The U.S. Court of Appeals for the Eighth Circuit recently upheld the district court's entry of summary judgment against a loan originator who refused to repurchase thirteen loans under the terms of its agreement with its loan purchaser.
In so ruling, the Eighth Circuit held that the client guide, which governed the terms of loan sales between the parties and was specifically incorporated into the parties' contract, granted the loan purchaser the exclusive right to determine whether an event of default had occurred. Accordingly, the Court held that the district court properly concluded it could not independently review the loan purchaser's determination of the occurrence of an event of default.
A copy of the opinion is available at: http://media.ca8.uscourts.gov/opndir/13/08/122569P.pdf.
Plaintiff loan purchaser ("Purchaser") entered into a contract with defendant loan originator ("Originator") allowing Originator to sell Purchaser mortgage loans it originated. The contract incorporated a seller and servicer guide ("Client Guide") that contained certain representations and requirements relating to the mortgage loans sold to Purchaser. Among other requirements, the Client Guide provided that Originator would repurchase certain loans within thirty days of demand if Purchaser determined that an event of default had occurred. The Client Guide allowed Originator to appeal Purchaser's determination as to whether an event of default occurred, but retained for Purchaser sole discretion to determine any appeals. The Client Guide additionally specified that Purchaser was not required to demand repurchase within any particular period of time, and that any delay in making a demand would not constitute a waiver of any of Purchaser's rights and remedies.
In 2008, Purchaser demanded that Originator repurchase thirteen loans for various determined events of default. When Originator refused, Purchaser sued Originator for breach of contract and indemnification relating to Purchaser's attorneys' fees and costs incurred in pursuing the suit. Purchaser moved for summary judgment as to both counts, and the district court granted Purchaser's motion. The district court found that Originator was solely responsible for misrepresentations and inaccuracies in the loans it sold to Purchaser, and that Purchaser was authorized to determine whether those misrepresentations and inaccuracies existed. The district court further found that the contract required Originator to indemnify Purchaser for all attorney's fees and costs. The district court ultimately awarded Purchaser over $200,000.00 in attorneys' fees and costs.
Originator appealed, and the Eighth Circuit affirmed the district court's ruling -- upholding the district court's finding that Originator breached the terms of the parties contract, rejecting Originator's arguments concerning waiver, and holding that the district court did not err in its determination of Purchaser's attorneys' fees and costs.
The Court rejected Originator's position that the district court was required to determine whether Originator breached a representation or warranty that would require Originator to repurchase the loan, and instead approved the district court's holding that the only issues it could review were (1) whether Purchaser notified Originator that an event of default occurred, thereby obligating Originator to repurchase the loan; and (2) whether Originator refused to honor its obligation.
The Court found that the Client Guide -- which was expressly incorporated into the parties' contract -- unambiguously gave Purchaser sole discretion to determine whether an event of default occurred, and held that "[Originator] cannot contract away judicial review by granting [Purchaser] the exclusive right to determine [whether] an 'Event of Default' has occurred, only to later ask a court to independently review [Purchaser's] determination." The Court similarly rejected Originator's argument that this "on-demand repurchase provision" made the contract unenforceable for lack of consideration, as well as Originator's implied argument that the on-demand provision made the terms of the contract unconscionable. Finally, the Court found that Purchaser did not act in bad faith in demanding that Originator repurchase the loans -- recognizing that "[a] party to a contract does not act in bad faith by asserting or enforcing its legal and contractual rights."
The Court next rejected Originator's arguments that Purchaser waived its right to demand repurchase of the thirteen loans in question by not demanding repurchase for other loans throughout the parties' ten plus year relationship. Though acknowledging that the mere presence of a nonwaiver clause such as the one present here would not automatically bar a waiver, the Court found that Originator provided no evidence that Purchaser intended to relinquish its rights under the contract, as would be required to establish a waiver by Purchaser's.
The Court noted that Purchaser had no incentive to waive a highly advantageous contract providing, and held that Purchaser's history of working out informal resolutions to prior breach of warranty was not contrary to the terms of the contract, and was instead merely declining the option to pursue a remedy for which the contract allowed. For the same reasons, the Court also rejected Originator's argument that Purchaser waived its ability to demand repurchase of so-called stated income loans by never demanding repurchase of a stated income loan "in the first decade of the parties' relationship."
The Court also upheld the district court's award to Purchaser of over $200,000.00 in attorneys' fees and costs.
Originator argued that, under Minnesota law, a party is entitled to recover only the fees it necessarily incurred in pursuing its claim. According to Originator, therefore, if the district court's interpretation were correct that the only issues it could consider were whether Purchaser demanded repurchase, and whether Originator thereafter complied, then Purchaser needlessly took several depositions and wrote an overly long summary judgment brief. Noting that the parties' contract unambiguously provided fees to Purchaser "without limitation," the Court stated that Originator's position was wrong. The Court held that, as with the other disputed issues in the case, the district court correctly relied on the language of the contract that the parties freely signed, and did not err in its calculation of Purchaser's attorneys' fees and costs.
Accordingly, the Eighth Circuit affirmed the district court's ruling.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
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Chicago, Illinois 60602
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Admitted to practice law in Illinois
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