Facts: A seller conveys their commercial property to a buyer, carrying back a note secured by a second trust deed on the property. The first trust deed is held by a different lender. The buyer acquires a risk insurance policy to guarantee the seller replacement costs if the property is damaged, as required by the carryback note. Later, the buyer defaults on the loans. The seller then discovers the buyer has severely damaged the property. Thereafter, the lender holding the first trust deed commences foreclosure and the seller purchases the senior lender’s interest in the property to stop the foreclosure. The seller then submits their claim to the insurance company and forecloses on the second trust deed, making a full credit bid at the foreclosure sale fully satisfying the money owed them on their carryback note. The insurance company denies the seller’s claim.
Claim: The seller seeks money losses from the insurance company, claiming it breached the contract by not awarding the seller payment for their claim for the damaged property, as entitled to them under the insurance policy.
Counter claim: The insurance company claims the seller is not entitled to payment for their claim since the seller placed a full credit bid at the foreclosure sale, thus establishing the property’s value as equal to their debt and barring them from collecting additional recovery under the insurance policy.
Holding: A California court of appeals held the seller is not entitled to payment from the insurance company since the seller knew of the property’s diminished value and still made a full credit bid at the foreclosure sale, establishing the value of the property as equal to the seller’s debt and preventing them from recovering additional relief from the insurance company. [Najah v. Scottsdale Insurance Company (September 30, 2014)_CA4th_]