Brooks v. Valley Nat. Bank

• Decision Date: 26 April 1976
• Docket Number: No. 12334--PR,12334--PR
• Citation: 113 Ariz. 169,548 P.2d 1166
• Parties: Charles R. BROOKS, Appellant, v. The VALLEY NATIONAL BANK, a corporation, Appellee.
• Court: Arizona Supreme Court

Page 1166

548 P.2d 1166

113 Ariz. 169

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

No. 12334--PR.

Supreme Court of Arizona, In Banc.

April 26, 1976.

Yankee & Bernstein by James A. Yankee, Phoenix, for appellant.

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

HOLOHAN, Justice.

Appellant Brooks filed an action for himself and on behalf of all mortgage borrowers of appellee, Valley National Bank for a declaratory judgment and an accounting of that portion of mortgage payments paid for taxes and insurance. The action also sought compensatory and punitive damages from the appellee. The superior court granted the motion of appellee to dismiss the action. On appeal, Division One of the Court of Appeals affirmed. Brooks v. Valley pNational Bank, 24 Ariz.App. 484, 539 P.2d 958 (1975). Appellant's petition for review was accepted by this Court. The opinion of the Court of Appeals is vacated. The judgment of the superior court is affirmed.

In May, 1968, appellant Charles R. Brooks and his wife purchased a residence and assumed an outstanding mortgage which had been contracted with appellee Valley National Bank by appellant's predecessor in interest. Under the terms of the mortgage, appellant was required to pay to the appellee, in addition to monthly payments of principal and interest, a monthly prorated amount to secure the payment of taxes, insurance premiums, and special assessments on the mortgaged premises. The appellee assigned the mortgage to the Dollar Savings Bank of New York, which designated appellee as the servicing agent of the mortgage.

The action by the appellant challenged the practice of the appellee bank in its use of the monthly amounts collected from mortgagors for payment of taxes and insurance--the so-called impoundments. The appellant argued that the amounts collected by the bank were being used by it in its banking business, and the impoundment funds were not actually set aside for the use required under the mortgage. As formulated by the appellant, the essence of his claim for relief rests on two stated grounds:

'(1) Relief Grounded on Contract

Defendant has breached its fiduciary duties as trustee in the funds in that it has affirmatively used the impound account for its own benefit and not the benefit of the individual beneficiaries.

'(2) Equitable Relief

Defendant has become 'unjustly enriched' to the extent that it has benefitted from the use of said impound funds.'

The issue of whether appellant has properly asserted a class action is not before us; the question for review is whether the appellant is entitled to relief under either of his theories.

The controversy concerning the use of impoundment funds by banks and savings and loan associations has been the subject of litigation in a number of jurisdictions: Manchester Gardens, Inc. v. Great West Life Assurance Co., 205 F.2d 872 (D.C. Cir. 1953); Surrey Strathmore Corp. v. Dollar Savings Bank of New York, 36 N.Y.2d 173, 366 N.Y.S.2d 107, 325 N.E.2d 527 (1975); Buchanan v. Brentwood Federal Savings and Loan Association, 320 A.2d 117 (Pa.1974); Carpenter v. Suffolk Franklin Savings Bank, 291 N.E.2d 609 (Mass.1973); Tucker v. Pulaski Federal Savings & Loan Association, 481 S.W.2d 725 (Ark.1972); Abrams v. Crocker-Citizens National Bank, 41 Cal.App.3d 55, 114 Cal.Rptr. 913 (1974); Durkee v. Franklin Savings Association, 17 Ill.App.3d 978, 309 N.E.2d 118 (1974); Yudkin v. Avery Federal Savings and Loan Association, 507 S.W.2d 689 (Ky.App.1974); Zelickman v. Bell Federal Savings and Loan Association, 13 Ill.App.3d 578, 301 N.E.2d 47 (1973); Sears v. First Federal Savings and Loan Association of Chicago, 1 Ill.App.3d 621, 275 N.E.2d 300 (1971). The decisions in the Illinois cases are based on mortgage instruments with somewhat different provisions than those found in the mortgage in this case, but the other cases involve mortgage provisions substantially the same as the one in issue. Common to most of the above cases is the attempt by the mortgagor to impose a trust on the impoundment funds. The mortgage provision upon which appellant relies provides:

'And the Mortgagor, in order more fully to protect the security of this mortgage, covenants and agrees as follows:

'1. That he will pay the indebtedness, as hereinbefore provided.

'2. That, together with, and in addition to, the monthly payments 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) If this mortgage and the said note secured hereby are insured under the provisions of the National Housing Act and so long as they continue to be so insured, one-twelfth (1/12) of the annual mortgage insurance premium for the purpose of putting the Mortgagee in funds with which to discharge the said Mortgagee's obligation to the Federal Housing Commissioner for mortgage insurance premiums pursuant to the applicable provisions of the National Housing Act and Regulations thereunder. The Mortgagee shall, on the termination of its obligation to pay mortgage insurance premiums, credit to the account of the Mortgagor all payments made under the provisions of this subsection which the Mortgagee has not become obligated to pay to the Federal Housing Commissioner.

'(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 assessments 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 Mortgagee in trust to pay said ground rents, premiums, taxes, and special assessments.

'(c) All payments mentioned in the two preceding 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:

(I) premium charges under the contract of insurance with the Federal Housing Commissioner;

(II) ground rents, taxes, special assessments, fire and other hazard insurance premiums;

(III) interest on the note secured hereby; and

(IV) amortization of the principal of said note.

Any deficiency in the amount of any such aggregate monthly payment shall, unless made good by the Mortgagor 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 exceed two cents (2cents) for each dollar ($1) of each payment more than fifteen (15) days in arrears to cover the extra expense involved in handling delinquent payments.

'3. That if the total of the payments made by the Mortgagor under (b) of paragraph 2 preceding shall exceed the amount of payments actually made by the Mortgagee for ground rents, taxes or assessments or insurance premiums, as the case may be, such excess shall be credited by the Mortgagee on subsequent payments to be made by the Mortgagor. If, however, the monthly payments made by the Mortgagor under (b) of paragraph 2 preceding shall not be sufficient to pay ground rents, taxes and assessments, and insurance premiums, as the case may be, when the same shall become due and payable, then the Mortgagor shall pay to the Mortgagee any amount necessary to make up the deficiency, on or before the date when payment of such ground rents, taxes, assessments, or insurance premiums shall be due. If at any time the Mortgagor shall tender to the Mortgagee, in accordance with the provisions of the note secured hereby, full payment of the entire indebtedness represented thereby, the Mortgagee shall, in computing the amount of such indebtedness, credit to the amount of the Mortgagor all payments made under the provisions of (a) of paragraph 2 hereof which the Mortgagee has not become obligated to pay to the Federal Housing Commissioner, and any balance remaining in the funds accumulated under the provisions of (b) of paragraph 2 hereof. If there shall be a default under any of the provisions of this mortgage resulting in a public sale of the premises covered hereby, the Mortgagee shall be, and hereby is, authorized and empowered to apply, at the time of the commencement of such proceedings, the balance then remaining in the funds accumulated under (b) of paragraph 2 preceding, as a credit against the amount of principal then remaining unpaid under said note and shall properly adjust any payments which shall have been made under (a) of paragraph 2.'

The appellant argues that the impoundment funds in paragraph 2(b) are to be held In trust to pay specific debts to third persons. He asserts that the bank has not held the funds in trust but uses them for their own purposes, and this use is an abuse of the trust for which the bank should respond in damages and account for any profits which it may have made on the use of the funds.

The two principal cases lending some support to appellant's position are: Carpenter v. Suffolk Franklin Savings Bank, supra, and Buchanan v. Brentwood Federal Savings and Loan Association, supra. In each of the foregoing trial courts dismissed complaints by plaintiffs which sought to impose a trust on impoundment funds. The decisions of the trial courts were reversed in each instance because the pleadings alleged sufficient facts, if proven, to establish a trust. In the Carpenter case the Massachusetts court did not have the written instrument before it, but the facts alleged were sufficient to require a trial of the issue. The written instruments were before the Pennsylvania Supreme Court in the Buchanan...