In Woodland Condominium Homeowners Assn v Fannie Mae, an unpublished Michigan Court of Appeals opinion, a condominium unit was destroyed by fire. The condominium association retained a contractor who estimated the cost of repairs at $141,000. The associatino submitted a claim under the association’s master policy, which issued a check in the amount of $87,900 payable to the association and the mortgagee jointly. The association’s managing agent endorsed the check and sent it to Fannie Mae’s servicer, who deposited the check in an escrow account. Although the servicer subsequently issued a check for a portion of the proceeds to the unit owner, the association, and a contractor retained by the association, the letter containing the check was later returned to the servicer as undeliverable. Fannie Mae then decided to apply the entire proceeds to pay down the loan balance, which was approximately $106,500. The association sued, claiming that the insurance funds should have been used to rebuild the property.
The mortgage provided that the mortgagee could apply insurance proceeds to pay down the mortgage unless the parties agreed otherwise in writing. The condominium documents contained a provision that “Nothing contained in the Condominium Documents shall be construed to give a Condominium Unit Owner, or any other party, priority over any rights of first mortgagees of Condominium Units pursuant to their mortgages in the case of a distribution to Condominium Unit Owners of insurance proceeds or condemnation awards for losses to or a taking of Condominium Units.” Because the condominium documents deferred to the mortgage document, the mortgagee was within its rights to use the insurance proceeds to pay down the loan balance rather than use the insurance proceeds to rebuild the property.
A different result might have occurred had the managing agent not endorsed the check and sent it to the servicer, or at least the association would have had leverage to obtain a written agreement to apply the insurance proceeds to repair of the unit.