Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_07-cv-00936/USCOURTS-azd-2_07-cv-00936-2/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Breach of Contract

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

The Biltmore Bank of Arizona, an Arizona

corporation, 

Plaintiff, 

vs.

First National Mortgage Sources, L.L.C.,

a foreign limited liability corporation, 

Defendant. 

)

)

)

)

)

)

)

)

)

)

)

)

)

No. CV-07-936-PHX-LOA

ORDER

Pending for ruling is The Biltmore Bank of Arizona’s (“Plaintiff” or “the

Bank”) Motion for Partial Summary Judgment and First National Mortgage Sources, L.L.C.’s

(“Defendant” or “the Broker”) Cross-Motion for Summary Judgment. (docket # 15 and #

19) Since the Bank’s request for oral argument would not aid the court’s decisional process,

the request will be denied. Mahon v. Credit Bur. of Placer County, Inc., 171 F.3d 1197,

1200 (9th Cir.1999) (explaining that if the parties provided the district court with complete

memoranda of the law and evidence in support of their positions, ordinarily oral argument

would not be required).

Each party argues that the other party violated their Wholesale Broker

Agreement, that there are no genuine disputes of material fact, and that each party is entitled

to summary judgment against the other as a matter of law. After considering all the briefing

submitted on the motions, including the various statements of fact, and the relevant case law,

Case 2:07-cv-00936-LOA Document 35 Filed 02/26/08 Page 1 of 18
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 2 -

the Court concludes that genuine issues of disputed material fact exist for resolution by the

trier of fact. Each party’s dispositive motion will be denied.

I. Jurisdiction

This Court has subject-matter jurisdiction over this lawsuit pursuant to 28 U.S.C.

§ 1332(a)(1) and (c) as the matter in controversy exceeds the sum of $75,000, exclusive of

interest and costs, and the adverse parties are of diverse citizenship. (docket # 9 at 3 - 4) The

Bank is an Arizona corporation with its principal place of business in Maricopa County,

Arizona. Id.; Indus. Tectonics v. Aero Alloy, 912 F.2d 1090, 1092 (9th Cir. 1990) (“[A]

corporation is a citizen of any state where it is incorporated and of the state of its principal

place of business.”). Defendant Broker represents that it is a limited liability company

organized under the laws of the State of Kansas, with its principal place of business in Hays,

Kansas. (docket # 9 at 3) For purposes of diversity jurisdiction, limited liability companies

are analogized to partnerships, which take the citizenship of every general and limited

partner. Johnson v. Columbia Props. Anchorage, LP, 437 F.3d 894, 899 (9th Cir. 2006)

(citing Carden v. Arkoma Associates, 494 U.S. 185 (1990); Belleville Catering Co. v.

Champaign Market Place, L.L.C., 350 F.3d 691, 692 (7th Cir. 2003). 

Based upon the February 25, 2008 declaration of Robert Readle, General

Manager of the Broker, “FNMS is wholly owned by one member and one company: (1)

Robert Readle, a citizen of the State of Kansas who is also domiciled in the State of Kansas

and (2) FNMS Home Loans, Inc., which is incorporated in the State of Kansas with its

principal place of business in Overland Park, Kansas. FNMS has no general or limited

partners.” (docket # 33, Exh. A, ¶¶ 4 - 8) Thus, the Court finds that because the Broker is

wholly owned by a business and individual that are citizens of Kansas, and the Bank is a

citizen of Arizona, complete diversity exists between the parties in this lawsuit.

Venue is also proper in this Court pursuant to 28 U.S.C. § 1391(a). All parties

have previously consented in writing to magistrate judge jurisdiction pursuant to 28 U.S.C. §

636(c)(1). (docket # 12)

///

Case 2:07-cv-00936-LOA Document 35 Filed 02/26/08 Page 2 of 18
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1 Plaintiff’s Statement of Facts (“PSOF”); docket # 16 at 2.

2 Defendant’s Statement of Facts and Controverting and Supplemental Statement of

Facts (“DSOF”); docket # 20 at 6.

3 The Broker denies the Bank’s allegation that the Agreement expressly provides, or

contemplates inferentially, that loans funded under the Agreement would be “saleable on the

secondary market.” (DSOF,¶¶ 5, 8) Because the Broker, however, does not dispute the

propriety of selling the first loan, this is an immaterial disputed fact.

- 3 -

II. Background

The parties do not dispute most of the material facts precipitating this lawsuit. 

The Bank, through its wholly-owned division, Axis Mortgage Investments, funded residential

loans for Defendant Broker, a mortgage broker and wholly-owned subsidiary of First

National Bank. (PSOF,1

 ¶¶ 2-3) In May or June 2006, the Broker requested that the Bank

fund a residential loan for the Broker’s borrower, Karapet Ter-Abraamyan

(“Ter-Abraamyan”), a non-party. On or about June 2, 2006, the Bank approved and funded

two loans for Ter-Abraamyan totaling $342,950, consisting of a first loan of $257,250 (“first

loan”) and a second loan of $85,700 (“second loan”). (PSOF, ¶ 7; DSOF,2

 ¶ 7) Both loans

were secured by a deed of trust duly recorded on Ter-Abraamyan’s residence located at 4047

Bridgeview Circle, Las Vegas, Nevada. (Complaint, ¶ 19; DSOF, ¶ 9)

On August 8, 2005, the parties entered into a contract, entitled “Wholesale

Broker Agreement” (the “Agreement”), which sets forth the terms upon which the Bank

agreed to fund loans originated and submitted by the Broker to the Bank. (Complaint, ¶ 11;

PSOF ¶ 4; DSOF, ¶ 4) The first loan consisted of the Adjustable Rate Note and Deed of

Trust, called the “Security Instrument,” which secured the indebtedness on the subject

residence. (PSOF, Exh. 1; docket # 16 at 5-9; DSOF, ¶ 10, Exh. B, ¶ 20) Both parties

acknowledge that after Ter-Abraamyan’s first loan was funded by the Bank, it was

appropriately sold by the Bank on the secondary market to non-party EMC Mortgage

(“EMC”). (PSOF ¶¶ 5, 8; DSOF, ¶ 53

) 

After EMC purchased the first loan from the Bank, Ter-Abraamyan defaulted

Case 2:07-cv-00936-LOA Document 35 Filed 02/26/08 Page 3 of 18
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4 Plaintiff’s Supplemental Statement of Facts (“PSSOF”); docket # 27.

5 As the Broker points out in its briefing, the Complaint only alleges that the Bank

requested the Broker to repurchase the first loan. The Bank’s dispositive motion, however,

attempts to expand the Bank’s claim by seeking summary judgment on both the first and

second loans. Because the Complaint has not been amended and the amendment deadline of

October 15, 2007 has passed, this order will address the first loan only. (Rule 16 scheduling

order, ¶ D; docket # 11)

- 4 -

on both loans. (PSOF, ¶ 9; DSOF, ¶ 9) In early January of 2007, EMC demanded the Bank

repurchase the first loan. (Complaint, ¶ 22; docket # 1; PSSOF,4

 ¶ 3) The Bank and EMC

settled their dispute over the first loan by the Bank’s repurchase of it. The Bank paid “EMC

30% of the total amount of loans for which EMC notified [the Bank] were in default. . . The

settlement agreement included a provision that EMC would not return the homes.” (PSSOF,

¶ 13) In other words, per its voluntary settlement with EMC, the Bank allowed EMC to keep

both the deed of trust securing the first loan and the residence itself.

The Bank claims that per its Agreement with the Broker, the Bank requested that

the Broker repurchase the first loan.5

 (PSOF, ¶ 10; DSOF, ¶¶ 12 and 14) The Bank contends

that after the Broker refused to repurchase the loan, the Bank successfully negotiated a

settlement with EMC in an effort to mitigate its damages and, as a result, seeks $77,175.00

(30% of the total damages) from the Broker, plus its costs and reasonable attorneys’ fees. The

Bank asserts a single cause of action for breach of contract, seeking damages for the Broker’s

alleged breach of the Agreement. (docket # 9 at 2, ¶ II A.)

The Broker denies it was required to repurchase the loan under the Agreement

with the Bank “due to the non-occurrence of two conditions precedent to [the Broker’s]

repurchase obligation: (1) the Bank’s failure to transfer the security instrument (deed of trust)

for the loan to the Broker in exchange for the Broker’s repurchase of the loan, and (2) the

Bank’s failure to properly comply with the Agreement’s notice-to-repurchase provision.

(docket # 29 at 2-3) Specifically, the Broker contends that the Agreement’s requirement for

Broker to repurchase the loan is conditioned upon the return of the original note and security

which is implied in the term “repurchase” and the failure to perform this condition precedent

justifies Broker’s refusal to perform, i.e., refusal to pay the Bank $77,175.00. (docket # 9

Case 2:07-cv-00936-LOA Document 35 Filed 02/26/08 Page 4 of 18
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

6 The January 25, 2007 e-mail between [the Bank’s] counsel, Scott Zwillinger, and

[the Broker’s] counsel, Andy Nolan, provides: “[d]ue to an early payment default, [the Bank]

has repurchased the loan and [the Broker] is now obligated to purchase the loan from [the

Bank] pursuant to the parties Wholesale Broker Agreement.” This same e-mail also states

that [the Bank] was not interested in the same settlement reached [on a different loan, called]

the Papaian loan and, instead, requested that [the Broker] repurchase the [Ter-Abraamyan]

loan. (PSSOF, ¶ 5, Exh. B, Gaia Aff. ¶ 6)

- 5 -

at 2-3) The Broker also claims that Bank counsel’s telephone call and a January 25, 2007

email6

 to Broker’s outside counsel to repurchase the loan was not “[p]roper notice” under the

Agreement and, therefore, failed to meet “a condition precedent to any obligation [the

Broker] had to repurchase the Ter-Abraamyan loan.” Id.

This lawsuit centers around two sections of the parties’ Agreement: Section K

and Section L. Section K of the Agreement is titled “REPURCHASE” and sets forth the

following:

Repurchase shall be required if Lender determines, at any

time, that any representation made by Broker with respect to

any mortgage loan application submitted to Lender was

untrue when made or any warranty or term hereof has been

breached. Repurchase shall also be required of Broker if for any reason a demand for repurchase is made by any

agency or investor with respect to any mortgage loan

funded by Lender for Broker that is not curable by Broker.

Broker shall repurchase within 15 days of notice any loan funded or purchased by Lender hereunder for an amount

equal to the sum of, at the time of repurchase, (a) the unpaid

principal balance of the loan plus the accrued interest on the

loan, (b) the amount of any mortgage broker compensation

paid to Broker by Lender at the time the loan funded, (c) the

aggregate amount of any advances made by Lender for the

account of the mortgagor and interest thereon at the interest

rate set forth in the promissory note, and (d) any attorney's

fees, legal expenses, court costs, etc.

(PSOF, ¶ 6, Heuermann Aff. ¶ 7 & Exh. 1 at Section K; DSOF, ¶ 6 (emphasis added).

Section L of the Agreement is titled “DELIVERY OF NOTICES,

DISCLOSURES & CORRESPONDENCE” and provides:

To the extent allowable by law, delivery of notices, disclosures and

correspondence in the normal course of business between the two parties shall

be deemed to have been delivered if sent by either U. S. Mail or electronic mail

to the addresses listed below: 

Case 2:07-cv-00936-LOA Document 35 Filed 02/26/08 Page 5 of 18
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 6 -

 BROKER: LENDER:

 U. S. Mail Address: U. S. Mail Address:

 First National Mortgage Sources, LLC Axis Mortgage& Investments

 2809 Hall 1201S.AlmaSchool Rd., Suite 3700

 Hays, KS 67601 Mesa AZ 85210 Attn: Broker Approval Coordinator

 Electronic Mail Address: Electronic Mail Address:

 Brandieg@mortgagesourcescorp.com wholesale@axismtg.com

 In the event Lender desires to . . . request the repurchase of a loan, request reimbursement of . . . other such sums as Lender may have rights under this Agreement to request, or either party wishes to assert a breach of this Agreement by the other party, such correspondence shall be deemed to have been delivered

 if sent by Registered or Certified U. S. Mail to the address listed above.

(PSOF, ¶ 6; Heuermann Aff., Exh. 1 at Section L)

III. Legal Standard

 A district court must grant summary judgment if the pleadings and supporting

documents, viewed in the light most favorable to the nonmoving party, “show that there is

no genuine issue as to any material fact and that the moving party is entitled to judgment as

a matter of law.” Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986);

Jesinger v. Nevada Fed. Credit Union, 24 F.3d 1127, 1130 (9th Cir. 1994). Substantive law

determines which facts are material. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248

(1986); Jesinger, 24 F.3d. at 1130. In addition, “[o]nly disputes over facts that might affect

the outcome of the suit under the governing law will properly preclude the entry of summary

judgment.” Anderson, 477 U.S. at 248. The dispute must be genuine, that is, “the evidence

is such that a reasonable jury could return a verdict for the nonmoving party.” Id.

 A principal purpose of summary judgment is “to isolate and dispose of factually

unsupported claims.” Celotex, 477 U.S. at 323-24. Summary judgment is appropriate against

a party who “fails to make a showing sufficient to establish the existence of an element 

Case 2:07-cv-00936-LOA Document 35 Filed 02/26/08 Page 6 of 18
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 7 -

essential to that party’s case, and on which that party will bear the burden of proof at trial.”

Id. at 322; Citadel Holding Corp. v. Roven, 26 F.3d 960, 964 (9th Cir. 1994). The moving

party need not disprove matters on which the opponent has the burden of proof at trial.

Celotex, 477 U.S. at 323.

 The party opposing summary judgment “may not rest upon the mere allegations

or denials of [the party’s] pleadings, but. . . must set forth specific facts showing that there

is a genuine issue for trial.” Fed.R.Civ.P. 56(e); Matsushita Elec. Indus. Co., Ltd. v. Zenith

Radio Corp., 475 U.S. 574, 586-87 (1986). Brinson v. Lind Rose Joint Venture, 53 F.3d

1044, 1049 (9th Cir. 1995). There is no issue for trial unless there is sufficient evidence

favoring the nonmoving party. If the evidence is merely colorable or is not significantly

probative, summary judgment may be granted. Anderson, 477 U.S. at 249-50. However,

“[t]he evidence of the non-movant is to be believed, and all justifiable inferences are to be

drawn in his [or her] favor.” Id. at 255 (citing Adickes v. S.H. Kress & Co., 398 U.S. 144,

158-59 (1970)).

 Whatever facts which may establish a genuine issue of fact must both be in the

district court’s file and set forth in the response. Carmen v. San Francisco Unified School

 District, 237 F.3d 1026, 1029 (9th Cir. 2001). The trial court

may determine whether there is a genuine issue of fact, on

summary judgment, based on the papers submitted on the

motion and such other papers as may be on file and specifically

referred to and facts therein set forth in the motion papers.

Though the court has discretion in appropriate circumstances to

consider other materials, it need not do so. The district court

need not examine the entire file for evidence establishing a

genuine issue of fact, where the evidence is not set forth in the

opposing papers with adequate references so that it could

conveniently be found.

Id. at 1031.

IV. Applicable Law

A. Choice of Law

A federal court sitting in diversity must apply the choice-of-law rules of the

state in which it sits. Fields v. Legacy Health Sys., 413 F.3d 943, 950 (9th Cir. 2005); Klaxon

Case 2:07-cv-00936-LOA Document 35 Filed 02/26/08 Page 7 of 18
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 7 Plaintiff’s Statement of Facts (“PSOF”), ¶ 4, Exhibit (“Exh) A1, docket # 16 at 2;

Defendant’s Statement of Facts and Controverting and Supplemental Statement of Facts

(“DSOF”), ¶ 3, Exh A1, docket # 20 at 2.

- 8 -

Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). Thus, this Court will apply

Arizona’s choice-of-law rules. Generally, Arizona courts apply the Restatement to determine

the applicable law in a contract action. Swanson v. The Image Bank, Inc., 206 Ariz. 264, 77

P.3d 439, 441 (Ariz. 2003); Cardon v. Cotton Lane Holdings, Inc., 841 P.2d 198, 202

(Ariz.1992). If a contract includes a specific choice-of-law provision, the court must

determine whether that choice is “valid and effective” under Restatement (Second) of

Conflict of Laws, § 187; Swanson, 841 P.2d at 203. Choice-of-law issues are questions of

law. Id. (citation omitted). 

Section 187, Restatement (Second) of Conflict of Laws, provides:

(1) The law of the state chosen by the parties to govern their contractual rights

and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.

(2) The law of the state chosen by the parties to govern their contractual rights

and duties will be applied, even if the particular issue is one which the parties

could not have resolved by an explicit provision in their agreement directed to

that issue, unless either

 (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice,

 or

 (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.

Restatement (Second) of Conflict of Laws, § 187; Magellan Real Estate Inv. Trust v. Losch,

109 F.Supp.2d 1144, 1155 (D. Ariz. 2000).

The parties’ Wholesale Broker Agreement7

 contains a clear and explicit choiceof-law provision. Paragraph M provides “that this Agreement shall be governed by,

construed and enforced in accordance with the laws of the state of Arizona.” (PSOF; Exh

Case 2:07-cv-00936-LOA Document 35 Filed 02/26/08 Page 8 of 18
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 9 -

A1, ¶ M at 5) Although they do not address the choice-of-law issue in their briefings, both

parties cite applicable Arizona law. Neither party argues that non-Arizona law is controlling.

The Court finds that the Bank and the subject Agreement have a substantial connection to

Arizona and applying Arizona law herein is not contrary to Arizona’s fundamental public

policy to enforce contractual obligations freely entered by private, business entities.

Westwood Homeowners Ass’n v. Tenhoff, 155 Ariz. 229, 231, 745 P.2d 976, 978 (Ariz. Ct.

App. 1987). The Court concludes that the parties’ choice-of-law provision is valid and

effective and, therefore, Arizona law controls this litigation.

B. Arizona Law on Contracts

1). General Contract Principles

In an action for breach of contract, the plaintiff has the burden of proving the

existence of a contract, its breach and the resulting damages. Chartone, Inc. v. Bernini, 207

Ariz. 162, 171, 83 P.3d 1103, 1111 (Ariz. Ct. App. 2004); Clark v. Compania Ganadera de

Cananea, S.A., 95 Ariz. 90, 387 P.2d 235 (1963). When a party agrees to perform in a certain

manner upon adequate consideration and fails to keep a material promise in a contract, that

party is liable to the performing party for any damages sustained as a result of such failure

to perform. Graham v. Asbury, 112 Ariz. 184, 540 P.2d 656, 657 (Ariz. 1975); Howell v.

Midway Holdings, Inc., 362 F.Supp.2d 1158, 1161 (D. Ariz. 2005). In Arizona, if one party

to a contract commits a material breach of the contract, the other party to the contract is

excused from performance. Rev. Ariz. Jury Instr. (Civil) (Contract 9), at 137 (4th ed. 2005)

(citing Restatement (Second) of Contracts § 241(1981)). A nonmaterial breach does not

excuse performance by the other party, but may permit a claim for damages. Id. Under

Arizona law, a material breach occurs when (1) a party fails to perform a substantial part of

the contract or one or more of its essential terms or conditions or (2) fails to do something

required by the contract which is so important to the contract that the breach defeats the very

purpose of the contract. Id.; Ry-Tan Const., Inc. v. Washington Elementary School Dist. No.

6, 208 Ariz. 379, 400, 93 P.3d 1095, 1116 (Ariz. Ct. App. 2004), vacated on other grounds,

/ / /

Case 2:07-cv-00936-LOA Document 35 Filed 02/26/08 Page 9 of 18
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 10 -

210 Ariz. 419, 111 P.3d 1019 (Ariz. 2005). Section 241 of the Restatement (Second) of

Contracts § identifies five factors to consider to determine the materiality of a breach:

(1) the extent to which the injured party will be deprived of the benefit which

he reasonably expected;

(2) the extent to which the injured party can be adequately compensated for the

part of that benefit of which he will be deprived;

(3) the extent to which the party failing to perform or to offer to perform will

suffer forfeiture;

(4) the likelihood that the party failing to perform or to offer to perform will

cure his failure, taking account of all the circumstances including any

reasonable assurances;

(5) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.

The Restatement (Second) of Contracts § 241 (1981); Foundation Development Corp. v.

Loehman’s, Inc., 163 Ariz. 438, 446, 788 P.2d 1189, 1197 (Ariz. 1990).

 It is basic Arizona law that the terms of a contract must be established with

sufficient specificity that the obligations involved may be ascertained. Savoca Masonry

Company, Inc. v. Homes and Son Construction Company, Inc., 112 Ariz. 392, 542 P.2d 817,

819 (1975). The terms of a contract, however, may be expressly stated or may be inferred

from the statements or conduct of the parties. Wagenseller v. Scottsdale Mem. Hosp., 147

Ariz. 370, 381, 710 P.2d 1025, 1036 (1985). Under Arizona law, “a professional custom

within a particular geographic area may be used to establish the terms of a contract.” Angle

v. Mario Builders, Inc., 128 Ariz. 396, 400, 626 P.2d 126, 131 (Ariz. 1981) (citation

omitted). “The general rule is that the determination whether in a particular case a promise

should be implied in fact is a question of fact.” Wagenseller, 710 P.2d at 1038. Where

reasonable minds may draw different conclusions or inferences from undisputed evidentiary

facts, a question of fact is presented.” Id. Whether a party has breached a contract, whether

a custom is so well established as to justify an expectation that it will be observed with 

Case 2:07-cv-00936-LOA Document 35 Filed 02/26/08 Page 10 of 18
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 11 -

respect to a particular transaction and whether that breach is material are questions of fact

for the trier of fact. Jeski v. American Express Co., 147 Ariz. 19, 22, 708 P.2d 110, 113

(Ariz. Ct. App. 1985); Angle, 626 P.2d at 131; FDIC v. Air Fla. Sys., Inc. 822 F.2d 833, 840

(9th Cir. 1987).

2). Contract Interpretation

Under Arizona law, interpretation of a contract is a matter of law to be

determined by the court. Hadley v. Southwest Prop., Inc., 570 P.2d 190, 193 (Ariz.1977).

Where the language of a contract is clear and unambiguous, it must be given effect as

written. Id. “The controlling rule of contract interpretation requires that the ordinary

meaning of language be given to words when circumstances do not show a different meaning

is applicable.” Chandler Medical Bldg Partners v. Chandler Dental Group, 175 Ariz. 273,

277, 855 P.2d 787, 791 (Ariz. Ct. App. 1993) (citations omitted). “A contract must be

construed so that every part is given effect, and each section of an agreement must be read

in relation to each other to bring harmony, if possible, between all parts of the writing.” Id.

“As a corollary, the court will not construe one provision in a contract so as to render another

provision meaningless [and] must apply a standard of reasonableness in contract

interpretation.” Id. In order to determine the ordinary meaning of a word, the Court may

look to the dictionary definition of the term. Horton v. Mitchell, 200 Ariz. 523, 527, 29 P.3d

870, 875 (Ariz. Ct. App. 2001) (reciting the standard of applying ordinary meaning to

contract terms and using a dictionary definition to assist in determining such meaning).

If “an ambiguity exists on the face of [a] document or the language admits of

differing interpretations, parol evidence is admissible to clarify and explain the document.”

Johnson v. Earnhardt’s Gilbert Dodge, Inc., 212 Ariz. 381, 384, 132 P.3d 825, 828 (Ariz.

2006) (citations omitted). “The court may also admit evidence to determine the intention of

the parties if ‘the judge. . . finds that the contract language is “reasonably susceptible” to the

interpretation asserted by its proponent.” Id. (citing Taylor v. State Farm Mut. Auto. Ins. Co.,

175 Ariz. 148, 154, 854 P.2d 1134, 1140 (1993)).

/ / /

Case 2:07-cv-00936-LOA Document 35 Filed 02/26/08 Page 11 of 18
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 12 -

3). Conditions Precedent

A “condition precedent” is “an act or event, other than a lapse of time, that

must exist or occur before a duty to perform something promised arises.” AIG Centennial Ins.

Co. v. Fraley-Landers, 450 F.3d 761, 764 (8th Cir. 2006) (citing Black’s Law Dictionary (8th

ed. 2004)). “Unlike a mere contract term, the breach of which must be material before it

excuses another party from performing, one party’s failure to fulfill a condition precedent

entirely excuses any remaining obligations of the other party.” Id. (citing Richard A. Lord,

Williston on Contracts § 38:7 (4th ed. 1990) and Restatement (Second) of Contracts § 224

(1981)). Arizona recognizes two forms of conditions precedent: a condition precedent to the

formation of a contract and a condition precedent to the duty or obligation of a party to

perform. Outdoor Life Network, LLC v. EMAT Corp., 2006 WL 3834287 *3 n. 29 (D. Ariz.

2006) (citing Ry-Tan Const., 111 P.3d at 1021-22) (formal signing of a contract by a public

entity a condition precedent to the formation of a contract) and Am. Cont’l Life Ins. Co. v.

Rainier Const. Co., Inc., 607 P.2d 372, 374-75 (Ariz.1980) (issuance of a certificate of

completion a condition precedent to the duty to make final payment)). Moreover, Arizona

has long held that in a contract containing a condition precedent in which the contract fails

to state the effect of failure to perform the condition, a showing of prejudice is required

before performance is excused for non-compliance with the condition. State Farm Mut. Auto

Ins. Co. v. Palmer, 237 F.2d 887, 891 (9th Cir. 1956) (citing Massachusetts Bonding & Ins.

Co. v. Arizona Concrete Co., 47 Ariz. 420, 56 P.2d 188 (Ariz. 1936) and Watson v. Ocean

A. & G. Corp., 28 Ariz. 573, 238 P. 338 (Ariz. 1925)); Lindus v. Northern Ins. Co. of New

York, 103 Ariz. 160, 438 P.2d 311 (Ariz. 1968) (absent a showing of material prejudice, an

insured’s failure to give timely notice does not discharge the insurer’s continuing duty to

provide insurance coverage). The burden of proving prejudice is on the party claiming

prejudice. Id.

“Generally, a construction of provisions as conditions precedent is not favored

when construing conditional provisions in a contract.” Angle v. Mario Builders, Inc., 626

P.2d 126, 129-30 (Ariz. 1981) (citing 17 Am. Jur. 2d Contracts § 321 (1964):

Case 2:07-cv-00936-LOA Document 35 Filed 02/26/08 Page 12 of 18
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 13 -

The parties are at liberty to agree upon a condition precedent upon which their

liability shall depend. However, the rule is that to make a provision in a

contract a condition precedent, it must appear from the contract itself that the

parties intended the provision so to operate ... It has been said that conditions

precedent are not favored and the courts will not construe stipulations to be

such unless required to do so by plain, unambiguous language or by necessary

implication.

Angle, 626 P.2d at 129-30; U.S. for Use and Ben. of Clark Bros. Contractors v. Bechtel 

Constructors Corp., 951 F.2d 365 (9th Cir. 1991) (“Construing provisions as conditions

precedent is disfavored.”) Thus, because conditions precedent are not favored under Arizona

law, contract stipulations will not be construed as such unless required by the plain,

unambiguous language or necessary implication. A condition precedent may also be waived.

Angle, 626 P.2d at 131. 

4). The Doctrine of Substantial Performance

“Substantial performance is the antithesis of material breach; if it is determined

that a breach is material, or goes to the root or essence of the contract, it follows that

substantial performance has not been rendered, and further performance by the other party

is excused.” 15 Williston on Contracts § 44:55 (4th ed. 1990) (footnotes omitted). Arizona

recognizes the doctrine of substantial performance. Rev. Ariz. Jury Instr. (Civil) (Contract

10), at 139-140 (4th ed. 2005) (citing, inter alia, Restatement (Second) of Contracts § 237,

comment d (1981)); Cracchiolo v. Carlucci, 62 Ariz. 284, 293, 157 P.2d 352, 355 (1945).

In Arizona, substantial performance means that one party has performed all that is required

by a contract, except for slight deficiencies in performance that can easily be cured. Id. To

determine whether a party has substantially performed his obligations under a contract, the

court or jury should consider the nature of the promised performance, the purpose of the

contract, and the extent to which any deficiencies in performance have defeated that purpose.

Id. The burden of proving substantial performance is on the party claiming it. Id. Like the

determination of whether a breach is material, whether there has been substantial

performance of a contract is a question of fact for the jury to resolve. Unicover World Trade

Corp. v. Tri-State Mint, Inc., 24 F.3d 1219, 1221 (10th Cir. 1994) (marketer’s failure to make

Case 2:07-cv-00936-LOA Document 35 Filed 02/26/08 Page 13 of 18
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

8

 Barnes v. Lopez, 25 Ariz.App. 477, 481, 544 P.2d 694, 698 (Ariz. Ct. App. 1976);

England v. Mack Trucks, Inc., 2008 WL 168689 (W.D. Wash. 2008) (“The duty to mitigate

damages, also known as the doctrine of avoidable consequences . . . .”).

9 Failure to mitigate damages is not among the affirmative defenses enumerated in

Fed. Rule Civ. P. 8(c) but the Ninth Circuit has joined the overwhelming majority of federal

courts in concluding that lack of mitigation is a Rule 8 affirmative defense as a matter of

federal procedural law. 999 v. C.I.T. Corp., 776 F.2d 866, 870 n. 2 (9th Cir. 1985); Modern

Leasing, Inc. of Iowa v. Falcon Mfg. of Cal., Inc., 888 F.2d 59, 62 (8th Cir. 1989). Failure

to plead lack of mitigation of damages as an affirmative defense results in a waiver of that

defense and its exclusion from the case.” Id.

- 14 -

written demand that mint cure its nonperformance was nonmaterial breach of contract); Am

Jur. 2d Contracts § 620 (2007). The purpose of the doctrine of substantial performance is to

avoid an injustice to a party to a contract whose performance has deviated from the contract

in only a trivial or minor way. American Continental Life Ins. Co. v. Ranier Constr. Co., 125

Ariz. 53, 60, 607 P.2d 372, 379 (Ariz. 1980). It is an equitable doctrine, intended to prevent

unjust enrichment. Ballou v. Basic Construction Co., 407 F.2d 1137, 1140 (4th Cir. 1969)

(approvingly quoting the district court’s ruling based on Virginia law).

5). Mitigation of Damages or the Doctrine of Avoidable Consequences. 8

In Arizona, damages for breach of contract may be limited if a non-breaching

party fails to take reasonable steps to mitigate the damages resulting from the breach.

Northern Arizona Gas Service, Inc. v. Petrolane Transport, Inc., 145 Ariz. 467, 477, 702

P.2d 696, 706 (Ariz. Ct. App.1984) (citations omitted). “A basic principle of the law of

damages is that one who claims to have been injured by a breach of contract must use

reasonable means to avoid or minimize the damages resulting from the breach.” West Pinal

Family Health Center, Inc. v. McBryde, 162 Ariz. 546, 548, 785 P.2d 66, 68 (Ariz. Ct. App.

1989) (citing, inter alia, Restatement (Second) of Contracts § 350 (1981) (emphasis added)).

Failure to mitigate damages is an affirmative defense. 9

 Id. at n. 1. Whether the duty is

violated is a question of fact. Northern Arizona Gas Service, Inc., 702 P.2d at 706.

Case 2:07-cv-00936-LOA Document 35 Filed 02/26/08 Page 14 of 18
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 15 -

Mindful of the foregoing controlling legal standard and applicable substantive

law, the Court will consider the parties’ dispositive motions.

V. Discussion

While the parties agree there is a contract governing their relationship and

obligations to each other, they disagree under the facts of this case which documents are

required to be delivered by the Bank before the Broker is obligated to repurchase a bad loan.

Assuming arguendo that the return of the deed of trust is a material term to the parties’

Agreement and that prejudice would result to the Broker if it were not returned upon

repurchase, the Court concludes that the Bank’s delivery of the deed of trust to the Broker

is not a condition precedent to the Broker’s obligation to repurchase the subject loan. 

Fairly read, the parties’ Agreement does not expressly, or by necessary

implication, make delivery of the security (deed of trust) back to the Broker a condition

precedent before the Broker is obligated to repurchase the loan. There are no words or

phrases in paragraph K, or elsewhere in the Agreement, demonstrating that both parties to

the Agreement clearly intended the delivery of the deed of trust to the Broker is a condition

precedent to the Broker’s obligation to repurchase the loan. Words or phrases, such as, “if

the deed of trust is returned,” “on condition that the deed of trust is returned,” or “provided

the deed of trust is returned” are absent from the parties’ Agreement. While there is no

requirement in Arizona that such words or phrases be utilized to create a condition precedent,

courts conclude that their absence is probative of the parties’ intention that a promise was

made rather than a condition imposed. Washington Properties, Inc. v. Chin, Inc., 760 A.2d

546, 549 (D.C. 2000); Mackinder v. Schawk, Inc., 2005 WL 1832385, *6 (S.D.N.Y. 2005)

(citing 13 Williston, On Contracts § 38:16 (4th ed. 2000) (applying New York law));

International Food Concepts, Inc., v. Eastern Agricultural and Food, 242 F.3d 382 (9th Cir.

2000) (“Although no particular words are required to create a condition precedent,

contractual language will not be construed as such unless that clearly appears to have been

the intent of the parties.”) (applying Pennsylvania law)); Cedyco Corp. v. PetroQuest

Energy, LLC, 497 F.3d 485, 489 (5th Cir. 2007) (applying Texas law)).

Case 2:07-cv-00936-LOA Document 35 Filed 02/26/08 Page 15 of 18
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 16 -

A reasonable construction of the language utilized in the parties’ Agreement

does not “plainly and unambiguously” show that the parties’ intention was create a condition

precedent of returning the deed of trust to the Broker before repurchase is required. L.

Harvey Concrete, Inc. v. Agro Constr. & Supply Co., 189 Ariz. 178, 181, 939 P.2d 811, 814

(Ariz. Ct. App. 1997) (“[C]ourts are not inclined to construe a contractual provision as a

condition precedent unless such construction is plainly and unambiguously required by the

language of the contract.”) A court cannot expand the language used in the parties’ contract

beyond its plain and ordinary meaning, nor will it add something to the contract which the

parties have not put there, especially for sophisticated parties. Lawrence v. Beneficial Fire

& Casualty Ins. Co., 8 Ariz.App. 155, 158, 444 P.2d 446, 449 (Ariz. Ct. App. 1968);

Mackinder, at 6 (citing Seetransport Wiking Trader Schiffarhtsgesellschaft MBH & Co.

Kommanditgesellschaft v. Republic of Romania, 123 F.Supp.2d 174, 188, fn. 16 (S.D.N.Y.

2000) (“court declined to find a condition precedent in settlement contract, stating that if

sophisticated parties intended a condition precedent, they could have explicitly so

provided.”)).

Considering the foregoing and that Arizona law disfavors construing provisions

of a contract as conditions precedent, the Court concludes that the Bank’s return of the deed

of trust to the Broker is not a condition precedent to the Broker’s obligation to repurchase the

subject loan under the parties’ Agreement. Nevertheless, the Court finds that the Broker has

created an issue of material fact for resolution by the trier of fact, i.e., whether return of the

deed of trust is a material term of the parties’ Agreement before the Broker’s obligation to

repurchase the subject loan arises.

The Court agrees with the Broker that, even though not expressly set forth in

their Agreement, return of the deed of trust to Broker may be deemed a material term of the

parties’ contract before Broker is required to perform. Arizona law clearly provides that the

terms of a contract may be expressly stated in a contract, inferred from the parties’ statements

and conduct or may be established by reference to a professional custom in the community.

Wagenseller , 710 P.2d at 1036; Angle, 626 P.2d at 131. The Bank’s own evidence supports

the Broker’s argument that return of the deed of trust is a material term to the parties’

Case 2:07-cv-00936-LOA Document 35 Filed 02/26/08 Page 16 of 18
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 17 -

Agreement because it acknowledges the “industry practice” and the “common practice in the

residential real estate lending industry that if the parties agree to a repurchase of a loan,

tender of security will occur.” (PSSOF, ¶¶ 6 and 10, Gaia Aff. ¶¶ 7 and 11) Moreover, some

of the factors set forth in § 241 of the Restatement (Second) of Contracts militate in favor of

a finding of materiality. The Bank’s argument that allowing EMC to keep the loan’s security

as a part of the Bank’s duty to mitigate its damages is unpersuasive because its mitigation

must be “reasonable” to minimize the Broker’s alleged breach of the Agreement for failure

to repurchase the loan. Whether return of the deed of trust is a material term to the parties’

Agreement and whether the Bank’s conduct was reasonable to minimize the Bank’s damages

due to the Broker’s alleged breach of the Agreement are questions of fact reserved for trial.

Jeski, 708 P.2d at 113; Angle, 626 P.2d at 131; Northern Arizona Gas Service, Inc., 702

P.2d at 706.

The Court also concludes that the Agreement’s notice-to-repurchase provision

is not a condition precedent to the Broker’s obligation to repurchase the subject loan.

Although it does not deny its agent received oral and email notice to repurchase the

Ter-Abraamyan loan or that it was timely received per the Agreement, Broker argues that the

method used to deliver the notice-to-repurchase is a condition precedent and absent strict

compliance, it is relieved of its obligation to repurchase the loan. Using a similar analysis

related to whether delivery of the deed of trust to the Broker is a condition precedent, the

Court finds that a reasonable construction of the language utilized in the parties’ Agreement

in paragraph L does not “plainly and unambiguously” show that the parties intended to create

a condition precedent such that strict compliance with the Agreement’s method-of-notice was

mandated before the Broker was required to repurchase the loan. L. Harvey Concrete, Inc.,

939 P.2d at 814. There are no explicit words or phrases in paragraph L, or elsewhere in the

Agreement, indicating that both parties clearly intended that only delivery of the notice to

Brandieg@mortgagesourcescorp.com “in the normal course of business” or by registered

or certified mail sent to no designated person at “2809 Hall, Hays, Kansas 67601” would

trigger the Broker’s obligation to repurchase the loan. In light of Arizona law disfavoring a

Case 2:07-cv-00936-LOA Document 35 Filed 02/26/08 Page 17 of 18
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 18 -

construction of contractual provisions as conditions precedent, the Court concludes that the

Bank’s failure to comply with the Agreement’s technical notice provisions is not a condition

precedent to the Broker’s obligation to repurchase the subject loan. Whether delivery of the

notice to repurchase exactly as delineated in the parties’ Agreement was a material term

under the facts and circumstances of this case and whether the Bank’s oral and email notice

actually delivered to Broker’s counsel constitutes substantial performance are questions of

fact that may only be properly resolved at trial. Jeski, 708 P.2d at 113; Rev. Ariz. Jury Instr.

(Civil) (Contract 10), supra.; Unicover World Trade Corp., 24 F.3d at 1221.

Accordingly,

IT IS ORDERED that Plaintiff The Biltmore Bank of Arizona’s Motion for

Partial Summary Judgment, docket # 15, is DENIED.

IT IS FURTHER ORDERED that Defendant First National Mortgage

Sources, L.L.C.’s Cross-Motion for Summary Judgment, docket # 19, is DENIED.

IT IS FURTHER ORDERED that the Bank’s request for oral argument is

DENIED.

Dated this 26th day of February, 2008.

Case 2:07-cv-00936-LOA Document 35 Filed 02/26/08 Page 18 of 18