CitiMortgage, Inc. v. Reunion Mortgage, Inc.
MEMORANDUM AND ORDER: IT IS HEREBY ORDERED that CitiMortgage, Inc.s motion for summary judgment # 61 is GRANTED. IT IS FURTHER ORDERED that CitiMortgage, Inc.s motion to exclude the opinions of Donald Coker # 57 is GRANTED. IT IS FURTHER ORDERED that CitiMortgage, Inc.s motion to strike the affidavit of David Thayer # 80 is DENIED. Signed by District Judge Rodney W. Sippel on 11/9/2012. (RAK)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
REUNION MORTGAGE, INC.,
Case No. 4:10CV1632 RWS
MEMORANDUM AND ORDER
CitiMortgage, Inc. is in the business of purchasing, reselling, and servicing residential
mortgage loans. Reunion Mortgage, Inc. is engaged in the business of originating, sourcing
and/or reselling residential mortgage loans. CitiMortgage and Reunion entered into a contract
whereby CitiMortgage could purchase mortgage loans originated by Reunion. Under the
contract Reunion is obligated to cure or repurchase any loans that contain defects such as
material misrepresentations. CitiMortgage has demanded that Reunion cure or repurchase
twenty-six loans that are materially defective. Reunion declined to do so. Citimortgage filed this
lawsuit asserting a claim for breach of contract against Reunion. CitiMortgage has moved for
summary judgment on its claim. Because it is undisputed that Reunion breached the contract, I
will grant CitiMortgage’s motion for summary judgment.
CitiMortgage purchases mortgages that have been originated by approved lenders,
including lenders known as “correspondents,” under its Loan Purchasing Program (the
Program). Through the Program, CitiMortgage functions as an investor in the secondary
mortgage market. CitiMortgage in turn resells some of the loans it purchases to the Federal
National Mortgage Association (a/k/a Fannie Mac), the Federal Home Loan Mortgage
Corporation (a/k/a Freddie Mac), and to other investors in the secondary mortgage market.
CitiMortgage uses a standard contract with loan originators and correspondents to
purchase residential mortgage loans. The contract is entitled “Correspondent Agreement Form
200.” Reunion entered into a Correspondent Agreement Form 200 with CitiMortgage on March
10, 2004. In addition, Reunion and CitiMortgage entered into a Delegated Underwriting
Addendum on March 10, 2004, a Bulk Purchase Amendment dated January 25, 2006, and an
Early Purchase Program Amendment on November 29, 2004. These contracts will collectively
be referred to as “the Agreement” between CitiMortgage and Reunion.
Under the Agreement, Reunion must deliver certain loan documentation to CitiMortgage
for each loan sold to CitiMortgage. The Agreement gives CitiMortgage the right to require
Reunion to repurchase any loan that CitiMortgage, in its sole and exclusive discretion,
determines is defective because it was underwritten or originated or based on materially
inaccurate information or material misrepresentation, and / or in violation of the terms of the
Agreement and applicable underwriting guidelines, and / or must be repurchased from Fannie
Mac, Freddie Mac, or other secondary market investor. When CitiMortgage is required to
repurchase a loan from an investor it will make the investor whole by paying the repurchase
price requested by the investor and assuming the investor’s rights in the loan.
CitiMortgage’s right to require Reunion to repurchase such defective loan is found in
Section 11 of Form 200 which provides:
If CMI, in its sole and exclusive discretion, determines any Loan
purchased pursuant to this Agreement:
(i) was underwritten and/or originated in violation of any term, condition,
requirement or procedure of this Agreement or the CMI Manual in effect as of the
date CMI purchased such Loan;
(ii) was underwritten and/or originated based on materially inaccurate
information or material misrepresentation made by the Loan borrower(s),
[Reunion], [Reunion's] directors, officers, employees, agents, independent
contractors and/or affiliates or any other party providing information relating to
(iv) must be repurchased from any secondary market investor (including
but not limited to the Fannie Mae, Freddie Mac, FHA, VA, HUD or Government
National Mortgage Association) due to a breach by [Reunion] of any
representation, warranty or covenant contained in this Agreement of the CMI
Manual or a failure by [Reunion] to comply in all material respects with the
applicable CMI Manual terms, conditions, requirements and procedures; ....
[Reunion] will, upon notification by CMI, correct or cure such defect within the
time prescribed by CMI to the full and complete satisfaction of CMI. If, after
receiving such notice from CMI, [Reunion] is unable to correct or cure such
defect within the prescribed time, [Reunion] shall, at CMI's sole discretion, either
(i) repurchase such defective Loan from CMI at the price required by CMI
("Repurchase Price"), or (ii) agree to such other remedies (including but not
limited to additional indemnification and/or refund of a portion of the Loan
purchase price) as CMI may deem appropriate. If CMI requests a repurchase of a
defective Loan, [Reunion] shall, within ten (10) business days of [Reunion's]
receipt of such repurchase request, pay to CMI the Repurchase Price... If such
defective Loan is owned by CMI at the time of the repurchase by [Reunion], CMI
shall ... execute and deliver such instruments of transfer or assignment ... as shall
be necessary to vest in [Reunion] or its designee title to the repurchased loan.
(Doc. # 64, CitiMortgage’s Statement of Uncontroverted Facts in Supp. of Summ J., Ex. B at
In addition, Section 10 of the Agreement included an indemnification provision in the
event Reunion breached the Agreement:
[Reunion] agrees to indemnify and hold CMI harmless from any and all claims,
actions and costs, including reasonable attorneys' fees and costs, arising from (i)
[Reunion's] performance or failure to perform under the terms, conditions or
obligations of this Agreement or the CMI Manual... (ii) any fraud,
misrepresentation or breach of any representation, warranty or covenant
contained [in] this Agreement or the CMI Manual...
(Id. at ¶10).
The loans at issue
Since 2004, CitiMortgage purchased over 13,000 mortgages from Reunion under the
Agreement. Twenty-six (26) of those loans are at issue in this lawsuit. Those loans are
identified by the parties as the: Acevedo Loan # XXXXXX8621; Avila Loan # XXXXXX4130;
Bates Loan # XXXXXX9657; Camba Loan # XXXXXX7467; Cassidy Loan # XXXXXX9656;
Du Loan # XXXXXX4191; Gurrola Loan # XXXXXX1500; Hernandez Loan # XXXXXX6323;
Herrera Loan # XXXXXX0851; Macias Loan # XXXXXX7007; McCulloch Loan #
XXXXXX9007; McGrautha Loan # XXXXXX9221; Ng Loan # XXXXXX9005; Nguyen Loan
# XXXXXX8402; Oliva Loan # XXXXXX1301; Pascua Loan # XXXXXX4547; Perguson Loan
# XXXXXX1243; Pickert Loan # XXXXXX1144; Ramos Loan # XXXXXX0915; Roman Loan
# XXXXXX6628; Sanchez Loan # XXXXXX8406; Sanchez Loan # XXXXXX8845; Singh
Loan # XXXXXX1465; Tafoya Loan # XXXXXX7250; Valdez Loan XXXXXX8405; and
Young Loan # XXXXXX1697.
After purchasing these loans from Reunion, CitiMortgage discovered that the application
packages for these loans were materially inaccurate or contained material misrepresentations or
that the loans were otherwise defective. The sale of these loans was governed by the Agreement.
Under the Agreement, CitiMortgage is granted sole discretion to determine whether a
loan was underwritten and/or originated in violation of any condition of the Agreement (and its
incorporated documents). The Agreement gives CitiMortgage the discretion to demand that
Reunion cure any defect in a loan. If the defect is not cured, CitiMortgage may require Reunion
to repurchase the loan.
CitiMortgage has demanded that Reunion cure the defects in these loans or repurchase
them. Reunion has declined to do so. Reunion does not dispute that CitiMortgage, in its sole
discretion, has found that the loans are materially defective under the Agreement. Instead,
Reunion asserts that it followed CitiMortgage’s underwriting guidelines was not aware of any
defects at the time it sold the loans to CitiMortgage.
CitiMortgage filed this case asserting a breach of contract claim against Reunion for
failing to comply with the demand to indemnify CitiMortgage for all losses associated with these
loans and/or for failing to repurchase the loans. CitiMortgage seeks damages in the amount of
the “Repurchase Price” for these loans as that price is calculated in the Agreement. Under
section 2301(the glossary) of the CitiMortgage Manual, the Repurchase Price is defined as:
[T]he sum of (i) the current principal balance on the loan as of the paid-to
date; (ii) the accrued interest calculated at the mortgage loan Note rate from the
mortgage loan paid-to date up to and including the repurchase date; (iii) all
unreimbursed advances (including but not limited to tax and insurance advances,
delinquency and/or foreclosure expenses, etc.) incurred in connection with the
servicing of the mortgage loan; (iv) any price paid in excess of par by
CitiMortgage on the funding date; and (v) any other fees, costs, or expenses
charged by or paid to another investor in connection with the repurchase of the
mortgage loan from such investor but only to the extent such fees, costs and
expenses exceed the total of items (i) through (iv) above.
(Id., Ex. C). CitiMortgage calculates the total Repurchase Price of the twenty-six loans at issue
is $4,007,191.47. (Id. at p 24). CitiMortgage has moved for summary judgment in this amount
on its claim for breach of contract against Reunion.
Summary judgment is appropriate if the evidence, viewed in the light most favorable to
the nonmoving party, demonstrates that there is no genuine issue as to any material fact and that
the moving party is entitled to judgment as a matter of law. Lynn v. Deaconess Medical Center,
160 F.3d 484, 486 (8th Cir. 1998)(citing Fed. R. Civ. P. 56(c)). The party seeking summary
judgment bears the initial responsibility of informing the court of the basis of its motion and
identifying those portions of the affidavits, pleadings, depositions, answers to interrogatories,
and admissions on file which it believes demonstrates the absence of a genuine issue of material
fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). When such a motion is made and
supported by the movant, the nonmoving party may not rest on his pleadings but must produce
sufficient evidence to support the existence of the essential elements of his case on which he
bears the burden of proof. Id. at 324. In resisting a properly supported motion for summary
judgment, the plaintiff has an affirmative burden to designate specific facts creating a triable
controversy. Crossley v. Georgia-Pacific Corp., 355 F.3d 1112, 1113 (8th Cir. 2004).
Under Missouri law, the elements for a breach of contract are: "(1) the existence of an
enforceable contract between the parties to the action; (2) mutual obligations have arisen under
the contract terms; (3) defendant has not performed its obligations imposed by the contract; and
(4) plaintiff was thereby damaged." Superior Insurance Com. v. Universal Underwriters
Insurance Company, 62 S.W.3d 110 (Mo. Ct. App. 2001). In the present case, the parties
entered into the Agreement, which provided for mutual obligations. CitiMortgage has asserted
that it has made a demand under the Agreement for Reunion to perform its obligation to
repurchase the loans at issue, Reunion has declined to repurchase the loan, and, as a result, that
CMI has been damaged.
Reunion admits that defects were found in each of the loans. (Doc. # 70, Reunion’s
Mem. in Opp’n at pp. 23-33). Likewise, Reuinion admits that CitiMortgage determined that the
loans were defective pursuant to one or more subsections of Section 11. (Doc. # 71, Reunion's
Resp. to CitiMortgage's Statement of Uncontroverted Facts ¶¶ 49 - 108).1 Section 11 of the
Agreement provides that CitiMortgage, upon determining in its own discretion that the loans are
defective, may demand cure or repurchase of the loans. As a result, Reunion's failure to
repurchase the loans after requested to do so by CitiMortgage constitutes a breach of contract.
I find that CitiMortgage has proven all of the elements of its breach of contract claim.
CitiMortgage found, in its exclusive discretion, that there were defects in the loans.
CitiMortgage asked Reunion to repurchase the loans. Reunion has refused that demand which
has cause CitiMortgage to be damaged. CitiMortgage, therefore, is entitled to summary
judgment unless there is an affirmative or absolute defense that would preclude entry in
CitiMortgage’s favor as a matter of law.
Reunion has not produced any evidence that challenges CitiMortgage’s determination
that these loans contain material misrepresentations, misstatements or other material defects as
defined in the Agreement. Instead, Reunion asserts that the Agreement contains ambiguities
which negates its obligation to repurchase the loans. Reunion also argues that it originated the
loans in accord with CitiMortgage’s underwriting guidelines and was not aware of any material
misrepresentations or defects at the time it sold the loans to CitiMortgage. Reunion argues that
In response to these sections of CitiMorgage’s Statement of Uncontested Facts,
Reunion claims it followed CitiMortgage’s underwriting guidelines and had no reason to know
of the loan defects, but Reunion does not dispute that CitiMortgage determined that the loans
it is unfair to require it to repurchase loans in which material defects were found after
CitiMortgage performed further reviews of the loan. It is undisputed, however, that Reunion
entered into the Agreement with CitiMortgage which gave CitiMorgage the right to demand that
Reunion cure or repurchase any loans that CitiMortgage found, in its sole and exclusive
discretion, were materially defective.
Reunion asserts that its duty to repurchase the loans under the Agreement is
unenforceable because the Agreement contains an ambiguity. Reunion argues that Sections 2(i),
10, and 11 of the Correspondent Agreement Form 200 creates such an ambiguity.
This identical argument was made by Reunion’s counsel in another case in this District.
In CitiMortgage v. Allied Mortgage Group. Inc, 4:10CV1863 JAR (Slip Opin. E.D. Mo.,
October 24, 2012) CitiMortgage filed a breach of contract claim against Allied for Allied’s
refusal to repurchase defective loans. CitiMortgage and Allied entered the identical Agreement
at issue in this case. The same attorneys who represent the parties in this case represented the
parties in the Allied case. Reunion’s Memorandum in Opposition to CitiMortgage’s Motion for
Summary Judgement makes the identical arguments that Reunion’s counsel asserted as counsel
in the Allied case. United States District Judge John A. Ross granted CitiMortgage’s motion for
summary judgment in the Allied case in a memorandum opinion entered on October 24, 2012.
Judge Ross’s opinion thoroughly analyzed Allied’s defenses in the Allied case (the identical
defenses asserted in this case by Reunion).2
As counsel of record in the Allied case, both parties’ counsel in this litigation have a
copy of Judge Ross’ opinion. CitiMortgage filed a copy of the opinion in this case and Reunion
filed a supplemental memorandum regarding the opinion.
Judge Ross rejected Allied’s claim that the Agreement contained the ambiguity that
Allied’s counsel reasserts in this case on behalf of Reunion. Judge Ross’s opinion stated the
The Just Mortgage [CitiMortgage v. Just Mortgage, Inc., 4:09CV1909
DDN (E.D. Mo)] court outlined when a contract will be considered ambiguous:
A contract is ambiguous where reasonable people could fairly and
honestly differ in the reading of the terms because the terms are
susceptible of more than one interpretation. Yerington v. La-Z-Boy, Inc.,
124 S.W.3d 517, 520 (Mo. Ct. App. 2004); accord Kastendieck v. Millers
Mut. Ins. Co., 946 S.W.2d 35, 39 (Mo. Ct. App. 1997) (“An ambiguity
exists where there is duplicity, uncertainty or indistinctness in the
meaning of the words used.”). In addition, “if language which appears
plain considered alone conflicts with other language in the contract, or if
giving effect to it would render other parts of the contract a nullity, then
[the court should] find the contract to be ambiguous.” Zeiser v. Tajkarimi,
184 S.W.3d 128, 133 (Mo. Ct. App. 2006). Similarly, “language which
promises something in one point and takes it away in another is
ambiguous.” Kastendieck, 946 S.W.2d at 39. In construing a contract, the
court should “attribut[e] a reasonable meaning to each phrase and clause,
and harmoniz[e] all provisions of the agreement” rather than “leave
some of the provisions without function or sense.” Teets v. Am. Fam.
Mut. Ins. Co., 272 S.W.3d 455, 467 (Mo. Ct. App. 2008) (citation
omitted). Whether or not a contract is ambiguous is a question of law for
the court to decide. Id. at 462.
Just Mortgage, 2012 U.S. Dist. LEXIS 43522, at *35-36.
Allied again argues that Sections 2(i), 10 and 11 of the Agreement are
patently ambiguous. (Response, pp. 5-13).3 Allied asserts that allowing CMI to
The Court previously addressed the ambiguity argument in its Order on Allied’s Motion
to Compel Disclosure (ECF No. 39). In its Order, the Court ruled that “no ambiguity exists
between §2(I) and §11(ii). (ECF No. 51, p. 8). The Court stands by this determination.
CitiMortgage, Inc. v. Allied Mortg. Group, Inc., No. 4:10CV01863, 2012 U.S. Dist. LEXIS
treat Section 11 of the Agreement as a “strict liability” provision would render
Section 2(i) and Section 10 of the Agreement completely meaningless.
(Response, p. 5).
Section 2 of the Agreement, labeled “Representations and Warranties”
Correspondent represents warrants and covenants throughout the term of
this Agreement as follows:
(i) That neither this Agreement nor any statement, report or other
information provided or to be provided pursuant to this Agreement
(including but not limited to the statements and information contained in
the documentation for each loan purchased by CMI) contains or will
contain any misrepresentation or untrue statement of facts or omits or will
omit to state a fact necessary to make the information not misleading.
The provisions of this sub-section shall not apply to information
obtained from (i) appraisers, escrow agents, title companies, closers,
credit reporting agencies or any other entity approved from CMI
(“Approved Entity”) unless Correspondent knows or has reason to
believe that any information provided by such Approved Entity is not
true, correct or valid in any material respect and (ii) the Loan
applicant(s) unless Correspondent knows, has reason to believe or,
after performing its normal due diligence and quality control review,
should have known that any information provided by the Loan
applicant(s) is not true, correct or valid in any material respect.
(Response, p. 7)(emphasis in Response). Allied contends that the safe harbor
provision in Section 2 conflicts with the purported strict liability provision in
60790, at *10-12 (E.D. Mo. May 1, 2012)
Section 11. (Id., pp. 7-8). Allied maintains that CMI improperly attempts to
limit Section 2(i) to Section 10 of the Agreement and assume that Section 11 is
immune from the knowledge provision of Section 2(i). Allied asserts that this is
an incongruous distinction because Sections 10 and 11 of the Agreement are the
same in terms of the triggering events and the relief afforded under them. (Id., p.
8). Allied claims that both provisions are triggered by “the existence of material
misrepresentations resulting in one or more defects in a loan sold to CMI” under
the Agreement. (Id.). Allied argues that whether the relief available under
Sections 10 and 11 of the Agreement is termed repurchase (Section 11) or
indemnification (Section 10) “is solely a semantic difference--the result is the
same, and thus Allied’s liability under those substantially identical provisions
should be the same.” (Id., p. 9).
Allied also suggests that there are ambiguities between Sections 2202 and
248 of the CMI Manual and Section 11 of the Agreement. Allied claims these
sections, along with Sections 2(i) and 10 of the Agreement, vary “simply” and
“radically” regarding what standard will be applied in determining the
requirements under which it will be obligated to repurchase and/or indemnify
losses for loans Allied sold to CMI. (Id., p. 10). Section 2202 of the CMI
Manual, called “REPRESENTATIONS AND WARRANTIES,” contains a
subheading, “Fraud and Misrepresentation,” which provides:
As of the date the Loan was originated, except as qualified in section 2(i)
of the Correspondent Loan Purchase Agreement, the Correspondent
represents and warrants that all information relating to the Loan was
complete and accurate, and contained no fraud or misrepresentation,
whether the information was obtained, derived or requested by a third
party or an affiliate of the Correspondent or otherwise, or by the
(Response, p. 9)(emphasis in Response). Allied argues that this section qualifies
Allied’s liability to only those loans with defects it knew of or should have
known of; Allied claims this qualification supports the conclusion that Sections
2(i), 10 and 11 of the Agreement, as well as Section 2202 of the CMI Manual are
ambiguous. (Id., p. 10).
Likewise, Allied notes that, under Section 248, it was precluded from
verifying income on Stated Income products. Section 248 of the CMI Manual,
called “PROGRAM DESCRIPTIONS,” contains a subheading, “Asset Based
Stated Income Program.” (Id.). This section provides, “If income is documented
in loan file, the loan is no longer eligible for a stated income or no income
program.” (Id.). Allied claims that its inability to verify borrowers’ incomes and
assets cuts in its favor because it should not be held liable for misrepresentations
which it could not have verified or otherwise prevented. (Id.). Allied contends
that barring it from verifying borrower statements of income further supports the
conclusion that Sections 2(i), 10 and 11 of the Agreement and Sections 248 and
2202 of the CMI Manual are reasonably susceptible of more than on construction.
Several Courts have addressed the ambiguity issue and found no
ambiguity between §2(i) and §11. As this Court previously recognized, there is
no ambiguity or conflict between these sections:
Section 2(i) and § 2202 are representation and warranty sections,
the terms of which are limited to each subsection. Section 2(i)
and § 2202 are breached when a correspondent knows or should
have known that loan documents contain misstatements,
misrepresentations, or omissions but nonetheless submits the
defective documents to CitiMortgage. Section 11(ii) sets forth one
set of circumstances in which CitiMortgage can demand a
correspondent cure or repurchase a loan, specifically, upon
CitiMortgage determining that the loan was underwritten or
originated based on a misstatement, misrepresentation, or
omission. Section 11(ii) is breached when a correspondent fails to
cure or repurchase the loan, and applies regardless of the
That § 2(i) and § 2202 are limited to those instances where the
correspondent knows or should have known of the misstatement,
misrepresentation, or omission does not conflict or create an
ambiguity when read with § 11(ii). ...
Just Mortgage, 2012 U.S. Dist. LEXIS 43522, at *38-39.
The Court also finds Allied’s argument that Section 10 creates an
ambiguity with respect to Section 11(ii) to be unpersuasive because these
Sections do not have the same triggering events or remedy provisions. First,
Section 10 only becomes operable when there is a breach of the Agreement.
Section 10 is a general indemnification provision, which is applicable to breaches
of the Agreement, including breaches of any representations or warranties such as
those set out in Sections 2(i) and 2202. In contrast, Section 11 allows CMI to
demand cure or repurchase when there has been a misrepresentation, even absent
of any breach. See Just Mortgage, 2012 U.S. Dist. LEXIS 43522, at *38
(“Section 11(ii) is breached when a correspondent fails to cure or repurchase the
loan, and applies regardless of the correspondent’s knowledge.”). Second, “[t]he
remedies available for breach of § 2(i) also differ from those available for a
breach of § 11(ii). Remedies for a breach of § 2(i) are set forth in § 10, while the
available remedies for a breach of § 11(ii) are [CMI’s] ability to demand that the
correspondent cure or repurchase the defective loan and any other such remedies
as [CMI] deems appropriate.” Just Mortgage, 2012 U.S. Dist. LEXIS 43522, at
*30. Likewise, Section 11 provides that CMI’s rights under Section 11 do not
affect any indemnification obligations Allied has under Section 10 for breach of
the Agreement independent of Section 11. See Reply, p. 15.
Based upon the above reasoning and as discussed by this Court
previously, the Court finds that Allied has not demonstrated that §§ 2(i), 10,
11(ii), 2202, and 248 when read together, are ambiguous and conflicting.4
Accordingly, Allied has not proven the defense of ambiguity. See Scenic
Holding, LLC v. New Bd. of Trs. of the Tabernacle Missionary Baptist Church,
Inc., 506 F.3d 656, 670 (8th Cir. 2007)(“The burden of proving a defense of an
affirmative nature is upon the defendant.”)(citation omitted); Midwest Oilseeds,
Inc. v. Limagrain Genetics Corp., 387 F.3d 705, 714 (8th Cir. 2004)(“The
specificity requirement of Rule 56 applies with equal force where the defendant
opposes summary judgment, especially where the defendant resists by asserting
Similarly, the Court finds no basis for finding that Section 248 makes the Agreement
ambiguous. As discussed herein, Allied had the option not to utilize CMI’s Stated Income
products, and instead use products that allowed Allied to verify the borrowers’ income and
assets. Therefore, Allied’s argument that it should not be held liable for misrepresentations
which it could not have verified or otherwise prevented is unfounded. Allied could have
verified this information, and not have been subject to the strict liability provisions, if it had
utilized one of CMI’s non-Stated Income products.
affirmative defenses which it has a burden to prove.”); Herd v. Am. Sec. Ins. Co.,
501 F. Supp. 2d 1240, 1245 (W.D. Mo. 2007)(burden of proof for establishing an
affirmative defense is on the defendant).
Allied, 4:10CV1863 at 8-12.
As stated above, Judge Ross was analyzing the identical ambiguity argument asserted in
the Allied case which Reunion, represented by the same counsel which represented Allied,
asserts in the present case. I agree with Judge Ross’ well reasoned analysis there is no
ambiguity in the Agreement as asserted by Reunion.
Moreover, Reunion’s remaining defenses in this matter are the identical defenses
Reunion’s counsel raised in an identical brief submitted in the Allied case in the identical
contract dispute with CitiMortgage.
Judge Ross addressed the those defenses in Allied as follows:
Good Faith and Fair Dealing
Allied argues that CMI abused the “sole and exclusive” discretion
afforded it under the Agreement, thereby breaching the implied covenant of good
faith and fair dealing. (Response, pp. 13-14). Allied also asserts that CMI
exercised bad faith by creating and developing “defective” loan guidelines for a
Stated Income Loan product that CMI knew “showed a marked propensity
towards default.” (Id., p. 13).
Allied, however, fails to address relevant case law that found no bad faith
by CMI under similar circumstances. As noted by the OCM court, “to establish a
breach of the covenant of good faith and fair dealing, there must be evidence that
the party with the discretion exercised its discretion in such a way so as to evade
the spirit of the transaction or deny the other party the expected benefit of the
contract.” OCM Bancorp, 2011 U.S. Dist. LEXIS 45437, at *10. As previously
discussed, Allied does not dispute that there were defects in the Loans. Instead,
Allied simply argues that, despite these defects, CMI would be acting in bad faith
to demand the repurchase of the Loans because CMI knew of the high default rate
of Stated Income products.
The Court finds that “[t]here can be no bad faith if [CMI] simply
performed the actions expressly granted it by the parties’ agreement, including
determining that loans were defective and needed to be repurchased.” OCM
Bancorp, 2011 U.S. Dist. LEXIS 45437, at *11. It is undisputed that CMI acted
in accordance with the provisions of the Agreement and the unfettered discretion
afforded to CMI therein. Likewise, CMI’s purported knowledge “concerning
market conditions and the efficacy of its guidelines does not implicate whether it
exercised its discretion to demand cure or repurchase of the ... Loans in good
faith.” Just Mortg., Inc., 2012 U.S. Dist. LEXIS 43522, at *45. In sum, Allied
has not shown that CMI “exercised a judgment conferred by the express terms of
the agreement in such a manner as to evade the spirit of the transaction or so as to
deny [Allied] the expected benefit of the contract.” CitiMortgage, Inc. v. First
Cal. Mortg. Co., No. 4:10 CV 1498 RWS, 2011 U.S. Dist. LEXIS 154568, at *5
(E.D. Mo. Nov. 29, 2011). Accordingly, the Court finds that Allied has failed to
meet its burden of proof on the defense that CMI acted in bad faith in its
performance of the Agreement.
Allied raises the defenses of unconscionability and adhesion. These
defenses are related, but distinct defenses. See Surman v. Merrill Lynch, Pierce,
Fenner & Smith, 733 F.2d 59, 61 (8th Cir. 1984)(noting that a court may deny
giving effect to an “unconscionable” clause in a standardized contract of
adhesion); International Harvester Credit Corp. v. Leaders, 818 F.2d 655, 659
(8th Cir. 1987)(a contract of adhesion is not automatically unconscionable, but
rather must be examined in light of several factors). The Courts in this district
have discussed the elements for what constitutes an unconscionable contract or
provision or a contract of adhesion:
Under Missouri law, an unconscionable ... provision in a
contract will not be enforced. State ex rel. Vincent v. Schneider,
194 S.W.3d 853, 856-61 (Mo. 2006) (invalidating as
unconscionable arbitration clauses requiring the consumer to pay
for all arbitration fees and allowing an entity related to one of the
parties to select the arbitrator). There are procedural and
substantive aspects to unconscionability. Procedural
unconscionability relates to the formalities of the making of an
agreement and encompasses, for instance, fine print clauses, high
pressure sales tactics or unequal bargaining positions; substantive
unconscionability refers to undue harshness in the contract terms.
Cicle v. Chase Bank USA, 583 F.3d 549, 554 (8th Cir. 2009);
Whitney v. Alltel Comm’cs, Inc., 173 S.W.3d 300, 308-14 (Mo.
Ct. App. 2005); Fay v. New Cingular, Wireless, PCS, LLC, No.
4:10CV883 HEA, 2010 U.S. Dist. LEXIS 124831, 2010 WL
4905698, at *2 (E.D. Mo. Nov. 24, 2010). “Generally there must
be both procedural and also substantive unconscionability before a
contract or clause can be voided.” Whitney, 173 S.W.3d at 308;
see also Kan. City Urology, P.A. v. United Healthcare Servs., 261
S.W.3d 7, 15 (Mo. Ct. App. 2008) (reversing the trial court's
finding that arbitration clause was void where the trial court found
only substantive unconscionability and not procedural
Kenner v. Career Educ. Corp., No. 4:11CV00997, 2011 U.S. Dist. LEXIS
136484, at *8-9 (E.D. Mo. Nov. 29, 2011).
A contract of adhesion, as opposed to a negotiated
contract, is a form contract that is created and imposed by the
party with greater bargaining power. Robin v. Blue Cross
Hospital Service, Inc., 637 S.W.2d 695, 697 (Mo. banc. 1982).
The “stronger party” has more bargaining power than the “weaker
party,” often because the weaker party is unable to look elsewhere
for more attractive contracts. Id. The contract is offered on a “take
this or nothing” basis. State ex rel. Vincent v. Schneider, 194
S.W.3d 853, 857 (Mo. banc. 2006). The terms in the contract are
imposed on the weaker party and “unexpectedly or
unconscionably limit the obligations and liability of the [stronger
party].” Robin v. Blue Cross Hospital Service, Inc., 637 S.W.2d
695, 697 (Mo. banc. 1982).
Finnie v. H&R Block Fin. Advisors, Inc., No. 07-429-CV-W-NKL, 2007 U.S.
Dist. LEXIS 74472, at *7-8 (W.D. Mo. Oct. 4, 2007)
Allied argues that the Agreement is substantively and procedurally
unconscionable. (Response, pp. 14-18). Allied contends that it is procedurally
unconscionable because of Allied’s lack of knowledge and lack of voluntariness
in entering into the Agreement. (Id., pp. 16-18). Allied argues that Section 11
essentially turns the Agreement into an insurance policy for CMI whereby Allied
must indemnify and insure against any and every defect in the loans it sold CMI,
regardless of whether it was aware of the defect. (Id., p. 15). Allied argues that it
did not have knowledge that the “safe harbor,” afforded by Section 2(i), would be
rendered meaningless by the unilateral imposition of a strict liability
interpretation of Section 11. (Id., p. 17). Allied notes that the CMI Manual
consists of thousands of pages and asserts that CMI essentially drowned Allied in
a “flood of paperwork” that it knew “would not and could not be read in time for
the signing of the contract.” (Id.). Allied also argues that the Agreement was not
voluntary because Allied had to accept it “as is” even though the Agreement is
patently one-sided. (Id.). In addition, Allied contends that the Agreement is
substantively unconscionable due to the harsh contract terms. (Id., p. 18).
Basically, Allied argues that it was allocated all of the risk of the loans, without
affording Allied any benefit for the assumption of that risk. (Id.).
Similar to its argument that the Agreement was unconscionable, Allied
argues that the Court should not enforce the Agreement because it was a contract
of adhesion. (Id., pp. 18-19). Allied asserts that if it had known that the
standardized provisions, particularly Section 11, would have been interpreted as
“an insurance policy, whereby it was obligated to forever indemnify CMI for any
defect existing with regards to the Subject Loans, regardless of whether Allied
could have even known of such defects” then it would not have entered into the
Agreement. (Id.). Accordingly, Allied argues that the Court should not enforce
In the instant case, the Court finds that the affirmative defenses of
unconscionability and adhesion are not available to Allied because it, like CMI,
is a sophisticated business entity. There is no gross disparity between the parties.
Allied and CMI are both well versed in reviewing and negotiating contract
language. The Court finds that both parties were fully capable of negotiating or
altering the contract language to effect any change desired. Moreover, the Court
does not believe that the Agreement is so “one-sided” that it could be considered
unconscionable or a contract of adhesion. Allied clearly benefitted from their
Agreement. During the course of their Agreement, Allied sold CMI over 2,560
loans, constituting over three hundred and sixteen million dollars worth of
business. (Reply, p. 24). Thus, Allied’s affirmative defenses of
unconscionability and adhesion fail.
In Pari Delicto, Unclean Hands, and Laches
In its Answer, Allied raises the equitable defenses of in pari delicto,
unclean hands and laches. “Pari delicto is Latin for ‘equal fault.’ The in pari
delicto doctrine is the principle that a plaintiff who participated in wrongdoing
may not recover damages based on the wrongdoing.” In re Senior Cottages of
Am., LLC, 482 F.3d 997, 999, n.3 (8th Cir. 2007). Likewise, the doctrine of
unclean hands is a defense that bars one who has acted wrongfully with respect to
the subject of the suit from obtaining an equitable remedy. Sangamon Assocs.,
Ltd. v. Carpenter 1985 Family P'ship, Ltd., 165 S.W.3d 141, 145 (Mo.
2005)(citing Karpierz v. Easley, 68 S.W.3d 565, 572 (Mo. App. 2002)). Finally,
“[l]aches may be used to bar a lawsuit when the plaintiff is guilty of (1)
unreasonable and unexcused delay, (2) resulting in prejudice to the defendant.”
Whitfield v. Anheuser-Busch, Inc., 820 F.2d 243, 244 (8th Cir. 1987)(citing
Goodman v. McDonnell Douglas Corp., 606 F.2d 800, 804 (8th Cir. 1979)).
In its Memorandum, CMI argues that these defenses are “not available as
a matter of law because CMI is not seeking an equitable remedy.”
(Memorandum, p. 24). In response, Allied claims that it is entitled to the
affirmative defenses of in pari delicto (defense no. 12), unclean hands (defense
no. 13), and laches (defenses no. 14) because CMI seeks equitable relief in its
First Amended Complaint, specifically, “an order requiring Defendant to perform
its obligations under the Agreement, including, but not limited to, repurchase of
defective loans.” (Response, p. 20). Allied claims that this Court must deny
CMI’s motion for summary judgment because CMI argued that its only basis for
denying these affirmative defenses was that it was not seeking equitable relief.
In reply, CMI contends that it has not moved for summary judgment on its
claim for equitable relief; it has only moved for money damages. (Reply, p. 26).
CMI asserts that it is not required to seek each and every type of relief sought in
the Complaint. (Id.). In addition, CMI contends that, contrary to Allied’s claim,
it has addressed the substantive deficiencies in Allied’s affirmative defenses.
(Memorandum, pp. 24-26; Reply, pp. 26-27). First, with respect to unclean
hands and in pari delicto, CMI asserts that the undisputed facts do not evidence
any tortious or criminal activity or other conduct capable of serving as a basis for
either defense. (Memorandum, p. 25; Reply, p. 26). Nor has Allied identified
any tortious or criminal activity by CMI. (Reply, p. 26). With respect to its
laches defense, CMI argues that the laches defense is unavailable because “‘the
doctrine of laches will not bar a suit before expiration of the period set forth in
the applicable statute of limitations in the absence of special facts demanding
extraordinary relief.’” Lane v. Non-Teacher Sch. Emple. Ret. Sys. of Mo., 174
S.W.3d 626, 640 (Mo. Ct. App. 2005)(quoting State ex rel. Gen. Elec. Co. v.
Gaertner, 666 S.W.2d 764, 767 (Mo. banc 1984)); Memorandum, p. 26; Reply,
pp. 26-27. CMI notes that the statute of limitations has not expired, and Allied
has not identified any facts that would justify the “extraordinary” relief of
allowing a laches defense. (Memorandum, p. 26; Reply, pp. 26-27). Moreover,
CMI claims that a laches defense is inapplicable because CMI has not delayed
bringing suit after Allied failed to repurchase the loans. (Id.).
The Court finds that Allied has failed to provide evidence to support the
affirmative defenses of in pari delicto, unclean hands, and laches. Allied has not
demonstrated that CMI was involved in any tortious or criminal activity that
would warrant application of the in pari delicto and unclean hands defenses.
Likewise, Allied is not entitled to the laches defense because the statute of
limitations has not expired and because there has been no allegation that CMI
delayed in filing suit. Accordingly, the Court finds that these equitable defense
are not available to Allied as a matter of law.5
Absolute Defenses to Liability
Based upon the operation of Section 2(i) of the Correspondent
Because the Court addresses the substance of these defenses, the Court need not address
CMI’s argument that it is not proceeding on its equitable claims and, therefore, the equitable
defenses do not apply.
Agreement, Allied argues that it did not breach any of the terms of the Agreement
and, therefore, CMI has no valid basis for demanding that Allied repurchase
and/or indemnify CMI for the Loans. That is, Allied claims it originated the
Loans with the “utmost” due diligence and is shielded from liability pursuant to
Section 2(i). (Response, pp. 20-28).
This argument, however, is premised upon a reading of Section 2(i) which
has already been rejected by this Court. As previously discussed, the cure or
repurchase clause of Section 11(ii) allows CMI to demand repurchase at any time
if it discovers a borrower’s material misrepresentation, “even if Allied complied
with Citimortgage’s guidelines when originating the loan.” See OCM Bancorp,
Inc., 2011 U.S. Dist. LEXIS 45437, at *15-16. Section 11(ii) does not have any
“qualifying language” that CMI can only demand repurchase if it determines that
Allied knew of the borrower’s misrepresentation. Id.
In addition, Allied asserts that it is not liable to repurchase or indemnify
CMI for Loans involving income and/or asset misrepresentations because this
information was immaterial to CMI’s decision to purchase the Loans. (Response,
pp. 25-26). Allied notes that all of the Loans were originated pursuant to CMI’s
Stated Income loan product guidelines, which precluded Allied from verifying
income and/or assets. (Id.). Given that Allied was forbidden from verifying the
borrowers’ income and assets, Allied argues that CMI cannot claim that this
information was material to its decision to purchase the Loans. (Id.).
In response, CMI claims that the borrowers’ representations of income
and assets were material, and that Allied has not provided any evidence to
support its claim that these representations were not material to CMI. (Reply,
pp. 17-19). CMI states that it would not have asked borrowers their income if it
were not material to CMI’s decision to purchase the loan. (Id., p. 18). The
borrowers’ representations in the Uniform Residential Loan Application were
made subject to criminal and civil penalties for falsehood. (Id.). CMI, thus,
contends that the borrowers’ statements of income on the loan applications were
the means it used to determine the borrowers’ incomes for Stated Income Loans.
(Id.). As noted by CMI “[n]othing in the Agreement required Allied to originate
loans as Stated Income Loans as opposed to originating the loans under a full
documentation program.” (Id.). Because Allied chose to originate the Loans and
sell them to CMI as Stated Income Loans, “Allied assumed the risk that it would
have to repurchase any Loans that CMI determined had been originated or sold to
it on the basis of a material misrepresentation or misstatements of fact.” (Id.).
As evidence that CMI considered the borrowers’ income statements to be
material, CMI notes that Allied placed its broker for the Weston Loan, a Stated
Income Loan, on its “list of suspended brokers’ because Allied had discovered
‘misrepresentation [sic] in the verification of employment as well as fictitious
bank statements’ in connection with the Weston Loan’s origination.” (SSUF
Response, ¶71; Reply, p. 19). There, Allied did not claim that the
misrepresentations or misstatements were not material, but told its broker, “[t]his
incident is serious and should require your immediate attention.” (Reply, p. 19).
The Court agrees with the OCM court’s determination that a borrower’s
“substantially misrepresented income” constitutes “a material misrepresentation
as a matter of law.” OCM Bancorp, Inc., 2011 U.S. Dist. LEXIS 45437, at *16.
“Under Missouri law, ‘a misrepresentation is deemed material where it is
reasonably calculated to affect the action and conduct of the company in deciding
whether or not to accept the risk by issuing its policy covering the risk.’” Id.
(quoting Continental Cas. Co. v. Maxwell, 799 S.W.2d 882, 889 (Mo. Ct. App.
1990)). The Court finds that this is an instance where the “the materiality of a
misrepresentation is so clear that it should be declared material as a matter of
law.” Continental Cas. Co., 799 S.W.2d at 889; OCM Bancorp, Inc., 2011 U.S.
Dist. LEXIS 45437, at *16-17. As noted by CMI, and which Allied does not
dispute, a borrower’s income is “perhaps the most important and material factor
in determining the ability of the borrower to pay back the loan.” (Reply, p. 18).
“[A] potential borrower’s income affects the decision of whether or not to
underwrite a loan to that borrower, and, in turn, affects whether [CMI] will want
to invest in that loan in the secondary loan market.” OCM Bancorp, 2011 U.S.
Dist. LEXIS 45437, at *17. Thus, the Court finds that “a borrower’s substantially
misrepresented income is a material misrepresentation, and so [CMI’s] discovery
of a borrower's misrepresented income would entitle it under the parties’
agreement to demand that OCM repurchase the loan for containing material
Allied, 4:10CV1863 at 12-20.
Reunion and CitiMortgage raise the identical arguments in this case which they raised in
the Allied matter. I have thoroughly reviewed the parties’ briefs and exhibits. I completely
agree with Judge Ross’ conclusion that the defenses raised by Allied, which are identically
asserted in the present case by Reunion, are without merit. I hereby adopt the reasoning and
conclusions which Judge Ross made in the Allied case and apply them to the matter before me.
As a result, I find that Reunion has failed to assert a legal ground which prevents CitiMortgage
from prevailing on its motion for summary judgment on its breach of contract claim.
CitiMortgage has also filed motions to exclude the opinion Reunion’s proposed
mortgage banking expert, Donald Coker, and to strike the affidavit of David Thayer, Reunion’s
president, which were submitted by Reunion. Reunion offers Coker’s opinion to support its
position that the Agreement contains an ambiguity. Coker also opines on how he construes the
Agreement and how Reunion has asserted valid affirmative defenses. None of this testimony is
relevant. Because I have found the Agreement not to be ambiguous, Coker’s construction of the
Agreement is irrelevant. To the extent that Coker is offering his view of whether Reunion has
established its affirmative defenses, such testimony is beyond the purview of expert testimony
and offers impermissible legal conclusions. Coker also opines on the damages available to
CitiMortgage. However, the calculation of CitiMortgage’s damages are clearly defined under
the Agreement as the Repurchase Price. Coker’s opinion on this issue is irrelevant. As a result,
I will grant CitiMortgage’s motion to exclude Coker’s opinion.
Similarly, David Thayer’s affidavit asserts that the Agreement contained ambiguities and
asserts what he thought Reunion’s duties were under the Agreement. Thayer’s opinion that the
Agreement contains ambiguities is irrelevant because I have already rejected that position.
Thayer’s understanding of what Reunion’s duties were under the Agreement is superfluous
because the terms of the Agreement speak for themselves. Thayer’s position that CitiMortgage’s
demand to repurchase the loans at issue is unfair because Reunion complied with all of
CitiMortgage’s underwriting requirements misses the central contractual obligation of this case.
Under the unambiguous terms of the Agreement, Reunion agreed to repurchase loans which
CitiMortgage, in it sole discretion found to be materially defective. Thayer’s interpretation of
the Agreement to the contrary is not supported by the terms of the Agreement. As a result, I will
deny CitiMortgage’s motion to strike Thayer’s affidavit. Instead, I will give his affidavit the
weight it is due.
IT IS HEREBY ORDERED that CitiMortgage, Inc.’s motion for summary judgment
[#61] is GRANTED.
IT IS FURTHER ORDERED that CitiMortgage, Inc.’s motion to exclude the opinions
of Donald Coker [#57] is GRANTED.
IT IS FURTHER ORDERED that CitiMortgage, Inc.’s motion to strike the affidavit of
David Thayer [#80] is DENIED.
RODNEY W. SIPPEL
UNITED STATES DISTRICT JUDGE
Dated this 9th day of November, 2012.
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