1996 Decisions

Opinions of the United

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Precedential or Non-Precedential: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

Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1996

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova

University School of Law Digital Repository. It has been accepted for inclusion in 1996 Decisions by an authorized administrator of Villanova

University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.

Recommended Citation

"Sterling Natl Mtg Co v. Mtg Corner Inc" (1996). 1996 Decisions. Paper 34.

http://digitalcommons.law.villanova.edu/thirdcircuit_1996/34
 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. 

 _____________________