Case Title: Buchanan v. Century Fed. Sav. & Loan

Citation: 374 Pa. Super. 1, 542 A.2d 117

Docket Number: 

State: pennsylvania

Court: Pennsylvania Supreme Court

Date: 1988-04-27T00:00:00Z

Document:
374 Pa. Superior Ct. 1 (1988) 542 A.2d 117 Roger E. BUCHANAN and Dorothy E. Buchanan, His Wife, et al., v. CENTURY FEDERAL SAVINGS AND LOAN ASSOCIATION OF PITTSBURGH, et al. Appeal of Roger BUCHANAN, on Behalf of Himself and All Others. Supreme Court of Pennsylvania. Argued September 28, 1987. Filed April 27, 1988. *2 Michael P. Malakoff, Pittsburgh, for appellant. Franklin Poul, Philadelphia, for appellees. Before CIRILLO, President Judge, and CAVANAUGH, BROSKY, ROWLEY, OLSZEWSKI, DEL SOLE, KELLY, POPOVICH and JOHNSON, JJ. JOHNSON, Judge: This case presents the question of whether a mortgagor's advance payment to a mortgagee of money in escrow to be used to pay taxes and insurance premiums constitutes a trust. On the facts presented in this case, we find that a trust is created. At the non-jury trial, the parties stipulated to the following facts. Roger and Dorothy Buchanan purchased a two family residential dwelling located on Dawson Street, Pittsburgh, Pennsylvania, which they bought as investment property. In financing the purchase they executed a mortgage *3 on May 29, 1969 with Abbott Mortgage Corporation of Pittsburgh (Abbott). This mortgage was insured by the Federal Housing Administration (FHA) and executed on a printed form prepared by the FHA. The Federal National Mortgage Association (FNMA) purchases mortgages insured by the FHA as well as mortgages guaranteed by the Veterans' Administration (VA). FNMA does not originate mortgages and has no direct contact with any mortgagors. The purchase of mortgages by FNMA is normally pursuant to a selling agreement. The mortgages are serviced by mortgage banking institutions, generally the original mortgagees, in accordance with a standardized servicing agreement. On June 11, 1969 FNMA purchased the mortgage entered into between the Buchanans and Abbott. An assignment of mortgage was executed between Abbott and FNMA. Abbott remained the FNMA servicer of the mortgage. At some point Abbott changed its name to Galbreath Mortgage Company. In addition to purchasing the Buchanan mortgage FNMA purchased FHA and VA mortgages in the 1960's and 1970's for residential properties located in Pennsylvania. These mortgages were issued on FHA and VA prepared mortgage forms. FHA regulations required that mortgagors, such as the Buchanans, pay, in addition to their monthly payments of principal and interest, an amount equal to 1/12 of the annual insurance premiums and tax assessments anticipated to be due on the mortgaged property. Such a requirement was also contained in the VA mortgage forms. On FHA and VA mortgages for properties located in Pennsylvania FNMA has never paid interest or other compensation on the monthly payments of taxes and insurance. The clause in the Buchanan mortgage which set forth the advance payment of insurance and taxes reads as follows: FHA Form No. 2171 m, as revised July, 1966. The case now before this Court is a class action which was commenced in 1971 by a complaint in equity. The plaintiffs in action are the Buchanans, and other individual mortgage borrowers who represent themselves and others similarly situated (hereinafter reference to the Buchanans shall be understood to include reference to the other plaintiffs, where applicable). The defendants are FNMA and numerous banking institutions which issued mortgages to the Buchanans and other plaintiffs containing tax and insurance escrow provisions similar to the one set forth above. The Buchanans alleged that the advance payments of tax, insurance and assessments into escrow (hereinafter, advance payments or escrow payments) to the defendants pursuant to the mortgages are monies which defendants receive and hold as trustee for the Buchanans. The Buchanans alleged that in violation of a trustee's fiduciary duties, defendants commingled their *5 escrow payments and those of other borrowers with the defendants' general funds. As a result of this, the Buchanans allege that defendants earned profits from the use and investment of these escrow payments in the operation of their business. Among other things, the Buchanans sought an accounting for all earnings which defendants derived from the use of these monies and sought to enjoin the future collection of such advance payments. An amended complaint and second amended complaint were filed. The Court of Common Pleas of Allegheny County dismissed the complaints for failure to state a cause of action. On appeal, the Pennsylvania Supreme Court upheld the dismissal of a cause of action set forth under the Truth in Lending Act but in all other respects reversed the common pleas court and remanded the case. Buchanan v. Brentwood Federal Savings & Loan Assoc., 457 Pa. 135, 320 A.2d 117 (1974) (Buchanan I). The supreme court found that appellants pleaded sufficient facts to put at issue the creation of a trust. The court also found that on remand plaintiffs would be allowed the opportunity to prove their alternative theories of constructive trust and breach of implied contract. On remand, the common pleas court certified the plaintiff class and established subclasses. The plaintiffs agreed to a proposed settlement with all defendants except FNMA. Following hearings the common pleas court disapproved the settlement. On appeal this Court found that the decision to refuse the settlement was manifestly unreasonable. Buchanan v. Century Federal Savings & Loan Assoc., 259 Pa.Super. 37, 393 A.2d 704 (1978) (Buchanan II). The Court reversed the lower court and ordered the acceptance of the amended settlement. In 1980 plaintiffs filed a motion for partial summary judgment against the remaining defendant FNMA. The common pleas court granted the motion finding that a trust relationship existed between plaintiff class members and FNMA. The court held that it was clear that FNMA is a trustee of the advance payments and that FNMA commingled and used the funds for its own benefit, thus breaching *6 FNMA's fiduciary duties. On appeal this Court, in a three judge panel, reversed. Buchanan v. Century Federal Savings & Loan Assoc., 306 Pa.Super. 253, 452 A.2d 540 (1982) (Buchanan III). The court held that the absence of an agreement to pay interest did not necessarily mean that a trust relationship was intended. Accordingly, the court remanded the case for trial as there remained a genuine issue of material fact about whether or not the parties intended to enter a trust relationship. The court noted that Buchanan I did not preclude a finding of a debtor-creditor relationship. On remand the trial court found in favor of FNMA. The court concluded that the Buchanans failed in their burden of proving the creation and existence of a trust between themselves and Abbott. As FNMA was an assignee of Abbott, likewise no trust was established as to them. The court stated that the Buchanans abandoned the claims of constructive trust and implied contract at trial by not presenting any evidence in support of these claims. The Buchanans, in the instant action, appeal the finding that no trust was established. Following our decision in Buchanan III the question which the trial court was to determine, and the question that is before us now, is whether or not the parties intended to enter into a trust relationship. In Buchanan III we granted the Buchanans an opportunity to prove at trial that the parties intended to enter into a trust relationship. We found that summary judgment was an improper vehicle by which to dispose of this issue. Since Buchanan III the parties have proceeded to trial and introduced evidence concerning the issue of intent. We have reviewed that evidence, as well as the parties' briefs, the extensive record and numerous prior opinions in this case, along with this Commonwealth's law in the area. We disagree with the trial court's ruling. We find that the Buchanans sufficiently met their burden of proof and established that the parties intended to enter into a trust relationship. Accordingly, we reverse the trial court's order and remand this case for determination of the damages issue. *7 In Buchanan I our supreme court set forth the law to be applied in determining the issue before us. The court stated: Id., 279 Pa. at 332, 123 A. at 815. Accord, In re Interborough Consol. Corp., 288 F. 334, 347 (2d Cir.), cert. denied, 262 U.S. 752, 43 S. Ct. 700, 67 L. Ed. 1215 (1923); Andrew v. Union Savings Bank & Trust Co., 220 Iowa 712, 715, *8 263 N.W. 495, 497 (1935); Carpenter v. Suffolk Franklin Savings Bank, 362 Mass. 770, 291 N.E.2d 609 (1973). See 1A. Scott, Law of Trusts § 24, at 192 (3d ed. 1967). Buchanan I, 457 Pa. at 143-44, 320 A.2d at 122-23. In concluding its discussion of the express trust issue the court stated: Buchanan I, 457 Pa. at 150, 320 A.2d at 125-26. Looking at the mortgage agreement as a whole we believe it evidences an intent that the advance payments are to be held in trust by the mortgagee. The express language used in the form, drafted by FHA, is that these advance sums are "to be held by Mortgagee in trust to pay ground rents, premiums, taxes, and special assessments.. . .". This Court will not ignore this express contractual language. While we are aware that the mere presence of the words "trust" and "trustee" is not determinative of an intention to create a trust, neither are these words irrelevant or to be accorded no weight. In drafting its mortgage form FHA chose to include the above-quoted language. The Buchanans, who were represented by counsel in the transaction, manifested their agreement with the terms of the mortgage by signing the indenture. There is nothing to suggest that the use of the word "trust" was in any way an accident or oversight. Judging from the completeness and precision of the remainder of the agreement, the inclusion of the word was intentional. What FNMA asks this Court to do is to conveniently *9 ignore this language now, while presumably leaving the other rights and obligations of the agreement intact and enforceable. This we will not do. Viewing the agreement in its entirety the procedure established by the mortgage is that mortgagor will pay mortgagee the advance sums. The mortgagee will hold these sums to pay the taxes, assessments, premiums, etc., on the subject property. These are the powers and duties explicitly set forth in the agreement. The clear import of these powers and duties is that mortgagee is equitably bound to deal with the advance sums for the benefit of mortgagor, that is, to hold the sums to pay the taxes, etc. Mortgagee is not free to do with the sums as it pleases but is bound to apply them as provided. Additionally, the agreement does not provide that interest was to be paid on the advance sums. In Buchanan I, supra, the supreme court explicitly directed that this fact be considered in determining the issue before us. That no interest was being paid on the escrow monies held by mortgagee may evidence a trustee-beneficiary relationship. Buchanan I, supra. In the context of the agreement before this Court we find the absence of interest is one of the facts which evidences a trust relationship. When the Supreme Court discussed the absence of interest factor, it directed attention to comment (g) of the Restatement (Second) of Trusts § 12. That comment states in part: Restatement (Second) of Trusts § 12, comment (g) (1959). Here the mortgagee was not obligated to pay interest on the advance sums. Had interest been required, this may have suggested a debt relationship. Considering the language of the agreement and the purpose for the payments the absence of interest is one more factor suggesting a trust relationship. Viewing the agreement in its entirety we conclude that the mortgage agreement established a trust relationship between mortgagor and mortgagee with respect to the advance tax and insurance payments. The commingling of these funds by FNMA and the use of the funds as working capital to generate income was a violation of the fiduciary duty it owed mortgagor. We reverse the order of the trial court and remand for a determination of the damages issue. Order reversed. Case remanded for proceedings consistent with this opinion. Jurisdiction relinquished. ROWLEY, J., files a dissenting opinion in which BROSKY, J., joins. ROWLEY, Judge, dissenting: I respectfully dissent. In Buchanan III, this Court vacated a summary judgment which was entered by the trial court on the ground that a trust relationship existed between the class members and Federal National Mortgage Association. The panel specifically noted that the trial court's decision to grant *11 summary judgment was based on several factors including but not limited to: 1) the fact that the words "to be held . . . in trust" in the agreement strongly indicated that a trust was contemplated; 2) that in Buchanan I the Supreme Court had determined that although the use of the word "trust" in the mortgage agreement is not determinative of the intent to create a trust, an intent to create a trust was manifested by the provisions of the agreement transferring property with directions that the transferee deal with the property for the benefit of another; and 3) the factors enumerated in Comment (g) of the Restatement (Second) of Trust, § 12 with regard to whether or not a trust is contemplated when interest is not paid on money deposited with another as security. The panel concluded that the trial court misinterpreted Buchanan I, and that all the Court held in that case was that the plaintiffs should have the opportunity at trial to present evidence establishing that a trust, and not a debt, was created; that the absence of an agreement to pay interest was not a crucial factor, but only a "significant" one; and that there were factors from Comment (g) of the Restatement (Second) of Trusts, § 12 which the trial court did not consider, and that the trial court failed to mention Comment (b) of the Restatement (Second) of Trusts § 12 which was "more nearly on point." Buchanan III, 306 Pa.Super. at 261, 452 A.2d at 544. In vacating the summary judgment and remanding, the panel in Buchanan III stated: Id. It seems apparent from the panel decision in Buchanan III that the court held that summary judgment could not be entered because there was a factual question concerning the intent of the parties to establish a trust, which question *12 could not be resolved as a matter of law by applying principles of law to the written mortgage agreement, and it was necessary to remand for the presentation of evidence as to the intent of the parties. Upon remand, a trial was held following which the court determined that the evidence showed among other things that: 1) it was the standard practice in the industry for mortgagees to require mortgagors to make advance payments for taxes and insurance, but not to compensate the mortgagors for the advance payments; 2) that the mortgagors did not examine the mortgage to determine whether or not they would have to pay monthly sums for taxes and insurance; 3) that the mortgagors had no recollection of the substance of any of their discussions concerning the terms of the mortgage with counsel; and 4) that the mortgagors never discussed the terms of the mortgage with the mortgagee. Thus there was no evidence introduced at the trial which was not already in the record when the motion for summary judgment was filed to indicate that there was an intention to create a trust. In the present case, by virtue of Buchanan III, it is the "law of the case" that whether or not the parties intended to create a trust is a factual determination which cannot be ascertained as a matter of law. Because the evidence introduced at trial which was not available for the court's consideration on the motion for summary judgment does not show that the parties intended to create a trust, the adjudication of the trial court following trial that there was not a trust relationship, should be affirmed. The majority's determination in the instant appeal that there was a trust relationship is premised exclusively on the terms of the mortgage agreement itself. Since in Buchanan III the court held, as the law of the case, that the intention of the parties to establish a trust relationship could not be determined as a matter of law from the terms of the mortgage agreement itself, the majority's decision in the present case is contradictory with Buchanan III. Upon remand, and pursuant to the express instructions of the Court in Buchanan III, the trial court held a hearing *13 and thereafter found as a fact that a trust relationship had not been established. McDole v. Duquesne Brewing Company of Pittsburgh, 281 Pa.Super. 78, 83, 421 A.2d 1155, 1158 (1980); quoting from Philadelphia Fresh Food Terminal Corporation v. M. Levin and Company, 239 Pa.Super. 287, 292, 361 A.2d 886, 889 (1976). My review of the record of the trial following Buchanan III shows that it supports the trial court's factual determination that a trust relationship was not established. Therefore, in my opinion it is not appropriate to reverse the factual determination of the trial court. I would affirm the judgment on the trial court's opinion. BROSKY, J., joins the dissenting opinion by ROWLEY, J.