Summary of a Recent
Judicial Development in
Finance & Credit

Breach of Contract Between Loan Purchaser and Seller

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Federal Agricultural Mortgage Corp. v. It's a Jungle Out There, Inc., No. C 03-3721 VRW, 2005 WL 3325051 (N.D. Cal. Dec. 7, 2005), the United States District Court for the Northern District of California granted in part and denied in part a plaintiff loan purchaser's motion for summary judgment for breach of contract against the defendant field servicer, and granted summary judgment in favor of the plaintiff on the defendant's counterclaims.

Background

Federal Agricultural Mortgage Corporation (Farmer Mac), a federally chartered corporation regulated by the Farm Credit Administration, purchased a loan from Vintage Capital in 1999, and entered into a seller/servicer agreement (S/S agreement) with Vintage which incorporated an S/S guide. Id. at *1. The S/S guide provided that sellers who made false representations or warranties concerning the loan would be required to cure, replace or repurchase the loan, and that Farmer Mac could terminate the agreement in the event of default. Id. at *2. The loan was taken out by RAM Enterprises to refinance its apple orchards, using the orchards as security. Id. at *3. RAM defaulted on the loan in 2001, and Farmer Mac foreclosed on the orchards. Id. Farmer Mac then discovered several facts about the orchards and RAM's owners that it claimed should have been disclosed by Vintage, and in accordance with its remedies for breach of contract, demanded that Vintage repurchase the loan. Id. Vintage failed to do so, and in 2003 Farmer Mac terminated Vintage as an approved seller and as a field servicer, and then filed a complaint against Vintage and its principals, the Howers, for breach of contract, fraud, negligent misrepresentation, false advertising and trademark infringement, and later added a claim for express indemnity in its amended complaint. Id. Defendants counterclaimed against Farmer Mac, alleging breach of contract and breach of the implied covenant of good faith and fair dealing, and also alleged trade libel, restraint of trade and intentional interference with prospective economic advantage against both Farmer Mac and its financier, Zions Bank. Id. Vintage and the Howers then moved to dismiss Farmer Mac's claims for breach of contract, fraud, negligent misrepresentation and express indemnity, and moved for summary judgment on Farmer Mac's false advertising and trademark infringement claims. Id. at *10.

Arguments

Vintage and the Howers argued that Farmer Mac's claims for fraud and negligent misrepresentation should be dismissed because Farmer Mac had failed to plead with sufficient particularity. Id. at *5. Vintage also argued that the S/S guide was "noncontractual," and therefore could not serve as the predicate for breach of contract, and that Farmer Mac's claim for express indemnity was not covered by the S/S guide's indemnity provision. Id. at *7-8. They further argued that Farmer Mac's claims of trademark infringement and false advertising were moot because Vintage had removed all Farmer Mac references from its website. Id. at *10. Lastly, they argued that there were issues of triable fact regarding whether they had breached their contract with Farmer Mac. Id. at *14.

Farmer Mac argued that Vintage had breached several of its obligations under the S/S agreement, and in response to Vintage's challenge to its infringement claim, argued that discontinuance of infringement or false advertising did not necessarily moot claims for injunctive relief under the Lanham Act. Id. at *13, *10.

Analysis and Holdings

The court was satisfied that Farmer Mac's amended complaint described its claims for fraud and negligent misrepresentation with sufficient particularity, so it refused to dismiss those claims. Id. at *6-7. The court also found that because Farmer Mac had alleged in its complaint that the S/S agreement, signed by Mr. Hower on behalf of Vintage, incorporated the S/S guide by reference, Farmer Mac has sufficiently alleged that Vintage was contractually bound by the terms of the S/S guide, and therefore refused to dismiss the claim for breach of contract. Id. at *7. Regarding Farmer Mac's claim for express indemnity, the court noted that the S/S guide's indemnity provision clearly stated that sellers were required to indemnify and hold Farmer Mac harmless against "any and all" claims arising out of "any" event of default, and therefore denied Vintage's and Hower's motion to dismiss that claim as well. Id. at *8. The court also denied Vintage's and Hower's motion for summary judgment concerning injunctive relief for trademark infringement and false advertising because case law precedent held that Lanham Act claims for injunctive relief are not necessarily moot due to discontinuance of the infringement. Id. at *11.

The court did grant summary judgment in favor of Vintage and the Hower concerning monetary relief on those same claims, however, because Farmer Mac had not shown that the defendants had profited from the infringement. Id. The court then considered Farmer Mac's motion for summary judgment for breach of contract and Vintage's and Hower's motions for summary judgment on their counterclaims for breach of contract. Id. at *14, *20. The court found that Vintage and the Howers had breached certain obligations under the S/S agreement and granted summary judgment to Farmer Mac as to those specific issues, but found issues of fact relating to several other issues, and even granted summary judgment sua sponte to Vintage on one issue. Id. at *14-20. The court then granted summary judgment to Farmer Mac, Zion Bank and the other third party defendants concerning all of Vintage's and Hower's counterclaims because the defendants had failed to meet their burden of proof in most of their allegations. Id. at *20-32.

The case was decided on December 7, 2005.