                                                                                                                           Opinions of the United
1996 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


10-1-1996

Sterling Natl Mtg Co v. Mtg Corner Inc
Precedential or Non-Precedential:

Docket 96-5007




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Recommended Citation
"Sterling Natl Mtg Co v. Mtg Corner Inc" (1996). 1996 Decisions. Paper 34.
http://digitalcommons.law.villanova.edu/thirdcircuit_1996/34


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                UNITED STATES COURT OF APPEALS
                    FOR THE THIRD CIRCUIT
                         ___________

                          NO. 96-5007
                          ___________

             STERLING NATIONAL MORTGAGE CO., INC.,
           A Corporation of the State of New Jersey,

                                       Appellant

                                  v.

                     MORTGAGE CORNER,   INC.,
           A Corporation of the State   of Connecticut;
                  CENTERBANK MORTGAGE   COMPANY,
           A Corporation of the State   of Connecticut

                ______________________________

        On Appeal From the United States District Court
                 For the District of New Jersey
                    (D.C. Civ. No. 93-03266)
                 ______________________________

                     Argued:   June 6, 1996

         Before: BECKER, MANSMANN, Circuit Judges, and
SCHWARZER, District Judge.


(Filed October 1, l996)


JOEL N. KREIZMAN, ESQUIRE (ARGUED)
Evans, Osborne, Kreizman and Bonney
180 White Road, Suite B 101
Little Silver, NJ 07739

Attorneys for Appellant

SIGRID S. FRANZBLAU, ESQUIRE (ARGUED)
Riker, Danzig, Schered, Hyland & Perretti
One Speedwell Avenue
Morristown, NJ 07962-1981

Attorneys for Appellees


                    _________________________

                       OPINION OF THE COURT
                    _________________________
BECKER, Circuit Judge.

         This is an appeal from an order of the district court in
a diversity case granting summary judgment for the defendants on
plaintiff's state law claims of breach of contract and tortious
interference with a prospective economic relationship. We affirm
with respect to the tortious interference claim, but reverse with
respect to the contract claims, and remand for further proceedings.

                                I.
         Defendant The Mortgage Corner ("TMC") runs a multilender
mortgage loan network. Lenders on TMC's network regularly fax
their current mortgage rates, terms, and conditions to TMC
financial service representatives ("FSRs") stationed in various
local real estate offices. The FSRs then present these rates and
terms to potential homebuyers. In this manner, lenders compete for
business, and consumers have a choice of mortgage rates and terms.
For its part, TMC receives a percentage of each loan that closes as
a result of its referral.
         On July 23, 1992, Sterling National Mortgage Company
("Sterling") entered into an agreement with TMC pursuant to which
it became a lender on the TMC network. Under this agreement, TMC
"may submit completed Mortgage Loan Applications to [Sterling] from
time to time." (J.A. at 18.) Sterling, in turn, had a duty to
"process, accept, issue mortgage loan commitments for, fund and
close, in a timely manner," the applications submitted by TMC.
(J.A. at 18.) For each completed loan, Sterling would pay TMC .625
basis points. (Pl.'s Br. at 7.) The agreement was to last one
year but could "be terminated without cause by either party upon
thirty (30) days written notice to the other." (J.A. at 20.)
Sterling geared up for the network competition. It hired two
people to service both the TMC system and a similar network. By
February 1993, Sterling was performing well and had received 109
mortgage applications.
         All was not, however, copacetic. Centerbank Mortgage
Company ("CMC") owned TMC. CMC was also a lender on the network,
and it was TMC's hope that CMC would secure a significant number of
loan referrals from the FSRs. (Dep. of Former TMC President,
Walter Vail at J.A. 108.) To this end, TMC management stressed its
goal to the FSRs. (See Dep. of TMC Regional Manager, Nicholas
Meras at J.A. 104.) FSRs were also paid higher commissions for
CMC referrals. Eventually, according to Sterling, FSRs were
specifically discouraged from referring loans to Sterling, (J.A.
45-46), and ultimately, on April 27, 1993, TMC's Regional Manager
Nicholas Meras issued a memorandum instructing the FSRs to stop
accepting Sterling applications, (J.A. 42). It was not until May
14, 1993, (two and one half weeks after this effective termination)
that TMC sent Sterling the thirty day notice of termination
required under the agreement. That notice, which was properly
executed, became effective June 14, 1993.
         On July 26, 1993, Sterling filed a three count complaint
against TMC and CMC (referred to collectively as "defendants") in
the district court. The defendants filed an Answer and
Counterclaim alleging that Sterling had failed to pay all of TMC's
fees. Following discovery, Sterling and the defendants filed cross
motions for summary judgment on Sterling's affirmative claims.
         In Count I of its complaint, Sterling alleged that TMC
had breached the network contract by (1) encouraging its employees
to dissuade customers from choosing Sterling's loan products, and
(2) by terminating the contract before providing thirty days
notice. (Dist. Ct. Op. at J.A. 174.) In its summary judgment
motion, TMC contended that, since the contract provision at issue
simply provided that TMC "may" submit loans to Sterling, TMC was
under no obligation to refer any loans to Sterling, and therefore
could not be held in breach of the agreement. The district court
agreed, and granted TMC's motion for summary judgment on Count I.
It reasoned that, because TMC's referral of loans to Sterling was
completely discretionary, Sterling was unable, as a matter of law,
to establish that the agreement was breached. (Dist. Ct. Op. at
J.A. 175.)
         In Count III, Sterling charged that TMC's behavior
breached the implied covenant of good faith and fair dealing under
Connecticut law. The court concluded that, while every contract
carries this implied covenant "which requires that neither party do
anything that will injure the right of the other party to receive
the benefits of the agreement," such principle "cannot be applied
to achieve a result contrary to the clearly expressed terms of the
contract." (Dist. Ct. Op. at J.A. 176.) According to the court,
"under the clearly expressed terms of the agreement . . . The
Mortgage Corner had total discretion as to whether to refer loan
applications to Sterling." (Dist. Ct. Op. at J.A. 176.) The court
granted TMC's motion for summary judgment on Count III as well.
         Sterling's Count II alleged that the defendants' steering
of consumers to CMC tortiously interfered with Sterling's
prospective economic relationship with both TMC and potential
customers. The district court noted that the defendants had
directed loan applications to CMC and had paid higher commissions
on loans placed there. (Dist. Ct. Op. at J.A. 177 (citation
omitted).) However, such conduct, the court reasoned, could not
form the basis of a tortious interference claim in this case.
Because TMC had no obligation to originate any loans with Sterling,
neither defendant by its actions could have "lured away" any of
Sterling's customers. Therefore, no genuine issue of material fact
existed as to the "gravamen of a tortious interference claim is
'the luring away, by devious, improper and unrighteous means, of
the customer of another' . . . ." (Dist. Ct. Op. at J.A. 177-78
(citation omitted)). As an alternative basis for its holding, the
district court stated that the dispute was not covered by tort
principles because a party could not tortiously interfere with its
own contract. (Dist. Ct. Op. at J.A. 178.)
         Sterling appeals the district court's determinations.
Our review of the district court's grant of summary judgment is
plenary, See Groman v. Township of Manalapan, 47 F.3d 628, 633 (3d
Cir. 1985).
                               II.
                                A.
         We first take up the district court's grant of summary
judgment for the defendants on Sterling's Count I claim that TMC's
attempt to discourage FSRs from offering Sterling's loans and TMC's
premature termination of Sterling's relationship constituted a
breach of contract. As noted above, the district court viewed the
relevant contract clause, "[TMC] may submit completed Mortgage Loan
Applications [to Sterling]," (J.A. at 18), as unambiguously
granting TMC complete discretion in the referral process, (Dist.
Ct. Op. at J.A. 175). As such, the court concluded that any
actions by TMC that might have inhibited referral could not violate
the contract. (Dist. Ct. Op. at J.A. 175.)
           The use of the word "may" in Sterling's contract could,
of course, signal a discretionary duty on the part of TMC.
However, Sterling argues, and we agree, that the clause setting
forth TMC's responsibilities is ambiguous. According to Sterling's
submission, it expected and was entitled to participate in a fair
competition to attract borrowers. Along with other lenders,
Sterling would fax its mortgage rates to TMC. TMC, through its
FSRs, would then display those rates to consumers. If a consumer
chose Sterling's proposed mortgage arrangement, TMC was supposed to
submit to Sterling the completed mortgage application. In other
words, TMC was obligated to submit bids to Sterling, but only in
the event that a consumer opted to apply for a loan from Sterling.
Under this persuasive interpretation, TMC's attempts to avoid
directing referrals to Sterling could constitute a breach of
contract, and the word "may" refers merely to the contingent
(rather than the discretionary) nature of the referrals.
           As with any ambiguous term, the district court should
have admitted extrinsic evidence to ascertain its meaning. See,
e.g., Hare v. McClellan, 662 A.2d 1242, 1249 (Conn. 1995); Levine
v. Massey, 654 A.2d 737, 744 (Conn. 1995) (Berdon, J., dissenting).
The court thus incorrectly granted summary judgment to the
defendants based on a plain reading of the contract; rather it
should have permitted extrinsic evidence to establish the actual
rights and responsibilities of the parties.
                                B.
          The district court should also not have granted summary
judgment for the defendants on Sterling's Count III claim of a
breach of the covenant of good faith and fair dealing. That
covenant prohibits each party to a contract from engaging in
behavior that would thwart the other's rational expectations. In
the majority of states, "even though the express terms of a
contract appear to permit unreasonable action, the duty of good
faith limits the parties' ability to act unreasonably in
contravention of the other party's reasonable expectations." 3A
Arthur L. Corbin, Corbin on Contracts § 654A(B) at 89 (Supp. 1994).
Although Connecticut recognizes that the good faith covenant
protects the parties' expectations, it takes a more restrictive
position than the majority. In Connecticut, the covenant cannot be
applied to achieve a result contrary to the clearly expressed termsof a
contract unless those terms are contrary to public policy.
Eis v. Meyer, 566 A.2d 422, 426 (Conn. 1989). Sterling argues that
the defendants' behavior violated its reasonable expectation that
it was to participate in a fair competition.
         In Warner v. Konover, 553 A.2d 1138 (Conn. 1989), the
Connecticut Supreme Court applied the covenant of good faith and
fair dealing to a landlord-tenant agreement. The lease arrangement
in Warner prohibited the tenant from assigning his interest without
the written consent of the landlords. Id. at 1139. When the
landlords conditioned tenant's assignment on a renegotiation of the
rental payment, the tenant brought suit. Id. at 1140. The
landlords argued that, absent a clause in the lease specifying that
consent could not be unreasonably withheld, they retained
unfettered discretion to withhold consent. Id.
         The trial court agreed and dismissed the tenant's
complaint, but the Supreme Court reversed. Id. The Supreme Court
explained that "'[e]very contract imposes upon each party a duty of
good faith and fair dealing in its performance and its
enforcement.'" Id. (quoting Restatement (Second) of Contracts §
205). It then reasoned that a landlord "who contractually retains
the discretion to withhold its consent to the assignment of a
tenant's lease must exercise that discretion in a manner consistent
with good faith and fair dealing." Id. at 1140-41. The court
refused to say whether the landlords had in fact breached the
covenant, as that determination would involve a complex evaluation
of the defendants' "faithfulness to an agreed common purpose and
consistency with the justified expectations of the [tenant] . . .
." Id. Nonetheless, the plaintiff's claim alleged sufficient
indicia of a breach to survive summary judgment.
         Shortly after Warner, the Connecticut Supreme Court
refused to apply the good faith covenant to a case involving an
easement. Eis v. Meyer, 566 A.2d 422 (Conn. 1989). In Eis, the
plaintiff's deed provided that upon expansion of his home, his
easement over the defendant-neighbor's property would be
extinguished. Id. at 423. The plaintiff informed the defendant of
his plan to build an addition. Id. Knowing that this action would
extinguish the easement, the defendant remained quiet -- at least
until the addition was built, at which point she promptly
terminated the plaintiff's easement. Id. Plaintiff claimed that
defendant's underhandedness was a violation of the implied covenant
of good faith and fair dealing, but the Supreme Court disagreed.
Id. at 425.
         Acknowledging that the covenant had been applied to the
lease in Warner, the court distinguished that case. In Warner, the
landlord had retained discretion to withhold consent to assignment
of the lease. Id. at 426. "The express terms of the lease,
however, did not establish the parameters of that discretion.
Accordingly, we held that implicit in the terms of the lease was
that the landlord's discretion must be exercised in a manner
consistent with good faith and fair dealing." Id. (citations
omitted). By contrast, the clearly expressed terms of the deed in
Eis "contemplated termination only upon an affirmative act of the
dominant tenement owner [i.e. the plaintiff in this case]." Id.
To condition termination on the silence of the burdened landowner
would contradict the express terms of deed. Id. at 426. Although
the implied covenant of good faith and fair dealing is a rule of
construction used to fulfill the reasonable expectations of the
parties, it could not be applied to achieve a result contrary to
the clearly expressed terms of a contract. Id.
         Using the aforementioned principles as our guide, we
consider the district court's grant of the defendants' motion for
summary judgment on the breach of the implied covenant of good
faith. Although the district court provided little explication of
its reasoning, it seemed to conclude that, even if Sterling
rationally expected to participate in a fair competition, the
contract language that TMC "may" direct loans to Sterling granted
TMC complete discretion in the referral process. On this theory,
any determination that TMC breached the implied covenant of good
faith by failing to refer loans to Sterling would contradict the
express terms of the contract making referral discretionary.
(Dist. Ct. Op. at J.A. 176.)
         We disagree. Even if TMC did have total discretion to
direct loans to Sterling, its behavior could still violate the
covenant of good faith and fair dealing. According to Sterling's
submission, TMC billed the network as an even competition among
lenders when, in fact, the network was rigged in CMC's favor. Such
a misrepresentation would be evidence of TMC's bad faith.
Furthermore, as Warner makes clear, when a contract has afforded a
party unbounded discretion, it is perfectly proper to impose a duty
on that party to exercise its discretion in good faith. In Warner,
the landlords had unrestricted power to refuse assignments. But
implicit in this power was a requirement that they wield it fairly.
Warner, 553 A.2d at 1140-41. Accordingly, TMC's seeming discretion
to refer loans should have been exercised in conformance with
Sterling's reasonable expectations.
         Moreover, unlike the clear specifications for easement
termination in Eis, the contract condition that TMC "may refer"
loans to Sterling is an ambiguous requirement subject to several
interpretations. "May" can indicate discretion, but as we have
earlier noted, may can also indicate a conditional occurrence or
event. The simple fact that this clause is amenable to more than
one interpretation indicates that subjecting the defendant's
performance to a good faith requirement could not violate the
contract's express terms.
         In sum, Sterling's claim that TMC's actions in dissuading
consumers from choosing its product and prematurely terminating its
contract breached the covenant of good faith and fair dealing is
sufficient to survive summary judgment.

                                C.
         In Count II, Sterling alleged that the defendants'
practice of steering loans to CMC constituted tortious interference
with its prospective economic relationship with both TMC and
potential borrowers. More specifically, Sterling complained about
the higher commissions paid to FSRs for CMC referrals and the
reminders that FSRs received about the increased profitability of
placing loans with CMC. (Pl.'s Br. at 21.) According to Sterling,
CMC's "special advantages" were never disclosed to it; rather,
Sterling was led to believe that its loans competed on a level
field with all other lenders.
         This claim need not detain us long. Whether or not
Sterling has otherwise met the various requirements of the leading
New Jersey case regarding tortious interference, see Printing Mart-
Morristown v. Sharp Electronics Corp., 563 A.2d 31 (N.J. 1989), it
has not advanced sufficient evidence to survive summary judgment.
         There is evidence of relevant acts committed by TMC. For
example, Nicholas Meras, TMC's Regional Manager, reminded the FSRs
about the lucrative nature of CMC loans, and ultimately issued a
memorandum instructing the FSRs to stop accepting Sterling
applications. But, it is axiomatic that TMC cannot be said to have
tortiously interfered with its own contract. Therefore, the only
possible viable claim as to tortious interference could be against
CMC. The most that Sterling adduces as to CMC, however, is the
conclusory allegation that CMC gave incentives to the FSRs, such as
higher commissions, to steer loans to CMC. No other acts are cited
to support a tortious interference claim. This showing is
insufficient to survive summary judgment.
         CMC is the parent of TMC, and perhaps there is evidence
somewhere that CMC dictated TMC's allegedly offending decisions.
However, it was up to Sterling to come forward with such evidence
to raise a triable issue and to defeat the motion. Mere
speculation about the possibility of the existence of such facts
does not entitle Sterling to go to trial. And, even if a parent
may be liable for a subsidiary's decisions on how to manage its
commercial relationships, that is not enough to establish tortious
interference with prospective economic relations as contemplated by
Printing-Mart. The summary judgment with respect to the tortious
interference claim will therefore be affirmed.

                               III.
          For the foregoing reasons, the judgment of the district
court will be affirmed as to Count II and reversed as to Counts I
and III and remanded for further proceedings with respect to those
counts.
                      _____________________
