Summary of a Recent
Judicial Development in
Bankruptcy

Mortgagee, Not Debtor, Entitled to Proceeds of
Fire Insurance Policy

Patrick Roberts
National AgLaw Center Graduate Assistant

Summary of Decision

In In re Alexander, 329 B.R. 919 (Bankr. M.D. Ga. 2005), the United States Bankruptcy Court for the Middle District of Georgia determined that a Chapter 12 debtor was not entitled to receive the proceeds of a fire insurance policy issued to a mortgagee as a result of arson-caused fire damage to three of the debtor’s poultry houses.

Background

Chapter 12 debtor Brian T. Alexander operated a chicken farm that was destroyed by arson. See id. at 921. Wells Fargo Financial Leasing, Inc. (Wells Fargo) financed and held a primary security interest in the debtor’s farming operation. See id. The debtor filed a loss claim with his insurer, the Georgia Farm Bureau Mutual Insurance Company (Farm Bureau). The Farm Bureau denied the debtor’s claim, but subsequently issued payment to Wells Fargo in the amount of $423,250 because the insurance policy provided that denial of Debtor’s claim would not apply to any claims held by Wells Fargo as mortgagee. See id.

Arguments

Debtor asserted that he was entitled to receive the insurance proceeds held by Wells Fargo on the grounds that the proceeds were cash collateral. See id. at 922. Wells Fargo argued that it was entitled to retain the payments on the ground that the proceeds were not cash collateral. Wells Fargo also moved for relief from the automatic stay so that it could repossess or foreclose on its collateral. See id.

Analysis and Holdings

In order to determine the parties’ interest in the proceeds, the court examined the insurance policy’s mortgage clause to determine whether under Georgia law the clause provided for a “simple mortgage clause” or a “standard mortgage clause.” See id. at 922, 923. It explained that under a “simple mortgage clause” the mortgagee is an appointee that collects insurance proceeds due the insured and collects through the right of the insured, rather than in its own right as mortgagee. See id. The court also explained that under a “standard mortgage clause” a separate and distinct contract between the mortgagee and the insurance company is created, thereby protecting the mortgagee even if the insured does something to invalidate the insurance policy. See id.

The court determined that the debtor did not have an interest in the insurance proceeds because Wells Fargo’s claim was paid pursuant to a standard mortgage clause. See id. The court then granted Wells Fargo relief from the automatic stay because the debtor’s Chapter 12 case was not feasible without the insurance proceeds. See id.

The case was decided on July 21, 2005; this summary was posted Apr. 17, 2006.