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Sears v. First Fed. Sav. And Loan Assoc.

SEPTEMBER 21, 1971.




APPEAL from the Circuit Court of Cook County; the Hon. SAMUEL B. EPSTEIN, Judge, presiding.


Plaintiff filed an amended complaint in chancery individually and on behalf of all mortgage borrowers from First Federal Savings and Loan Association of Chicago (defendant). Plaintiff sought an accounting in behalf of the class on the theory that certain money paid to defendant constituted a trust, the earnings of which should inure to the benefit of the class. The trial court sustained a motion to dismiss filed by defendant, considering only one of several stated grounds. Plaintiff appeals.

The amended complaint alleges in substance that defendant is a corporation organized under the laws of the United States. It has for many years operated a savings and loan association and has loaned money to various persons evidenced by notes of the borrowers secured by real estate mortgages. In April of 1964, plaintiff obtained a loan from defendant to finance purchase of a home. Plaintiff executed a form of note used by defendant, together with a mortgage on the property. Since the controversy centers about certain language in the note, we reproduce the pertinent portions in full:

"In order to provide for the payment of taxes, we promise to pay monthly in addition to the above payments, one-twelfth of the annual real estate taxes as estimated by the Association, in such manner as the Association may prescribe, so as to provide for the current year's tax obligation on the last day of each such year during the term of this obligation. We promise, further, to pay monthly a pro-rata share of all assessments, future hazard insurance premiums and any other charges that may accrue against the property securing this indebtedness. If the amount estimated to pay said taxes, insurance, assessments, and other charges is not sufficient, we promise to pay the difference upon demand. It is agreed that all such payments may, at the option of the Association (1) be held in trust by it without earnings for the payment of such items; (2) be carried in a borrower's tax and insurance account and withdrawn by the Association to pay such items; or (3) be credited to the unpaid balance of said indebtedness as received, provided that the Association advances upon this obligation sums sufficient to pay said items as the same accrue and become payable. If such sums are held in trust or carried in a borrower's tax and insurance account, the same are hereby pledged together with any other account of the undersigned in the Association to further secure this indebtedness and any officer of the Association is authorized to withdraw the same and apply thereon. The Association is authorized to pay said items as charged or billed without further inquiry."

The amended complaint further alleges that those persons who borrowed money from defendant executed notes with the same, or substantially the same, provisions. It is alleged that the defendant exercised the second option, set forth above, to carry the payments, "* * * in a borrower's tax and insurance account * * *." About the time of the filing of the amended complaint, these accounts for various borrowers contained a total of some $19,000,000.

The essence of the amended complaint is then set forth to the effect that the defendant has received these monthly payments from plaintiff and all other borrowers as a trustee and fiduciary which imposed upon defendant a duty to segregate the trust funds and to account to plaintiff and other borrowers for all earnings and profits resulting from the funds. It is alleged that defendant has violated its duty as trustee by commingling these funds with its general assets and by earning large amounts of money therefrom so that defendant has become unjustly enriched by sums which should accrue to the benefit of plaintiff and the entire class.

The amended complaint also contains allegations describing the class and purporting to show the necessity for a class action and that plaintiff's representation of the class will be fair. The amended complaint prays declaratory relief to fix the status of the payments in question as trust funds; the taking of an accounting regarding profits obtained from use of the trust funds and ancillary relief such as the appointment of a receiver to collect the sums which may be found due and allowance of various fees and expenses.

The motion to dismiss the amended complaint specifies seven grounds. Paragraph number seven states that the provisions of the note are not sufficient in law or in equity to impose trust obligations upon defendant and that defendant was not otherwise required to distribute earnings to borrowers. The trial court held that this ground was ample and that it was not necessary to decide others. We will consider this stated ground first.

The problem here is the true meaning of the cited language of the promissory note. It is plaintiff's contention that exercise by defendant of the second option above described created a trust fund. Plaintiff argues ably and tenaciously that the language of the second option created a special deposit of money to be used for a specifically designated purpose and that this is sufficient to create a trust. Plaintiff urges that since the note provides that the funds in the borrower's tax and insurance account were to be pledged to secure the indebtedness created by the note, another ground exists for creation of a trust. However, with equal ability and tenacity, defendant argues that no trust is created by the language of the second option and that a pledge is not a trust. Each sidet stoutly maintains that the authorities cited in support of the contrary position may be differentiated with ease and with finality.

1 • Before embarking upon analysis of these conflicting claims, we will pause briefly to define our terms. We define an express trust as "* * * one which is created in express terms in the deed, writing or will, or which arises from the direct and positive action of the parties evidenced by a written instrument * * *." (35 I.L.P. Trusts § 4 at 176.) We define an implied trust as one which, "* * * is deducible from the nature of the transaction between the parties, or which is superimposed on the transaction by operation of law, independently of the intention of the parties." (35 I.L.P. Trusts § 4 at 177.) Implied trusts may be further categorized into constructive and resulting trusts. Murray v. Behrendt, 399 Ill. 22, 27.

• 2, 3 All trusts of every kind are necessarily included within these two general classifications of express and implied. Although the term, "implied trust" has been used to designate an express trust arising from the construction of language in a document, it seems to us that it is preferable to define the trust which would arise in such situations as an express trust. Thus, if option two in the promissory note were declared to create a trust, this trust should, in our opinion, be classified as an express trust. The trust would actually arise from construction of the document or by implication from the language used; but, properly speaking, it should be classified as an express trust as differentiated from an implied trust. See: Bogert, Trusts and Trustees (2nd ed. 1964), § 451.

• 4-7 We must arrive at the meaning of the second option from an examination of the language used in the document. As plaintiff urges, construction of the note is, "a pure question of law" for this court; to be determined "* * * from the clear language of the mortgage provision." However, in this process, we must examine all of the pertinent language of the note itself as above quoted. We cannot give effect to portions of the note only. Each clause and all of the language used must, if possible, be given meaning, life and effect. (J. & R. Electric Co. v. Edward P. Allison Co., Inc., 125 Ill. App.2d 123, 130; Bowler v. Metropolitan Sanitary District, 117 Ill. App.2d 237, 242; Donahue v. Rockford Showcase & Fixture Co., 87 Ill. App.2d 47, 51.) In addition, we must consider the background of the transaction befort the court. In this context, the motion to dismiss is deemed to admit all facts properly pleaded in the amended complaint. Acorn Auto Driving School, Inc. v. Board of Education, 27 Ill.2d 93, 96; Follett's Illinois Book & Supply Store, Inc. v. Isaacs, 27 Ill.2d 600, 603; Country Mutual Insurance Co. v. Drendel, 116 Ill. App.2d 466, 470; Martin v. Po-Jo, Inc., 104 Ill. App.2d 462, 468.

• 8, 9 We commence by noting carefully the first few words expressed in the second option; namely, the words "* * * be carried in a borrower's tax and insurance account * * *." Webster's Second New International Dictionary cites 23 separate meanings for the verb "to carry". In the light of the background of this transaction, it seems most reasonable to define the word as "to keep on one's books as a debtor." The phrase "carry on the books" is common in legal as well as in banking circles. We also note in this connection that three words are significantly omitted from use in conjunction with the verb "carry". The note could have stated that this tax and insurance account would be "segregated", "separated" or even "isolated". None of these terms are used. Their absence shows a lack of direction and intent that this tax and insurance account be treated as a special deposit.

• 10 It is true that the funds of this borrower's tax and insurance account are intended to be used primarily for a specific purpose; namely, the payment of taxes and insurance premiums. However, the final sentence of the pertinent language of the note authorizes defendant to pay these items, "* * * as charged or billed without further inquiry * * *." In addition, in the immediately preceding sentence, the document specifically pledges the tax and insurance account as further security for the indebtedness created by the note and authorizes any officer of defendant to withdraw from the account for that purpose. These additional provisions indicate that the payments made by the borrower are to be devoted to payment of the main indebtedness as well as to payment of taxes and insurance. We have, therefore, a situation in which the payments are not to be segregated or separated but merely carried on the books. These sums in effect are to be applied to payment of taxes or insurance or on account of the indebtedness; subject only to the condition that the defendant assures payment of all taxes ...

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