In a mortgage loan repurchase action, the U.S. Court of Appeals for the Eighth Circuit recently reversed a trial court's order granting summary judgment in favor of an originator and seller of loans, and held that the mortgage loan purchaser adequately and substantially complied with the contract in its demands that the originator repurchase several allegedly defective loans.
In so ruling, the Eight Circuit determined that the trial court erred in determining that the purchaser's notice letters failed to satisfy a condition precedent to prescribe a time for the originator to correct the alleged defects, as the agreement governing the loan purchase at issue neither specified a required form of notice, nor prescribed an amount of time that must be contained within the notice.
A copy of the opinion is available at: Link to Opinion
A mortgage loan purchaser and reseller ("Purchaser") bought approximately 750 mortgage loans from a mortgage originator ("Originator") for more than $140 million dollars (the "Purchase"). An agreement between Purchaser and Originator governed the Purchase, and addressed the delegation of underwriting/loan-origination authority to Originator (the "Agreement").
Under the Agreement, Purchaser had sole and exclusive discretion to determine if any loans under the Agreement were defective as a result of Originator's failure to meet applicable underwriting standards or otherwise, and if Purchaser itself was required to repurchase a loan it resold to a third party.
Upon notification from Purchaser, Originator was provided opportunity to "correct or cure such defect within the time prescribed by [Purchaser] to the full and complete satisfaction of [Purchaser]," and absent Purchaser's satisfaction, could be required to repurchase defective loans. Additionally, if Purchaser was required to repurchase a loan after sale to a third party, it could in turn, demand that Originator repurchase that same loan.
After Purchaser resold loans that were part of the Purchase, it was informed by the third-party purchaser that there were defects in seven (7) of the resold mortgages. Accordingly, and per the terms of the Agreement, for each of the seven allegedly-defective loans, Purchaser sent Originator letters (i) identifying and describing the potential breach; (ii) inviting Originator to investigate the matter and send a written response within thirty (30) days, and; (iii) notifying Originator that a repurchase may be required if Purchaser did not find the resolution satisfactory.
After the expressly-identified thirty days passed, Purchaser sent a follow-up letter to Originator as to each loan again describing the breach, stating that repurchase was required and citing a deadline of thirty days to respond. After that thirty-day period expired, a third letter was sent to Originator reciting the same breaches and providing 30 days to confirm the repurchase.
Some letters confirmed receipt of documentation and explanation from Originator and deemed responses to Purchaser's prior letters as unsatisfactory, while others noted that Originator failed to respond to the prior letters altogether.
More than two years after sending the last letter for the seventh loan, purchaser filed suit against the Originator for breach of the Agreement. The Originator moved for summary judgment, arguing: (1) Purchaser could not force repurchase because the agreement had been terminated; (2) Purchaser could not force repurchase because Purchaser had already foreclosed on the underlying mortgage loans; and (3) Purchaser failed to satisfy a condition precedent in that it did not prescribe a time for cure or correction.
Addressing only the third argument, the trial court concluded that the Agreement's phrase "upon notification by [Purchaser], correct or cure such defect within the time prescribed by [Purchaser]to the full and complete satisfaction of [Purchaser]," placed a condition precedent upon the Originator's repurchase duty, and that Purchaser's letters did not provide adequate notice because it failed to expressly "prescribe" a time for it to correct or cure the alleged defects.
Specifically, the trial court concluded: (i) that the Purchaser essentially conceded that its first set of letters did not give proper notice of the alleged defect; (ii) the second set of letters failed to expressly prescribe a time for cure or correction, and; (iii) the Agreement's addendum's reference to a thirty-day response time did not serve as the prescription of a time for cure or correction.
Accordingly, summary judgment was entered in favor of the Originator and against the Purchaser, whose motion for rehearing was thereafter denied. This appeal followed.
On appeal, the Eight Circuit questioned whether the prescription of a time for the Originator to correct or cure an alleged breach is a condition precedent, and noted that conditions precedent are generally disfavored in Missouri. See James E. Brady& Co. v. Eno, 992 F.2d 864, 869 (8th Cir. 1993) ("Courts should not construe contract provisions to be conditions precedent 'unless required to do so by plain, unambiguous language or by necessary implication.'" (quoting Kansas City S. Ry. v. St. Louis–San Francisco Ry., 509 S.W.2d 457, 460 (Mo. 1974))).
Here, the Appellate Court perceived that both parties were undeniably aware of the Agreement's rights to cure and notice provisions. The Court noted that, although the Agreement's notice provision indicates a time for attempting cure after Originator was made aware of the defect, it contains no language suggesting that Purchaser's right to force repurchase is conditional.
As such, the Eight Circuit found that the time aspect of the notice provision defined a right for Purchaser to limit the time to cure, rather than a condition precedent to protect Originator, and its failure to do so by instead sending letters and delaying suit should not wholly eliminate Originator's obligation to repurchase defective loans.
In any event, the Eight Circuit stated that it need not decide whether the contested provision imposes a condition precedent, because the three letters concerning each loan, viewed collectively, satisfied Purchaser's notice obligation by identifying a defect, inviting written responses with supporting documentation, and identifying a deadline.
The Court noted that nothing within the Agreement stated that the time "prescribed" for cure or correction need be in writing or indicates specific triggering words such as "cure or correct," and the clear and repeated notice provided in this case satisfied the vague requirements of the Agreement. See Gray v. Bicknell, 86 F.3d 1472, 1479 (8th Cir. 1996) ("Under Missouri law, the nature of notice required by contract depends upon the provisions of that contract.").
Accordingly, the trial court's entry of judgment in Originator's favor was reversed and remanded to the trial court for further proceedings.
Ralph T. Wutscher
Maurice Wutscher LLP
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