Foreclosing lenders in secured transactions who intend to make a claim under an insurance policy for pre-foreclosure damage should be wary of making a full credit bid at the foreclosure sale.
In Najah v. Scottsdale Insurance Company, 14 C.D.O.S. 11439, September 30, 2014, the Court of Appeals held that a lender’s full credit bid at a foreclosure sale barred subsequent insurance recovery for pre-foreclosure damage to the property. In this case, Najah, the foreclosing lienholders, were originally the junior lienholders. They eventually purchased the senior loan secured by the first deed of trust and obtained an assignment of the first deed of trust.
After purchasing the senior loan, Najah learned of significant damage to the property, and submitted a claim to Scottsdale Insurance Company under the policy maintained by the borrower. Unable to successfully resolve the claim and obtain payment from Scottsdale Insurance Company, Najah sued Scottsdale Insurance Company.
Najah subsequently commenced foreclosure proceedings on the second deed of trust only and ultimately submitted a full credit bid at the foreclosure sale for the amount of the second loan. Najah was the successful bidder at the foreclosure sale.
Following the foreclosure sale, Scottsdale Insurance Company argued that Najah was no longer entitled to any payment under the insurance policy based on the well established “full credit rule” that bars lienholders from collecting insurance proceeds for preforeclosure damage if the lienholders’ debt is extinguished at foreclosure by a bid in the full amount owed under the loan.
Najah argued that all liens held by a lienholder should be combined to determine whether a full credit bid was made. Because their credit bid at the foreclosure sale was limited to the amount of the second loan only and not the full amount owed under both the first and second loans, Najah argued that they had not made a full credit bid and they were therefore entitled to payment under the insurance proceeds.
The Court ultimately disagreed with Najah’s argument and found that Najah did in fact make a full credit bid by bidding the full amount owed under the second loan. The Court also reaffirmed the well established rule that because a loan is extinguished by a full credit bid, a lender who purchases an encumbered property at a foreclosure sale by making a full credit bid is not entitled to insurance proceeds payable for pre-foreclosure damage to the property, regardless of whether the person making the insurance claim is the senior or junior lienholder.
Key Takeaway: Your attorney needs to know the law and the judgments that have been made pertaining to those laws before recommending a course of action.
The attorneys at PLP are highly skilled in secured transactions like the situation in this Najah case. Our attorneys regularly represent lenders in complex secured transactions and assist our clients as they navigate through the foreclosure process. We are prepared to offer our expertise to lenders, both institutions and private lenders, and to assist with the foreclosure process. We invite you to contact our office for a consultation.