Hingham Mutual had issued its homeowners policy, with a $100,000 limit, to Krystyna Matsunaga, and it showed two mortgagees--the Chicopee Savings Bank held the first mortgage, and The Money Store held the second. On November 29, 1992, a fire occurred with damage within the policy limit. Hingham Mutual paid the balance of $40,000 due on the first mortgage note to Chicopee and became subrogated to "all rights of the mortgagee granted on the mortgage on the property." As permitted, Hingham Mutual took from Chicopee a full assignment and transfer of the mortgage and all securities held as collateral to the mortgage debt. It then proceeded to foreclose on its first mortgage, thereby extinguishing the junior mortgage held by The Money Store, as well as any claims by the latter to the insurance proceeds.

The parties agreed that the fair market value of the damaged property at the time of the foreclosure sale was between $35,000 and $40,000, while the damage from the explosion and subsequent fire was $40,648.40. (The record showed that the insured, and owner of the property, had intentionally caused the damage by setting off the explosion; under the Massachusetts statute, the owner's wrongful act did not cut off the rights of the mortgagees to claim under the loss payable clause of the fire policy.)

The Money Store contended there was nothing due on the first mortgage at the time of the foreclosure sale since Hingham Mutual had paid the balance; therefore, The Money Store was entitled to the $30,000 proceeds of the foreclosure sale, or the fair market value of the property at the time of the sale.

The trial court entered judgment in favor of The Money Store for $21,558 plus interest and costs and deducted from the $30,000 foreclosure sale price Hingham Mutual's payment of taxes, utilities, foreclosure and legal fees. Hingham Mutual appealed on the basis it had "stepped into the shoes" of the first mortgagee, Chicopee, thus extinguishing any interest of The Money Store.

In affirming the trial court's judgment, the higher court noted that the policy involved here contained the usual loss payable clause, and the higher court said the insurance company was obligated to pay the named mortgagees the debts due them to the extent of the loss or the policy limits. In this case, both Chicopee and The Money Store were listed and had balances due them at the time of the fire; therefore, both were entitled to the policy proceeds to the extent of the loss. The court said, in part: "Neither the subrogation mechanism nor the assignment device is supposed to bestow a windfall on the insurer as to junior mortgagees. Were that not so, the obligation to pay junior mortgagees would be meaningless; insurers could and would cheerfully pay off the first mortgagee, foreclose and shut out the junior mortgagee. The policy in this case provided that "subrogation will not impair the right of the mortgagee to recover the full amount of the mortgagee's claim."

Hingham was obligated to pay to The Money Store the net proceeds (and not the gross proceeds from the foreclosure sale) it received, after deducting the expenses paid by it.

The judgment entered in the trial court in favor of The Money Store was affirmed.

The Money Store, Massachusetts, Inc. v. Hingham Mutual Fire Insurance Company et al.--No. 97-P-1322--Appeals Court of Massachusetts, Middlesex--April 16, 1999--708 North Eastern Reporter 2d 687.