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filed: November 5, 1982.


No. 669 Pittsburgh, 1981, Appeal from the Order of the Court of Common Pleas, Civil Action, Law, of Allegheny County at No. 2781 January Term, 1972.


Judith R. Cohn, Pittsburgh, for appellant.

Michael Malakoff, Pittsburgh, for appellees.

Hester, Johnson and Popovich, JJ. Johnson, J., files a dissenting statement.

Author: Popovich

[ 306 Pa. Super. Page 254]

This class action was brought in 1971 by a group of mortgage borrowers challenging the practice of numerous banks and lending institutions of requiring monthly payments of one-twelfth of annual taxes, assessments and fire and casualty insurance premiums, without compensating mortgagors for the use of their money. In 1971 and 1972, preliminary objections for failure to state a cause of action were filed by all defendants except the Federal National

[ 306 Pa. Super. Page 255]

Mortgage Association, (FNMA), the sole appellant in this appeal. In 1973, the trial court sustained these preliminary objections and dismissed the case with respect to all defendants, including FNMA. In Buchanan v. Brentwood Federal Savings and Loan Association, 457 Pa. 135, 320 A.2d 117 (1974) (Buchanan I), the Supreme Court reversed, holding that the allegations of the complaint were sufficient to withstand preliminary objections and that plaintiffs should be permitted to prove facts sustaining their theories of express trust, constructive trust and implied contract. After remand, FNMA filed preliminary objections challenging plaintiffs' standing and the propriety of a class action and demurring to the complaint on the grounds that, because FNMA is only an assignee of mortgages and makes no mortgage loans directly to borrowers, FNMA could not have entered into a trust relationship, a constructive trust relationship, or an implied contract with the plaintiffs. These preliminary objections were denied in 1975, and no appeal was taken from that order. On November 6, 1975, the trial court entered an order certifying a class and certain sub-classes, approving the class litigation notice and establishing procedures for the future conduct of the case. The class in regard to FNMA consists of persons who obtained loans secured by mortgages on property in Allegheny County, having entered into form mortgage agreements prescribed and insured by the Federal Housing Administration and Veterans Administration, which were subsequently sold by the mortgagor lending institutions to FNMA. In December of 1975, plaintiffs concluded a settlement with all defendants except FNMA. However, the Court of Common Pleas refused to approve the settlement. In Buchanan v. Century Federal Savings & Loan Association, 259 Pa. Super. 37, 393 A.2d 704 (1978) (Buchanan II), this Court held that the lower court had erred, and that the parties' settlement was fair, reasonable and in the best interest of the class.

In June, 1980, the named representatives of the class of plaintiffs asserting claims against FNMA, Roger and Dorothy Buchanan, filed a motion for partial summary judgment on the issue of liability against FNMA. Judge Silvestri

[ 306 Pa. Super. Page 256]

    granted appellees' motion, finding that a trust relationship existed between plaintiff class members and FNMA and that FNMA violated its fiduciary duties by commingling and using the tax and insurance premium prepayments for its own benefit. Following the entry of partial summary judgment, Judge Silvestri ordered FNMA to capitalize the escrow payments received by FNMA from members of the class on FHA and VA mortgage loans owned by FNMA which originated between December 7, 1965 and August 10, 1970. This appeal followed. We reverse.

Appellees, the Buchanans, obtained the mortgage which is the basis of their claim against FNMA on May 20, 1969 from the Abbott Mortgage Corporation, which subsequently became the Galbreath Mortgage Company. The note and mortgage were sold to FNMA on June 11, 1969. Galbreath remained as the servicer of the mortgage for FNMA, with the responsibility for collecting all monies due, keeping records and protecting all rights of the mortgagee. The following language exists in the form mortgage executed by appellees, and is representative of the language contained in other mortgages purchased by FNMA.

"That in order to more fully protect the security of this mortgage, the Mortgagor, together with, and in addition to, the monthly payments of principal and interest payable under the terms of the note secured hereby, ...

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