Legal Question in Real Estate Law in California

That's a very interesting question. You can't cash the check without the bank signing off. Even if you sent it to them, they couldn't cash it without your endorsement. If the bank had not yet foreclosed, they could have forced you to use the money to repair the house and then foreclosed on a repaired house. Had you taken the money and not done the repairs, they could have foreclosed in court, instead of through a trustee's sale, and would have gotten a judgment against you for the money and the house. By conducting a trustee's sale, however, they waived the right to foreclose in court. That might, MIGHT create a waiver of their right to the insurance proceeds. Maybe another attorney knows the answer off the top of their head. I would have to research it, which is beyond the scope of a free answer. If no one else answers, however, feel free to contact me and we can discuss some creative fee arrangement for me to figure this out for you and get you the money if it is in fact yours to keep.

Mr. McCormick is on the right track. The key to answering your question involves the answer to two other questions. The first question is whether the bank required the fire insurance policy in the deed of trust, and required them to be named as "a loss payee?" Most institutional lenders have this as boilerplate, so I am going to assume that the fire insurance was required under the deed of trust, with the bank named as loss payee. If it was not a requirement, and it was a separate policy you purchased on your own, they have no right to the insurance proceeds.

Assuming that the bank did require it as part of the deed of trust, the second big question is whether the bank made a "full credit bid" at the foreclosure sale. If the bank made a full credit bid, they are not entitled to the proceeds of the insurance, and the proceeds are yours. If the bank made a less than full credit bid at the foreclosure sale, they have an interest in the insurance proceeds. Because the insurance proceeds are additional security for the debt, the limitations for collection of a deficiency after a nonjudicial foreclosure or the foreclosure of a purchase-money mortgage are not applicable.

You can find out whether or not the bank made a full credit bid by looking at the recorded "Trustee's Deed Upon Sale."