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8th Cir. Holds Repurchase Demand Did Not Need to Include Specific Time to Cure

In a mortgage loan repurchase action, the U.S. Court of Appeals for the Eighth Circuit recently reversed a trial court’s order granting summary judgment in favor of an originator and seller of loans, and held that the mortgage loan purchaser adequately and substantially complied with the contract in its demands that the originator repurchase several allegedly defective loans.

In so ruling, the Eighth Circuit determined that the trial court erred in determining that the purchaser’s notice letters failed to satisfy a condition precedent to prescribe a time for the originator to correct the alleged defects, as the agreement governing the loan purchase at issue neither specified a required form of notice, nor prescribed an amount of time that must be contained within the notice.

A copy of the opinion in CitiMortgage, Inc. v. Platinum Home Mortgage Corp. is available at:  Link to Opinion.

A mortgage loan purchaser and reseller bought approximately 750 mortgage loans from a mortgage originator for more than $140 million.  An agreement between the purchaser and the originator governed the purchase, and addressed the delegation of underwriting/loan-origination authority to the originator.

Under the agreement, the purchaser had sole and exclusive discretion to determine if any loans under the agreement were defective as a result of  the originator’s failure to meet applicable underwriting standards or otherwise, and if the purchaser itself was required to repurchase a loan it resold to a third party.

Upon notification from the purchaser, the originator was provided opportunity to “correct or cure such defect within the time prescribed by [purchaser] to the full and complete satisfaction of [purchaser],” and absent the purchaser’s satisfaction, could be required to repurchase defective loans.  Additionally, if the purchaser was required to repurchase a loan after sale to a third party, it could in turn, demand that the originator repurchase that same loan.

After the purchaser resold loans that were part of the purchase, it was informed by the third-party purchaser that there were defects in seven of the resold mortgages.  Accordingly, and per the terms of the agreement, for each of the seven allegedly-defective loans, the purchaser sent the originator letters (i) identifying and describing the potential breach; (ii) inviting the originator to investigate the matter and send a written response within 30 days, and; (iii) notifying the originator that a repurchase may be required if the purchaser did not find the resolution satisfactory.

After the expressly identified 30 days passed, the purchaser sent a follow-up letter to the originator as to each loan again describing the breach, stating that repurchase was required and citing a deadline of 30 days to respond.  After that 30-day period expired, a third letter was sent to the originator reciting the same breaches and providing 30 days to confirm the repurchase.

Some letters confirmed receipt of documentation and explanation from the originator and deemed responses to the purchaser’s prior letters as unsatisfactory, while others noted that the originator failed to respond to the prior letters altogether.

More than two years after sending the last letter for the seventh loan, the purchaser filed suit against the originator for breach of the agreement.  The originator moved for summary judgment, arguing: (1) the purchaser could not force repurchase because the agreement had been terminated; (2) the purchaser could not force repurchase because the purchaser had already foreclosed on the underlying mortgage loans; and (3) the purchaser failed to satisfy a condition precedent in that it did not prescribe a time for cure or correction.

Addressing only the third argument, the trial court concluded that the agreement’s phrase “upon notification by [purchaser], correct or cure such defect within the time prescribed by [purchaser] to the full and complete satisfaction of [purchaser],” placed a condition precedent upon the originator’s repurchase duty, and that the purchaser’s letters did not provide adequate notice because it failed to expressly “prescribe” a time for it to correct or cure the alleged defects.

Specifically, the trial court concluded: (i) that the purchaser essentially conceded that its first set of letters did not give proper notice of the alleged defect; (ii) the second set of letters failed to expressly prescribe a time for cure or correction, and; (iii) the agreement’s addendum’s reference to a 30-day response time did not serve as the prescription of a time for cure or correction.

Accordingly, summary judgment was entered in favor of the originator and against the purchaser, whose motion for rehearing was thereafter denied.  This appeal followed.

On appeal, the Eighth Circuit questioned whether the prescription of a time for the originator to correct or cure an alleged breach is a condition precedent, and noted that conditions precedent are generally disfavored in Missouri.  See James E. Brady & Co. v. Eno, 992 F.2d 864, 869 (8th Cir. 1993) (“Courts should not construe contract provisions to be conditions precedent ‘unless required to do so by plain, unambiguous language or by necessary implication.’” (quoting Kansas City S. Ry. v. St. Louis–San Francisco Ry., 509 S.W.2d 457, 460 (Mo. 1974)).

Here, the Appellate Court perceived that both parties were undeniably aware of the agreement’s rights to cure and notice provisions.  The Court noted that, although the agreement’s notice provision indicates a time for attempting cure after the originator was made aware of the defect, it contains no language suggesting that the purchaser’s right to force repurchase is conditional.

As such, the Eighth Circuit found that the time aspect of the notice provision defined a right for the purchaser to limit the time to cure, rather than a condition precedent to protect the originator, and its failure to do so by instead sending letters and delaying suit should not wholly eliminate the originator’s obligation to repurchase defective loans.

In any event, the Eighth Circuit stated that it need not decide whether the contested provision imposes a condition precedent, because the three letters concerning each loan, viewed collectively, satisfied the purchaser’s notice obligation by identifying a defect, inviting written responses with supporting documentation, and identifying a deadline.

The Court noted that nothing within the agreement stated that the time “prescribed” for cure or correction need be in writing or indicates specific triggering words such as “cure or correct,” and the clear and repeated notice provided in this case satisfied the vague requirements of the agreement.  See Gray v. Bicknell, 86 F.3d 1472, 1479 (8th Cir. 1996) (“Under Missouri law, the nature of notice required by contract depends upon the provisions of that contract.”).

Accordingly, the trial court’s entry of judgment in the originator’s favor was reversed and remanded to the trial court for further proceedings.

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Christopher P. Hahn practices in Maurice Wutscher’s Commercial Litigation, Consumer Credit Litigation and Insurance Recovery and Advisory groups. Prior to joining Maurice Wutscher LLP, he served under the General Counsel at the Florida Office of Financial Regulation. He also obtained extensive experience litigating property insurance claims through all phases of discovery, motion practice and other pre-trial activities. Christopher obtained his Bachelor of Science degree in Business Administration from the University of Southern California, followed by his Juris Doctorate degree from the University of Miami School of Law. He is also a graduate of the University of Miami’s Masters of Business Administration program, completing his degree with an emphasis on finance and mergers and acquisitions.

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