fannie Mae foreclosed on the mortgage, but the foreclosure took place in New Hampshire, and the details of that process (governed by New Hampshire law), including whether such foreclosure required Fannie Mae to show that it held or serviced the Loan, are absent from the record.
A second obstacle to summary judgment was MGIC's failure to establish that it provided notice to its Insured of its intention to pursue for its own account a deficiency judgment against the borrowers, as policy Section 7.2(a) requires MGIC to do in order to obtain such a subrogation right under Section 7.3. Nor did MGIC establish that this notice requirement was waived by MGIC's Insured, whoever that may have been. For this additional reason, MGIC has not established that it obtained subrogation rights against the borrowers under the policy.
These gaps in MGIC's case are not mere technicalities. As mentioned in notes 4 and 8, supra , they not only leave questions as to MGIC's rights; they also leave the borrowers exposed to a second suit by another entity, seeking to collect the same deficiency that MGIC seeks to collect here. We therefore vacate the judgment for MGIC and remand the case for further proceedings, which, in the discretion of the Superior Court, may include discovery by the borrowers regarding the gaps in MGIC's case, and a renewed summary judgment motion by MGIC, or a summary judgment motion by the borrowers.
2. The borrowers' remaining arguments . We address the borrowers' other arguments as to why summary judgment was improper, explaining why none of them is persuasive.
First, there is no merit to the borrowers' argument that the copy of the promissory note contained in the record was not properly authenticated. In their answer, the borrowers admitted the allegation that a true and correct copy of the note was attached as an exhibit to the complaint. In a related vein, the borrowers argue that they were entitled to discovery regarding "the location of the original of the note [and] how it was acquired by the unnamed ‘owner or servicer’ to whom a claim was paid." They state that they had discovery requests pending at the time of the ruling on the summary judgment motion. But there is no claim or indication in the record that they filed an affidavit under Mass.R.Civ.P. 56(f), 365 Mass. 824 (1974), in an effort to obtain time to complete such discovery. The two issues that they mention as warranting further discovery may be relevant to the merits of MGIC's claim and the gaps that they have identified in it. As stated above, we leave the question of further discovery to the discretion of the judge on remand.
The borrowers' answer further stated that the exhibit "sp[oke] for itself." Such a statement commonly responds to a complaint's characterization of the contents of an attached exhibit; it does not amount to a denial of a complaint's express allegation that the exhibit itself is a true and correct copy of an original document. See generally Mass.R.Civ.P. 8(b), 365 Mass. 749 (1974).
Second, the borrowers argue that because they paid premiums to MGIC for insurance to benefit the lender (rather than themselves), and because MGIC "presumably calculates such [premiums] to allow for the occasional deficiency," their premium payments have already compensated MGIC for any deficiency that MGIC paid the lender, so that it would be an inequitable "double recovery" for MGIC to recover the deficiency from them in this action. But the borrowers cite no evidence of how MGIC sets its premiums and, more important, no law or equitable principle barring MGIC from covering its costs, or earning profits, through pursuing deficiencies as well as by collecting premiums.
Moreover, borrowers, although not the direct beneficiaries or insureds under a mortgage insurance policy, do ordinarily obtain a benefit for the premiums that they pay. The borrowers' affidavits here recounted that, at their original closing, the lender told them that, "because [their] down payment was not large enough, it was necessary for [them] to pay for mortgage insurance." Such insurance "makes lenders more willing to provide mortgage loans for home buyers, especially those home buyers with very limited cash resources," and thus "helps substantially in increasing the percentage of occupant home ownership, particularly for families with lower or moderate incomes." See Johnstone, Private Mortgage Insurance, 39 Wake Forest L. Rev. 783, 836 (2004).
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Finally, the borrowers argue, and aver in their affidavits, that they were not informed at their closing that the mortgage insurance they were required to purchase would insure only the lender and leave MGIC free to pursue them for any deficiency—all of which led them to believe that the insurance would protect them in the event of a deficiency. They characterize this as a "fraudulent failure to disclose the true nature of the mortgage insurance." But policy Section 7.4 makes explicit that the borrowers are not parties to or intended beneficiaries of the policy. Nor have the borrowers either asserted that MGIC was involved in making any alleged fraudulently incomplete representations to them, or explained how any such misrepresentations made by other entities, at or around the time of the closing in 2006, could provide a defense to MGIC's claim here. The motion judge correctly rejected this argument.
3. Conclusion . We vacate the judgment and remand the case for further proceedings consistent with this memorandum and order.
So ordered .
Vacated and remanded.