Petition — LaThrop v. Bell Federal Savings & Loan Ass'n

Supreme Court brief1978

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Text

No. @7" 1172.

In the

Supreme Court of the United

i FILED

FEB 18 1978

ICHAEL RODAK, JR.. CLERK

Statrs—

Court, U. S "7

Octorer Term, A.D. 1977

ERNEST LaTHROP and MARY D. LaTHROP, individually and

as representatives of all persons similarly situated,

Petitioners,

vs.

BELL FEDERAL SAVINGS & LOAN ASSOCIATION,

a corporation organized and existing under

the laws of the United States,

Respondent.

PETITION FOR WRIT OF CERTIORARI

TO THE SUPREME COURT OF ILLINOIS

EDWARD ATLAS

HAROLD A. HARRIS

MAREMONT, LEWIN & MAREMONT

111 West Monroe Street

Chicago, Illinois 60603

(312) 726-1025

Attorneys for Petitioners

Of Counsel:

SIDNEY Z. KARASIK

134 South LaSalle Street

Chicago, Dlinois 60603

(312) 782-7295

UNITED STATES LAW PRINTING CO., CHICAGO, ILLINOIS 60618 (312) 525-6581

TABLE OF CONTENTS

PAGE

Opinions of the Courts Below ..2..n.........2..0....ccccscssecsseeees 2

MITEL: -scistteihcnnsincinstersiacnienseciasininasieietaiameiithcienimiidiemniiaaiiaias 2

I IIE sisisditcctidinsitinsclnalibicdinntndnatihiesisbidilll leliinaiteaia 2

I enccccenticsienenrccncnteniassinnnianiibinmiiaiditmatians 2

The Controlling Federal Statute and the Regulations

Sr eisai niin 4

SP Te EE citttinkidttneeneninie 8

The Question Involved Is Of Pervading National Im-

portance And Affects The Rights Of Millions Of Home

Loan Borrowers Under FHA And VA Mortgages ........ 8

Il.

The Policy Underlying The National Housing Act And

The Expressed Intent Of The FHA Regulations Gov-

erning The Use Of Advanced Funds To Be Held In

Trust For The Benefit Of The Home Loan Mortgagor

Is Frustrated By The State Court Opinion Below .... 11

EL DRE eR EE LON, ORE LON ROR 12

Appendix I—Opinion of the Supreme Court ....... App. 1

Appendix I1—Opinion of the Appellate Court ....... App. 23

Appendix I1J—Order of Supreme Court of Illinois

denying Petition for Rehearing ................ App. 36

TABLE OF AUTHORITIES

CaSEs

PAGE

Abrams v. Crocker-Citizens National Bank, 114 Cal.

Reptr. 913, 41 Cal. App. 3d 55 (1974) 000. sis 10

Bowles v, Seminole Rock Co., 325 U.S. 40, 415 (1945) . 10

Boyce v. Commercfal B & Co. of Albany, 247 NYS 2d

RRR eeIaeek “SRC a ee sen a dre SAe ncn sa ere ROT 10

Brooks v. Valley National Bank, 113 Ariz. 169, 548 P.

Rr eet Renn e lente Nomen ae aOR ar 9, 10

Buchanan v. Brentwood Federal Savings & Loan <As-

sociation, 457 Pa. 135, 320 A. 2d 117 (1974) _20.. 10

Carpenter v. Suffolk Franklin Savings Bank, 362 Mass.

ee Et eS FS 5 a en see 10

Franklin Life Ins. Co. v. U.S., U.S. Tax Cases, Vol.

67-2, par. 9515 (U.S. D.C. SD Ill. 1967) 2... 10

Gibson v. First Federal Savings & Loan Association,

Fw FF eS | eee i)

Liberty National Ins. Co. v. United States, 463 F. 2d

A Re De 10

McGhee v. Bank of American Natl. Trust & Sav. Assn.,

131 Cal. Reptr. 482, 60 Cal. App. 3d 442 (1976) ........ 10

Richmond Hill Savings Bank v, Commissioner, 57 U.S.

SS A: IU, MEE MITTEE sicsincshscenchesbatnicsindioealletateaten 10

STATUTES AND REGULATIONS

Se eis Seeeeita MN MII. - setnticnsciciisiieceniishinaiaatibeiapatciaiiion 3, 4

a i i a a a 2

24 C.F.R.; §203.

OU. ‘<toesapestiaieieeecaendiiptiapnenseiibnaniduidiniiattininitnicnaaan

OD. asctitannnenipsiaditinntpincntipinimnasiauiinisinigananpion

OT, anamicaneechiasaididenaiinielieinienceninicasiiaalananmicaindin

SEP - inestessecitesiiceiisianpileadnienannatesiiintimstinenaiain

FHA Mortgages Guide Book (FHA G 4015.9, 1-4a,

SUEY. sinediedsiaiubiabedllisaidlidhicietisataciseeshibneadbamiisteaanmibishgiasensiicenetasiis

PAGE

Iu the

Supreme Court of the United States

Ocrosper Term, A.D. 1977

No.

ERNEST LaTHROP and MARY D. LaTHROP, individually and

as representatives of all persons similarly situated,

Petitioners,

vs.

BELL FEDERAL SAVINGS & LOAN ASSOCIATION,

a corporation organized and existing under

the laws of the United States,

Respondent.

PETITION FOR WRIT OF CERTIORARI

TO THE SUPREME COURT OF ILLINOIS

To The Honorable, The Chief Justice and

Associate Justices of the Supreme Court

of the United States:

Your petitioners, Ernest LaThrop and Mary D. La-

Throp, pray that a Writ of Certiorari issue to review

the decision of the Supreme Court of Illinois entered on

October 5, 1977. A timely petition for rehearing was filed,

but denied on November 23, 1977.

OPINIONS OF THE COURTS BELOW

The opinion of the Supreme Court of Illinois (three

Justices dissenting, including the Chief Justice) is re-

ported at 68 Ill. 2d 375, 370 N.E.2d 213, (App. I, post).

The opinion of the Appellate Court is reported at 42 IIl.

App. 3d 183, 355 N.E. 2d 667 (App. IT post). 3

JURISDICTION

The jurisdiction of the Court is invoked under Title 28,

United States Code, Section 1257(3).

QUESTIONS PRESENTED

1. Whether mortgage lenders under federally insured

home-loan mortgages on federally prescribed mortgage

contracts are required to segregate funds deposited with

them by home-loan borrowers for taxes and insurance,

where the Federal Housing Authority (FHA) pursuant to

the National Housing Act of 1934 has mandated that funds

deposited for such purposes are to be considered ‘‘trust’’

funds for the benefit of the mortgagors and to be used solely

for the purposes deposited?

2. Whether mortgage lenders under federally insured

home-loan mortgages are required to account for earnings

derived from the use of escrowed funds commingled with

the lenders’ general funds?

3. Whether the state courts below correctly interpreted

the National Housing Act of 1934 and the Regulations of

the Federal Housing Authority issued thereunder pertain-

ing to the issues above stated?

STATEMENT

Petitioners are borrowers from a federal savings and

loan association under a home-loan mortgage guaranteed

by the Federal Housing Authority. Pursuant to the pro-

visions of their mortgage—on a contract form prescribed

by the FHA—plaintiffs were required, in addition to their

payments of principal and interest, to make monthly

deposits to the mortgagee of one-twelfth (1/12) of the

annual ground rents (if any), insurance premiums, taxes

and assessments. Under the terms of the mortgage and

the FHA regulations said sums are to be held in escrow

and paid by the mortgagee when due for the purposes

stated.

Plaintiffs brought a class action for themselves and

in a representative capacity for all other persons similarly

situated who borrowed money on mortgage loans insured

by agencies of the government (viz., the Federal Housing

Authority and the Veterans administration). The com-

plaint alleged that contrary to the regulations of the FHA,

the savings and loan association did not segregate the ad-

vance sums deposited and commingled the deposits with its

general funds which produced earnings for the lender, and

which were retained by the lender for its own account.

The suit prayed for an accounting to the plaintiffs of the

earnings produced by the improper use of the escrowed

funds.

To promote home ownership, deemed by Congress to be

a socially desirable objective, the National Housing Act

of 1934 (12 USC, §1701, et seq.) was enacted, inter alia,

for the purpose of enabling persons of low and moderate

means to obtain home-loan financing not otherwise avail-

able to them in the conventional mortgage market. Under

the Act, FHA-approved mortgages are insured against

loss on such loans. A federally insured home-loan mort-

gage is on a prescribed form in national use and uniformly

provides that borrowers shall deposit monthly with the

mortgage lender one-twelfth (1/12) of the estimated ground

rent, insurance premiums, taxes and special assessments

and that:

———— ee ee a

‘*.. such funds [are] to be held by mortgagee in trust

to pay said ground rents, premiums, taxes and special

assessments.’’ (Emphasis added).

The theory of the class action was that the FHA-pre-

scribed form of mortgage mandated and created an express

trust of the monthly advanced escrow deposits for the bene-

fit of the mortgage borrower. The suit claimed that the

defendant lender breached that trust by commingling the

monthly escrow deposits with its general funds to generate

earnings for its own account. The complaint prayed for an

accounting of those earnings. Alternatively, the plaintiffs

sought imposition of a constructive trust upon such escrow

funds for the benefit of themselves and for all other bor-

rowers similarly situated on the theory that defendant

unlawfully converted the earnings to its own use and was

unjustly enriched thereby.

The Illinois Supreme Court affirmed a judgment dis-

missing the action in favor of defendant. The state courts

below held that notwithstanding the express language of

the mortgage contract, ‘‘in trust to pay’’, an express trust

was not thereby created and that the FHA Regulations

governing creation and maintenance of advance escrow

funds did not require ‘‘supervised lenders’’ (such as de-

fendant) to segregate such funds nor to give an accounting

of any earnings derived from the use of such funds.

THE CONTROLLING FEDERAL STATUTE AND THE

REGULATIONS AND RULES OF THE FHA:

Section 1709(b)(7) of the National Housing Act (12

U.S.C. $1709) provides that FHA mortgages shall:

‘¢.. (C]jontain such terms and provisions with respect

to insurance, repairs, alterations, payment of tazes,

default reserves, delinquency charges, foreclosure pro-

)

ceedings, anticipation of maturity, additional and

secondary liens, and other matters as the Secretary

may tn his discretion prescribe.’’ (Emphasis added).

By sections 1701(¢)(a) and 1715(b) of the Act the

Secretary of Housing and Urban Development is empow-

ered to make such rules and regulations ‘‘as may be neces-

sary to carry out his functions, powers and duties.’’ Pur-

suant to such powers, the Secretary of HUD has done the

following:

—(a) Adopted FHA Regulation 24 CFR, §203.23, which

in pertinent part provides:

‘‘The mortzaze shall further provide that such

payment shall be held by the mortgagee in a

manner satisfactory to the Commissioner, for the

purpose of paying such ground rents, taxes, assess-

ments and insurance premiums before the same

become delinquent, for the benefit and account of

mortgagor.’’ (Emphasis added).

—(b) Adopted FHA Regulation 24 CFR, §202.7(a) (3)

which provides that approval of an FHA mortgagee-

lender may be withdrawn where the insured lender

makes

‘* . . use of escrow funds for any purpose other

than that for which they were receiwved;’’ (Em-

phasis added).

—(c) Prescribed the form of mortgage containing the

‘tin trust’’ language set forth above;

—(d) Uniformly referred to month]: deposits for taxes

and insurance, ete., as ‘‘escrow’’ accounts or funds.

For example, FHA form No. 2001 entitled ‘‘ Applica-

tion for Approval as Mortgagee’’ states that an ap-

plicant for FHA Mortgage Insurance agrees that:

**5. It will analyze mortgagors’ escrow accounts

at least annually.’’ (Emphasis added).

—(e) Issued an FHA Mortgagee’s Guide Book (FHA

G 4015.9, 1-4a (1970) interpreting FHA regulations

and the ‘‘in trust’’ provisions of the FHA mortgage

in the following terms:

“Question 3. On Page 7 of the HUD VA report

on mortgage settlement cost, you propose that

HUD and the VA see to it that all escrow deposits

are kept to a minimum.

‘*B— Who is the owner of funds deposited in

escrow accounts?

‘‘Answer: B. These funds are owned by the

‘‘(a) The FHA escrow requirements * *

regardless of the mortgagee’s group, they [i.e.,

the escrow deposits] may be used only for the pur-

pose for which they were collected. Many mort-

gagors fail to understand this requirement, which

is imposed by hoth the security instrument and

FHA regulations and cannot be waived, and they

believe that the mortgagee is earning interest on

escrow deposits which are rightfully the property

of the mortgagor. An explanation that it is not

mortgagor and held in trust by the mortgagee for

the mortgagor’s behalf.’’** (Emphasis added).

It is submitted that the Illinois courts completely ignored

the intent of Congress to protect home loan borrowers un-

der the National Housing Act of 1934 and have clearly mis-

interpreted the FHA Regulations and its Interpretative

Rules with respect to the handling of the advance escrow

funds in question.

possible for the mortgagee to earn interest on

escrow accounts and that the mortgagee, in making

monthly collections, performs a service for the

mortgagor for which the mortgagee is not reim-

bursed, might prevent many later questions and

misunderstandings.’’* (Kmphasis added).

—(f) With reference to the above-quoted FHA regula-

tions and to FHA mortgages, then Secretary of HUD

Romney in answer to a written question by a sub-

committee of Congress testified: |

* The reference in the foregoing statement to “mortgagee’s group”

refers to FHA regulations 24 CFR §203.1 and 203.4 which classify

FHA approved mortgagees into two groups: the first being mort-

gagees subject to federal or state supervision and the second

being unsupervised mortgagees such as private mortgage lenders.

The “security instrument” and “FHA regulations” refer respectively

to the FHA mortgage and FHA regulations 24 CFR, §203.23 and

203.27(a) (3), quoted supra.

**U. S. Congress, House Real Estate Settlement Cost, FHA

Mortgage Foreclosures, Housing Abandonment and Site Selection

Policies. Hearing on HR 13337, part 1, Feb. 22 and 24, page 239,

before Subcommittee on Housing of the Committee on Banking and

Currency, 92nd Congress, Second Session.

REASONS FOR GRANTING WRIT

THE QUESTION INVOLVED IS OF PERVADING NA-

TIONAL IMPORTANCE AND AFFECTS THE RIGHTS

OF MILLIONS OF HOME LOAN BORROWERS UNDER

FHA AND VA MORTGAGES.

The precise question presented in the instant class ac-

tion is whether the ‘‘in trust’’ provisions of federally in-

sured mortgages create an express trust of the escrow de-

posits made by home loan borrowers for the purpose of

paying insurance, taxes and other items of a similar na-

ture. If, indeed, such funds are ‘‘owned by the mortgagor”’

and held in trust ‘‘for the mortgagor’s behalf’’, then it

was improper for the savings and loan association to com-

mingle such funds with its own general funds and to retain

the earnings without accounting for same.

Such impropriety is not mitigated by the fact that the

lender ultimately does pay the taxes and insurance pre-

miums or special assessments for which the deposits were

made by the borrower in the first instance. The wrongful

conversion is not cured by the restitution and does not erase

the breach of the fiduciary duty. Further, the risk of mis-

use of the converted funds creates the ever present pos-

sibility that funds will not be available on due dates for

the purposes for which the borrower made the advance

deposits—e.g. the insolvency of the lender.

In reaching its conclusion that the sums in question are

not in fact trust funds—notwithstanding the express lan-

guage used—and that the savings and loan association

need not account for the earnings generated by the com-

mingled funds, the Illinois Supreme Court relied principal-

ly on two cases which are not actually dispositive of the

question or supportive of the court’s determination: Brooks

v. Valley National Bank, 113 Ariz. 169, 548 P. 2d 1166

(1976) (App. I, pp. 2, 11, 13) was decided on the basis of the

bank’s affidavit relative to custom and usage and the opin-

ion makes no reference to the pertinent FHA Regulations

and Guides. Nor does the opinion show how local custom

and usage may nullify a federal regulation governing a

federally-insured loan. (It is noteworthy, however, that

in a separate concurring opinion, the Chief Justice of the

Arizona Supreme Court held that the FHA mortgage did

clearly establish an express trust.)

In Gibson v. First Federal Savings & Loan Association

of Detroit, 504 F. 2d 826 (6th Cir. 1974) (App. I, pp. 9, 10)

the Sixth Circuit decided the case on the ground that the

FHA Guides do not have the force or effect of a regulation.

The Michigan court’s determination that ‘‘there is no regu-

lation which requires supervised institutions to segregate

escrow funds’’, (App. I, p. 9) nor any FHA regulation

which prohibits the ‘‘practice of using escrow funds for

investment purposes’’ is palpably contrary to FHA Regu-

lation 24 CFR, §2037(a)(3), supra, which subjects the

supervised mortgage lender to the risk of withdrawal of ap-

proval by FHA if it makes ‘‘use of escrow funds for any

purpose other than for which they were received.’’

Moreover, FHA Guide FHA G4015.9, 1-4(a) explicitly

states that the prohibition against a mortgagees’ earning

interest on escrow accounts ‘‘is imposed by both the secur-

ity instrument and FHA regulations’’. Both the Michigan

federal court and the Illinois state court have misappre-

hended that it is not the FHA Guides which impose the

prohibition, but that the guides are expressive of FHA’s

interpretation of its own regulations. This Court in Bowles

v. Seminole Rock Co., 325 U.S. 40, 415 (1945) has held

that in construing an administrative regulation:

‘¢ .. the ultimate criterion is the administrative inter-

pretation which becomes of controlling weight unless

it is plainly erroneous or inconsistent with the regula-

tion.”’

The national importance and interest of the issues pre-

sented by the instant case was remarked by the Illinois

Supreme Court in ‘‘noting that many cases involving simi-

lar questions have been presented to the courts of this

State and country in the last decade . . . most of the sig-

nificant cases have been collected in Brooks v. Valley

National Bank (supra).’’ (App. I, p. 2). (None of the

eases collected in Brooks, however involved an FHA mort-

gage).

Contrary to the conclusion of the majority of the Illinois

Supreme Court in the case at bar, cases from other juris-

dictions, in various contexts, have held that the phrase

‘in trust’’ in the FHA mortgage creates an express trust

with all the consequences thereof: viz., McGhee v. Bank of

American Natl. Trust & Sav. Assn., 131 Cal. Reptr. 482,

60 Cal. App. 3d 442 (1976); Abrams v. Crocker-Citizens

National Bank, 114 Cal. Reptr. 913, 41 Cal. App. 3d 55

(1974) ; Liberty National Ins. Co. v. United States, 463 F. 2d

1027 (5th Cir. 1972); Franklin Life Ins. Co. v. U.S., US.

Tax Cases, Vol. 67-2, par. 9515 (U.S. D.C. SD IIL. 1967) ;

Richmond Hill Savings Bank v. Commissioner, 57 US.

Tax Repts. 738, 747 (1972); Boyce v. Commercial B & Co.

of Albany, 247 NYS 2d 521 (1964) ; Buchanan v. Brentwood

Federal Savings & Loan Association, 457 Pa. 135, 320 A. 2d

117 (1974) (involving an FHA mortgage as well as other

forms of mortgages). See also Carpenter v. Suffolk Frank-

lin Savings Bank, 362 Mass. 770, 291 N.E. 2d 609 (1972).

II.

THE POLICY UNDERLYING THE NATIONAL HOUS.-

ING ACT AND THE EXPRESSED INTENT OF THE

FHA REGULATIONS GOVERNING THE USE OF AD-

VANCED FUNDS TO BE HELD IN TRUST FOR THE

BENEFIT OF THE HOME LOAN MORTGAGOR IS

FRUSTRATED BY THE STATE COURT OPINION BE-

LOW.

The dissenting opinion of the Illinois Supreme Court

aptly states:

‘‘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 USC §1709(b)(2) (sup. 1975) ; 24 CFR

203.18 (1977)). Thus, persons who obtain FHA mort-

gages are purchasers of non-expensive homes or are

of limited means. Savings & loan associations are

designed to promote home ownership. (Ill. Rev. Stat.

1975, chap. 32, par. 702 (a) ; 12 USC $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 circum-

stance we@@annot 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.’’ (68 Ill. 2d

375 at p. 396, App. I, p. 19).

It was the manifest purpose of the National Housing

Act and the explicit intent of the FHA Regulations, supra,

to protect beneficial ownership in the escrow funds paid

under a federally-insured mortgage and to impose fiduciary

obligations on the ‘‘supervised’’ lender in its stewardship

of those funds. Citizens in every state of the Union num-

bering in the millions, who are home loan borrowers under

federally insured mortgages have a definite stake in the

determination of the issues here presented. The conflict-

ing decisions in the state courts and the federal circuits

as to whether the ‘‘in trust’’ provision of the uniform

type FHA mortgage imposes recognized fiduciary obliga-

tions upon the ‘‘trustee’’ merits resolution by this Court.

CONCLUSION

For all of the foregoing reasons, it is respectfully prayed

that a Writ of Certiorari issue to the Supreme Court of

Illinois.

Respectfully submitted,

Epwarp ATLAS

Haroitp A. Harris

Maremont, Lewin & MarREMONT

Attorneys for Plaintiff-Petitioners

Of Counsel:

Srwney Z. Karastx

APPENDIX

APPENDIX I

Opinion of the Supreme Court

MR. JUSTICE MORAN delivered the opinion of the

court:

The plaintiffs, Ernest and Mary La Throp, sought to

represent a class of mortgagors whose mortgages from the

defendant, Bell Federal Savings and Loan, are insured by

the Federal Housing Authority (FHA) or the Veterans

Administration (VA) and whose contracts, on FHA- or

VA-prescribed forms, provide that the mortgagee will hold

certain tax and insurance funds ‘‘in trust to pay’’ tax and

insurance obligations of the mortgagor. They claim that,

under the terms of their mortgage contract, an express

trust for the benefit of the mortgagors was created as to

such funds, in violation of which the defendant has

commingled the funds with its general funds, has earned

large profits from investment thereof, and has never paid

the plaintiffs or made an accounting to them for their pro

rata share of these earnings. Instead, plaintiffs assert,

defendant has wrongfully appropriated these earnings for

its own use. Plaintiffs ask an accounting for these earnings.

Alternatively, the plaintiffs seek imposition of a construc-

tive trust upon the funds, on the theory that defendant

unlawfully converted the earnings and was unjustly en-

riched thereby. The defendant denied that it is a trustee,

_as claimed by the plaintiffs, admits that it commingles the

funds, and asserts by way of affidavit that it has a legal

right to treat the funds as its own, and that in so doing it

follows the long-standing practice in Illinois and elsewhere

with regard to such funds.

Without reaching the question of the propriety of a

class action herein, the circuit court of Cook County

sustained defendant’s ‘‘motion for judgment on the plead-

App. 2

ings or in the alternative for summary judgment or in the

alternative to dismiss.’’ The appellate court affirmed (42

Ill. App. 3d 183), and we here affirm.

It is worth noting that many cases involving similar

questions have been presented to the courts of this State

and country in the last decade. Because of differences in

the specific language of the mortgage contracts and be-

cause of the different posture of the cases on the pleadings

and on appeal, we deem none of them dispositive of the

issues herein. Most of the significant cases have been col-

lected in Brooks v. Valley National Bank (1976), 113 Ariz.

169, 171, 548 P.2d 1166, 1168.

The plaintiffs assert that certain FHA regulations and

interpretations make erroneous the appellate court’s find-

ing that the mortgagee’s language, ‘‘in trust to pay,’’ did

not create an express trust between mortgagor and mort-

gagee, and further that the appellate court erred in hold-

ing that the plaintiffs’ complaint fails to state a cause

of action for the imposition of a constructive trust. In this

regard, it is urged that the complaint adequately alleges

that defendant has been unjustly enriched by the breach

of a fiduciary duty it owed plaintiffs, which breach war-

rants the imposition of a constructive trust upon the ad-

vance funds in the hands of the defendant. On cross-appeal

the defendant urges that this suit cannot be maintained as

a class action, and that the Federal Home Loan Bank

Board has primary jurisdiction of the subject matter of

plaintiffs’ complaint.

To determine if an express trust has been created, a

court must look beyond the mere use, or absence of, the

word. ‘‘trust.’’ (Oglesby v. Springfield Marine Bank (1946),

395 Ill. 37, 49; Restatement (Second) of Trusts sec. 24(2)

App. 3

(1959).) ° Critical to the creation of a trust is the expressed

intention to create a relationship constituting a trust.

(Restatement (Second) of Trusts sec. 23, comment a

(1959).) The intent of the parties to a contract must be

determined with reference to the contract as a whole, not

merely by reference to particular words or isolated phrases,

but by viewing each part in light of the others. Martindell

v. Lake Shore National Bank (1958), 15 Ill. 2d 272, 283.

Having viewed the mortgage contract as a whole, we

deem the following to be the relevant provisions. The

plaintiffs promise:

‘*That, together with, and in addition to, the monthly

payment of principal and interest payable under the

terms of the note secured hereby, the Mortgagor will

pay to the Mortgagee, on the first day of each month

until the said note is fully paid, the following sums:

(a) An amount sufficient to »rovide the holder

hereof with funds to pay the next mortgage insurance

premium if this instrument and the note secured hereby

are insured, or a monthly charge (in lieu of a mortgage

insurance premium) if they are held by the Secretary

of Housing and Urban Development, as follows:

(I) If and so long as said note of even date

and this instrument are insured or are reinsured

under the provisions of the National Housing Act,

an amount sufficient to accumulate in the hands

of the holder one (1) month prior to its due date

the annual mortgage insurance premium, in order

to provide such holder with funds to pay such

premium to the Secretary of Housing and Urban

Development pursuant to the National Housing

Act, as amended, and applicable Regulations

thereunder, or

(II) If and so long as said note of even date

and this instrument are held by the Secretary of

Housing and Urban Development, a monthly

App. 4

charge (in lieu of a mortgage insurance premium)

which shall be in the amount equal to one-twelfth

(1/12) of one-half (14) per centum of the average

outstanding balance due on the note computed

without taking into account delinquencies or pre-

payment;

(h) A sum equal to the ground rents, if any, next

due, plus the premium that will next become due and

payayble on policies of fire and other hazard insurance

covering the mortgaged property, plus taxes and as-

sessments next due on the mortgaged property (all as

estimated by the Mortgagee) less all sums already paid

therefor divided by the number of months to elapse

before one month prior to the date when such ground

rents, premiums, taxes and assessments will become

delinquent, such sums to be held by M ortgagee tn trust

to pay said ground rents, premiums taxes and special

assessments; and

(ec) All payments mentioned in the two preceding

sub-sections of this paragraph and all payments to be

made under the note secured hereby shall be added

together and the aggregate amount thereof shall be

paid by the Mortgagor each month in a single payment

to be applied by the Mortgagee to the following items

in the order set forth:

(I) Premium charges under the contract of

insurance with the Secretary of Housing and Ur-

ban Development, or monthly charge (in lieu of

mortgage insurance premium), as the case may

be;

(II) Ground rents, if any, taxes, special assess-

ments, fire and other hazard insurance premium;

(III) Interest on the note secured hereby; and

(IV) Amortization of the principal of the said

note.

Any deficiency in the amount of any such aggregate

monthly payment shall, unless made good by the Mort-

App. 5

gagor prior to the due date of the next such payment,

constitute an event of default under this mortgage.

The Mortgagee may collect a ‘late charge’ not to ex-

ceed two cents (2¢) for each dollar ($1) for each pay-

ment more than fifteen (15) days in arrears, to cover

the extra expense involved in handling delinquent pay-

ments.’’ (Emphasis added.)

Paragraphs (a) and (b) above dealt with the advance

funds in question here, and paragraph (b) specifically uses

the term ‘‘trust.’’ However, there is no express provision

in the contract indicating that the plaintiffs intended that

the defendant should segregate the advance funds from its

general account, nor is there any provision requiring

defendant to pay plaintiffs earnings on such funds. (Like-

wise, there is no language manifesting agreement that de-

fendant would pay plaintiffs interest on such funds. This

is not determinative, however, as the presence of such

language would tend to negate the intention to create a

trust and is more in keeping with the creation of a

debtor-creditor relationship. Restatement (Second) of

Trusts sec. 12, comment g (1959).

Counterbalancing the use of the word ‘‘trust,’’ section

ments stated in paragraphs (a) and (b) in an aggregate

sum with the principal and interest due on the note. The

second sentence of (c)(IV) makes any deficiency in the

payment of the above aggregate sum (absent timely cure)

an act of default under the mortgage. The final sentence

of that section provides for the assessment of a late charge

for failure to make the aggregate payment on time. These

provisions are indicative of the creation of a debtor-creditor

relationship with respect to the advance funds, and that

relationship is inconsistent with the existence of a trust

as to the same funds. (See Restatement (Second) of Trusts

App. 6

sec. 12 (1959). See generally Kilgore v. State Bank (1939),

372 Ill. 578, 584-85.) We therefore find that the express

terms of the mortgage document are ambiguous as to the

intention to create a trust.

When the terms of a contract are plain, the instrument

itself is the only source of intent of the parties. (Decatur

Lumber & Manfacturing Co. v. Crail (1932), 350 Ill. 319,

323-24.) However, where there is an ambiguity arising

from the terms of the contract, the meaning may be derived

from extrinsic facts surrounding the formation of the

contract. 4 Williston, Contracts sec. 629, at 923 (3d ed.

1961).

The plaintiffs assert that extrinsic evidence regarding

the contract formation supports a finding of intent to

create a trust. Plaintiffs have argued at length that, in

essence, the defendant’s intent to create a trust was im-

plicit in its use of the word ‘‘trust’’ because of the

existence of certain FHA regulations and interpretations,

and because, by the terms of defendant’s original applica-

tion to the FHA for acceptance as an insured mortgagee,

the defendant agreed to ‘‘analyze mortgagors’ escrow ac-

counts at least annually.’’ The defendant therein further

agreed to comply with the provisions of the FHA regula-

tions and other requirements of the Federal Housing

Commissioner. In a slightly different vein, plaintiffs urge

that, in the contract with plaintiffs, defendant was bound

by the FHA regulations which have the force of law; that

these regulations are to be given the interpretation of the

agency charged with their administration, and such regula-

tions and interpretations establish that the advance funds

were to be segregated funds, in escrow, used only for the

designated purposes and held for the benefit of the

plaintiffs.

App. 7

It is undisputed that Federal regulations may have the

force of law with regard to regulated groups, and that the

defendant was entitled, by 12 C.F.R. section 545.6—11, to

collect the subject advance funds. This same Federal

Savings and Loan System Regulation provides that all loan

instruments shall comply with applicable provisions of law,

government regulations, and the Federal association’s

charter. FHA regulation (24 C.F.R. sec. 203.23) provides

that the terms of the insured mortgage ‘‘[sJhall further

provide that such [advance] payments shall be held by the

mortgagee in a manner satisfactory to the Commissioner

for the purpose of paying such ground rents, taxes, assess-

ments, and insurance premiums before the same become

delinquent, for the benefit and account of the mortgagor.’’

(Emphasis added.) It is asserted that these regulations

bind the mortgagee to the creation of a trust of the

advance funds ‘‘for the benefit and account of the mort-

gagor.’’ Laying aside, for the moment, the implicit as-

sertion that Federal regulations can substitute for the

intent of the private parties to a contract and bind them to

the creation of a trust, we believe that the plaintiffs mis-

interpret the import of the phrase, ‘‘for the benefit and

account of the mortgagor.’’ As we interpret it, this phrase

does not relate back to the words ‘‘shall be held by the

mortgagee’’ (emphasis added), but instead relates back to

the word ‘‘paying.’’ Thus, the mortgagee is to have funds

to pay, for the benefit and account of the mortgagor, the

taxes, insurance, ete. Our conclusion that this regulation

does not dictate imposition of a trust is supported by the

addition, in 1975, of 12 C.F.R. section 545.6—11(c), which

makes clear that on certain loans made on or after July

16, 1975, a Federal association shall pay interest on the

escrow account if there is in effect a specific State statutory

provision for such, and that, ‘‘‘‘[e]acept as provided by

App. 8

contract, a Federal association shall have no obligation

to pay interest on escrow accounts apart from the duties

imposed by this paragraph.’’ (Emphasis added.)

The only other FHA regulations which are asserted to

support the intention or legal obligation of the creation,

under the mortgage, of a trust for the advance funds is

found in 24 C.F.R. section 203.7, which provides in per-

tinent part:

‘*(a) Approval of a mortgagee may be withdrawn

at any time by notice from the Commissioner, by

reason of:

° - *

(2) The failure of a nonsupervised mortgagee

to segregate all escrow funds received from mort-

gagors on account of ground rents, taxes, assess-

ments and insurance premiums, and to deposit such

funds to a special account or accounts with a

financial institution whose accounts are insured

by the Federal Deposit Insurance Corporation or

by the Federal Savings and Loan Insurance Cor-

poration ; 3

(3) The use of escrow funds for any purpose

other than that for which they were received.”’

The plaintiffs assert that the use of the word ‘‘escrow”’

in section (3) indicates that a trust was to be created with

respect to the advance funds. Without delving into the

differences between an escrow and a trust, we point out

that the mere use of the word ‘‘escrow”’ is, of itself, no

more determinative of the creation of a trust relation than

the use of the word ‘‘trust,’’ as indicated above. Addi-

tionally, section (2) above, which requires segregation of

advance funds, deals only with nonsupervised lenders. It

is uncontroverted that, pursuant to FHA regulation (24

C.F.R. section 203.4), the defendant herein is a supervised

App. 9

lender. As such, it is not subject to the terms of section 2.

‘‘(TJhere is no regulation which requires supervised in-

stitutions to segregate escrow funds.”’ (Gibson v. First

Federal Savings & Loan Association (6th Cir. 1974), 504

F.2d 826, 829.) The district court of Michigan pointed out

in Gibson that section (3) does not expressly prohibit the

practice of using escrow funds for investment purposes.

It observed:

‘Rather, it prohibits application of the funds for pur-

poses different from that for which they were received.

Plaintiffs do not dispute that [defendant] pays the

taxes and insurance premiums with the escrow funds

and that any excess it collects over the amount ac-

tually paid out for taxes and insurance is credited

for future payments of these items. Thus, the escrow

funds are used exclusively for the purpose for which

they were received.’? (Footnote omitted.) Gibson v.

First Federal Savings & Loan Association (E.D. Mich.

1973), 364 F. Supp. 614, 616.

We deem it significant that 24 C.F.R. section 203.7(a)

appears, on its face, to regulate the relationship between

mortgagee and FHA, rather than the relationship between

mortgagee and mortgagor, for it provides that approval of

the mortgagee may be withdrawn for failure to comply

with the provisions thereof, but section (b) thereto provides

that ‘‘[w]ithdrawal of a mortgagee’s approval shall not

affect the insurance on mortgages accepted for insurance.’’

The plaintiffs strongly urge that the terms of the regu-

lations above must be construed in light of the FHA’s

own applicable interpretations. Plaintiffs cite numerous

sections of the FHA’s interpretive Mortgagee’s Guide,

published in April of 1970. Insofar as the interpretations

therein were published almost a year after the date of the

mortgage contract herein, such interpretation can in no

App. 10

way be deemed to have controlled the intent of either

party to the contract at the time of its formation. Fur-

thermore, it is undisputed that administrative interpre-

tations (as distinguished from administrative regulations)

do not have the force and effect of law. In Gibson v. First

Federal Savings d Loan Association (6th Cir. 1974), 504

F.2d 826, 830, which refers specifically to the Mortgagee’s

Guide and certain opinions of departmental counsel, it has

been held that ‘‘such statements and opinions do not have

the force or effect of regulations.”’

As a supervised lender, the defendant is subject to the

control of the Federal Home Loan Bank Board, whose

regulations ‘‘do * * * appear to authorize the complained

of practice.’’ (Kinee v. Abraham Lincoln Federal Savings

& Loan Ass’n (E.D. Pa. 1973), 365 F. Supp. 975, 978.)

The court in Kinee points out that even if those regulations

did not specifically authorize the practice, ‘‘the plaintiffs

would still be in the position of never having brought to

the Court’s attention any provision of the Homeowners

Loan Act or of the regulations promulgated pursuant

thereto which forbid the practice and therefore might

arguably create a cause of action for following the prac-

tice ’’ (365 F. Supp. 975, 978.) As the Mortgagee’s Guide

was published after the formation of the contract in ques-

tion, and as the applicable FHA regulations do not clearly

require the creation of a trust, we believe the plaintiffs’

reliance upon the FHA regulations and interpretations

in the construction of this contract is misplaced.

Furthermore, even if plaintiffs are correct in their

contention that the FHA regulations and the Mortgagee’s

Guide have the purpose of imposing a trust upon the

advance funds, we deem it clear that in an action between

«a mortgagor and mortgagee (not between the mortgagee

App. 11

and FHA), where the mortgage contract does not speci-

fically incorporate the FHA regulations or expressly in-

dicate agreement thereto, such regulations are not deter-

minative of the content of the contract created between the

parties. Once again, the intention of the parties thereto is

paramount. No intention to so incorporate FHA regula-

tions is discernible from the mortgage document.

An affidavit by William C. Prather, general counsel for

the United States Savings and Loan League, states in

support of the defendant’s motion that it is, and it has for

many years been, common practice in the savings and loan

business in Illinois and throughout the United States to

commingle the lender’s general funds and the mortgage

loan payments—including the required advance payments

for taxes and insurance—and to distribute no earnings or

interest earned on such advance funds to the mortgagors.

This custom and usage has been noted elsewhere in a

similar case where, in a specially concurring opinion, Vice

Chief Justice Struckmeyer observed in Brooks v. Valley

National Bank (1976), 113 Ariz. 169, 175-77, 548 P.2d

1166, 1172-74:

‘The majority have cited to ten lawsuits which have

been brought against lending institutions in various

courts of this country to compel reimbursement for

the use of impound funds, or what is usually described

as escrow funds.** * [These cases] * * * establish a

usage, the customary practice by lending institutions

in the United States. Without exception, interest was

not paid nor were the earnings on the investment of

the impound funds credited to the mortgagor.

The practice of requiring impound payments has

existed since the early 1930’s. In every instance, with-

out exception, where a suit has been brought to com-

pel payment of interest or the earnings on the invest-

App. 12

ment of the impound funds, the lending institution

has not paid the mortgagor for the use of the impound

funds. Nor is there anywhere the slightest suggestion

that the Valley National Bank or any lending institu-

tion ever paid for the use of impound funds.

While a few isolated instances will not prove a

usage, one so firmly established for so many years

nationwide should be controlling. A usage will be bind-

ing if it is uniform, long established, and so well

known that it can be said that the parties contracted

with reference to it and the failure to conform to it

would be the exception. Cleveland etc. R.R. Co. v.

Jenkins, 174 Ill. 398, 51 N.E. 811. Nor is a usage in-

valid because its effect is different from a general rule

of law.

‘It is well settled that a trade usage which is

contrary to a statute or which contravenes public

policy is invalid and may not be invoked; but

where a rule of law is of a character that the

parties may make it inappilcable to their contract

by express agreement, they may likewise render

it inapplicable by implied agreement or by usage.’

[ Citation. }”’

(Although Vice Chief Justice Struckmeyer felt the use of

the words ‘‘in trust’’ created a trust fund in this case, he

concurred in the result of the majority, denying payment

for the usage of advance funds on the basis of the above

rationale.) We believe that the plaintiff’s intention and

expectation with regard to the advance-payment provi-

sions of the mortgage must be judged in light of the cus-

tom and usage of commingling the funds and of not pay-

ing interest or earnings thereupon. We conclude that plain-

tiffs have failed to make a showing that they intended to

create an express trust of those advance funds.

We decline the plaintiffs’ invitation to overlook defi-

ciencies in their expressed intention on the basis that the

contract herein was a contract of adhesion-—a form con-

App. 13

tract supplied by FHA and the mortgagee—the terms of

which could be accepted or rejected, but not negotiated,

by the plaintiffs. If there is need for the imposition of an

unwritten contract term to impose a trust on these advance

funds for the benefit of plaintiffs, we believe it is the

proper function of the legislature to so determine. See

Surrcy Strathmore Corp. v. Dollar Savings Bank (1975),

36 N.Y.2d 173, 178, 325 N.E.2d 527, 530, 366 N.Y.S.2d 107,

110; Carpenter v. Suffolk Franklin Savings Bank (1976),

aia Mass. ........, ......... 346 N.E.2d 892, 900. See also III.

Rev. Stat. 1975, ch. 95, par. 101 et seq. (effective January

1, 1976).

We likewise reject plaintiffs’ assertion that they have

stated a claim for unjust enrichment. It has been pointed

out that ‘‘the absence of a provision to pay interest on the

impoundment funds is equivalent to an agreement that it

should not be paid. A person is not entitled to compensa-

tion on the grounds of unjust enrichment if he receives

from the other that which it was agreed between them the

other should give in return. Restatement of Restitution

sec. 107, commeat (1)a. Finally, where there is a specific

contract which governs the relationship of the parties, the

doctrine of unjust enrichment has no application.’’ (Brooks

v. Valley National Bank (1976), 113 Ariz. 169, 174, 548

P.2d 1166, 1171.) The above principles are applicable to

the case at bar, and they are not altered by the finding of

a mortgagee’s fiduciary duty in Janes v. First Federal

Savings & Loan Association (1974), 57 Ill. 2d 398. In that

case, this court held the defendant breached a fiduciary

duiy owed to its creditor, for whom and with whose funds

it purchased title insurance and then retained a rebate

thereon from the insurer. The court observed that ‘‘[m]ore

is involved here, however, than a relationship of mortga-

gor and mortgagee ‘of itself’ * * *.’’ (57 Tll. 2d 398, 408.)

App. 14

Nothing in the specific relationship of the parties here

suggests anything other than the customary mortgagor-

mortgagee relationship. Although the breach of a fidu-

ciary relationship may justify the imposition of a con-

structive trust, plaintiffs have failed to allege facts suffi-

cient to establish the creation of a fiduciary relationship

or a breach thereof.

Defendant’s cross-appeal claims that the Federal Home

Loan Bank has primary jurisdiction of this cause of action.

We have reviewed the cases submitted for this proposition

and find the contention to be without merit. In view of our

disposition of the above issues, we do not reach the class

action issue asserted by the defendant on cross-appeal.

For the above reasons, the judgments of the appellate

and circuit courts are affirmed.

Judgments affirmed.

MR. JUSTICE DOOLEY, dissenting:

The majority commits the basic error of treating this

appeal as if there had been a determinat‘»n on the merits.

While it describes defendant’s motion as a ‘‘motion for

judgment on the pleadings or in the alternative for sum.-

mary 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 Il.

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

App. 15

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 in trust

to pay said ground rents, premiums, taxes and special as-

sessments.’’ (Emphasis added.)

The FHA regulations concerning this obligation provide

that ‘‘such [advance] payments shall be held by the mort-

gagee * * * for the purpose of paying such ground rents,

taxes, assessments, and insurance premiums * * * for 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 pro-

viding that supervised lenders must use such funds only

for the purpose for which they we.e collected, namely, to

pay bills for taxes, special assessments, ground rents and

hazard insurance premiums.

Defendant, it is alleged, had a fiduciary duty to plain-

tiffs. 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 con-

App. 16

verted 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 declara-

tion 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 na-

ture of the specific agreement and all the facts before the

court. See Carpenter vy. Suffolk Franklin Savinas 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: Restate-

ment (Second) of Trusts sec. 12, comment g, sec. 24 ( 1959).

The Restatement (Second) of Trusts sec. 12, comment

9 (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 con-

duct 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 crea-

tion of such a trust, yet they are employed here. (See Car-

penter v. Suffolk Franklin Savings Bank (1973), 362 Mass.

770, 776, 291 N.E.2d 609, 614; Buchanan v. Brentwood Fed-

eral Savings & Loan Assoc. (1974), 457 Pa. 135, 143, 320

A.2d 117, 122; Restatement ( Second) of Trusts see. 24(2)

and sec. 24, comment b (1959).) They must he given their

common meaning. We cannot ignore clear contractual lan-

tA a ey teeta ghee ee ee

o — — ee

App. 17

guage. 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 mort-

gagee 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 di-

rection to transfer it to * * * a third person, this may be

a sufficient manifestation of an intention to create 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 attach-

ment suit, it was observed: ‘‘[T]he money dces 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 exis-

tence of a trust. Carpenter v. Suffolk Franklin Savings

Bank (1973), 362 Mass. 770, 777, 291 N.E.2d 609, 614;

App. 18

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: Judicial and

Legislative Developments, 23 Syracuse L. Rey. 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 ques-

tion 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 essen-

tials 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 927, 531 (Wachtler, J., dis-

senting).

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 ad.

vance funds, is not conclusive of the issue. In the law of

trusts, as in the law of contracts in general, it is the ex-

ternal manifestation of intent which is controlling. (Re-

statement (Second) of Trusts sec. 2, comment g, sec. 23,

comment a (1959).) A trier of fact might reasonably con-

clude 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.

App. 19

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 resi-

dences. (12 U.S.C. see. 1709(b) (2) (Supp. 1975) ; 24 C.F.R.

203.18 (1977).) Thus, persons who obtr*n FHA mortgages

are purchasers of nonexpensive homes or are of limited

means. Savings and loan associations are designed to pro-

mote home ownership. (Ill. Rev. Stat. 1975, ch. 32, par.

702(a); 12 U.S.C. see. 1464(a) (1970).) It is a recognized

fact that banks are not interested in investiug 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

lll. 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 im-

position 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 Accounta-

bility and the Problem of Noninterest-bearing Mortgage

Escrow Accounts, 54 Boston U.L. Rev. 516, 524 (1974).

Plaintiff’s alternate contention is that the profits defen-

dant earned through use of their funds should be impressed

with a constructive trust for their benefit.

App. 20

A constructive trust can arise where there is either

actual fraud or implied fraud resulting from the breach of

a confidential relationship. (Hofert vy. Latorri (1961), 22

Ill. 2d 126, 130; Carroll vy. Caldwell (1957), 12 Til. 2a 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 commis-

sion or other profit, he holds what he receives upon a

constructive trust for the beneficiary.’’

Plaintiffs are entitled to prove their claim for the decla-

ration of a constructive trust based on the breach of the

fiduciary relationship created by the mortgage agreement.

More is involved here than a relationship between a mort-

gagor and a mortgagee. There js 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 construc-

tive 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 117.) The plaintiffs

are not seeking both to enforce a contractual provision

concerning interest and to receive restitution for unjust

App. 21

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: Judi-

cial 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 justifica-

tion 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 in-

equality in bargaining or dealings between parties.’’

Far ll v. Brentwood Federal Savings ¢ Loan

Assoc. (1974), 457 Pa. 135, 152-53, 320 A.2d 117, 127.

Whether there is an express trast 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 Pennsy]l-

vania (Buchanan v. Brentwood Federal Savings & Loan

Assoc. (1974), 457 Pa. 135, 320 A.2d 117) and Massachu-

setts (Carpenter v. Suffolk Franklin Savings Bank ( 1973),

App. 22

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.

App. 23

APPENDIX II

OPINION OF THE APPELLATE COURT

Mr. JUSTICE McGLOON delivered the opinion of the

court:

In this case, we are asked to consider the question of

whether individuals representing a class of mortgagors

are entitled to maintain an action against their mortgagee

for interest earned by the mortgagee on the mortgagors’

advance payments to the mortgagee for taxes, assessments,

and insurance. Plaintiffs-mortgagors, Ernest and Mary

LaThrop, filed suit in the cireuit court of Cook County

against their mortgagee, Bell Federal Savings and Loan

Association, asking for an accounting of such wrongfully

appropriated earnings. The trial court granted defen-

dant’s motion to dismiss, and this appeal was taken by

plaintiffs.

We affirm.

The pertinent facts are as follows. On May 2, 1969,

plaintiffs secured a mortgage loan from Bell. The mort-

gage was in a form prescribed by the Federal Housing

Authority, which guaranteed the loan. By the terms of

the mortgage, plaintiffs promised:

‘That, together with, and in additon to, the monthly

payment of principal and interest payable under the

terms of the note secured hereby, the Mortgagor will

pay to the Mortgagee, on the first day of each month

until the said note is fully paid, the following sums:

(a) An amount sufficient to provide the holder here-

of with funds to pay the next mortgage insurance pre-

mium if this instrument and the note secured hereby

are insured, or a monthly charge (in lieu of a mortgage

insurance premium) if they are held by the Secretary

of Housing and Urban Development, as follows:

App. 24

(I) If and so long as said note of even date and

this instrument are insured or are reinsured under

the provisions of the National Housing Act, an

amount sufficient to accumulate in the hands of

the holder one (1) month prior to its due date the

annual mortgage insurance premium, in order to

provide such holder with funds to pay such pre-

mium to the Secretary of Housing and Urban De.

velopment pursuant to the National Housing Act,

as amended, and applicable Regulations there-

under, or

(II) If and so long as said note of even date

and this instrument are held by the Secretary of

Housing and Urban Development, a monthly

charge (in lieu of a mortgage insurance premium)

which shall be in an amount equal to one-twelfth

(1/12) or one-half (14) per centum of the average

outstanding balance due on the note computed

without taking into account delinquencies or pre-

payment ;

(b) A sum equal to the ground rents, if any, next

due, plus the premiums that will next become due and

payable on policies of fire and other hazard insurance

covering the mortgaged property, plus taxes and as-

sessment next due on the mortgaged property (as esti-

mated by the Mortgagee) less all sums already paid

therefor divided by the number of months to elapse

before one month prior to the date when such ground

rents, premiums, taxes and assessments will become

delinquent, such sums to be held by Mortgagee in trust

to pay said ground rents, premiums, taxes and special

assessments; and

subsections of this paragraph and all payments to be

made under the note secured hereby shall be added

together and the aggregate amount thereof shall be

paid by the Mortgagor each month in a single payment

to be applied by the Mortgagee to the following items

in the order set forth;

App. 25

' (I) Premium charges uuder the contract of in-

surance with the Secretary of Housing and Urban

Development, or monthly charge (in lieu of mort-

gage insurance premium), as the case may be;

(II) Ground rents, if any, taxes, special assess.

ments, fire and other hazard insurance premiums;

(IIT) Interest on the note secured hereby; and

(IV) Amortization of the principal of the said

note.”’

We are concerned with section (b), which provides that

plaintiffs-mortgagors will make monthly advance payments

for ground rents, hazard insurance premiums, taxes and

assessments to Bell, ‘‘such sums to he held by Mortgagee

in trust to pay said ground rents, premiums, taxes and

special assessments * * *.’’

Plaintiffs contend that the language in section (b) cre-

ated a trust, and that Bell violated its trust duties by com-

mingling the trust funds with its general funds, using the

funds in its operations, earning money through the use of

the trust funds, and appropriating the earnings for itself.

In the alternative, plaintiffs contend that Bell should be

declared a constructive trustee of the funds for the benefit

of plaintiffs and the class they represent. Defendant ad-

mits that it commingles the funds, denies that it is a trus-

tee, and contends that it has the legal right to treat the

funds as its own.

@1i,2 The first issue on appeal is whether an express

trust was created in the motrgage by the language requir-

ing that the funds are ‘‘to be held by the Mortgagee in

trust to pay * * *.’’ Plaintiffs’ basic position is that the

clear language of the instrument leaves no room for con-

struction, and that the ‘‘in trust’’ provision in the FHA

form mortgage has been held to create a trust. Defendant

App. 26

argues that (1) the mortgage language is inconsistent with

the creation of a trust; (2) the intention of the parties to

create a trust is lacking; (3) the Bank is not required by

law to either segregate the advance payments or pay earn-

ings to mortgagors; and (4) at most, the advance payments

are general deposits for a special purpose which do not

create a trust.

The first Illinois case to consider the question of whether

an express trust may be found to exist with regard to a

mortgagor’s advance payments for taxes and insurance is

Sears v. First Federal Savings & Loan Association (1971),

1 Il. App. 3d 621, 275 N.E.2d 300, 50 A.L.R.3d 683. There-

in, the mortgagors argued that the clear language of that

mortgage controlled. Of this argument, this court stated:

‘(* * *

we must examine all of the pertinent language

of the note itself as above quoted. We cannot give ef-

fect to portions of the note only. Each clause and all

of the language used must, if possible, be given mean-

ing, life and effect. * * * In addition, we must consider

the background of the transaction before the court.’’

(1 Ill. App. 3d 621, 627.)

Although the mortgage language in Sears: is substantially

different than the unqualified ‘‘in trust to pay’’ provision

in the instant case, the above stated rule is applicable. It

is also clear that the use or nonuse of the words ‘‘in trust”?

‘is not the controlling criteria as to whether an express

trust has or has not been created.’’ (Oglesby v. Springfield

Marine Bank (1946), 395 Ill. 37, 49; Restatement (Second)

of Trusts §24(2) (1959).) The question of law arising in

such a case is ‘‘whether the settlor manifested an intention

to impose upon himself or upon a transferee of the prop-

erty, equitable duties to deal with the property for the

benefit of another person,’’ which is in effect ‘‘whether the

settlor manifested an intention to create the kind of rela-

—

oy 1 OO Ra BREA aire viet te ny

App. 27

tionship which to lawyers is known as a trust.’’ 1 Scott,

Law of Trusts §24, at 192 (3d ed. 1967).

Bell argues that the mortgage language is inconsistent

with the creation of a trust, citing Sears. The first incon-

sistency noted is that the mortgagors made payments to

the mortgagee, and the concept of payment is inconsistent

with a trust relationship. The court in Sears stated:

‘*Webster’s Second New International Dictionary

defines the verb ‘to pay’ as ‘to discharge one’s obli-

gation.’ Under the note here involved, the debtor

makes a payment and receives simply and only pro

tanto satisfaction of his debt. * * * All that we have

here from the language of this note is a binding direc-

tion imposed upon defendant as a creditor concerning

payment of taxes and insurance.’’ (1 Ill. App. 3d 621,

629.)

Bell’s theory is that the payments were merely a part of

the debtor-creditor relationship which existed between the

parties with respect to the advanced funds for the ultimate

payment of taxes and insurance premiums. A contrary

interpretation was made by the Pennsylvania Supreme

Court in Buchanan v. Brentwood Federal Savings & Loan

Association (1974), 457 Pa. 135, 150, 320 A.2d 117, 125,

which felt that such a construction of ‘‘pay’’ was hyper-

technical, and not in keeping with the reading of the agree-

ment as a whole, stating that ‘‘the word ‘pay’ was used

generically to mean tender, hand over, or deliver.’’

®3 The second inconsistency argued by Bell is that the

mortgage document does not require the segregation or

isolation of the advanced funds, which tends to show that

a trust was not intended. Sears held that the absence of

terms requiring the segregation of funds showed a ‘‘lack

of direction and intent’’ that the funds were to be held in

trust as a special deposit. (1 Ill. App. 3d 621, 628.) Of the

lack of segregation, one commentator wrote:

App. 28

‘The court’s reasoning [in Sears], however assumes

its conclusion that no trust exists; for, if the escrow

funds were intended to be held in trust, then the bank’s

failure to segregate the funds would indicate the

bank’s breach of that trust rather than demonstrate

that no trust was present.’’ (Note, Lender Account-

ability and the Problem of Noninterest-Bearing Mort-

gage Escrow Accounts, 54 Boston U.L. Rev. 516, 524

(1974).)

Neither alleged inconsistency is controlling on the issue

because the real question, of course, is whether the mort-

gagors intended to create a trust, notwithstanding that

they may not have known ‘‘the precise characteristics of

the relationship which is called a trust.’’ 1 Seott, Law of

Trusts §23, at 191.

an express trust is an explicit declaration of trust, or cir-

cumstances which show that a trust was intended to be

created. If an intention to create a trust can be fairly col-

lected from the language of the instrument in question,

the courts will give effect to that intention. (Stowell v.

Satorius (1952), 413 Ill. 482, 492.) No particular form or

words are necessary to create a trust. (Goldstein v. Han-

dley (1945), 390 Ill. 118.) As this court stated generally

in Williams v. Teachers Insurance & Annuity Association

(1973), 15 Ill. App. 3d 542, 546: ‘‘ Equity looks to the sub-

stance rather than the form; if a trust was created it does

not matter whether it is designated accurately, inaccurate-

ly or not at all.’’ Some of the considerations for identify-

ing the intention to create a trust are set forth in 89 C.J.S.

Trusts $43, at 776 (1955):

‘‘* * * the intention may be gathered from powers

granted and duties imposed and from manifest pur-

poses which cannot be accomplished except through a

trust, or from the relationship of the parties and acts

App. 29

affecting the title to, and possession of, the trust prop-

erty.”

agreement before us and the transaction of which it is a—

part. Plaintiffs borrowed money from defendant to pur-

chase a home, and gave a mortgage on their home to de-

fendant as security. The mortgage was guaranteed by the

Federal Housing Authority. Under the mortgage agree-

ment, the mortgagors remained primarily liable for the

payment of insurance premiums, taxes, and assessments

on the mortgaged property. The mortgagee required, how-

ever, that the mortgagors pay to it a certain amount every

month so that the mortgagee could make the payments

when these obilgations became due. Should the mortgagors

refuse or neglect to make the advance payments for these

obligations to the mortgagee, the mortgagee was entitled

to pay such obligations itself and tack the amount so ex-

pended onto the mortgagors’ indebtedness.

The mortgagee is allowed by law to require such monthly

payments. (12 C.F.R. §545.6—11.) The origins of this prac-

tice were explained in a recent case:

‘‘In the 1930’s substantial numbers of foreclosures

were caused by inability to pay annual assessments.

As a result of this, banks began requiring the monthly

tax payments. The theory was that individual home-

owners, especially small borrowers, would find it easier

to make monthly payments of one-twelfth the yearly

taxes, than to meet in a single payment the annual bill.

The practice has continued ever since.’’ (Buchanan v.

Brentwood Federal Savings & Loan Association

(1974), 457 Pa. 135, 141, 320 A.2d 117, 121.)

(See generally Note, Lender Accountability and the Prob-

lem of Noninterest-Bearing Mortgage Escrow Accounts, 54

Boston U.L. Rev. 516 (1974); Note, The Attack Upon the

App. 30

Tax and Insurance Escrow Accounts in Mortgages, 47

Temp. L.Q. 352 (1974) ; and Note, The Real Estate Escrow

Account—Recent Trends Toward Reform, 10 Ga. State

B.J. 618 (1974).) The primary purpose of the monthly

payments is to serve as an additional security device for

the protection of the mortgagee savings and loan associa-

tion’s interest in the mortgaged property. The mortgagee

knows that if these obligations are satisfied in a timely

fashion, its interest in the mortgaged property or its pro-

ceeds would not be impaired. Should the property be de-

stroyed by fire, the mortgagee would be protected by the

proceeds of a valid insurance policy. Similarly, by making

sure the taxes and assessments are paid, the mortgagee

protects itself from a tax sale of the property and the sub-

ordinate role the mortgagee must take to the taxing body.

intended to retain such an interest in the money given to

the mortgagee as would be consistent with the creation of

an express trust. Many courts which have dealt with simi-

lar cases have ruled that as a matter of law, the mortgagor

relinauishes all control over the money when it is tendered

to the mortgagee. It has been held that should a mortgagor

be declared bankrupt, the trustee in bankruptcy could not

recover the funds from the mortgagee, even where the

mortgage stated that the mortgagee ‘‘shall hold such

monthly payments in trust * * *.’? The court in In re Simon

(E.D. N.Y. 1958), 167 F. Supp. 214, 215, wrote that such

funds ‘‘are no longer within the control or jurisdiction of

the bankrupt.’’ In Central Suffolk Hospital Association v.

Downs (1961), 213 N.Y.S.2d 192, the mortgagor’s judg-

ment creditor attempted to reach the funds which, under

the terms of a similar FHA mortgage, were to be held by

the mortgagee ‘‘in trust to pay.’’ The court wrote:

of joke

App. 31

‘“‘The funds paid by the judgment debtors under the

foregoing provisions are no longer under their control

and consequently they would have no right to demand

or recover same from the mortgagee.’’ (213 N.Y.S.2d

192, 194.)

(See also Valerio v. College Point Savings Bank (1965),

264 N.Y.S.2d 343 48 Mise. 2d 91.) We have reached similar

conclusions. In Sears v. First Federal Savings & Loan

Association, the court wrote:

‘‘When the payments were made, the borrowers re-

tained no specific property rights in any of the sums

thus paid. They retained no right to refund of any

portion of any payment. The payment was uncondi-

tional except for a contractual right vested in the bor-

rower to have the taxes and insurance paid to the ex-

tent of the total of the monthly payments. Plaintiff

had no property rights beyond this in any payment

after it was made.”’ (1 Ill. App. 3d 621, 631.)

In Durkee v. Franklin Savings Association (1974), 17 Ill.

App. 3d 978, 982, 309 N.E.2d 118, the Second District Ap-

pellate Court held:

‘*Plaintiffs’ mortgage agreement is devoid of any lan-

guage that would allow them to receive back any or all

of their monthly partial tax and insurance payments

after such sum is paid to defendant.’’

®8 In the instant case, the mortgage does not contain

any language from which we can discern the mortgagors’

intention to retain any rights in the funds which would be

consistent with the creation of an express trust. The mort-

gagee is not impressed with any duty whatsoever to do

anything with the money except to use it to pay the taxes,

assessments, and hazard insurance premiums when they

become due and owing. (See Boyce v. National Commercial

Bank & Trust Co. (1964), 247 N.Y.S.2d 521, 41 Mise. 2d

1071.) Absent the showing of the plaintiffs’ intention to

App. 32

place an affirmative duty upon defendant to care for the

funds as a trustee, an express trust cannot be proven in

this case under the complaint before us. Although plain-

tiffs call to our attention the various Federal and State

laws, regulations, and guides which govern the operation

of savings and loar »*seciations, we have not been able to

find any provisic» » «ch states that a supervised lending

institution such »: Hell has the affirmative duty to act as

a trustee with regard to these advanced funds. Gibson v.

First Federal Savings & Loan Association (6th Cir. 1974),

504 F.2d 826, 829.

®9 Plaintiffs cite two cases from courts in other juris-

dictions which have held, under similar facts, that the

mortgagor has sufficiently put in issue the creation of an

express trust. In both cases, Buchanan v. Brentwood Fed-

eral Savings & Loan Association (1974), 457 Pa. 135, 320

A.2d 117, and Carpenter v. Suffolk Franklin Savings Bank

(1973), 362 Mass. 770, 291 N.E.2d 609, the underlying the-

ory was that funds deposited with a bank to be used for a

special purpose constitute trust funds.

‘*Where the mortgagor pays funds to a bank with

an expressed purpose that the funds shall be used for

a particular purpose, then the funds may be deemed

to be held in trust.’’ (362 Mass. 770, 777, 291 N.E.2d

609, 614; quoted in Buchanan, 457 Pa. 135, 147, 320

A.2d 117, 124.)

Illinois courts have consistently held that the relationship

between the parties in a case of this type arises when the

mortgage agreement is entered into, and not when the

mortgagor makes his first payment to the mortgagee. The

court in Durkee v. Franklin Savings Association (1974),

17 Ill. App. 3d 978, 981-82, discussing Illinois cases on

deposits for a special purpose, wrote:

App. 33

‘*Both cases involve true deposit relationships—a con-

tractual relationship between the depositor and the

depositary bank which arises from the delivery of

money by the depositor into the possession of the

bank. 10 Am. Jur. 2d Banks, sec. 337.

The contractual relationship between plaintiffs and

defendant Franklin Savings Association, however, did

not arise upon the delivery of the first monthly real

estate and insurance premium payments to defendant.

Rather, the contractual relationship between plaintiffs

and defendant arose upon plaintiffs’ execution of the

mortgage agreement wherein they promised ‘to pay’

the required monthly amounts to defendant.’’

In Oddo v. Western Savings & Loan Association (1974), 17

Ill. App. 3d 276 (abstract opinion), we ruled that the pre-

payments were not deposits in a legal sense. The cases

cited by plaintiffs are contrary to Illinois law in this re-

gard, and are not authority for the proposition that plain-

tiffs herein intended to create an express trust.

Accordingly, the trial court did not err in dismissing

that portion of plaintiffs’ complaint which alleged the cre-

ation of an express trust as to the funds held by defendant.

®10 In the alternative, plaintiffs’ complaint prays for

the imposition of a constructive trust upon Bell’s earnings

on the advance payments. It is alleged that defendant

fraudulently converted the earnings for its own use and

commingled the earnings with its general funds. Plaintiffs

conclude that defendant was unjustly enriched and should

be declared a constructive trustee of the earnings.

Constructive trusts are divided into two general classes:

‘‘one where actual fraud is considered as an equitable

ground for raising the trust, and the other where there is

a confidential relationship and the subsequent abuse of the

confidence reposed.’’ (Dial v, Dial (1959), 17 Ill.2d 537, 162

App. 34

N.E.2d 404, 406.) The complaint at bar alleges a bare

fraudulent conversion of earnings, but does not specifically

allege facts to show how the fraud was perpetrated. The

defendant openly admits that it treats the earnings as its

own, contending that it has a right to do so. At best, there

is a dispute as to the competing interests in the earnings;

we fail to see the fraud which must be clearly alleged to

state a cause of action for the imposition of a constructive

trust.

a confidential relationship is abused. Plaintiffs call our

attention to the decision in Janes v. First Federal Savings

& Loan Association (1974), 57 Ill.2d 398. In Janes, the

mortgagors-borrowers authorized their mortgagee-lender

to order a title insurance policy for them and to pay for

the policy from the loan proceeds. The mortgagee pur-

chased the policy and charged the mortgagors, but also

received a 10% discount or rebate from the title insurance

company which the mortgagors sought to recover under a

constructive trust theory. The language utilized by our

supreme court deserves careful attention:

‘The appellate court then considered the possibility

of the existence and breach of a trust, but rejected any

right to recover on such a theory on the ground that

‘the relationship of mortgagor and mortgagee does

not of itself show the existence of a confidential or

fiduciary relationship.’ More is involved here, how-

ever, than a relationship of mortgagor and mortgagee

‘of itself,’ and in our opinion count I of the complaint

alleges a fiduciary relationship. The loan statement

attached to the complaint is an accounting by Berwyn

for its disposition of the money which the plaintiffs

had borrowed from it. The statement recites the

amount borrowed by the plaintiffs, and it contains

their authorization to Berwyn to make specific disposi-

tions of that sum of money. Any disposition of those

funds for a purpose other than as authorized by the

App. 35

plaintiffs was improper and a violation by Berwyn of

the duty which it owed to the plaintiffs.’’ (57 Ill. 2d

398, 408-09.)

The plaintiffs herein submit that Janes is direct authority

for the conclusion that Bell is their fiduciary because more

is involved than a mortgagor-mortgagee relationship. A

close examination of Janes along traditional legai lines of

analysis shows that the cases are distinguishable. The

usual test for the existence of a fiduciary relationship is

whether a special trust or confidence has been reposed by

an innocent party. (Tarpoff v. Karandjeff (1964), 51 Ill.

App. 2d 454, 201 N.E.2d 549.) In Janes, the particular

arrangement of authorizing disbursement for the cost of

a title insurance poilcy necessarily involved confidence re-

posed in the lender-mortgagee, the confidence that the

lender would not pay out more than was authorized. By

the lender paying out the stated policy cost knowing full

well that the actual cost was lower because of the rebate,

the relationship of confidence with respect to the payouts

was abused. In our case, the plaintiffs’ complaint does not

allege any facts showing a relationship of special trust or

confidence as in Janes. To assert on appeal only that there

is more than the usual mortgagor-mortgagee relationship

is to disregard the well-known rules pertaining to the es-

tablishment of fiduciary relationships.

® 12 In light of our ruling, we need not consider the

class action aspects of this case. Zelickman v. Bell Federal

Savings & Loan Association (1973), 13 Ill. App. 3d 578,

301 N.E.2d 47.

For the above-mentioned reasons, the judgment of the

circuit court of Cook County dismissing plaintiffs’ com-

plaint for failure to state a cause of action is affirmed.

Judgment affirmed.

DEMPSEY and McNAMARA, JJ., concur.

App. 36

APPENDIX III

SUPREME COURT OF ILLINOIS

ORDER

Petition for Rehearing was filed, but Denied on

ber 23, 1977.

Novem

“od way

a se sittin

We ac ae

Baath iin seinen paid

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