The fact that on August 25 BOFS informed Advanta that BOFS "[would] terminate the
[Loan Servicing Agreement for cause] if Advanta failfed] to correct [certain] performance
deficiencies . . . with respect to the remaining ARM and balloon loans within thirty days after
receipt of this Notice" does not help Advanta's case, even assuming that Advanta had never
agreed to the performance standards, and even assuming that Advanta could not have complied
with the performance standards. At most, this statement represents a threat to terminate the Loan
Servicing Agreement, not a call to terminate the Loan Servicing Agreement as of August 25.
The two are not the same. The fact that Silver stated on August 25 that BOFS "had concluded
that it was [BOFS's] desire to end the [BOFS/Advanta] relationship" does not help Advanta's
case, either. Notwithstanding this expression of desire, or any secret desires existing at the time,
it cannot be disputed that BOFS and Advanta had enforceable obligations between them under
the Loan Servicing Agreement at least until August 31. On August 25, BOFS did not order
Advanta to transfer the ARM and balloon loans. Therefore, BOFS cannot be said to have
actually put an end to the Loan Servicing Agreement at that time.

Nor can we conclude that BOFS constructively terminated the Loan Servicing Agreement
on August 25, as Advanta contends. The concept of constructive termination recognizes that a
party to a contract can engage in conduct that results in a termination of the contract even though
the conduct itself does not actually terminate the contract. It applies where one party unilaterally
modifies the terms of the parties' contractual relationship if the modification substantially
interferes with the other party's ability to obtain the benefits of the contract. See Petereit v. S.B.
Thomas, Inc., 63 F.3d 1169, 1183 (2d Cir. 1995) (involving a manufacturer who unilaterally

modified the territories of its distributors). It also applies where one party unilaterally imposes

-19-


a loan, enforceable obligations formed between BONA and Advanta with regard to the servicing
of that loan.

Since the mere execution of the Interim Loan Servicing Agreement did not give rise to
any enforceable obligations between BONA and Advanta, at the time of execution either party
could have freely withdrawn from the Interim Loan Servicing Agreement. BONA could have
remained still, not delivering a single loan to Advanta for servicing, or BONA could have made a
counteroffer, rejecting Advanta's standing offer. See Restatement (Second) of Contracts § 36
(1981). In comparison, Advanta could have revoked its standing offer, informing BONA that
Advanta no longer desired to create any enforceable obligations. /d. However, as explained
above, this freedom from obligation lasted only until BONA delivered a loan to Advanta for
servicing. At that time, BONA accepted Advanta's offer and bound Advanta to the terms and
conditions of the Interim Loan Servicing Agreement. Delivery of the loan also bound BONA to
the terms and conditions of the Interim Loan Servicing Agreement. On both sides, enforceable
obligations formed.’ /d. §§ 53(1), 54(1).

Section 6.15(b) of the Interim Loan Servicing Agreement comes into play at the moment
when BONA puts an end to all of the enforceable obligations between it and Advanta. We
interpret the phrase Interim Loan Servicing Agreement in Section 6.15(b) in this fashion to

emphasize that a termination of Advanta's standing offer, as represented by the Interim Loan

” This arrangement between BONA and Advanta resembles the arrangement between
credit card companies and their potential customers. The company makes an offer to finance the
customer's purchases; the customer accepts the offer by making a purchase with the credit card.
Until the customer uses the credit card, the company may revoke its offer. But once a customer
uses the credit card to make a purchase, the company becomes obligated to finance that purchase.
See Sharp Elecs. Corp., 216 F.3d at 393-94 (citing Garber v. Harris Trust & Sav. Bank, 432
N.E.2d 1309, 1311-13 (IIL App. Ct. 1982)).

-13-


Advanta never provided itself with any such actual benefit under the Loan Servicing Agreement
in the first place. See Guz, 8 P.3d at 1110.

In the end, we hold that, as a matter of law, Advanta terminated the Loan Servicing
Agreement by virtue of its August 31 letter. In the letter, Advanta informed BOFS that Advanta
was transferring all of the loans to another servicer as per BOFS's instruction, thereby putting an
end to all of the enforceable obligations between the parties. As explained above, by putting an
end to all of the enforceable obligations between the parties, Advanta terminated the Loan

Servicing Agreement.

The remainder of BOFS's Motion for Summary Judgment, which deals with whether
Section 4.5 of the Loan Servicing Agreement permitted Advanta to withdraw the disputed
termination fee from the Collection Account, is rendered moot by this Court's conclusion that
Advanta, not BOFS, terminated the Loan Servicing Agreement. Since we conclude that BOFS
owned the disputed funds prior to the commencement of this suit, it is not necessary to determine
who had the right to hold the disputed funds during this suit. Accordingly, we deny this portion

of BOFS's motion.

IIL Conclusion
For the reasons stated, this Court grants Advanta's Motion for Partial Summary Judgment
as to whether BONA terminated the Interim Loan Servicing Agreement, and this Court grants
BOFS's Motion for Summary Judgment as to whether Advanta terminated the Loan Servicing

Agreement. The parties’ motions for summary judgment on the applicability of Section 4.5 are

-23-


"|Advanta] terminates [the Loan Servicing Agreement] it shall be liable to pay all reasonable
costs associated with the transfer of Mortgage Loans to a successor servicer." (Silver Aff. Ex. A
at 22.) Section 4.5 permitted Advanta to withdraw from the Collection Account any expenses
incurred by and reimbursable to it as a result of a termination by BOFS.

Between November 1996 and August 1999, BOFS and Advanta performed according to
the terms and conditions of the Loan Servicing Agreement. BOFS's initial delivery of loans to
Advanta took place around March 1997. More loans followed over time. By October 1998,
Advanta was servicing a pool of loans valued at about one billion dollars. And by August 1999,
the value of the pool of loans soared to approximately three billion dollars.

A corporate reorganization at Bank One in August 1999 resulted in BOFS's wholesale
mortgage loan origination business being transferred to BONA effective September 1, 1999. As
a result, as of September 1, 1999, BOFS could not own any new loans, which meant that BOFS
no longer had the ability to transfer new loans to Advanta for servicing. Since BONA and
Advanta desired to do business, they executed an Interim Loan Servicing Agreement on
August 31, 1999, as a means to deal with Advanta's servicing of BONA's loans until a new
servicing agreement was executed by the parties.

The Interim Loan Servicing Agreement, an agreement separate from the Loan Servicing
Agreement, adopted and incorporated by reference the terms and conditions of the Loan
Servicing Agreement with some exceptions. The Interim Loan Servicing Agreement mirrored
the Loan Servicing Agreement in that, among other things, it was a nonexclusive agreement, it
had no minimal requirements regarding the amount or number of loans that BONA was to deliver

to Advanta for servicing, and it required Advanta to service any loan that BONA delivered to

-4-


conditions so intolerable that the other party has no option but to resign. See Turner v.
Anheuser-Busch, Inc., 816 P.2d 1022, 1244-45 (Cal. 1994) (involving an employer who allegedly
harassed an employee).

Advanta relies on the following facts to support its constructive termination argument: the
August 25 letter drastically changed the nature and value of the portfolio, as BOFS left Advanta
to service only the least profitable loans; and the August 25 letter imposed new conditions on
Advanta, to which it never agreed, and with which it could not have complied in thirty days as
required by BOFS. But even if the August 25 letter drastically changed the nature and value of
the loan portfolio, we fail to see how this was equivalent to a termination of the Loan Servicing
Agreement. BOFS did not interfere with Advanta's ability to obtain any benefit that it was
entitled to under the Loan Servicing Agreement. For according to the terms of Advanta's offer,
as represented by the Loan Servicing Agreement, BOFS had the tight to transfer some of the
loans and thereby change the nature and value of the loan portfolio as it pleased. Likewise, we
fail to see how the new conditions could serve as a basis for finding a constructive termination.
Advanta has presented no evidence to show that the conditions interfered with Advanta's ability
to obtain the benefits that it was entitled to under the Loan Servicing Agreement, and Advanta
has presented no evidence to show that the conditions prevented Advanta from performing under
the Loan Servicing Agreement. From what we can tell, BOFS never took any action to interfere
with Advanta's ability to service the ARM and balloon loans. And BOFS never refused to pay
Advania a servicing fee with respect to those loans. So we cannot discern how the conditions
proposed by BOFS could have "effectively forced Advanta to resign." (Advanta's Mem. Opph

BOFS's Mot. Summ. J. at 14.)

-20-


Section 6.15(c) itself. Section 6.15(c) unambiguously provides BOFS with a very broad right to
transfer some of the loans to another servicer without terminating the Loan Servicing
Agreement—and therefore without paying a termination fee. (Silver Aff. Ex. A at 22.) Section
6.15(c) transfers are not limited in frequency, value, or number of loans per transfer (besides
being only some loans). Nor are Section 6.15(c) transfers limited in any other relevant way.
Section 6.15(c) does not even require BOFS to give a reason for ordering a transfer.

To read into the Loan Servicing Agreement an implied covenant placing limitations on
BOFS's right to transfer some of the loans, as Advanta asks this Court to do, would require this
Court to place limits on BOFS's right to transfer some of the loans beyond the limits to which the
parties actually agreed. It would require this Court to obliterate BOFS's Section 6.15(c) right as
it is expressly stated in the Loan Servicing Agreement. The California courts are clear: "No
obligation can be implied . . . which would result in the obliteration of a right expressly given
under a written contract." Gerdlund v. Electronic Dispensers Int'l, 235 Cal. Rptr. 279, 286 (Cal.
Ct. App. 1987). Consequently, Advanta's ninth affirmative defense and part of its counterclaim
must fall. See Guz, 8 P.3d at 1112.

We recognize that Advanta frames this argument as one to protect its right to a Section
6.15(b) termination fee. (See Advanta's Mem. Law Opp'n Mot. Dismiss Counterel. at 13-15.)
But precisely because Section 6.15(c) allows BOFS to transfer some of the loans without
limitation and without terminating the Loan Servicing Agreement, BOFS does not frustrate
Advanta's right to a termination fee merely by doing so. Thus, Advanta cannot preclude BOFS

from using Section 6.15(c) to lessen a subsequent termination fee under Section 6.15(b) because

-22-


claims that it was Advanta, not BOFS, that terminated the Loan Servicing Agreement by virtue
of Advanta's August 31 letter. Finally, BOFS contends that Section 4.5 of the Loan Servicing
Agreement did not provide Advanta with the right to withdraw the disputed termination fee.

Advanta acknowledges that the August 25 letter directed the transfer of some of the loans
under the Loan Servicing Agreement, but proffers that other portions of the letter cast serious
doubt on whether a mere transfer occurred. Particularly, Advanta argues that Silver's statement
that BOFS "had concluded that it was [BOFS's] desire to end the [BOFS/Advanta] relationship,"
and Silver's threat that BOFS would terminate the Loan Servicing Agreement for cause if
Advanta failed to correct certain performance deficiencies within thirty days, raise at least an
issue of fact as to whether BOF'S's August 25 letter actually or constructively terminated the Loan
Servicing Agreement. In any event, Advanta claims that it has raised a genuine issue of fact as to
whether BOFS's transfer of some of the loans breached the implied covenant of good faith and
fair dealing; this alone should preclude summary judgment."

Much of our analysis in the preceding section applies here due to the similarities between
the Interim Loan Servicing Agreement and Loan Servicing Agreement. For instance, we find the

Loan Servicing Agreement to be nothing more than an agreement between BOFS and Advanta

'° We will treat BOFS's motions to strike Advanta's allegations of breach of the implied
covenant of good faith and fair dealing as motions for summary judgment and apply the standard
for summary judgment delineated earlier in this decision. Both BOFS and Advanta have
submitted statements of fact and supporting materials in accordance with Local Rule 56.1 on this
issue. And both BOFS and Advanta have included case law and argument on this issue in their
summary judgment briets. See Marco Holding Co, v. Lear Siegler, Inc., 606 F. Supp. 204,
212-13 (N.D. Ill. 1985), Additionally, we note that additional discovery would not assist
Advanta in opposing BOFS's Motion for Summary Judgment. (See Advanta's Mem. Opp'n
BOFS's Mot. Summ. J. at 26-27 (requesting time to conduct additional discovery pursuant to
Rule 56(f)).)

-17-


had the right to withdraw disputed termination fees from the Collection Accounts pursuant to
Section 4.5 of the Interim Loan Servicing Agreement and Loan Servicing Agreement. Lastly, on
December 10, 2001, Advanta filed a Motion to Strike BONA's and BOFS's Responses to
Advanta's Statement of Additional Facts. All of the motions have been fully briefed and argued.
We now address the pertinent issues, beginning with those contained in the motions for summary

judgment.

II. Discussion

A. Standard of Review

Summary judgment must be granted "if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits . . . show that there is no
genuine issue as to any material fact and that the moving party is entitled to a judgment as a
matter of law." Fed. R. Civ. P. 56(c). A material fact is a fact that may affect the outcome of a
claim under the law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A genuine
issue as to a material fact exists only if there is sufficient evidence for a jury to return a verdict in
favor of the nonmoving party. La Preferida, Inc. v. Cerveceria Modelo, S.A. de C.V.,914 F.2d
900, 905 (7th Cir. 1990), In determining whether a genuine issue of material fact exists, the
court construes all facts in the light most favorable to the nonmoving party and draws all
reasonable inferences in that party's favor. Shank v, William R. Hague, Inc., 192 F.3d 675, 681
(7th Cir. 1999).

Both parties acknowledge that summary judgment is often an appropriate method of

resolving contract disputes. Where resolution of the dispute involves the application of

-9-


[BONA's and BOFS's] desire to end thefir] relationship[s] [with Advanta]. Advanta's response
was that [BONA and BOFS were not entitled to transfer the portfolios] without payment of the
termination fee[s] required by the applicable contracts." (Silver Aff. Ex. D at 1.) In the third
paragraph of the letter, Silver directed Advanta to transfer to Wendover Financial Service
Corporation all of the loans being serviced by Advanta under the {nterim Loan Servicing
Agreement by November 1, 2000, and to transfer to Wendover some of the loans being serviced
by Advanta under the Loan Servicing Agreement by the same date.> Silver stated that the
transfers were being made pursuant to Section 6.15(c) of the Interim Loan Servicing Agreement
and Loan Servicing Agreement.

In accordance with Section 6.15(c) of the Interim Loan Servicing Agreement, BONA
agreed to pay Advanta twenty-five dollars per loan transferred, and in accordance with Section
6.15(c) of the Loan Servicing Agreement, BOFS agreed to pay Advanta fifty dollars per loan
transferred. With 38,161 loans subject to transfer under the Interim Loan Servicing Agreement
and 24,796 loans subject to transfer under the Loan Servicing Agreement, Silver assessed the
total transfer fee at $2,193,825.

Silver expressly stated in the August 25 letter that BONA was not terminating the
Interim Loan Servicing Agreement for cause pursuant to Section 6.4. Silver threatened that

BOFS would terminate the Loan Servicing Agreement for cause if Advanta failed to correct

5 BOFS allowed approximately one billion dollars' worth of ARM and balloon loans to
remain with Advanta. According to Advanta, these loans were the least profitable to service.

-6-


Advanta for servicing. One difference between the Interim Loan Servicing Agreement and the
Loan Servicing Agreement, however, was Section 6.15(c). Instead of providing BONA with the
right to transfer only some of the loans, Section 6.15(c) of the Interim Loan Servicing Agreement
provided that BONA could "transfer[] some or all of the Mortgage Loans to another servicer.” In
that event, BONA was to pay Advanta twenty-five dollars per loan transferred.

During the twelve months following the execution of the Interim Loan Servicing
Agreement, BONA delivered to Advanta for servicing approximately $200 million of loans each
month. By August 1, 2000, the total value of all loans being serviced by Advanta under the
Interim Loan Servicing Agreement and Loan Servicing Agreement was approximately five
billion dollars. Along with the growth in the pool of loans came increased servicing fees for
Advanta. It also brought about periodic expressions of concern by BONA and BOFS with
respect to Advanta's ability to service loans.

On August 17, 2000, Peter Silver of BONA and BOFS contacted John Berens of Advanta
to inform him that BONA and BOFS had assessed their relationships with Advanta and
concluded that, in light of Advanta's performance, it was BONA's and BOFS's desire to end their
relationships with Advanta. Berens responded by demanding payment of termination fees
pursuant to Section 6.15(b) of the Interim Loan Servicing Agreement and Loan Servicing
Agreement. Silver did not accede to Berens's demand.

On August 25, 2000, Silver sent a letter to Berens. The letter began by referencing the
August 17 conversation: "In that call | indicated that [BONA and BOFS] had assessed the future
of [their relationships with Advanta] in light of [Advanta's] current performance on the

portfolio[s] and new developments in the[ir] relationship[s], and had concluded that it was

-5-


establishing the terms and conditions that would apply if and when BOFS delivered a Joan to
Advanta for servicing. It amounted to a negotiated and agreed standing offer by Advanta that
proposed to create enforceable obligations between it and BOFS each time BOFS delivered a
loan. Our previous interpretation of Section 6.15(b) also applies here, as Section 6.15(b) of the
Loan Servicing Agreement is identical to Section 6.15(b) of the Interim Loan Servicing
Agreement. Hence, if we were to find that BOFS put an end to all of the enforceable obligations
between it and Advanta, then we would find that BOFS terminated the Loan Servicing
Agreement pursuant to Section 6.15(b). The only new ground we tread is Section 6.15(c) of the
Loan Servicing Agreement. It states that "if [BOFS] transfers servicing of some of the Mortgage
Loans to another servicer without terminating [the Loan Servicing Agreement], [BOFS] shall pay
to [Advanta] $50.00 per Mortgage Loan transferred." (Silver Aff. Ex. A at 22.) We point out
that none of the pertinent sections of the Loan Servicing Agreement are ambiguous, again ncither
party has presented any evidence or argument to show otherwise.

Determining whether BOFS actually terminated the Loan Servicing Agreement pursuant
to Section 6.15(b) is quite simple, using the principles previously stated. On August 25, BOFS
ordered the transfer of only some of the loans, leaving over one billion dollars’ worth of loans
with Advanta for servicing. As to the remaining loans, BOFS and Advanta had enforceable
obligations between them. At the most basic level, Advanta was to service the loans and BOFS
was to pay Advanta a servicing fee. Due to the existence of these enforceable obligations, we
find that, as a matter of law, BOFS did not actually terminate the Loan Servicing Agreement on

August 25.

-18-


On December 1, 2000, Advanta transferred to Wendover al! of the loans that Advanta had
been servicing under the Interim Loan Servicing Agreement and Loan Servicing Agreement as
per BONA's and BOFS's instructions. Following the transfer, Advanta withdrew approximately
$25 million from the Collection Accounts for payment of termination fees, unbeknownst to
BONA and BOFS, both of whom, as mentioned above, had previously informed Advanta that it
was not entitled to termination fees.

This withdrawal from the Collection Accounts by Advanta prompted BONA and BOFS
to file suit in federal court on December 21, 2000. BONA's and BOFS's later filed Second
Amended Complaint contained one count for breach of contract, two counts for declaratory
judgment, and one count for conversion. All of the counts attacked Advanta's claim to
termination fees, which Advanta fervidly defended with an answer containing twelve affirmative
defenses and a counterclaim with two counts.

On July 27, 2001, after conducting some discovery, Advanta filed a Motion for Partial
Summary Judgment, asking for rulings on whether BONA terminated the Interim Loan Servicing
Agreement and on whether Advanta had the right to withdraw the disputed termination fee from
the Collection Account pursuant to Section 4.5 of the Interim Loan Servicing Agreement. A
month later, BONA and BOFS filed a Motion to Dismiss Count I] of Advanta’s Counterclaim,
which alleged a breach of the implied covenant of good faith and fair dealing under the Interim
Loan Servicing Agreement and Loan Servicing Agreement, as well as a Motion to Strike
Advanta's Ninth Affirmative Defense, which alleged the same. In October 2001, BONA and
BOFS filed a Motion for Summary Judgment, asking for rulings on whether Advanta terminated

the Interim Loan Servicing Agreement and Loan Servicing Agreement, and on whether Advanta

-8-


moot due to the preceding conclusions. BOFS's motions to strike Advanta's allegations of breach
of the implied covenant of good faith and fair dealing are moot. The motions have been treated
herein as motions for summary judgment. Advanta's Motion to Strike Portions of BONA's and
BOFS's Responses to Advanta's Statement of Additional Facts is denied as moot because this
Court has not relied on any of the pertinent information.

As this memorandum opinion and order only decides issues relating to liability, the
parties are hereby given notice that issues relating to damages, interest, etc., will be addressed in

open court at the next status hearing.

ENTER ORDER:
—_— bs. CO Co . a
© Creek LE
MARTIN C. ASHMAN
Dated: January 22, 2002. United States Magistrate Judge

-24-


Minute Order Form (06/97)

United States District Court, Northern District of Illinois

Name of Assigned Judge
or Magistrate Judge

Martin C, Ashman

Sitting Judge if Other
than Assigned Judge

CASE NUMBER 00 C 8027 DATE 1/22/2002
CASE Banc One Financial Services, Inc., et al. vs. Advanta Mortgage Corp., USA, et al.
TITLE
[In the Following box (a) indicate the party filing the motion, .g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented.]

DOCKET ENTRY:

(ap) oO Filed motion of [ use listing in “Motion” box above.]

(2) Oo Brief in support of motion due

(3) Oo Answer brief to motion due . Reply to answer brief due

(4) Oo Ruling/Hearing on ___set for at_

(5) a Status hearing set for 1/31/2002 at 10:00 A.M..

(6) go Pretrial conference[held/continued to] [set for/re-set for] on set for at

(7) Oo Trial[set for/re-set for] on _ at

(8) oO [Bench/Jury trial] [Hearing] held/continued to at

(9) oO This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

COFRCP4(m) (General Rule21 COFRCP4I(a\(1) OO FRCP41(a)(2).

qo) {Other docket entry] | Enter memorandum opinion and order. Defendants’ motion for partial
summary judgment [42-1] is granted in part and denied in part; plaintiffs’ motion for summary judgment
[56-1] is granted in part and denied in part; plaintiffs’ and defendants’ motions to strike [89-1], [52-1] are
denied as moot.

qi) ff [For further detail see order attached to the original minute order.]

No notices required, advised in open court
3

No notices required.
umber of uotices

Document
Number

V | Notices mailed by judge’s staf.

Notified counsel by telephone.

Docketing to mail notices,

Mail AO 450 form, ra!

Copy to judgc/magistrate judge.

22/2002

date mailed notice

courtroom c
is deputy’s o
initials

Pafetimerertvet in
hal Ofer Oiiibe <I

railing deputy initials



ambiguity in the language of the contract. Morey vy. Vannucci, 75 Cal. Rptr. 2d 573, 578 (Cal.
Ct. App. 1998); Shaw v. Regents of the Univ. of Cal., 67 Cal. Rptr. 2d 850, 855 (Cal. Ct. App.
1997); General Motors Corp. v. Superior Court, 15 Cal. Rptr. 2d 622, 626-27 (Cal. Ct. App.
1993). The court must interpret the words of the contract in their ordinary and popular sense.
Cal. Civ. Code § 1644. And the court must interpret the contract as a whole, giving effect to
each and every part. /d. § 1641.

As an initial matter, we note that, for purposes of deciding Advanta's motion, the only
relevant pool of loans is the pool of loans that Advanta serviced under the Interim Loan Servicing
Agreement. BONA and Advanta created the Interim Loan Servicing Agreement as an agreement
separate from the Loan Servicing Agreement, and BOFS was not a party to the Interim Loan
Servicing Agreement. (Silver Aff. Ex. B at 1.) As such, we need only direct attention to
BONA's actions with respect to the pool of loans that Advanta serviced under the Interim Loan
Servicing Agreement. Those actions determine whether BONA terminated the Interim Loan
Servicing Agreement.

The first issue raised in Advanta's motion——whether BONA terminated the Interim Loan
Servicing Agreement on August 25—involves the interpretation of Section 6.15(b) and Section
6.15(c) of the Interim Loan Servicing Agreement. Section 6.15(b) states that BONA "may, at
any time and in its sole discretion, terminate (the Interim Loan Servicing Agreement] upon at
least ninety days prior written notice to [Advanta]; provided if [BONA] terminates [the Interim
Loan Servicing Agreement], [BONA] shall pay [Advanta] a termination fee ...." (Silver Aff.
Ex. A at 22.) Section 6.15(c), on the other hand, states that if BONA "transfers servicing of

some or all of the Mortgage Loans [from Advanta] to another servicer, [BONA] shall pay to

-ll-


undisputed facts to an unambiguous contract, there is no need to present the case to a jury.
Contract interpretation is a question of law. Murphy y, Keystone Steel & Wire Co., 61 F.3d 560,

564-65 (7th Cir. 1995); Samuels v. Wilder, 871 F.2d 1346, 1351 (7th Cir. 1989).

B. Advanta's Motion for Partial Summary Judgment: The Interim
Loan Servicing Agreement

Advanta's Motion for Partial Summary Judgment is directed exclusively at BONA's
claims for damages and declaratory relief under the Interim Loan Servicing Agreement. Advanta
contends that this Court should find, as a matter of law, that Advanta was entitled to the
termination fee pursuant to Section 6.15(b) of the Interim Loan Servicing Agreement because
BONA terminated the agreement, and that Advanta properly withdrew the termination fee from
the Collection Account because Section 4.5 of the Interim Loan Servicing Agreement provided it
with such a right. In response, BONA submits that it did not terminate the Interim Loan
Servicing Agreement as a matter of law because BONA exercised only its express right to
transfer loans pursuant to Section 6.15(c) and because BONA retained an option to deliver new
loans to Advanta in the future. BONA accuses Advanta of attempting to magically transform
BONA's transfer into a termination of the Interim Loan Servicing Agreement to obtain the more
alluring termination fee. BONA also challenges Advanta's interpretation of Section 4.5.

The fundamental goal of contract interpretation is to give effect to the mutual intent of the
parties at the time of contracting. Cal. Civ. Code § 1636 (West 2001). Under California law,
which the parties agree governs this case, the mutual intent of the parties is to be ascertained

from the contract alone, assuming that the evidence presented to the court does not expose any

-10-


twelve purported performance deficiencies within thirty days. Silver listed all twelve
deficiencies on an exhibit that was attached to his letter.°

On August 31, 2000, Advanta’s counsel, Jay Dubow, responded to Silver's August 25
letter. Dubow accused Silver of falsely charging Advanta with poor performance and
characterized Silver's letter as a "failed attempt at trying to ‘transfer’ the Mortgage Loans pursuant
to Section 6.15(c) of the [Interim Loan Servicing Agreement and Loan Servicing Agreement]."
(Silver Aff. Ex. E at 1.) Dubow explained that Advanta never agreed to service joans according
to the standards listed on Silver's exhibit so BOFS had no right to hold Advanta to those
standards. Dubow then declared that Advanta rejected Silver's labeling of the transfers as being
made pursuant to Section 6.15(c) of the Interim Loan Servicing Agreement and Loan Servicing
Agreement. Instead, Advanta deemed the transfers as being made pursuant to Section 6.15(b) of
the agreements due to Silver's statements in the August 25 letter. Dubow closed the letter with a
request for the name of a successor servicer and a demand for termination fees.

BONA's and BOFS's counsel, William Gibbons, responded to Dubow by stating that
Silver intended to transfer all of the loans pursuant to Section 6.15(c) of the Interim Loan
Servicing Agreement and Loan Servicing Agreement. Nonetheless, BONA and BOFS agreed to
accept Advanta's transfer of all of the loans to Wendover. As Gibbons pointed out, Advanta
possessed the right to transfer all of the loans pursuant to Section 6.15(b) of the Interim Loan

Servicing Agreement and Loan Servicing Agreement.

° The alleged deficiencies ranged from Advanta's timing of collection efforts to
Advanta's calling strategy. (Silver Aff. Ex. D at 4.)

-7-


Turning to Advanta's final argument, we agree with BOFS that its August 25 transfer did
not breach the implied covenant of good faith and fair dealing as a matter of law, even assuming
that the transfer was part of a device to avoid paying Advanta a termination fee. Under
California law, every contract contains an implied covenant of good faith and fair dealing to
prevent either party from unfairly frustrating the other party's right to receive the benefits of the
contract actually made. Guz v. Bechtel Nat'l, Inc., 8 P.3d 1089, 1110 (Cal. 2000). As the
implied covenant only protects the express terms of the contract, it "cannot 'be endowed with an
existence independent of its contractual underpinnings." /d. (quoting Waller v. Truck Ins. Exch.,
Inc., 900 P.2d 619, 639 (Cal. 1995)). Furthermore, "[i]t cannot impose substantive duties or
limits on the contracting parties beyond those incorporated in the specific terms of their
agreement." Jd. Indeed, where a specific act is authorized by the express terms of the contract,
no implied covenant of good faith and fair dealing can be read into the contract to forbid that act,
even if the act would otherwise have been forbidden by an implied covenant of good faith and
fair dealing. EPIS, Inc. v. Fidelity & Guar. Life Ins. Co., 156 F. Supp. 2d 1116, 1127-28 (N.D.
Cal. 2001); Guz, 8 P.3d at 1109-11; Carma Developers (Cal.), Inc. v. Marathon Dev. Cal., Inc.,
826 P.2d 710, 727-29 (Cal. 1992); Third Story Music, Inc. v. Waits, 48 Cal. Rptr. 2d 747, 753
(Cal. Ct. App. 1996).

Here, Advanta seemingly argues that an implied covenant should be read into Section
6.15(c) of the Loan Servicing Agreement to preclude BOFS from using Section 6.15(c) to
transfer some of the loans for the purpose of avoiding a more expensive termination fee. The
downfall of Advanta's argument—even assuming that BOFS actually used Section 6.15(c) to

avoid paying the more expensive Section 6.15(b) termination fee—is the express language of

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under the terms of their loans and deposit those collections into a Collection Account.’ In
exchange for performing this and other servicing functions, BOFS was to pay Advanta a
servicing fee—forty basis points per annum per loan—which Advanta was to retain from the
interest portion of any loan payments. Accrued and unpaid servicing fees, however, could be
withdrawn by Advanta from the Collection Account pursuant to Section 4.5 of the Loan
Servicing Agreement.

Section 6.2 of the Loan Servicing Agreement permitted Advanta to transfer its right to
receive servicing fees to a successor servicer, but only if BOFS gave prior written consent to the
transfer. Section 6.15(c) permitted BOFS to "transfer[] servicing of some of the Mortgage Loans
to another servicer without terminating [the Loan Servicing Agreement]." In that event, BOFS
was to pay Advanta fifty dollars per loan transferred. Any expenses incurred by and
reimbursable to Advanta as a result of the transfer could be withdrawn by Advanta from the
Collection Account.

Terminations of the Loan Servicing Agreement not for cause were covered in Section
6.15(b). Section 6.15(b) allowed either BOFS or Advanta “at any time and in its sole discretion
{to] terminate [the Loan Servicing Agreement] upon at least ninety days prior written notice to
the other party." Section 6.15(b) continued: "if [BOFS] terminates [the Loan Servicing
Agreement], [BOFS] shall pay [Advanta] a termination fee of 0.5% of the aggregate principal

balance of the Mortgage Loans as of the last day of the related remittance period,” but if

* The Loan Servicing Agreement defined "Collection Account" as "{t]he separate trust
account or accounts, each of which shall be . . . created and maintained by [Advanta] specifically
for the collection of principal and interest, Insurance Proceeds, Liquidation Proceeds, and other
amounts received with respect to the Mortgage Loans... ." (Silver Aff. Ex. A at 2.)

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Servicing Agreement, could not trigger the application of Section 6.1 5(b). After all, Advanta had
no enforceable right to compel BONA to accept the standing offer and BONA had no enforceable
right to compel Advanta to continue the standing offer. We find that Section 6.1 5(b)
contemplates an end to all of the enforceable obligations between BONA and Advanta, rather
than some, in light of Section 6.15(b)'s formula to calculate the termination fee—one-half of one
percent of the aggregate principal balance of the loans—and of BONA's express right to transfer
loans to another servicer pursuant to Section 6.15(c).

By ordering a transfer of all of the loans on August 25, we hold that BONA did, in fact,
terminate the Interim Loan Servicing Agreement. BONA put an end to all of the enforceable
obligations between it and Advanta, leaving Advanta with no servicing function to perform under
the Interim Loan Servicing Agreement. It is impossible to conceive of any further terminating
act that would have added any more conclusive, final, or effective end to the enforceable
obligations between BONA and Advanta under the Interim Loan Servicing Agreement.

BONA argues that this interpretation of Section 6.15(b) renders meaningless BONA's
express right to transfer all of the loans pursuant to Section 6.15(c). We disagree. Section
6.15(c) provides BONA with the right to transfer loans on condition that the transfer is not
equivalent to a termination of the enforceable obligations between it and Advanta. Section
6.15(c) would apply if BONA ordered the transfer of some of the loans. Section 6.1 5(c) would
also apply if BONA ordered the transfer of all of the loans with a concurrent delivery of new
loans. In ncither of these two situations could BONA be deemed to have put an end to the
enforceable obligations between it and Advanta. At all times, enforceable obligations would

exist.

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did—a finding that BONA could still accept Advanta's standing offer would not preclude a
finding that BONA terminated the enforceable obligations between it and Advanta.’
* * *

The remainder of Advanta's Motion for Partial Summary Judgment deals with whether
Section 4.5 of the Interim Loan Servicing Agreement permitted Advanta to withdraw the
termination fce from the Collection Account. We need not address this issue, however, because
the issue is rendered moot by the conclusion that BONA terminated the Interim Loan Servicing
Agreement. Since we conclude that Advanta owned the disputed funds prior to the
commencement of this suit, it is not necessary to determine who had the right to hold the
disputed funds during this suit. (See Advanta's Reply Br. at 14 n.9 (pointing out that a decision
on this issue would not affect the outcome of this case).) Accordingly, we deny this portion of

Advanta's motion.

Cc. BOFS's Motion for Summary Judgment: The Loan Servicing
Agreement

With the issues surrounding the Interim Loan Servicing Agreement resolved, we shift the
focus of this decision to the Loan Servicing Agreement. In its Motion for Summary Judgment,
BOFS asserts that it properly exercised its express right to transfer "some of the loans" on
August 25 as a matter of law. The transfer did not terminate the Loan Servicing Agreement,
BOFS argues, because the transfer did not end the relationship between BOFS and

Advanta—over one billion dollars' worth of loans remained with Advanta for servicing. BOFS

° Conversely, a finding that BONA rejected Advanta's standing offer would not
necessarily lead to a finding that BONA terminated the Interim Loan Servicing Agreement.

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Statement of Additional Facts.’ For the following reasons, Advanta's Motion for Partial
Summary Judgment is granted in part and denied in part due to mootness, BOFS's Motion for
Summary Judgment is granted in part and denied in part due to mootness, and all of the other

motions are denied due to mootness.’

I. Background

The relationship between BOFS and Advanta began on November 1, 1996, when the
parties executed a Loan Servicing Agreement.? BOFS was a financial services company that
owned certain first and second lien, fixed and adjustable rate, nonconforming residential
mortgage loans, and Advanta was a financial services company that serviced these types of loans
for itself and for third parties. The Loan Servicing Agreement established the terms and
conditions under which Advanta was to service loans for BOFS.

The Loan Servicing Agreement was a nonexclusive agreement and had no minimal
requirements regarding the amount or number of loans that BOFS was to deliver to Advanta for
servicing. Yet Advanta was obligated to service any loan that BOFS delivered to Advanta for

servicing. As part of its servicing function, Advanta was to collect payments made by borrowers

' We note that the following motions have been withdrawn: BONA's and BOFS's Motion
to Dismiss Count | of Advanta's Counterclaim, and Advanta's Motion to Dismiss Claims Against
Advanta Corp. (See BONA's and BOFS's Reply Mem. Supp. Mot. Dismiss Count IL Advanta's
Countercl. at 1 n.1.)

> The parties have consented to have this Court conduct any and all proceedings,
including the entry of final judgment. See 28 U.S.C. § 636(c); Local R. 73.1(b).

> The following facts are uncontroverted.

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Copies have been mailed to:

WILLIAM J. GIBBONS, Esq.

STEPHEN A. SWEDLOW, Esq.

B. JOHN CASEY, Esq.
Latham & Watkins

233 South Wacker Drive
Suite 5800, Sears Tower
Chicago, IL 60606

Attorneys for Plaintiffs

RAYMOND E. STACHNIK, Esq.
Connelly, Roberts & McGivney, L.L.C.
One North Franklin Street

Suite 1200

Chicago, IL 60606

JAY A. DUBOW, Esq.

PATRICK MATUSKY, Esq.

ANNE C. SINGER, Esq.

Wolf, Block, Schorr & Solis-Cohen, L.L.C.
1940 Route 70 East

Cherry Hills, NJ 08003

Attorneys for Defendants


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

BANC ONE FINANCIAL SERVICES, yp 2
INC., and BANK ONE, N.A.,

Plaintiffs, Case No. 00 C 8027

v. Magistrate Judge

Martin C. Ashman
ADVANTA MORTGAGE CORP. USA,
and ADVANTA CORPORATION,

Defendants.

wee eS ee Se SS SD

MEMORANDUM OPINION AND ORDER

Banc One Financial Services, Inc. ("BOFS") and Bank One, N.A. ("BONA") filed this
diversity suit against Advanta Mortgage Corp. USA and Advanta Corp. (collectively referred to
throughout this decision as "Advanta") for breach of contract, declaratory judgment, and
conversion. According to the complaint, Advanta wrongfully withdrew approximately $23
million from BONA and BOFS in violation of certain loan servicing agreements. Advanta
denied any impropriety on its part and set forth twelve affirmative defenses and a counterclaim
with two counts. A contention that BONA and BOFS breached the covenant of good faith and
fair dealing underlain one of Advanta's affirmative defenses and part of Advanta's counterclaim.
Presently before this Court are the following motions: Advanta's Motion for Partial Summary
Judgment; BONA's and BOFS's Motion for Summary Judgment; BONA’s and BOFS's motions
to strike Advanta's allegations of breach of the implied covenant of good faith and fair dealing;

and Advanta's Motion to Strike Portions of BONA's and BOFS's Responses to Advanta's


[Advanta] $25.00 per Mortgage Loan transferred." (/d. Ex. B at 2.) We conclude that the
language in both sections is unambiguous, neither party has presented any evidence or argument
to suggest otherwise.

Section 6.15(b) contains a word and a phrase that need elaboration. ‘The word is
terminate. Terminate means "to put an end to" or "to bring to an end or a halt." Black's Law
Dictionary 1471 (6th ed. 1990); Webster's II New Riverside University Dictionary 1194 (1994).
The phrase is Interim Loan Servicing Agreement. Interim Loan Servicing Agreement, as used in
Section 6.15(b), means all of the enforceable obligations between BONA and Advanta, as we
explain more fully below.

The Interim Loan Servicing Agreement represents, at most, an agreement between BONA
and Advanta establishing the terms and conditions that would apply if and when BONA
delivered a loan to Advanta for servicing. Upon execution of the Interim Loan Servicing
Agreement, BONA had no obligation to deliver a single loan to Advanta for servicing. Advanta
had no obligation to request a single loan ftom BONA. The Interim Loan Servicing Agreement
did obligate Advanta to service any loan delivered to it by BONA in exchange for a fee; however,
it was within the sole discretion of BONA to deliver a loan to Advanta in the first place.

In contract parlance, the Interim Loan Servicing Agreement amounted to a negotiated and
agreed standing offer by Advanta that invited acceptance by BONA in the form of performance,
ie., delivery of a loan. See Sharp Elecs. Corp. v. Deutsche Fin. Servs. Corp., 216 F.3d 388,
393-94 (4th Cir. 2000); see also Asmus v. Pacific Bell, 999 P.2d 71, 75 & n.4 (Cal. 2000). The
offer was a standing offer in the sense that it proposed to create enforceable obligations between

BONA and Advanta from time to time. Each time BONA accepted Advanta's offer by delivering

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The interpretation we advance considers the whole of the Interim Loan Servicing
Agreement, giving effect to every part of the agreement. Section 6.15(b) applies where the
transfer puts an end to the enforceable obligations between BONA and Advanta, while Section
6.15(c) applies to anything short of that.* BONA's interpretation, too dependent on the label of a
transfer rather than the substance of one, fails to give effect to every part of the Interim Loan
Servicing Agreement by effectively rubbing out the line between Section 6.15(b) and Section
6.15(c).

We have considered BONA's argument that its transfer of all of the loans did not put an
end to the Interim Loan Servicing Agreement because BONA retained the option to deliver loans
to Advanta in the future. In our view, this option did not exist after at least Advanta's receipt of
Silver's August 25 letter as Silver, on behalf of BONA, rejected Advanta's standing offer to
service loans. See Restatement (Second) of Contracts §§ 38, 40. In no uncertain terms, Silver
stated that BONA “had concluded that it was [BONA's] desire to end [its] relationship" with
Advanta. (Silver Aff. Ex. D at 1.) BONA had no intention to do further business with Advanta
at that time. (Silver Aff. 4 20.) Thus, it was reasonable for Advanta to change its position in
reliance on Silver's letter. See Restatement (Second) of Contracts § 38 cmt. a.

In any event, even if BONA had retained the option to deliver loans, it would not affect
our decision. We hold that Section 6.15(b) applies because BONA put an end to the enforceable
obligations between the parties. Since the mere existence of Advanta's standing offer did not

create enforceable obligations between it and BONA-—only BONA's actual delivery of loans

* We agree with BONA that a transfer could not fall within the scope of both Section
6.15(b) and Section 6.15(c).

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