[161 NJSuper Page 594] Originally certified as a class action by the trial judge, 133 N.J. Super. 124 (Ch. Div. 1975), this matter was remanded by the Appellate Division to be tried as a "test case," reserving for future consideration whether it
should be certified as a class action. 143 N.J. Super. 423 (App. Div. 1976). Pursuant to that remand the Chancery Division entered judgment adverse to plaintiffs on the merits of the cause of action. 154 N.J. Super. 576 (Ch. Div. 1977). Plaintiffs now appeal.
The facts are detailed in the cited decisions and need not be repeated here. Suffice it to say that plaintiffs, mortgagors under G.I. and F.H.A. mortgages, appeal from a decision holding that, although the mortgage instruments provide that advance, estimated tax payments paid to defendant mortgagees (hereafter sometimes called "the banks") are to be held "in trust" for payment of taxes, the parties did not intend to create a trust thereby but only to impose upon the mortgagees a contractual duty to apply the payments to taxes. Thus, defendant mortgagees were not held accountable by the trial court for any money earned through investment of said funds.
Defendant mortgagees cross-appeal from the trial judge's decision to enjoin them from using the "in trust" language in such mortgages in the future and reserving the issue of counsel fees and awarding costs.
Nature of the relationship: trust or debt
Plaintiffs contend that a trust was created because of the "in trust" language of the mortgage instruments and, further, on the theory that the tax payments were "deposits for a special purpose." We conclude that such contentions are erroneously based on a too literal reading of the "in trust" language, isolating it from the remaining provisions of the instruments, and fail to consider established principles of trust law as recognized by leading authorities in the field and as applied, in virtual unanimity, by the decisional law of this and other states.
Whether a trust or a debt is created when one party pays money to another depends primarily upon their intent, State
v. Atlantic City Electric Co. , 23 N.J. 259, 266 (1957); State v. Western Union Telegraph Co. , 17 N.J. 149, 152 (1954). It is well established that use of the phrase "in trust" in connection with a particular transaction does not dispose of the question of intention, and that even where such language is used a debtor-creditor relation may nonetheless arise. 1 Scott, Trusts (3 ed. 1967), § 24 at 194-195; Restatement 2d, Trusts , § 24, Comment (b) at 68 (1959); Brooks v. Valley National Bank , 113 Ariz. 169, 548 P. 2d 1166, 1171 (Sup. Ct. 1976). Further, the mere fact that a bank or other entity has accepted funds for transmittal to a third party does not necessarily give rise to a trust relationship. Again, the question is one of intent. See State v. Western Union Telegraph Co., supra 17 N.J. at 152.
In determining whether the parties intended to create a trust or merely a debt, several factors must be considered. Thus, in Restatement 2d, Trusts, supra § 12, Comment (g) at 37, it is said:
g. Manifestation of intention. If one person pays money to another, it depends upon the manifested intention of the parties whether a trust or a debt is created. If the intention is that the money shall be kept or used as a separate fund for the benefit of the payor or a third person, a trust is created. If the intention is that the person receiving the money shall have the unrestricted use thereof, being liable to pay a similar amount whether with or without interest to the payor or to a third person, a debt is created.
The intention of the parties will be ascertained by a consideration of their words and conduct in the light of all the circumstances. Among the circumstances which may be of importance in determining the intention of the parties are: (1) the presence or absence of an agreement to pay interest on the money paid; (2) the amount of money paid; (3) the time which is to elapse before the payee is to be called upon to perform his agreement; (4) the relative financial situation of the parties; (5) the relations between the parties; (6) their respective callings; (7) the usage or custom in such or similar transactions.
In applying these principles in the case at bar it must first be recognized that plaintiffs and defendants, by reason of their mortgagor-mortgagee relationship, stand in a debtor-creditor
relation and that the advance tax payments were required solely as further security for the mortgage debt. Thus, the payments were intended to benefits the banks, not plaintiffs. In State v. Atlantic City Electric Co., supra , the Supreme Court, in determining whether utility deposits were held by defendant as a trustee, considered this factor as significant in finding that no trust relation existed: "The individual consumer was not to retain any beneficial interest in the money deposited, the security arrangement obviously being solely for the benefit of the company." 23 N.J. at 269; Petherbridge v. Altadena Federal S. & L. Ass'n , 79 Cal. App. 3d 509, 145 Cal. Rptr. 87, 96 (D. Ct. App. 1978).
Second, the terms of the mortgage instruments themselves indicate that the parties considered the tax payments as part of the "debt" created by the loan and mortgage. The instruments state flatly that failure to pay the estimated taxes in advance shall constitute a deficiency and default, and that upon such default defendants may opt to declare the entire indebtedness immediately due and payable. Thus, it is clear that the tax payments were in no way different from the payments on account of the principal and interest due under the mortgage, the only exception being that defendants thereby became obligated to satisfy the taxes. As such, the transaction partakes more of a debtor-creditor relation than of a trust relation. This is also evidenced by the fact that excess payments for taxes, insurance, ground rents and special assessments "shall be credited on subsequent payments" -- not held in a separate account for future charges.
Third, the mortgage instruments make no provision for segregating tax payments in a separate account. In fact, as indicated above, the instruments affirmatively indicate that such payments would not be segregated. The fact that there is no provision for segregating the payments and that the payments were, indeed, not segregated provides strong evidence that no trust was intended. See State v. Atlantic City Electric Co., supra 23 N.J. at 268-269; State v. Western Union Telegraph Co., supra 17 N.J. at 152-153.
Further, plaintiffs assert that a trust relationship is indicated by the fact that defendants were not required to pay interest on the tax payments. True, such a circumstance is ordinarily probative of the existence of a trust. State v. Atlantic City Electric Co., supra 23 N.J. at 266. However, payment of interest is but one factor which the courts may assess and is not determinative in itself. McGlynn v. Schultz , 90 N.J. Super. ...