Voyles v. Sandia Mortgage Corp., No. 2-98-0753

2nd District, 16 February 2000

JUSTICE INGLIS delivered the opinion of the court:

Following a bench trial in which plaintiff, Graceia M. Voyles, was awarded damages totaling $10,000, plaintiff appeals thejudgment of the circuit court of Du Page County. Defendant, Sandia Mortgage Corporation, cross-appeals.

The following information was adduced at trial. In 1976, plaintiff purchased a single-family residence in Springfield,Illinois, and financed the purchase with a mortgage from Citizen's Savings & Loan. In 1979, plaintiff moved to the Chicagoarea and found employment. Plaintiff still owned the Springfield home and rented it to a tenant. In 1981, plaintiff purchaseda home in Northbrook, Illinois, financed with a mortgage from Citibank FSB (Citibank).

In 1987, plaintiff sold her Northbrook home and purchased a home in Naperville, again financed with a Citibank mortgage.Plaintiff's mother became seriously ill in 1987 and moved in with plaintiff in her Naperville home. Plaintiff's mother diedlater that year. Plaintiff's son also died in September 1987, and plaintiff initiated guardianship proceedings to obtain custodyof her granddaughter. In 1989, plaintiff was granted permanent guardianship over her granddaughter and brought her to livewith plaintiff in her Naperville home.

As a result of plaintiff's personal problems from 1987 to 1989, she made arrangements with her Springfield tenant (herattorney at trial and on appeal) to assume the responsibility of making all payments related to the Springfield property.Thus, the tenant made the monthly mortgage payments to Citizen's Savings & Loan. Citizen's Savings & Loan questionedplaintiff as to why the mortgage and insurance payments for the Springfield property were not made in her name. Followingplaintiff's explanation, Citizen's Savings & Loan issued a passbook to the tenant, who used it to make all payments toCitizen's Savings & Loan during the next five years.

In 1991, Citizen's Savings & Loan was taken over by the Resolution Trust Corporation, which assigned plaintiff's loan todefendant. Plaintiff's Springfield tenant then sent the mortgage payments directly to defendant.

In September 1991, defendant began rejecting the mortgage payments. Defendant apparently believed that the tenant hadobtained ownership of the Springfield property in violation of the mortgage. Plaintiff's tenant continued to tender themortgage payments to defendant, and defendant continued to refuse to accept them. According to defendant, it hadreviewed the escrow account and found that the monthly escrow payments were insufficient to cover the annual propertytax. According to defendant, therefore, it increased the monthly mortgage payment to reflect the increase in the amount ofthe monthly escrow payment. The trial court found, however, that defendant never actually notified plaintiff that it wasincreasing the monthly mortgage payments. According to defendant, as a result of the shortfall in plaintiff's tenders,defendant rejected the payments. In October 1991, defendant reported that plaintiff was delinquent in her mortgagepayments to the credit reporting agencies of TransUnion and TRW.

Plaintiff's tenant continued to tender mortgage payments to defendant, all of which defendant rejected. In January 1992,plaintiff agreed that defendant was correct in demanding a higher amount and attempted to pay off the mortgage arrears bytendering the full amount due and owing. Defendant rejected this tender because one of the checks comprising the tenderwas drawn on the Springfield tenant's personal account, and the other check, an insurance payment for repairs on theSpringfield property, was made out to both the tenant and Citizen's Savings & Loan. Plaintiff again attempted to pay thearrearage but mistakenly omitted the amount of the Springfield tenant's personal check. In addition, another month's rentwas due, so defendant again rejected plaintiff's attempt to cure her delinquency.

In February 1992, defendant initiated foreclosure proceedings and reported this to TransUnion and TRW. In March 1992,plaintiff attempted to refinance her mortgage with Citibank to take advantage of lower interest rates. Plaintiff wished to addher car payments to her mortgage and thus improve her cash flow and receive tax benefits.

After receiving her refinancing application, Citibank performed a credit check, which revealed plaintiff's delinquency inmaking her mortgage payments and the pending foreclosure action reported by defendant. Citibank notified plaintiff abouther credit situation and informed her that the foreclosure would prevent her from getting the loan. Citibank also apparentlydetermined that plaintiff's application was incomplete and informed plaintiff by letter dated April 2, 1992.

On April 9, 1992, defendant advised plaintiff for the first time about its concern that the due-on-sale clause of the mortgageon the Springfield property was violated. Plaintiff then advised defendant that the foreclosure proceeding was preventingplaintiff from obtaining the loan from Citibank. On June 10, 1992, defendant informed Citibank that it should disregard theforeclosure and delinquencies it had reported. James Duran, defendant's vice-president, wrote to Deborah Mabeley, whowas processing plaintiff's loan application for Citibank, that defendant had a dispute with plaintiff's lawyer, WayneGolomb. Duran wrote that defendant was challenging the lawyer's power of attorney over the Springfield mortgage, hadaccelerated the debt, and was returning payments tendered by Golomb on plaintiff's behalf. Duran conceded that plaintiff'scredit history should not have been harmed by defendant's dispute with Golomb and that it was issuing corrections for anyreported delinquencies. Citibank received defendant's letter on June 16, 1992. Plaintiff, however, was unexpectedlyterminated from her job on June 12, 1992.

After receiving defendant's June 10 letter, Citibank completed processing plaintiff's loan application. Citibank refused torefinance plaintiff's loan on July 13, 1992, as a result of plaintiff's unemployment, although it rated plaintiff's credit assatisfactory.

On September 3, 1992, plaintiff filed suit against defendant, alleging negligent reporting of credit information (count I);negligent failure to correct falsely reported credit information (count II); breach of contract directed against Citibank (countIII); breach of defendant's duty of good faith and fair dealing (count IV); and tortious interference with prospectiveeconomic advantage (added on October 24, 1997). Plaintiff sought compensatory damages and, alleging that defendant'sconduct was willful, requested punitive damages (count V). Defendant filed a motion for summary judgment, which wasgranted. Plaintiff appealed, and this court reversed and remanded. Voyles v. Sandia Mortgage Co., No. 2--94--0158 (1995)(unpublished order under Supreme Court Rule 23).

The case proceeded to trial on September 4, 1997. During trial, plaintiff, a licensed realtor, attempted to introduce evidenceconcerning the expected value of her Naperville property. Plaintiff was seeking damages for having to sell the Napervillehome earlier than she had planned as a result of not receiving the refinancing loan from Citibank. Plaintiff made an offer ofproof in which her attorney stated that she intended to stay in the Naperville house until her granddaughter graduated fromhigh school. Because she did not obtain refinancing on her mortgage, her savings were depleted by October 1993 and shewas forced to sell the home. Plaintiff also stated that she bought the house for $262,000 in 1987; it was valued at $330,000at the time she applied for the refinancing, and it sold for $344,000 in 1994. The trial court did not allow the testimony intoevidence, ruling that it was speculative.

The trial court entered judgment for plaintiff on counts I and II and awarded damages totaling $10,000. The trial courtfound that plaintiff had failed to prove a breach of defendant's duty of good faith and fair dealing, a cause of action fordefamation as well as the existence of special damages, or that defendant acted intentionally. The trial court accordinglyheld that plaintiff could not recover on her claims for the tortious interference with prospective economic advantage and thebreach of the duty of good faith and fair dealing claims and that she could not recover punitive damages. Plaintiff timelyappeals and defendant timely cross-appeals.

We turn first to plaintiff's appeal. Plaintiff first contends that the trial court erred by finding that she had not proved thatdefendant violated the implied covenant of good faith and fair dealing. The covenant of good faith and fair dealing is aderivative principle of contract law that usually aids in the construction of a contract. Perez v. Citicorp Mortgage, Inc., 301Ill. App. 3d 413, 424 (1998). This covenant comes into play where one party to the contract is given broad discretion inperformance. Perez, 301 Ill. App. 3d at 423-24. The party holding this broad discretion under the contract is required toexercise its discretion " 'reasonably and with proper motive, not arbitrarily, capriciously, or in a manner inconsistent withthe reasonable expectations of the parties.' " Perez, 301 Ill. App. 3d at 424, quoting Resolution Trust Corp. v. Holtzman,248 Ill. App. 3d 105, 112 (1993). Plaintiff argues that she proved at trial that defendant violated the covenant of good faithand fair dealing. Defendant counters that the duty of good faith and fair dealing does not form the basis of a separate andindependent tort recognized in Illinois, citing to Cramer v. Insurance Exchange Agency, 174 Ill. 2d 513, 519 (1996). Wefind, however, that Cramer is distinguishable from the instant case.

The issue in Cramer was whether an insured's claim against his insurer alleging that the insurer breached its duty of goodfaith and fair dealing in denying him his insurance proceeds could proceed. Cramer, 174 Ill. 2d at 515. Our supreme courtdetermined that it could not, because section 155 of the Illinois Insurance Code (215 ILCS 5/155 (West 1994)) provided theonly available extracontractual remedy for plaintiffs. Cramer, 174 Ill. 2d at 527. The court emphasized that it would notcreate a common-law tort where the legislature had acted to provide a limited remedy and where that remedy had beenregularly updated by the legislature. Cramer, 174 Ill. 2d at 527-28. In the instant case, however, the legislature has notintervened to remedy the abuses of lenders in the home mortgage field. Further, the court's analysis included only the line ofcases beginning with Ledingham v. Blue Cross Plan for Hospital Care of Hospital Service Corp., 29 Ill. App. 3d 339(1975), rev'd on other grounds, 64 Ill. 2d 338 (1976), all of which dealt with bad faith claims against insurers. The court'sanalysis did not cover bad faith claims arising from other contexts. Thus, we find that Cramer does not control the outcomeof this case.

We note that recent decisions indicate that courts have implicitly accepted the existence of the tort of bad faith in lender-mortgagee scenarios. In Perez, the court did not hold that plaintiff could not state a cause of action because the tort did notexist under Illinois law; rather, the court merely found that the plaintiff had failed to properly plead his cause of actionbecause the terms of the contract on which the suit was based trumped any implied terms, such as the implied duty of goodfaith and fair dealing. Perez, 301 Ill. App. 3d at 423-25. In Citicorp Savings v. Rucker, 295 Ill. App. 3d 801, 808 (1998), thecourt found that there were factual issues raised by the pleadings that defeated the bank's motion to dismiss, allowing theclaim to go forward. The Rucker court, therefore, determined that Rucker could proceed on his claim for the breach of theduty of good faith and fair dealing. Thus, contrary to defendant's assertion, Illinois courts have tacitly recognized theviability of such a claim.

Additionally, considering the record, we conclude that plaintiff has proved her action in tort for breach of the duty of goodfaith and fair dealing. See Perez, 301 Ill. App. 3d at 424 (gravamen of action is the arbitrary and capricious use ofcontractually vested discretion). The trial court specifically found, and the evidence amply supports, that defendant failed toprovide plaintiff with notice that it was increasing the amount of her monthly payments before doing so in September 1991.Rather than acting to correct the problem it had caused, defendant rejected plaintiff's attempts to set the account straight.Thus, while defendant had the discretion to fix an appropriate tax escrow payment, it was required to notify plaintiffbeforehand of its intention to increase her monthly payments. Further, once defendant had increased plaintiff's monthlypayment without first providing her notice, it acted arbitrarily and capriciously in rejecting her partial tenders andsubsequent efforts to work out an amicable solution. Indeed, the evidence thus points to only one conclusion: defendantwrongfully manufactured the credit controversy in an attempt to foreclose on the property. Based on the narrowcircumstances of this case, we hold that plaintiff proved her claim that defendant acted in bad faith and breached its duty ofgood faith and fair dealing. We therefore reverse the trial court's finding as to plaintiff's good faith and fair dealing claim. Inaddition, we also remand this claim for further proceedings to determine plaintiff's damages.

We note that the concern that the recognition of a tort of bad faith and unfair dealing will swallow ordinary breach ofcontract cases is minimal in this case. This case involved a homeowner whose long-standing and personal relationship withthe lender was terminated by defendant's purchase of the assets of the original lender. Defendant then embarked on a courseof action to force plaintiff into foreclosure by raising her monthly payments with no notice and then arbitrarily andcapriciously refusing plaintiff's tender of amounts owing. Defendant's conduct was intentional and outrageous. In the future,in order to state a claim for bad faith, a defendant's conduct would have to be similarly egregious and outrageous. Further,this is not a case in which a sophisticated real estate developer and a lender entered into an arm's-length agreement that didnot pan out. Plaintiff had no choice in the matter, as defendant assumed plaintiff's mortgage. Moreover, plaintiff was not asophisticated developer; rather, she was a homeowner. Finally, we note that, like employment and insurance cases, this caseconcerns an area of great personal importance to any prospective plaintiff, namely, her home mortgage. Thus, in our view,the wrongfulness of defendant's conduct, plaintiff's lack of choice in dealing with defendant, the inequality of plaintiff'sposition in relation to defendant, and the vital importance of plaintiff's interest in her home mortgage establish thehallmarks of any future bad faith claims arising from a lender's misconduct.

Plaintiff next contends that the trial court's determination that defendant's conduct was not intentional was against themanifest weight of the evidence. We will not disturb the trial court's factual determination unless it is against the manifestweight of the evidence. Zeitz v. Village of Glenview, 304 Ill. App. 3d 586, 592 (1999).

Plaintiff contends that the evidence demonstrates that defendant acted intentionally in making false statements aboutplaintiff's creditworthiness to the various credit reporting agencies. We agree. Intentional conduct evinces " 'a desire tocause consequences or at least [a] substantially certain belief that the consequences will result.' " Ziarko v. Soo Line R.R.Co., 161 Ill. 2d 267, 272 (1994), quoting 1 M. Polelle & B. Ottley, Illinois Tort Law