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Zelickman v. Bell Federal Savings & Loan Ass'n

JULY 23, 1973.




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


Morton and Sharlene Zelickman and Walter F. Osborn (plaintiffs) filed a second amended and supplemental complaint (referred to as "complaint") individually and on behalf of all mortgage borrowers from Bell Federal Savings and Loan Association (defendant). Plaintiffs sought an accounting in behalf of the class they seek to represent on the theory that certain sums paid to defendant constituted a trust and earnings upon these funds should inure to the benefit of the class. The trial court sustained a motion to dismiss filed by defendant and filed a memorandum opinion in which he held that no trust was created by virtue of the dealings between plaintiffs and defendant. The opinion stated that the trial judge felt bound by the principle of stare decisis to accept the decision of this court in a previous case involving a similar attempt to establish a trust by borrowers from another savings institution. Sears v. First Federal Savings & Loan Assn., 1 Ill. App.3d 621, 275 N.E.2d 300; leave to appeal denied January 27, 1972.

Some time prior to the entry of the order of dismissal, the trial court heard arguments of counsel concerning the legal propriety of the class action in the case at bar. In a lengthy and able memorandum, the trial court held that the allegations in the complaint contain all of the requisite elements for a class action. A motion of defendant to dismiss the suit on this ground was denied. Defendant has taken a cross-appeal from this order. This aspect of the proceeding will be considered at a later point in this opinion.

Counsel for plaintiffs here, the same who represented the plaintiff in Sears, have given us a scholarly and thorough exposition of the legal questions presented. Aside from the statement of certain fundamental principles applicable here, they urge that deposits made each month by plaintiffs of sums for payment of taxes and insurance premiums, are trust funds. They predicate this contention primarily upon three key words, "deposit", "pledged" and "authorized". They urge that these deposits, being made for specific and limited purposes, become trust funds and that this conclusion is fortified by the pledge of the deposits, which also constitutes a trust, as well as by the use of the word "authorized". They urge also that the decision in Sears actually supports the trust conclusion here and that defendant is a fiduciary which should be required to account. Plaintiffs contend finally that their action is not barred by rules of primary jurisdiction and exhaustion of remedies.

In response, defendant urges that advance payments for taxes and insurance do not constitute a trust in accordance with our previous holding in Sears; intention to create a trust is lacking here; deposit of funds for a special purpose does not create a trust and a pledge is not a trust. Defendant also urges that even if these advance payments were held in trust, it would not be required to account for earnings thereon. Finally, defendant contends that the Federal Home Loan Bank Board has primary jurisdiction over the issues here presented and plaintiffs have not exhausted their administrative remedies.

• 1 Development of the facts here involved must commence with a statement of the basic principle that the motion to dismiss filed by defendant admits all properly pleaded allegations of plaintiffs' complaint. See Holiday Magic, Inc. v. Scott, 4 Ill. App.3d 962, 963, 282 N.E.2d 452, citing decisions of the Illinois Supreme Court. The complaint alleged that plaintiffs had made mortgage loans from defendant using defendant's conventional form. Prior to May 29, 1969, defendant was an Illinois corporation but on that date it was converted to, and formally became, a federal savings and loan association. Defendant was duly chartered by the governments of Illinois and, in turn, of the United States. A sample copy of the type of mortgage signed by plaintiffs and of the type of application for loan executed by them are appended to the complaint.

The application for loan provided that the money borrowed would be repaid in payments of a designated amount, "* * * including principal and interest, plus 1/12 estimated taxes and Hazard Insurance * * *" with the debt secured by a first mortgage. The application also provided that the borrowers agreed to keep the mortgaged premises insured against such hazards as defendant might require for the full insurable value thereof with the policies to contain proper mortgage clauses. Plaintiffs as applicants, also covenanted:

"To deposit with you [defendant] the amount necessary to establish a reserve for taxes and insurance as outlined above so that, together with the monthly deposits hereafter made, there will be funds available to pay general taxes by January of the year in which they are due and insurance premiums two months before installments are due."

The mortgage itself conveyed the property to defendant as mortgagee. It provided for repayment of the sum borrowed in monthly installments including interest. Any additional advances, together with interest thereon, that might be made by defendant for protection of the security, constituted additional indebtedness secured thereby. The borrowers further covenanted that the indebtedness thereby secured should include all sums agreed to be paid by them to defendant. The document also contained the following additional convenience by the borrowers:

"(3) To pay when due all taxes and assessments levied against said property or any part thereof under any existing or future law, and to deliver receipts for such payments to the Mortgagee promptly upon demand.

(9) To provide for payments of taxes, assessments and insurance premiums, stipulated to be paid hereunder, the Mortgagor shall deposit with the Mortgagee on each monthly payment date an amount equal to one-twelfth of the annual taxes and assessments levied against said premises and one-twelfth of the annual premium on all such insurance, as estimated by the Mortgagee. All such deposits as made are pledged as additional security for the payment of the principal mortgagee indebtedness. If default is made in the payment of said deposits, the Mortgagee may, at its option, charge the same to the unpaid balance of the mortgage indebtedness and the same shall bear interest at the same rate as the principal mortgage indebtedness. As taxes and assessments become due and payable and as insurance policies expire, or premiums thereon become due, the Mortgagee is authorized to use such deposits for the purpose of paying taxes or assessments, or renewing insurance policies or paying premiums thereon. In the event any deficit shall exist or the deposits are so reduced that the remaining deposits together with the monthly deposits will not provide sufficient funds to pay the then current calander [sic] year's estimated taxes or the estimated insurance premium on the last day of said year, the Mortgagee may, at its option, either declare immediately due and payable or add to the unpaid balance of the mortgage indebtedness secured hereby such a sum which shall, together with the remaining deposits and monthly deposits, provide sufficient funds to pay one year's estimated taxes or insurance premiums on the last day of said year."

The mortgage further provided that time was of the essence thereof and in event of default by plaintiffs as to any covenants therein "* * * or in making of any deposits required hereunder * * *" defendant was authorized without notice to declare all sums secured by the mortgage then immediately due and payable and to foreclose.

The complaint further alleged that plaintiffs paid to defendant all deposits of taxes and insurance required and that each year defendant refunded to any borrower upon request the excess of tax and insurance reserves over the amount required to pay taxes and insurance premiums payable in that year. The complaint alleged that these monies paid to defendant by plaintiffs as tax and insurance deposits were held by defendant as a trustee or fiduciary so that defendant owed a duty to segregate the trust funds and to account to plaintiffs for earnings and profits resulting therefrom. It alleged that defendant has violated this duty by commingling these funds with its general assets and by earning large sums of money therefrom so that defendant has become unjustly enriched; or, in the alternative, has converted these earnings to its own use.

The complaint further alleged that there is no provision in Federal law, or in the law of Illinois, which would afford administrative relief to plaintiffs and the class they represent. It also contained allegations describing the class and purporting to show the necessity for class action and also that plaintiffs' representation of the class would be fair. The motion to dismiss averred that the complaint was substantially insufficient in law for failure to state a ...

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