Brooks v. Valley Nat. Bank

• Decision Date: 09 September 1975
• Docket Number: CA-CIV
• Citation: 24 Ariz.App. 484,539 P.2d 958
• Parties: Charles R. BROOKS, Appellant, v. The VALLEY NATIONAL BANK, a corporation, Appellee. No 12481.
• Court: Arizona Court of Appeals

Page 958

539 P.2d 958

24 Ariz.App. 484

Charles R. BROOKS, Appellant, v. The VALLEY NATIONAL BANK, a corporation, Appellee.

No 1 CA-CIV 2481.

Court of Appeals of Arizona, Division 1, Department B.

Sept. 9, 1975.

Rehearing Denied Oct. 10, 1975.

[24 Ariz.App. 485] Yankee & Bernstein, by James A. Yankee, Phoenix, for appellant.

Snell & Wilmer, by George H. Lyons and John J. Bouma, Phoenix, for appellee.

OPINION

JACOBSON, Presiding Judge.

Was a cause of action stated against a collector of mortgage payments to account for profits derived by the collector in investing moneys received from periodic payments for taxes and insurance? This is the sole question presented on this appeal.

Appellant, Charles R. Brooks, brought an action on behalf of himself and others similarly situated ¹ against the appellee, Valley National Bank (Bank), seeking a declaratory judgment and an accounting for alleged profits earned by the Bank from investments of monies received from Brooks in payment of his obligations for insurance and taxes, which monies were received along with the monthly obligation covering interest and principal and as aprt of the monthly payment.

The operative facts are not in dispute. On May 2, 1958, Walter J. Gray and Alva M. Gray entered into a mortgage contract with the Bank, a national banking association regulated by the Federal Reserve Board, whereby they became obligated to pay to the Bank monthly payments covering interest and principal on their primary obligation, plus 1/12 of the estimated real estate taxes, insurance and ground rents. The mortgage in this regard states:

'The mortgagor will pay to the mortgagee . . . 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 . . . plus taxes and assessments next due . . . such sums to be held by mortgagee in trust to pay said ground rents, premiums, taxes and special assessments.'

That portion of the monthly payment relating to taxes, insurance and ground rents is generally referred to as 'impounds'. On May 24, 1958, Brooks assumed the Gray mortgage.

On December 10, 1958, the Bank assigned the Gray mortgage to the Dollar Savings Bank of New York, and at the time this action was commenced, the Bank was only the servicing agent for this mortgage. There is no contention, however, that because of this servicing agent status the Bank has not received or used the impounds under this mortgage. In fact, such impounds are deposited by the Bank's real estate department in the Bank's demand deposits account where they are available for the general investment policies of the Bank. The Bank in turn, pays the tax bills and insurance premiums, semi-annually as to taxes, and either every two or three years as to insurance.

Brooks contends that his complaint states a valid cause of action, at least so as to survive a motion to dismiss, on two theories:

(1) That a trust relationship exists between himself and the Bank in regards to impounds and that the Bank breached its fiduciary duty as trustee by using the res of the trust (the impounds) for its own benefit and not for the benefit of its beneficiary, Brooks, and

(2) that the Bank has become unjustly enriched to the extent that it has benefited from use of the impound funds.

Brooks's first contention is that because the mortgage document refers to the impounds being held by the Bank 'in trust' for the payment of taxes and insurance (ground rents are not present in this case), a trust relationship was created between the mortgagor and the mortgagee, with the Bank as trustee, and that the legal duties flowing from this relationship attached to the Bank's use of the impound funds.

The issue of whether a mortgagee's obtaining impound funds in connection with monthly mortgage payments creates a trust relationship as to those funds has been the subject of increased litigation in the recent past. The leading case upholding the trust theory is Carpenter v. Suffolk Franklin Savings Bank, Mass., 291 N.E.2d 609 (1973). In Carpenter, as here, the matter came to the Massachusetts Supreme Judicial Court based on a motion to dismiss without an evidentiary hearing. Moreover, the Massachusetts appellate court did not have before it the mortgage document which it was alleged created the trust agreement and thus was limited to a determination of whether, if true, the allegations of the mortgagor's complaint stated a cause of action. Among the allegations of the complaint was an averment that the mortgagee bank held the impound funds 'as escrowee'. The Carpenter court held that such an allegation:

'. . . puts in issue the creation of a trust. The corpus of the alleged trust is identified. (citation omitted). . .. There is nothing in the plaintiffs' allegation that necessarily precludes a fiduciary relationship and there are sufficient allegations that could lead to a finding that the tax instalments were impressed with a trust. The bank, which has not disputed the alleged obligation of the mortgage and loan agreements, could be held to have assumed the role of a fiduciary over the trust. If the defendant, as a fiduciary, invested the tax payments and accumulated a profit thereon, which the defendant's demurrer is considered to admit (citation omitted) then an accounting, as prayed for by the plaintiffs, would be an appropriate form of relief to determine what, if anything, is due the plaintiffs. (citations omitted).' 291 N.E.2d at 615.

However, the Carpenter court was quick to point out that 'whether a trust was created depends upon the intention of the parties 'manifested by their words and conduct and the end to be accomplished',' 291 N.E.2d at 614 and that their holding 'limited to the present record, is simply that there are sufficient averments in the plaintiff's bill to state a cause of action.' 291 N.E.2d at 616.

A like result has been reached in Pennsylvania, Buchanan v. Brentwood Federal Savings & Loan Ass'n., 457 Pa. 135, 320 A.2d 117 (1974) and in California, Abrams v. Crocker-Citizens National Bank, 41 Cal.App.3d 55, 114 Cal.Rptr. 913 (1974). It is interesting to note that the mortgage in Abrams contained language that impounds were held 'in trust', and that both cases reached the appellate court without evidentiary hearings on the trust issue.

On the other hand, contrary authority exists. In Surrey Strathmore Corp. v. Dollar Savings Bank, 36 N.Y.2d 173, 325 N.E.2d 527 (1975) the New York Court of Appeals had before it a mortgage which stated that impounds were held 'in trust' and the mortgagor sought to establish its right to the income, if any, received by the mortgagee with respect to the monies paid as impounds. Again, the matter came to the appellate court without an evidentiary hearing. The court, after stating that the words 'in trust' did not afford any conclusionary grounds as to the true status of the parties' relationship, stated:

'We observe that the written expression of the agreement of the parties contains no explicit provision, one way or the other, with respect to payment of interest or earnings on the tax payments. The payment of interest or earnings was not indispensable to effectuate the objectives of the mortgage agreement and there is no other provision of the written instrument from which it may be inferred that the parties intended that there be payment of interest or earnings. Indeed, from the parties' silence the inference may be drawn that no such payment was intended. . .. There being no express agreement of the parties and no predicate for any inference that such an agreement was intended, we conclude that this mortgagor is not entitled to the relief it now seeks.' 325 N.E.2d at 529--30.

In accord with the holding of the New York Court, See Manchester Gardens, Inc. v. Great West Life Assur. Co., 92 U.S.App.D.C. 320, 205 F.2d 872 (1953); Durkee v. Franklin Savings Ass'n., 17 Ill.App.3d 978, 309 N.E.2d 118 (1974); Zelickman v. Bell Fed. Sav. & Loan Ass'n., 13 Ill.App.3d 578, 301 N.E.2d 47 (1973); Sears v. First Fed. Savings & Loan Ass'n., 1 Ill.App.3d 621, 275 N.E.2d 300 (1971); Yudkin v. Avery Fed. Sav. & Loan Ass'n., 507 S.W.2d 689 (Ky.1974). While the cases from Illinois can possibly be distinguished based upon the particular language of the mortgages involved an the Kentucky case can be distinguished based on the relief prayed for, we are of the opinion that all jurisdictions which have considered this problem, reaching either pro or con conclusions, have relied primarily upon the same underlying legal principals in reaching their respective conclusions.

In our opinion, these agreed upon principles are:

(1) That the presence or absence of words such as 'in trust', 'trustee' or 'beneficiary' do not necessarily manifest an intent to create a trust relationship. State v. Coerver, 100 Ariz. 135, 412 P.2d 259 (1966). Surrey Strathmore Corp. v. Dollar Savings Bank, supra.

(2) Whether a trust is created depends upon the intention of the parties to be ascertained from their words, and conduct in light of the surrounding circumstances. Abrams v. Crocker-Citizens National Bank, supra; Carpenter v. Suffolk Franklin Savings Bank, supra.

(3) A debt is not a trust. Restatement 2d., Trusts § 12.

(4) In establishing a trust there must be a res or specific property that forms the subject matter of the trust. Sears v. First Federal Savings & Loan Ass'n., supra; Bogert, Trust and Trustees, § 111 (2nd Ed. 1964).

As can be seen, the...