The U.S. Court of Appeals for the Eighth Circuit recently affirmed summary judgment against the seller and originator of mortgage loans and in favor of the purchaser because the originator breached the purchase and sale agreement by refusing to cure or repurchase eight of the 11 loans.

A copy of the opinion in CitiMortgage, Inc. v. Chicago Bancorp, Inc. is available at:  Link to Opinion.

The plaintiff mortgage loan investor purchased mortgage loans originated by the defendant lender in 2004. The plaintiff’s business involved re-selling most of its loans to other investors in the secondary mortgage market.

The purchase and sale agreement required the seller to cure or repurchase any loan that the buyer, in its “sole and exclusive discretion,” determined did not conform to Fannie Mae’s underwriting requirements or was based on any materially inaccurate information or any misrepresentation.

Between 2004 and 2009, more than 4,700 loans were purchased under the agreement. The buyer determined that 11 of the loans were defective and demanded that the seller cure or repurchase.  The seller refused and the buyer sued in federal court to recover the repurchase price of the defective loans as provided in the agreement.

The trial court, applying Missouri law, concluded that the seller breached the agreement and granted the buyer’s motion for summary judgment as to eight of the 11 loans. The trial court also concluded that the buyer acted in good faith in determining which loans were defective and disposing of the underlying properties.

On appeal, the seller argued that the trial court erred because there existed genuine issues of material fact regarding whether the buyer acted in bad faith in determining that four of the 11 loans violated the terms of the purchase and sale agreement, and in calculating the amount of damages owed on two other loans. The seller also argued that it was not obligated to cure or repurchase three of the loans because the plaintiff buyer was the underwriter of those loans and was thus responsible for any defects as to those loans.

Relying on its own earlier decision in Residential Funding Co. v. Terrace Mortg. Co., the Eighth Circuit refused to look beyond the plain language of the agreement to second guess the accuracy, materiality, and good faith of the buyer’s loan-defectiveness determinations, even though the trial court had done so, given the unfettered discretion conferred by the purchase and sale agreement to the plaintiff buyer on these issues.

The Eighth Circuit found that the seller did not provide any evidence that the buyer acted in bad faith in exercising its clear contractual right to determine whether a loan was defective.

The seller also argued that genuine issues of material fact existed with respect to the appropriate calculation of the repurchase price under the purchase and sale agreement, because the buyer supposedly unreasonably delayed in disposing of the collateral properties by specifically refusing to approve a deed in lieu of foreclosure or a short sale that would have limited the decline in the properties’ value and the resulting repurchase price.  The seller argued that this conduct by the buyer and the resulting increase in the repurchase price was not reasonably foreseeable to the seller, and was a violation of the buyer’s duty to mitigate damages.

The Eighth Circuit rejected this argument, holding that the measure of damages — i.e., the repurchase price — was specifically bargained for by the parties and reflected in the purchase and sale agreement.  Accordingly, the Court affirmed the district court’s summary judgment awarding the repurchase price to the plaintiff buyer as calculated using the formula in the agreement.

Lastly, the seller argued that summary judgment was improper as to three of the loans because there was a genuine issue of material fact regarding which party’s negligent underwriting caused the loans to be defective.

However, the Eighth Circuit held that the language of the purchase and sale agreement clearly and unequivocally required the seller to cure or repurchase a loan if the buyer, in its sole and exclusive discretion, determined that any loan was “underwritten and/or originated” based on any materially inaccurate information or misrepresentation.  The Court noted that the seller originated these loans, and that the buyer exercised its discretion in determining that they were originated based on material misrepresentations.

Accordingly, the Court held that the trial court did not err in granting summary judgment on these loans.