Bankruptcy court holds that bank can apply insurance proceeds to outstanding loan of borrower in default on loan

Nadler & Darwish, a company that was in bankruptcy proceedings, was in default on mortgages on property it owned.  After a fire its insurer issued a check for $165,000.  Following standard procedure, the insurer issued the check jointly to Nadler & Darwish, the insurance adjuster (probably a public adjuster, who advocates for an insured in property loss cases and is entitled to a percentage of the loss paid) and Mechanics Cooperative Bank, the bank that held the mortgages on the property.

The bank endorsed the check on Nadler & Darwish's behalf, deposited it, paid the adjuster's commission, and then used the rest to reduce Nadler & Darwish's outstanding loan obligations to the bank.

Nadler & Darwish moved that the bank be ordered to repay the amount of the check except the adjuster's commission.  In In re Nadler & Darwish, LLC, 2016 WL 5396652 (D. Mass.) (unpublished), the Bankruptcy Court ruled in favor of the bank.  It held that under Massachusetts statute and case law, when a mortgage is in default and  a fire destroys the property, the mortgage bank can assert its rights with respect to the proceeds of the insurance policy as the intended third-party beneficiary of the policy.  Although a check made out to more than one party can only be cashed if all the parties endorse it, under the mortgage documents the bank was given power of attorney that allowed it to sign on behalf of Nadler & Darwish.