Daniel Avila v. CitiMortgage, Incorporated , 801 F.3d 777 ( 2015 )


Menu:
  •                                In the
    United States Court of Appeals
    For the Seventh Circuit
    ____________________
    No. 14-1949
    DANIEL AVILA, on behalf of himself
    and all other persons similarly situated,
    Plaintiff-Appellant,
    v.
    CITIMORTGAGE, INCORPORATED,
    Defendant-Appellee.
    ____________________
    Appeal from the United States District Court for the
    Northern District of Illinois, Eastern Division.
    No. 13 C 3566 — Ronald A. Guzmán, Judge.
    ____________________
    ARGUED SEPTEMBER 29, 2014 — DECIDED SEPTEMBER 4, 2015
    ____________________
    Before EASTERBROOK, WILLIAMS, and SYKES, Circuit Judges.
    SYKES, Circuit Judge. Daniel Avila alleges that CitiMort-
    gage, Inc., violated a fiduciary duty and breached its mort-
    gage agreement with him by using the payout from his
    homeowner’s insurance policy to pay down his loan rather
    than repair his damaged house. The district court dismissed
    Avila’s suit—a proposed class action—for failure to state a
    2                                                  No. 14-1949
    claim, reasoning that (1) his allegations do not support a
    fiduciary duty on CitiMortgage’s part; and (2) Avila was
    barred from pursuing his contract claim because he had
    materially defaulted on his own contractual obligations by
    missing several mortgage payments prior to CitiMortgage’s
    purported breach.
    We agree with the district court on the first point: Avila’s
    allegations of a fiduciary relationship are inadequate as a
    matter of law. But his claim that the mortgage agreement
    remained enforceable after his missed payments is plausible
    in light of the agreement’s structure and the remedies it
    prescribes in the event of default. The breach-of-contract
    claim should not have been dismissed.
    I. Background
    Avila bought his Chicago home in 2005 with a $100,500
    mortgage loan from CitiMortgage. Five years later, a serious
    fire made the house uninhabitable. Avila filed a claim with
    his homeowner’s insurance carrier, which paid out just over
    $150,000. Pursuant to the terms of the mortgage agreement,
    CitiMortgage took control of the insurance proceeds. Avila
    selected a contractor, and CitiMortgage paid $50,000 of the
    insurance money to get the restoration underway. CitiMort-
    gage later inspected the work and found that it was of poor
    quality and needed to be redone, but by that time Avila had
    missed several mortgage payments. CitiMortgage then
    applied the remaining $100,000 from the insurance payout
    toward Avila’s outstanding mortgage loan. Avila’s home was
    never repaired.
    No. 14-1949                                                           3
    The parties’ respective obligations regarding homeown-
    er’s insurance are spelled out in section 5 of the mortgage
    agreement.1 Avila was required to obtain a homeowner’s
    policy that included a standard mortgage clause and named
    CitiMortgage as a loss payee. 2 CitiMortgage had the right to
    disapprove Avila’s choice of carrier, take possession of the
    insurance documents, and demand proof that Avila was
    paying the premiums.
    Section 5 also addressed the parties’ obligations in the
    event that damage to the property resulted in an insurance
    claim:
    Unless Lender and Borrower otherwise agree
    in writing, any insurance proceeds … shall be
    applied to restoration or repair of the Property,
    if the restoration or repair is economically fea-
    sible and Lender’s security is not lessened.
    During such repair and restoration period,
    Lender shall have the right to hold such insur-
    ance proceeds until Lender has had an oppor-
    tunity to inspect such Property to ensure that
    the work has been completed to Lender’s satis-
    faction … . … Lender shall not be required to
    pay Borrower any interest or earnings on such
    1The mortgage agreement was based on the Fannie Mae/Freddie Mac
    Uniform Instrument for single-family homes in Illinois.
    2  As we discuss in more detail later, “the ‘standard’ mortgage
    clause … forms a separate and distinct contract between the insurer and
    the mortgagee, the effect of which is to shield the mortgagee from being
    denied coverage based upon the acts or omissions of the insured or the
    insured’s noncompliance with the terms of the policy.” Old Second Nat’l
    Bank v. Ind. Ins. Co., 
    29 N.E.3d 1168
    , 1175 (Ill App. Ct. 2015).
    4                                                         No. 14-1949
    proceeds. … If the restoration or repair is not eco-
    nomically feasible or Lender’s security would be
    lessened, the insurance proceeds shall be applied to
    the sums secured by this Security Instrument,
    whether or not then due, with excess, if any, paid to
    Borrower.
    (Emphasis added.) Section 5 also provided that CitiMort-
    gage could use the insurance proceeds to pay down the loan
    on the occurrence of any of three additional conditions: if the
    borrower abandoned the property, ignored notice concern-
    ing the insurance carrier’s offer to settle a claim, or if
    CitiMortgage foreclosed on the property.
    As we’ve noted, CitiMortgage used the insurance pro-
    ceeds to pay down the loan rather than repair the house, but
    it never claimed that restoration was economically infeasible
    or would reduce its security interest. Nor had any of the
    three special conditions described above occurred.
    Avila sued CitiMortgage in Cook County Circuit Court
    alleging that its actions breached a fiduciary duty and the
    mortgage contract. He sought to represent a class of all
    defaulting CitiMortgage borrowers whose homeowner’s
    insurance proceeds had been applied to their mortgage loans
    rather than home repairs. CitiMortgage removed the case to
    federal court. 3
    3  Federal jurisdiction arose under the Class Action Fairness Act,
    28 U.S.C. § 1332(d), based on minimal diversity. After an Illinois-based
    codefendant was dropped, the parties became completely diverse, so
    jurisdiction was also proper under 28 U.S.C. § 1332(a)(1).
    No. 14-1949                                                            5
    CitiMortgage moved to dismiss for failure to state a
    claim. See FED. R. CIV. P. 12(b)(6). The district court granted
    the motion, concluding that CitiMortgage owed no fiduciary
    duty and Avila was precluded from bringing a breach-of-
    contract claim because his default on his payment obliga-
    tions preceded CitiMortgage’s alleged breach. 4 The dismissal
    order was without prejudice, and Avila twice tried to amend
    his complaint. The later iterations of the complaint were also
    dismissed—the last one with prejudice. This appeal fol-
    lowed.
    II. Discussion
    We review de novo the judge’s order dismissing Avila’s
    complaint under Rule 12(b)(6) for failure to state a claim.
    Carmody v. Bd. of Trs. of the Univ. of Ill., 
    747 F.3d 470
    , 471 (7th
    Cir. 2014). To survive a motion to dismiss, a complaint must
    contain sufficient factual allegations to state a claim for relief
    that is legally sound and plausible on its face. Ashcroft v.
    Iqbal, 
    556 U.S. 662
    , 678 (2009) (citing Bell Atl. Corp. v.
    Twombly, 
    550 U.S. 544
    , 570 (2007)). Avila brought state-law
    claims for breach of fiduciary duty and breach of contract.
    Illinois law controls.
    A. Fiduciary Duty
    Avila alleges that CitiMortgage’s use of his homeowner’s
    insurance proceeds to pay down his mortgage loan was a
    4 Avila’s initial complaint also alleged claims for conversion and negli-
    gence. These claims too were dismissed, and Avila does not challenge
    this aspect of the judge’s ruling.
    6                                                              No. 14-1949
    breach of its duty as a fiduciary. “[I]n order to state a claim
    for breach of fiduciary duty, [a complaint] must … allege[]
    that a fiduciary duty exists, that the fiduciary duty was
    breached, and that such breach proximately caused the
    injury of which the plaintiff complains.” Neade v. Portes,
    
    739 N.E.2d 496
    , 502 (Ill. 2000). The judge concluded that
    Avila’s complaint failed to allege facts sufficient to support
    the existence of any fiduciary duty. We agree.
    “A fiduciary relationship exists when there is a special
    confidence reposed in one who, in equity and good con-
    science, is bound to act in good faith and with due regard to
    the interest of the one reposing the confidence.” Hensler v.
    Busey Bank, 
    596 N.E.2d 1269
    , 1274 (Ill. App. Ct. 1992). Some
    fiduciary relationships exist as a matter of law (e.g., the
    attorney-client relationship), but the mortgagor-mortgagee
    relationship is not one of them. 5 See Teachers Ins. & Annuity
    5 Where the alleged fiduciary relationship does not exist as a matter of
    law, Illinois requires that the facts from which the fiduciary relationship
    arises be “pleaded and proved by clear and convincing evidence.”
    Hensler v. Busey Bank, 
    596 N.E.2d 1269
    , 1275 (Ill. App. Ct. 1992). But
    federal pleading standards apply when considering a motion to dismiss
    a complaint that rests on diversity jurisdiction. See Windy City Metal
    Fabricators & Supply, Inc. v. CIT Tech. Fin. Servs., Inc., 
    536 F.3d 663
    , 670–72
    (7th Cir. 2008) (discussing the contemporary framework for determining
    whether a federal procedural rule applies); Caraluzzi v. Prudential Sec.,
    Inc., 
    824 F. Supp. 1206
    , 1213 (N.D. Ill. 1993) (holding that federal pleading
    standards control in a breach-of-fiduciary-duty action brought under
    Illinois law); 5 CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FED. PRAC.
    & PROC. CIV. § 1204 (3d ed. 2004) (“[The] suggesti[on] that state pleading
    tests must be followed insofar as the manner or the particularity of
    pleading in a federal court … [is] erroneous … .”). To survive CitiMort-
    gage’s motion to dismiss, Avila only needed to plead facts that plausibly
    stated a claim for relief arising out of CitiMortgage’s violation of a
    fiduciary duty.
    No. 14-1949                                                                7
    Ass’n of Am. v. La Salle Nat’l Bank, 
    691 N.E.2d 881
    , 888 (Ill
    App. Ct. 1998). Avila counters that the fiduciary relationship
    at issue in this case “is limited to the use of the insurance
    proceeds” and arose because “the insurance proceeds [were]
    placed in the hands of [CitiMortgage],” thus “creat[ing] an
    escrow” under Illinois law.
    An escrow is “[a] legal document or property delivered
    by a promisor to a third party to be held by the third party
    for a given amount of time or until the occurrence of a
    condition, at which time the third party is to hand over the
    document or property to the promisee.” BLACK’S LAW
    DICTIONARY (10th ed. 2014); see also Wiczer v. Wojciak,
    
    30 N.E.3d 670
    , 679 (Ill. App. Ct. 2015). In effect, an escrow
    reduces the degree of trust necessary to complete a deal by
    reducing the risk that one party won’t turn over money or
    documents as promised. Under Illinois law “[a]n escrow
    agent has a fiduciary duty to the party making the deposit
    and the party for whose benefit the deposit is made. As a
    result, an escrow agent must act impartially toward all
    parties.” 6 Wells Fargo Bank Minn., N.A. v. EnviroBusiness, Inc.,
    
    22 N.E.3d 125
    , 136 (Ill. App. Ct. 2014) (citation omitted).
    More specifically, an escrow agent’s “duty [is] to act only in
    accordance with the … escrow instructions.” Int’l Capital
    Corp. v. Moyer, 
    806 N.E.2d 1166
    , 1170 (Ill. App. Ct. 2004). If
    under the mortgage agreement CitiMortgage was an escrow
    6 Illinois courts have described escrow agents both as “special agents”
    and “trustees,” see Estate of Reinhold v. Mansfield, 
    412 N.E.2d 1146
    , 1149
    (Ill. App. Ct. 1980), but in either case the agent assumes fiduciary duties,
    see Albrecht v. Brais, 
    754 N.E.2d 396
    , 399 (Ill. App. Ct. 2001) (distinguish-
    ing an escrow agent from a trustee).
    8                                                    No. 14-1949
    agent, then Avila has adequately alleged the existence of a
    fiduciary duty.
    CitiMortgage objects that Avila’s escrow theory comes
    too late—he never used the word “escrow” in any of his
    three complaints and did not argue below that a fiduciary
    relationship between the parties arose based on an escrow.
    There’s no question that Avila could have helpfully clarified
    his case if he had characterized the alleged fiduciary rela-
    tionship as an escrow from the beginning. That said, plain-
    tiffs are not required to plead specific legal theories. King v.
    Kramer, 
    763 F.3d 635
    , 642 (7th Cir. 2014). Avila’s complaint
    alleged that a fiduciary duty existed because
    “Citi[Mortgage] had the right to retain exclusive control over
    these insurance proceeds” and he “had no right to object to
    or interfere with Citi[Mortgage]’s determination regarding
    the satisfactory completion of the [repair] work.” These
    allegations gave CitiMortgage and the court adequate notice
    of the scope of, and basis for, the alleged fiduciary relation-
    ship. Cf. Vincent v. City Colleges of Chi., 
    485 F.3d 919
    , 923 (7th
    Cir. 2007) (holding that Rule 8(a)(2) of the Federal Rules of
    Civil Procedure “calls for a short and plain statement; the
    plaintiff pleads claims, not facts or legal theories”).
    It’s true that Avila did not utter a word about an “escrow
    theory” in opposition to any of CitiMortgage’s Rule 12(b)(6)
    motions in the district court. Issues raised for the first time
    on appeal are generally treated as waived. County of
    McHenry v. Ins. Co. of the W., 
    438 F.3d 813
    , 820 (7th Cir. 2006)
    (explaining that new factual allegations may be considered
    on appeal if consistent with the complaint, but new issues
    raised for the first time on appeal ordinarily will not be
    No. 14-1949                                                   9
    addressed). Even if we set the waiver aside, however, Avila’s
    escrow theory comes up short.
    “The dominant party must accept the responsibility, accept
    the trust of the other party before a court can find a fiduciary
    relationship.” Pommier v. Peoples Bank Marycrest, 
    967 F.2d 1115
    , 1119 (7th Cir. 1992) (emphases added); see also DeWitt
    Cnty. Pub. Bldg. Comm’n v. County of DeWitt, 
    469 N.E.2d 689
    ,
    701 (Ill. App. Ct. 1984) (“Those who have in the law’s view
    been strangers remain such, unless both consent by word or
    deed to an alteration of that status.” (quoting S. Trust Co. v.
    Lucas, 
    245 F. 286
    , 288 (8th Cir. 1917))). Section 5 of the mort-
    gage agreement does not explicitly create an escrow, and
    nothing in Avila’s complaint supports an inference that
    CitiMortgage affirmatively accepted the role of escrow
    agent. Still, the existence of an escrow, like any fiduciary
    relationship, can “be determined from the relations of the
    parties and their respective rights and duties.” Albrecht v.
    Brais, 
    754 N.E.2d 396
    , 399 (Ill. App. Ct. 2001). Avila argues
    that section 5 implicitly creates an escrow. In other words, he
    argues that the implied escrow is so self-evident that
    CitiMortgage accepted the duties of escrow agent merely by
    entering into the mortgage agreement. This is essentially a
    question of contract interpretation.
    The function of an escrow agent is to serve as intermedi-
    ary, faithfully delivering the escrowed property in strict
    conformity with the instructions issued by the parties to the
    escrow agreement. See 
    Wiczer, 30 N.E.3d at 679
    ; Int’l Capital
    
    Corp., 806 N.E.2d at 1170
    . Avila says that CitiMortgage is the
    intermediary between his insurance carrier and himself. But
    that’s not an accurate characterization of CitiMortgage’s role.
    The insurance carrier was not party to the mortgage agree-
    10                                                        No. 14-1949
    ment and thus could not be the grantor in any escrow creat-
    ed by section 5. The insurance carrier’s involvement was
    completed as soon as it issued the check for the policy
    proceeds; it gave no instructions about how CitiMortgage
    should use the money, and without instructions there can be
    no escrow. 7
    Instead, section 5 is an agreement between Avila and
    CitiMortgage alone. And as a term of the contract, it exists
    almost exclusively for CitiMortgage’s benefit. Without
    section 5, Avila could use the insurance proceeds to repair
    his house or pay down his loan at his discretion. The mort-
    gage agreement shifts that discretion to CitiMortgage to
    ensure that repairs are “economically feasible,” that its
    “security is not lessened,” and that it will have “an oppor-
    tunity to inspect such Property to ensure the work has been
    completed to [its] satisfaction.” 8 Avila suggests that these are
    the escrow instructions, but it’s not consistent with a typical
    escrow arrangement to give an escrow agent authority to
    make self-interested and discretionary decisions about when
    and where to disburse the escrowed funds. Contract law
    imposes an implied duty of good faith on parties empow-
    ered by the contract to exercise discretion, see RBS Citizens,
    7 Avila’s homeowner’s insurance policy is not in the record, but any
    conditions it might impose on the use of the insurance proceeds are
    independent of the obligations imposed on CitiMortgage in section 5 of
    the mortgage agreement.
    8 The fact that Avila will also benefit from the insurance funds in the
    sense that they will ultimately be used either to repair his house or pay
    down his mortgage loan does not alter the conclusion that the purpose of
    the arrangement in section 5 is to enable CitiMortgage to protect its own
    interests, not Avila’s.
    No. 14-1949                                                          11
    Nat’l Ass’n v. RTG-Oak Lawn LLC, 
    943 N.E.2d 198
    , 206–07 (Ill.
    App. Ct. 2011), but that duty doesn’t create a fiduciary
    relationship. Simply put, nothing in section 5 indicates that
    CitiMortgage assumed a duty to act for Avila’s benefit in
    place of its own. See RESTATEMENT (THIRD) OF TRUSTS § 2
    cmt.b (2003) (“Despite the differences in the legal circum-
    stances and responsibilities of various fiduciaries, one
    characteristic is common to all: a person in a fiduciary
    relationship to another is under a duty to act for the benefit
    of the other as to matters within the scope of the relation-
    ship.”).
    There’s another important way in which CitiMortgage
    differs from a typical escrow agent: While “[a]n escrow
    agent … is not vested with title to the property,” 
    Albrecht, 754 N.E.2d at 399
    , CitiMortgage did have title to the insur-
    ance proceeds. CitiMortgage was a loss payee under the
    insurance policy, as well as the beneficiary of the insurance
    contract’s standard mortgage clause. 9 See GRANT S. NELSON &
    DALE A. WHITMAN, REAL ESTATE FINANCE LAW 173 (5th ed.
    2007) (“The effect of the [standard mortgage] provision is to
    insure the mortgagee’s interest, as fully and to the same
    extent as if the mortgagee had taken out a separate policy
    directly from the insurer … .”); Old Second Nat’l Bank v. Ind.
    Ins. Co., 
    29 N.E.3d 1168
    , 1175 (Ill. App. Ct. 2015). In other
    words, CitiMortgage was not merely a custodian of Avila’s
    money; the insurance proceeds were issued to CitiMortgage
    directly, and it had a property interest in them. While it’s
    9 Avila emphasizes that section 5 says that CitiMortgage will “hold” the
    insurance proceeds. That single use of the term does not alone change
    the formal legal relationships established by or mandated in the mort-
    gage agreement.
    12                                                No. 14-1949
    common for escrow agents to be compensated out of the
    funds in the escrow, it’s not consistent with an escrow for the
    agent to have title to those funds while they remain in es-
    crow.
    This conclusion is bolstered by the fact that CitiMortgage
    expressly agreed to the creation of escrows (and to be an
    escrow agent) elsewhere in the mortgage agreement. Specifi-
    cally, section 3 allows for the use of escrows to pay for
    property taxes, lease payments, insurance premiums, and
    community association dues. The “Definitions” section of
    the mortgage contract defines “Escrow Items” solely as
    “those items that are described in [s]ection 3.”
    Comparing sections 3 and 5 is telling. Section 3 allows
    third-party banks to collect money from Avila and disburse
    it to the relevant tax authorities, insurance carriers, and
    homeowner’s associations in accordance with the instruc-
    tions agreed to by Avila and CitiMortgage. These “instruc-
    tions” are clear and the payment amounts are fixed by law
    or contract. Distribution of the escrowed funds is not subject
    to the escrow agent’s discretion, nor is the agent entitled to
    determine whether a given use of the funds furthers its own
    economic interests. Finally, the intermediary bank does not
    have an independent property interest in the funds—it’s just
    a custodian until the money can be paid out in accordance
    with the escrow instructions.
    Section 3 expressly authorizes CitiMortgage to serve as
    the escrow agent, assuming it is “an institution whose
    deposits are insured by a federal agency.” But the important
    point is that its function is simply to possess the funds and
    disburse them in accordance with the escrow instructions.
    There can be no conflict of interest between Avila and
    No. 14-1949                                                  13
    CitiMortgage with respect to the section 3 escrows because
    both parties share a common interest in ensuring that the
    taxes, premiums, and fees are paid on time. Also, section 3
    (unlike section 5) requires CitiMortgage, if it’s serving as
    escrow agent, to provide an annual accounting of the es-
    crowed funds. Cf. Midwest Decks, Inc. v. Butler & Baretz
    Acquisitions, Inc., 
    649 N.E.2d 511
    , 517 (Ill. App. Ct. 1995)
    (noting, in the course of finding that no escrow existed, that
    “the purchase agreement in the case at bar did not call for
    setting up an escrow account or for segregating the funds”).
    In sum, while the parties clearly intended for section 5 to
    govern their interlocking contractual obligations with re-
    spect to Avila’s homeowner’s insurance policy, Avila has not
    plausibly alleged that CitiMortgage assumed any additional,
    extra-contractual duties of a fiduciary nature. See Zelickman
    v. Bell Fed. Sav. & Loan Ass’n, 
    301 N.E.2d 47
    , 51 (Ill. App. Ct.
    1973) (holding that a fund from which the lender paid
    insurance premiums on behalf of the homeowner was not a
    trust but rather “an additional contractual security device for
    the protection of defendant’s rights as creditor, specifically
    agreed to in the contract between the parties”). The claim for
    breach of a fiduciary duty was properly dismissed.
    B. Breach of Contract
    Avila’s breach-of-contract claim is based on the following
    language from section 5: “Unless Lender and Borrower
    otherwise agree in writing, any insurance proceeds … shall
    be applied to restoration or repair of the Property, if the
    restoration or repair is economically feasible and Lender’s
    security interest is not lessened.” (Emphasis added.) Because
    14                                                 No. 14-1949
    CitiMortgage never indicated that repairing the house was
    economically infeasible or would harm its security interest,
    Avila argues that it breached the mortgage agreement. He
    also points out that the other three conditions listed in
    section 5 that would permit CitiMortgage to use the insur-
    ance proceeds to pay down the loan—abandonment, the
    failure to respond to an insurance settlement, and foreclo-
    sure—did not occur.
    The judge concluded that Avila could not prevail on his
    breach-of-contract claim even assuming CitiMortgage had, in
    fact, breached section 5. The elements of a claim for breach of
    contract are (1) the existence of a valid and enforceable
    contract; (2) substantial performance by the plaintiff;
    (3) breach of contract by the defendant; and (4) resultant
    injury to the plaintiff. W.W. Vincent & Co. v. First Colony Life
    Ins. Co., 
    814 N.E.2d 960
    , 967 (Ill. App. Ct. 2004). The judge
    reasoned that since Avila had defaulted on his mortgage
    payments prior to CitiMortgage’s alleged misuse of the
    insurance proceeds, he fell short on the “substantial perfor-
    mance” element of the claim. See RESTATEMENT (SECOND) OF
    CONTRACTS § 237 (1981) (“[I]t is a condition of each party’s
    remaining duties to render performances to be exchanged
    under an exchange of promises that there be no uncured
    material failure by the other party to render any such per-
    formance due at an earlier time.”). Avila responds that the
    parties intended that section 5 would remain enforceable
    even after a default by the borrower.
    Section 22 of the mortgage agreement describes
    CitiMortgage’s remedies in the event of a default by the
    homeowner. Specifically, the lender is entitled to accelerate a
    loan and initiate judicial foreclosure proceedings, but only
    No. 14-1949                                                   15
    after giving the homeowner notice of the alleged default and
    providing 30 days to cure it. (Acceleration in turn triggers
    the borrower’s right to reinstate the mortgage agreement if
    certain conditions are met.) Avila argues that because sec-
    tion 22 establishes a specific process for dealing with a
    default, the homeowner’s first default would not make the
    mortgage agreement thereafter wholly unenforceable. And
    while CitiMortgage could have accelerated Avila’s loan in
    response to his default, applying the insurance proceeds to
    pay down his loan balance was not a remedy for missed
    payments.
    That’s a reasonable reading of the mortgage contract. Sec-
    tion 5 appears to envision the survival of its terms after a
    default. As we’ve explained, that section gives CitiMortgage
    the right to apply insurance proceeds toward the outstand-
    ing loan balance under certain specified conditions, includ-
    ing the homeowner’s abandonment of the property or
    foreclosure by CitiMortgage. Abandonment is a default per
    se under certain circumstances (under section 6 of the
    agreement), and foreclosure necessarily follows a default.
    These provisions of section 5 would be superfluous if any
    default immediately gave CitiMortgage the right to apply an
    insurance payout toward the mortgage loan. See Cent. Ill.
    Light Co. v. Home Ins. Co., 
    821 N.E.2d 206
    , 213 (Ill. 2004) (“[A]
    contract[] is to be construed as a whole, giving effect to every
    provision, if possible, because it must be assumed that every
    provision was intended to serve a purpose.”).
    Indeed, CitiMortgage concedes that the mortgage agree-
    ment does not become a nullity at the moment of default,
    though it apparently thinks that the contract becomes entire-
    ly unenforceable (from the breaching party’s perspective) from
    16                                                   No. 14-1949
    that point forward. But CitiMortgage’s position would give it
    a carte blanche of indeterminate duration to hold Avila to his
    contractual obligations while its own performance is subject
    to nothing but its own whims.
    Contracting parties are free to negotiate in advance how
    breaches should be handled. For example, a nondefaulting
    party cannot recover in excess of the amount it agreed to in a
    liquidated damages clause, regardless of its actual damages.
    See Berggren v. Hill, 
    928 N.E.2d 1225
    , 1229 (Ill. App. Ct. 2010).
    A contrary holding would raise equitable concerns similar to
    those addressed by the election-of-remedies principle, which
    holds that
    [i]f a party to a contract breaks it, the other par-
    ty can abandon the contract (unless the breach
    is very minor) and sue for damages, or it can
    continue with the contract and sue for damag-
    es. But if it makes the latter election, it is bound
    to the obligations that the contract imposes on
    it.
    Emerald Invs. Ltd. P’ship v. Allmerica Fin. Life Ins. & Annuity
    Co., 
    516 F.3d 612
    , 618 (7th Cir. 2008) (citations omitted); see
    also Omni Partners v. Down, 
    614 N.E.2d 1342
    , 1346 (Ill. App.
    Ct. 1993) (“[I]f the injured party chooses to continue perfor-
    mance, he has doubtless lost his right to stop performance.”);
    14 SAMUEL WILLISTON & RICHARD A. LORD, WILLISTON ON
    CONTRACTS § 43:15 (4th ed. 2014) (“[B]y outward manifesta-
    tions indicating that the defective performance has been
    accepted, the obligor has sent the unmistakable signal—by
    conduct, rather than by an express promise—that it still
    considers the contract to be binding.”).
    No. 14-1949                                                  17
    In light of the bargained-for remedies for default con-
    tained in section 22 of the mortgage agreement, and the
    presumption against superfluity as applied to section 5,
    Avila has stated a facially plausible claim that the parties did
    not intend that his missed payments preclude him from
    enforcing section 5 of the agreement. Though CitiMortgage
    could have accelerated Avila’s loan in response to his missed
    mortgage payments, it did not do so.
    CitiMortgage cites Hukic v. Aurora Loan Services, 
    588 F.3d 420
    (7th Cir. 2009), for the proposition that a borrower’s
    breach makes him powerless to enforce a mortgage agree-
    ment. That’s a significant overreading of the opinion. Hukic’s
    mortgage agreement required him to provide his lender
    with proof that he was paying his property taxes and insur-
    ance premiums. If he didn’t, the lender was entitled to pay
    the taxes and insurance itself and then add the costs to the
    monthly mortgage payment. 
    Id. at 433.
    Hukic paid his taxes
    and premiums but ignored the lender’s repeated requests for
    proof of payment and then sued when the lender paid the
    bills on his behalf. 
    Id. We affirmed
    the dismissal of Hukic’s
    breach-of-contract claim. 
    Id. As we
    explained in a later case,
    “Hukic’s failure to comply with his contractual obligations
    was material and absolved the servicers from liability be-
    cause it directly caused the servicers’ actions that were the
    basis of his own breach of contract claims.” Catalan v. GMAC
    Mortg. Corp., 
    629 F.3d 676
    , 692 (7th Cir. 2011).
    Here, Avila’s claim is that CitiMortgage’s use of the in-
    surance proceeds to reduce his loan was not a contractually
    permitted response to his default. In Hukic the lender’s
    response to the borrower’s default was expressly permitted.
    The two cases are not analogous.
    18                                                No. 14-1949
    CitiMortgage also claims that Avila’s complaint is defec-
    tive unless it asserts his compliance with each and every
    affirmative duty imposed on him by the mortgage agree-
    ment. We disagree, for essentially the same reasons dis-
    cussed above; Avila has pleaded a facially plausible claim
    that the mortgage agreement survived his default. The
    possibility that Avila has other unknown (and uncured)
    defaults does not necessarily defeat his claim.
    We do not, of course, express any view on the ultimate
    merits of Avila’s claim. CitiMortgage may have contract
    defenses that eventually prove decisive. Perhaps Avila’s suit
    should be barred because he breached the contract by filing
    suit without providing the lender with notice and a “reason-
    able period” in which to “take corrective action,” as required
    by section 20. Perhaps CitiMortgage can muster evidence
    that the parties did not intend for section 22 to be conclusive
    as to CitiMortgage’s remedies in the face of a default and in
    fact wanted the breaching party to be precluded from enforc-
    ing the mortgage agreement. Or perhaps CitiMortgage can
    revive its argument—rejected in passing by the district
    court—that Avila suffered no economic damages because the
    insurance proceeds reduced his loan balance. None of these
    potential defenses have been litigated, and they were not
    part of the judge’s order dismissing the case. CitiMortgage is
    free to raise them on remand.
    For the foregoing reasons, we AFFIRM the dismissal of the
    claim for breach of fiduciary duty, REVERSE the dismissal of
    the breach-of-contract claim, and REMAND for further pro-
    ceedings consistent with this opinion.
    

Document Info

Docket Number: 14-1949

Citation Numbers: 801 F.3d 777, 2015 U.S. App. LEXIS 15779, 2015 WL 5166377

Judges: Easterbrook, Williams, Sykes

Filed Date: 9/4/2015

Precedential Status: Precedential

Modified Date: 10/19/2024

Authorities (22)

Omni Partners v. Down , 246 Ill. App. 3d 57 ( 1993 )

W.W. Vincent & Co. v. First Colony Life Insurance , 351 Ill. App. 3d 752 ( 2004 )

Albrecht v. Brais , 324 Ill. App. 3d 188 ( 2001 )

International Capital Corp. v. Moyer , 347 Ill. App. 3d 116 ( 2004 )

Neade v. Portes , 193 Ill. 2d 433 ( 2000 )

County of McHenry v. Insurance Company of the West , 438 F.3d 813 ( 2006 )

De Witt County Public Building Commission v. County of De ... , 128 Ill. App. 3d 11 ( 1984 )

Zelickman v. Bell Federal Savings & Loan Ass'n`` , 13 Ill. App. 3d 578 ( 1973 )

Midwest Decks, Inc. v. Butler and Baretz Acquisitions, Inc. , 208 Ill. Dec. 455 ( 1995 )

Caraluzzi v. Prudential Securities, Inc. , 824 F. Supp. 1206 ( 1993 )

Hensler v. Busey Bank , 231 Ill. App. 3d 920 ( 1992 )

Veronica Vincent v. City Colleges of Chicago, Ezekiel ... , 485 F.3d 919 ( 2007 )

Central Illinois Light Co. v. Home Insurance , 213 Ill. 2d 141 ( 2004 )

Bell Atlantic Corp. v. Twombly , 127 S. Ct. 1955 ( 2007 )

Ashcroft v. Iqbal , 129 S. Ct. 1937 ( 2009 )

Windy City Metal Fabricators & Supply, Inc. v. CIT ... , 536 F.3d 663 ( 2008 )

Hukic v. Aurora Loan Services , 588 F.3d 420 ( 2009 )

Teachers Insurance & Annuity Ass'n of America v. La Salle ... , 295 Ill. App. 3d 61 ( 1998 )

Emerald Investments Ltd. Partnership v. Allmerica Financial ... , 516 F.3d 612 ( 2008 )

bernard-pommier-individually-and-as-a-beneficiary-of-land-trust-number-959 , 967 F.2d 1115 ( 1992 )

View All Authorities »