Court overturns treble damages and attorney fee award to homeowners after insurer stopped payment on fire policy and re-issued to the bank.
Jason and Karrie Howard sued National City Mortgage and American Security Insurance for fraud and conversion in Genesee County. Their home burned while the bank had initiated foreclosure proceedings. The insurer issued a check for the insured amount, payable jointly to them and the bank. The mortgagor and mortgagee couldn't agree on how to handle the check, so it remained uncashed. The bank then completed its foreclosure by a "full credit bid" of $69,000.00. That action eliminated the Howard's interest in the property and also wiped out the bank's right to a deficiency under existing law.
The bank then contacted the insurer and persuaded it to re-issue the check payable only to the bank. This resulted in awarding the bank not only the mortgage amount, but also any equity the Howards had in the property. They sued both entities, arguing that the defendants were guilty of "conversion" by taking the Howards' property for their own use. The trial judge agreed and awarded them statutory attorney fees and treble damages. The defendants appealed.
The Court of Appeals agreed that the check should not have re-issued only in the name of the bank, and that the insurer should have paid the Howards under the policy. Nevertheless, the judges ruled that the legal violation wasn't a statutory "conversion" and therefore no punitive damages or attorneys' fees were payable. Both institutions were bound under Michigan precedent to know that the bank's "full credit bid" on the foreclosed property "extinguished" the Howards' debt, but they owed the Howards only the amount of the insured pay-off under the contract.