The U.S. Court of Appeals for the Eighth Circuit held that the purchaser of residential mortgage loans could not require the seller of the loans to repurchase purportedly defective loans under their agreement after the loans had gone through foreclosure. However, the seller was required to repurchase the defective loans that had not gone through foreclosure.

Accordingly, the Eighth Circuit affirmed the ruling of the trial court granting summary judgment in part to the seller and in part to the purchaser.

A copy of the opinion in CitiMortgage, Inc. v. Equity Bank, N.A. is available at: Link to Opinion.

Over the course of years, a company (“purchaser”) purchased hundreds of residential mortgage loans from a bank (“seller”). Rather than negotiate a new deal each time, the parties entered into one overarching contract (the “agreement”).

The agreement generally placed the risk of loss on the seller by requiring it to abide by a long list of representations and warranties, and granting the purchaser the “sole and exclusive discretion” to identify defects in loans, and giving the purchaser significant rights if it did.

With respect to 12 of the loans, the purchaser notified the seller of defects in writing, and informed the seller that it needed to take action under the agreement’s “cure-or-repurchase” provision.

The “cure-or-repurchase” provision of the agreement obligated the seller to “correct or cure [the] defect within the time prescribed by [the purchaser] to the full and complete satisfaction of [the purchaser],” and if the seller was unable to correct or cure the defect within the prescribed time, the seller was required to either “repurchase such defective Loan from [the purchaser] at the price required by [the purchaser],” or “agree to such other remedies . . . as [the purchaser] deem[ed] appropriate.”

By the time the purchaser demanded that the seller buy back six of the loans, the mortgages securing them had already been through foreclosure.

When the seller refused to act, the purchaser sued. Both sides requested summary judgment, and the magistrate analyzed the loans differently based on whether foreclosure had occurred. For the six in which it had not, the judge ruled that the seller breached the agreement. For the other six, the judge determined that the seller owed nothing to the purchaser. Both parties appealed.

On appeal, the Eighth Circuit first noted that the agreement contained a Missouri choice-of-law provision, and therefore Missouri law applied to the interpretation of the agreement. The Court then explained that its “task is to interpret the agreement by examining ‘the plain and ordinary meaning of the language used’ to determine the parties’ obligations, both for the loans that had gone through foreclosure and those that had not.”

With respect to the loans that had not gone through foreclosure, the seller argued that because the purchaser’s letters never specified the repurchase prices of any of the loans, which it characterized as a condition precedent to its own performance, it was not required to act.

The Eighth Circuit disagreed, ruling that although the purchaser’s letters omitted the repurchase prices, “[t]he cure-or-repurchase provision did not contain any language suggesting that inclusion of the repurchase price was necessary to trigger the [seller’s] obligation to perform.” Thus, the seller “had to hold up its end of the bargain.”

The seller next argued that the purchaser delayed too long before acting, first by waiting before demanding that the seller repurchase the loans and later by failing to sue in a timely fashion.

The Eighth Circuit again disagreed, noting that although the purchaser waited more than two years in some cases to demand action from the seller, “nothing in the Agreement required it to act any sooner.”

Further, although in the face of silence courts will sometimes presume that an option or a right “must be exercised within a reasonable time,” they must also be “leery of imposing time limits” when there is evidence that the “parties to the contract bargained” against them.

The Eighth Circuit determined that the agreement suggested that the parties bargained against a reasonable time limitation, because the purchaser was assigned the “sole and exclusive discretion” to determine whether a loan was defective, the agreement contained a provision stating that the failure of either party to exercise a contractual right did not constitute a waiver, and that agreement stated that the purchaser had the right to review or fail to review the loan documentation without affecting its right to demand repurchase.

The seller further argued that the lawsuit was filed too late under Missouri’s five-year statute of limitations. The Eighth Circuit explained that the argument turned on when the purchaser’s claims accrued, as the record showed it sued within five years of the seller refusing to repurchase the loans. The purchaser argued that it did not suffer an “actual loss” until the seller refused the repurchase, but the seller argued that the purchaser suffered a loss as soon as it purchased the defective loans.

The Court sided with the purchaser, ruling that “only when [the seller] refused to fulfill its repurchase obligation and make things right did [the purchaser] suffer an ‘actual loss.’”

Turning to the six loans that had gone through foreclosure, the Eighth Circuit stated that “[the purchaser] has not explained what, exactly, [the seller] was supposed to repurchase.”

The Court observed that sometimes residential-mortgage loans cease to exist following a foreclosure by operation of state law, or through discharge in federal bankruptcy proceedings. Thus, “without evidence of what, if anything, remained of the underlying loans, we are left guessing about whether [the seller] breached by failing to fulfill its repurchase obligation.”

The purchaser argued that it did not matter if the loans still existed, because it was entitled to money damages either way. However, the Eighth Circuit explained that the purchaser’s argument “conflates the two distinct remedies available under the cure-or-repurchase provision,” which were to repurchase the loan, or other remedies (including indemnification or refund).

The Eighth Circuit stated that the purchaser’s “current theory that it was entitled to compensation no matter what was left of the loans fits in the second category, not the first,” but the purchaser “has always claimed that [the seller] breached because it failed to ‘comply with its repurchase obligations,’ which falls in the first category.”

Thus, the Eighth Circuit held, the purchaser’s “current theory is inconsistent with the remedy it has sought all along.”

Accordingly, the ruling of the trial court was affirmed.