Author: Nancy Lischer

In Parks v. Wells Fargo Bank, Cons.Nos. 03-2663, 03-2773 (7th Cir. Feb. 23, 2005), the Seventh Circuit reversed a $1,252,129 judgment. The mortgage company agreed to pay property taxes for a homeowner, but after the homeowners combined two properties and a new tax ID number was assigned, the tax payment was misdirected to the prior number. Two other missteps also occurred including a misdirected notice of the tax sale, which resulted in a tax scavenger obtaining title to the plaintiffs’ home. That title was eventually vacated.

The Seventh Circuit vacated all punitive damages awarded for breach of fiduciary duty and vacated the award for emotional distress. It also held that there was no claim under the Consumer Fraud Act (CFA), and vacated the compensatory and punitive damages, and the attorney fee award.

Judge Wood, who authored this decision, wrote with a very broad brush, which makes this decision important for the mortgage industry. The court accepted the defendant’ s argument that three inadvertent missteps in the payment of taxes, which would cause Norwest/Wells Fargo to lose its collateral, was not the type of conduct which would give rise to punitive damages. Judge Wood agreed. She first noted there was nothing in the record that showed egregious actions indicating wanton disregard of the rights of others, which would warrant punitive damages. However, she went on to hold: “Perhaps most important,” the interests of the plaintiffs (homeowners) and defendant (mortgage company) were “aligned,” and “any reckless indifference Norwest exhibited towards the Parkses would have been equally detrimental to its own ability to rely on the property as security for the repayment of the mortgage.”  

The court held that the reason for punitive damages is to punish a defendant who might otherwise “find that its behavior was cost-effective.” In the context of an agreement to pay taxes, the mortgage company has “ample incentive” to institute measures to prevent this situation. Such a system was in place, but it failed. However, the mere fact that the preventative measures failed “does not mean that punishment is appropriate.” This is very strong language which can be used in any case where punitive damages are sought in this type of case.

The Seventh Circuit also agreed that emotional distress damages do not lie for breach of the contract. Although the three inadvertent errors put the plaintiffs’ home at risk, the “kind of emotional disturbance they suffered falls outside the ambit of contract law.” The court held that the breach of an agreement to pay taxes “cannot give rise to anything more than liability for the direct consequences of its omission.”

For further information about this case, please contact Nancy Lischer or your regular Hinshaw attorney.

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