Kronisch v. Howard Sav. Inst.

• Decision Date: 04 August 1978
• Citation: 392 A.2d 178,161 N.J.Super. 592
• Parties: Myron W. KRONISCH et al., Plaintiffs-Appellants, v. The HOWARD SAVINGS INSTITUTION, etc., Defendant-Respondent and Cross-Appellant. Harold CHAMBERS et al., Plaintiffs-Appellants, v. BERKELEY SAVINGS AND LOAN ASSOCIATION, etc., Defendant-Respondent and Cross-Appellant.
• Court: New Jersey Superior Court — Appellate Division

Page 592

161 N.J.Super. 592

392 A.2d 178

Myron W. KRONISCH et al., Plaintiffs-Appellants, v. The HOWARD SAVINGS INSTITUTION, etc., Defendant-Respondent

and Cross-Appellant.

Harold CHAMBERS et al., Plaintiffs-Appellants, v. BERKELEY SAVINGS AND LOAN ASSOCIATION, etc.,

Defendant-Respondent and Cross-Appellant.

Superior Court of New Jersey, Appellate Division.

Argued May 25, 1976.

Remanded July 19, 1976.

Reargued June 7, 1978.

Decided Aug. 4, 1978.

Cyrus J. Bloom, Newark, for plaintiffs-appellants (Cyrus J. Bloom and Barbara J. Williams, Newark, on the brief).

William H. Hyatt, Jr., Newark, for defendant-respondent and cross-appellant The Howard Sav. Inst. (Pitney, Hardin & Kipp, Newark, attorneys).

Arthur D. Grossman, Newark, for defendant-respondent and cross-appellant Berkeley Federal Sav. (Fox & Fox, Newark, attorneys).

Before Judges LYNCH, LARNER and HORN.

PER CURIAM.

Originally certified as a class action by the trial judge, 133 N.J.Super. 124, 335 A.2d 587 (Ch.Div.1975), this matter was remanded by the Appellate Division to be tried as a "test case," reserving for future consideration whether it should be certified as a class action. 143 N.J.Super. 423, 363 A.2d 376 (App.Div.1976). Pursuant to that remand the Chancery Division entered judgment adverse to plaintiffs on the merits of the cause of action. 154 N.J.Super. 576, 382 A.2d 64 (Ch.Div.1977). Plaintiffs now appeal.

The facts are detailed in the cited decisions and need not be repeated here. Suffice it to say that plaintiffs, mortgagors under G.I. and F.H.A. mortgages, appeal from a decision holding that, although the mortgage instruments provide that advance, estimated tax payments paid to defendant mortgagees (hereinafter sometimes called "the banks") are to be held "in trust" for payment of taxes, the parties did not intend to create a trust thereby but only to impose upon the mortgagees a contractual duty to apply the payments to taxes. Thus, defendant mortgagees were not held accountable by the trial court for any money earned through investment of said funds.

Defendant mortgagees cross-appeal from the trial judge's decision to enjoin them from using the "in trust" language in such mortgages in the future and reserving the issue of counsel fees and awarding costs.

I

Nature of the relationship: trust or debt

Plaintiffs contend that a trust was created because of the "in trust" language of the mortgage instruments and, further, on the theory that the tax payments were "deposits for a special purpose." We conclude that such contentions are erroneously based on a too literal reading of the "in trust" language, isolating it from the remaining provisions of the instruments, and fail to consider established principles of trust law as recognized by leading authorities in the field and as applied, in virtual unanimity, by the decisional law of this and other states.

Whether a trust or a debt is created when one party pays money to another depends primarily upon their intent, State v. Atlantic City Electric Co., 23 N.J. 259, 266, 128 A.2d 861 (1957); State v. Western Union Telegraph Co., 17 N.J. 149, 152, 110 A.2d 115 (1954). It is well established that use of the phrase "in trust" in connection with a particular transaction does not dispose of the question of intention, and that even where such language is used a debtor-creditor relation may nonetheless arise. 1 Scott, Trusts (3 ed. 1967), § 24 at 194-195; Restatement 2d, Trusts, § 24, Comment (b) at 68 (1959); Brooks v. Valley National Bank, 113 Ariz. 169, 548 P.2d 1166, 1171 (Sup.Ct.1976). Further, the mere fact that a bank or other entity has accepted funds for transmittal to a third party does not necessarily give rise to a trust relationship. Again, the question is one of intent. See State v. Western Union Telegraph Co., supra, 17 N.J. at 152, 110 A.2d 115.

In determining whether the parties intended to create a trust or merely a debt, several factors must be considered. Thus, in Restatement 2d, Trusts, supra, § 12, Comment (g) at 37, it is said:

G. Manifestation of intention. If one person pays money to another, it depends upon the manifested intention of the parties whether a trust or a debt is created. If the intention is that the money shall be kept or used as a separate fund for the benefit of the payor or a third person, a trust is created. If the intention is that the person receiving the money shall have the unrestricted use thereof, being liable to pay a similar amount whether with or without interest to the payor or to a third person, a debt is created.

The intention of the parties will be ascertained by a consideration of their words and conduct in the light of all the circumstances. Among the circumstances which may be of importance in determining the intention of the parties are: (1) the presence or absence of an agreement to pay interest on the money paid; (2) the amount of money paid; (3) the time which is to elapse before the payee is to be called upon to perform his agreement; (4) the relative financial situation of the parties; (5) the relations between the parties; (6) their respective callings; (7) the usage or custom in such or similar transactions.

In applying these principles in the case at bar, it must first be recognized that plaintiffs and defendants, by reason of their mortgagor-mortgagee relationship, stand in a debtor- creditor relation and that the advance tax payments were required solely as further security for the mortgage debt. Thus, the payments were intended to benefit the banks, not plaintiffs. In State v. Atlantic City Electric Co., supra, the Supreme Court, in determining whether utility deposits were held by defendant as a trustee, considered this factor as significant in finding that no trust relation existed: "The individual consumer was not to retain any beneficial interest in the money deposited, the security arrangement obviously being solely for the benefit of the company." 23 N.J. at 269, 128 A.2d at 867; Petherbridge v. Altadena Federal S. & L. Ass'n, 79 Cal.App.3d 509, 145 Cal.Rptr. 87, 96 (D.Ct.App.1978).

Second, the terms of the mortgage instruments themselves indicate that the parties considered the tax payments as part of the "debt" created by the loan and mortgage. The instruments state flatly that failure to pay the estimated taxes in advance shall constitute a deficiency and default, and that upon such default defendants may opt to declare the entire indebtedness immediately due and payable. Thus, it is clear that the tax payments were in no way different from the payments on account of the principal and interest due under the mortgage, the only exception being that defendants thereby became obligated to satisfy the taxes. As such, the transaction partakes more of a debtor-creditor relation than of a trust relation. This is also evidenced by the fact that excess payments for taxes, insurance, ground rents and special assessments "shall be Credited on subsequent payments" not held in a separate account for future charges.

Third, the mortgage instruments make no provision for segregating tax payments in a separate account. In fact, as indicated above, the instruments affirmatively indicate that such payments would not be segregated. The fact that there is no provision for segregating the payments and that the payments were, indeed, not segregated provides strong evidence that no trust was intended. See State v. Atlantic City Electric Co., supra, 23 N.J. at 268-269, 128 A.2d 861; State v. Western Union Telegraph Co., supra, 17 N.J. at 152-153, 110 A.2d 115.

Further, plaintiffs assert that a trust relationship is indicated by the fact that defendants were not required to pay interest on the tax payments. True, such a circumstance is ordinarily probative of the existence of a trust. State v. Atlantic City Electric Co., supra, 23 N.J. at 266, 128 A.2d 861. However, payment of interest is but one factor which the courts may assess and is not determinative in itself. McGlynn v. Schultz, 90 N.J.Super. 505, 517, 218 A.2d 408 (Ch.Div.1966), aff'd 95 N.J.Super. 412, 231 A.2d 386 (App.Div.1967). As said in 1 Scott, op. cit., § 12.2 at 112:

No agreement to pay interest. Where there is no agreement for the payment of interest, other circumstances must be resorted to in order to determine whether a trust or a debt is created. The question in each case is whether it was intended that the person receiving the money should hold it for the benefit of another, or whether it was intended that he might use it as his own, being under a merely personal liability to pay a similar amount of money. In the latter case a debt and not a trust is created. In most cases, of course, the language of the parties or the character of the transaction makes it clear which relation was contemplated.

Here, as noted earlier, the "language of the parties" looking at the documents as a whole and the "character of the transaction" are strongly indicative of a debtor-creditor relation.

Also, the conduct of the parties belies any intention to create a trust. Not only have defendants commingled the tax payments with their general funds ever since the mortgage payments first became due, but plaintiffs themselves never suggested or indicated in any way that defendants could not do so. Further, it is simply contrary to common sense that plaintiffs and defendants intended to create a trust, requiring defendants to establish a separate account for the tax funds and precluding them from merely mingling such sums in their general funds. As Professor Bogert notes:

In deciding these questions account should be taken of the practices of banks in incurring and satisfying all their obligations. They customarily intend to, and do, meet obligations out of any assets which are convenient at the time, and are loathe to commit themselves to satisfying claims out of particular, earmarked assets. This practice facilitates speed and ease of administration. Earmarking and setting...