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
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 pleadings 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 because 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 collected 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 finding that the mortgagee's language, "in trust to pay," did not create an express trust between mortgagor and
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) (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:
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. (Likewise, there is no language manifesting agreement that defendant 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 (c) requires plaintiffs to make the monthly advance payments 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
When the terms of a contract are plain, the instrument itself is the only source of intent of the parties. (Decatur Lumber & Manufacturing 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 implicit 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 application to the FHA for acceptance as an insured mortgagee, the defendant agreed to "analyze mortgagors' escrow accounts at least annually." The defendant therein further agreed to comply with the provisions of the FHA regulations 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 regulations 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
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 "[s]hall 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, assessments, 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 mortgagor." Laying aside, for the moment, the implicit assertion 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 misinterpret 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, etc. 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]xcept as provided by contract, a Federal association shall have no
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 pertinent part:
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. Additionally, 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 lender. As such, it is not subject to the terms of section 2. "[T]here is no regulation which requires supervised institutions 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
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 regulations 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 way be deemed to have controlled the intent of either party to the contract at the time of its formation. Furthermore, it is undisputed that administrative interpretations (as distinguished from administrative regulations) do not have the force and effect of law. In Gibson v. First Federal Savings & Loan Association (6th Cir.1974), 504 F.2d 826,
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 practice." (365 F.Supp. 975, 978.) As the Mortgagee's Guide was published after the formation of the contract in question, 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 and FHA), where the mortgage contract does not specifically incorporate the FHA regulations or expressly indicate agreement thereto, such regulations are not determinative 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 regulations is discernible from the mortgage document.
An affidavit by William C. Prather, general counsel for the United States Savings and Loan League, states in
(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 provisions of the mortgage must be judged in light of the custom and usage of commingling the funds and of not paying interest or earnings thereupon. We conclude that plaintiffs 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 deficiencies in their expressed intention on the basis that the contract herein was a contract of adhesion — a form contract 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
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 compensation 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, comment (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 duty 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 mortgagor and mortgagee `of itself' * * *." (57 Ill.2d 398, 408.) Nothing in the specific relationship of the parties here suggests anything other than the customary mortgagor-mortgagee relationship. Although the breach of a fiduciary relationship may justify the imposition of a constructive trust, plaintiffs have failed to allege facts sufficient to establish the creation of a fiduciary relationship or a breach thereof.
Defendant's cross-appeal claims that the Federal
For the above reasons, the judgments of the appellate and circuit courts are affirmed.
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
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 * * * 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 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,
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 create a trust."
In Andrew v. Union Savings Bank & Trust Co. (1935),
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: Judicial 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,
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).
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):
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 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 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:
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.