The Court of Appeal of the State of California, Second Appellate District, recently held that neither California Civil Code section 2954.8 nor the parties’ loan agreement required the mortgagee to pay interest on insurance proceeds it held in escrow following the destruction of the plaintiff’s home.
A copy of the opinion in Gray v. Quicken Loans is available at: Link to Opinion.
The plaintiff’s home was destroyed by a wildfire and his hazard insurance policy jointly paid him and his mortgagee, the defendant, a total of $1,342,740. The deed of trust allowed the mortgagee to hold the insurance proceeds in escrow and to disburse the funds as repairs to the home were being made. Accordingly, the mortgagee placed the funds in a non-interest bearing escrow account.
The plaintiff then brought suit, alleging that the mortgagee breached its fiduciary duty and violated Civil Code section 2954.8 and Business and Professions Code section 17200. The plaintiff argued that section 2954.8 requires a mortgagee to pay interest on insurance proceeds held in escrow following the partial or total destruction of the insured’s residence or other structure.
The trial court sustained the mortgagee’s demurrer to the complaint without leave to amend, and the plaintiff appealed.
Section 2954.8, subdivision (a), requires a lender “that receives money in advance for payment of taxes and assessments on the property, for insurance, or for other purposes relating to the property” to pay two percent interest per annum on the amount being held. Section 2954.8. The plaintiff argued that the hazard insurance proceeds the defendant received count as “money in advance.”
The deed of trust in this matter required the plaintiff to maintain hazard insurance on his home, and further stated: “During such repair and restoration period, Lender shall have the right to hold such insurance proceeds until Lender has had an opportunity to inspect such Property to ensure the work has been completed to Lender’s satisfaction, provided that such inspection shall be undertaken promptly. Lender may disburse proceeds for the repairs and restoration in a single payment or in a series of progress payments as the work is completed. Unless an agreement is made in writing or Applicable Law requires interest to be paid on such insurance proceeds, Lender shall not be required to pay Borrower any interest or earnings on such proceeds.” (Italics added).”
The Second District noted that Lippitt v. Nationstar Mortgage, LLC (C.D. Cal. Apr. 16, 2020, No. SA CV 19-1115-DOC-DFM) 2020 U.S. Dist. Lexis 122881, addressed nearly identical facts to the matter at hand. The Lippitt court, reading the borrower’s deed of trust in conjunction with section 2954.8’s plain language, concluded that section 2954.8 does not apply to insurance funds received in arrears for past losses and then held for specified purposes. Id. at 20. The court in Lippitt did not consider these funds “money in advance.” Id.
The Second District agreed with the Lippitt court and held that, based upon the contractual language and the plain language in the statute, section 2954.8 applies to common escrows maintained to pay taxes, assessments, and insurance premiums, not to the unique scenario of hazard insurance proceeds held by a lender pending property rebuilding. Id. at 21.
The Second District also concluded that the plaintiff’s secondary reliance on the supposed purpose of section 2954.8 cannot override the plain language of the statute. “The statute’s plain meaning controls the court’s interpretation unless its words are ambiguous. If the plain language of a statute is unambiguous, no court need, or should, go beyond that pure expression of legislative intent.” White v. Ultramar, Inc. (1999) 21 Cal.4th 563, 572.
Given that the Second District determined that no section 2954.8 violation occurred, it did not address whether the statute creates a private right of action or whether, by failing to pay interest on the insurance proceeds, the mortgagee breached its fiduciary duties and engaged in unfair competition.
Accordingly, the Second District concluded that the insurance proceeds held by the mortgagee pursuant to the deed of trust fall outside the scope of section 2954.8 and affirmed the trial court’s ruling sustaining the mortgagee’s demurrer to the complaint without leave to amend.