Hadjis v. Anderson

Singley, J., delivered the opinion of the Court. Mr. and Mrs. George C. Hadjis (Hadjis), regarding themselves as having been badly used by Wellham Building and Loan Association, Inc. (Wellham), which held the mortgage on property owned by them, filed exceptions to the ratification of the report of sale filed by the attorney named in the mortgage, who had foreclosed the mortgage and sold the property for $20,000. From an order of the Circuit Court for Anne Arundel County granting the mo ³² tion to dismiss which Wellham made at the end of Hadjis’ case and overruling Hadjis’ exceptions, this appeal was taken. The facts underlying the controversy can be briefly told.

On 6 January 1966, Hadjis borrowed $24,000 from Wellham. The loan was secured by a purchase money mortgage on an improved quarter-acre tract in Glen Burnie. The mortgage provided for the payment of 6% interest and called for monthly payments of $225 commencing 20 February 1966 to be applied to the payment of interest ; then to the payment of taxes, insurance premiums and public charges; and finally, to the reduction of principal. Among the covenants of the mortgage was an undertaking “to keep the buildings on the premises insured against loss by fire and windstorm and all hazards for the benefit of the Mortgagee, its successors or assigns, in some company acceptable to [Wellham], its successors or assigns, to the extent of its lien thereon, and to deliver the policy and all renewal receipts to [Wellham], its successors or assigns * * Two policies of fire and extended coverage insurance on the property were written by Insurance Company of North America (the Insurer) in the total amount of $20,000.

Wellham was identified as the mortgagee in each policy, and each provided, in substance, that loss would be payable to Wellham, as its interest might appear, subject to the provisions of the usual mortgagee clause attached to the policy. An examination of Wellham’s ledger card, introduced in evidence below, shows that Hadjis had kept his monthly payments current or had brought them to date through most of 1966 and 1967, but that by the end of 1967, had begun to run one or two months behind. In December of 1967, he made an additional borrowing from Crest Investment Trust, Inc. (Crest), secured in part by a second mortgage on the property. The monthly mortgage payment due 20 September had been paid only in part and the October payment was unpaid when, on 18 November 1968, the improvements on the premises were destroyed by fire.

There were no further payments until ³³ late December, when the October and November installments were met. In February, the December installment was paid in part. Meanwhile, efforts to adjust the fire loss were under way, which resulted in the recovery of $8,922.68 from the Insurer, a portion of which was claimed by the firm of public adjusters who had represented Hadjis. In February, 1969, Wellham sent the Insurer’s checks to Hadjis with instructions to obtain the endorsements of Crest and of the public adjusters, to endorse them himself, and to return them to Wellham.

When the checks were not returned, Wellham brought a declaratory action in the Circuit Court for Anne Arundel County against Hadjis, the other payees of the checks and the Insurer, which sought to impress an equitable lien on the insurance proceeds. Hadjis and Crest failed to answer; a decree pro confesso was entered against them; Hadjis paid the public adjuster’s fee, and the case was ultimately settled when the checks for $8,922.68, properly endorsed, were delivered to Wellham. What happened next sowed the seeds of this controversy. On 11 June, Wellham applied $424.68 of the insurance proceeds to the arrearages of interest on the mortgage, bringing these payments to date, and applied the balance, or $8,498.00, to the reduction of the principal debt, thus reducing it from $21,234.12 to $12,736.-12.

We have not been able, on the record before us, to determine the amount by which payments in reduction of principal were in arrears on 11 June, but it is fair to assume that they approximated $500.00, so that the balance of the insurance proceeds remaining in Wellham’s hands was about $8,000.00. The record is scanty as to how this came about. Hadjis testified — and his testimony was not controverted — that when he delivered the insurance checks to Wellham’s counsel a discussion took place: “[W]hat I did tell them is this that I will sign the checks over to you provided I will have time ³⁴ to sell my properties, in other words not to pay any monthly installments as they fall due but be paid from the proceeds of the checks I had given him until I sell it or refinance the property. What had caused me to do so and wanted them to apply them in this fashion was that Wellham Building & Loan Association at one meeting with the Directors and Mr. Richard Anderson present there indicated they would not allow me to rebuild or repair the place because they said, ‘We don’t want you to put good money into the burnt building,’ and this was told by the President, Mr. Cromwell, and in another instance I was told [point] blank, ‘We don’t want you to be —we don’t want to have you here in our mortgage — in our — with our Association.

You are a bad payer.’ ” Hadjis continued: “After I delivered the checks to the — to Mr. Marvin Anderson [counsel for the Association] and we had our little brief discussion that evening, he said, ‘I will see what I can do with the Association,’ and that was the last I heard from theiii. No notification that how they applied the monies, the proceeds towards the account or anything else.” Hadjis’ testimony was that the only notice he received thereafter was a letter of 3 November 1969, advising him that the foreclosure proceeding had been instituted. Ernest R. Smoot, Secretary of Wellham, was called as a witness by Hadjis. He testified on direct examination: “[Q] At whose direction did you post in this manner [by crediting principal with $8,-498 on 11 June 1969], sir? “A. Whenever there is a fire loss then the proceeds of the fire insurance policy are usually applied to the principal of the mortgage. ³⁵ “[Q] And this is the policy that you applied in this case? “A. I have applied that for thirty-five years in the banking and building and loan business. “[Q] And this is why you applied [it] in this case because of policy ? “A. That’s the policy that should be applied.” Bearing in mind that on review of the granting of a motion to dismiss, the evidence and the logical and reasonable inferences to be drawn therefrom must be taken in the light most favorable to the plaintiff, Maryland Rule 535; Price v. Levin, 248 Md. 158 , 235 A. 2d 547 (1967), on the record before him, the chancellor could have found the following facts.

Hadjis’ mortgage secured a 15 year level payment direct reduction loan. 1 His payment record was erratic and the mortgage had been technically in default most of the time from late 1967 until the insurance checks were credited to the account on 11 June. Hadjis had reason to assume that he had worked out an arrangement for taking care of monthly payments from and after 20 June, because he testified no payments were demanded and no notice of acceleration was given. Because we are satisfied that the motion to dismiss should not have been granted, we propose to reverse the order overruling the exceptions and remand the case for further proceedings in order that Wellham may have the opportunity to make a record justifying the action it took, if it can. Because it may be of assistance to the chancellor at the new hearing, and may minimize the likelihood of a further appeal, we propose to summarize what we conceive to be the law applicable to the facts in the record before us.

We do not question Wellham’s right to retain the insurance proceeds. It was an insured named in the policy ³⁶ and had the right to retain such of the proceeds as did not exceed the amount of the mortgage debt, Federal Land Bank of Baltimore v. Cosimano, 165 Md. 333 , 168 A. 886 (1933); Woody v. Lytton Savings & Loan Ass’n, 229 Cal.App.2d 641 , 40 Cal. Reptr. 560 (1964). If the proceeds were to be applied to restoration, this would have had to be done by agreement between Wellham and Hadjis, since no procedure was spelled out in the mortgage.

Once it is granted that Wellham had the right to retain the proceeds, there follows the question, how were they to be applied ? It is abundantly clear that the application of the insurance proceeds was not governed by the terms of the mortgage, but that the determination was made on the basis of what Mr. Smoot described as “policy,” for which we can find no support in the law. At any time after 20 September 1967 and prior to 11 June 1969, Wellham could have given notice that it proposed to accelerate the maturity of the mortgage because of continuing delinquency and could have demanded payment of the debt. This it did not do.

Even the letter which Wellham wrote to Hadjis on 13 February 1969 threatening foreclosure was predicated on Hadjis’ failure to deliver the insurance checks. Presumably this was cured when Well-ham accepted the checks. As we see it, in the absence of an appropriate provision in the mortgage, Wellham had at least three alternatives open to it when it received the checks: (i) It could have suggested to Hadjis that it would have been willing to hold $8,498.00 in escrow, and with Hadjis’ consent or at his direction, could have applied this sum to Hadjis’ monthly payments of $225 until the sum was exhausted, when payments would again commence. (ii) It could have advised Hadjis that it would apply the $8,498.00 to the first installments of principal to be due thereafter, until the sum was exhausted by such applications.

Until such time, Hadjis’ monthly payments would have been $63.68 (6% ³⁷ on