CELINK v. Estate of Pyle

Celink v. The Estate of William R. Pyle
No. 0940, September Term 2022
Opinion by Kehoe, J.
Mortgages and Deeds of Trust — Destruction of Premises by Fire
When the improvements on a secured property are destroyed by fire and the loan is due
and payable, Maryland applies the “loss before foreclosure rule.”
The rule provides:
Where a mortgagee has a right to foreclose a mortgage because the
mortgage obligation is fully due and payable and the mortgagee has a right
to casualty insurance . . . the mortgagee may either:
(1) recover from the insurance proceeds . . .; or
(2) foreclose on the mortgaged real estate and, to the extent that doing so
does not satisfy the mortgage obligation, recover the balance from the
insurance proceeds[.]
RESTATEMENT (THIRD) OF PROPERTY (MORTGAGES) (2007) § 4.8.
Circuit Court for Cecil County
Case No. C-07-CV-19-000482
REPORTED
IN THE APPELLATE COURT OF
OF MARYLAND*
No. 940
September Term, 2022
____________________________________
CELINK
v.
ESTATE OF WILLIAM R. PYLE
____________________________________
Wells, C. J.,
Kehoe,
Zarnoch, Robert A.
(Senior Judge, Specially Assigned),
JJ.
____________________________________
Pursuant to the Maryland Uniform Electronic Legal Materials
Act (§§ 10-1601 et seq. of the State Government Article) this
Opinion by Kehoe, J.
document is authentic. ____________________________________
2023-07-27 15:19-04:00
Filed: July 27, 2023
Gregory Hilton, Clerk
* At the November 8, 2022 general election, the voters of Maryland ratified a
constitutional amendment changing the name of the Court of Special Appeals of
Maryland to the Appellate Court of Maryland. The name change took effect on December
14, 2022.
In 2016, a fire destroyed the Elkton, Maryland residence of William R. Pyle. The
conflagration claimed his life, as well as the life of one of his adult children. Mr. Pyle’s
residence was subject to a deed of trust which became due upon his demise. The secured
party, acting through Compu-Link Corporation d/b/a Celink (“Celink”), its mortgage loan
servicer, foreclosed. Celink purchased the property at the foreclosure auction for
substantially less than the balance due on the loan. Mr. Pyle maintained a fire insurance
policy on the property. This appeal arises out of a dispute between Celink and Mr. Pyle’s
estate (the “Estate”) as to how the proceeds of the policy should be allocated between
them. Celink asserts that it is entitled to the difference between what it paid at auction and
the total amount due on the loan. Celink concedes that the Estate is entitled to the balance
of the policy proceeds. The Estate contends that all of the proceeds are payable to it.
The Circuit Court for Cecil County concluded that the proceeds of the policy were
the property of the Estate and issued a declaratory judgment to that effect. Celink has
appealed and presents two issues:
1. Did the circuit court err in holding that the foreclosure sale extinguished
the entire debt, including the deficiency, thereby extinguishing the lender’s
right to insurance proceeds up to the amount of the deficiency?
2. Did the circuit court err in disregarding the contractual assignment of
insurance proceeds to Celink?
We sympathize with Mr. Pyle’s survivors. However, as we will explain, the circuit
court erred when it concluded that Celink’s claim to a portion of the insurance proceeds
were extinguished by the foreclosure sale. We will reverse the judgment of the circuit
court and remand this case for entry of a judgment consistent with this opinion. There is
no reason for us to address Celink’s second contention.
B ACKGROUND
On February 22, 2013, Mr. Pyle entered into a reverse mortgage loan agreement1
with Urban Financial Group, Inc. Repayment of the loan was secured by a deed of trust
encumbering his residence. Urban Financial’s successor-in-interest, Finance of America
Reverse LLC, retained Celink to act as sub-servicer of the loan. Celink’s responsibilities
included foreclosing on the mortgage loan in the event of default.
1
Md. Code, Com. Law § 12–1201(h) defines a “reverse mortgage loan” as:
[A] nonrecourse loan that:
(1) Is secured by the borrower’s principal dwelling;
(2) Provides the borrower with purchase money proceeds, a lump sum
payment, periodic cash advances, a line of credit, or any combination of
those payment plans based on the equity in or value of the borrower’s
principal dwelling; and
(3) Requires no payment of principal or interest until the full loan becomes
due and payable.
In Bennett v. Donovan, 703 F.3d 582, 584–85 (D.C. Cir. 2013), the Court explained:
A “reverse mortgage” is a form of equity release in which a mortgage
lender (typically, a bank) makes payments to a borrower based on the
borrower's accumulated equity in his or her home. Unlike a traditional
mortgage, in which the borrower receives a lump sum and steadily repays
the balance over time, the borrower in a reverse mortgage receives periodic
payments (or a lump sum) and need not repay the outstanding loan balance
until certain triggering events occur (like the death of the borrower or the
sale of the home). Because repayment can usually be deferred until death,
reverse mortgages function as a means for elderly homeowners to receive
funds based on their home equity.
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There are two provisions of the deed of trust that are particularly relevant to the
issues raised in this appeal. The first is section 3, which requires the borrower to
maintain fire insurance on any improvement located on the property. Section 3 also
provides that if there is a loss, and restoration or repair of the property is not
“economically feasible,” the policy proceeds are to be applied to the balance due on the
note, with any excess to be paid “to the entity legally entitled thereto.”2
The second provision is section 10, which provides that the debt can only be enforced
through the sale of the property subject to the deed of trust. Section 10 explicitly prohibits
the secured party from obtaining a deficiency judgment in the event of a foreclosure.
The loan became due upon Mr. Pyle’s death. Celink appointed substitute trustees who
filed a foreclosure action. At the foreclosure auction, the substitute trustees purchased the
property for $175,000, which was $208,108.25 less than the balance due on the loan and
2
Section 3 of the deed of trust also states:
In the event of foreclosure of this Security Instrument or other transfer of
title to the Property that extinguishes the indebtedness, all right, title and
interest of Borrower in and to insurance policies in force shall pass to the
purchaser.
Before the circuit court, and relying on this language, Celink argued that it was
entitled to all of the policy proceeds because it purchased secured property at the
foreclosure sale. Celink does not make the same contention to us. In its brief it states that
it “only seeks a right to collect the proceeds up to the amount of its deficiency[.]”
It is not necessary for us to address the merits of Celink’s alternative argument, and
we decline to do so. See Garner v. Archers Glen Partners, 405 Md. 43, 46 (2008) (“[A]n
appellate court should use great caution in exercising its discretion to comment
gratuitously on issues beyond those necessary to be decided.”)
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the costs of sale. Consistent with the prohibition contained in section 10 of the deed of
trust, the substitute trustees did not file an action to obtain a deficiency judgment.
Subsequent to the foreclosure sale, the insurer of the property issued a check for the
proceeds of the insurance policy in the amount of $287,531.47. The check was payable
jointly to the Estate and Celink. The actual check was mailed to the personal
representative of the Estate.
Following some initial legal skirmishing, the Estate filed a civil action seeking a
declaration that the insurance proceeds were payable to it. The Estate asserted that it had
the right to all of the policy proceeds because Celink failed to obtain a deficiency
judgment in the foreclosure proceeding. It was Celink’s position that, under Maryland
law, it had a right to the policy proceeds up to the amount of its deficiency, which was
$208,108.25.
After a hearing, the circuit court entered a declaratory judgment that stated in
pertinent part that “by foreclosing the Property, [Celink] eliminated the indebtedness
secured by the Deed of Trust, thereby eliminating any right or claim to the insurance
proceeds[.]” As ancillary relief, the court directed Celink to endorse the check issued by
the insurer so that the proceeds could be paid to the Estate.
T HE S TANDARD OF R EVIEW
Because the issues raised in this appeal are questions of law, we exercise de novo
review over the judgment of the circuit court. See, e.g., Buarque de Macedo v. Auto. Ins.
Co. of Hartford, 480 Md. 200, 208 (2022).
-4-
A NALYSIS
As we have related, the circuit court concluded that Celink’s foreclosure of the
property eliminated any indebtedness and therefore any claim to the insurance proceeds.
The court was incorrect. Maryland law is clear that, as a general rule, if the proceeds of a
foreclosure sale are not adequate to discharge the debt, the lender may attempt to recover
the balance due from the borrower.3 In cases in which the foreclosed property is an
owner-occupied residential property, the lender’s exclusive remedy is to seek a deficiency
judgment within the foreclosure action.4
In its brief, the Estate acknowledges that the underlying debt was not extinguished by
the sale of the property. However, it argues that Celink:
reserved the right to seek a deficiency judgment in the amount of the
balance that was due. However, [Celink] never met the statutory
3
See, e.g., Daughtry v. Nadel, 248 Md. App. 594, 617 (2020) (explaining that, at
common law, a secured party “had the right to seek recovery of a deficiency that
remained after a foreclosure” by “seek[ing] a deficiency judgment within a foreclosure
action, or by filing an “action at law to enforce either the Note or the Deed of Trust or a
mortgage, as contracts, and to obtain a remedy at law—monetary damages.”) (cleaned
up) (citing Md. Rule 14-208(b) and Wellington Co., Inc. Profit Sharing Plan & Tr. v.
Shakiba, 180 Md. App. 576, 591 (2008)).
4
See Daughtry, 248 Md. App. at 615 (explaining that in 2014, the General Assembly
enacted chapter 592 of the 2014 Laws of Maryland which added § 7-105.13 to the Real
Property Article). Section 7-105.13 provided that “a motion for a deficiency judgment
shall constitute the sole post-ratification remedy available to a secured party or party in
interest for breach of a covenant contained in a deed of trust, mortgage, or promissory
note that secures or is secured by owner-occupied residential property.” In 2019, Real
Prop. § 7-105.13 was recodified as Real Prop. § 7-105.17. See Chapter 93, Laws of
Maryland 2019.
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requirements under Md. Rule 14-216(b)[5] to preserve that right of
collection.
There are two difficulties with this contention. The first is that Celink did not reserve
the right to seek a deficiency judgment—it expressly waived its right to do so in the deed
of trust. The second problem is that this action is not one in which Celink is seeking a
deficiency judgment. Instead, the parties are seeking a declaration of their respective
rights to the proceeds of the insurance policy. Rule 14-216(b) does not apply to this case.
This brings us to the dispositive issue in this appeal, namely, the proper interpretation
of section 3 of the deed of trust, which provides that, if there is an insurable loss and if
restoration of the property is not economically feasible, “the insurance proceeds shall be
applied . . . to the reduction” of the secured indebtedness. Our first step is one of
terminology.
In the factual context presented by this appeal, disputes between lenders and
borrowers over the proceeds of fire insurance policies tend to fall into two categories. The
first consists of cases in which the insurable loss occurs prior to the foreclosure sale.
These are termed “loss before foreclosure” cases. As we will explain, the secured party
has a claim to the policy proceeds up to the difference between the amount realized at the
5
Md. Rule 14-216 states in pertinent part:
(b) Deficiency Judgment. At any time within three years after the final
ratification of the auditor’s report, a secured party or any appropriate party
in interest may file a motion for a deficiency judgment if the proceeds of
the sale, after deducting all costs and expenses allowed by the court, are
insufficient to satisfy the debt and accrued interest. . . .
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sale and the balance due on the secured indebtedness. The borrower is entitled to the
remainder. We will refer to this principle as the “loss before foreclosure rule.”6
The fons et origo of the loss before foreclosure rule in Maryland is Thomas’ Adm’rs
v. Vonkapff’s Ex’rs, 6 G. & J. 372, 1834 WL 2000 (1834). The mortgage at issue in that
case stated that the borrower would maintain fire insurance on all of the improvements on
the secured property and that, in the event of a loss, policy proceeds
shall be immediately applied to the rebuilding . . . so that the [lender] . . .
shall in case of loss by fire, be benefitted by such insurance, or participate
in the benefit thereof, to the extent of his aforesaid lien.
Id. at 378.7
The principal building on the property was destroyed by fire and the insurer paid
$10,000 to the borrower, who deposited the sum in a bank pending a decision whether to
rebuild the structure or to pay the sum to the lender in partial satisfaction of the mortgage
debt. 6 G. & J. at 374. Both the borrower and the lender died before the former made a
decision. Id. at 374–75. The lender’s administrators thereupon foreclosed but the
6
The other scenario is when the loss occurs after the foreclosure sale. The general
rule is: “If a casualty loss occurs after the mortgagee has purchased at the sale the
mortgagee is entitled to the full amount of the loss, up to the amount of the policy limits.”
Baxter Dunaway et al. 1 THE LAW OF DISTRESSED REAL ESTATE § 11:105 (2023) (citing,
among other authorities, Nationwide Mut. Fire Ins. Co. v. Wilborn, 291 Ala. 193, 196–97
(1973) (footnote omitted)). In Rollins v. Bravos, 80 Md. App. 617, 628–29 (1989), we
implied that this approach would apply in Maryland.
7
We have gleaned the facts from the reporter’s notes, 6 G. & J at 373–75, and the
Court’s opinion, id. at 378–79.
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proceeds of the sale were significantly less than the balance due on the mortgage. Id.at
374. The borrower’s successors-in-interest then asserted that, because the property had
been sold, it was impossible for the policy proceeds to be used to rebuild the
improvements as the mortgage required. Accordingly, they argued, the proceeds were an
asset of the borrower’s estate, free and clear of any claim that could be asserted by the
lender. 6 G. & J. at 378–79.
Not so, concluded the Supreme Court of Maryland.8 The Court recognized that, under
the literal terms of the mortgage, the insurance proceeds were to be used to repair or
rebuild the damaged improvements. Therefore, the lender had no enforceable legal right
to the proceeds. However, the Court concluded that (1) a covenant in a mortgage
requiring the borrower to provide fire insurance for the secured property was for the
benefit of the lender and its assignees, (2) any claim by the borrower or his successors-in-
interest to the policy proceeds was “subject to the [lender’s] equity,” (3) the lender had
the right to enforce its interest, and (4) the lender’s right to do so stemmed from
fundamental principles of equity and fairness. 6 G. & J. at 380–81. The court explained:
We have said that although a lien existed, it gave [the lender] no right to the
possession of the fund . . .; the design being to apply it for the purpose of
reinstating the premises. But the facts show that the lien cannot in the terms
of the contract be specifically enforced, owing to the sale of the mortgaged
premises. A court of equity, however, is not on this account powerless. It
must administer relief, in the only manner in which it can now be done. As
8
At the November 8, 2022 general election, the voters of Maryland ratified a
constitutional amendment changing the name of the Court of Appeals of Maryland to the
Supreme Court of Maryland. The name change took effect on December 14, 2022.
-8-
the leading object in effecting the insurance, was exclusively a beneficial
one to the [the lender], its great spirit and object will be effectuated by
decr[e]eing him the fund. The mode only, of giving relief, will be changed.
Id. at 382.
Maryland’s appellate courts have cited one or more of Thomas’ holdings in
Mercantile-Safe Deposit & Tr. Co. v. Mayor & City Council of Baltimore, 308 Md. 627,
632–33 (1987); Com. Bldg. & Loan Ass’n v. Robinson, 90 Md. 615, 620 (1900); Carson
v. Phelps, 40 Md. 73, 89 (1874); Giddings v. Seevers, 24 Md. 363, 375–76 (1865);
Alexander v. Ghiselin, 5 Gill 138, 174 (1847); and Gallagher v. Bell, 69 Md. App. 199,
209 n.5 (1986). Additionally, but without specifically citing to Thomas, our Supreme
Court applied one or more of its holdings in Seidewitz v. Sun Life Insurance Company of
America, 144 Md. 508, 514–515 (1924); Heinz v. German Building Association, 95 Md.
160, 169 (1902); and Callahan v. Linthicum, 43 Md. 97, 101, 103–04 (1875).9
Our survey of the Maryland cases concludes with Rollins v. Bravos, 80 Md. App. 617(1989). In it, we observed that in Maryland, “where a mortgage requires the mortgagor to
insure the property against loss and the property is so insured when a loss occurs as to
which the insurance applies, the proceeds of the policy of insurance must be applied to
9
Additionally, Thomas was cited by a number of courts in other jurisdictions as
supporting the principle that a lender has an equitable claim to the proceeds of a fire
insurance policy if the loss occurred prior to foreclosure. See, e.g., Burton v. Chesapeake
Box & Lumber Corp., 190 Va. 755, 765–66 (1950); Hyde v. Hartford Fire Ins. Co., 70
Neb. 503, 97 N.W. 629, 630 (1903); Nordyke & Marmon Co. v. Gery, 112 Ind. 535, 13
N.E. 683, 684–85 (1887); Ames v. W. Mfrs. Mut. Ins. Co., 29 Minn. 330, 333, 13 N.W.
137, 138–39 (1882); and Nichols v. Baxter, 5 R.I. 491, 494 (1858).
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the extinguishment of the debt.” Id. at 629 (citing, among other cases, Seidewitz, 144 Md.
508 at 514–515, and Heinz, 95 Md. at 169). Further, we espoused what we characterized
as the “majority view” across jurisdictions regarding the loss before foreclosure rule:
[W]here the insured premises are damaged before foreclosure proceedings
have been instituted or, if after they have been instituted, prior to the sale
being held, and the mortgagee purchases the property at the foreclosure
sale, the mortgagee is permitted to retain the insurance proceeds pursuant to
a mortgage clause requiring insurance, to the extent of any deficiency
between the amount brought at foreclosure and the amount of the debt. The
remainder of the proceeds is payable to the mortgagor.[10]
Id.Thus, in Rollins, we reiterated what the Supreme Court of Maryland had first
articulated 155 years earlier in Thomas. We are not quite through with Thomas, however.
In Wheeler & Co. v. Factors’ & Traders’ Ins. Co. of New Orleans, 101 U.S. 439(1879), the United States Supreme Court identified Thomas as the leading case in this
country for the proposition that “if the mortgagor is bound by covenant or otherwise to
insure the mortgaged premises for the better security of the mortgagee, the latter will
have an equitable lien upon the money due on a policy taken out by the mortgagor to the
extent of the mortgagee’s interest in the property [is] destroyed.” Id. at 442.
In Thomas v. PHH Mortgage Servs., No. CV RDB-16-3700, 2017 WL 2242671, at
10
*3 (D. Md. 2017), the Court quoted this passage and observed that it was “undisputed”
that Rollins correctly summarized Maryland law.
- 10 -
The principles enunciated in Thomas and Wheeler are fully consistent with the
leading modern case on this topic, National Mutual Fire Ins. Co. v. Wilborn, 291 Ala.
193, 279 So. 2d 460, 463–64 (1973), which stated (emphasis added):
Where. . . the [property damage] loss precedes the foreclosure, the rule is
[that the mortgagee] may satisfy the mortgage indebtedness by two
different means. He may look to the insurance company for payment as
mortgagee . . . and may recover, up to the limits of the policy, the full
amount of the mortgage debt at the time of the loss. In this event he would
have no additional recourse against the mortgagor for the reason that his
debt has been fully satisfied.
The second alternative available to the mortgagee is satisfaction of the
mortgage debt by foreclosure. If the mortgagee elects to pursue this latter
option, and the foreclosure sale does not bring the full amount of the
mortgage debt at the time of the loss, he may recover the balance due under
the insurance policy as owner. If the foreclosure does fully satisfy the
mortgage debt, he, of course, has no additional recourse against the
insurance company, as his debt has been fully satisfied.[11]
The reasoning of all of these decisions is reflected in the American Law Institute’s
RESTATEMENT (THIRD) OF PROPERTY (MORTGAGES) (2007).
The basic principle is set out in Restatement §§ 4.7–4.8. Section 4.7 states in relevant
part (emphasis added):
Mortgagee’s Right to Funds Paid Under Casualty Insurance or Taking in
Eminent Domain
(a) Unless a different disposition is provided in the mortgage, the
mortgagee has a right to the following funds paid on account of loss or
11
Other representative recent decisions recognizing and applying the loss before
foreclosure rule include: Lexington Ins. Co. v. 3039B Assocs., Inc., 627 Fed. Appx. 108,
111 (3d Cir. 2015); Allstate Insurance Company v. James, 779 F.2d 1536 (11th Cir. 1986);
Lenart v. Ocwen Fin. Corp., 869 So. 2d 588, 591–92 (Fla. Dist. Ct. App. 2004); and
Rodriguez v. First Union Nat. Bank, 810 N.E.2d 1282, 1285 (Mass. App. Ct. 2004).
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damage to the mortgaged real estate, to the extent that the mortgagee’s
security has been impaired by the loss or damage. . .:
(1) the proceeds paid by a casualty insurer due to the occurrence of an
insured loss to the real estate, if the mortgagor promised the mortgagee, in
the mortgage or otherwise, to purchase the insurance[.]
Restatement § 4.8 states in relevant part (emphasis added):
Effect of Foreclosure on Mortgagee’s Right to Insurance and Eminent
Domain Proceeds
(a) Where a mortgagee has a right to foreclose a mortgage because the
mortgage obligation is fully due and payable and the mortgagee has a right
to casualty insurance or eminent domain proceeds under § 4.7, the
mortgagee may either:
(1) recover from the insurance proceeds . . .; or
(2) foreclose on the mortgaged real estate and, to the extent that doing so
does not satisfy the mortgage obligation, recover the balance from the
insurance proceeds or from the eminent domain award.
Comment a to Restatement § 4.8 is particularly pertinent. It explains (emphasis
added):
In the event of an insured casualty loss, the mortgagee may satisfy the
mortgage obligation by two different means. It may recover on the
insurance policy, up to its limits, the full amount of the mortgage obligation
at the time of the loss. . . . Alternatively, the mortgagee may proceed first to
foreclose the mortgage. When this approach is followed, and the
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foreclosure sale does not yield the full amount of the mortgage obligation,
the balance may be recovered under the insurance policy, up to its limits.[12]
We note that the parties do not identify, nor have we been able to find, appellate
decisions applying the loss before foreclosure rule in cases involving reverse mortgages
and deeds of trust. Nonetheless, application of the loss before foreclosure rule makes
sense in this case. Mr. Pyle’s residence, together with the fire insurance policy that he was
required to maintain to protect the lender’s interests, was the security for the repayment
of the loan. Under the terms of the deed of trust, as well as by Maryland law, Celink was
barred from seeking a deficiency judgment. Therefore, we do not agree with the Estate
that Celink’s failure to obtain a deficiency judgment somehow precluded its ability to
share in the proceeds of the fire insurance policy.
In summary, we see no reason why the legal principles that were first articulated by
the Supreme Court of Maryland nearly two centuries ago to protect a lender’s interests
when the collateral is damaged by fire should not apply in this case.13
12
The reasoning in the Restatement and the cases discussed in the main text is
reflected in the preeminent treatise on insurance law:
When insured property is damaged prior to foreclosure, a purchasing
mortgagee may retain under the mortgage clause those proceeds amounting
to any deficiency after foreclosure and the mortgagor recovers the
remainder of the proceeds.
Steven Plitt et al., 12A COUCH ON INSURANCE § 178:57 (3rd. Ed., 2023 Update)
(footnotes omitted).
13
We do not address whether or how the loss before foreclosure rule might apply in
cases involving inequitable or improper conduct by a lender.
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C ONCLUSION
We reverse the judgment of the circuit court and remand this case to it for it to enter a
judgment declaring that Celink is entitled to $208,108.25 of the policy proceeds and that
the Estate is entitled to the remaining balance. The circuit court may also grant such
further relief as is necessary or proper to effectuate the declaratory judgment. See Courts
& Jud. Proc. § 3-412; Falls Road Community Ass’n v. Baltimore County, 437 Md. 115,
148 (2014).
THE JUDGMENT OF THE CIRCUIT
COURT FOR CECIL COUNTY IS
REVERSED AND THIS CASE IS
REMANDED FOR PROCEEDINGS
CONSISTENT WITH THIS OPINION.
APPELLEE TO PAY COSTS.
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