Daily Development for Wednesday, October 3, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

MORTGAGES; INSURANCE; ESCROWS: Mortgagee acquiring insurance with monies escrowed from mortgagor may be fiduciary. 

Smith v. GMAC Mortgage Corp., 2007 WESTLAW 2593148 (9/5/07)

Smith had a home mortgage on which she paid escrows for taxes and insurance.   She acquired insurance from Nationwide Insurance Company.    About eight months into the loan relationship, she  received a notice from the original mortgagee loan was being transferred to GMAC, and that GMAC would collect payments and manage your escrow account for insurance . . . .   GMAC sent Smith a letter confirming this and that a notice was being sent to the insurer to send future insurance information to GMAC. 

For over two years, GMAC made regular payments out of the escrow account to pay insurance premiums on Smiths property.  Nationwide peridically sent notice to Smith that the premiums were being billed to GMAC.  

Then, although Smith had continued to pay into escrow, Nationwide sent a series of notices to GMAC that the insurance premiums had not been paid and that the policy would be cancelled if the nonpayment was not resolved.  Ultimately, a Nationwide agent sent a notice to GMAC that the insurance had indeed been cancelled and that Ms. Smith had lost the advantage of earlier eligibility rules, so that if she renewed her insurance, the premium would be recomputed under new guidelines.

Later, GMAC denied that it had failed to pay the insurance premiums to Nationwide, and blamed the problem on Nationwide.  But GMAC apparently never denied that it did not respond to the numerous warnings it received from Nationwide that the policy was about to lapse for nonpayment.  And Smith apparently got no word of the problem from either Nationwide or GMAC until after the policy had lapsed.

Shortly after the policy was cancelled, Smith received notice from GMAC that it would force place an insurance policy through Balboa Insurance Group.  The policy cost three times the amount of the Nationwide policy.  Interestingly, GMAC had just selected Balboa as the manager of its mortgagor escrow functions.  So if the mortgagees side did fail to make a payment to Nationwide, it likely was Balboa that erred.  And Balboa is also the beneficiary.  Smith alleged that GMAC had a profit interest in Balboa, anyway. 

Ms. Smith alleged that the increased burden of this policy caused her to default in her mortgage payments, which led GMAC to schedule a foreclosure.  Even when confronted with the evidence of Nationwides assertion that GMAC had defaulted in the insurance payments, leading to increased insurance payments and therefore mortgage payments, GMAC refused to postpone the foreclosure.  A judge dismissed it. 

In addition to these problems Smiths credit rating deteriorated, causing other credit problems.  Smith further alleged that GMAC failed to pay the property taxes on her home as well, although it had the escrowed monies to do so.  She reobtained a Nationwide insurance policy, but due to the rerating, her premiums were around 70% higher than before.

In her lawsuit, Smith chose to predicate her claim on the notion that GMAC had a fiduciary responsibility to her as manager of her insurance escrow account.  GMAC sought summary judgment on the grounds that a lender could not be regarded as a fiduciary of a borrower as a matter of law. 

The federal court here ruled that, under North Carolina law, whether a fiduciary relationship exists depends on all the facts and circumstances.  A party can be a fiduciary for another party as to some elements of the relationship between the two, but not others.  Here, the court ruled, plaintiff Smith certainly had made a sufficient showing to support denial of summary judgment.

The court noted that even as to situations where North Carolina had determined that no fiduciary relationship typically was involved, such a relationship could be found where special circumstances existed resulting in one party having superiority and influence over the other.  Apparently as an additional consideration, the court discussed relationships in which a subordinate party entrusted the handling of its business affairs to the dominant party and place trust and confidence in it.  In fact, the court suggested, North Carolina already has concluded that a mortgagee had a fiduciary relationship toward a mortgagor where transactions affecting the mortgaged property are concerned.

Although the court acknowledged that a typical debtor creditor relationship normally would not give rise to a fiduciary relationship being found, this likely will not be so when, in a residential transaction a debtor entrusts to the mortgagee the responsibility for paying taxes and insurance with monies provided by the debtor.  The court concluded, however, that the ultimate determination of whether there was a fiduciary duty would be a jury determination.  But certainly there were enough facts alleged, the court held, to permit the jury to consider the question here. 

Comment 1: This case has potentially broad consequences.  If, indeed a mortgagee is a fiduciary of the borrower in managing the escrow account, it might also have that same duty in connection with the force placing of insurance.  If that is the case, then the fiduciary would have a duty, first, to avoid profiting itself from the placement of such insurance and, second to make forced placement decisions that were in the best interests of the borrower.  Certainly there is cheaper insurance available that that which typically is force placed by lenders.  And certainly the lenders generally profit in such forced placements at the present time.  All this would have to change.

Further, the fiduciary relationship might help the mortgagor in situations in which, due to the mortgagees negligence, the insurance is not paid, but the mortgagor gets wind of the problem.  Once the mortgagor knows of the problem, the mortgagor perhaps would have an immediate duty to mitigate.  But if the mortgagor can rely on the mortgagee as a fiduciary, the mortgagors failure to solve the problem immediately may not deprive the mortgagor of remedies against the mortgagee. 

Note that here apparently there was not prior communication about the premium default between mortgagee and mortgagor, but the facts are vague about when the mortgagor discovered that she had a problem and what she did to correct it. 

Comment 2: The editor believes he may be the only scholar who has ever considered insurance escrow questions in a law review article.  He did so in The Mortgagees Interest in Casualty Loss Proceeds; Evolving Rules and Risks, 32   ABA Real Property, Probate & Trust Law Journal, 1 (1997).  Specifically as to the escrow issue, the editor concluded that there ought to be a cognizable duty on the part of the mortgagee that collects escrows to use them to buy appropriate insurance.  But, remarkably, the editor found several cases suggesting otherwise, and discusses them at some length in the article.  (Most of the article deals with other mortgagee insurance issues.) 

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