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District Court Order Could Have Major "IMPAC" On Payment Of Insurance Proceeds

May 01, 2013 BY Sarah Dumbacher

         A recent Order from the United States District Court for the Northern District of Georgia denying an insurer’s motion to dismiss for failure to state a claim has placed insurers and their adjusters in an interesting predicament with regard to issuing payment after a loss when one of the payees is the named mortgagee under the subject insurance policy.  See Impac Funding Corporation, as master servicer for Impac CMB Trust Series 2005-4 v. Amica Mutual Insurance Company, 2013 WL 1136860 (N.D. Ga. March 18, 2013).  In Georgia, the mere existence of a mortgage relationship does not entitle a mortgagee to the insurance proceeds owed to an insured after a property loss.  See JCS Enterprises, Inc. v. Vanliner Ins., 227 Ga. App. 371, 489 S.E.2d 95 (1997).  A mortgagee has no interest in the insurance proceeds unless the mortgagee is named in either the insurance policy or the mortgage as being entitled to the proceeds, the insurance policy has been assigned to it, or there is an agreement that has been reached between the mortgagee and mortgagor that the mortgagee is entitled to proceeds.  See Balboa Life and Casualty, LLC v. Home Builders Finance, Inc., 304 Ga. App. 478, 697 S.E.2d 240 (2010); see also Fuller v. Stonewall Cas. Co. of W. Va., 172 W. Va. 193, 304 S.E.2d 347 (1983).

             Often, a mortgagee is entitled to insurance proceeds pursuant to a specific provision of an insurance policy known as the mortgagee clause.  Such clauses have been held valid and enforceable under Georgia law and entitle the mortgagee to payment of insurance proceeds “as interests appear.”  See Balboa Life and Casualty, LLC v. Home Builders Finance, Inc., 304 Ga. App. 478, 697 S.E.2d 240 (2010); American Central Ins. Co. v. Lee, 273 Ga. 880, 548 S.E.2d 338 (2001).  A typical mortgagee clause may read, “[i]f a mortgagee is named in this policy, any loss payable under [the policy] will be paid to the mortgagee and you, as interests appear.”  See Impac Funding Corporation, 2013 WL 1136860, *5.  Thus, a mortgagee as loss payee under an insurance policy is said to be vested with an insurable interest in the insurance proceeds as security payment of the mortgage debt.  Balboa Life and Casualty, LLC v. Home Builders Finance Inc.,  304 Ga. App. 478, 697 S.E.2d 240 (2010) (citing Beasley v. Agricredit Acceptance Corp., 224 Ga. App. 372, 374, 480 S.E.2d 257 (1997)).

             But what happens when a mortgagee does not receive payment for a loss as a result of another payee’s fraud, forging the mortgagee’s endorsement and absconding the proceeds?  Based on the recent Federal Court ruling, it appears the insurer may be liable through no fault of its own and ultimately, may be forced to make payment to the mortgagee and then seek recovery from the drawee bank through a conversion suit or other legal remedies.

            This issue came before the United States District Court for the Northern District of Georgia in the matter of Impac Funding Corporation, as master servicer for Impac CMB Trust Series 2005-4 v. Amica Mutual Insurance Company, 2013 WL 1136860 (N.D. Ga. March 18, 2013).  Because Defendant Amica Mutual Insurance Company (“Amica”) addressed the issue in a Motion to Dismiss, the Court was required to accept as true all facts alleged in the Complaint as follows: in 2005, insured Lynn Christopher purchased the property at issue (the “Property”), obtaining a loan for the purchase.  In connection with that loan, Amica issued an insurance policy (the “Policy”) to Christopher providing certain insurance coverage for the Property.  The loan was later deposited into the Impac CMB Trust Series 2005-4 (the “Trust”), for which Impac Funding Corporation (“Impac”) was the master servicer and GMAC Corporation (“GMAC”) was the subservicer.  Id. at *1.

            In January 2008, the Property sustained certain covered losses under the Policy, and Lynn Christopher subsequently filed a claim with Amica seeking recovery.  After investigation of the claim, Amica issued two checks for repairs to be made to the Property, both made payable to multiple loss payees, including Disaster Restoration and Consultants (the contractor hired to perform repairs at the Property), Lynn Christopher, and GMAC Mortgage Corporation, Its Successors and/or Assigns.

            At the time the checks were presented to Branch Banking & Trust Company (“BB&T”) by Disaster Restoration and Consultants, the checks reflected the alleged endorsements of each of the payees.  Impac alleged, and the Court accepted as true for the purposes of the Motion, that neither GMAC nor anyone on behalf of the Trust received or endorsed the checks nor were the alleged endorsements made by an authorized representative of either entity.  In the same vein, Impac alleged that neither insured Lynn Christopher nor Countrywide Mortgage endorsed the checks or authorized the endorsements to be made. Impac contended that Disaster Restoration and Consultants had obtained the checks and forged the endorsements for the other payees. As a result of the alleged fraudulent endorsements, BB&T paid the entire proceeds of both checks to Disaster Restoration and Consultants, who then failed to perform any of the necessary repairs to the Property.  Id.

            Thereafter, Impac filed suit against Amica asserting claims for breach of contract and enforcement of the checks pursuant to O.C.G.A. § 11-3-309.  Id. at *2.  As damages, Impac alleged that the Trust was injured by its failure to receive any insurance proceeds resulting from the losses and the fact that the Property was never repaired.  Amica then filed its Motion to Dismiss, on the grounds that the Complaint failed to state a claim for relief, among others.

            To survive a motion to dismiss, a complaint must only allege facts that, if true, “state a claim to relief that is plausible on its face.”  Ashcroft v. Igbal, 556 U.S. 662, 678 (2009).  “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”  Id.  At the crux of Impac’s claims was the contention that the Trust after the subject loss was vested with an interest in any proceeds paid under the Policy’s mortgage clause.  Because the Trust never received any insurance proceeds as a result of the forged endorsements, it was Impac’s contention that the Trust was never “paid” and Amica remained indebted to the Trust for the amounts of the checks pursuant to Amica’s obligations under the Policy.  In addition, Impac alleged that due to the forged endorsements of GMAC and the other payees, Disaster Restoration and Consultants was not a holder of the checks and thus, was not entitled to enforce them, the payment of which did not discharge Amica’s obligations under the Policy.

            Amica sought dismissal of Impac’s breach of contract claim arguing that its only obligation under the Policy was to issue payment jointly to the insured and the Trust, and that there existed no obligation under the Policy to ensure that each payee listed on the checks actually endorsed the check or that the funds were used as anticipated.  In addition, Amica argued Impac could not enforce the checks under O.C.G.A. § 11-3-309 as Disaster Restoration and Consultants was in fact a “holder” of the checks as it had an interest in the proceeds and that the Court could not enter judgment in favor of Impac as Amica was not adequately protected against the loss that might occur by reason of another person’s claim to enforce them.  See O.C.G.A. § 11-3-309 (2013).

            Ultimately, the Court found that Impac had stated a plausible claim for both breach of contract and enforcement of the two checks pursuant to O.C.G.A. § 11-3-309.  With regard to Impac’s breach of contract claim, the Court first looked to the policy’s mortgagee clause, which read, “[i]f a mortgagee is named in this policy, any loss payable under Coverage A or B will be paid to the mortgagee and you, as interests appear.” Impac Funding Corp., 2013 WL 1136860, *5 (emphasis added by the Court).  Focusing on the term “paid”, the Court acknowledged that the Trust had not actually been paid as it had never received money from Amica under the Policy.  Thus, the Court held that Impac had stated a cause of action for breach of contract as Amica had failed to fulfill its obligations under the mortgagee clause of the Policy. Id. (citing Balboa Life & Cas., 697 S.E.2d at 480-81 (recognizing validity of mortgagee’s claim for breach of insurer’s contractual obligation to pay the mortgagee, where the insurer issued checks jointly payable to the mortgagee and insured and where the insured forged the mortgagee’s endorsement and absconded with the proceeds)).

            With regard to Impac’s claim to enforce the checks under O.C.G.A. § 11-3-309, the Court relied on the Massachusetts Supreme Judicial Court case of General Motors Acceptance Corporation v. Abington Casualty Insurance Company for the proposition that “delivery of a check to one co-payee constitutes delivery to the remaining co-payee; thus, … where a check is paid to one co-payee without the endorsement of the other, the other may sue the drawer of the check as the owner of a lost instrument under the foregoing provision.”  Impac Funding Corp., 2013 WL 1136860, *6 (citing General Motors Acceptance Corp., 413 Mass. 583, 602 N.E.2d 1085 (Mass. 1992).  Finding no Georgia authority on point and in accordance with General Motors Acceptance Corp., the Court found that Impac had stated a plausible claim under O.C.G.A. § 11-3-309.  The Court further found that Amica had adequate protection against any loss that would occur by reason of Impac enforcing the checks in that Amica may seek to recover its losses from the drawee bank.

            In light of the Northern District’s Order in Impac Funding Corp., a mortgagee’s interest in certain property as created by the mortgagee clause of an insurance policy creates a duty for an insurer to see that payment of insurance proceeds is not only made to, but actually received by the mortgagee after a loss.  Simply naming the mortgagee as a payee on a settlement check is insufficient to satisfy an insurer’s obligations under the policy.  Should a situation as in Impac Funding Corp. occur, an insurer may be forced to issue a second payment to the mortgagee and then seek redress through suit against either the bank who issued payment or the payee who absconded the funds.  Id. at *6-*7.

            Although the Court’s Order in Impac Funding Corp. only found that the Plaintiff had successfully stated a claim for relief and did not in fact find the insurer liable, it may still be prudent for insurers and their adjusters to consider and develop procedures for issuing checks for insurance proceeds to multiple payees to avoid such breach of contract claims or claims to enforce a check under O.C.G.A. § 11-3-309.  For example, it may be helpful to put all payees on notice of any payment that is issued. Another alternative may be to require copies of endorsed checks to be reviewed with the adjuster prior to being presented at a bank for draw. This would allow the adjuster to confirm the endorsements with the respective payees. While such measures may be costly and time-consuming, adequate consideration should be given to the Court’s decision in Impac Funding Corp.  to avoid fraudulent endorsements and to minimize future litigation costs spent defending similar claims. 

The Journal is a publication for the clients of Drew Eckl & Farnham, LLP. It is written in a general format and is not intended to be legal advice to any specific circumstance. Legal Opinions may vary when based upon subtle factual differences. All rights reserved. 

Editorial Board:

H. Michael Bagley
(Editor-in-chief)