Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_06-cv-03090/USCOURTS-azd-2_06-cv-03090-2/pdf.json

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

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The agreement outlined the parties' rights and responsibilities with regard to the

loans submitted by Cateret to Hamilton.

WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Hamilton Mortgage Company,

Plaintiff,

v.

Carteret Mortgage Corp.,

Defendant.

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No. CV-06-3090-PHX-SMM

 ORDER

Pending before the Court is Defendant Carteret Mortgage Corp.'s ("Cateret") Motion

to Dismiss (Doc. 13) Plaintiff Hamilton Mortgage Company's ("Hamilton") Complaint

pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim

upon which relief can be granted. In its Complaint, Hamilton alleges one count of breach of

contract on the grounds that Cateret failed to comply with the terms of the parties' Wholesale

Broker Agreement ("Agreement"). After careful consideration, the Court finds the following.

BACKGROUND

This case arises out of a dispute concerning the Wholesale Broker Agreement that

governed the relationship between the parties. It is undisputed that, pursuant to the terms of

the Agreement1

, Cateret was to broker loans to Hamilton for review, underwriting, and

ultimate funding in exchange for the payment of certain fees. More specifically, the dispute

Case 2:06-cv-03090-SMM Document 23 Filed 04/02/07 Page 1 of 6
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arises out of an alleged unilateral modification made by Cateret to the Agreement

concerning indemnification in circumstances involving fraud by a third party.

In or about August 2006, Cateret provided Hamilton with a loan application for a

mortgage transaction involving Ryan Waddell. Hamilton reviewed the package, underwrote

the loan, and funded two mortgage loans for Mr. Waddell in the amounts of $1,640,000 and

$400,000, respectively. Subsequently, based on the documents submitted by Cateret,

Hamilton sold the loans to an investor. Shortly thereafter, Hamilton was notified by the

investor that fraud had occurred in the loan transaction. Consequently, the investor

demanded that Hamilton buy back the loan for an amount in excess of $2.2 million.

Hamilton discovered that certain pertinent information provided to Cateret in connection with

the original loan application transaction was false. Specifically, Hamilton contends that false

signatures were used, false account documents identified, and unverifiable account and

employment information was provided to Cateret in connection with the loan. As a result,

Hamilton turned to Cateret demanding that it provide proof that no fraud had occurred in the

transaction, or in the alternative, that Cateret either repurchase or refinance the loan as a

result of the fraud. Cateret refused to comply with the demand, contending that the parties

had agreed that Cateret would not assume liability for the fraud of third parties. On or about

November 8, 2006, Hamilton made a second demand to Cateret for the repurchase or

refinance of the loan. Cateret did not comply. Hamilton asserts that such noncompliance is

a breach of Cateret's obligation pursuant to Paragraph VIII of the Agreement. The

Agreement provides in pertinent part:

VIII. Broker Indemnification:

A. HMC may require Broker to indemnify HMC for any loan

with respect to which:

1. Broker breaches any material warranty or fails to

satisfy any of its material representations, warranties, covenants,

agreements or obligations under this Agreement.

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2. Borrower(s) or guarantor(s) contends that there has

been an act of commission or omission by Broker, which could result

in liability of HMC or materially impair HMC's collection of the loan.

3. There is any material fraud, misrepresentation or deceit

in connection with the Mortgage Loan on the part of Broker, any of

Broker's representatives, Borrower or any third party in connection with

the application or origination of such Mortgage Loan, including, but not

limited to, misrepresentation of the Borrower's income, personal

information, funds on deposit, employment or real estate appraisals,

regardless of whether Broker has any knowledge of such fraud or

misrepresentation.

***

(Doc. 13, Ex. A).

Hamilton contends that pursuant to the language agreed upon in paragraph VIII,

Cateret is required to indemnify Hamilton such that Hamilton will not be liable for the loan.

Cateret has refused to comply. As a result, Hamilton initiated this action, alleging breach of

contract. In response, Cateret filed the pending Motion to Dismiss (Doc. 13) contending that

Hamilton's claim for breach of contract should be dismissed as a matter of law "because, by

the plain language of the parties' agreement, Cateret has no obligation to repurchase the

allegedly fraudulent loan." (Doc. 13). Cateret contends that the parties expressly agreed that

Cateret specifically contracted not to accept liability for borrower or third party fraud such

as the type at issue in this litigation. (Doc. 13). 

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STANDARD OF REVIEW

Rule 12(b)(6) authorizes a court to dismiss a claim on the basis of a dispositive issue

of law. Neitzke v. Williams, 490 U.S. 319, 326 (1989). A complaint may not be dismissed

for failure to state a claim “unless it appears beyond doubt that the plaintiff can prove no set

of facts in support of [the] claim which would entitle [the plaintiff] to relief.” Usher v. City

of Los Angeles, 828 F.2d 556, 561 (9th Cir.1987) (quoting Conley v. Gibson, 355 U.S. 41,

45-46 (1957)). If as a matter of law it is clear that no relief could be granted under any set

of facts that could be proved consistent with the allegations, under Rule 12(b)(6) a claim

must be dismissed, without regard to whether it is based on an outlandish legal theory or on

a close but ultimately unavailing one. See Neitzke, 490 U.S. at 327. Dismissal may be based

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on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a

cognizable legal theory. See Balistreri v. Pacifica Police Department, 901 F.2d 696, 699

(9th Cir.1988). On a motion to dismiss for failure to state a claim, the court must presume

all factual allegations of the complaint to be true and draw all reasonable inferences in favor

of the nonmoving party. Usher, 828 F.2d at 561. The Court declines to consider any

materials submitted outside of the pleadings. Fed.R.Civ.P. 12(b).

DISCUSSION

In support of its motion, Defendant contends that the parties agreed that their

relationship was to be governed by a document entitled "'Loan Fraud'-Zero Tolerance". As

part of entering into the broker relationship and as a condition of brokering loans to

Hamilton, Cateret asserts that it was provided with, and required to sign the "Zero

Tolerance"document. The document set forth Hamilton's specific policy with regard to loan

fraud. Upon receipt of the document, Cateret modified the document, adding language to

indicate its unwillingness to accept liability for third party and borrower fraud. The

following language was added to the document by Cateret:

Cateret Mortgage Corporation cannot be held liable for borrower or third party

fraud where the borrower or any third party (appraiser, processor, closing

agent, etc.) has intentionally set out to deceive the Loan Officer/loan process

and were the Loan Officer could not have detected the fraud in the normal

course of loan origination.

(Doc. 13-2, Ex. A.)

Cateret contends that pursuant to the "express language of the parties'

agreement...Cateret specifically contracted not to accept liability for the kind of fraud at the

heart of this litigation." (Doc. 13). Cateret concludes that, because the parties agreed that

Cateret would not be liable to Plaintiff in instances involving third party and borrower fraud,

Hamilton's claim should be dismissed. On the other hand, Hamilton contends that it was not

the intent of the parties, but instead the intent of only Cateret to modify the document.

It is Hamilton's contention that Mr. Weinstein, CEO of Cateret Mortgage, unilaterally

modified the "Loan Fraud Zero Tolerance" document without the assent of Hamilton. In

Arizona, it is well established law that, "one party to a written contract cannot unilaterally

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modify it without the assent of the other party." Angus Medical Co. v. Digital Equipment

Corp., 840 P.2d 1024, 1029 (Ariz, App. 1989)(citing Coronado Co., Inc. v. Jacome's Dept.

Store, 129 Ariz. 137, 140, 629 P.2d 553, 556 (App.1981)); Ruck Construction Co., Inc. v.

City of Tucson, 116 Ariz. 533, 570 P.2d 220 (App.1977). Here, the record demonstrates that

Hamilton did not assent to the terms of the change. Hamilton contends that Cateret attempted

to hide the modification from Hamilton by adding the text into the body of the document and

sending it back to Hamilton for signature without notification of the change and without

striking through the duplicative language found in the Wholesale Broker Agreement in the

hopes of avoiding drawing attention to the modification. Despite this, Hamilton did not sign

the altered document or agree to modify the terms of the "Loan Fraud-Zero Tolerance".

(Doc. 14, Ex. 3. Affidavit of James Lyddon).

Moreover, the clause that Cateret added to the "Loan Fraud-Zero Tolerance"

document states, "Cateret Mortgage Corporation cannot be held liable for borrower fraud or

third party fraud where the borrower...has intentionally set out to deceive the loan

officer/loan processor and there the Loan Officer could not have detected the fraud in the

normal course of loan origination. (Doc. 13-2, Ex. A). Hamilton asserts that it was the loan

officer's obligation to verify the allegedly fraudulent information. It contends that a phone

call should have been made in the normal course of business to verify the information that

Plaintiff ended up discovering was fraudulent. A complaint may be dismissed pursuant to

Rule 12(b)(6) of the Federal Rules of Civil Procedure only if "it appears beyond doubt that

the plaintiff can prove no set of facts in support of his claim which would entitle him to

relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Parks Sch. of Bus., Inc. v. Symington,

51 F.3d 1480, 1484 (9th Cir. 1995). Hamilton has provided the Court with sufficient facts

to support a claim for breach of contract. For the foregoing reasons, Cateret's Motion to

Dismiss is DENIED without prejudice. 

CONCLUSION

Accordingly,

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IT IS HEREBY ORDERED that Defendant's Motion to Dismiss (Doc. 13) Plaintiff's

Complaint is DENIED without prejudice.

DATED this 1st day of April, 2007.

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