Rollins v. Bravos

ROBERT M. BELL, Judge. At issue on this appeal from the judgment of the Circuit Court for Baltimore City are questions of entitlement. Barry D. Rollins and Raymond A. Brookhart, substituted trustees under a deed of trust (appellants) securing indebtedness owed by Anthony Bravos, one of the appellees, to Loyola Federal Savings and Loan Association (Loyola), maintain that the purchaser of fire damaged property at foreclosure sale is also entitled to receive insurance proceeds paid in respect of the damage. Bravos and an insurance adjustment company, Goodman-Gable-Gould-Co., the other appellee, argue, on the other hand, that the proceeds must be applied to extinguish Bravos’ debt and that, since Loyola’s ⁶²⁰ bid at foreclosure exceeded Bravos’ debt to it, it was entitled to none of the proceeds.

Goodman also maintains that it is entitled to have its fee for adjusting the fire insurance claim paid out of those proceeds. It is Bravos’ position that he is entitled to retain that portion of the insurance proceeds remaining after the extinguishment of Loyola’s mortgage debt, the payment of appellee Goodman’s fee, and the payment of other creditors. The trial judge accepted appellees’ argument and ruled against appellants. Appellants have appealed.

As will hereinafter become apparent, it provides appellants little solace. Bravos borrowed $240,000 from Loyola for the purchase of property located at 921 N. Charles Street. To secure the indebtedness, he deeded the property to appellants in trust for Loyola. He also executed a Deed of Trust Note made payable to Loyola.

Paragraph 6 of the deed of trust provides: That he will keep the improvements now existing or hereafter erected on the said premises insured as may be required from time to time by the holder of the note against loss by fire and other hazards, casualties, and contingencies in such amounts and for such periods as may be required by the holder of the note and will pay promptly, when due, any premium on such insurance, provisions for payment of which has not been made hereinbefore. All insurance shall be carried in companies approved by the holder of the note and the policies and renewals thereof shall be held by the holder of the note and have attached thereto loss payable clauses in favor of and in form acceptable to the holder of the note. In event of loss he will give immediate notice by mail to the holder of the note, who may make proof of loss if not made promptly by the party of the first part, and each insurance company concerned is hereby authorized and directed to make payment for such loss directly to the holder of the note instead of to the party of the first part and the holder of the note jointly, and insurance proceeds, ⁶²¹ or any part thereof, may be applied by the holder of the note as [sic] its option either to the reduction of the indebtedness hereby secured or to the restoration or repair of the property damaged. In event of foreclosure of this Deed of Trust or other transfer of title to the said premises in extinguishment of the indebtedness secured hereby, all right, title, and interest of the party of the first part in and to any insurance policies then in force shall pass to the purchaser or grantee.

(Emphasis added) After Bravos paid only a small portion of the principal amount of the loan, he defaulted and foreclosure proceedings against the property were instituted. Prior to the commencement of foreclosure proceedings, the property was damaged by a major fire. At the time that it was sold, the property was valued at approximately $125,000; it had not been repaired, thus, the lower value. Notwithstanding the value of the property, appellants sold the property at public auction to their principal, Loyola, at a purchase price of $265,000, an amount in excess of the principal amount of the Deed of Trust note.

Prior to the sale and after consultation with appellants, the auctioneer advised the prospective bidders concerning their right to receive insurance proceeds as follows: During the time that you are the successful bidder and it’s knocked down to you, the insurance money comes in prior to the auditor ratifying his auditors report you will not necessarily be [e]ntitled to the insurance claim in money, it will be applied to the debt. If, however, the auditor ratifies his report and the money has not come in, then you may have a right to claim the money____ It is obvious the place has been fire damaged, there is a claim for fire damage. The monies have not come in. If the money comes in during the time that the auditor has not ratified his report, his audit between 16-20 days approximately from sale date for ratification, then you will have the right to claim the money if he ratifies the auditor’s sale, the auditor’s report.

If the money comes in during ⁶²² the time he has not ratified it, the money will be applied to the debt____ Questions from the bidders produced the following colloquy: AUDIENCE: When does all that take place? AUCTIONEER: We are still waiting for the insurance money. If the insurance money comes in between now and time that the sale has not been ratified by the auditor, you will not have a claim on the money, it will be applied to the debt. If the money comes in after the time that the sale has been ratified by the auditor you will have a right to the money.

AUDIENCE: Does that take place after the settlement. AUCTIONEER: Let me explain something to you. You’re not listening. (Let Mr. Rinaudo go a little further.) The sale must first must be ratified by the court under an order of starting within thirty days after the date we record it.

After the sale has been ratified the auditor states his account which is a period of time from 15 to 20 days after the ratification of sale. After the 20 days, then the court auditor sends out his notices and then if there are no objections to the auditor’s account then the sale that auditor’s account is ratified. Then you are talking about a month to two months from now. AUDIENCE: And if it comes in before that.

AUCTIONEER: It goes into the auditor’s account as additional deposit. 1 Subsequent to the sale, Loyola received the insurance proceeds in the amount of $188,040.25. Loyola did not apply the proceeds to reduce its mortgage debt, rather it asserted its entitlement to them as the purchaser at the foreclosure sale. In the meantime, Loyola sold the property it had purchased at foreclosure for $265,000 for $130,000. ⁶²³ The initial report of sale was filed, and ratified, shortly after the foreclosure sale. When the insurance proceeds had been received, appellants filed an amended report of sale, acknowledging receipt of the proceeds and seeking to include them as part of the property sold to, and bought by, Loyola.

That amended report was ratified by the court and appellees filed a timely objection. Treating Bravos’ objection as a motion for reconsideration, the court, by order dated April 4, 1988, referred the case to the General Equity Master for “hearing, report and recommendation as provided by Rule 2-541.” Because appellee Goodman’s motion alleged an equitable lien on any surplus remaining after the foreclosure sale, the court, by order of the same date, pursuant to Md.Rule W75, referred it to the auditor “for a determination of its validity and priority.” To date, the auditor has not rendered a decision in the matter. Bravos’ objection challenged Loyola’s entitlement to the insurance proceeds on two grounds: 2 1. That [the] Deed of Trust allows Loyola Federal, upon foreclosure, to keep the insurance proceeds so long as the debt is extinguished.

Loyola Federal has not extinguished the debt, however, they propose to keep the insurance proceeds and also to make a claim for the full amount of the debt plus interest, denying the Defendant of any benefit from the insurance he maintained on the premises. In the alternative, without considering a foreclosure, Loyola must use the insurance proceeds to reduce the mortgage debt or to restore the premises, either of which would have benefit the Defendant. Loyola has also refused to exercise those options. and 2. That the instructions given by the auctioneer before the bidding commenced were confusing, misleading and ⁶²⁴ chilled the bidding process allowing Loyola to purchase the property at below market value.

The General Equity Master rejected both rationales and concluded that, inasmuch as Loyola was entitled to the insurance money, its amended Report of Sale should be accepted by the court. As to the latter, the Master found: “[sjince Loyola Federal, the lender, purchased at the sale, the announcements by the auctioneer are not relevant” and, in any event, objection on that basis “should have been timely raised [within thirty days of] the original report of sale ...” pursuant to Md.Rule BR6.b. 3 Concerning the former, the Master construed the last sentence of paragraph six of the Deed of Trust. She concluded that “[t]he phrase ‘other transfer of title to the said premises in extinguishment of the indebtedness hereby’ is a separate term from ‘foreclosure.’ ” Therefore, since [u]nder Maryland law foreclosure does not extinguish the debt, and the lender has a right to a deficiency judgment[,] Rule W75.b [,i]t would be incorrect to interpret the deed of trust language in a manner that modifies the word foreclosure with the phrase “in extinguishment of the indebtedness”. Such an interpretation would be contrary to both the syntax of the deed of trust and existing Maryland law.

The trial court sustained exceptions, filed by both appellees, to the Master’s Report and Recommendation. By its order, the court rescinded its prior approval of the amended report; ordered that the auditor apply the insurance proceeds as a reduction of Loyola’s claim; and ordered that the ⁶²⁵ auditor allow Goodman’s claim in the amount of its fee for adjusting the insurance claim. It is from this order that appellants have appealed. 4 1. Appellants maintain that paragraph six of the deed of trust and, in particular, the last sentence of that paragraph, means that the insurance proceeds pass to the foreclosure sale purchaser as a part of the property sold at the foreclosure sale.

To reach this result, appellants interpret “foreclosure” as being different from “other transfer of title to the said premises in extinguishment of the indebtedness secured hereby.” Thus, limited to the situation applicable to them, appellants read the last sentence as follows, “in the event of foreclosure of this Deed of Trust, ... all right, title, and interest ... in and to any insurance policies then in force shall pass to the purchaser or grantee.” Appellants thus rely upon the rule of the last antecedent, pursuant to which, modifying words, clauses, or phrases refer to the words, clauses, or phrases immediately preceding them and not to remote antecedents. See In Re Mid-Atlantic Toyota Antitrust Litigation, 525 P.Supp. 1265, 1286 (D.Md.1981); Sullivan v. Dixon, 280 Md. 444, 451 , 373 A.2d 1245 (1977). 5 In any event, it is implicit in appellants’ ⁶²⁶ argument that the phrase, “insurance policies then in force”, necessarily includes insurance proceeds. Rules of construction, including grammatical rules, while helpful, are not controlling as to the meaning of a particular phrase. See Stanbalt Realty v. Commercial Credit Corp., 42 Md.App. 538, 543 , 401 A.2d 1043 (1979).

Where the context, In Re Mid-Atlantic, 525 F.Supp. at 1286, or the intention of the parties indicate that it is otherwise, an interpretation suggested by the rule of the last antecedent will be subordinated to the context or the intent of the parties. In short, “[t]he ‘last antecedent’ rule is merely an aid to construction and will not be adhered to where remote antecedent is clearly intended.” 42 Md.App. at 544 , 401 A.2d 1043 . It is true, as appellants insist, that unless the proceeds of the sale are sufficient for that purpose, the mere foreclosure on a deed of trust and even sale of the property pursuant to the foreclosure proceedings, does not “extinguish” the debt, see Mizen v. Thomas, 156 Md. 313, 319 , 144 A. 479 (1929); Weismiller v. Bush, 56 Md.App. 593, 598-99 , 468 A.2d 646 (1983); in appropriate circumstances, a deficiency judgment may be entered in favor of the mortgagee. Kronovet v. Lipchin, 288 Md. 30, 57 , 415 A.2d 1096 (1980); ⁶²⁷ McKenna v. Sachse, Executor, 225 Md. 595, 599-600, 171 A.2d 732 (1961); Kline v. Chase Manhattan Bank, 43 Md.App. 133, 143 , 403 A.2d 395 (1979); Garland v. Hill, 28 Md.App. 622, 630 , 346 A.2d 711 , aff'd, 277 Md. 710 , 357 A.2d 374 (1975).

That this is so does not, however, render ineluctable the position taken by appellants. The validity of their position necessarily depends upon the extent to which it reflects the status of Maryland law. As we have seen, the mortgaged property was substantially damaged by a hazard against which the mortgagor was required to and, indeed, did, insure, prior to default. Upon his default, foreclosure proceedings were instituted and a foreclosure sale held prior to the insurance proceeds being paid.

Notwithstanding the fact that the property had a much lower value after the fire than it had before, the mortgagee purchased the property for an amount in excess of the debt owed by the mortgagor. Thus, the precise issue presented here is whether, under these facts, the purchaser at the foreclosure sale is entitled to receive, in addition to the premises bid upon, insurance proceeds due in respect of the damage to those premises. Put another way, the question is: were the insurance proceeds a part of the consideration for which the mortgagee bid at the foreclosure sale? This precise issue has not been decided by a Maryland court.

Other jurisdictions have, however, and, for the most part, they have applied the “foreclosure after loss” principle. See, e.g., Calvert Fire Insurance Company v. Environs Development Corp., 601 F.2d 851 , 855-56 (5th Cir.1979); United States v. Lititz Mutual Insurance Company, 694 F.Supp. 159 (M.D.N.C. 1988); Tech Land Development, Inc. v. South Carolina Insurance Company, 57 N.C.App. 566 , 291 S.E.2d 821 , cert. denied, 306 N.C. 563 , 294 S.E.2d 228 (1982); Laurel National Bank v. Mutual Benefit Insurance Company, 297 Pa.Super. 473 , 444 A.2d 130 (1982); Smith v. Stockton, Whatley, Davin & Company, 487 So.2d 923 (Ala.Civ.App.1985); Nationwide Mutual Fire Insurance Company v. Wilborn, 291 Ala. 193 , 279 So.2d 460 (1973); Imperial ⁶²⁸ Mortgage Corporation v. Travelers Indemnity Company of Rhode Island, 43 Colo.App. 74 , 599 P.2d 276 (1979). The approach taken by these courts, which may be characterized as the majority view, see Lititz Mutual Insurance Company, 694 F.Supp. at 160 ; 5A J Appleman, Insurance Law and Practice, § 3403 (1970, 1981 Supp.), stresses the sequence of events. Thus, where the insured premises are damaged before foreclosure proceedings have been instituted or, if after they have been