Daniel Avila v. CitiMortgage, Incorporated
2015 U.S. App. LEXIS 15779
| 7th Cir. | 2015Background
- Avila obtained a mortgage from CitiMortgage and, after a 2010 fire, his homeowner’s insurer paid just over $150,000. CitiMortgage, named as loss payee, took control of the proceeds.
- Avila hired a contractor; CitiMortgage disbursed $50,000 for repairs, later found the work unsatisfactory, and by then Avila had missed several mortgage payments.
- CitiMortgage applied the remaining ~$100,000 of insurance proceeds to Avila’s loan balance rather than completing repairs; the house was never repaired.
- Section 5 of the mortgage contract allocated rights over insurance proceeds: proceeds should be used for repair if feasible and Lender’s security isn’t lessened; alternatively proceeds may be applied to the loan under specified conditions (abandonment, failure to respond to settlement, or foreclosure).
- Avila sued in state court for breach of fiduciary duty and breach of contract (class action), defendant removed to federal court; the district court dismissed both claims (fiduciary duty dismissed; contract claim dismissed as barred by Avila’s prior default).
- On appeal the Seventh Circuit affirmed dismissal of the fiduciary-duty claim but reversed dismissal of the breach-of-contract claim and remanded for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether CitiMortgage owed a fiduciary duty (escrow/agent) over insurance proceeds | Avila: Section 5 put proceeds "in hands of" CitiMortgage creating an escrow and fiduciary duties to use proceeds for repairs | CitiMortgage: No escrow; section 5 protects lender’s interests and does not show acceptance of fiduciary role | Held: No fiduciary duty — section 5 does not plausibly show an escrow or that lender assumed duties to act for borrower’s benefit |
| Whether insurance proceeds were improperly applied to loan rather than repairs in absence of lender’s finding of infeasibility or security impairment | Avila: Section 5 requires repairs if feasible and Lender did not claim infeasibility or security impairment, so applying proceeds to loan breached contract | CitiMortgage: Borrower’s prior missed payments (default) preclude him from enforcing the mortgage terms; default defeats substantial performance | Held: Avila plausibly alleged the contract (including §5) survived his default; dismissal of breach-of-contract claim was improper and reversed |
| Whether Avila waived an escrow theory by not using the word in district court | Avila: pleaded facts showing exclusive control of proceeds and lacked need to name legal theory | CitiMortgage: Escrow theory raised first on appeal is waived | Held: Even treating the theory as preserved, the facts do not support an implied escrow or fiduciary relationship |
| Whether Hukic controls to bar Avila’s contract claim due to his breach | CitiMortgage: Hukic shows borrower breaches can bar contractual claims | Avila: Hukic is distinguishable because there lender’s remedy was expressly authorized by contract and caused by borrower’s breach | Held: Hukic distinguished; it does not mandate dismissal here because CitiMortgage’s challenged action is not an expressly authorized response to the borrower’s default |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading standard: plausibility requirement)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (pleading standard and plausibility framework)
- Neade v. Portes, 739 N.E.2d 496 (Ill. 2000) (elements of breach of fiduciary duty under Illinois law)
- Hensler v. Busey Bank, 596 N.E.2d 1269 (Ill. App. Ct. 1992) (requirement to plead and prove facts establishing fiduciary relationship)
- Hukic v. Aurora Loan Servs., 588 F.3d 420 (7th Cir. 2009) (borrower’s material breach can bar certain contract claims; distinguished here)
- Zelickman v. Bell Fed. Sav. & Loan Ass’n, 301 N.E.2d 47 (Ill. App. Ct. 1973) (arrangement for lender to pay insurance premiums characterized as contractual security device, not trust)