CitiMortgage, Inc. v Platinum Home Mortgage, Corp.

Filing 45

MEMORANDUM AND ORDER - IT IS HEREBY ORDERED that the Citi Parties Motion to Strike (ECF No. 28 ) is GRANTED. IT IS FURTHER ORDERED that the Citi Parties Motion to Dismiss Counterclaim (ECF No. 26 ) is GRANTED in part, DENIED in part, and DENIED without prejudice in part, in accordance with the foregoing. IT IS FURTHER ORDERED that Platinum is granted until Monday, January 25, 2016, within which to file an Amended Counterclaim conforming to the holdings set forth in this opinion. (Platinum Home Mortgage, Corp. Amended Counterclaim/answer due 1/25/2016.) Signed by District Judge Jean C. Hamilton on 1/13/16. (KJS)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION
CITIMORTGAGE, INC.,
Plaintiff,
v.
PLATINUM HOME MORTGAGE
CORPORATION,
Defendant.

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No. 4:15CV1242 JCH

MEMORANDUM AND ORDER
This matter is before the Court on Counterclaim Defendants CitiMortgage, Inc. (“CMI”)1,
Citibank, N.A., and Citigroup, Inc.’s (collectively “the Citi Parties”) Motion to Dismiss
Counterclaim, and Motion to Strike, both filed December 2, 2015. (ECF Nos. 26, 28). The
motions are fully briefed and ready for disposition.
BACKGROUND
At all relevant times, CMI was in the business of, among other things, purchasing,
reselling, and servicing residential mortgage loans on the secondary mortgage market.
(Complaint (“Compl.”), ¶ 1). Defendant Platinum Home Mortgage Corporation (“Platinum”)
was engaged in the business of originating, sourcing and/or reselling residential mortgage loans.
(Id.).
According to CMI, at various times the relationship between CMI and Platinum was
governed by a contract entitled “Correspondent Agreement Form 200” (“Correspondent
Agreement”), dated February 13, 2004, and a “DBA Addendum” dated July 12, 2005, a
“Delegated Underwriting Addendum” dated October 14, 2004, and a “CMI Select Addendum”

1 CMI alone is the Plaintiff in the underlying Complaint in this matter.
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dated October 14, 2004. (Compl., ¶ 16).2 Section 1 of the Correspondent Agreement provided
that, “[f]rom time to time, [Platinum] may sell to CMI and CMI may purchase from [Platinum]
one or more residential mortgage, home equity or other loans (“Loan(s)”) in accordance with the
terms, conditions, requirements, procedures, representations and warranties set forth in the
‘CitiMortgage, Inc. Correspondent Manual’…”

(Compl., Exh. 1, P. 1).

Section 1 further

provided that “CMI may purchase Loans with or without conducting a complete review of the
Loan documentation. CMI’s review of, or failure to review, all or any portion of the Loan
documentation shall not affect CMI’s rights to demand repurchase of a Loan or any other CMI
right or remedy provided by this Agreement.” (Id.).
Section 2 of the Correspondent Agreement set forth Platinum’s representations and
warranties. As relevant here, it provided 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 fact 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 by CMI (“Approved Entity”) unless
[Platinum] 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 [Platinum] 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.

(Compl., Exh. 1, P. 2).
Section 11 of the Correspondent Agreement addressed cure and repurchase, providing in
relevant part as follows:

2 According to CMI, true and correct copies of the four documents are attached to its Complaint
as Exhibit 1. (Compl., ¶ 21).
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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 contained in this Agreement
or the CMI Manual in effect as of the date CMI purchased such
Loan;

(ii)

was underwritten and/or originated based on any materially
inaccurate information or material misrepresentation made by the
Loan borrower(s), [Platinum, Platinum’s] directors, officers,
employees, agents, independent contractors and/or affiliates, or any
other party providing information relating to said Loan;

(iii)

was or is capable of being rescinded by the applicable borrower(s)
pursuant to the provisions of any applicable federal (including but
not limited to the Truth-in-Lending Act) or state law or regulation;

(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 [Platinum] of any representation, warranty or covenant
contained in this Agreement or the CMI Manual or a failure by
[Platinum] to comply in all material respects with the applicable
CMI Manual terms, conditions, requirements and procedures….

[Platinum] 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, [Platinum] is unable to correct or cure such
defect within the prescribed time, [Platinum] 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.
(Compl., Exh. 1, P. 5).
CMI asserts that Platinum sold it at least seven loans “(a) that were underwritten and/or
originated based upon [] materially inaccurate information or on material misrepresentations
made by the borrower, [Platinum, Platinum’s] directors, officers, employees, agents, independent
contractors, and/or affiliates; (b) for which CMI has discovered discrepancies regarding property
ownership, income representations, or employment representations; (c) for which applicable
Fannie Mae, Freddie Mac, FHA, VA, HUD and/or other industry standards or requirements were
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not followed; (d) for which the secondary mortgage investor, such as Fannie Mae, Freddie Mac,
FHA, VA and/or HUD demanded repurchase of the loan; and/or (e) that have turned out to be
otherwise defective or not in compliance with the CMI Manual incorporated into the
Agreement.” (Compl., ¶ 29). CMI maintains it sent notice of the defects to Platinum, and
demanded that Platinum cure the defects or repurchase the loans. (Id., ¶ 30). Despite such
alleged notice, CMI alleges Platinum did not cure the defects or repurchase the loans, as required
by the parties’ agreement. (Id., ¶ 31).
Based on the foregoing, CMI filed its Complaint in this matter on August 13, 2015,
asserting one count for breach of contract. (Compl., ¶¶ 34-45). Platinum responded with its
Answer, Affirmative Defenses, and Counterclaims on October 9, 2015. As Defendants to its
Counterclaims Platinum names CMI, together with Citibank, N.A. and Citigroup, Inc. 3 Platinum
maintains that in entering into the Correspondent Agreement with Platinum, the Citi Parties
never intended to abide by the covenant of good faith and fair dealing, implied in every Missouri
written contract. (Counterclaim, ¶¶ 49, 51). Specifically, Platinum contends the Citi Parties’
lack of good faith was evident in their loan repurchase demands because, inter alia, (a) the
requests were arbitrary and capricious, as the claimed defects were non-existent or based on
erroneous facts, and (b) the Citi Parties refused to rescind repurchase demands despite request,
even months or years after Platinum refuted the alleged defects. (Id., ¶¶ 58, 59). With respect to
the seven loans at issue in CMI’s Complaint, Platinum asserts the Citi Parties breached the
covenant of good faith and fair dealing by, inter alia, conducting flawed and misleading
appraisal reviews using guidelines to which the parties never agreed, improperly verifying or
calculating borrower income, improperly verifying borrower employment, failing to afford
Platinum the contractually mandated period and opportunity to cure or correct the purportedly

3 The Citi Parties have not yet filed an answer to Platinum’s Counterclaims.
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defective loan before demanding repurchase, and claiming loan defects they knew were nonexistent or based on erroneous facts. (Id., ¶ 63). Based on these allegations, Platinum asserts
counterclaims for breach of the implied covenant of good faith and fair dealing, and fraudulent
concealment. (Id., ¶¶ 68-80).
As stated above, the Citi Parties filed a Motion to Dismiss Counterclaim on December 2,
2015, asserting Platinum’s claim for fraudulent concealment is both time-barred and fails on the
merits, its claim for breach of the implied covenant of good faith and fair dealing fails on the
merits, and Platinum has not and cannot plead facts sufficient to support its alter ego theory.
(ECF Nos. 26, 27). The Citi Parties further filed a Motion to Strike, asking that the Court strike
portions of paragraphs 11, 12, and 14, and paragraphs 15, 23, and 25-40 of Platinum’s
Counterclaim in their entirety, pursuant to Federal Rule of Civil Procedure 12(f). (ECF Nos. 28,
29).
DISCUSSION
I. Motion To Strike
As noted above, the Citi Parties filed a Motion to Strike on December 2, 2015, asking
that the Court strike portions of paragraphs 11, 12, and 14, and paragraphs 15, 23, and 25-40 of
Platinum’s Counterclaim in their entirety, pursuant to Federal Rule of Civil Procedure 12(f).
(ECF Nos. 28, 29). Upon careful consideration of the parties’ briefs, the Court will grant the Citi
Parties’ motion. The Court will grant Platinum until Monday, January 25, 2016, within which
to file an Amended Counterclaim that conforms to this and other rulings set forth in this opinion.
II. Motion To Dismiss
As noted above, the Citi Parties filed a Motion to Dismiss Counterclaim on December 2,
2015, asserting Platinum’s claim for fraudulent concealment is both time-barred and fails on the
merits, its claim for breach of the implied covenant of good faith and fair dealing fails on the
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merits, and Platinum has not and cannot plead facts sufficient to support its alter ego theory.
(ECF Nos. 26, 27).
A. Standard For Motion To Dismiss
In ruling on a motion dismiss, the Court must view the allegations in the complaint in the
light most favorable to plaintiff. Eckert v. Titan Tire Corp., 514 F.3d 801, 806 (8th Cir. 2008).
The Court, “must accept the allegations contained in the complaint as true and draw all
reasonable inferences in favor of the nonmoving party.” Coons v. Mineta, 410 F.3d 1036, 1039
(8th Cir. 2005) (citation omitted). The complaint’s factual allegations must be sufficient “to raise
a right to relief above the speculative level,” however, and the motion to dismiss must be granted
if the complaint does not contain “enough facts to state a claim to relief that is plausible on its
face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 570 (2007) (abrogating the “no set of
facts” standard for Fed.R.Civ.P. 12(b)(6) found in Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).
Furthermore, “the tenet that a court must accept as true all of the allegations contained in a
complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of
action, supported by mere conclusory statements, do not suffice.” Ashcroft v. Iqbal, 129 S. Ct.
1937, 1949 (2009) (citing Twombly, 550 U.S. at 555 (pleading offering only “labels and
conclusions” or “a formulaic recitation of the elements of a cause of action” will not do)).
B. Breach Of Implied Covenant Of Good Faith And Fair Dealing
The Citi Parties claim that under Missouri law, a claim for breach of the implied covenant
of good faith and fair dealing does not lie when the complained-of action, i.e., the demand for
cure or repurchase of defective loans, is expressly permitted by the parties’ agreement.
(Memorandum in Support of Motion to Dismiss Counterclaim (“Citi Parties’ Memo in
Support”), PP. 9-10). In a recent opinion out of this District, Judge Perry set forth the standards
the Court should employ in determining such a claim, as follows:
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In cases where a contract gives one party discretion to determine issues
arising under the contract, Missouri law requires that party to exercise its
discretion in good faith, consistent with the covenant of good faith and fair
dealing implied in every contract. See, e.g., Missouri Consol. Health Care Plan v.
Cmty. Health Plan, 81 S.W.3d 34, 48 (Mo. Ct. App. 2002); see also, e.g.,
Farmers’ Elec. Coop., Inc. v. Missouri Dep’t of Corr., 977 S.W.2d 266, 271 (Mo.
1998) (“Missouri law implies a covenant of good faith and fair dealing in every
contract.”). “The covenant of good faith and fair dealing encompasses an
obligation imposed by law to prevent opportunistic behavior, that is, the
exploitation of changing economic conditions to ensure gains in excess of those
reasonably expected at the time of contracting.” City of St. Joseph v. Lake
Contrary Sewer Dist., 251 S.W.3d 362, 370 (Mo. Ct. App. 2008) (internal citation
and quotation marks omitted). The covenant does not create a general
reasonableness requirement in contracts, however, and it is not enough “to show
that a party invested with discretion made an erroneous decision.” BJC Health
Sys. v. Columbia Cas. Co., 478 F.3d 908, 914 (8th Cir. 2007) (interpreting
Missouri law); see also, e.g., Schell v. Lifemark Hosps. Of Mo., 92 S.W.3d 222,
230-31 (Mo. Ct. App. 2002); Cordry v. Vanderbilt Mortg. & Fin., Inc., 445 F.3d
1106, 1112 (8th Cir. 2006) (applying Missouri law). Moreover, it is well settled
that there is no breach of the covenant where the parties’ agreement expressly
permits the actions being challenged, and the party acted in accordance with the
agreement. See St. Joseph, 251 S.W.3d at 371.
Instead, 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. See, e.g., BJC, 478 F.3d at 914;
see also Cordry, 445 F.3d at 1112 (“When a decision is left to the discretion of
one party, the question is not whether the party made an erroneous decision but
whether the decision was made in bad faith or was arbitrary or capricious so as to
amount to an abuse of discretion.”).
CitiMortgage, Inc. v. OCM Bancorp, Inc., 2011 WL 1594950, at *3-4 (E.D. Mo. Apr. 27, 2011).
Upon consideration, the Court finds Platinum’s allegations state a counterclaim for
breach of the covenant of good faith and fair dealing, sufficient to survive the Citi Parties’
Motion to Dismiss. As support for this ruling, the Court notes that rather than merely allege the
Citi Parties made their repurchase requests in error, Platinum contends the requests were
“arbitrary and abusive,” as among other things they were based on claimed loan defects the Citi
Parties knew were non-existent, and failed to afford Platinum the contractually-mandated period
and opportunity to cure or correct the purportedly defective loans before demanding repurchase.
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(Counterclaim, ¶ 63).

These allegations support Platinum’s position that the Citi Parties

exercised their contractual discretion “so as to evade the spirit of the transaction or deny
[Platinum] the expected benefit of the contract,” see OCM Bancorp, 2011 WL 1594950, at *4,
and so this portion of their Motion to Dismiss must be denied.
The Eighth Circuit’s recent opinion in CitiMortgage, Inc. v. Chicago Bancorp, Inc., 2015
WL 9268117 (8th Cir. Dec. 21, 2015), is not to the contrary, for two reasons. First, the Court
agrees with Platinum it is significant that the case reached the Eighth Circuit in a different
procedural posture, i.e., on appeal from the grant of a motion for summary judgment rather than,
as here, on an early-filed motion to dismiss. Second, while the Court in Chicago Bancorp
reaffirmed the proposition that “there can be no breach of the implied…covenant…where the
contract expressly permits the action being challenged, and the defendant acts in accordance with
the express terms of the contract,” see Chicago Bancorp, 2015 WL 9268117, at *3 (quotation
marks and citations omitted), it continued to hold as follows:
And even if CMI erroneously exercised its “sole and exclusive discretion”
under the contract, Bancorp has not provided evidence to establish that CMI acted
in bad faith. It is not enough “to show that a party invested with discretion made
an erroneous decision.” BJC Health Sys. v. Columbia Cas. Co., 478 F.3d 908,
914 (8th Cir. 2007) (interpreting Missouri law). Rather, Bancorp was required to
provide evidence that CMI exercised its discretion in a way intended “to evade
the spirit of the transaction or…to deny [Bancorp] the expected benefit of the
contract.” Id. (noting that it is insufficient to provide evidence that a discretionary
determination “was flawed or unreasonable”) (citation omitted); see also Armour
& Co. v. Inver Grove Heights, 2 F.3d 276, 279 (8th Cir. 1993) (noting that
“[c]onclusory affidavits do not provide a basis upon which to deny motions for
summary judgment”).
Bancorp has presented no evidence that CMI exercised its discretion under
the agreement in a manner intended to sabotage or evade the spirit of the
agreement or to deny Bancorp the expected benefit of its bargain. See BJC
Health Sys., 478 F.3d at 914 (noting that the burden of proof is on the party
asserting a bad-faith exercise of discretion). Accordingly, we conclude that the
district court did not err in granting summary judgment on the….loans.

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Id. at *4-5. In so holding, the Eighth Circuit confirmed that a party still may make a claim of
breach of covenant of good faith and fair dealing when the contract at issue provides discretion,
by asserting the alleged offender exercised its discretion in a manner intended to evade the spirit
of the transaction, or to deny the other party the expected benefit of the contract. Id. at *4.4
C. Fraudulent Concealment
The Citi Parties next assert Platinum’s fraudulent concealment claim must be dismissed
as untimely filed. (Citi Parties’ Memo in Support, PP. 4-7). As support for this position, the Citi
Parties note that Missouri law provides a five year statute of limitations for actions grounded in
fraud. (Id. (citing Mo.Rev.Stat. § 516.120(5))). Because Platinum entered into the agreement at
issue in February, 2004, over eleven years before it filed its claim for fraudulent concealment,
the Citi Parties maintain the claim is barred by the applicable statute of limitations.
In response, Platinum notes that the five year period for “‘[a]n action for relief on the
ground of fraud’ runs from accrual, and a fraud cause of action is ‘deemed not to have accrued
until the discovery by the aggrieved party, at any time within ten years, of the facts constituting
the fraud.’”

(Platinum’s Memorandum in Opposition to Counter-Defendants’ Motion to

Dismiss, P. 6 (quoting Mo.Rev.Stat. § 516.120(5))). Platinum continues to assert its claim did
not accrue until February, 2011, when it received the following email from CMI Repurchase
Claims Analyst John Manocchio:
I have consulted with our legal division and want to clarify section 2(i) of
the Loan Purchase Agreement. It is common in the industry to require knowledge
4 The Court recognizes that pursuant to Chicago Bancorp, it is not to engage in a loan-by-loan
analysis to decide whether CMI exercised its discretion in good faith. Id. at *4. Platinum thus
must show that CMI acted generally in a manner so as to evade the spirit of the transaction, or to
deny it the expected benefit of the contract, Id., such as by demonstrating that CMI intended to
unwind the entire agreement, or deny Platinum its expected profits thereunder. While Platinum
may have “an uphill battle ahead of it” in attempting to prove such a claim, see CitiMortgage,
Inc. v. K. Hovnanian American Mortg., 2014 WL 1255943, at *4 (E.D. Mo. Mar. 26, 2014), the
Court finds its allegations sufficient to survive the instant Motion to Dismiss. (See, e.g.,
Counterclaim, ¶¶ 59, 62).
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qualifiers regarding borrower misrepresentation for certain reps and warrants to
induce the funding and purchase of a loan yet remove the qualifiers when
determining if repurchase is necessary. These reps and warrants are for the life of
each loan and can be reviewed by CMI at any point in time. CMI specifically
reserved the right to demand repurchase or indemnification, whether the loan was
reviewed at the time of purchase or not. When these reps and warrants turn out to
be fraudulent or materially inaccurate, CMI has the right under section 11 of the
Loan Purchase Agreement to demand repurchase. It is CMI’s position that the
borrower’s (sic) are obligated to make truthful statements in their origination
package and the risk of a borrower lying during the origination process is
contractually intended to shift back to the originator of the loan through the
repurchase process. The borrower is still obligated to be truthful and provide
accurate information regardless of what type of loan program the loan originated
under. So in a nutshell, whether Platinum did or did not have knowledge, any
misrepresentation discovered in the loan origination file is a repurchaseable event.
(Email Exchange, attached to Platinum’s Counterclaim as Exh. A, P. 1). Platinum contends it
was only upon receipt of this email that it discovered the fraudulently concealed material fact
regarding the 2004 Correspondent Agreement, i.e., that the Citi Parties “never intended to abide
by the implied covenant of good faith and fair dealing” with respect to said agreement.
(Counterclaim, ¶ 51 (emphasis in original)).
Upon consideration, the Court finds the language of the February, 2011 email does not
establish circumstances sufficient to toll the five-year statute of limitations set forth in §
516.120(5). A plain reading of the email exchange reveals Mr. Manocchio consulted with CMI’s
legal division in response to Platinum Vice President Lori Pelinski’s contention that there exists
an ambiguity in the Correspondent Agreement.

(See Counterclaim, Exh. A, P. 2).

Mr.

Manocchio’s response then catalogues the distinctions between sections 2 and 11 of the
Correspondent Agreement, differences that are apparent from the language of the agreement
itself, and offers a brief explanation of the motivation underlying the “common” industry
practice of including the two provisions. The Court finds no support for Platinum’s claim that
the email provided evidence of the Citi Parties’ fraudulent intent, i.e., evidence that at the time of
contracting, they never intended to abide by the covenant of good faith and fair dealing. In the
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absence of such evidence there is no basis for tolling, and so Platinum’s claim for fraudulent
concealment is barred by the five year statute of limitations.
D. Citibank, N.A. And Citigroup, Inc. As Alter Egos
The Citi Parties finally assert that Citibank, N.A., and Citigroup, Inc., should be
dismissed as Defendants, as Platinum provides no basis to pierce the corporate veil and treat
them as alter egos of CMI. (Citi Parties’ Memo in Support, PP. 13-15). As noted above, the
Court has granted Platinum until Monday, January 25, 2016, within which to file an Amended
Counterclaim. The Court therefore will deny this portion of the Citi Parties’ Motion to Dismiss,
without prejudice to their right to reassert the argument in relation to Platinum’s Amended
Counterclaim.5
CONCLUSION
Accordingly,
IT IS HEREBY ORDERED that the Citi Parties’ Motion to Strike (ECF No. 28) is
GRANTED.
IT IS FURTHER ORDERED that the Citi Parties’ Motion to Dismiss Counterclaim
(ECF No. 26) is GRANTED in part, DENIED in part, and DENIED without prejudice in part,
in accordance with the foregoing.
IT IS FURTHER ORDERED that Platinum is granted until Monday, January 25,
2016, within which to file an Amended Counterclaim conforming to the holdings set forth in this
opinion.
Dated this 13th Day of January, 2016.

/s/ Jean C. Hamilton
UNITED STATES DISTRICT JUDGE
5 Platinum is cautioned to plead its allegations of alter ego liability solely with reference to
matters at issue in this suit.
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