Daniel William Cook and Yolanda T. Cook

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
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06/10/06
Daniel William Cook and Yolanda T. Cook
04-17704
Memorandum Opinion re: [120-1] Motion For Turnover of Insurance Proceeds by
Spica Properties, Inc. .
Received on: 2006-03-01 13:19:06.000
2006-03-01 00:00:00.000
2006-03-01 00:00:00.000
James Burke
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1 Among other things, Mr. Cook is a general contractor and
constructed the house himself in 1982-83 at a cost of $175,000.
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
Daniel William Cook
and Yolanda T. Cook,
Debtors. 	No. 11 - 04-17704 - SA
MEMORANDUM OPINION ON MOTION
TO RECOVER INSURANCE PROCEEDS
This matter came before the Court on Spica Properties,
Inc.’s (“Spica”) Motion to Recover Insurance Proceeds (doc 120)
and the Objection by Debtors thereto (doc 129). 	The parties
submitted Memoranda in support of their respective positions
(docs 211 and 212) and Requested Findings of Fact and Conclusions
of Law (docs 293 and 295). 	Having considered the evidence at
trial and the arguments of the parties, the Court finds that
Spica’s motion is well taken and should be granted. 	This is a
core proceeding. 	28 U.S.C. § 157(b)(2)(A) and (O).
FACTS
The facts are not generally disputed. 	Debtors owned real
property and improvements 1 located at 5101 Eakes Road NW,
Albuquerque, New Mexico on which Eastern Savings Bank, FSB
(“Eastern”) had a mortgage that secured a debt in the original
amount of $900,000. 	Debtors defaulted under the mortgage and
Eastern foreclosed, obtaining its foreclosure judgment on October
1, 2003. 	Eastern purchased the property at a December 11, 2003
foreclosure sale, bidding its entire debt for the property and
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Page -2-
thereby extinguishing Debtors’ liability to Eastern. 	On December
22, 2003 the state court approved the sale by order. 	The Special
Master’s Deed conveying the property to Eastern was recorded on
December 29, 2003. 	Eastern transferred the property to Spica by
deed executed December 19, 2003 and recorded on January 5, 2004.
The state court granted a four-month right of redemption to
the Debtors, ending April 22, 2003, provided they pay Eastern
$10,703.40 for each month after a 30 day period of redemption.
Debtors made payments pursuant to the redemption order and
continued to live in the house. 	By agreement of the parties, the
redemption period was extended several times, both orally and in
writing. 	The redemption period was still in effect on the date
Debtors filed their voluntary Chapter 11 petition on October 21,
2004. 	The right to redeem has since expired without being
exercised. 	The Court finds that Debtors never had the financial
ability to redeem, and that it would have been unreasonable for
them to expect that they would be financially able to redeem.
There are no allegations and there was no evidence that the
foreclosure sale was not properly conducted under state law. 	No
appeal was taken.
As a condition of the extended redemption period, Eastern
required Debtors to insure the property. 	Debtors obtained
insurance, listing themselves as insured and Eastern as an
additional insured.
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2Debtors argue that because the insurance was received post-
petition it is estate property free of any claims. 	The Court
disagrees. 	Debtors’ and Spica’s respective interests in the
funds were established on the date of the loss independent of
when Debtors filed their case. 	Furthermore, Debtors did not own
the property at the date of the loss, so any proceeds from the
property’s damages are not proceeds of estate property and may
not even be property of the estate. 	What is estate property is
the Debtors’ interest in the insurance contract. 	Debtors also
argue that because they paid for the policy, they should be
entitled to keep the proceeds. 	This is not the law in New
Mexico. 	See Berlier v. George, 94 N.M. 134, 135-36, 607 P.2d
1152, 1153-54 (1980)(Party who bears risk of loss is entitled to
insurance proceeds regardless of who contracts for coverage.)
3Mr. Cook testified that he did not keep track of amounts
spent on the roof, but that all charges could be found in his
monthly operating reports. 	The Court has not reviewed the
operating reports to determine the exact amounts expended.
Page -3-
On October 5, 2004, the property was damaged by a hail
storm. 	Debtors filed an insurance claim and received 2 $58,367.83
for damage to the roof and interior of the house. 	Debtors spent
some money to repair the roof 3, $2,630.53 to repair/maintain the
air conditioning system, $1,999.96 to repair/maintain the
sprinkler system, $4,482 to renew the insurance policy for the
period May 2005 to May 2006, approximately $21,000 for patent
maintenance fees, some amounts for living expenses and car
maintenance and for other purposes, and have approximately
$13,000.00 remaining. 	Spica seeks a turnover of all insurance
proceeds as the owner of the property.
There was no evidence presented that the Debtors lost the
use of the property after the storm or that any of their personal
property was damaged or destroyed. 	The Court has no admissible
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4In New Mexico, redemption is provided for by statute.
Section 39-5-18 provides, in relevant part:
A. After sale of any real estate pursuant to any such
judgment or decree of any court, the real estate may be
redeemed by the former defendant owner of the real
estate, his heirs, personal representatives or assigns
or by any junior mortgagee or other junior lienholder:
(1) by paying to the purchaser, his personal
representatives or assigns, at any time within nine
months from the date of sale, the amount paid, with
interest from the date of purchase at the rate of ten
percent a year, together with all taxes, interest and
(continued...)
Page -4-
evidence of the value of the land or improvements at the time of
the foreclosure sale, at the time of the hail storm, at the time
of the Chapter 11 filing, or any other time. 	At trial, Mr. Cook
attempted unsuccessfully to qualify himself as an expert on house
values. 	Mr. Cook did testify, however, as an estimator and he
suggested the property’s replacement cost was in the neighborhood
of $1 million exclusive of land. 	Replacement cost for a twenty
year old house may give an indication of market value, but the
Court had no evidence on this point. 	Also in evidence is Spica’s
insurance policy on the property, which insures the dwelling for
$750,000. 	The subject insurance policy valued the property at
$975,000.
DISCUSSION
In general, insurance law provides that a foreclosing
mortgagee is entitled to all insurance proceeds after foreclosure
if the mortgagor fails to redeem 4 .
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4(...continued)
penalties thereon, and all payments made to satisfy in
whole or in part any prior lien or mortgage not
foreclosed, paid by the purchaser, with interest on
such taxes, interest, penalties and payments made on
liens or mortgages at the rate of ten percent a year
from the date of payment; or
(2) by petitioning the district court in which the
judgment or decree of foreclosure was entered for a
certificate of redemption and by making a deposit of
the amount set forth in Paragraph (1) of this
subsection in cash in the office of the clerk of the
district court in which the order, judgment or decree
under which the sale was made was entered, at any time
within nine months from the date of sale.
B. Copies of the petition for redemption shall be
served upon the purchaser of real estate under a
foreclosure sale or his personal representatives or
assigns.
C. Any purchaser of real estate under a foreclosure
sale or his personal representatives or assigns, upon
being served with the petition for redemption of the
property, shall answer the petition within thirty days
after service of the petition.
D. The hearing shall be governed by the rules of civil
procedure. At the hearing, the judge shall determine
the amount of money necessary for the redemption, which
shall include the money paid at the sale and all taxes,
interest, penalties and payments made in satisfaction
of liens, mortgages and encumbrances. At the conclusion
of the hearing, the district court may order the clerk
of the court to issue the certificate of redemption
upon such terms and conditions as it deems just.
Page -5-
Where the damage occurs after approval of the
foreclosure sale and before expiration of the
mortgagor's right to redeem, courts have allowed the
purchasing mortgagee to recover all the insurance
proceeds should the mortgagor fail to redeem within the
time period. 	5A J. Appleman, Insurance Law and
Practice § 3403 (1970). 	The courts point out that the
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5Debtors argue that, through their efforts, they repaired
the roof to a condition better than it had been before the storm.
Thus, they claim that Spica will be unjustly enriched if it ends
up with both a better roof and the insurance proceeds. 	The Court
has two responses. 	First, a repaired roof is not a substitute
for a new roof, which is for what the insurance company paid.
And, there was no evidence at trial that any repairs or
replacements were done in the interior of the house. 	Second, to
the extent Debtors used their efforts to repair the roof, they
were under no obligation to do so, so acted as mere volunteers
for which they cannot now recover. 	See Brooks v. Leadinghouse,
29 N.M. 309, 222 P. 660 (1924)(Tenant with no obligation to
repair roof acted as a mere volunteer with no right of recovery
against the landlord.) 	See also Holland v. Harmston (Estate of
(continued...)
Page -6-
mortgagee's bid represented the property in an
undamaged state. 	See, e.g., Nationwide Mutual Fire
Insurance Co. v. Wilborn, [291 Ala. 193, 279 So.2d 460
(1973)]; City of Chicago v. Maynur, 28 Ill.App.3d 751,
329 N.E.2d 312 (1975). The mortgagee is thus "entitled
to what remains and to the money which stands in place
of the lost portion of the property which he
purchased." 	Malvaney v. Yager, 101 Mont. 331, 54 P.2d
135, 139 (1936).
Tech Land Development, Inc. v. South Carolina Ins. Co., 57
N.C.App. 566, 569-70, 291 S.E.2d 821, 824 (Ct.App. 1982)(emphasis
in original). 	See also 12 Couch on Insurance § 178:57 (3 rd
Ed.)(“Where damage occurs after approval of a foreclosure sale
and before the expiration of the mortgagor’s right to redeem, a
purchasing mortgagee is entitled to recover all insurance
proceeds should the mortgagor fail to redeem within the time
period.”) 	Therefore, because the property was damaged after
foreclosure and the Debtors never redeemed, the insurance
proceeds are properly payable to Spica to stand in the place of
the damaged portion of the property it purchased. 5
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5(...continued)
De La Fuente), 93 N.M. 87, 88, 596 P.2d 856, 857 (1979)(A renter
who acts as a volunteer in making improvements cannot recover
against owner.)
Page -7-
This result is also suggested by the New Mexico insurable
interest statute and cases interpreting it, as well as by cases
interpreting similar statutes elsewhere. 	Section 59A-18-6 NMSA
1978 provides:
A. No contract of insurance of property or of any
interest in property or arising from property shall be
enforceable as to the insurance except for the benefit
of persons having an insurable interest in the things
insured as at the time of the loss.
B. "Insurable interest" as used in this section means
any actual, lawful and substantial economic interest in
the safety and preservation of the subject of the
insurance free from loss, destruction, pecuniary damage
or impairment.
The Court finds that the Debtors had no insurable interest
in the property at the time of the loss. 	Alternatively, even if
they did, that interest was de minimus and not established by the
evidence.
A. 	No insurable interest.
The right of redemption is essentially an option to
repurchase a foreclosed property for a particular price and for a
particular time. 	Courts routinely hold that an unexercised
option to purchase property does not create an insurable
interest. 	See Harris v. North Carolina Farm Bureau Mutual Ins.
Co., 91 N.C.App. 147, 152, 370 S.E.2d 700, 703 (Ct.App. 1988)(An
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Page -8-
unexercised option is a mere expectancy and does not qualify as
an insurable interest.); Anderson v. State Farm Fire and Casualty
Co., 397 N.W.2d 416, 418 (Minn. Ct.App. 1987)(Interest in
acquiring property in the future does not give a present
insurable interest.); Travelers Indemnity Co. v. Duffy’s Little
Tavern, Inc., 478 So.2d 1095, 1096 (Fla. App. 1985)(An
unexercised option does not generate equitable or legal title to
realty.); Erie-Haven, Inc. v. Tippmann Refrigeration
Construction, 486 N.E.2d 646, 650 (Ind. App. 1985)(An unexercised
option does not create a present interest in property.); Christ
Gospel Temple v. Liberty Mutual Ins. Co., 273 Pa.Super. 302, 308,
417 A.2d 660, 663 (1979), cert. denied, 449 U.S. 955 (1980)(The
“mere possibility” that an option might be exercised does not
amount to an insurable interest.); Hane v. Hallock Farmers Mutual
Ins. Co., 258 N.W.2d 779, 782 (Minn. 1977)(If one holds only an
option to purchase property but no obligation to purchase it
there is no loss upon the property’s destruction and no insurable
interest.) 	The Court finds these cases persuasive. 	See also
Gossett v. Farmers Ins. Co. of Washington, 133 Wash.2d 954, 967,
948 P.2d 1264, 1271 (1997)(An assignment of all interest in
property which extinguishes the debt on the property generally
eliminates any insurable interest in the property.) 	The Debtors
had no insurable interest in the property; they held no legal or
equitable title at the time of the loss, or at any time
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Page -9-
thereafter. 	The Debtors suffered no losses in the hail storm,
Spica did.
B. 	Interest was de minimus and not established.
Even if the Debtors had an insurable interest in the
property, that interest was de minimus and not established by the
evidence. 	“The conclusion that the insured has an insurable
interest in the destroyed property does not end the inquiry. 	It
is also necessary to measure that insurable interest, to
determine its extent. ... The insurable interest ordinarily
should not exceed the potential loss to the insured.” 	Teague-
Strebeck Motors, Inc. v. Chrysler Ins. Co., 127 N.M. 603, 615-16,
985 P.2d 1183, 1195-96 (Ct. App. 1999).
One rule in New Mexico is that an insured with a limited
interest in property can recover only to the extent of the
limited interest. 	Id. at 616, 985 P.2d at 1196. 	The Debtors
held no legal or equitable title to the property; their interest
was the value of the use of the property on a month to month
basis, plus their personal property, plus perhaps any
improvements they had made to the property. 	See Duffy’s Little
Tavern, 478 So.2d at 1096. 	There was no evidence presented that
Debtors lost the use of the property, that any of their personal
property was damaged, or that they had made improvements to the
property at their own expense after foreclosure. 	Compare
Anderson, 397 N.W.2d at 419 (Insured failed to prove value of
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Page -10-
loss of use of his limited right of occupancy.) 	Simply put, the
Debtors did not establish that they stood to lose anything from
the hail damage. 	An insurable interest is limited to the amount
of potential loss. 	Teague-Strebeck Motors, 127 N.M. at 616, 985
P.2d at 1196. 	See also City of Carlsbad v. Northwestern Nat’l
Ins. Co of Milwaukee, Wisconsin, 81 N.M. 56, 59, 463 P.2d 32, 35
(1970)(An insured is limited in recovery to the value of the
actual interest lost.) 	The Court finds that the extent of the
insurable interest was de minimus or nonexistent. 	If the Debtors
retained the insurance proceeds, they would receive a windfall.
Other issue
The Debtors are entitled to a credit, however, for the
amount they paid for the policy. 	See 	Teague-Strebeck Motors,
127 N.M. at 616, 985 P.2d at 1196 (citing Berlier v. George, 94
N.M. 134, 135-36, 607 P.2d 1152, 1153-54 (1980)). 	Similarly, the
Court finds that Debtors should receive a credit for all funds
actually expended on the property, including the costs of roof
repairs and amounts spent on the air conditioning system and
sprinklers.
The Court will enter an Order in conformity with this
Memorandum Opinion directing Debtors to provide an accounting to
Spica to facilitate entry of a specific order directing turnover
of the insurance proceeds.
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Page -11-
Honorable James S. Starzynski
United States Bankruptcy Judge
I hereby certify that on March 1, 2006, a true and correct copy
of the foregoing was electronically transmitted, faxed,
delivered, or mailed to the listed counsel and/or parties.
William R Keleher
PO Box 2168
Albuquerque, NM 87103-2168
Daniel William Cook
920 Galeras Street NW
Albuquerque, NM 87120
Yolanda T. Cook
920 Galeras Street NW
Albuquerque, NM 87120
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