La Throp v. Bell Federal Savings & Loan Ass'n

MR. JUSTICE DOOLEY, dissenting:

The majority commits the basic error of treating this appeal as if there had been a determination on the merits. While it describes defendant’s motion as a “motion for judgment on the pleadings or in the alternative for summary judgment or in the alternative to dismiss” (68 Ill. 2d at 380), the order indicates that there was a judgment of dismissal.

A motion for judgment on the pleadings admits the truth of well-pleaded facts by the opposite party. (Walker v. State Board of Elections (1976), 65 Ill. 2d 543, 553 ; Cunningham v. MacNeal Memorial Hospital (1970), 47 Ill. 2d 443, 448 ; Milanko v. Jensen (1949), 404 Ill. 261, 265 .) So also on a motion to dismiss we must consider as true all well-pleaded facts. (Edgar County Bank & Trust Co. v. Paris Hospital, Inc. (1974), 57 Ill. 2d 298, 305 .) Since the record is without evidence of summary judgment, and in view of the order entered, we must view this case as decided on a motion to dismiss.

The query then becomes, What facts do the plaintiffs seek to prove? Plaintiffs, as the majority indicates, own homes which are mortgaged to defendant on Federal Housing Authority (FHA) or Veterans Administration (VA) forms. The mortgages require mortgagors to make payments one month prior to the date when ground rents, insurance premiums, taxes and assessments will become delinquent, “such sums to be held by Mortgagee m trust to pay said ground rents, premiums, taxes and special assessments.” (Emphasis added.)

The FHA regulations concerning this obligation provide that “such [advance] payments shall be held by the mortgagee *** for the purpose of paying such ground rents, taxes, assessments, and insurance premiums ***/or the benefit and account of the mortgagor.” (Emphasis added.) (24 C.F.R. sec. 203.23 (1977).) Plaintiffs allege that the language in the agreement establishes an express trust, and that the FHA regulations and other requirements binding defendant contemplate a trust relationship in providing that supervised lenders must use such funds only for the purpose for which they were collected, namely, to pay bills for taxes, special assessments, ground rents and hazard insurance premiums.

Defendant, it is alleged, had a fiduciary duty to plaintiffs. Instead of accounting to plaintiffs for all earnings and proceeds made by the use of the funds deposited in trust, it has made profits through the investment of such funds in the operation of its business. In the alternative, plaintiffs contend that the defendant fraudulently converted the earnings from these monies to its own use, commingled these funds with its general funds and was unjustly enriched as a result. Plaintiffs seek the declaration of a constructive trust as an alternative remedy.

The issue before us is rather simple: Does the complaint allege facts sufficient to state a cause of action for breach of an express trust or for the declaration of a constructive trust?

The complaint alleges that an express trust was created. The existence of such an express trust turns upon the nature of the specific agreement and all the facts before the court. See Carpenter v. Suffolk Franklin Savings Bank (1973), 362 Mass. 770, 779-80 , 291 N.E.2d 609, 615-16 ; Buchanan v. Brentwood Federal Savings & Loan Assoc. (1974), 457 Pa. 135, 143-45 , 320 A.2d 117, 122-23 ; Restatement (Second) of Trusts sec. 12, comment g, sec. 24 (1959).

The Restatement (Second) of Trusts sec. 12, comment g (1959), cited by the majority, states that the existence of a trust can be determined from the intention of the parties as ascertained by a consideration of their words and conduct in light of all the circumstances. But how can such intent be determined without learning the facts? This is the limbo in which we find ourselves when there has been a summary disposition on a motion to dismiss.

Plaintiffs’ allegations indicate the presence of a trust. While the words “in trust” are not necessary to the creation of such a trust, yet they are employed here. (See Carpenter v. Suffolk Franklin Savings Bank (1973), 362 Mass. 770, 776 , 291 N.E.2d 609, 614 ; Buchanan v. Brentwood Federal Savings & Loan Assoc. (1974), 457 Pa. 135, 143 , 320 A.2d 117, 122 ; Restatement (Second) of Trusts sec. 24(2) and sec. 24, comment b (1959).) They must be given their common meaning. We cannot ignore clear contractual language. Brooks v. Valley National Bank (1976), 113 Ariz. 169, 175-76 , 548 P.2d 1166, 1172-73 (Vice Chief Justice Struckmeyer, specially concurring).

It would seem that the payments were designated by both mortgagor and mortgagee for a specific purpose — the payment of ground rents, taxes, assessments and insurance premiums. Where a mortgagor makes payments, to a mortgagee with the express purpose that the funds shall be used for a particular purpose, then such funds may be considered held by the mortgagee in trust. 1 A. Scott, Trusts sec. 24, at 192 (3d ed. 1967), observed: “Where the owner of property transfers it to another with a direction to transfer it to *** a third person, this may be a sufficient manifestation of an intention to créate a trust.”

In Andrew v. Union Savings Bank & Trust Co. (1935), 220 Iowa 712, 715 , 263 N.W. 495, 497 , where a bank agreed to hold certain sums pending the outcome of an attachment suit, it was observed: “[T] he money does not become the property of the bank. The fund is merely intrusted to the bank as a trustee or bailee without any authority on the part of the bank to use it as its own.”

In the oft-quoted In re Interborough Consol. Corp. (2d Cir. 1923), 288 F. 334, 347 , the court observed: “There are certain principles we regard as established: *** Every person who receives money to be paid to another, or to be applied to a particular purpose, to which he does not apply it, is a trustee, and may be sued either at law for money had and received, or in equity as a trustee, for a breach of trust.” It is well established that the transfer of funds to a bank with the express purpose that they be used for a specified purpose lends support for the existence of a trust. Carpenter v. Suffolk Franklin Savings Bank (1973), 362 Mass. 770, 777 , 291 N.E.2d 609, 614 ; Buchanan v. Brentwood Federal Savings & Loan Assoc. (1974), 457 Pa. 135, 147-48 , 320 A.2d 117, 124 ; 1 A. Scott, Trusts sec. 24, at 192 (3d ed. 1967); see Comment, Payment of Interest on Mortgage Escrow Accounts: fudicial and Legislative Developments, 23 Syracuse L. Rev. 845 , 852 (1972).

Despite the strained interpretation given the language by the majority (slip op. at 5), FHA regulation (24 C.F.R. sec. 203.23 (1977)) provides the advance payments in question are to be held by the mortgagee for the purpose of paying certain obligations for the benefit of the mortgagor. All this leads to the conclusion that the complaint stated a cause of action for an express trust.

In this posture of the case there are present the essentials of a trust, namely, a fund, title in the trustee, a trustee and a well-defined beneficiary, as Mr. Justice Wachtler graphically points out in his opinion in Surrey Strathmore Corp. v. Dollar Savings Bank (1975), 36 N.Y.2d 173, 179-80 , 325 N.E.2d 527, 531 (Wachtler, J., dissenting).

That the bank may not have subjectively intended to create a trust relationship, as evidenced by the common practice to distribute no earnings or interest on such advance funds, is not conclusive of the issue. In the law of trusts, as in the law of contracts in general, it is the external manifestation of intent which is-controlling. (Restatement (Second) of Trusts sec. 2, comment g, sec. 23, comment a (1959).) A trier of fact might reasonably conclude that the mortgage agreement and whatever other facts are adduced in a hearing on the merits indicate the presence of a trust relationship. The mortgagors who signed the form mortgage contracts presumably read the agreement.

The FHA insures mortgages on homes. There is a dollar limitation on the amount of any particular home mortgage which may be guaranteed by it. At present that limit is $45,000 for owner-occupied, single-family residences. ( 12 U.S.C. sec. 1709 (b)(2) (Supp. 1975); 24 C.F.R. 203.18 (1977).) Thus, persons who obtain FHA mortgages are purchasers of nonexpensive homes or are of limited means. Savings and loan associations are designed to promote home ownership. (Ill. Rev. Stat. 1975, ch. 32, par. 702(a); 12 U.S.C. sec. 1464 (a) (1970).) It is a recognized fact that banks are not interested in investing in long-term mortgages. Hence, the only avenue to borrowers without particular stature at banks has been the savings and loan association, today a vital force in the supply of credit. This, of course, adds up to inequality of bargaining power, a circumstance we cannot disregard. The mortgagors in these FHA loans had no place to go but to the savings and loan lenders. They had to accept the mortgage on the savings and loan association’s terms.

The majority noted that plaintiffs have not made a showing that they intended to create an express trust ( 68 Ill. 2d 390 ). But there has been no opportunity to do so, and the majority would foreclose such an occasion. Further analysis is idle. The complaint stated sufficient allegations to put in issue the creation of a trust and consequent imposition of fiduciary duties. Carpenter v. Suffolk Franklin Savings Bank (1973), 362 Mass. 770 , 291 N.E.2d 609 ; Buchanan v. Brentwood Federal Savings & Loan Assoc. (1974), 457 Pa. 135 , 320 A.2d 117 ; Note, Lender Accountability and the Problem of Noninterestbearing Mortgage Escrow Accounts, 54 Boston U.L. Rev. 516,524 (1974).

Plaintiff’s alternate contention is that the profits defendant earned through use of their funds should be impressed with a constructive trust for their benefit.

A constructive trust can arise where there is either actual fraud or implied fraud resulting from the breach of a confidential relationship. (Hofert v. Latorri (1961), 22 Ill. 2d 126, 130 ; Carroll v. Caldwell (1957), 12 Ill. 2d 487, 493-94 .) This court has recognized that the mortgagor-mortgagee relationship can be fiduciary in character. (Janes v. First Federal Savings & Loan Association (1974), 57 Ill. 2d 398 .) Where the loan agreement provides for a specific disposition of a sum of money, a fiduciary relationship may arise. Where the mortgagee uses the money for a purpose other than that authorized and for its own gain, the mortgagee breaches its fiduciary duty. In holding that the complaint stated a cause of action, the Janes court quoted from the Restatement of Restitution, section 197 (1937):

“Where a fiduciary in violation of his duty to the beneficiary receives or retains a bonus or a commission or other profit, he holds what he receives upon a constructive trust for the beneficiary.”

Plaintiffs are entitled to prove their claim for the declaration of a constructive trust based on the breach of the fiduciary relationship created by the mortgage agree-merit. More is involved here than a relationship between a mortgagor and a mortgagee. There is also an agreement to hold money in trust for the purpose of paying obligations of the mortgagor. Should the trial result in a finding that there is no express trust, there could be found a constructive trust based on the mortgage agreement.

There is no inconsistency between these two theories. (See Buchanan v. Brentwood Federal Savings & Loan Assoc. (1974), 457 Pa. 135 , 320 A.2d $17.) The plaintiffs are not seeking both to enforce a contractual provision concerning interest and to receive restitution for unjust enrichment. They are seeking alternative relief. If there is no binding express trust, then, the complaint alleges, in the alternative, there is a constructive trust. The language quoted by the majority from Brooks v. Valley National Bank (1976), 113 Ariz. 169, 174 , 548 P.2d 1166, 1171 , is not germane.

A constructive trust is raised by equity to require a party to disgorge retained funds on the ground that their retention is wrongful and unjustly enriches the holder. (Restatement of Restitution sec. 160 (1937); Restatement (Second) Trusts sec. 1, comment e (1959); See Comment, Payment of Interest on Mortgage Escrow Accounts: Judicial and Legislative Developments, 23 Syracuse L. Rev. 845 , 852 n.43 (1972).) - As the Pennsylvania Supreme Court noted, in deciding a similar case:

“It is rare that the existence or absence of justification for imposing an equitable remedy, especially a constructive trust, can be decided as a matter of law. Only after all the facts are before a court, can it in most cases properly determine-the issue. ***

* * *

*** The evil to be avoided is unfairness and inequality in bargaining or dealings between parties.” Buchanan v. Brentwood Federal Savings & Loan Assoc. (1974), 457 Pa. 135, 152-53 , 320 A.2d 117, 127 .

Whether there is an express trust or constructive trust cannot be determined by a court on a motion to dismiss. Whether the plaintiffs will be successful on a trial we do not know, but simple justice dictates that under the facts and circumstances here they be given a hearing. Nor do we stand alone. Such reputable jurisdictions as Pennsylvania (Buchanan v. Brentwood Federal Savings & Loan Assoc. (1974), 457 Pa. 135 , 320 A.2d 117 ) and Massachusetts (Carpenter v. Suffolk Franklin Savings Bank (1973), 362 Mass. 770 , 291 N.E.2d 609 ) have both decided that under similar circumstances it was error to preclude a trial. It is worthy of note that these authorities are not alluded to in the majority opinion.

I would reverse the judgment of the appellate court and afford plaintiffs the opportunity to prove their case. Only then will the intangibles of these issues become realities. In my opinion, summary dispositions can be destructive of substantial rights in certain instances. This is one of them.

WARD, C.J., and GOLDENHERSH, J., join in this dissent.