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HOUSEHOLD FINANCIAL SERVICES v. COASTAL MORTGAGE SERVICES

July 12, 2001

HOUSEHOLD SERVICES, INC., PLAINTIFF,
v.
COASTAL MORTGAGE SERVICES, INC., DEFENDANTS



The opinion of the court was delivered by: James H. Alesia, Judge

MEMORANDUM OPINION AND ORDER

Before the court are (1) plaintiff Household Financial Services Inc.'s ("Household") motion for summary judgment pursuant to Federal Rule of Civil Procedure 56 and (2) defendant Coastal Mortgage Services, Inc.'s ("Coastal") motion of summary judgment pursuant to Federal Rule of Civil Procedure 56. For the reasons that follow, the court (1) grants in part and denies in part Household's motion for summary judgment and (2) denies Coastal's motion for summary judgment.

I. BACKGROUND*fn1

Household has filed a one-count complaint against Coastal for breach of contract. In turn, Coastal filed a two-count counter claim. Count I is for breach of contract. Count II is a claim for breach of duty of good faith and fair dealing. Also, in its answer, Coastal has alleged the following affirmative defenses: (1) Household failed to comply with its contractual obligations; (2) Coastal cured any breach or deficiencies; (3) Household waived its present claim by failing to object to the purchase of the loans in question; and (4) Household's present claim is estopped.

In order to understand this court's opinion, one must be aware of a number of facts. For the sake of clarity, a recitation of these facts is in three parts. Part A discusses the nature of the relationship between Household and Coastal. Part B discusses the terms of the Loan Purchase Agreement entered into between Household and Coastal. Part C discusses events which give rise to the current controversy.

A. Relationship between Household and Coastal

Defendant Coastal is a mortgage company which issues original loans. Those loans are then often sold to investors, either on an individual basis or as part of a large bulk loan package. Household is just such an investor. For several years, Household has purchased loans from Coastal. In order to effectuate such sales, on April 11, 1996, Household and Coastal entered into a Purchase Agreement to govern the loan sales between the two companies. The Purchase Agreement provided a structured procedure for transactions between the parties. Initially, Coastal is supposed to submit a written offer to sell certain loans. Under the Purchase Agreement, this written offer should contain detailed information about each loan offered for sale. This includes information regarding the status of the current balance of each loan, the number of payments made on each loan contained for sale in the bulk package, the unpaid principal balance of each loan, and the dates to which the principal and interest have been paid.

After receiving the written offer, Household would then have a period of time for due diligence. Following the due diligence period, Household would submit a written response to the information received, which is supposed to include any loans Household wishes to exclude from the bulk sale and Household's proposed purchase price. Then, Coastal would execute an acceptance of Household's response. This foregoing procedure is established within the Purchase Agreement.

However, the procedures contained in the Purchase Agreement were not adhered to in reality. In fact, the majority of the bulk loan package sales were not made in conformance with the Purchase Agreement. According to Coastal, it generally did not submit an offer to sell. Accordingly, it did not provide the information which, under the Purchase Agreement, it was supposed to provide with such an offer to sell. Further, Household did not submit a written response to the office but instead communicated verbally with Coastal. Coastal claims that the bulk packages were sold in the following manner.

Coastal would fax a spreadsheet to various investors containing information about the various bulk loan packages (including the principal balance, interest rate, and the loan to value ratio). Then, the investors would make a bid on the bulk sale package. Generally, Household would make this bid orally. Next, Coastal would determine whether or not to accept this bid. If Household's bid was accepted, then Coastal would send the contents of the loan origination file, which includes a copy of the original promissory note for the loans. However, the documents required under the Purchase Agreement were not all sent. Household would then evaluate the contents of the loans contained in the bulk package. During the evaluation, if deficiencies were found, Household would demand that they be cured by Coastal. Also, during the evaluation, Household would identify which individual loans it wanted to exclude from the bulk sale package. Household's bid would then be adjusted to reflect its evaluated value of the package. Once the evaluation process was completed, which included Coastal clearing any deficiencies, Household would submit a final purchase advice. Once this was approved by Coastal, Household would wire the funds to Coastal. Prior to July 1999, Coastal claims that every bulk loan package bid on by Household was completed using the above, informal procedure.

B. Loan Purchase Agreement

On April 11, 1996, the parties entered into the Loan Purchase Agreement. The Purchase Agreement was drafted by Household, but both parties were represented by counsel during the preparation of that agreement. Paragraph 2.1 of the Purchase Agreement set forth the procedure for initiating the sale of a bulk loan package. Specifically, paragraph 2.1(b) stated that:

Each offer shall be sent by hand delivery or overnight courier and shall be accompanied by a letter notifying Buyer [Household] that Seller [Coastal] is making an offer to sell the Offered Loans at a Purchase Price based on a Bid Percentage, which shall be determined by Buyer and which shall be subject to acceptance by Seller. Each Offer shall attach an Offered Loan Schedule, which shall include mapping document information relating to each Offered Loan according to the Format and criteria set forth in Schedule 2.1 to this Agreement.

(Joint 12(m) Statement, Ex. 1 at ¶ 2.1(b).) Schedule 2.1 was to include information about each loan contained in the bulk package, including first payment due date, current principal interest payment amount, next payment date, current balance, and original balance. (See id.)

Further, pursuant to section 12.2 of the Purchase Agreement, that Agreement "may not be amended, modified, or supplemented except in writing signed by both parties." (Id. at ΒΆ 12.2.) It is undisputed that the parties never amended or modified the Agreement in writing, nor did the parties specifically state that they intended to modify the Agreement. However, Coastal contends that the Purchase Agreement ...


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