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Kronisch v. Howard Savings Institution

Decided: October 21, 1977.

MYRON W. KRONISCH AND SHEILA KRONISCH, INDIVIDUALLY AND ON BEHALF OF A CLASS, PLAINTIFFS,
v.
THE HOWARD SAVINGS INSTITUTION, A NEW JERSEY CORPORATION, INDIVIDUALLY AND AS REPRESENTATIVE OF A CLASS, DEFENDANT. HAROLD CHAMBERS AND VERAIAN CHAMBERS, HIS WIFE, INDIVIDUALLY AND ON BEHALF OF A CLASS, PLAINTIFFS, V. BERKELEY SAVINGS AND LOAN ASSOCIATION OF NEW JERSEY, A NEW JERSEY CORPORATION, INDIVIDUALLY AND AS REPRESENTATIVE OF A CLASS, DEFENDANT



Lester, J.s.c.

Lester

This matter was remanded to this court by the Appellate Division, 143 N.J. Super. 423 (1976). The case had been certified as a class action by the trial court, 133 N.J. Super. 124 (Ch. Div. 1975), and an appeal was taken.

The appellate court reserved and remanded the matter as a "test case". The reported decisions contained a recitation of the background of this litigation. It is not necessary to repeat or expand on the facts except as may be necessary to meet the mandate before this court.

The issue here is whether a mortgagor is entitled to the profits derived from the investment of tax escrow moneys by a mortgagee operating under the mortgage instruments which describe the escrow fund as being held "in trust".

Plaintiffs Kronisch purchased their residence in Livingston, New Jersey, by the use of a G.I. mortgage with defendant

The Howard Savings Institution (Howard) for $18,000.00 for a period of twenty-five years. The mortgage was executed and delivered on October 23, 1957. Mr. Kronisch has been an attorney-at-law of New Jersey since 1957 and indicated the probability of having read through the document line by line prior to its execution.

Neither before nor at the closing was there discussion of how taxes were to be paid nor did plaintiffs, prior to July 25, 1972, request to pay taxes directly or inquire whether the tax escrow was segregated from Howard's general fund or had produced any earnings for the bank.

Plaintiffs Chambers obtained an F.H.A. mortgage from defendant Berkeley Savings and Loan Association of New Jersey (Berkeley) on May 31, 1972. Prior to the closing the Chambers were told by an officer of Berkeley that the mortgage agreement required the mortgagors to pay a monthly sum for taxes and that Berkeley would make sure they were properly paid to the taxing authority.

There were no conversations or inquiries made prior to the institution of this action as to whether taxes could be paid by the mortgagors directly, or whether Berkeley would segregate the monthly escrow or pay over to the Chambers any earnings derived from investment of the escrowed funds.

The Kronisch G.I. mortgage contained the following language:

"Mortgagor, in order more fully to protect the security of this mortgage, hereby covenants and agrees as follows:

"1. Together with, and in addition to, the monthly payments of principal and interest payable under the terms of the bond secured hereby, he will pay to the Mortgagee, on the first day of each month until said bond is fully paid:

"(a) a sum equal to the ground rents, if any, next due, plus the premiums that will next become due and payable on policies of fire and other hazard insurance covering the mortgaged property, plus taxes and assessments next due on the mortgaged property (all as estimated by the Mortgagee and of which the Mortgagor is notified) less all sums already paid therefor divided by the number of months to elapse before one month prior to the date when such ground rents, premiums, taxes and assessments

will become delinquent, such sums to be held by Mortgagee in trust to pay such ground rents, premiums, taxes and special assessments." [Emphasis added.]

Similarly, the Chambers F.H.A. mortgage provided:

"And the Mortgagor, in order to more fully protect the security of this mortgage, does hereby covenant as follows:

"1. That, together with, and in addition to, the monthly payments of principal and interest payable under the terms of the bond secured hereby, he will pay to the Mortgagee, on the first day of each month until the said bond is fully paid, the following sums:

"(a) * * *

"(b) a sum equal to the ground rents, if any, next due, plus the premiums that will next become due and payable on policies of fire and other hazard insurance covering the mortgaged property, plus taxes and assessments next due on the mortgaged property (all as estimated by the Mortgagee) less all sums already paid therefor divided by the number of months to elapse before one month prior to the date when such ground rents, premiums, taxes and assessments will become delinquent, such sums to be held in trust to pay such ground rents, premiums, taxes and special assessments; * * *." [Emphasis added.]

These funds were commingled with the bank's general funds and were in all likelihood used for investment purposes. The bank made no disclosure to plaintiffs or any other mortgagor as to what these funds had earned, and no distribution was ever made of such earnings; nor were any charges ever made for the administrative expense of the so-called "trust".

Plaintiffs maintain that the undertaking of the respective defendants with regard to these funds involved a trust and that, accordingly, defendants, as trustees, were under an obligation to segregate the money "entrusted" to them and to apply the same to no other purpose than for that which the trust was established and that a trustee, as a fiduciary, must account for any profit or loss incurred by the unauthorized investment of trust funds.

As plaintiffs have put it, "where A delivers $100 to B in trust, that B shall pay the said $100 to C 30 days later, B is accountable for profits if in the 30 day interim he shall

speculate with the said $100 on the stock market and derive a profit therefrom".

Plaintiffs argue that a trust is established by the express language of the respective mortgage documents, by an analysis of the purposes of the escrow, and by operation of the theory of constructive trust.

Defendants contend that the mortgage language merely imposed on them the contractual obligation to pay taxes and insurance properly and that in the absence of any breach of this contractual obligation, the lending institutions were free to deal with the funds as they saw fit.

I. SCOPE OF INQUIRY

Before proceeding to a discussion of the merits, mention must be made of the unusual circumstances under which this litigation is being pursued. Plaintiffs had originally brought this action seeking to have themselves designated representatives of all mortgagors similarly situated in New Jersey and having defendants designated representatives of a class or classes of similarly situated mortgagees pursuant to R. 4:32.

The issue of the propriety of the trial judge approving the maintainability of the class actions, Kronisch v. Howard Savings Institution , 133 N.J. Super. 124 (Ch. Div. 1975), was reserved by the Appellate Division which held that in view of the "formidable" problems entailed in the projected class action, it would better serve the interests of the judicial system to have the matter proceed as a "test case" on remand. Kronisch v. Howard Savings Institution , 143 N.J. Super. 423 (App. Div. 1976).

"In sum, we conclude that since the decision in a 'test case' may make unnecessary the management of the massive class action contemplated, maintenance of a class action is not, at this time, superior to the use of the test case approach. * * * We remand the cases of Kronisch v. The Howard Savings Institution and Chambers v. Berkeley Savings and Loan Association to the trial court. That court is to determine the liability of defendants on the issue of their rights and obligations with respect to tax escrow deposits as they arise from the language of the mortgage documents. We further direct

that on the remand the trial court is to exclude consideration of any defenses asserted against the named plaintiffs, such as laches, estoppel, waiver or other defense contentions unrelated to construction of the documentary language.

"The trial court is to make findings and conclusions and file them with this court * * *". Kronisch, supra , at 431.

This opinion, then, is an attempt to follow that mandate. It is apparent that the normal scope of evidentiary material has been subject to curtailment by the mandate.

It is the position of plaintiffs that the Appellate Division intended this court to look solely to the language of the mortgage documents in order to determine whether a trust was thereby created. Reliance is placed on the words, "as they arise from the language of the mortgage documents". Defendants, on the other hand, would have this court consider all extrinsic evidence that would assist it in determining the intent of the parties.

Neither party's contentions are fully acceptable. Were plaintiffs' position to be accepted, and the duty of this court were confined to a perusal solely of language in the mortgage documents, it would be difficult to conceive why the Appellate Division would have remanded the matter. The operative portion of the mortgage documents bearing upon the establishment of a tax escrow provided that "such sums to be held by mortgagee in trust to pay such ground rents, premiums, taxes and special assessments". [Emphasis added.] It would obviate the necessity for a remand "to make findings" were this court to hold that the language in question means what it purports to mean; i.e. , that a trust relation is established. It would also obviate the necessity for a further hearing by a trial court were it authorized to consider only whether a trust is created by virtue of the payment, in the abstract, of money to one person for a specific purpose.

The objective of this court in construing the terms of this "contract" is, as it is in all such cases, to discern the intent of the parties and to enforce their rights as they arise from their agreement.

Ordinarily, the written terms of an agreement are the sole objective manifestation of the parties' intent, and it is only by resort to the writing itself that their intent may be discovered. Extrinsic or parol evidence is, therefore, inadmissible. Naumberg v. Young , 44 N.J.L. 331, 339 (S. Ct. 1882); Ross v. Orr , 3 N.J. 277, 282 (1949). This rule of construction is equally applicable to ...


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