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. e du/thir dc ir c uit_1996/34UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

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NO. 96-5007

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

Appellant

v.

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

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

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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

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OPINION OF THE COURT

_________________________BECKER, Circuit Judge.

This is an appeal from an order of the dis trict 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 relationsh ip. We affirm with respect to the tortious interference claim, bu t reverse with respect to the contract claims, and remand for furt her proceedings.

I. Defendant The Mortgage Corner ("TMC") runs a multilender mortgage loan network. Lenders on TMC's network re gularly fax their current mortgage rates, terms, and conditions to TMC financial service representatives ("FSRs") statione d in various local real estate offices. The FSRs then present t hese rates and terms to potential homebuyers. In this manner, len ders compete for business, and consumers have a choice of mortgage r ates and terms. For its part, TMC receives a percentage of each loa n that closes as
a result of its referral. On July 23, 1992, Sterling National Mortga ge Company ("Sterling") entered into an agreement with TMC pur suant 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, h ad a duty to "process, accept, issue mortgage loan commitments f or, fund and close, in a timely manner," the applications submit ted by TMC. (J.A. at 18.) For each completed loan, Sterling wo uld pay TMC .625 basis points. (Pl.'s Br. at 7.) The agreement was to last one year but could "be terminated without cause by eith er 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. Centerba nk Mortgage Company ("CMC") owned TMC. CMC was also a lender o n the network, and it was TMC's hope that CMC would secure a signi ficant number of loan referrals from the FSRs. (Dep. of Former TMC President, Walter Vail at J.A. 108.) To this end, TMC managem ent stressed its goal to the FSRs. (See Dep. of TMC Regional Manage r, 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 St erling, (J.A. 45-46), and ultimately, on April 27, 1993, TMC's Re gional 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 effect ive termination) that TMC sent Sterling the thirty day notice of ter mination required under the agreement. That notice, which w as properly executed, became effective June 14, 1993. On July 26, 1993, Sterling filed a three c ount complaint against TMC and CMC (referred to collectively as "d efendants") in
the district court. The defendants filed an Answer andCounterclaim alleging that Sterling had failed to p ay all of TMC's

fees. Following discovery, Sterling and the defend ants filed cross motions for summary judgment on Sterling's affirmat ive claims. In Count I of its complaint, Sterling alle ged that TMC had breached the network contract by (1) encouragin g its employees to dissuade customers from choosing Sterling's loan products, and (2) by terminating the contract before providing th irty days notice. (Dist. Ct. Op. at J.A. 174.) In its summa ry judgment motion, TMC contended that, since the contract prov ision at issue simply provided that TMC "may" submit loans to Ster ling, 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 judgme nt on Count I. It reasoned that, because TMC's referral of loans t o Sterling was completely discretionary, Sterling was unable, as a matter of law, to establish that the agreement was breached. (Dis t. Ct. Op. at J.A. 175.) In Count III, Sterling charged that TMC's behavior breached the implied covenant of good faith and fai r dealing under Connecticut law. The court concluded that, while e very contract carries this implied covenant "which requires that neither party do anything that will injure the right of the other pa rty to receive the benefits of the agreement," such principle "can not be applied to achieve a result contrary to the clearly express ed 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 defen dants' steering of consumers to CMC tortiously interfered with Ster ling's prospective economic relationship with both TMC and potential
customers. The district court noted that the defen dants had directed loan applications to CMC and had paid high er commissions on loans placed there. (Dist. Ct. Op. at J.A. 177 (citation omitted).) However, such conduct, the court reason ed, could not
form the basis of a tortious interference claim in this case. Because TMC had no obligation to originate any loan s 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 interfere nce claim is 'the luring away, by devious, improper and unrighte ous means, of the customer of another' . . . ." (Dist. Ct. Op. at J.A. 177-78 (citation omitted)). As an alternative basis for i ts holding, the district court stated that the dispute was not cove red by tort principles because a party could not tortiously int erfere with its own contract. (Dist. Ct. Op. at J.A. 178.) Sterling appeals the district court's dete rminations. 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 gran t of summaryjudgment for the defendants on Sterling's Count I c laim that TMC's

attempt to discourage FSRs from offering Sterling's loans and TMC's premature termination of Sterling's relationship co nstituted a breach of contract. As noted above, the district c ourt viewed the relevant contract clause, "[TMC] may submit complet ed Mortgage Loan Applications [to Sterling]," (J.A. at 18), as unamb iguously granting TMC complete discretion in the referral pr ocess, (Dist. Ct. Op. at J.A. 175). As such, the court concluded that any actions by TMC that might have inhibited referral c ould 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 cl ause setting forth TMC's responsibilities is ambiguous. Accordi ng to Sterling's submission, it expected and was entitled to partici pate 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 applicati on. 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 attempt s to avoid directing referrals to Sterling could constitute a breach of contract, and the word "may" refers merely to the c ontingent (rather than the discretionary) nature of the refer rals. As with any ambiguous term, the district court should
have admitted extrinsic evidence to ascertain its m eaning. 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 establi sh the actual rights and responsibilities of the parties.

B. The district court should also not have g ranted summary judgment for the defendants on Sterling's Count III claim of a breach of the covenant of good faith and fair deali ng. That covenant prohibits each party to a contract from en gaging in behavior that would thwart the other's rational exp ectations. In the majority of states, "even though the express te rms of a contract appear to permit unreasonable action, the duty of good faith limits the parties' ability to act unreasonab ly in contravention of the other party's reasonable expec tations." 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 co venant 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). Ster ling argues that
the defendants' behavior violated its reasonable ex pectation that it was to participate in a fair competition. In Warner v. Konover, 553 A.2d 1138 (Conn. 1989), theConnecticut Supreme Court applied the covenant of g ood faith and

fair dealing to a landlord-tenant agreement. The l ease 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 rene gotiation of the rental payment, the tenant brought suit. Id. at 11 40. The landlords argued that, absent a clause in the lease specifying that consent could not be unreasonably withheld, they re tained
unfettered discretion to withhold consent. Id. The trial court agreed and dismissed the t enant's complaint, but the Supreme Court reversed. Id. Th e 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) o f Contracts § 205). It then reasoned that a landlord "who contra ctually retains the discretion to withhold its consent to the assig nment of a
tenant's lease must exercise that discretion in a m anner consistent with good faith and fair dealing." Id. at 1140-41. The court refused to say whether the landlords had in fact br eached the covenant, as that determination would involve a com plex evaluation of the defendants' "faithfulness to an agreed commo n 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 Supr eme 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 hi s home, his easement over the defendant-neighbor's property wou ld be extinguished. Id. at 423. The plaintiff informed the defendant of his plan to build an addition. Id. Knowing that t his action would extinguish the easement, the defendant remained qui et -- at least until the addition was built, at which point she pr omptly terminated the plaintiff's easement. Id. Plaintif f claimed that
defendant's underhandedness was a violation of the implied covenant of good faith and fair dealing, but the Supreme Cou rt disagreed.
Id. at 425. Acknowledging that the covenant had been a pplied to the lease in Warner, the court distinguished that case. In Warner, the
landlord had retained discretion to withhold consen t to assignment of the lease. Id. at 426. "The express terms of t he lease, however, did not establish the parameters of that d iscretion. 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 affirmat ive act of the dominant tenement owner [i.e. the plaintiff in this case]." Id.
To condition termination on the silence of the burd ened 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 expecta tions of the parties, it could not be applied to achieve a resul t 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 defendan ts' motion for summary judgment on the breach of the implied coven ant 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 compet ition, the contract language that TMC "may" direct loans to St erling granted TMC complete discretion in the referral process. O n this theory, any determination that TMC breached the implied cov enant of good faith by failing to refer loans to Sterling would c ontradict the express terms of the contract making referral discr etionary. (Dist. Ct. Op. at J.A. 176.) We disagree. Even if TMC did have total d iscretion 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 compe tition among lenders when, in fact, the network was rigged in CM C'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 fa ith. In Warner, the landlords had unrestricted power to refuse assi gnments. But implicit in this power was a requirement that they wield it fairly. Warner, 553 A.2d at 1140-41. Accordingly, TMC's se eming discretion
to refer loans should have been exercised in confor mance 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 subje ct to several interpretations. "May" can indicate discretion, bu t as we have earlier noted, may can also indicate a conditional occurrence or event. The simple fact that this clause is amenabl e to more than one interpretation indicates that subjecting the de fendant's performance to a good faith requirement could not v iolate the contract's express terms. In sum, Sterling's claim that TMC's action s in dissuading consumers from choosing its product and prematurely terminating its contract breached the covenant of good faith and fa ir dealing is sufficient to survive summary judgment.

C. In Count II, Sterling alleged that the def endants' practice of steering loans to CMC constituted torti ous interference with its prospective economic relationship with bot h TMC and potential borrowers. More specifically, Sterling c omplained about the higher commissions paid to FSRs for CMC referra ls and the reminders that FSRs received about the increased pr ofitability of placing loans with CMC. (Pl.'s Br. at 21.) Accord ing 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. Wheth er or not Sterling has otherwise met the various requirements of the leading New Jersey case regarding tortious interference, se e 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 committ ed by TMC. For example, Nicholas Meras, TMC's Regional Manager, re minded the FSRs about the lucrative nature of CMC loans, and ultima tely issued a memorandum instructing the FSRs to stop accepting S terling applications. But, it is axiomatic that TMC cannot be said to have tortiously interfered with its own contract. There fore, the only possible viable claim as to tortious interference c ould be against CMC. The most that Sterling adduces as to CMC, how ever, is the conclusory allegation that CMC gave incentives to t he FSRs, such as higher commissions, to steer loans to CMC. No othe r acts are cited to support a tortious interference claim. This sho wing is insufficient to survive summary judgment. CMC is the parent of TMC, and perhaps ther e is evidence somewhere that CMC dictated TMC's allegedly offendi ng 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, eve n if a parent may be liable for a subsidiary's decisions on how t o manage its commercial relationships, that is not enough to est ablish tortious interference with prospective economic relations as contemplated by Printing-Mart. The summary judgment with respect t o the tortious
interference claim will therefore be affirmed.

III. For the foregoing reasons, the judgment o f the district
court will be affirmed as to Count II and reversed as to Counts I and III and remanded for further proceedings with r espect to those

counts.

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