Stone v. Davis

• Decision Date: 22 April 1981
• Docket Number: No. 80-585,80-585
• Citation: 66 Ohio St.2d 74,20 O.O.3d 64,419 N.E.2d 1094
• Parties: , 20 O.O.3d 64 STONE et al. v. DAVIS, Appellee, et al.; Ashtabula County Savings & Loan Company, Appellant.
• Court: Ohio Supreme Court

Page 74

66 Ohio St.2d 74

419 N.E.2d 1094, 20 O.O.3d 64

STONE et al. v. DAVIS, Appellee, et al. Ashtabula County Savings & Loan Company, Appellant.

No. 80-585.

Supreme Court of Ohio.

April 22, 1981.

Syllabus by the Court

1. A lending institution using a Federal Reserve Board Regulation Z disclosure form and eliciting from a loan customer a written express desire for mortgage insurance has a duty to advise the customer as to how the insurance may be procured.

2. Where a mortgage loan customer indicates on the Regulation Z form a desire for mortgage insurance and thereafter the lending institution neglects to point out the procedure to be followed and to advise the customer that he must procure the insurance himself by directly applying to a mortgage insurance company, the lending institution may be held liable for any proximately caused injury to the customer resulting from such negligence.

This cause originated as a foreclosure action filed in the Court of Common Pleas of Ashtabula County by George and Clara Stone, sellers and mortgagees of a dairy farm located in Austinburg Township, Ashtabula County, against appellee Judy V. Davis, one of the purchasers and mortgagors of the farm, and other individuals and entities holding alleged lien interests in the farm, including appellant Ashtabula County Savings & Loan Company (hereinafter "Ashtabula S & L").

In 1972, Danny I. Davis and his wife, Judy Davis, 21 and 19 years old respectively, negotiated with the Stones for the purchase of their dairy farm in Ashtabula County. In order to finance the major part of this purchase, the Davises applied to Ashtabula S & L (since merged with Cardinal Federal Savings & Loan) for a $60,000 mortgage loan.

By letter dated October 26, 1972, Ashtabula S & L notified the Davises that it had approved their mortgage loan application. ¹ On the day following the making of its loan commitment to the Davises, Ashtabula S & L presented them with a document entitled "Notice to Customers Required by Federal Law, Federal Reserve Regulation Z," which contained an itemization of the costs of their loan. The Davises acknowledged receipt of this disclosure form on October 27, 1972, by dating and affixing their signatures to it.

Relevant to the instant controversy, the following language appeared within the disclosure form concerning the subject of "Other Insurance":

Below this language appeared the following juxtapositional statements: "I desire ________ insurance coverage," and "I DO NOT desire such insurance coverage." Underneath each of these statements were two blank lines for a date and a signature.

In the disclosure form presented to the Davises, the word "mortgage" had been typed onto the blank space of the first statement. On the lines under this statement, Danny Davis signed his name and entered the date "10/27/72."

What transpired next in connection with Danny Davis' expressed desire for mortgage insurance was disputed by the parties to this controversy. The trial court, however, found that Ashtabula S & L thereafter neither took any steps to procure mortgage insurance for Danny Davis nor advised Davis that he was to procure the insurance himself. In any event, no mortgage insurance was ever obtained for Davis.

Thereafter, the sale of the Stones' property to the Davises was completed, and they began operation of the dairy farm. In the Spring of 1975, the Davises encountered business difficulties when their herd of dairy cows contracted a reproductive disease which required that it be sold. As a result of this problem, the Davises fell behind on their mortgage payments to both their sellers, the Stones, who had financed part of the purchase price of the farm, and Ashtabula S & L. The Davises were three months in default on these mortgages when, on July 18, 1975, Danny Davis died as a result of injuries he sustained in a motorcycle accident.

Following her husband's death, Judy Davis made some 30 additional monthly mortgage payments to Ashtabula S & L, but her loan nevertheless remained in default. The Stones thereupon instituted this foreclosure action in the Court of Common Pleas on June 20, 1977.

After filing answers to the Stones' complaint, appellant Ashtabula S & L and appellee Davis cross-claimed against each other. In its cross-claim, Ashtabula S & L alleged that Judy Davis was indebted to it on the remaining balance of a $60,000 mortgage loan it had made to her and her deceased husband Danny Davis to finance part of the purchase price of the Stones' farm.

In her cross-claim, Judy Davis alleged that Ashtabula S & L, either negligently or in breach of a promise to do so, had failed to procure mortgage insurance for her husband Danny; that, as a proximate result, when Danny Davis died in an accident in 1975, he was not covered by any mortgage insurance; and that Ashtabula S & L was therefore liable to her for the amount of the lost mortgage insurance proceeds.

Appellant's and appellee's cross-claims were severed from the other claims in the Stones' foreclosure action and tried without a jury to the common pleas court. At the time of the trial of the parties' cross-claims in October 1978, Judy Davis' account with Ashtabula S & L showed a principal balance of $58,572.08 and accrued interest of $2,780.55 on the original $60,000 loan she and her husband had taken out in October 1972.

The trial court rendered a judgment for Judy Davis, holding that Ashtabula S & L had breached a duty to inform the Davises that they had to procure mortgage insurance themselves if they so desired it, and was therefore liable to Judy Davis for her loss of mortgage insurance proceeds. ²

On appeal, the Court of Appeals affirmed the trial court's judgment.

The cause is now before this court pursuant to the allowance of a motion to certify the record.

Frank R. Bodor, Warren, for appellee.

Parks, Eisele, Bates & Wilsman and John A. Hallbauer, Cleveland, for appellant.

JOHN V. CORRIGAN, Justice.

In this appeal, Ashtabula S & L advances six propositions of law which are considered infra.

I.

Propositions of law Nos. 1 through 3, which may be treated together, read as follows:

"(1.) A federal truth-in-lending Regulation Z disclosure form promulgated by the Federal Reserve Board does not render a creditor using such form liable under Ohio law in either contract or tort for the non-existence of insurance for which a debtor has indicated his 'desire' on the disclosure form.

"(2.) A lending institution dealing at arm's length with a prospective borrower prior to the creation of any debtor-creditor or other contractual relationship has no tort law duty to affirmatively advise and counsel the prospective debtor as to the legal mechanics or the legal consequences of either the prospective lending transaction or collateral matters.

"(3.) The Federal Truth-in-Lending Act contains and creates its own exclusive remedies and liabilities, and an Ohio court's application of the Act and of forms promulgated thereunder by a federal agency in disregard of the Act's express limitations upon liability is violative of both the federal and the Ohio Constitutions."

The major thrust of the arguments underlying these propositions of law is that a lending institution, which complies with the disclosure requirements of federal truth-in-lending law (Sections 1601 et seq., Title 15, U.S.Code) and, in so doing, notifies its loan customer that procurement of mortgage insurance is not a condition for the loan and need be purchased only if the customer so desires, does not, upon eliciting from the customer an expressed desire for mortgage insurance, assume a further duty to disclose to the customer how such insurance may be procured. We do not accept appellant's argument as a correct statement of Ohio law, and, for the reasons which follow, we hold instead that a lending institution does assume this further duty of disclosure and, in negligently failing to observe this duty, may become liable for any injury to the customer proximately caused.

In Umbaugh Pole Bldg. Co. v. Scott (1979), 58 Ohio St.2d 282, 390 N.E.2d 320, we recognized that, in most instances, the relationship of a creditor to his debtor, governed by the principles of freedom of contract, was not a fiduciary relationship. There, we held that evidence which revealed that the creditor had given advice to the debtor concerning the operation of the debtor's business was insufficient to transform what was otherwise a business relationship into a fiduciary relationship. In so holding, we conclude that, in the matter upon which the advice there was rendered, the parties were operating at arm's length, each seeking to protect his own legitimate business interests. Id., at page 287, 390 N.E.2d 320.

The facts are different in the case sub judice and more compelling of a conclusion that, in broaching the subject of mortgage insurance, Ashtabula S & L was acting as a fiduciary to Danny and Judy Davis, its loan customers.

"A 'fiduciary relationship' is one in which special confidence and trust is reposed in the integrity and fidelity of another and there is a resulting position of superiority or influence, acquired by virtue of this special trust." In re Termination of Employment (1974), 40 Ohio St.2d 107, 115, 321 N.E.2d 603. A fiduciary relationship need not be created by contract; it may arise out of an informal relationship where both parties understand that a special trust or confidence has been reposed. Umbaugh, supra.

The facts surrounding and the setting in which a bank gives advice to a loan customer on the subject of mortgage insurance warrant a conclusion that, in this aspect of the mortgage loan process, the bank acts as its customer's fiduciary and is under a duty to fairly disclose to the customer the mechanics of procuring such insurance.

We observe that, while a bank and its customer may be said to, stand at arm's length in negotiating the terms and conditions of a mortgage loan, it is...