Western World Insurance Group v. Church Mutual Insurance Co.

USCA4 Appeal: 20-2001 Doc: 39 Filed: 01/25/2022 Pg: 1 of 17
UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 20-2001
WESTERN WORLD INSURANCE GROUP,
Claimant - Appellee,
and
GUIDEONE NATIONAL INSURANCE COMPANY,
Plaintiff,
v.
CHURCH MUTUAL INSURANCE COMPANY,
Defendant - Appellant.
Appeal from the United States District Court for the District of South Carolina, at
Charleston. Margaret B. Seymour, Senior District Judge. (2:17-cv-01361-MBS)
Argued: October 28, 2021 Decided: January 25, 2022
Before DIAZ and THACKER, Circuit Judges, and Thomas T. CULLEN, United States
District Judge for the Western District of Virginia, sitting by designation.
Vacated and remanded by unpublished per curiam opinion.
ARGUED: Ainsley Fisher Tillman, Ian Scott Ford, FORD WALLACE THOMSON LLC,
Charleston, South Carolina, for Appellant. Bradish Johnson Waring, Kenyatta Laffette
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Gardner, BUTLER SNOW LLP, Charleston, South Carolina, for Appellee. ON BRIEF:
Stephen P. Groves, Sr., BUTLER SNOW LLP, Charleston, South Carolina, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
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PER CURIAM:
Abundant Faith Lighthouse of Jesus Christ, Inc. (“Abundant Faith”) purchased a
church building in Conway, South Carolina (“the Property”) from the Refuge at FPHC
(“the Refuge”), another local church. To make the purchase, Abundant Faith took out a
mortgage with the Refuge as the mortgagee. Pursuant to the mortgage agreement,
Abundant Faith was required to maintain property insurance and assign the proceeds of
any payment received from the insurance policy to the Refuge.
When Abundant Faith’s insurance on the Property lapsed, the Refuge, as the
mortgagee, obtained an insurance policy from Western World Insurance Group (“Western
World”). In an effort to avoid foreclosure, Abundant Faith also ultimately procured
insurance for the Property. First, Abundant Faith purchased a policy from GuideOne
National Insurance Company (“GuideOne”) that listed the Refuge as the mortgagee of the
Property. Church Mutual Insurance Company (“Church Mutual”) also issued a policy to
Abundant Faith, but no mortgagee was listed on the Church Mutual policy.
On July 24, 2016, a fire destroyed the Property. Shortly thereafter, the insurance
companies began determining what they were required to pay and to whom. In exchange
for Western World paying the totality of the claim, the Refuge assigned its mortgage
interest in the Property to Western World. Western World then contacted GuideOne and
Church Mutual seeking payment for their share of the loss.
Eventually, GuideOne brought a declaratory judgment action in federal court
against both Western World and Church Mutual to clarify how the insurance proceeds
should be distributed. Western World, in turn, raised crossclaims and counterclaims
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against GuideOne and Church Mutual. But before a final decision was made below,
GuideOne and Western World settled, with GuideOne agreeing to pay its pro-rata share of
the loss to Western World. After the settlement between Western World and GuideOne,
only Western World’s claims against Church Mutual remained in the action before the
district court. Western World sought to recoup its share of the loss from Church Mutual
through an equitable lien.
The district court concluded that Western World possessed an equitable lien on the
proceeds from the Church Mutual policy. Accordingly, it ordered Church Mutual to pay
Western World pursuant to the equitable lien. But because the district court did not
consider any possible defenses Church Mutual may have had before ordering such
payment, we vacate and remand for further proceedings.
I.
A.
The Insurance Policies
From 2012 to 2014, the Refuge leased the Property to Abundant Faith. Then, on
March 13, 2014, Abundant Faith purchased the Property from the Refuge through a
mortgage agreement with the Refuge listed as the mortgagee. The mortgage agreement
included a clause that required Abundant Faith, as the mortgagor, to:
keep [the Property] insured from loss or damage in the
maximum insurable value and assign the policy of insurance to
the said Mortgagee, and in case the Mortgagor shall at any time
neglect or fail to maintain such insurance, the Mortgagee may
cause the same to be insured in his or its own name, and
reimburse himself or itself for the premium and expenses of
such insurance under this mortgage.
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J.A. 26. 1
However, Abundant Faith failed to maintain insurance on the Property. In 2016,
Abundant Faith’s policy with Stillwater Insurance Company expired, and it did not renew
the policy or procure new insurance. In response to this lapse, the Refuge purchased
$500,000 of insurance coverage from Western World to protect its interest in the Property.
The Refuge also informed Abundant Faith that it intended to begin foreclosure proceedings
due to Abundant Faith’s nonpayment of the mortgage and failure to maintain insurance
pursuant to the mortgage agreement.
To avoid foreclosure, Abundant Faith contacted GuideOne and Church Mutual to
purchase insurance for the Property. Abundant Faith purchased a $1,500,000 policy from
GuideOne on June 22, 2016. The Refuge was listed on the GuideOne policy as Abundant
Faith’s mortgagee. GuideOne does not dispute, nor has it ever disputed, the existence of
this policy. Abundant Faith made payments on the GuideOne policy, and both parties
behaved as though they were in an insurer-insured relationship.
On July 6, 2016, Church Mutual also issued a $795,000 insurance policy for the
Property to Abundant Faith. But Abundant Faith claimed that it did not intend to purchase
a policy from Church Mutual and attempted to stop the policy from being issued.
Therefore, Abundant Faith made no payments on the Church Mutual policy. In response
to Abundant Faith’s attempt to disclaim the policy, Church Mutual advised Abundant Faith
1
Citations to the J.A. refer to the Joint Appendix filed by the parties in this appeal.
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that it was bound to purchase the policy because Church Mutual had already begun the
underwriting process. Despite not making any premium payments on the Church Mutual
policy, Abundant Faith took no affirmative steps to cancel it.
When applying for the Church Mutual policy, it is unclear whether Abundant Faith
represented that there were no mortgages on the Property. In any event, no mortgagee was
listed on the policy. As such, at least on the face of the policy, Church Mutual was unaware
of the Refuge’s interest in the Property when it entered into the insurance contract with
Abundant Faith.
Just weeks after these insurance policies were purchased, on July 24, 2016, the
Property was destroyed in a fire. An investigation of the origin of the fire indicated that it
was set intentionally. Shortly after the fire, Abundant Faith’s pastor was arrested for arson,
but those charges were later dismissed, and the cause of the fire has never been fully
litigated.
B.
Insurance Claims
On July 27, 2016, Abundant Faith informed Church Mutual that it did not intend to
make a claim on the Church Mutual policy because it had other insurance, namely the
GuideOne policy. Consistent with this representation, Abundant Faith filed a claim only
on the GuideOne policy. Church Mutual nonetheless acted as though Abundant Faith had
made a claim on the Church Mutual policy and began investigating the fire. For its part,
the Refuge, which at this point was aware of the Church Mutual policy, asked Church
Mutual to add the Refuge to the policy as the mortgagee, but Church Mutual did not do so.
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On August 19, 2016, Western World contacted Church Mutual and GuideOne and
asserted that its policy was excess to theirs. Therefore, according to Western World,
Church Mutual and GuideOne owed the Refuge compensation on a pro-rata basis because
their policies contained clauses entitling the mortgagee of the Property -- i.e. The Refuge -
- to any insurance proceeds in the event of a loss. Thus, Western World made formal
claims with GuideOne and Church Mutual for payment via the mortgagee clauses. Neither
company paid the Refuge or Western World. As a result, on October 24, 2016, Western
World paid the Refuge the entire sum of the Refuge’s interest in the Property, $282,968.36.
In turn, the Refuge assigned its mortgage interest in the Property to Western World.
Ultimately, on November 22, 2016, Church Mutual canceled its policy with
Abundant Faith due to nonpayment of premiums and sent Abundant Faith a letter claiming
the policy was “voided from its inception.” J.A. 132. Church Mutual also informed
Abundant Faith that it would not conduct any further investigation into the loss.
In February 2017, GuideOne denied payment on Abundant Faith’s policy because
Abundant was not “actually operating as a church” and had made allegedly fraudulent
statements to GuideOne regarding the church’s operations, the Church Mutual policy, and
the cause of the loss. J.A. 135-6.
At that point, only Western World had compensated the Refuge for the loss of the
Property.
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C.
Procedural History
On May 25, 2017, GuideOne filed a declaratory judgment action in federal district
court seeking a declaration that the GuideOne policy was excess insurance to the other
policies and that it had no obligation to pay the Refuge because the Church Mutual and
Western World policies provided sufficient primary coverage for the loss of the Property.
In response, Church Mutual argued that it offered no coverage because the Refuge was not
listed as a mortgagee on the Church Mutual policy, and further that its policy was void
from its inception and not enforceable. Church Mutual also stated it was reserving defenses
deriving from the policy itself, most notably the criminal-acts exclusion.
For its part, Western World filed counterclaims and crossclaims seeking
reimbursement from both GuideOne and Church Mutual for their pro-rata shares of the
loss. Western World also brought a bad faith claim against GuideOne, asserting that
GuideOne had unreasonably delayed making decisions on Western World’s claim, failed
to evaluate the claim, relied on illegal policy provisions, and took other actions which
Western World claimed were unjustifiable. GuideOne sought summary judgment on
Western World’s bad faith claim, arguing that it was justified in delaying its decision until
authorities could conclude their investigation into the fire and that there were reasonable
grounds for contesting Western World’s claims.
After considering competing motions for summary judgment from each party, the
district court issued an order holding: (1) the GuideOne policy was not excess insurance to
Western World’s policy; (2) the Church Mutual policy was enforceable; (3) Western
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World’s policy was excess to the GuideOne and Church Mutual policies; (4) Western
World possessed an equitable lien on the Church Mutual policy; and (5) GuideOne was not
entitled to judgment as a matter of law on Western World’s bad faith claim asserted against
it. Pursuant to this order, the district court directed GuideOne to pay Western World
$183,942.43 and Church Mutual to pay Western World $99,045.93 given the equitable lien
Western World possessed on the proceeds from the Church Mutual policy. Significantly,
however, Church Mutual was not afforded the opportunity to raise any potential defenses
before the district court ordered payment pursuant to the equitable lien.
On January 22, 2020, the parties informed the district court of a settlement
agreement between GuideOne and Western World. Pursuant to the settlement agreement,
Western World assigned its mortgage interest in the Property to GuideOne. In turn,
GuideOne paid its pro-rata share of the loss to Western World. But Western World
specifically reserved its right to recover insurance proceeds from Church Mutual.
Church Mutual then filed a motion pursuant to Rule 59(e) of the Federal Rules of
Civil Procedure seeking to set aside the equitable lien. Church Mutual argued that the
settlement agreement between GuideOne and Western World extinguished Western
World’s interest in the Property as a mortgagee, and, therefore, Western World could not
hold an equitable lien on the Church Mutual policy proceeds. The district court denied the
Rule 59(e) motion because Western World specifically reserved the right to recover on the
equitable lien from Church Mutual when it assigned its mortgage interest to GuideOne in
the settlement agreement. In this order, the district court also formally dismissed the claims
between Western World and GuideOne.
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Church Mutual timely appealed. In this appeal, Church Mutual challenges the
district court’s imposition of the equitable lien without giving it an opportunity to raise
defenses to payment as well as the determination that the Western World policy was excess
to the Church Mutual policy.
II.
We review the district court’s grant of summary judgment de novo. East Coast
Repair & Fabrication, LLC v. United States ex rel. Dep’t of the Navy, 16 F.4th 87, 90 (4th
Cir. 2021). Summary judgment is appropriate if, construing the evidence in favor of the
non-movant, there is no genuine dispute as to any material fact and the movant is entitled
to judgment as a matter of law. Id. Federal jurisdiction in this case is premised on diversity,
so the district court applied South Carolina substantive law. See Eshelman v. Puma
Biotech. Inc., 2 F.4th 276, 281 (4th Cir. 2021). We review the district court’s analysis of
state law de novo. See Sky Cable, LLC v. DirecTV, Inc., 886 F.3d 375, 385 (4th Cir. 2018).
III.
A.
Western World Holds an Equitable Lien on the Proceeds from the Church Mutual Policy
1.
South Carolina law provides, “if the mortgagor is bound by the mortgage to insure
the mortgaged property, the mortgagee has an equitable lien on the insurance proceeds.”
Knapp v. Victory Corp., 302 S.E.2d 330, 331 (S.C. 1983). The concept of an equitable lien
originates from the maxim “equity regards as done what ought to be done,” which applies
in cases where the party seeking equitable relief establishes “a clear obligation based upon
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a valuable consideration that another do some act which he has failed to perform.” Regions
Bank v. Wingard Properties, Inc., 715 S.E.2d 348, 354 (S.C. Ct. App. 2011).
Here, “what ought to be done” can be found in the mortgage agreement between the
Refuge and Abundant Faith which obligates Abundant Faith to (1) maintain insurance on
the Property; and (2) assign the proceeds from any payment from that insurance to the
Refuge as the mortgagee. It is clear from the record that Abundant Faith failed to fulfill
either obligation. Indeed, there was a period of time during which Abundant Faith failed
to maintain any insurance at all. And when it did obtain insurance, Abundant Faith failed
to list the Refuge as the mortgagee on the Church Mutual policy. 2
2.
At its core, Church Mutual’s argument against the equitable lien is that its insurance
contract with Abundant Faith is not covered by the policy-proceeds assignment clause of
the mortgage agreement. Church Mutual claims that because the proceeds assignment
clause is satisfied by other insurance policies, and there was no mortgagee listed on its
policy, it is not bound to pay the Refuge or its assignees as the mortgagee. In short, Church
Mutual asserts that any policy-proceeds assignment issue is of no moment because the
GuideOne and Western World insurance policies can cover the Refuge’s loss.
2
Church Mutual asserts there is no policy. However, Church Mutual’s own actions,
such as (1) referring to Abundant Faith’s “claim” related to the fire and (2) telling Abundant
Faith that it had a policy, demonstrate that Church Mutual and Abundant Faith were, in
fact, in an insurer-insured relationship.
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Taken to its logical end, Church Mutual’s argument would allow insurance
companies to avoid paying mortgagees if the mortgagee is not listed on the policy and
another insurance company provides coverage. But this flies in the face of well-established
South Carolina law regarding equitable liens, which ensures that the interests of
mortgagees are protected. See Knapp 302 S.E.2d at 331 (holding that where a party is
contractually bound to assign its insurance proceeds to its mortgagee, the mortgagee always
possesses an equitable lien in the policy proceeds). Therefore, Church Mutual’s arguments
are unavailing.
Abundant Faith, as the mortgagor, had an obligation set forth in the mortgage
agreement to maintain insurance on the Property and to assign the insurance proceeds to
the Refuge as the mortgagee, in the event of a covered loss. The Refuge then assigned its
mortgage interest to Western World in exchange for Western World paying the Refuge for
the loss of the Property. At this point, Western World became entitled to any insurance
proceeds from any policy that Abundant Faith held. In turn, when Western World settled
with GuideOne, Western World relinquished its mortgagee interest in the Property to
GuideOne. However, because Western World expressly reserved the right to be considered
the mortgagee for the purpose of collecting the Church Mutual policy proceeds, Western
World maintains its mortgagee status in that regard. Therefore, the district court correctly
determined that Western World is the rightful holder of the equitable lien.
3.
Church Mutual further attempts to avoid the equitable lien by arguing that the
district court should not have invoked equity at all because the legal remedies in the case
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were adequate. To support this argument, Church Mutual relies on the equitable maxim
that “equity supplement[s] the law and does not displace it.” Wigfall v. Tideland Utilities
Inc., 580 S.E.2d 100, 108 (S.C. 2003). Church Mutual argues that because Abundant Faith
obtained a policy from GuideOne which was sufficient to cover the Refuge’s loss, the
mortgagee’s interest is fully covered contractually and, therefore, equity has no place here.
However, this argument misapprehends the issue. It is true that if there is a complete
legal remedy in a case, courts should not apply an equitable remedy. See Wigfall 580
S.E.2d at 108. In this case, though, equity is necessary in order to provide a complete
remedy to the parties. Critically, what matters in this case is that the Refuge, and later its
assignee, Western World, are ultimately paid the proper amount from each party -- a result
that can only occur by imposing an equitable lien. The amount of the loss to the Refuge
was $282,968.36. Western World paid this entire sum to the Refuge. But because the
district court held the Western World policy was excess insurance, Western World was not
obligated to pay the Refuge anything. 3 Accordingly, the district court ordered GuideOne
to pay Western World $183,942.43 and Church Mutual to pay Western World $99,045.93. 4
3
Church Mutual also challenges the finding that the Western World policy was
excess insurance. We find no merit in this argument because the Western World and
Church Mutual insurance policies protect different interests, with Western World’s
protecting the mortgagee’s interest, and Church Mutual’s the mortgagor’s interest. The
only “insured” seeking to collect in this case is the Refuge, and later its assignee Western
World, and the only excess insurance clause that protects the interest of the insured is the
one in the Western World policy. Therefore, the district court did not err in holding that
the Western World policy was excess to the Church Mutual policy.
4
These sums total $20 more than Western World paid the Refuge for the loss. The
district court did not provide a reason for this discrepancy.
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No mortgagee is named in the Church Mutual policy, and literally speaking, because
the Refuge obtained the total amount owed to it via the Western World settlement, it would
be simple to view the loss as settled. But when Western World became the mortgagee, it
found itself in the unenviable position of covering a loss that the district court determined
it did not owe. And given that no mortgagees appear in the Church Mutual policy, Western
World cannot seek contractual reimbursement from Church Mutual via the policy.
Therefore, Western World is left with only equitable remedies.
As noted above, an equitable lien exists to ensure that the mortgagee’s interests are
protected even if the original policy holder fails to include the mortgagee on its insurance
policy. That is precisely the case here. As a result, we hold that Western World holds an
equitable lien in the Church Mutual insurance policy proceeds.
B.
Church Mutual’s Potential Defenses, If Any, Must Be Considered
Granting insurance proceeds to a party through an equitable lien involves a three-
step process. First, the court must determine whether an equitable lien applies. See
Farmers & Merch. Nat’l Bank of Lake City v. Moore, 133 S.E. 913, 918 (S.C. 1926).
Second, the court must determine the extent of the equitable relief available, if any,
considering the defenses the insurer would have against the original insured. See
Rosemond v. Campbell, 343 S.E.2d 641, 645 (S.C. Ct. App. 1986); Farmers & Merch.
Nat’l Bank, 133 S.E. at 918. Finally, the court orders relief. The district court erred in this
case by conducting only steps one and three of this process and failing to consider step two.
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In determining how much relief to provide on an equitable lien, the court must first
determine whether contractual language limits the amount of insurance proceeds available
to the mortgagee. See Knapp, 302 S.E.2d at 331. Absent such a limitation between the
parties, the mortgagee is generally entitled to receive the full amount of proceeds secured
by the policy. See id. In situations where the mortgage agreement or another instrument
limits the amount of insurance proceeds available to the mortgagee, however, relief is
capped at that amount. See id. For example, in Knapp, the mortgage agreement stated that
the property was to be insured up to $160,000. Id. The South Carolina Supreme Court held
that this limitation restricted the amount to which the mortgagee was entitled through an
equitable lien. See id. Therefore, the maximum amount available through an equitable
lien is either set through a limitation in the mortgage agreement or is the entire amount of
the insurance proceeds.
Unlike the contract in Knapp, the mortgage agreement here does not limit the
amount that the mortgagee is entitled to collect. In the case at hand, the mortgage
agreement entitles the mortgagee to the entire amount of the insurance proceeds. This is
because the mortgage agreement contains a simple assignment of all rights to proceeds by
Abundant Faith to the mortgagee stating: “keep [the Property] insured from loss or damage
in the maximum insurable value and assign the policy of insurance to the said Mortgagee”
J.A. 26. Thus, any proceeds derived from an insurance policy held by Abundant Faith
belong to the mortgagee. Still, that does not end the analysis.
Pursuant to South Carolina law, an assignee enjoys the same rights as the assignor.
See Rosemond, 343 S.E.2d at 645. As a result, “the assignee of a debt takes the obligation
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subject to all claims and defenses the obligor may have against the assignor.” Id. In other
words, the assignee steps into the shoes of the assignor, and the assignee’s right to proceeds
rises or falls with the assignor’s rights. See Farmers & Merch. Nat’l Bank, 133 S.E. at 918
(holding that in the insurance context, a party may only collect proceeds as if it were the
party originally entitled to the proceeds).
This means that Western World, acting as the assignee of the Church Mutual policy
proceeds can only collect the Church Mutual policy proceeds to the extent that Abundant
Faith could collect those proceeds itself. Further, Western World’s right to proceeds is
subject to all defenses Church Mutual could raise to deny coverage to Abundant Faith.
Therefore, to determine the amount of proceeds, if any, to which Western World is entitled
through the equitable lien, the district court was required to first consider any possible
defenses Church Mutual could have raised against Abundant Faith.
Church Mutual preserved several defenses to paying the claim, including the
criminal-acts exclusion in the policy, lack of meeting of the minds to create a valid
insurance contract, lack of consideration, and mistake. Nonetheless, the district court held
that the Church Mutual policy was enforceable, and in turn rejected the latter three
defenses. Specifically, the district court held that the parties reached a meeting of the minds
because Church Mutual “inform[ed] Abundant Faith it had pushed the button,” that is,
begun the underwriting process, that no consideration was required because “the facts
support a finding that Church mutual waived payment of a premium,” and that there was
“no evidence that Abundant Faith induced any mistake on the part of Church Mutual.” J.A.
557. However, the district court did not analyze whether Church Mutual had any legitimate
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defenses to paying the policy beyond enforceability, most notably the arson defense, i.e.,
the criminal-acts exclusion. We conclude this was error.
IV.
The district court properly invoked an equitable lien in this case. However, it did
not afford Church Mutual the opportunity to raise all defenses it could have raised against
Abundant Faith before ordering payment pursuant to the equitable lien. This was error.
Therefore, we vacate the judgment and remand to the district court for further proceedings.
VACATED AND REMANDED
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