Affordable Communities of Missouri, LP v. EF&A Capital Corporation et al

Filing 58

MEMORANDUM AND ORDER -....IT IS HEREBY ORDERED that defendants EF&A Capital Corp. and EF&A Funding LLC's Motion for Judgment on the Pleadings is GRANTED in part and DENIED in part; the motion is GRANTED as to: (1) the negligent misreprese ntation claim in Count I based on the representation that the defeasance option "should" cost less than the yield maintenance option upon defeasance, (2) the breach of contract claim in Count II, and (3) the breach of the covenant of good f aith and fair dealing claim in Count III; and the motion is DENIED as to: (1) the negligent misrepresentation claim in Count I based on the representation that upon defeasance, Fannie Mae would provide substitute securities for the deed of trust on t he Property at the then-prevailing mortgage rates for multifamily apartment buildings like the Property, and (2) the unjust enrichment claim in Count IV. [Doc. 41]. An appropriate partial judgment will accompany this memorandum and order.. Signed by Honorable Charles A. Shaw on 1/9/2012. (MRC)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION

AFFORDABLE COMMUNITIES OF
MISSOURI,
Plaintiff,
v.
EF&A CAPITAL CORP., et al.,
Defendants.

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No. 4:11-CV-555 CAS

MEMORANDUM AND ORDER
This matter is before the Court on a Motion for Judgment on the Pleadings under Rule 12(c)
of the Federal Rules of Civil Procedure, filed by remaining defendants EF&A Capital Corp. and
EF&A Funding, LLC (collectively, “EFA”). Plaintiff Affordable Communities of Missouri
(“ACM”) opposes the motion and it is fully briefed. For the following reasons, the motion will be
granted in part and denied in part.
Background
ACM is a limited partnership that at one time owned the Jefferson Arms Apartments (“the
“Property”) in St. Louis, Missouri. In 1999, ACM sought to refinance the existing secured debt on
the Property. For assistance with the refinancing, ACM’s principal, Barry Cohen, contacted
defendant Eichler, Fayne & Associates (“EFA”),1 a lender in the business of making loans secured
by mortgages on multifamily properties. EFA operated under former defendant Federal National
Mortgage Association’s (“Fannie Mae”) Delegated Underwriting and Servicing (“DUS”) program,
under which Fannie Mae purchases loans originated by EFA and serviced by EFA, with EFA and

1

All references to EFA include its general partner, defendant EF&A Capital Corp., and its
successor, defendant EF&A Funding, LLC.

Fannie Mae sharing the risk of loss on the loans. Loans issued under the DUS program include
certain rules and requirements imposed by Fannie Mae for loans that will be sold to it and in the
secondary market.2
ACM communicated with EFA’s representative Gene Glaser. ACM states that Glaser told
Cohen the DUS program included limitations on loan prepayments that required borrowers to choose
between two forms of prepayment options – a yield maintenance option, or a defeasance option that
involved substitution of collateral instead of a loan prepayment fee. ACM alleges that Glaser stated
the defeasance option should cost a borrower less than the yield maintenance option. ACM asserts
that this representation was false because of Glaser and EFA’s failure to use ordinary care in
obtaining or communicating accurate information, that ACM did not know the representation was
false, and that ACM relied on the representation.
ACM chose the defeasance option and not the yield maintenance option for its loan because,
based on Glaser’s representations, it believed that upon any necessary defeasance under the loan,
the substitute collateral would be new securities at the then-prevailing mortgage rates for similar
properties that were available for purchase in the marketplace at the time, which matched the credit
rating in terms of the original mortgage/deed of trust placed upon the Property in connection with
the loan made by EFA. ACM closed on the transaction with EFA and obtained a loan for
$8,175,000 (the “Loan”), which was evidenced by certain loan documents (the “Loan Documents”),
including a Multifamily Note dated April 22, 1999 with attached Schedules A, B and C (the “Note”),
and a Multifamily Open-End Deed of Trust, Assignment of Rents, and Security Agreement dated

2

Fannie Mae is a government-sponsored but privately-owned enterprise chartered by
Congress, 12 U.S.C. § 1216. Fannie Mae is prohibited from originating mortgage loans, 12 U.S.C.
§ 1719(a)(2), but rather operates in the U.S. secondary mortgage market.

April 22, 1999 with attached Exhibits A, B and C (the “Security Instrument”). Subsequently, the
Loan was sold and assigned to Fannie Mae in the secondary mortgage market.
In 2005, approximately six years after the Loan was made, the City of St. Louis (“City”)
threatened the use of eminent domain as a means of acquiring the Property from ACM through
condemnation. ACM alleges the City worked with another real estate developer in an effort to
arrange a conveyance of the Property by ACM to the other developer in lieu of condemnation
proceedings. ACM then entered into a Purchase and Sale Agreement with the other real estate
developer, which Agreement specifically stated that ACM agreed to sell the Property in lieu of the
threatened condemnation. In connection with the sale transaction, ACM contacted EFA and
informed it that the sale of the Property pursuant to the Purchase and Sale Agreement was in lieu
of condemnation, under threat of condemnation, and that the intended sale of the Property would not
violate the prepayment prohibitions of the Loan Documents under Schedule B to the Note,
notwithstanding the defeasance provisions in Schedule B and in the Security Instrument.
EFA and Fannie Mae disagreed that the prepayment prohibitions were not violated, and
required ACM to proceed under the defeasance option of Exhibit B to the Security Instrument and
to comply with all of the provisions in the Loan Documents relating to defeasance if ACM wanted
to sell the Property and obtain the release of the lien on the Property under the Security Instrument.
EFA, representing Fannie Mae, provided ACM an estimated amount of a prepayment fee which was
calculated as the Defeasance Deposit under the terms of the Note and the Security Instrument. ACM
was required to give a defeasance notice and pay a defeasance commitment fee within the time
frame called for by the Loan Documents in order to effectuate a substitution of collateral for the
mortgaged Property and obtain the release of the lien on the Property provided under the Loan
Documents, in order to allow a sale of the Property otherwise constituting the collateral for the Loan.
3

ACM completed the defeasance process in order to sell the Property, thereby substituting
collateral which was purchased with ACM funds through the defeasance process. The substitute
collateral was a Fannie Mae Investment Security with a rate of 4.8524%, determined based on the
then-current yields on highly rated U.S. Treasury Securities. ACM alleges that because the rate of
these securities was substantially below the 7.065% rate called for under the original Note, Security
Instrument and Loan Documents encumbering the Property and the payments on the Note had to be
satisfied out of the Fannie Mae Investment Security, ACM was required to pay a substantial amount
over the Note balance to purchase the securities constituting the substitute collateral, to obtain the
release of the lien on the Property to allow the sale to proceed.
The scheduled amount ACM owed under the Loan held by Fannie Mae was approximately
$7,100,000. To obtain the release of the lien on the Property so that ACM could sell it, ACM alleges
it paid a defeasance commitment fee to EFA and Fannie Mae of 1% of that loan balance. ACM also
alleges it paid the Defeasance Deposit calculated by EFA and Fannie Mae in connection with the
closing and release of the mortgage lien on the Property. ACM alleges it should not have had to pay
these prepayment fees and that it suffered damages as a direct result of the defendants’ actions in
the amount of approximately $500,000.
ACM filed its Petition in state court asserting claims against EFA and Fannie Mae for
negligent misrepresentation (Count I), breach of contract (Count II), breach of the covenant of good
faith and fair dealing (Count III), and unjust enrichment (Count IV). The case was removed to this
Court. By Memorandum and Order of August 22, 2011 (the “Order”), the Court granted Fannie
Mae’s motion to dismiss ACM’s claims against it for failure to state a claim upon which relief can
be granted.
EFA now moves for judgment on the pleadings on all of ACM’s claims against it.
4

Legal Standard
Rule 12(c) of the Federal Rules of Civil Procedure provides that after the pleadings are
closed, a party may move for judgment on the pleadings. A motion under Rule 12(c) is determined
by the same standards that are applied to a motion under Rule 12(b)(6). Ginsburg v. InBev NV/SA,
623 F.3d 1229, 1233 n.3 (8th Cir. 2010). To survive a motion to dismiss pursuant to Rule 12(b)(6)
for failure to state a claim upon which relief can be granted, “a complaint must contain sufficient
factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v.
Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570
(2007)). “A grant of judgment on the pleadings is appropriate where no material issue of fact
remains to be resolved and the movant is entitled to judgment as a matter of law.” Clemons v.
Crawford, 585 F.3d 1119, 1124 (8th Cir. 2009) (internal quotation marks and quoted case omitted).
“Well-pleaded facts, not legal theories or conclusions, determine the adequacy of the
complaint.” Id. (brackets and quoted case omitted). “The facts alleged in the complaint must be
enough to raise a right to relief above the speculative level.” Id. (internal quotation marks and
quoted case omitted). The Court must “accept as true all factual allegations set out in the complaint”
and “construe the complaint in the light most favorable to the plaintiff, drawing all inferences in its
favor.” Ashley County, Ark. v. Pfizer, Inc., 552 F.3d 659, 665 (8th Cir. 2009) (quoted case omitted).
“A plaintiff need only allege facts that permit the reasonable inference that the defendant is liable,
even if the complaint ‘strikes a savvy judge that actual proof of the facts alleged is improbable’ and
recovery ‘very remote and unlikely.’” Hamilton v. Palm, 621 F.3d 816, 819 (8th Cir. 2010) (quoting
Braden v. Wal-Mart Stores, 588 F.3d 585, 594 (8th Cir. 2009)).

5

In considering a Rule 12(c) motion, the Court may consider the pleadings themselves,
materials embraced by the pleadings, exhibits attached to the pleadings, and matters of public record.
Porous Media Corp. v. Pall Corp., 186 F.3d 1077, 1079 (8th Cir. 1999).
Discussion
I. Negligent Misrepresentation – Count I
A.
EFA moves for judgment on the pleadings on Count I, which asserts a claim for negligent
misrepresentation. The parties agree that Missouri law controls this matter. “The elements of
negligent misrepresentation are: (1) the speaker supplied information in the course of his business;
(2) because of the speaker’s failure to exercise reasonable care, the information was false; (3) the
information was intentionally provided by the speaker for the guidance of limited persons in a
particular business transaction; (4) the hearer justifiably relied on the information; and (5) due to the
hearer’s reliance on the information, the hearer suffered a pecuniary loss. A party must prove every
element of a claim for negligent misrepresentation for the claim to succeed.” Renaissance Leasing,
LLC v. Vermeer Mfg. Co., 322 S.W.3d 112, 134 (Mo. 2010) (en banc) (internal citation omitted).
According to EFA, the Petition alleges that its employee, Glaser, negligently made the
following misrepresentations to ACM: (1) “the defeasance option should cost a borrower less than
the yield maintenance option,” Pet. ¶ 16; and (2) “upon a sale of property secured by an EFA and
Fannie Mae loan that was included in the DUS program, Fannie Mae would provide substitute
securities for the deed of trust on the [Property] at the then-prevailing mortgage rates for multifamily
apartment buildings like the [Property].” Id.
EFA moves for judgment on the pleadings on the basis that ACM cannot establish the fourth
element, justifiable reliance on its representations, as a matter of law. EFA argues ACM could not
6

justifiably rely on the representation that the defeasance option should cost less than the yield
maintenance option, because this was an opinion or prediction about uncertain future events. EFA
contends the representation necessarily related to a future event because at the time it was made, the
Loan had not yet been made and the representation could only refer to a time in the future when
ACM might decide to sell the Property. EFA states that by the express terms of the Loan
Agreement, the cost in the future was uncertain because the Lender “in its sole discretion” could
choose the “Investment Security” to serve as Substitute Collateral, which could be either a Fannie
Mae Investment Security or U.S. Treasury Securities, whose cost varies over time.3
The Court agrees. EFA’s representation that the defeasance option should cost less than the
yield maintenance option in the event of a future prepayment of the Loan was a statement of opinion
about a future event. The Petition alleges EFA informed ACM that Fannie Mae required it to select
one of two potential prepayment options, the defeasance option or the yield maintenance option, and
that “the defeasance option should cost a borrower less than the yield maintenance option.” Pet.
¶ 16 (emphasis added). It is well established under Missouri law that a “claim for negligent
misrepresentation generally cannot be based on unfulfilled promises or statements as to future
events, unless the statement is a representation of the speaker’s present intention or concerns matters
within the speaker’s control.” Ryann Spencer Group, Inc. v. Assurance Co. of Am., 275 S.W.3d
284, 291 (Mo. Ct. App. 2008). A failure to accurately predict future circumstances does not give
rise to a claim for negligent misrepresentation. See Comp & Soft, Inc. v. AT & T Corp., 252 S.W.3d
189, 197 (Mo. Ct. App. 2008).

3

EFA quotes from the Modification to Instrument Defeasance Provisions, Exhibit B to
the Fannie Mae Multifamily Security Instrument, Exhibit 3, at ¶¶ 54(a)(3), (h)(10).
7

Here, EFA offered its opinion and prediction as to which prepayment option would be less
costly. ACM’s use of the word “should” in paragraph 16 of its Petition suggests the prediction of
a future event based on an opinion of how the applicable Loan language would apply to the facts at
the time of the transaction. The opinion necessarily related to a potential future sale of the Property
by ACM at an unknown time and, crucially, was subject to economic influences and factors over
which EFA had no control. Cf. Kelly Tire Serv., Inc. v. Kelly-Springfield Tire Co., 338 F.2d 248,
253 (8th Cir. 1964) (“At best, these projections, however persuasive in shaping plaintiff’s plans,
were opinions subject to the uncontrollable economic influences of free enterprise and not fraudulent
misrepresentations of past or existing facts on which plaintiff justifiably relied to its detriment.”).
More specifically, the Petition shows that the defeasance took place eight years after EFA’s
representation about the yield maintenance and defeasance options was allegedly made. The
language of the defeasance option in Section 54 of the Security Instrument (Ex. B to the Security
Instrument, §§ 54(a)(1), (3), (6), (b)), indicates that the cost of the defeasance option was dependent
on a number of variable factors that could not have been known with certainty to either EFA or
ACM at the time of the alleged misrepresentation in 1998. These factors affecting the cost could
not be determined until the time ACM elected to proceed with the defeasance, and only then could
a comparison be made to the cost of the yield maintenance option.
Variable factors set out in the Loan Documents make it clear that EFA’s statement could
only be a prediction of the cost of the defeasance option based on identifiable but thenunquantifiable factors to occur in the future, all of which had to be known to establish the real cost
of the defeasance option in comparison to the cost of the yield maintenance option. For example,
Section 54(h)(1) provides the definition of “Annual Yield” which is dependent on variable published
yields in place at the time of the Defeasance Notice. The “Defeasance Commitment Fee” under
8

Section 54(h)(5) can be two different amounts depending on whether the Successor Borrower is
designated by the Borrower or the Lender. The “Defeasance Deposit” under Section 54(h)(6) is
dependent on present value calculations performed at a time dependent on the Defeasance Closing
Date. The “Investment Security” serving as the Substitute Collateral in the defeasance was either
a Fannie Mae Investment Security purchased in the market or U.S. Treasury Securities, on which
the cost and return varied at all times. Further, these variables were dependent on overall economic
conditions, interest rates, and the timing of the defeasance selected by ACM. These variables could
be made certain only at the time of Defeasance Closing, as shown from the applicable language of
the Loan Documents.
The variable factors set out in the Loan Documents make it clear that EFA’s statement was
a prediction of the cost of the defeasance option based on recognizable but then-unknown factors
to occur in the future, all of which had to be known to establish the real cost of that option.
Therefore, EFA’s alleged misrepresentation was a prediction of a future event and is not actionable,
as a matter of law.4

4

Count I of the Petition alleges in pertinent part that EFA negligently misrepresented in 1998
that upon any future prepayment, the defeasance option would cost ACM less than the yield
maintenance option. The Petition does not, however, allege what ACM’s cost would have been
upon prepayment in 2006 had it selected the yield maintenance option instead of the defeasance
option. The Petition also does not allege that the yield maintenance option was in fact less
expensive than the defeasance option. Presumably, the correct measure of damages on Count I as
pleaded would be the difference between what it would have cost ACM to prepay the Loan under
the yield maintenance option and what it actually cost ACM to prepay it under the defeasance
option. Or perhaps, the measure of damages would be the difference between the cost of the
defeasance option as promised by EFA (i.e., substitute securities at the then-prevailing mortgage
rates for multifamily apartment buildings like the Property, Pet. ¶ 16), and the cost of the defeasance
option as actually determined by Fannie Mae and EFA, substituting securities based on then-current
yields on highly rated U.S. Treasury Securities.
9

As a result, when the Petition is construed in the light most favorable to ACM and all
reasonable inferences are drawn in its favor, the Petition does not state a plausible claim for
negligent misrepresentation with respect to the representation that the defeasance option should have
been less costly for ACM. EFA’s motion for judgment on the pleadings should be granted on this
claim.
B.
EFA also moves for judgment as a matter of law on the second alleged misrepresentation,
that upon a sale of the Property, Fannie Mae would provide substitute securities for the deed of trust
on the Property at the then-prevailing mortgage rates for multifamily apartment buildings like the
Property. EFA argues that ACM cannot justifiably rely on this representation, even if EFA did
misrepresent the legal effect of the terms, because the express terms of the Loan Agreement describe
how prepayment and defeasance would operate.
EFA cites Missouri case law for the proposition that a party “cannot defeat the enforcement
of a provision of a . . . contract by a mere showing that the other party misrepresented its legal effect
or gave assurances that the same would not be binding or enforced.” St. Joseph Lead Co. v.
Fuhrmeister, 182 S.W.2d 273, 279 (Mo. 1944). Also, “A contracting party is bound by the terms
of the written contract he or she executes.” Hamra v. Magna Group, Inc., 956 S.W.2d 932, 940 (Mo.
Ct. App. 1997). “[The law] is not an indulgent guardian which can go to romantic length of giving
protection against consequences of indolence, folly or careless indifference to ordinary and
accessible means of information.” Id. (quoted case omitted).
EFA asserts that under Hamra, it is entitled to judgment on this claim. In Hamra, the
plaintiff, a former bank director, claimed coverage under the bank’s deferred compensation plan,
saying he was told by an insurance agent hired by the bank to market the plan that compensation
10

would be payable when he reached age 65, whether or not he remained a director. A provision in
the written plan, however, clearly terminated any company obligation if service as a director
terminated prior to the individual’s 65th birthday. Id. at 935-36. The former director had received
a copy of the plan and participation agreement before he met with the agent to discuss his possible
participation. Id. at 940. The agent’s testimony supported the plaintiff’s case, as he testified he was
instructed by bank personnel that directors would receive their full benefits if they reached age 65,
and no one advised him that a director who was terminated before reaching age 65 would only
receive an assignment of some life insurance. Id. Nonetheless, the Missouri Court of Appeals
affirmed summary judgment for the bank on the former director’s negligent misrepresentation claim,
holding the plaintiff could not justifiably rely on the agent’s representations because they were
contrary to the plain language of the plan. Id.
ACM argues that Hamra is distinguishable because Mr. Hamra received a copy of the plan
language and had the opportunity to read it before he talked with the agent and decided to enter into
the plan, whereas ACM did not have access to the Loan Documents until after it had made a
$165,000 Rate Lock Payment based on its understanding of the Loan terms as misrepresented by
EFA, and stood to lose all of that payment if it did not go through with the transaction. ACM also
asserts that while Mr. Hamra was described as an “experienced attorney and businessman,” in this
case EFA had superior knowledge about the transaction and held itself out as having “specialized
experience and knowledge in DUS program loans and the features, terms, and operation of the
program.” Pl.’s Mem. Opp. at 12.5

5

The Petition alleges that ACM “had no experience with defeasance options under the loan
agreements, or knowledge of the specific terms of a defeasance option under the DUS program of
Fannie Mae.” Pet. ¶ 19. ACM also alleges that the forms used by EF&A and EFA were
standardized Fannie Mae documents that “could not be negotiated and must be executed without
11

EFA replies that the Hamra decision did not focus on the fact that the plaintiff received the
plan documents and could have read them before the misrepresentations were made, but instead
focused on the fact that, as here, the plaintiff “had received and executed the contract documents
such that there was ‘no justifiable basis for him to have relied on statements by the insurance agent
contrary to the plain language of the plan.’” Defs.’ Reply at 4 (quoting Hamra, 956 S.W.2d at 940).
EFA further replies that the Petition shows ACM is a sophisticated investor because it was the owner
of the Property since 1993 and “invested funds in a number of renovation and modernization
programs at the facility,” Pet. ¶ 9; sought a loan for over $8 million dollars, id. ¶ 23; and was a
California limited partnership that recently merged in to a Nevada limited partnership, id. ¶ 1.
Missouri law is clear that a person cannot evade contractual obligations by claiming he did
not read a contract, even if he was told the contract said something that it does not. See, e.g., Sanger
v. Yellow Cab Co., Inc., 486 S.W.2d 477, 481 (Mo. 1972) (en banc) (“The rule is that the one who
signs a paper, without reading it, if he is able to read and understand, is guilty of such negligence
in failing to inform himself of its nature that he cannot be relieved from the obligation contained in
the paper thus signed, unless there was something more than mere reliance upon the statements of
another as to its contents[.]”) (quoting Higgins v. American Car Co., 22 S.W.2d 1043, 1044 (Mo.
1929)); St. Joseph Lead, 182 S.W.2d at 279 (A party “cannot defeat the enforcement of a provision

change.” Id. ¶ 22. ACM alleges that it was pressured into paying the rate lock payment to lock in
the interest rate offered under the Loan Commitment without seeing the Loan Documents that
described the defeasance option. See Pet. ¶¶ 25-28. (“The financial terms of the Defeasance Option
were not set forth in the Loan Commitment. Rather, the Loan Commitment stated that the
Defeasance Option may be exercised ‘per the terms of the loan documents’ . . .[which] were not
included with the Loan Commitment delivered to Affordable.”) Pet. ¶ 24. ACM alleges that upon
payment of the Rate Lock Payment, it “had no alternative other than to execute whatever
standardized Fannie Mae loan documents were submitted by [EFA], unless it was willing to forfeit
the entire Rate Lock Payment.” Pet. ¶ 27.
12

of a . . . contract by a mere showing that the other party misrepresented its legal effect or gave
assurances that the same would not be binding or enforced.”).
The Missouri Supreme Court appears to recognize the possibility, however, that a different
result may be appropriate if a party has not had a reasonable opportunity to know about the terms
of a contract by reading it, State ex rel. PaineWebber, Inc. v. Voorhees, 891 S.W.2d 126, 130 (Mo.
1995) (en banc), or has been pressured, influenced, rushed, or denied the opportunity to read the
contract. See Sanger, 486 S.W.2d at 481.
The Court finds that ACM’s allegations, accepted as true and construed in the light most
favorable to ACM, raise issues of fact as to whether EFA misrepresented the terms of the defeasance
option, whether ACM was denied the opportunity to see the Loan Documents before it entered into
the Rate Lock Payment, whether ACM was pressured into paying the Rate Lock Payment to lock
in the interest rate offered under the Loan Commitment without seeing the Loan Documents that
described the defeasance option, and whether after making that payment it had no alternative but to
execute the standard Fannie Mae Loan Documents, or forfeit the entire Rate Lock Payment.6 Pet.
¶¶ 25-28. As a result, the Court cannot determine as a matter of law that ACM’s execution of the
Loan Documents precludes this cause of action.
For these reasons, EFA has not established that it is entitled to judgment on ACM’s negligent
misrepresentation claim based on EFA’s representation that upon any necessary defeasance under
the loan, the substitute collateral would be new securities at the then-prevailing mortgage rates for
similar properties that were available for purchase in the marketplace at the time, which matched the

6

EFA argues that ACM’s action in proceeding to execute the Loan Documents was a
business decision, but this argument raises issues that are outside the pleadings and cannot be
resolved on a motion for judgment on the pleadings.
13

credit rating in terms of the original mortgage/deed of trust placed upon the Property in connection
with the loan made by EFA.
II. Breach of Contract S Count II
EFA moves for judgment on the pleadings on Count II, which asserts a claim for breach of
contract. In Count II, ACM alleges that under the terms of the Loan Documents, it should have been
allowed to prepay the remaining Loan balance without any cost or penalty upon its conveyance of
the Property in lieu of condemnation, but EFA and Fannie Mae wrongly required it to comply with
defeasance provisions in the Security Instrument requiring payment of a defeasance commitment fee
and Defeasance Deposit.
Under Missouri law, the essential elements of a breach of contract action are: “(1) the
existence and terms of a contract; (2) that plaintiff performed or tendered performance pursuant to
the contract; (3) breach of the contract by the defendant; and (4) damages suffered by the plaintiff.”
Keveney v. Missouri Military Acad., 304 S.W.3d 98, 104 (Mo. 2010) (en banc).
In the Order, the Court held that Fannie Mae was entitled to dismissal of ACM’s breach of
contract claim as a matter of law. EFA argues that because Fannie Mae was entitled to dismissal of
the claim as a matter of law, it is entitled to judgment on the pleadings because the same conduct by
it cannot constitute a breach of contract. EFA relies on the law of the case doctrine in support of its
motion. ACM responds that the law of the case doctrine “does not apply at this stage” because the
Court’s interlocutory ruling as to Fannie Mae is not final, and asserts that EFA is “in a different
posture” than was Fannie Mae. Pl.’s Mem. Opp. at 1.
In the Order, the Court granted Fannie Mae’s motion to dismiss Count II, concluding that the
clear and unambiguous terms of the Loan Documents specifically establish that a condemnation

14

award, not the threat of condemnation, was required for ACM to avoid the prepayment premium,
and therefore no breach of contract occurred:
Because the unambiguous language of the Note and Security Instrument establishes
that ACM had no right to prepay the Loan at the time of its sale of the Property in
lieu of or under threat of condemnation, Fannie Mae’s enforcement of its contractual
right to receive the defeasance commitment fee and Defeasance Deposit upon ACM’s
sale of the Property did not constitute a breach of the Note or Security Instrument,
as a matter of law.
Mem. and Order of Aug. 22, 2011 at 16. In reaching this conclusion, the Court rejected ACM’s
contention that Paragraph 20 of the Security Instrument allowed it to prepay without penalty upon
a sale of the Property in lieu of or under threat of condemnation. Id. The Court concluded that under
the Loan Documents, ACM had to receive a formal condemnation award and then apply the
proceeds of that award to the Loan in order to prepay the Loan without penalty. Id. Because the
Petition alleges that ACM did not receive a formal condemnation award, but rather chose to sell the
Property in lieu of or under the threat of a formal condemnation, the Court held that Count II failed
to state a claim as a matter of law and dismissed it as against Fannie Mae.
ACM concedes that the “Court may well reach the same result on [the breach of contract
claim] as it did on Fannie Mae’s motion to dismiss,” Pl.’s Mem. Opp. at 14, but argues that EFA “in
interpreting the Note and Security Agreement to require ACM to pay the defeasance commitment
fee and defeasance deposit, breached the contract with ACM or, at the very least, failed to treat ACM
with good faith and fair dealing.” Id. at 14-15. ACM contends that it and EFA had a
meeting of the minds at closing on how the defeasance provision would work. The
“contract” was not silent on these points; Fannie Mae’s applications of its standards
and practices, however, was contrary to the terms represented and initially agreed.
EFA later adopted those interpretations contrary to their representations to ACM.
Id. at 15.

15

As ACM observes, the Order dismissing its claims against Fannie Mae is interlocutory and
could be reconsidered at any time prior to entry of a final judgment. See First Union Nat’l Bank v.
Pictet Overseas Trust Corp., Ltd., 477 F.3d 616, 620 (8th Cir. 2007). Nonetheless, “when a court
decides upon a rule of law, that decision should continue to govern the same issues in subsequent
stages in the same case.” Id. (quoted case omitted). “A court has the power to revisit prior decisions
of its own . . . in any circumstance, although as a rule courts should be loathe to do so in the absence
of extraordinary circumstances such as where the initial decision was ‘clearly erroneous and would
work a manifest injustice.’” Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 817 (1988)
(quoting Arizona v. California, 460 U.S. 605, 618, n.8 (1983)).
Here, ACM offers no argument or citation to legal authority suggesting that the Court’s
decision granting Fannie Mae’s motion to dismiss the breach of contract claim was erroneous or
manifestly unjust. ACM also does not make any specific arguments as to why the Court’s prior
decision should not apply to ACM’s breach of contract claim against EFA.
The Petition alleges that ACM should have been able to prepay the Loan without penalty
when it sold the Property in lieu of condemnation. The Court disagreed, and determined that under
the language of the Loan Documents, Fannie Mae properly enforced its contractual right to receive
defeasance fees where ACM sold the Property in lieu of condemnation. When all facts pleaded in
the Petition are accepted as true and construed in the light most favorable to ACM, and all
reasonable inferences are granted in its favor, there is no basis for the Court to conclude that ACM’s
allegations concerning EFA’s conduct in enforcing the explicit contractual right to receive
defeasance fees upon ACM’s sale of the Property state a claim to relief for breach of contract that

16

is plausible on its face.7 EFA’s motion for judgment on the pleadings should therefore be granted
as to Count II.
III. Breach of the Covenant of Good Faith and Fair Dealing S Count III
EFA moves for judgment on the pleadings on Count III, which asserts a claim for breach of
the implied covenant of good faith and fair dealing. In Count III, ACM does not specifically allege
how EFA and Fannie Mae breached the covenant of good faith and fair dealing, but rather states,
“EFA, acting through EF&A Capital Corp., and Fannie Mae have materially breached the covenant
of good faith and fair dealing in the Note and Security Instrument.” Pet. ¶ 71. EFA states that in
opposing Fannie Mae’s motion to dismiss, ACM clarified that EFA and Fannie Mae misrepresented
“the benefits and operation of Fannie Mae’s defeasance option under the subject loan” and leveraged
an interest rate lock-in fee of $165,000, which would be forfeited if ACM chose not to close the loan,
that “opportunistically compelled ACM to enter into a loan transaction at variance with that which
had been promised.” Pl.’s Mem. Opp. to Def. Fannie Mae’s Mot. Dismiss at 23. ACM also argued
that a breach of the covenant occurred because Fannie Mae refused to release its lien without
receiving defeasance fees and costs. Id.
The Court rejected ACM’s theory that Fannie Mae breached the covenant of good faith and
fair dealing by misrepresenting the terms of the defeasance option, because it found there was no
agency relationship between Fannie Mae and EFA before Fannie Mae purchased the Loan. As a
result, Fannie Mae could not be liable for any pre-purchase representations made by EFA. See Mem.

7

The Petition does not contain any factual allegations that EFA told ACM it could prepay
the Loan without penalty if it sold the Property under threat of or in lieu of foreclosure, but rather
only alleges that EFA gave it incorrect information about the nature of the substitute securities upon
defeasance. ACM’s vague assertion in its opposition memorandum that it had a “meeting of the
minds” with EFA “on how the defeasance provision would work” does not offer any support for its
breach of contract claim, which fails based on the language contained in the Loan Documents.
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and Order of Aug. 22, 2011, at 20. The Court rejected the theory that Fannie Mae breached the
covenant by refusing to release its lien without payment of the defeasance fees and costs, because
it determined that the Loan Documents entitled Fannie Mae to collect under the defeasance option
upon sale of the Property. Id. at 20-21. The Court concluded, “Fannie Mae merely enforced the
terms of the Loan Documents and did nothing that prevented or hindered ACM in the performance
of the contract, evaded the spirit of the transaction, or deprived ACM of its expected contractual
benefits.” Id. at 21.
In support of its motion, EFA argues that it is entitled to judgment as a matter of law because
the Loan Documents expressly describe the benefits and operation of the defeasance option, and
therefore there can be no breach of the covenant of good faith and fair dealing. EFA cites Giessow
Restaurants, Inc. v. Richmond Restaurants, Inc., 232 S.W.3d 576, 579 (Mo. Ct. App. 2007) (“A court
will not ‘find an implied covenant if the parties have either dealt expressly with the matter or have
intentionally left the contract silent on the point.’” (quoting Crestwood Plaza, Inc. v. Kroger, 520
S.W.2d 93, 97 (Mo. Ct. App. 1974)); and Bishop v. Shelter Mutual Insurance Co., 129 S.W.3d 500,
505 (Mo. Ct. App. 2004) (“Another general principle is that ‘there can be no breach of the implied
promise or covenant of good faith and fair dealing where the contract expressly permits the actions
being challenged, and the defendant acts in accordance with the express terms of the contract.’”).
ACM argues that the Giessow case is distinguishable because it did not concern a covenant
of good faith and fair dealing, but rather whether a covenant of continuous business use should be
read into a lease agreement silent on the issue. Id., 232 S.W.3d at 578. ACM also states that the
covenant of good faith and fair dealing, which is implied in all Missouri contracts, “prevents a party
from exercising a judgment conferred by the express contract ‘in such a manner as to evade the spirit
of the transaction or so as to deny the other party the expected benefit of the contract.” Owen v.
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General Motors Corp., 533 F.3d 913, 921 (8th Cir. 2008) (quoting Martin v. Prier Brass Mfg. Co.,
710 S.W.2d 466, 473 (Mo. Ct. App. 1986)). ACM does not, however, explain why the Court’s
decision on Fannie Mae’s motion to dismiss Count III should not apply to ACM’s claim against
EFA, or otherwise discuss why judgment on the pleadings is not appropriate here.
As the Court stated in the Order, under Missouri law, “There is a promise implied in every
contract not to prevent or hinder performance by the other party and a breach of this implied promise
constitutes a breach of contract.” Housley v. Mericle, 57 S.W.3d 360, 363 (Mo. Ct. App. 2001)
(citations omitted). A claim for breach of the implied covenant of good faith and fair dealing is a
contractual claim. Hardee’s Food Sys., Inc. v. Hallbeck, 776 F.Supp.2d 949, 952 (E.D. Mo. 2011)
(citing Koger v. Hartford Life Ins. Co., 28 S.W.3d 405, 413 (Mo. Ct. App. 2000)). “In order to
succeed on a breach of contract, a plaintiff must show the making of a valid enforceable contract
between the plaintiff and defendant, the right of the plaintiff and obligation of the defendant under
the contract, a violation by the defendant, and damages resulting to the plaintiff from the breach.”
Koger, 28 S.W.3d at 412 (cited case omitted). “The party claiming breach of the implied covenant
of good faith must present substantial evidence that it has been violated.” Schell v. LifeMark Hosps.
of Missouri, 92 S.W.3d 222, 230 (Mo. Ct. App. 2002).
The duty of good faith and fair dealing under Missouri law “prevents one party to the
contract from exercising 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 the other party the expected benefit
of the contract.” Stone Motor Co. v. General Motors Corp., 293 F.3d 456, 466 (8th Cir. 2002)
(quoting Amecks, Inc. v. Southwestern Bell Tel. Co., 937 S.W.2d 240, 243 (Mo. Ct. App. 1996)).
“‘[T]he implied duty of one party to cooperate with the other party to a contract to enable

19

performance and achievement of expected benefits is an enforceable right.’” Id. at 467 (quoting
Koger, 28 S.W.3d at 412).
The implied duty of good faith and fair dealing is “incapable of altering the express terms
of [an] agreement” and “cannot give rise to new obligations not otherwise contained in a contract’s
express terms.” Stone Motor, 293 F.3d at 466 (internal quotation marks and quoted case omitted).
The Eighth Circuit has described the implied duty as serving “merely as a gap filler to deal with
circumstances not contemplated by the parties at the time of contracting.” Id. (quoted case omitted).
“Since good faith is merely a way of effectuating the parties[’] intent in unforeseen circumstances,
the implied covenant has nothing to do with the enforcement of terms actually negotiated and cannot
block [the] use of terms that actually appear in the contract.” Id. (quoted case omitted).
Based on the foregoing authorities, the Court concludes as a matter of law that ACM cannot
assert a claim against EFA for breach of the covenant of good faith and fair dealing based on
enforcement of the defeasance option when ACM sold the Property in lieu of foreclosure. This is
because the Loan Documents specifically allowed EFA and Fannie Mae to require payment of
defeasance fees and costs upon such a sale, as more fully discussed in the Order. As stated above,
the implied duty of good faith and fair dealing is incapable of altering the express terms of an
agreement. Stone Motor, 293 F.3d at 466.
The Court also concludes as a matter of law that ACM cannot assert a claim for breach of
the covenant of good faith and fair dealing based on EFA’s alleged misrepresentation concerning
the terms of the defeasance option, the requirement of the rate-lock payment, and the “opportunistic”
compelling of ACM to enter into the Loan. The implied promise in every Missouri contract is “not
to prevent or hinder performance by the other party[.]” Housley, 57 S.W.3d at 363. As the Eighth
Circuit has explained, the duty of good faith and fair dealing “prevents one party to the contract from
20

exercising 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 the other party the expected benefit of the
contract.” Stone Motor Co. v. General Motors Corp., 293 F.3d 456, 467
ACM’s claim against EFA in Count III does not fit within the parameters of a claim for
breach of the duty of good faith and fair dealing. ACM does not allege that EFA prevented or
hindered its performance, or exercised a judgment conferred by the express terms of the Loan
Documents in a manner to “evade the spirit of the transaction” or deny ACM “the expected benefit
of the contract.” These are the kinds of allegations that would be needed to assert a breach of the
duty of good faith and fair dealing claim. Instead, ACM alleges that EFA misrepresented the terms
of the Loan Documents and then essentially forced it to execute those documents or lose its $165,000
rate-lock payment.

These are the same factual allegations that underlie ACM’s negligent

misrepresentation claim, which ACM attempts to shoehorn into a claim for breach of the duty of
good faith and fair dealing.
The Eighth Circuit has explained that to establish the existence of a question of material fact
regarding breach of the duty of good faith and fair dealing in the summary judgment context, a party
must present evidence tending to establish that the other party exercised its discretion “so as to evade
the spirit of the transaction or so as to deny the other party the expected benefit of the contract.”
Stone, 293 F.3d at 467 (quoting Amecks, 937 S.W.2d at 243). The Eighth Circuit’s reasoning in
Stone is properly modified and applied to this case. To be entitled to judgment on the pleadings,
EFA must show that ACM has failed to plead facts from which it may be reasonably implied that
EFA exercised its discretion under the Loan Documents to evade the spirit of the transaction or deny
ACM the expected benefit of the contract. When all facts pleaded in the Petition are accepted as true
and construed in the light most favorable to ACM, and all reasonable inferences are granted in its
21

favor, there is no basis for the Court to conclude that EFA’s conduct as pleaded could state a claim
for breach of the covenant of good faith and fair dealing that is plausible on its face. EFA is
therefore entitled to judgment on this claim.
IV. Unjust Enrichment S Count IV
Finally, EFA moves for judgment on the pleadings on Count IV, which asserts a claim for
unjust enrichment. In Count IV, ACM alleges that when EFA and Fannie Mae required it to comply
with the defeasance provisions of the Loan Documents and pay the defeasance commitment fee and
defeasance deposit, EFA was enriched, and it would be inequitable to allow EFA to retain the
economic benefit of the amounts represented by the defeasance commitment fee and deposit.
Under Missouri law, “An unjust enrichment has occurred where a benefit was conferred upon
a person in circumstances in which retention of the benefit, without paying its reasonable value,
would be unjust.” S & J, Inc. v. McLoud & Co., L.L.C., 108 S.W.3d 765, 768 (Mo. Ct. App. 2003).
The elements of unjust enrichment are (1) a benefit conferred on the defendant by the plaintiff; (2)
appreciation by the defendant of that benefit; and (3) acceptance and retention of the benefit under
such circumstances that it would be inequitable for defendant to retain the benefit without paying
for its value. US Bank Nat’l Ass’n v. Cox, 341 S.W.3d 846, 852 (Mo. Ct. App. 2011) (cited cases
omitted).
The third element of an unjust enrichment claim, “unjust retention of the benefit, is
considered the most significant and most difficult of the elements.” US Bank, 341 S.W.3d at 852
(quoting Adams v. One Park Place Investors, LLC, 315 S.W.3d 742, 749 (Mo. Ct. App. 2010)). “In
determining whether it would be unjust for the defendant to retain the benefit, courts consider
whether any wrongful conduct by the defendant contributed to the plaintiff’s disadvantage.” S &
J, Inc., 108 S.W.3d at 768 (citing Graves v. Berkowitz, 15 S.W.3d 59, 61 (Mo. Ct. App. 2000)).
22

“There must be some something more than passive acquiescence, such as fault or undue advantage
on the part of the defendant, for defendant’s retention of the benefit to be unjust.” Id. (citing Graves,
15 S.W.3d at 64). “[T]here can be no unjust enrichment if the parties receive what they intended to
obtain.” US Bank, 341 S.W.3d at 853. This is because an action for unjust enrichment is based on
a theory of quasi contract or contract implied in the law. Id.
In support of its motion, EFA states that the Court held as a matter of law in the Order that
ACM could not assert an unjust enrichment against Fannie Mae because Fannie Mae did not engage
in any wrongful conduct and received only what the parties intended it to obtain under the Loan
Documents. Mem. and Order of Aug. 22, 2011, at 24. EFA states that ACM alleges EFA was
unjustly enriched through the same conduct and in the same manner as Fannie Mae and, therefore,
under the law of the case doctrine, EFA cannot be found to be unjustly enriched as a matter of law.
ACM responds that EFA is not similarly situated to Fannie Mae, because ACM alleges that
EFA, among other things, induced ACM to enter into a loan agreement on the basis of negligently
false statements and, as loan servicer, later forced ACM to pay fees and other costs. ACM states that
the Petition alleges EFA knew or should have known from its loan servicing operations how a
defeasance program would operate in comparison to a yield maintenance option but apparently did
not, and that EFA was enriched by its error. ACM argues it would be inequitable to permit EFA to
solicit and secure the loan on incorrect representations, evade any responsibility for its error, and
earn substantial transaction fees and profits, and ongoing servicing fees, while ACM is left with
undisclosed or inaccurately presented loan term descriptions that cost it a premium over the debt it
owed in the first place. ACM contends that its unjust enrichment claim against EFA is different than
its claim against Fannie Mae, because EFA controlled its representations and is responsible for them.

23

EFA replies that because the terms of the Loan were disclosed and presented in the contract
documents that ACM chose to execute, EFA, like Fannie Mae, was only enforcing the terms of the
Loan Documents and received what it was intended to obtain, such that there can be no unjust
enrichment as a matter of law.
The law of the case doctrine does not entitle EFA to judgment as a matter of law on this
claim. The Court found no fault on the part of Fannie Mae because Fannie Mae had not engaged in
wrongful conduct, EFA’s representations could not be attributed to Fannie Mae as a matter of law,
and Fannie Mae did nothing more than enforce the terms of the Loan Documents. Mem. and Order
of Aug. 22, 2011, at 9-11, 24. Because the Petition accuses EFA of wrongful conduct, EFA and
Fannie Mae are not similarly situated for purposes of the unjust enrichment claim. EFA is therefore
not entitled to judgment as a matter of law merely because the Court determined that Fannie Mae
was entitled to dismissal. As this is the only basis for judgment asserted in EFA’s motion, EFA has
failed to meet its burden of proof.
Further, EFA has not cited any Missouri authority to establish that a party cannot assert an
unjust enrichment claim as a matter of law where it claims that a defendant engaged in wrongful
conduct in order to obtain a contract, and then received the benefits of that contract. Without citation
to such authority, judgment as a matter of law is not warranted. EFA’s motion to dismiss Count IV
should therefore be denied.8

8

ACM acknowledges in its opposition memorandum that “one might interpret the [Petition]
as limiting the unjust enrichment cause of action to defeasance fees and costs[.]” Pl.’s Mem. Opp.
at 14. This is a reasonable interpretation, because Count IV asserts only that it would be inequitable
for EFA “to retain the economic benefit of the amounts representing the defeasance commitment fee
and the Defeasance Deposit paid by ACM,” Pet. ¶ 75, and the prayer for relief in Count IV asks that
EFA be required to repay the defeasance commitment fee and Defeasance Deposit. Pet. 18.
Although ACM asks in its opposition memorandum for leave to file an amended complaint to
address this issue, Pl.’s Mem Opp. at 2 & n.2, 14 & n.4, a party must submit the proposed
24

Conclusion
For the foregoing reasons, EFA’s motion for judgment on the pleadings should be granted
as to (1) the negligent misrepresentation claim in Count I based on the representation that the
defeasance option “should” cost less than the yield maintenance option upon defeasance, (2) the
breach of contract claim in Count II, and (3) the breach of the covenant of good faith and fair dealing
claim in Count III; and denied as to (1) the negligent misrepresentation claim in Count I based on
the representation that upon defeasance, Fannie Mae would provide substitute securities for the deed
of trust on the Property at the then-prevailing mortgage rates for multifamily apartment buildings
like the Property, and (2) the unjust enrichment claim in Count IV. EFA’s request for costs and
attorneys’ fees is denied without prejudice.
Accordingly,
IT IS HEREBY ORDERED that defendants EF&A Capital Corp. and EF&A Funding,
LLC’s Motion for Judgment on the Pleadings is GRANTED in part and DENIED in part; the
motion is GRANTED as to:
(1) the negligent misrepresentation claim in Count I based on the representation that the
defeasance option “should” cost less than the yield maintenance option upon defeasance,
(2) the breach of contract claim in Count II, and

amendment along with a motion to preserve the right to amend. In re 2007 Novastar Financial, Inc.,
Secs. Litig., 579 F.3d 878, 884-85 (8th Cir. 2009) (quoted case omitted); see also Case Management
Order at 2, ¶ I.c. (Doc. 32). “[P]lacing a footnote in a resistance to a motion to dismiss requesting
leave to amend in the event of dismissal is insufficient.” Minneapolis Firefighters’ Relief Ass’n v.
MEMC Electronic Materials, Inc., 641 F.3d 1023, 1030 (8th Cir. 2011) (cited cases omitted).
Because the Case Management Order’s deadline for amending pleadings was October 14,
2011, the good cause standard of Rule 16(b), not the standard of Rule 15(a), would apply to any
motion for leave to file an amended complaint. See Sherman v. Winco Fireworks, Inc., 532 F.3d
709, 716 (8th Cir. 2008); Popoalii v. Correctional Med. Servs., 512 F.3d 488, 497 (8th Cir. 2008).
25

(3) the breach of the covenant of good faith and fair dealing claim in Count III;
and the motion is DENIED as to:
(1) the negligent misrepresentation claim in Count I based on the representation that upon
defeasance, Fannie Mae would provide substitute securities for the deed of trust on the Property at
the then-prevailing mortgage rates for multifamily apartment buildings like the Property, and
(2) the unjust enrichment claim in Count IV. [Doc. 41]
An appropriate partial judgment will accompany this memorandum and order.

CHARLES A. SHAW
UNITED STATES DISTRICT JUDGE

Dated this 9th day of January, 2012.

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