Mid-America Nat. Bank of Chicago v. First Sav. and Loan Ass'n of South Holland

• Citation: 161 Ill.App.3d 531,113 Ill.Dec. 367,515 N.E.2d 176
• Decision Date: 16 September 1987
• Docket Number: No. 86-0417,MID-AMERICA,86-0417
• Parties: , 113 Ill.Dec. 367 NATIONAL BANK OF CHICAGO, etc., et al., Plaintiffs-Appellants, v. FIRST SAVINGS AND LOAN ASSOCIATION OF SOUTH HOLLAND, et al., Defendants-Appellees.
• Court: United States Appellate Court of Illinois

Page 176

515 N.E.2d 176

161 Ill.App.3d 531, 113 Ill.Dec. 367

MID-AMERICA NATIONAL BANK OF CHICAGO, etc., et al Plaintiffs-Appellants, v. FIRST SAVINGS AND LOAN ASSOCIATION OF SOUTH HOLLAND, et al Defendants-Appellees.

No. 86-0417.

Appellate Court of Illinois,

First District, Third Division.

Sept. 16, 1987.

Arnold H. Landis, Chicago, for plaintiffs-appellants.

Leon E. Lindenbaum, Chicago, for defendant-appellee First Sav. and Loan Ass'n of South Holland.

Raymond J. Ostler, Chicago, for defendant-appellee A.J. Smith Federal Sav. & Loan Ass'n.

Michael P. Tone, Chicago, for defendant-appellee Joliet Federal Sav. & Loan Ass'n.

Justice RIZZI delivered the opinion of the court:

Plaintiffs, members of a class action, appeal from the trial court's order dismissing their amended complaint with prejudice pursuant to section 2-615 motions (Ill.Rev.Stat.1985, ch. 110, par. 2-615) filed by defendants First Savings and Loan Association of South Holland, Talman Federal Savings and Loan Association, Joliet Federal Savings and Loan Association, A.J. Smith Federal Savings and Loan Association and Lomas Nettleson Company. We affirm.

Plaintiffs' present cause of action originates from a civil class action suit plaintiffs filed in the United States District Court for the Northern District of Illinois, No. 82 C 3386. In count I of their Federal complaint, plaintiffs alleged a statutory claim for violation of the National Flood Insurance Act (Flood Act), 42 U.S.C. § 4001 et seq. (1985). Count II sounded in a breach of a common law duty allegedly created by the Flood Act. Count III sounded in breach of the Illinois Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud Act). Ill.Rev.Stat.1985, ch. 121 1/2, par. 261 et seq.

Plaintiffs essentially alleged that they received mortgage loans from defendants to purchase improved real estate. Plaintiffs claimed that defendants failed to require plaintiffs to purchase flood insurance in an amount equal to the outstanding balance of the mortgages in violation of section 102(b) of the Flood Act. 42 U.S.C. § 4012a(b) (1985). Section 102(b) requires Federal agencies responsible for the regulation of institutional lending to direct federally insured lenders to provide loans secured by improved real estate located in areas identified as flood zones, only if the property is covered for the term of the loan by flood insurance in amount equal to the outstanding principal balance of the mortgage loan. 42 U.S.C. § 4012a(b). Plaintiffs further alleged that defendants failed to inform plaintiffs that the properties purchased were located in designated flood hazard areas in violation of section 1364(a) of the Flood Act. 42 U.S.C. § 4104a (1985). Section 1364 directs Federal agencies regulating federally insured institutional lenders to condition the making of a loan on the notification of flood hazards, in writing, a reasonable period in advance of the signing of the purchase agreement. 42 U.S.C. § 4104a. Plaintiffs contended that they suffered damages as a result of uninsured losses due to flooding.

Defendants filed motions to dismiss plaintiffs' Federal complaint with prejudice. In their motions, defendants argued that count I should be dismissed because no private statutory right of action to recover damages existed under the Flood Act. Defendants further argued that as a result, counts II and III of plaintiffs' complaint should be dismissed for lack of pendent jurisdiction. On March 30, 1983, the district court granted defendants' motions and dismissed counts I, II and III of plaintiffs' complaint.

Thereafter, plaintiffs appealed the dismissal of count I to the Seventh Circuit Court of Appeals. Plaintiffs also filed the lawsuit giving rise to the present cause of action in the Chancery Division of the Circuit Court of Cook County on April 15, 1983. The allegations contained in this complaint were virtually identical to those set forth in plaintiffs' Federal court complaint. Several defendants then filed motions to dismiss. However, before the motions could be ruled on by the trial court, a stay order was entered pending resolution of plaintiffs' appeal to the United States Court of Appeals for the Seventh Circuit.

On June 16, 1984, the United States Court of Appeals for the Seventh Circuit affirmed the district court's dismissal of plaintiffs' Federal claims. Mid-America National Bank v. First Savings & Loan Assoc. of South Holland (1984), 737 F.2d 638. (No implied right of action exists under provisions of the Flood Act which requires lenders to notify borrowers of the flood risk of property prone to flooding, or under provisions mandating lenders to require borrowers to purchase flood insurance to the extent of the loan amount. Owners of flood damaged property cannot maintain a cause of action under the Flood Act against lenders who fail to comply with the Act's requirements.) On January 14, 1985, the United States Supreme Court denied plaintiffs petition for a writ of certiorari. Mid-America National Bank of Chicago v. First Savings & Loan Assoc. of South Holland (1985), 469 U.S. 1160, 105 S.Ct. 911, 83 L.Ed.2d 924.

Following the denial of plaintiffs' petition for a writ of certiorari, plaintiffs filed an amended complaint. In count I of their amended complaint, plaintiffs alleged that the existence of the relationship between plaintiffs and defendants required defendants to warn plaintiffs of flood hazards. Plaintiffs sought damages for negligent misrepresentation. In count II of their amended complaint, plaintiffs claimed that defendants had adopted certain business practices in accordance with the requirements of the Flood Act. Plaintiffs argued that the adoption of these business practices imposed a duty on defendants to comply with the provisions of the Flood Act. In count III, plaintiffs alleged a violation of the Consumer Fraud Act. Ill.Rev.Stat.1985, ch. 121 1/2, par. 261 et seq.

Defendants subsequently filed section 2-615 motions (Ill.Rev.Stat.1985, ch. 110, par. 2-615), with supporting memoranda, seeking a dismissal of plaintiffs' amended complaint for failure to state a cause of action. Plaintiffs filed a reply. After a hearing, and argument of counsel, the trial court entered an order dismissing plaintiffs' amended complaint with prejudice. This appeal followed.

On appeal from a motion to dismiss at the pleading stage, we must consider the factual allegations of the complaint to determine not the probability but only the possibility of recovery. Stansbury v. Home State Bank (1976), 42 Ill.App.3d 58, 62, 355 N.E.2d 613, 617. All facts properly pleaded in a complaint will be taken as true for purposes of ruling on a motion to dismiss. Penkava v. Kasbohm (1987), 117 Ill.2d 149, 151, 109 Ill.Dec. 815, 816, 510 N.E.2d 883, 884.

We first address count I of plaintiffs' amended complaint sounding in negligent misrepresentation. Plaintiffs contend that defendants were legally obligated to disclose (1) that the properties to be acquired by plaintiffs were located in areas designated as having special flood hazards and (2) the availability of flood insurance. According to plaintiffs, defendants failure to warn them of the special risks associated with the properties they were to purchase constituted negligent misrepresentation.

The tort of negligent misrepresentation involves a breach of a duty to utilize due care in obtaining and communicating information upon which another individual may reasonably be expected to rely in conducting their economic affairs. A misrepresentation may arise from a failure to provide information which there is a duty to provide, or from providing information which is false. Lehmann v. Arnold (1985), 137 Ill.App.3d 412, 420-21, 91 Ill.Dec. 914, 920, 484 N.E.2d 473, 479. However, as plaintiffs concede, there can be no liability for a failure to inform, unless there is a duty to speak. Therefore, count I of plaintiffs' amended complaint states a cause of action for negligent misrepresentation only if the allegations contained therein establish a legally recognized duty on the part of mortgage lenders to disclose flood hazards to borrowers. While plaintiffs scrupulously avoid discussion of, or reference to, sections 102(b) and 1364 of the Flood Act, the gravamen of plaintiffs' argument is that these sections create a standard of conduct which, if breached, would give rise to a common law action for negligent misrepresentation.

The question of whether or not a Federal statute establishes the appropriate standard of conduct for a state common law cause of action is a matter of state law. Consequently, such a determination rests within the province of a State's courts of review. We believe that the determination of whether the requirements of a Federal statute may provide the basis for a duty which, if breached, would give rise to a state common law cause of action must necessarily depend upon the intent of the legislature which enacted the statute. We decline to espouse a result which would have sections of the Flood Act creating a duty, which if breached, would give rise to a common law action for negligent misrepresentation in this state.

Initially, the Flood Act does not provide borrowers with either an express or implied Federal statutory cause of action against a lending institution for violations of the Act. Mid-America National Bank v. First Savings & Loan Assoc. of South Holland (7th Cir.1984), 737 F.2d 638; Hofbauer v. Northwest National Bank of Rochester (8th Cir.1983), 700 F.2d 1197; Arvai v. First Federal Savings and Loan Assoc. (4th Cir.1983), 698 F.2d 683; Till v. Unifirst Federal Savings & Loan Assoc. (5th Cir.1981), 653 F.2d 152. Rather, the legislative history of the Flood Act reveals that it was adopted to "diminish, by implementation of sound land use practices and flood insurance, the massive burden on the federal treasury of escalating federal flood disaster assistance." Mid-America National Bank, 737...