SunTrust Mortgage, Inc. v. North Shore Bank, No. 3:2014cv00385 - Document 50 (E.D. Va. 2015)
Court Description: MEMORANDUM OPINION. Please see Opinion for details. Signed by District Judge James R. Spencer on 02/20/2015. (ccol, )
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SunTrust Mortgage, Inc. v. North Shore Bank Doc. 50 UNITED STATES DISTRICT COURT EASTERN DISTRICT OF VIRGINIA RICHMOND DIVISION SUNTRUST MORTGAGE, INC., Plaintiff, v. Action No. 3:14-CV-385 NORTH SHORE BANK, Defendant. MEMORAN D U M OPIN ION THIS MATTER is before the Court on Plaintiff’s Motion for Sum m ary J udgm ent (“Plaintiff’s Motion” or “SunTrust’s Motion”) (ECF No. 26) and Defendant’s Motion for Sum m ary J udgm ent (“Defendant’s Motion” or “North Shore’s Motion”) (ECF No. 23). For the reasons set forth below, Plaintiff’s Motion is hereby GRANTED and Defendant’s Motion is DENIED. I. BACKGROU N D a. St a t e m e n t o f Fa ct s 1 On Septem ber 23, 20 0 4, SunTrust Mortgage, Inc. (“SunTrust”) and North Shore Bank, FSB (“North Shore”) entered into a Correspondent Loan Purchase Agreem ent (the “Agreem ent”) (Com pl. Ex. A). SunTrust’s Correspondent Seller Guide (defined in the Agreem ent as the “Manual”) 2 is incorporated by reference into the Agreem ent. Under the Agreem ent, North Shore agreed to sell m ortgage loans to SunTrust an d SunTrust agreed to purchase m ortgage loans from North Shore, subject to the term s and conditions of the Agreem ent. Specifically, North Shore is responsible for the accurate preparation and com pletion of the loan application packages and to ensure they are in full com pliance with the term s of the Agreem ent and the 1 The parties filed a J oint Stipulation of Uncontroverted Facts (“Fact Stip.”) (ECF No. 22) on Decem ber 22, 20 14. The instant statem ent of facts includes both stipulated facts as well as facts gleaned from the parties’ briefs. 2 See Mem . in Supp. of Pl.’s Mot. Ex. C (“EZ Options Loan Program”). 1 Dockets.Justia.com Manual. Pursuant to paragraph 22 of the Agreem ent, North Shore agreed to indem nify SunTrust against any all claim s or losses resulting from , inter alia, a breach of the Agreem ent. North Shore originated, underwrote, and closed a Mortgage Loan to Therese Hounsell (the “Loan”) in the principal am ount of $ 181,60 0 .0 0 , secured by a m ortgage on property located at 4926 Harris Avenue, Sarasota, Florida (the “Subject Property”).3 On Novem ber 14, 20 0 6, SunTrust paid North Shore $ 2,724.0 0 to purchase the Loan. The Loan was sold to SunTrust pursuant to the Manual’s “No Ratio” docum entation option. SunTrust also paid a service release prem ium to North Shore for the Loan in the am ount of $ 1,816.0 0 . Additionally, as part of the closing, SunTrust charged Hounsell $ 245 to review the Loan Closing Package to ensure that the Loan file contained all of the required loan closing docum ents and security instrum ents. SunTrust, as servicer of the Loan, subsequently com pleted a Forbearance Agreem ent with Hounsell, allowing for “non-paym ent” of four paym ents, Septem ber 20 0 8 to Decem ber 20 0 8. Additionally, SunTrust com pleted a Loan Modification Agreem ent on Decem ber 22, 20 0 8, which increased the principal am ount of the loan, extended the m aturity date and m odified the interest paym ents. On Decem ber 26, 20 0 6, SunTrust sold the Loan to the Federal National Mortgage Association (“Fannie Mae”). SunTrust allegedly m ade its own warranty to Fannie Mae that the Loan m et the guidelines as of the date of the sale. Hounsell subsequently defaulted on her paym ent obligations for the Loan. On Novem ber 15, 20 12, SunTrust received a Loan Repurchase Notice from Fannie Mae dem anding that SunTrust repurchase the Loan due to insufficient docum entation of Hounsell’s assets in the loan file. (See Mem . in Supp. of Pl.’s Mot. Ex. B.) Upon receipt of this Notice, SunTrust conducted its own review of the Hounsell Loan file and determ ined that it was not underwritten in accordance with SunTrust’s underwriting guidelines. 3 North Shore closed on a second loan to Therese Hounsell in the principal am ount of $ 45,40 0 , secured by the sam e property. Hounsell thus paid a total of $ 227,0 0 0 to purchase the Subject Property. 2 According to the HUD-1 Settlem ent Statem ent (id. at Ex. E), Hounsell paid $ 1,20 1.12 to close the Hounsell Loan, m ade up of a $ 1,0 0 0 earnest m oney deposit check on the sale contract for the Subject Property (the “Earnest Money Deposit”) and $ 20 1.12 in funds brought to closing (the “Closing Cash”) (collectively, the “Funds to Close”). SunTrust alleges that because the funds from the Earnest Money Deposit were necessary to close the Loan, the Manual required that North Shore verify and docum ent that the Earnest Money Deposit cleared the drawer’s account. Additionally, because the Closing Cash was necessary to close the Loan, SunTrust alleges that the Manual required that North Shore verify and docum ent the source of the funds com prising the Closing Cash. Although the parties do agree that the loan file contained a copy of the $ 1,0 0 0 check, the Loan file subm itted by North Shore to SunTrust at the tim e North Shore sold the loan to SunTrust did not contain any other docum entation. Furtherm ore, Hounsell’s Uniform Residential Loan Application represented that Hounsell had liquid assets of $ 10 ,8 39.40 (the “Liquid Assets”). (See id. at Ex. F.) SunTrust alleges that the Manual also required North Shore to verify the Liquid Assets; however, the Loan file did not contain such docum entation either.4 On Novem ber 21, 20 12, SunTrust notified North Shore of Fannie Mae’s repurchase request regarding the Hounsell Loan and requested that North Shore provide SunTrust with the m issing docum entation to persuade Fannie Mae to withdraw the repurchase request. (Mem . in Supp. of Pl.’s Mot. Ex. G; Def.’s Mem . in Supp. of Mot. Ex. 2(I).) North Shore did not provide SunTrust with any new docum entation, but rather claim ed that it reviewed the loan file and it was their “recollection that this was a no doc program that didn’t require asset verification.” (Mem . in Supp. of Pl.’s Mot. Ex. H.) On Novem ber 29, 20 12, SunTrust sent a letter to Fannie Mae that stated “[t]he borrower satisfactorily m et the EZ Option guidelines . . . . According to the EZ Option guidelines, the borrower was not required to docum ent the $ 1,20 1 of funds used to close the subject m ortgage.” 4 North Shore contends that eleven days before closin g, North Shore received a three-page fax from AIG verifying that Hounsell had $ 10 ,839.40 in three accounts. 3 (Def.’s Mem . in Supp. of Mot. Ex. 2(J ).) By letter dated J anuary 16, 20 13, Fannie Mae rejected SunTrust’s argum ents. (Id. at Ex. 2(K).) SunTrust was given until J anuary 31, 20 13 to appeal the Fannie Mae decision. (Id.) SunTrust did not appeal Fannie Mae’s letter and did not inform North Shore about the deadline for such appeal. (Id. at Ex. 2 ¶ 68, 69.) On April 16, 20 13, SunTrust incurred a loss on the Hounsell Loan when it paid $ 248,620 .92 to Fannie Mae to repurchase the Loan. On May 17, 20 13, SunTrust notified North Shore of its obligation to repurchase the Hounsell Loan from SunTrust. (Mem . in Supp. of Pl.’s Mot. Ex. I; Def.’s Mem . in Supp. of Mot. Ex. 2(L).) On May 28, 20 13, North Shore em ailed SunTrust asking for a breakdown of the repurchase am ount “so that we [sic] set up this account online to reflect current servicing data” and that the repurchase needed to occur “no later than the end of next week (May 31st ).” (Def.’s Mem . in Supp. of Mot. Ex. 2(N).) On that sam e day, the Subject Property was sold to a third party buyer through a pre-arranged short sale for $ 80 ,0 0 0 .0 0 , with net sale proceeds of $ 67,285.53 credited towards the unpaid balance of the Hounsell Loan. On J une 6, 20 13, SunTrust wrote to North Shore, inform ing North Shore that the Subject Property had been sold through a short sale and SunTrust dem anded paym ent of $ 183,151.39. (Mem . in Supp. of Pl.’s Mot. Ex. J .) b. Pr o ce d u r a l Po s t u r e SunTrust filed its Com plaint against North Shore on May 30 , 20 14 in this Court pursuant to 28 U.S.C. § 1332. The one-count Com plaint alleges breach of contract and seeks to enforce SunTrust’s contractual rights to be indem nified for losses sustained on the Loan purchased from North Shore. SunTrust seeks dam ages in the am ount of $ 183,151.39, an award for attorneys’ fees, as well as all pre-judgm ent and post-judgm ent interest perm itted by law. 5 The parties attended a settlem ent conference with Magistrate J udge David J . Novak on Decem ber 12, 20 14. However, the parties failed to settle their claim s. 5 SunTrust seeks prejudgm ent interest at the legal rate of 6% set by Virginia Code § 6.2-30 2 from the date of its J une 6, 20 13 dem and latter, and post-judgment interest from the date of judgm ent in accordance with 28 U.S.C. § 1961. 4 A bench trial was scheduled to begin on February 17, 20 15. Pursuant to this Court’s Pretrial Order (ECF No. 19), the parties tim ely filed their present Motions for Sum m ary J udgm ent on J anuary 8 , 20 15. Once the issues were fully briefed, the Court held a hearing on February 5, 20 15. II. LEGAL STAN D ARD When faced with cross-m otions for sum m ary judgm ent, the Court applies the sam e standard as that applied to individual m otions for sum m ary judgm ent. See Rossignol v. Voorhaar, 316 F.3d 516, 523 (4th Cir. 20 0 3). The Court m ust consider “each m otion separately on its own m erits to determ ine whether either of the parties deserves judgm ent as a m atter of law.” Id. at 523 (internal citations and quotations om itted). A m otion for sum m ary judgm ent should be granted where “the m ovant shows that there is no genuine dispute as to any m aterial fact and the m ovant is entitled to judgm ent as a m atter of law.” Fed. R. Civ. P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). If there is no genuine dispute as to any m aterial fact, it is the “affirm ative obligation of the trial judge to prevent factually unsupported claim s and defenses from proceeding to trial.” Drew itt v. Pratt, 999 F.2d 774, 778– 79 (4th Cir. 1993) (internal quotation m arks om itted). However, if the court finds that there is a genuine issue of m aterial fact, the m otion m ust be denied. 10 A Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 2720 (3d ed. 20 11). A court m ust look to the specific facts pled to determ ine whether a triable issue exists. See Anderson v. Liberty Lobby , Inc., 477 U.S. 242, 247-49 (1986). The m oving party bears the burden of establishing the nonexistence of a triable issue of fact by “showing—that is, pointing out to the district court—that there is an absence of evidence to support the nonm oving party’s case.” Celotex, 477 U.S. at 325 (internal quotation m arks om itted). “The judge’s inquiry, therefore, unavoidably asks whether reasonable jurors could find by a preponderance of the evidence that the [nonm oving party] is entitled to a verdict.” Anderson, 477 U.S. at 252. 5 A district court m ust “resolve all factual disputes and any com peting, rational inferences in the light m ost favorable to the party opposing that m otion.” Rossignol, 316 F.3d at 523 (internal quotation m arks and citations om itted). On ly disputes over facts that m ight affect the outcom e of the suit under the governing law will properly preclude the entry of sum m ary judgm ent. Anderson, 477 U.S. at 248. “Mere unsupported speculation is not sufficient to defeat a sum m ary judgm ent m otion if the undisputed evidence indicates the other party should win as a m atter of law.” Francis v. Booz, Allen & Ham ilton, Inc., 452 F.3d 299, 30 8 (4th Cir. 20 0 6). Thus, if the nonm oving party’s evidence is only colorable or is not significantly probative, sum m ary judgm ent m ay be granted. Anderson, 477 at 249– 50 . III. D ISCU SSION SunTrust’s Motion straightforwardly argues that North Shore breached the Agreem ent by refusing to indem nify SunTrust for losses resulting from North Shore’s failure to verify and docum ent Hounsell’s assets as required by SunTrust underwriting guidelines. North Shore’s Motion argues that it is entitled to sum m ary judgm ent for four reasons: (1) SunTrust’s claim s are disingenuous and patently false because SunTrust adm itted to Fannie Mae in writing that the loan satisfied the guidelines and “the borrower was not required to docum ent the $ 1,20 1 of funds used to close the subject m ortgage;” (2) SunTrust’s claim s are m eritless because the loan in fact m et the guidelines; (3) any claim s against North Shore were released when SunTrust m odified the loan on Decem ber 8 , 20 0 8, caused the property to be sold at a short sale on May 28, 20 13, and released the borrower from liability; and (4) SunTrust breached two provisions of the Loan Agreem ent and the im plied covenant of good faith and fair dealing, thereby precluding its claim s against North Shore. Because the second claim in North Shore’s Motion encom passes the identical argum ents defined in SunTrust’s Motion, the Court need only address North Shore’s Motion to resolve the full dispute. // 6 ( 1) N o rth Sh o re ’s Claim 1: Su n Tru s t is Bo u n d By Its U n e qu ivo cal an d W ritte n Ad m is s io n to Fan n ie Mae Th at Th e Bo rro w e r “Satis facto rily” Me t Th e Lo an Gu id e lin e s In SunTrust’s response letter to Fannie Mae’s repurchase dem and, SunTrust states that “[t]he borrower satisfactorily m et the EZ Option guidelines” and “the borrower was not required to docum ent the $ 1,20 1 of funds used to close the subject m ortgage.” (Def.’s Mem . in Supp. of Mot. Ex. 2(J ).) North Shore now seeks to estop SunTrust from asserting an inconsistent position with such statem ents. North Shore relies on Burch v. Grace St. Bldg. Corp., 191 S.E. 672 (Va. 1937) to support its proposition. In that case, the Virginia Suprem e Court held “[a] litigant is estopped from taking a position which is inconsistent with one previously assum ed, either in the course of litigation for the sam e cause of action, or in dealings in pais.” Burch, 191 S.E. at 677. In their briefs, the parties’ disagreem ent is centered on whether federal or state law controls, as the Agreem ent contains a choice of law provision stating that it is “governed by the internal law of the Com m onwealth of Virginia.” (Agreem ent at ¶ 30 ). However, it becam e apparent at the hearing that the parties’ actual dispute lies in the interpretation of Burch. SunTrust interpreted Burch as referring to the doctrine of judicial estoppel and accordingly argued its position as to judicial estoppel in its briefs subm itted to the Court. But at the hearing North Shore contended that it was not relying on the doctrine of judicial estoppel. Instead, North Shore relied on Burch for the single sentence that a party is estopped from taking inconsistent positions with those previously assum ed in dealings in pais. Burch, 191 S.E. at 677. However, as Plaintiff noted and Defendant failed to rebut, no Virginia law exists about general estoppel principles barring any and all inconsistent claim s.6 Therefore, this Court will instead offer an analysis based on judicial estoppel. “J udicial estoppel is an equitable doctrine that exists to prevent litigants from playing 6 Although not referenced in recent Virginia Suprem e Court cases, older cases note that “estoppel in pais” is the equivalent of “equitable estoppel.” Moy ers Coal Corp. v. W hited, 160 S.E.43, 46 (Va. 1931); Thom asson v. W alker, 190 S.E. 30 9, 312 (Va. 1937). But here there has been no evidence presented for a claim of equitable estoppel. See Luddeke v. Am ana Refrigeration, Inc., 387 S.E.2d 50 2, 50 5 (Va. 1990 ) (defining the elements of equitable estoppel as “a representation, reliance, a change of position, and detriment”). Therefore, Defendant could not rely on this form of estoppel either. 7 ‘fast and loose’ with the courts– to deter im proper m anipulation of the judiciary.” Havird Oil Co., Inc. v. Marathon Oil Co., Inc., 149 F.3d 283, 292 (4th Cir. 1998) (citations and internal quotation m arks om itted). In order for judicial estoppel to apply under federal law, “(1) the party to be estopped m ust be advancing an assertion that is inconsistent with a position taken during previous litigation; (2) the position m ust be one of fact, rather than law or legal theory; (3) the prior position m ust have been accepted by the court in the first proceeding; and (4) the party to be estopped m ust have acted intentionally, not inadvertently.”7 Id. In other words, “[t]he party asserting judicial estoppel should show that the other party took a contrary position under oath in a prior proceeding which the court accepted.” RTC Mortg. Trust 1995-s/ N 2 v. McMahon, 225 B.R. 60 4, 60 8 (E.D. Va. 1997) (citing Low ery v. Stovall, 92 F.3d 219, 224 (4th Cir. 1996)). Here, Defendant cannot assert the doctrine of judicial estoppel because the statem ent at issue was not m ade during previous litigation. Rather, the statem ent was only written in a letter from SunTrust to Fannie Mae; it was not m ade under oath and the statem ent was not accepted by a court. Defendant adm itted as m uch at the hearing. Therefore, Defendant’s Motion as to Claim 1 is DENIED. ( 2 ) N o rth Sh o re ’s Claim 2 : Su n Tru s t’s Ad m is s io n s to Fan n ie Mae W e re Co rre ct Be cau s e th e Lo an In Fact Me t th e Lo an Gu id e lin e s 8 Under Virginia law, a plaintiff asserting a breach of contract claim “m ust show (1) a legally enforceable obligation or agreem ent; (2) the opposing party’s violation or breach of that obligation or agreem ent; and (3) injury or dam ages caused by that breach.” Design and Prod., Inc. v. Am . Exhibitions, Inc., 820 F. Supp. 2d 727, 736 (E.D. Va. 20 11) (citing Filak v. George, 7 Regardless of the parties’ argum ents in their briefs related to whether Virginia or federal law apply, in recent Virginia Suprem e Court cases interpreting judicial estoppel, the Court has required that “the prior inconsistent position must have been relied upon by the court or prior court in rendering its decision.” Virginia Elec. And Pow er Co. v. N orfolk Southern Ry . Co., 683 S.E.2d 517, 527 (Va. 20 0 9) (em phasis added). Because the statem ent m ade by SunTrust in the Novem ber 12, 20 12 letter to Fannie Mae was not relied on by any Court, judicial estoppel is inapplicable under either the federal or state standard. 8 As stated above, because North Shore’s Claim 2 and SunTrust’s Motion address the sam e issue regarding whether the Loan m et the underwriting guidelines, the parties’ argum ents are com bined here into one analysis. 8 267 Va. 612, 594 S.E.2d 610 , 614 (20 0 4)). Moreover, “[f]or a breach of contract to be actionable, a party m ust establish a m aterial breach.” Vienna Metro LLC v. Pulte Hom e Corp., 786 F. Supp. 2d 10 76, 10 81 (E.D. Va. 20 11) (citing Horton v. Horton, 487 S.E.2d 20 0 (Va. 1997)). To be m aterial, a breach m ust fail “to com ply with a fundam ental aspect of the contract, so that the failure to perform that obligation defeats an essential purpose of the contract.” Id. Here, there is no dispute regarding the first elem ent required for a breach of contract claim . The J oint Stipulation of Uncontroverted Facts expressly states that on Septem ber 23, 20 0 4, SunTrust and North Shore entered into a Correspondent Loan Purchase Agreem ent. (Fact Stip. ¶ 1.) Neither party disputes the enforceability of this Agreem ent. The second prong however requires greater analysis. Pursuant to paragraph 22 of the Agreem ent, Seller hereby agrees to indem nify, defend and hold harm less Purchaser . . . from and against any and all claim s, losses, dam ages, fines, penalties, forfeitures, attorney’s fees, judgm ents and any costs, court costs, fees and expenses relating to, arising out of, based upon, or resulting from (a) a breach by Seller of any representation, warranty, term , condition or obligation contained in or m ade pursuant to the Manual [or] this Agreem ent . . ., (b) a failure by Seller to disclose any inform ation that renders any such representation or warranty m isleading or inaccurate, (c) any m aterially inaccurate, incom plete, false, or m isleading inform ation by or through Seller to Purchaser, (d) any m isrepresentation m ade by or through seller to Purchaser concerning any Mortgage Loan, or (e) Seller’s ownership of or actions with respect to any Mortgage Loan. It is uncontested that SunTrust m ade a dem and on North Store to indem nify SunTrust for its losses on the Hounsell Loan pursuant to paragraph 22, (Fact Stip. ¶ 7), and North Shore refused that request, (id. at ¶ 8). Thus, the Court m ust only address whether North Shore’s refusal to indem nify SunTrust constituted a breach of the Agreem ent. In other words, did North Shore com m it one of the “triggering events” listed in (a) through (e) such that it would now be liable to SunTrust? In order to answer that question, the Court m ust analyze whether North Shore failed to underwrite the Loan in com pliance with the Agreem ent and Manual. The parties agree that the 9 EZ Options Loan Program contains the underwriting guidelines for the Hounsell Loan. The parties also agree that the Loan was written as a “No Ratio” Loan. North Shore argues the Loan m et the underwriting guidelines for a “No Ratio” loan. SunTrust however alleges three defects related to the docum entation of Hounsell’s assets and funds used to close the Loan: (1) North Shore did not subm it to SunTrust any docum ents verifying the source of the $ 1,0 0 0 Earnest Money Deposit or that it cleared the drawer’s account; (2) North Shore did not subm it to SunTrust any docum entation identifying the source of $ 20 1.12 in Closing Cash; and (3) North Shore did not subm it to SunTrust a written verification of deposit with two m onths average balance or the m ost recent bank statem ent to verify the $ 10 ,839.40 in liquid assets. (Pl.’s Mem . in Opp. at 10 .) The Court will first address SunTrust’s third issue– the Liquid Assets. Fannie’s Mae repurchase notice to SunTrust on Novem ber 5, 20 12 stated, According to the HUD-1 Settlem ent Statem ent, the borrower paid $ 1,20 1 to the [sic] close the subject loan. The loan file subm itted to our office contained a check m ade payable to the Trustee that reflected $ 1,0 0 0 ; however, there was no additional docum entation to show that these funds had cleared the borrower’s account. N o additional asset docum entation w as provided. The failure to adequately verify sufficient funds to close rendered the subject m ortgage ineligible for delivery to Fannie Mae. (Mem . in Supp. of Pl.’s Mot. Ex. B) (em phasis added). SunTrust claim s that “[t]he m issing docum entation for the Liquid Assets is ‘asset docum entation.’” (Pl.’s Mem . in Opp. at 13.) SunTrust relies on pages STM0 255-256 and 275 of the Manual to support its argum ent that the underwriting guidelines required North Shore to verify the Liquid Assets with a “written verification of deposit with two m onths average balance or the m ost recent bank statem ent.” (Id. at 12.) As an initial m atter, SunTrust’s reliance on the Manual is m isplaced. It is entirely unclear what SunTrust is referencing on pages STM0 255-256. There is no requirem ent on these pages that any specific docum ents be provided to SunTrust in the loan file. Sim ilarly, on page STM0 275, SunTrust references the statem ent, “Written verification of deposit (VOD) with 2 10 m onths average balance or m ost recent bank statem ent.” (Mem . in Supp. of Pl.’s Mot. Ex. C at STM0 275.) But this statem ent hardly provides any guidance as to docum entation for the liquid assets. These assets are not claim ed to be part of the deposit for the loan, and thus it rem ains uncertain why SunTrust references this page of the Manual. That being said, however, for the “No Ratio Option” loan the Manual does require verification of assets. (Id. at STM0 217.) Unfortunately for North Shore, as Roberta Woodard undeniably stated, “[North Shore] do[es] not have asset verification in the loan file, other than a copy of the $ 1,0 0 0 earnest m oney check already referenced.” (Mem . in Supp. of Pl.’s Mot. Ex. H.) Thus, North Shore failed to abide by the underwriting guidelines, and SunTrust is accordingly entitled to indem nification pursuant to Section 22 of the Agreem ent, regardless of any other alleged defects. North Shore attem pts to argue that the Liquid Assets are a non-issue as these assets had nothing to do with Fannie Mae’s repurchase dem and, and were not part of SunTrust’s dem and to North Shore on May 17, 20 13. (See Def.’s Mem . in Supp. of Mot. Ex. 2(L).) However Fannie Mae’s dem and stated, “No additional asset docum entation was provided.” (Mem . in Supp. of Pl.’s Mot. Ex. B) (em phasis added). The Liquid Assets would reasonably be inferred in this request. Next, with regards to the $ 1,0 0 0 Earnest Money Deposit check, in its opposition Plaintiff argues that “SunTrust’s underwriting guidelines required that North Shore verify and docum ent that the Earnest Money Deposit check cleared Hounsell’s account.” (Pl.’s Mem . in Opp. at 10 .) Plaintiff cites the Manual at STM0 254 for support. (See Mem . in Supp. of Pl.’s Mot. Ex. C. at STM0 254.) STM0 254 states that “[f]unds needed for closing m ust be verified.” (Id.) North Shore did in fact provide a copy of the $ 1,0 0 0 earnest m oney deposit check in the Loan file subm itted to SunTrust, (see Pl.’s Mem . in Opp. at 1 ¶ 4), and the paym ent appeared on the HUD1 Settlem ent Statem ent, (see Def.’s Mem . in Supp. of Mot. Ex. F). But, as stated above, SunTrust is still entitled to indem nification on the liquid assets issue. 11 Finally, with regards to the $ 20 1.12 Closing Cash, SunTrust argues that the Manual required North Shore to docum ent the source of the Closing Cash. (Pl.’s Mem . in Opp. at 11.) Again, SunTrust cites STM0 254 in support of its argum ent that “[f]unds needed for closing m ust be verified.” The parties agree that the HUD-1 Settlem ent Statem ent identifies the $ 20 1.12 paym ent as “Cash from Borrower,” (Def.’s Mem . in Supp. of Mot. Ex. 2(F)), and the settlem ent statem ent identifies the borrower as Therese M. Hounsell, (id). But, as SunTrust argues, the HUD-1 settlem ent statem ent appears in every loan file. This statem ent does not “verify” the Closing Cash, but only evidences that the transaction occurred. See Black’s Law Dictionary (9th ed. 20 0 9) (defining the term “verify” as “[t]o prove to be true; to confirm or establish the truth or truthfulness of; to authenticate”).9 For all of the aforem entioned reasons, North Shore’s Motion as to Claim 2 is DENIED. ( 3 ) N o rth Sh o re ’s Claim 3 : An y Claim s Again s t N o rth Sh o re W e re Re le as e d W h e n th e Lo an W as Mo d ifie d , th e Pro p e rty So ld an d H o u n s e ll Re le as e d Fro m Liability North Shore relies on Virginia suretyship law in arguing that it was released from any and all liability when SunTrust m odified the Hounsell Loan and subsequently conducted a short sale of the Subject Property. However, as SunTrust argues, North Shore’s reliance on such law m isses the m ark. “[A] surety contract is a tripartite agreem ent am ong a principal obligor, his obligee, and a surety. The surety m akes a direct prom ise to perform the obligation in the event the principal obligor fails to perform .” First Va. Bank-Colonial v. Baker, 30 1 S.E.2d 8, 11 (Va. 1983). To the contrary, "a contract of indem nity is a bilateral agreem ent between an indem nitor and an indem nitee in which the indem nitor prom ises to reim burse the indem nitee for loss suffered or to save him harm less from liability.” Id. 9 North Shore also argues that because of the “sm all amount of the paym ent,” the Closing Cash “is im m aterial and inconsequential.” (Def.’s Mem . in Supp. of Mot. at 11.) However, regardless of the am ount, the Manual required North Shore to verify “funds needed for closing.” Because it is undisputed that this Closing Cash was needed to close the Loan, North Shore was required by the underwriting guidelines to verify it, and North Shore can be held responsible for its failure to do so. 12 As SunTrust highlights, in this case there is no tripartite relationship. North Shore has not alleged that it prom ised to perform the obligation of the m ortgage borrower in the event the borrower defaulted. Instead, the Agreem ent at issue was an indem nification agreem ent only between North Shore and SunTrust. Thus, North Shore’s suretyship argum ent is without m erit. As to North Shore’s argum ent that “m any other courts have agreed that an act of an indem nitee that m aterially prejudices the rights of the indem nitor will discharge the indem nity obligation to the extent of the prejudice,” (Def.’s Mem . in Supp. of Mot. at 12 n.5) (citing, inter alia, U.S. Fidelity and Guar. Co. v. Hathaw ay , 394 S.E.2d 764, 767 (W. Va. 1990 )), this Court declines to hold that the Virginia Suprem e Court would extend the suretyship doctrine to this context. Therefore, Defendant’s Motion as to Claim 3 is DENIED. 10 ( 4 ) N o rth Sh o re ’s Claim 4 : Su n Tru s t Bre ach e d th e Lo an Agre e m e n t an d th e Im p lie d Co ve n an t o f Go o d Faith an d Fair D e alin g i. SunTrust’s Material Breach of Loan Agreem ent Section 10 .9.1. Section 10 .9.1. of the Agreem ent states, “Seller [North Shore] shall defend against any request received by Purchaser [SunTrust] for repurchase of a Mortgage Loan where the Mortgage Loan was both (a) sold by Seller to Purchaser and (b) underwritten using Delegated Underwriting authority.” North Shore argues that “SunTrust breached the Agreem ent when it failed to notify North Shore of [Fannie Mae’s] J anuary 16, 20 13 letter and its J anuary 31, 20 13 deadline for appeal.” (Def.’s Mem . in Supp. of Mot. at 14) (em phasis added). However, the Court need not look beyond the plain language of the Agreem ent. See Am erican Spirit Ins. Co. v. Ow ens, 541 S.E.2d 553, 555 (Va. 20 0 1) (citation om itted) (“[W]here the term s of the contract are clear and unam biguous, we will construe those term s according to their plain m eaning.”). This section does not im pose an obligation upon SunTrust to notify North Shore of a repurchase request; rather, the section only im poses an obligation on North Shore to defend such request. Moreover, as SunTrust highlights (see SunTrust’s Resp. at 18 n.9), if the parties intended to 10 Further, as SunTrust highlights, the indem nification provision in Section 22 of the Agreement survives “any purchase, sale or transfer of any Mortgage Loan or any interest therein by any of the Indem nitees, the liquidation of the Mortgage Loan, or any term ination of this Agreem ent.” 13 im pose such a notice obligation on SunTrust, the parties would have known how to do so, as exem plified by Section 10 .9.3 of the Agreem ent.11 ii. SunTrust’s Material Breach of Loan Agreem ent Section 20 Section 20 of the Agreem ent states, “In addition to any other rights and rem edies which Purchaser [SunTrust] m ay have against Seller [North Shore], Seller agrees to repurchase any Mortgage Loan . . . within 10 calendar days after Purchaser’s dem and . . . .” The Agreem ent also refers to “Seller’s repurchase obligations under . . . Section 20 .” (Agreem ent ¶ 20 .1.) Sim ilar to Section 10 .9.1 described above, the Court need only focus on the plain language to conclude that SunTrust cannot breach this section of the Agreem ent. Instead, Section 20 only im poses an obligation on North Shore. iii. SunTrust’s Breach of the Im plied Covenant of Good Faith and Fair Dealing “In Virginia, every contact contains an im plied covenant of good faith and fair dealing.” Enom oto v. Space Adventures, Ltd., 624 F. Supp. 2d 443, 450 (E.D. Va. 20 0 9) (citations om itted). To establish a claim for breach of the im plied covenant of good faith, a plaintiff m ust prove (1) a contractual relationship between the parties, and (2) a breach of the im plied covenant. Id. (citing Charles E. Brauer Co., Inc. v. NationsBank of Va., N.A., 466 S.E.2d 38 2, 386 (Va. 1996)). “[A]lthough the duty of good faith does not prevent a party from exercising its explicit contractual rights, a party m ay not exercise contractual discretion in bad faith, even when such discretion is vested solely in that party.” Va. Verm iculite, Ltd. v. W .R. Grace & Co.-Conn., 156 F.3d 535, 542 (4th Cir. 1998). In sum , “[t]he case law shows two ways in which the duty of good faith and fair dealing m ay be breached: (1) where a party has a clear contract right, even if its exercise would arguably by arbitrary, that party is only forbidden from acting dishonestly . . .; (2) but where a party has discretion in perform ance, that party cannot act arbitrarily or 11 Section 10 .9.3 of the Agreem ent contains an express notice provision by stating, “Seller shall subm it to Purchaser and m aintain a current and accurate list of its senior m anagement, and shall notify Purchaser in writing within 30 days . . . .” (Agreem ent ¶ 10 .9.3) (em phasis added). 14 unfairly.” Stoney Glen, LLC v. Southern Bank and Trust Co., 944 F. Supp. 2d 460 , 466 (E.D. Va. 20 13) (internal citations om itted). In Enom oto, the plaintiff contracted with the defendant for a space tourism flight to the International Space Station. 624 F. Supp. 2d at 446, 447. When the defendant failed to follow through, the plaintiff sued for, inter alia, breach of the im plied covenant of good faith and fair dealing. Id. at 448. In denying the defendant’s m otion to dism iss, the district court found that “Defendant’s actions were not m erely unfavorable, but actually dishonest.” Id. at 450 . The plaintiff “allege[d] that Defendant purposefully failed to provide him with a space flight and purposefully failed to inform him of the high likelihood of m edical disqualification until after he had paid three or four paym ents that Defendant subm its are non-refundable.” Id. at 451. Thus, the Court found that “[t]hese claim s are not m erely claim s for Defendant’s unfavorable exercise of its contractual rights. [Rather] Plaintiff has alleged bad faith and unfair dealing in a contractual relationship.” Id.12 Here, North Shore fails to identify any clear contractual right which SunTrust is alleged to have exercised dishonestly, and has also not provided any evidence that SunTrust acted arbitrarily or unfairly in exercising its discretion. Rather, North Shore sim ply states that SunTrust failed to notify North Shore on various occasions. (Def.’s Mem . in Supp. of Mot. at 17.) With this in m ind, the Court does find that SunTrust breached the im plied covenant of good faith and fair dealing. IV. CON CLU SION For the foregoing reasons, the Plaintiff’s Motion is hereby GRANTED and Defendant’s Motion is DENIED. 12 Defendant cites Enom oto for the proposition that “Courts also routinely rule a party breaches the covenant when it fails to act timely, including the failure to provide tim ely notice.” (Def.’s Mem. in Supp. of Mot. at 17.) Defendant states, “The allegation that defendant [in Enom oto] failed to tim ely inform the plaintiff of the ‘high likelihood of m edical disqualification’ until after he had m ade the non-refundable paym ents stated a claim for breach of the im plied covenant.” (Id.) However, as described above, the Court’s holding was not centered on the issue of tim eliness, but rather focused on defendant’s purposeful and dishonest behavior. See Enom oto, 624 F. Supp. 2d at 450 – 51. 15 Let the Clerk send a copy of this Mem orandum Opinion to all counsel of record. An appropriate Order will issue. ______________________/s/_________________ James R. Spencer Senior U. S. District Judge ENTERED this 20 th day of February 20 15. 16
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