Aurelio's Family Pizzeria, as the insured and West Suburban as the mortgagee.
On July 5, 1994, a fire completely destroyed the property. As of the date of the fire, the unpaid balance of the $ 315,000 note was $ 233,082.96, and the unpaid balance of the $ 265,000.00 note was $ 148,309.90. Subsequent to the fire, West Suburban released its mortgage lien in order to allow the owner to sell the property. On July 12, 1995, the property was sold for a gross price of $ 385,000.00. West Suburban is holding the net proceeds, $ 315,000, in escrow pending the outcome of this litigation.
Dough tendered to Badger a proof of loss under the insurance policy, but Badger denied Dough's claim. West Suburban requested that Badger pay it under the insurance policy, but Badger has not done so. As a result, on December 11, 1995 West Suburban filed this lawsuit seeking judgment for the amount of its claim secured by the property insured under the policy. Badger counterclaimed for a declaration that it has no obligation to West Suburban under the insurance policy, or in the alternative, that it is not obligated to indemnify West Suburban for amounts resulting from loss to property other than the building.
West Suburban is attempting to collect under the mortgage provisions of the insurance policy for the debt secured by the mortgage as well as the debt secured by the assignment of the beneficial interest. A mortgage and an assignment of beneficial interest are different: "[a] lien upon a beneficial interest in an Illinois land trust is not a lien upon the real property itself," such as a mortgage. Melrose Park National Bank v. Melrose Park National Bank, 123 Ill. App. 3d 282, 462 N.E.2d 741, 743, 78 Ill. Dec. 622 (4th Dist. 1984). The cases West Suburban cites do not support its argument that I should treat the assignment of beneficial interest as a mortgage for the purposes of the mortgage provisions of the policy. See International Insurance Company v. Melrose Park National Bank, 145 Ill. App. 3d 286, 495 N.E.2d 1197, 1198-1200, 99 Ill. Dec. 462 (1st Dist. 1986) (deciding legal effect of installment agreement to sell building on amount defendant could recover under insurance policy after fire damaged building and noting similarity of interest of a seller under an installment agreement to interest of a mortgagee); Redfield v. Continental Casualty Corp., 818 F.2d 596, 607 (7th Cir. 1987) (holding that trustee in bankruptcy for owner of property could sue on fire insurance policies despite fact that policies did not name owner as the insured and discussing nature of the land trust (rather than an assignment of a beneficial interest in a land trust)).
This predicament creates the question of whether the assignment of the beneficial interest to West Suburban as lender is in essence a mortgage. If so, West Suburban could look to the mortgage provisions of the insurance policy to recover the balance due under both notes. It is undisputed that the assignment of the beneficial interest secured the $ 265,000.00 note. The record before the court does not indicate any purpose for the assignment of the beneficial interest in the trust other than as collateral for that note. Furthermore, the assignment took place only twenty days subsequent to the creation of the trust. These facts weigh in favor of finding that the arrangement constituted a mortgage. See Capitol Bank & Trust of Chicago v. Fascetta, 771 F.2d 1077, 1079-80 (7th Cir. 1985).
Nevertheless, in order to conclude that the financing arrangement constituted a mortgage, the trust agreement would have to provide for the sale of the trust real estate upon default. See id. at 1080. The assignment of the beneficial interest did not provide for such a sale. Also, the security transaction concerned only the trust beneficial interest and did not refer to the real estate res of the trust. See id. Accordingly, West Suburban cannot recover under the mortgage provisions of the insurance policy for the debt secured by the assignment of the beneficial interest (i.e., the $ 265,000 note).
West Suburban can, however, recover the balance of the $ 315,000.00 note at the time of the fire. See Great-West Life Assurance Company v. General Accident Fire and Life Assurance Corporation, Limited, 116 Ill. App. 3d 921, 452 N.E.2d 550, 554, 72 Ill. Dec. 297 (1st Dist. 1983)("The balance of the debt at the time of the fire determines the amount recoverable by the mortgagee."). This note was secured by the mortgage. West Suburban was named as the mortgagee on the insurance policy. Therefore, its interest in the property secured by the mortgage was insured.
Badger argues, however, that the policy did not insure West Suburban's interest in the property pursuant to the mortgage. It first contends that it may pay West Suburban as mortgagee only after it has determined that the policy is void as to Dough. West Suburban filed its complaint in April, 1995; and Badger did not determine that the policy was void as to Dough until October, 1995. Nevertheless, because Badger has already decided that it has no liability with respect to Dough, even if it did so after plaintiff filed its complaint, this argument does not assist it.
Badger further argues that the fact that Dough rather than the mortgagor (i.e., the trust) is listed on the insurance policy as the insured prevents West Suburban from recovering as the mortgagee. The policy, however, does not anywhere state that the primary insured must be the mortgagor of the named mortgagee's mortgage in order for the mortgagee's interest to be insured. As support for its argument, Badger points to the provision of the insurance policy that states: "If we pay the mortgagee for a loss where your insurance may be void, the mortgagee's rights to collect that portion of the mortgage debt from you [(Dough)] then belongs to us." Thus Badger maintains that if it pays West Suburban as mortgagee, then it would have no recourse to recover its money because West Suburban has no rights against Dough. In making this argument, Badger has ignored the rest of the provision, which reads:
The insurance for the mortgagee continues in effect even when your insurance may be void because of your acts, neglect, or failure to comply with the coverage terms. ...
We may pay the mortgagee the remaining principal and accrued interest in return for a full assignment of the mortgagee's interest and any instruments given as security for the mortgage debt.