Mortgage Banker Must Face National Bank’s $1.2M Breach of Contract Suit

Recently, the U.S. District Court for the District of Minnesota declined to dismiss a national bank’s complaint against a mortgage bank for losses in connection with mortgage loans purchased by the national bank under a loan purchase agreement (LPA) between the parties.  The national bank claimed the loans violated certain representations and warranties under the LPA, rendering the loans subject to repurchase by the mortgage bank. 

In particular, the national bank asserted that the requirements of its Seller Guide were incorporated into the LPA, and that the mortgage bank breached its representations and warranties by selling loans, which violated the Seller Guide causing the national bank to suffer $1.2 million in damages payable to third party investors. 

The mortgage bank moved to dismiss the national bank’s complaint alleging that the complaint failed to properly plead incorporation of the Seller Guide into the LPA, and even if the complaint properly plead incorporation of the Seller Guide into the LPA, the merger doctrine applied to preclude the application of the Seller Guide’s terms, costs and fees as unfulfilled “conditions precedent,” which were subsequently waived by execution of the LPA.

The District of Minnesota declined to dismiss the national bank’s complaint at this stage of the proceedings, holding that the national bank plausibly plead the terms of its Seller Guide were incorporated into the LPA’s representations and warranties, and these terms were breached.  It also held that the merger doctrine did not apply to “preclude” the national bank from asserting a breach of these terms.

Under Minnesota law, a breach of contract claim contains four elements: “(1) formation of a contract; (2) performance by plaintiff of any conditions precedent; (3) a material breach of the contract by defendant; and (4) damages.”  Parkhill v. Minn. Mut. Life Ins. Co., 174 F. Supp. 2d 951, 961 (D. Minn. 2000) (citation omitted).  Since the parties did not dispute the contract’s formation, and because the mortgage bank did not assert that the national bank was responsible for performing a condition precedent before the terms of the Seller Guide would apply, the Court held that the mortgage bank’s alleged non-compliance could plausibly result in a breach. 

The Court further observed that merger doctrine is a rule applying to the conveyance of real property that precludes parties from asserting conditions precedent provided under previous agreements once the deed to the property is conveyed, executed, and delivered, deeming those arguments waived and “merged” into the deed.  Bruggeman v. Jerry’s Enters., Inc., 591 N.W.2d 705, 708–09 (Minn. 1999).  The court dismissed the mortgage bank’s merger argument for two reasons: (1) the LPA related to the sale and repurchase of loans, not actual property conveyances, and (2) the LPA in this context was essentially a repurchase agreement, and therefore the mortgage bank’s obligation to comply with the Seller Guide was a condition subsequent to the agreement, causing the merger doctrine to be inapplicable.