Despite Court Ruling, Quake Payouts Are Still in Dispute

Three weeks after a state appeals court ruled that homeowners--not their mortgage lenders--should get most earthquake insurance payments, many lenders are ignoring the ruling and apparently cannot be compelled to comply, homeowners and their attorneys complain.

Although a spokesman for the California Supreme Court said the decision is legally binding, setting a precedent that can be applied in other such cases statewide, “most lenders are not following the ruling,” said Richard Close, a Sherman Oaks homeowner and attorney.

“They’re giving people double talk,” he said. “Lenders are scared that people are going to take the money and abandon the property, and they’re making up stories.”

Most homeowner attorneys agreed, however, that with the matter now submitted to the California Supreme Court, little could be done to force the hand of lenders.

“I assume lenders will obey the law once we know for sure what it is,” said Geoffrey Bryan, the attorney who filed the precedent-setting case on behalf of a Northridge woman against her mortgage bank.

“But until the issue has been decided, I think each borrower is basically going to have to do the best he or she can dealing with the lender” by suing if necessary, he said.

Attorneys for both sides agree that it is common in such cases to take a wait-and-see approach, withholding payments to see if the decision will be reversed on appeal.

Homeowners say that continued refusal to give them control of damage payments from their insurance policies is costly--in some cases resulting in the loss of their homes.

Jerry FitzGerald, who had believed that the appellate court ruling might prompt his lender to hand over an insurance check for nearly $27,000, said Friday that the extended legal wrangling is almost certain to cost him his house.

The West Hills resident said he will be evicted from his home Tuesday because the bank that holds his first mortgage--which has custody of his insurance payment check--demands that he spend all of it on quake-damage repairs.

He can live with superficial cracks in his walls, FitzGerald said. He cannot live--at least not in his home of nearly nine years--without catching up on mortgage payments with a second bank, which has filed foreclosure papers.

Those payments, he said, have been held up because the Northridge earthquake nearly put his small Chatsworth electronics firm, EFCO Systems--already struggling in Chapter 11 bankruptcy--out of business.

“The earthquake hit and everything fell apart,” he said. But the ruling by the appeals court “gave me hope.”

That hope is dying fast, he said.

The fight over who should control insurance settlements began within weeks of the Northridge quake in January, 1994. As residents began to rebuild their lives and homes after the most costly earthquake in U.S. history, many were stunned to learn that checks from private quake insurance policies--purchased in addition to any policies required by their mortgage lenders--were made out to both them and their lenders.

Without the lender’s endorsement, the checks are worthless. The lenders commonly insist that all funds go to repair the damaged structure--their collateral.

It was this practice that the three-member 2nd District Court of Appeal ruled against, declaring that “when a lender does not require in its contract that the borrower obtain earthquake insurance on the property securing the loan, it has no right under the contract to receive or control the insurance proceeds as a result of earthquake damage to the property.”

But lenders--who fear that owners of heavily damaged homes will take the money and run--contend that the June 29 ruling has been frequently misinterpreted, that the decision changes nothing for the majority of policyholders still tussling with their mortgage holders over insurance payouts.

“The media and those legal scholars who have analyzed the opinion in the last three weeks have created a hysteria,” giving some homeowners false hope, said attorney Beth Young, who represents First Federal Bank of California in the case.

Young contended that the decision does not automatically turn payments over to homeowners just because they may have purchased quake polices on their own.

Such a policy would encourage owners to conclude that “I’ll make more money off this property by not repairing it than by repairing it,” she said, leaving the lenders holding the bag.

Young’s firm has appealed the case to the state’s highest court, which has 90 days to decide whether to accept it--an action that would put the appeals court ruling on hold.

Meanwhile, Edward Jessen, reporter of decisions for the state Supreme Court and Courts of Appeal, said this week that the decision by the 2nd District panel is the law. The decision went into effect immediately and “is binding and does have precedential authority until such time as the Supreme Court either grants the petition for review or denies the petition for review but orders the opinion to be de-published,” he said.

“De-publishing” the opinion would declare that it is no longer a binding precedent on other courts in the state.

Beleaguered homeowners hailed the appeals court decision, and many quickly phoned their lenders demanding that their insurance checks--some made out for hundreds of thousands of dollars--be released to them. They were again shocked when, despite the appellate ruling, their lenders refused.

Said attorney Bryan: “I don’t like to compare insurance policies and gambling, but what the court is basically saying is if you and I go to the racetrack and both of us place a bet on the same horse, you have no claim to my winnings.”

California law, he said, states that all parties with ownership interest in a property, including lenders, can “protect themselves . . . by buying their own insurance. Unless there is a special agreement, none of them has an interest in insurance bought by another.”

Bryan represented Phyllis Ziello, a 72-year-old Northridge woman, who brought the lawsuit against First Federal Bank that led to the appeals court ruling.

A widow subsisting on a dwindling trust fund, Ziello had fallen behind on her mortgage payments and was in danger of losing her $512,000 home when the quake struck, causing an estimated $100,000 in damage.

Safeco Insurance made out a check for $62,101, payable to Ziello and First Federal. When she declined to immediately spend the money on repairing her damaged home, the bank refused to endorse the check. The bank has since foreclosed on her home.

The legal arguments and interpretations are quickly becoming academic for FitzGerald, who was still awaiting his money Friday, four days before his scheduled eviction.

He never planned to take the insurance money and leave the bank with a damaged home, he said. He wanted to stay, and said he never missed a mortgage payment before the quake struck. But despite the ruling that held so much promise this month, he is planning for the worst.