Avila v. CitiMortgage, Inc.

• Decision Date: 04 September 2015
• Docket Number: No. 14–1949.,14–1949.
• Citation: 801 F.3d 777
• Parties: Daniel AVILA, on behalf of himself and all other persons similarly situated, Plaintiff–Appellant, v. CITIMORTGAGE, INCORPORATED, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

801 F.3d 777

Daniel AVILA, on behalf of himself and all other persons similarly situated, Plaintiff–Appellant

v.CITIMORTGAGE, INCORPORATED, Defendant–Appellee.

No. 14–1949.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 29, 2014.

Decided Sept. 4, 2015.

Sidney Jerome Levy, Attorney, S. Jerome Levy & Associates, P.C., Jonah Orlofsky, Attorney, Law Offices of Jonah Orlofsky, Chicago, IL, for Plaintiff–Appellant.

Christopher Comstock, Attorney, Lucia Nale, Attorney, Thomas V. Panoff, Attorney, Mayer Brown LLP, Chicago, IL, for Defendant–Appellee.

Before EASTERBROOK, WILLIAMS, and SYKES, Circuit Judges.

Opinion

SYKES, Circuit Judge.

Daniel Avila alleges that CitiMortgage, Inc., violated a fiduciary duty and breached its mortgage agreement with him by using the payout from his homeowner's insurance policy to pay down his loan rather than repair his damaged house. The district court dismissed Avila's suit—a proposed class action—for failure to state a claim, reasoning that (1) his allegations do not support a fiduciary duty on CitiMortgage's part; and (2) Avila was barred from pursuing his contract claim because he had materially defaulted on his own contractual obligations by missing several mortgage payments prior to CitiMortgage's purported breach.

We agree with the district court on the first point: Avila's allegations of a fiduciary relationship are inadequate as a matter of law. But his claim that the mortgage agreement remained enforceable after his missed payments is plausible in light of the agreement's structure and the remedies it prescribes in the event of default. The breach-of-contract claim should not have been dismissed.

I. Background

Avila bought his Chicago home in 2005 with a $100,500 mortgage loan from CitiMortgage. Five years later, a serious fire made the house uninhabitable. Avila filed a claim with his homeowner's insurance carrier, which paid out just over $150,000. Pursuant to the terms of the mortgage agreement, CitiMortgage took control of the insurance proceeds. Avila selected a contractor, and CitiMortgage paid $50,000 of the insurance money to get the restoration underway. CitiMortgage later inspected the work and found that it was of poor quality and needed to be redone, but by that time Avila had missed several mortgage payments. CitiMortgage then applied the remaining $100,000 from the insurance payout toward Avila's outstanding mortgage loan. Avila's home was never repaired.

The parties' respective obligations regarding homeowner's insurance are spelled out in section 5 of the mortgage agreement.¹ Avila was required to obtain a homeowner's policy that included a standard mortgage clause and named CitiMortgage as a loss payee.² CitiMortgage had the right to disapprove Avila's choice of carrier, take possession of the insurance documents, and demand proof that Avila was paying the premiums.

Section 5 also addressed the parties' obligations in the event that damage to the property resulted in an insurance claim:

Unless Lender and Borrower otherwise agree in writing, any insurance proceeds ... shall be applied to restoration or repair of the Property, if the restoration or repair is economically feasible and Lender's security is not lessened. During such repair and restoration period, Lender shall have the right to hold such insurance proceeds until Lender has had an opportunity to inspect such Property to ensure that the work has been completed to Lender's satisfaction.... ... Lender shall not be required to pay Borrower any interest or earnings on such proceeds.... If the restoration or repair is not economically feasible or Lender's security would be lessened, the insurance proceeds shall be applied to the sums secured by this Security Instrument, whether or not then due, with excess, if any, paid to Borrower.

(Emphasis added.) Section 5 also provided that CitiMortgage could use the insurance proceeds to pay down the loan on the occurrence of any of three additional conditions: if the borrower abandoned the property, ignored notice concerning the insurance carrier's offer to settle a claim, or if CitiMortgage foreclosed on the property.

As we've noted, CitiMortgage used the insurance proceeds to pay down the loan rather than repair the house, but it never claimed that restoration was economically infeasible or would reduce its security interest. Nor had any of the three special conditions described above occurred.

Avila sued CitiMortgage in Cook County Circuit Court alleging that its actions breached a fiduciary duty and the mortgage contract. He sought to represent a class of all defaulting CitiMortgage borrowers whose homeowner's insurance proceeds had been applied to their mortgage loans rather than home repairs. CitiMortgage removed the case to federal court.³

CitiMortgage moved to dismiss for failure to state a claim. See Fed.R.Civ.P. 12(b)(6). The district court granted the motion, concluding that CitiMortgage owed no fiduciary duty and Avila was precluded from bringing a breach-of-contract claim because his default on his payment obligations preceded CitiMortgage's alleged breach.⁴ The dismissal order was without prejudice, and Avila twice tried to amend his complaint. The later iterations of the complaint were also dismissed—the last one with prejudice. This appeal followed.

II. Discussion

We review de novo the judge's order dismissing Avila's complaint under Rule 12(b)(6) for failure to state a claim. Carmody v. Bd. of Trs. of the Univ. of Ill., 747 F.3d 470, 471 (7th Cir.2014). To survive a motion to dismiss, a complaint must contain sufficient factual allegations to state a claim for relief that is legally sound and plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). Avila brought state-law claims for breach of fiduciary duty and breach of contract. Illinois law controls.

A. Fiduciary Duty

Avila alleges that CitiMortgage's use of his homeowner's insurance proceeds to pay down his mortgage loan was a breach of its duty as a fiduciary. “[I]n order to state a claim for breach of fiduciary duty, [a complaint] must ... allege[ ] that a fiduciary duty exists, that the fiduciary duty was breached, and that such breach proximately caused the injury of which the plaintiff complains.” Neade v. Portes, 193 Ill.2d 433, 250 Ill.Dec. 733, 739 N.E.2d 496, 502 (2000). The judge concluded that Avila's complaint failed to allege facts sufficient to support the existence of any fiduciary duty. We agree.

“A fiduciary relationship exists when there is a special confidence reposed in one who, in equity and good conscience, is bound to act in good faith and with due regard to the interest of the one reposing the confidence.” Hensler v. Busey Bank, 231 Ill.App.3d 920, 173 Ill.Dec. 390, 596 N.E.2d 1269, 1274 (1992). Some fiduciary relationships exist as a matter of law (e.g., the attorney-client relationship), but the mortgagor-mortgagee relationship is not one of them.⁵ See Teachers Ins. & Annuity Ass'n of Am. v. La Salle Nat'l Bank, 295 Ill.App.3d 61, 229 Ill.Dec. 408, 691 N.E.2d 881, 888 (1998). Avila counters that the fiduciary relationship at issue in this case “is limited to the use of the insurance proceeds” and arose because “the insurance proceeds [were] placed in the hands of [CitiMortgage],” thus “creat[ing] an escrow” under Illinois law.

An escrow is “[a] legal document or property delivered by a promisor to a third party to be held by the third party for a given amount of time or until the occurrence of a condition, at which time the third party is to hand over the document or property to the promisee.” Black's Law Dictionary (10th ed.2014); see also Wiczer v. Wojciak, 391 Ill.Dec. 400, 30 N.E.3d 670, 679 (App.Ct.2015). In effect, an escrow reduces the degree of trust necessary to complete a deal by reducing the risk that one party won't turn over money or documents as promised. Under Illinois law “[a]n escrow agent has a fiduciary duty to the party making the deposit and the party for whose benefit the deposit is made. As a result, an escrow agent must act impartially toward all parties.”⁶

Wells Fargo Bank Minn., N.A. v. Envirobusiness, Inc., 387 Ill.Dec. 243, 22 N.E.3d 125, 136 (App.Ct.2014) (citation omitted). More specifically, an escrow agent's “duty [is] to act only in accordance with the ... escrow instructions.” Int'l Capital Corp. v. Moyer, 347 Ill.App.3d 116, 282 Ill.Dec. 578, 806 N.E.2d 1166, 1170 (2004). If under the mortgage agreement CitiMortgage was an escrow agent, then Avila has adequately alleged the existence of a fiduciary duty.

CitiMortgage objects that Avila's escrow theory comes too late—he never used the word “escrow” in any of his three complaints and did not argue below that a fiduciary relationship between the parties arose based on an escrow. There's no question that Avila could have helpfully clarified his case if he had characterized the alleged fiduciary relationship as an escrow from the beginning. That said, plaintiffs are not required to plead specific legal theories. King v. Kramer, 763 F.3d 635, 642 (7th Cir.2014). Avila's complaint alleged that a fiduciary duty existed because “Citi[Mortgage] had the right to retain exclusive control over these insurance proceeds” and he “had no right to object to or interfere with Citi[Mortgage]'s determination regarding the satisfactory completion of the [repair] work.” These allegations gave CitiMortgage and the court adequate notice of the scope of, and basis for, the alleged fiduciary relationship. Cf. Vincent v. City Colleges of Chi., 485 F.3d 919, 923 (7th Cir.2007) (holding that Rule 8(a)(2) of the Federal Rules of Civil Procedure “calls for a short and plain statement; the plaintiff pleads claims, not facts or legal theories”).

It's true that Avila did not utter a word about an “escrow theory” in opposition to any of CitiMortgage's Rule 12(b)(6) motions in the...