Sandusky v. First National Bank

Robert H. Dudley, Justice. The creditor bank, appellee, negligently failed to secure federal mortgage insurance protection on its loans to appellants. Upon default and foreclosure the chancellor granted a deficiency judgment against appellants. The appellants contend that the bank’s negligent failure to secure mortgage insurance should have excused them from the deficiency judgment. The chancellor ruled correctly, and, accordingly, we affirm. The appellants, Timothy and Rose Sandusky, obtained four (4) loans from the appellee, First National Bank of Sikeston, Missouri. The loans were secured by mortgages on real estate in Arkansas. The bank anticipated selling the notes and mortgages in secondary markets, and, in order to do so, intended to obtain mortgage insurance payment certificates from the Federal Housing Administration. These certificates would have guaranteed payment of the mortgages in the event of default. As part of the loan transaction the appellants were charged premiums for the federal mortgage insurance certificates. Borrowers routinely pay mortgage insurance premiums which are collected by lenders and then submitted to the F.H.A. These premiums then go into' insurance funds which are used to cover losses on insured defaulted loans. The issuance of an F.H.A. mortgage insurance certificate is a contract between F.H.A. and the lender. Thus, it is the lender, not the borrower, who makes the application. 12 U.S.C. § 1709 (a) (19 80). The lender in this case, appellee, was negligent in its loan processing and, as a direct result, did not obtain mortgage insurance on three (3) of the loans in question. Appellee subsequently sold all four (4) loans to another financial institution. Appellants then defaulted. Because appellee had failed to obtain the mortgage insurance, it was required to repurchase the three (3) loans. Appellee filed suit for foreclosure on the three (3) mortgages and, after sale of the real estate, sought a deficiency judgment against the appellants. The chancellor found that the failure to secure mortgage insurance was due to the bank’s negligence, but awarded the deficiency judgment after giving appellants credit for the insurance premiums. Appellants’ first point of appeal is that the chancellor erred in entering a deficiency judgment. The argument is without merit. Although the appellee bank was clearly negligent, that negligence damaged only the appellee bank. Instead of collecting the deficiency under a policy of insurance, the appellee, because of its negligence, has only a deficiency judgment, which may or may not be collectible. On the other hand, the appellants have not been damaged by the bank’s negligence. They owe the same unpaid balance on the note and face the same cause of action, no matter who the creditor is. If the mortgage insurance had been purchased, the appellants would have owed F.H.A. and faced foreclosure and a deficiency judgment because of the right of subrogation set out in 12 U.S.C. § 1710(a) (1980). Since the mortgage insurance was not purchased, they owe the appellee bank and are subject to the deficiency judgment in its favor. They simply have not been damaged. The chancellor gave them credit for the premiums which they paid. Appellants argue that the appellee should be estopped from obtaining the deficiency judgment. In Padgett v. Haston, 279 Ark. 367, 651 S.W.2d 460 (1983), we reiterated the doctrine of estoppel as follows: Four elements are necessary: (1) the party to be estopped must know the facts; (2) he must intend that his conduct shall be acted on or must so act that the party asserting the estoppel had a right to believe it is so intended; (3) the latter must be ignorant of the true facts; and (4) he must rely on the former’s conduct to his injury. Here, neither the second nor the fourth elements of estoppel were present. There was no reliance or altered conduct by the appellants because of the payment of the mortgage insurance premiums. Next, the appellants were not injured by reliance on the appellee’s conduct. For the same reason, appellants’ argument involving the doctrine of unclean hands must fail. A party must prove that he was injured in order for the unclean hands doctrine to apply. Batesville Truck Line, Inc. v. Martin, 219 Ark. 603, 243 S.W.2d 729 (1951). The rationale of the doctrine is to secure justice and equity and not to aid one in an effort to acquire property to which he has no right. The appellants next argue that they are entitled to a set-off of the amount of money which would have been paid by the mortgage insurance. This argument is also without merit. Since the appellants would not have been the payees under a certificate of mortgage insurance, and since no benefit would have accrued to them had the insurance been paid, they did not prove any damages or the entitlement to a set-off of the amount of insurance. They were entitled to a set-off of the premiums, and the court awarded that relief. The appellants next argue that the trial court erred in refusing to award damages to them for conversion of the insurance premiums. We need not deal with the issue of whether a conversion occurred because, even if it did, the proper measure of damages is the market value of the property at the time and place of the conversion. Burdan v. Walton, 286 Ark. 98, 689 S.W.2d 543 (1985). In this case that would be the amount of the premiums which the chancellor did apply against the deficiency. The appellants’ final argument is that the chancellor erred in refusing to award damages to appellants after finding that the appellee was negligent in failing to obtain the mortgage insurance. The argument is without merit for the reason that appellants suffered no damage as a result of the appellee’s negligence, as already set out. They face the same cause of action for foreclosure and deficiency judgment they would have faced had the mortgage insurance been purchased. Affirmed. Newbern, J., not participating. Purtle, J., dissents.