Whether Insured Covenant (IC) Agreements violated the rule against clogging a borrower’s right of redemption; Whether another entity’s payments of a lender’s claims made after plaintiffs’ default discharged plaintiffs’ obligations under the loan documents; Whether plaintiffs were bound by the Additional Named Insured Endorsements in the residual value insurance (RVI) policies; Financial Structures Limited (FSL)

The court held that the insurance contracts (IC Agreements) related to loans made to plaintiffs to finance their commercial real estate acquisitions did not violate the rule against clogging a borrower’s right of redemption. Further, a nonparty insurer’s (FSL) payments of the lender’s (PW) claims after plaintiffs’ default did not discharge their obligations under the loan documents. In these consolidated cases, plaintiffs appealed the grants of summary disposition to defendants. The cases arose from “the default of loans that resulted in the forfeiture of the underlying real properties.” As a precondition to obtaining the loans, PW had to receive RVI policies issued by FSL. As a condition for issuing the RVI policies, FSL required plaintiffs to enter into the IC Agreements. The court first rejected plaintiffs’ assertion that the trial courts erred in determining the IC Agreements did not violate the rule against clogging a borrower’s right of redemption that is inherent in every mortgage loan transaction. “FSL was not the mortgagee (or lender) and the IC Agreements were separate, distinct insurance contracts entered into days after plaintiff obtained loans secured by mortgages from” PW. The trial courts correctly held that “the ‘clogging’ doctrine only applies to contracts between a mortgagor and mortgagee. That is so because the equity of redemption is a characteristic of the mortgage.” The court noted that plaintiffs did not refer it “to case law from this jurisdiction or any other jurisdiction that supports its apparent claim that a mortgagor does not enjoy the freedom to contract in any way it chooses with another business entity—including an insurer—where the mortgaged property is involved.” Plaintiffs also argued that FSL’s payment to PW “of the Insured Values of their respective properties after plaintiffs defaulted on their loans actually satisfied plaintiffs’ loans and plaintiffs were no longer liable for any outstanding balances” on them. But the court agreed with the trial courts that these arguments were “obviously not consistent with the plain and unambiguous language of the RVI Policies and Additional Named Insured Endorsements.” The policies did not state that FSL’s payment to PW “of the Insured Values of the properties would satisfy plaintiffs’ financial obligations under the loans.” Plaintiffs did not cite to any provisions supporting such an argument.