Avila v. CitiMortgage, Inc.

Summarized by Kurt Carlson , Carlson Dash LLC
10 years 5 months ago

Citation:

Avila v. CitiMortgage, Incorporated, Court of Appeals, 7th Circuit 2015 (unpublished)

Tag(s):

Ruling:

(1) A provision in a mortgage contract that places the proceeds from a homeowner’s insurance claim with the lender during repair and restoration does not create a fiduciary relationship between the lender and borrower; and (2) when the mortgage provides specific processes for dealing with default, a borrower’s default on a mortgage does not render the mortgage unenforceable for purposes of bringing a breach of contract claim.

Procedural context:

Daniel Avila (the “Borrower”) sued CitiMortgage, Incorporated (the “Lender”) in a proposed class action filed in Illinois state court for breach of fiduciary duty and breach of contract. The Lender removed the case to federal court. The district court dismissed the Borrower’s suit for failure to state a claim, reasoning that (1) his allegations did not support a fiduciary duty on the Lender’s part; and (2) the Borrower was barred from pursuing the contract claim because he had materially defaulted on his own contractual obligations by missing several mortgage payments prior to the Lender’s alleged breach. The Borrower appealed. The Court of Appeals affirmed the dismissal of the claim for breach of fiduciary duty, but reversed the dismissal of the breach of contract claim and remanded for further proceedings.

Facts:

The Borrower bought his home and executed a $100,500 mortgage loan (the “Mortgage”) in favor of CitiMortgage. Section 5 of the Mortgage of the Mortgage requires the Borrower to obtain homeowner’s insurance, and provides that in the event that damage to the property resulted in an insurance claim, the insurance proceeds will be held by the Lender during repair and restoration. Section 5 further states that the Lender could use the insurance proceeds to pay down the loan if certain conditions were met. In 2010, a serious fire rendered the home uninhabitable, and the Lender used the insurance proceeds to pay down the loan rather than to repair the house. The Borrower argued that Section 5 implicitly creates an escrow and thus created a fiduciary relationship between him and the Lender. However, the Court of Appeals reasoned that the insurance carrier was not a party to the Mortgage and therefore could not be the grantor in any escrow created by Section 5. Furthermore, the insurance carrier could not give instructions about how the Lender should use the money; without instructions there was no escrow. Thus, there was no evidence that the Lender accepted any additional extra-contractual duties of a fiduciary nature. Section 5 of the Mortgage further provides that the insurance proceeds shall be applied to restoration or repair of the Property if the restoration or repair is economically feasible and the Lender’s security interest is not lessened.” The Borrower argued that the Lender breached the Mortgage by using the insurance proceeds to pay down the loan instead of repairing the home because it never indicated that repair was economically infeasible or would harm it’s security interest, and because none of the other three conditions listed in Section 5—abandonment, the failure to respond to an insurance settlement, and foreclosure—occurred. The district court held that the Borrower’s default did not constitute “substantial performance,” a required element for the breach of contract claim, and therefore was unenforceable from a breaching party’s perspective. In reversing the lower court’s decision, the Court of Appeals emphasized the bargained-for remedies for default, and found that the provisions establishing specific processes for dealing with default would be rendered superfluous if any default immediately gave CitiMortgage the right to apply an insurance payout toward the loan.

Judge(s):

Sykes

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