Title: Central Mortgage Co. v. Morgan Stanley Mortgage Capital Holdings LLC
Citation: N/A
Docket Number: 595, 2010
State: Delaware
Issuer: Delaware Supreme Court
Date: August 18, 2011

IN THE SUPREME COURT OF THE STATE OF DELAWARE 
 
CENTRAL MORTGAGE COMPANY, 
) 
 
 
 
 
 
 
 
)  No. 595, 2010 
 
 
Plaintiff Below 
 
 
) 
 
 
Appellant,  
 
 
)  Court Below:  Court of Chancery 
 
 
 
 
 
 
 
)  of the State of Delaware 
v. 
 
 
 
 
 
 
) 
 
 
 
 
 
 
 
)  C.A. No. 5140 
MORGAN STANLEY MORTGAGE  
) 
CAPITAL HOLDINGS LLC as 
 
 
) 
Successor-in-interest to MORGAN 
 
) 
STANLEY MORTGAGE CAPITAL, INC., ) 
 
 
 
 
 
 
 
) 
 
 
Defendant Below  
 
) 
 
 
Appellee. 
 
 
 
) 
 
Submitted:  May 25, 2011 
Decided:  August 18, 2011 
 
Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS and 
RIDGELY, Justices constituting the Court en Banc. 
 
 
Upon appeal from the Court of Chancery.  REVERSED and REMANDED. 
 
 
R. Judson Scaggs, Jr. and John Eakins, Morris, Nichols, Arsht & Tunnell 
LLP, Wilmington, Delaware.  Of Counsel:  Nicholas J. Boyle (argued), Richard 
Olderman and Daniel M. Dockery, Williams & Connolly LLP, Washington, DC 
for appellant. 
 
 
Steven J. Fineman and Rudolf Koch, Richards, Layton & Finger, P.A., 
Wilmington, Delaware.  Of Counsel:  Jeffrey Q. Smith (argued), Laila Abou-
Rahme, and Cynthia A. Hanawalt, Bingham McCutchen LLP, New York, NY for 
appellee. 
 
 
 
 
STEELE, Chief Justice: 
2 
 
 
 
Central Mortgage Company sued Morgan Stanley after mortgages for which 
CMC purchased servicing rights from Morgan Stanley began to fall delinquent 
during the early financial crisis in 2007.  CMC made a variety of claims, and the 
Vice Chancellor1 dismissed all of those claims with prejudice, except for its breach 
of contract claims which he dismissed without prejudice.  CMC now appeals the 
dismissal of its breach of contract and implied covenant of good faith and fair 
dealing claims.  We reverse. 
I. 
FACTS AND PROCEDURAL HISTORY 
 
Morgan Stanley is in the business of purchasing residential mortgage loans 
from originators, pooling them, and selling these pools to investors either 
securitized or in bulk.  It regularly sells servicing rights for these loans to third 
party servicers.  Loan servicers generally handle the operational aspects of 
mortgage lending, which include billing, collecting payments from mortgagors, 
and remitting payments to mortgagees.  Generally, servicers retain a small 
percentage of payments collected as compensation.  CMC is a servicer of 
residential mortgage loans. 
                                          
 
1 Chancellor Strine adjudicated Morgan Stanley’s Motion to Dismiss while sitting as a Vice 
Chancellor.  Although the Governor has elevated him to the position of Chancellor since he 
adjudicated this matter, this opinion refers to him as the Vice Chancellor because that was the 
capacity in which he acted. 
3 
 
In March 2005, Morgan Stanley offered about $1 billion in mortgage 
servicing rights for a servicer to purchase on a regular basis in the forthcoming 
months and years.  These rights pertained to pooled mortgage loans that Morgan 
Stanley planned to sell to both Fannie Mae and Freddie Mac (collectively, the 
Agencies) as well as private investors.  The offering materials explained that 
Morgan Stanley did not originate the loans and that all the loans were “Alt-A” in 
quality—lower quality than prime loans, but higher quality than subprime loans.  
CMC bid on the servicing rights, and Morgan Stanley accepted CMC’s bid in July 
2005. 
On July 25, 2005, Morgan Stanley and CMC signed a Master Agreement 
which, in 66 pages and 15 exhibits, established the framework for a series of future 
transactions between the parties.  Specifically, the Master Agreement gave CMC 
the opportunity, but not the obligation, to purchase servicing rights on specific 
pools of loans.  In the Master Agreement, the parties agreed that New York law 
would govern the contract and Delaware courts would have exclusive jurisdiction 
over disputes. 
If CMC decided to buy servicing rights with respect to loans Morgan 
Stanley sold to the Agencies, the Master Agreement required CMC to service those 
loans in strict compliance with Agency guidelines.  The Master Agreement 
contained an integration clause specifying that it, along with the documents for 
4 
 
each future transaction between the parties, constituted the parties’ entire 
agreement.  The Master Agreement also provided that the parties could only amend 
it in a signed writing.  In the Master Agreement, Morgan Stanley made 
representations and warranties to CMC, and it assigned to CMC all representations 
and warranties that the originators of the subject loans had made to Morgan 
Stanley.  The Master Agreement also provided a notice provision in section 10.13.  
Specifically, the notice provision provided: 
Upon discovery by either [Morgan Stanley] or [CMC] of a breach of 
any of the foregoing representations and warranties, the party 
discovering such breach shall give prompt written notice to the other 
party.  Within 60 days of the earlier of either discovery by or notice to 
[Morgan Stanley] of any such breach of a representation or warrant 
which materially and adversely affects the ownership interest of 
[CMC] in the Servicing Rights related to any Mortgage Loan, 
[Morgan Stanley] shall use its best efforts to promptly cure such 
breach in all material respects and, if such breach cannot be cured, 
[Morgan Stanley] shall, at [CMC’s] option, repurchase the Servicing 
Rights affected by such breach at the Purchase Price. 
 
The Master Agreement also contained a clause explaining that except as otherwise 
set forth, no remedy was exclusive of any other available remedy.  Finally, the 
Master Agreement contained a clause explaining that the parties could only waive 
a breach with written notice and the consent of all parties. 
 
In February 2006, CMC visited Morgan Stanley’s due diligence facilities.  
CMC alleges that during this visit Morgan Stanley assured CMC that it was 
performing due diligence on residential mortgage loans in accordance with the 
5 
 
Agencies’ guidelines.  Importantly, Morgan Stanley told CMC that the Agencies 
will not purchase loans from Morgan Stanley or other sellers unless the Agencies 
have reviewed and approved the underwriting criteria and the available 
information on the loans.  Because the Agencies review and approve Morgan 
Stanley’s underwriting guidelines before purchasing its loans, the Agencies issue 
guidance regarding their underwriting expectations.  Allegedly, Morgan Stanley 
took great pains during CMC’s visit to convince CMC that it paid close attention to 
this Agency guidance. 
 
On March 16, 2006, CMC made its first purchase of servicing rights on 
pooled loans Morgan Stanley sold to the Agencies.  CMC then made five separate 
additional purchases of servicing rights between January 31, 2007 and August 
2007 for pooled loans Morgan Stanley sold to the Agencies.  For each of the six 
separate purchase transactions, CMC and Morgan Stanley signed transaction 
specific documentation, which included a commitment letter, a purchase 
agreement, a sale of servicing rights agreement, and a “Form 981” or “Form 629” 
(together, the Agency Transfer Agreements) regarding the transfer of the servicing 
rights.2  The Agency Transfer Agreements provided that CMC, as transferee of the 
                                          
 
2 The parties submitted a Form 981 to Freddie Mac for its loans.  They submitted a Form 629 to 
Fannie Mae for its loans.  The integration clause of the Master Agreement made each of these 
transaction specific documents—except for the Agency Transfer Agreements—part of the 
complete and binding agreement between Morgan Stanley and CMC. 
6 
 
servicing rights, “acknowledge[d], covenant[ed] and warrant[ed] that it shall be 
responsible for all representations, covenants, and warranties concerning the 
eligibility of Mortgages for purchase by” the relevant Agency as provided in that 
Agency’s guidelines.  Under these Agency Transfer Agreements and Agency 
guidelines, Morgan Stanley and CMC became jointly and severally liable to the 
Agencies for all the responsibilities, duties, and selling warranties associated with 
the mortgages. 
 
In early 2007, CMC began to notice that the loans it had purchased from 
Morgan Stanley were not performing at the level the parties had expected.  CMC 
raised this concern with Morgan Stanley, and in response, Morgan Stanley 
allegedly admitted to a technical oversight and its failure to properly diligence the 
loans at issue.  Morgan Stanley agreed to reduce the price of the servicing rights by 
2% and to otherwise “take care” of CMC.  The parties also negotiated a written 
amendment to the Master Agreement, which the parties signed and dated 
retroactively to apply from January 2007 forward.  The amendment required 
Morgan Stanley to repurchase servicing rights at CMC’s option for any mortgage 
loans that, starting in January 2007, fell delinquent by 90 or more days within the 
first 12 months after their sale date.  Also, in that amendment, CMC and Morgan 
Stanley “in all respects ratified and confirmed” all the other terms, provisions, and 
conditions of the Master Agreement. 
7 
 
 
In early 2008, the Agencies began sending repurchase and make whole 
demands to CMC, as servicer of the loans, because many of the mortgages 
allegedly did not satisfy Agency guidelines.  The Agency Transfer Agreements 
obligated CMC either to repurchase the loans or to pay the make whole amounts.  
Initially, CMC merely forwarded the repurchase or make whole requests to 
Morgan Stanley, which then either repurchased the loans from CMC or reimbursed 
CMC for make whole payments 47 times in 2008 and early 2009. 
At some point, Morgan Stanley stopped repurchasing from, and reimbursing, 
CMC.  CMC alleges that it gave Morgan Stanley notice that Morgan Stanley had 
breached its agreements with CMC by failing to take back the loans the Agencies 
had returned to CMC but that Morgan Stanley declined to cure.  Instead, CMC 
itself either repurchased the loans from the Agencies or paid make whole payments 
with respect to about 50 loans after March 2009 that Morgan Stanley did not 
repurchase or reimburse.  When CMC filed this Court of Chancery action on 
December 14, 2009, 140 additional Agency repurchase or reimbursement demands 
were pending. 
In its complaint, CMC asserted 10 claims for relief against Morgan Stanley.  
Specifically, CMC claimed that Morgan Stanley breached the Master Agreement, 
breached the representations and warranties it made in the Master Agreement and 
the other transaction specific documents, repudiated the Master Agreement, 
8 
 
breached the implied covenant of good faith and fair dealing, unjustly enriched 
itself, has an implied duty to indemnify CMC requiring it to reimburse CMC for 
repurchases and make whole payments, and negligently misrepresented the 
characteristics of the loans it sold the Agencies.  CMC also argued that the court 
should rescind the Master Agreement because of CMC’s unilateral mistake 
regarding the nature of the loans for which CMC purchased servicing rights.  
Finally, CMC alleged that Morgan Stanley should be estopped from denying 
repurchase or repayment because CMC relied on Morgan Stanley’s promise that 
the loans satisfied Agency requirements and that it would indemnify CMC for any 
problems arising out of the sale of the loans to the Agencies. 
Morgan Stanley moved to dismiss all of CMC’s claims.  On August 19, 
2010, the Vice Chancellor dismissed all of CMC’s claims, but dismissed the 
breach of contract claims without prejudice, inviting CMC to replead them after 
providing proper notice.  CMC now appeals the Vice Chancellor’s dismissal, 
without prejudice, of its breach of contract claims, as well as the Vice Chancellor’s 
dismissal, with prejudice, of its claim that Morgan Stanley breached the implied 
covenant of good faith and fair dealing. 
9 
 
 
II. 
STANDARD OF REVIEW 
 
We review trial court rulings granting motions to dismiss de novo.3  We also 
review de novo the Court of Chancery’s interpretation of written agreements.4  
When reviewing a ruling on a motion to dismiss, we (1) accept all well pleaded 
factual allegations as true, (2) accept even vague allegations as “well pleaded” if 
they give the opposing party notice of the claim, (3) draw all reasonable inferences 
in favor of the non-moving party, and (4) do not affirm a dismissal unless the 
plaintiff would not be entitled to recover under any reasonably conceivable set of 
circumstances.5 
III. 
ANALYSIS 
 
The only claims that CMC contests in this appeal are CMC’s two breach of 
contract claims6 and its claim for breach of the implied covenant of good faith and 
fair dealing.  Pursuant to the Master Agreement, New York law governs CMC’s 
substantive claims.  The Vice Chancellor dismissed all three claims, but dismissed 
                                          
 
3 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896 (Del. 2002). 
4 Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160, 170 (Del. 2002). 
5 Savor, 812 A.2d at 896–97. 
6 Specifically, CMC claims that Morgan Stanley (1) breached the Master Agreement by selling 
servicing rights for loans that were never Agency eligible and (2) separately breached the 
representations and warranties it made in the Master Agreement with respect to the loans that are 
the subject of the servicing rights. 
10 
 
the breach of contract claims without prejudice on the basis of CMC’s alleged 
failure to follow the Master Agreement’s notice provision. 
A. 
THE VICE CHANCELLOR ERRONEOUSLY DISMISSED  
CMC’S BREACH OF CONTRACT CLAIMS ON THE 
BASIS OF INADEQUATE NOTICE. 
 
 
The Vice Chancellor dismissed CMC’s breach of contract claims on the 
basis that CMC failed to follow the requirements of the notice provision—namely, 
that CMC failed to provide Morgan Stanley adequate notice of the alleged 
breaches and a 60 day opportunity to cure those breaches.  The Vice Chancellor 
explained: 
There are two reasons why CMC failed to give notice under the 
contract.  First, attaching an exhibit to the complaint is not 
contractually proper notice under the Master Agreement, which 
required prompt written notice that allowed Morgan Stanley an 
opportunity to cure.  CMC’s exhibit does not provide Morgan Stanley 
with an opportunity to cure, because it was provided after CMC had 
initiated suit against Morgan Stanley and because it does not spell out 
what the breaches actually entailed.  Second, forwarding Agency loan 
files to Morgan Stanley after the Agencies returned the loans for non-
compliance with Agency guidelines is not proper notice because CMC 
did not point out to Morgan Stanley where the representations and 
warranties in the Master Agreement had been violated.7 
 
In other words, the Vice Chancellor concluded that CMC had failed to provide 
adequate notice to Morgan Stanley because the spreadsheet CMC attached to the 
                                          
 
7 Central Mortgage Co. v. Morgan Stanley Mortgage Capital Holdings LLC, 2010 WL 3258620, 
at *8 (Del. Ch. Aug. 19, 2010). 
 
11 
 
Complaint came too late to be “prompt” and because the Agency loan files that 
CMC previously forwarded to Morgan Stanley did not identify the breaches under 
the Master Agreement with sufficient specificity. 
 
The pleading standards governing the motion to dismiss stage of a 
proceeding in Delaware, however, are minimal.8  When considering a defendant’s 
motion to dismiss, a trial court should accept all well-pleaded factual allegations in 
the Complaint as true, accept even vague allegations in the Complaint as “well-
pleaded” if they provide the defendant notice of the claim, draw all reasonable 
inferences in favor of the plaintiff, and deny the motion unless the plaintiff could 
not recover under any reasonably conceivable set of circumstances susceptible of 
proof.9  Indeed, it may, as a factual matter, ultimately prove impossible for the 
plaintiff to prove his claims at a later stage of a proceeding, but that is not the test 
to survive a motion to dismiss. 
 
We most recently reaffirmed this “conceivability” pleading standard as 
governing Delaware law in 2002.  Then, in 2007, the United States Supreme Court, 
in Bell Atlantic Corp. v. Twombly, held that the proper pleading standard for 
certain federal antitrust claims to survive motions to dismiss is not 
                                          
 
8 See Savor, 812 A.2d at 896. 
9 Id. at 896–97. 
12 
 
“conceivability,” but rather “plausibility.”10  In 2009, the Supreme Court, in 
Ashcroft v. Iqbal, further explained this “plausibility” standard11 and confirmed 
that it applied to all federal civil actions.12  The Twombly-Iqbal “plausibility” 
pleading standard is higher than our governing “conceivability” standard, and it 
invites judges to “determin[e] whether a complaint states a plausible claim for 
relief” and “draw on . . . judicial experience and common sense.”13 
 
Since the Supreme Court decided Twombly in 2007, various members of the 
Court of Chancery have cited the Twombly-Iqbal “plausibility” standard with 
approval when adjudicating motions to dismiss.14  We have not had occasion yet to 
                                          
 
10 Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007) (“[W]e hold that stating such a 
claim requires a complaint with enough factual matter (taken as true) to suggest that an 
agreement was made.  Asking for plausible grounds to infer an agreement does not impose a 
probability requirement at the pleading stage . . . .”). 
 
11 Ashcroft v. Iqbal, 556 U.S. ___, 129 S.Ct. 1937, 1949 (2009) (“To survive a motion to dismiss, 
a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that 
is plausible on its face.  A claim has facial plausibility when the plaintiff pleads factual content 
that allows the court to draw the reasonable inference that the defendant is liable for the 
misconduct alleged.  The plausibility standard is not akin to a probability requirement, but it asks 
for more than a sheer possibility that a defendant has acted unlawfully.”) (citations omitted) 
(internal quotation marks omitted). 
 
12 Id. at 1953. 
13 Id. at 1950.  Our governing “conceivability” standard is more akin to “possibility,” while the 
federal “plausibility” standard falls somewhere beyond mere “possibility” but short of 
“probability.” 
 
14 See, e.g., QVT Fund LP v. Eurohypo Capital Funding LLC I, 2011 WL 2672092 (Del. Ch. July 
8, 2011); Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, 2011 WL 1348438 (Del. 
Ch. Apr. 8, 2011); Nichols v. Chrysler Group, LLC, 2010 WL 5549048 (Del. Ch. Dec. 29, 2010); 
MicroStrategy Inc. v. Acacia Research Corp., 2010 WL 5550455 (Del. Ch. Dec. 30, 2010); 
13 
 
address the impact, if any, that the United States Supreme Court’s holdings in 
Twombly and Iqbal should have on the Delaware standard.  Indeed, the Vice 
Chancellor explicitly cited the “plausibility” standard in this very case.15  We 
decline to use this case as the vehicle to address whether the Twombly-Iqbal 
holdings affect our governing standard, considering that the parties have not fully 
and fairly litigated the issue before either the Vice Chancellor or this Court.  
Instead, we emphasize that, until this Court decides otherwise or a change is duly 
effected through the Civil Rules process, the governing pleading standard in 
Delaware to survive a motion to dismiss is reasonable “conceivability.”16 
 
In this case, CMC alleged at Paragraph 79 of its Complaint that: 
For every loan that Morgan Stanley has refused to repurchase from, or 
reimburse, Central Mortgage, Central Mortgage has given Morgan 
Stanley notice and at least 60 days opportunity to cure its breaches by 
notifying Morgan Stanley of the repurchase or reimbursement request 
and the specific grounds on which the relevant Agency required the 
repurchase or reimbursement.  Morgan Stanley has declined to cure 
the breach with respect to the loans at issue in this case. 
                                                                                                                                        
Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405 (Del. Ch. Dec. 22, 2010); 
Airborne Health, Inc. v. Squid Soap, LP, 2010 WL 2836391 (Del. Ch. July 20, 2010); Morgan v. 
Cash, 2010 WL 2803746 (Del. Ch. July 16, 2010); BASF Corp. v. POSM II Props. P’ship, L.P., 
2009 WL 522721 (Del. Ch. Mar. 3, 2009); Agilent Techs., Inc. v. Kirkland, 2009 WL 119865 
(Del. Ch. Jan. 20, 2009); In re Seneca Invs. LLC, 970 A.2d 259 (Del. Ch. 2008); Rhodes v. 
Silkroad Equity, LLC, 2007 WL 2058736 (Del. Ch. July 11, 2007); Desimone v. Barrows, 924 
A.2d 908 (Del. Ch. 2007). 
 
15 See Central Mortgage Co., 2010 WL 3258620, at *7 (citing Desimone, 924 A.2d at 929). 
16 Cf. Webb v. Nashville Area Habitat for Humanity, 2011 WL 2905584, at *6 (Tenn. 2011) 
(declining to adopt the Twombly-Iqbal standard in Tennessee after full and fair litigation of the 
issue “squarely present[ed]” it to the court). 
14 
 
 
In this pleading, CMC asserts that it provided notice independent of the 
spreadsheet it attached to its Complaint, and that the notice it provided included 
“specific grounds.”  The Vice Chancellor decided that forwarding the Agency loan 
files, as CMC alleged it did, provided insufficiently specific notice to satisfy the 
Master Agreement’s notice requirements.  Whether this notice was sufficient as a 
matter of fact is an inquiry more appropriate for a later stage of the proceeding.  
We, therefore, take no position on the issue at this stage.  All that matters at the 
motion to dismiss stage is that CMC’s well-pleaded Complaint alleges that it 
provided adequate notice to Morgan Stanley and that its claim, if proven, would 
entitle CMC to relief under a reasonably conceivable set of circumstances. 
In this connection, the Complaint also alleges, and it bears notation, that on 
47 separate occasions, Morgan Stanley in fact repurchased loans from CMC or 
reimbursed CMC for make whole payments CMC paid the Agencies.  Morgan 
Stanley responded those 47 times based solely on CMC forwarding Agency loan 
files to Morgan Stanley.  On appeal, CMC contends that this fact alone proves that 
forwarding the loan files constituted sufficient notice.  Morgan Stanley asserts, 
however, that in those 47 instances it did not act out of a contractual obligation and 
that its conduct does not establish that CMC satisfied the notice provision of the 
Master Agreement.  Rather, Morgan Stanley asserts that it repurchased or 
15 
 
reimbursed those 47 times only to preserve a positive working relationship with 
CMC.  At the motion to dismiss stage, however, it matters not which party’s 
assertions are actually true. We must draw all reasonable inferences in favor of 
CMC, and it is reasonable to infer that Morgan Stanley repurchased or reimbursed 
the first 47 times because it had sufficient notice of its breaches and was acting to 
cure them. 
  By eliding the inquiry—whether CMC’s well-pleaded Complaint stated a 
claim that is provable under any reasonably conceivable set of circumstances—and 
instead deciding substantively that CMC did not provide adequate notice, the Vice 
Chancellor inappropriately shifted the burden and held CMC to a higher standard 
than required.17  To reiterate, at this stage, we make no judgment on the substantive 
adequacy of the notice.  We also decline to address CMC’s alternative claim that 
under New York law the notice provision is not a condition precedent to filing suit.  
For even assuming the notice provision is a condition precedent, CMC’s well-
pleaded complaint adequately pleads compliance with that provision.18  We reverse 
the Vice Chancellor’s dismissal of CMC’s breach of contract claims because 
                                          
 
17 See id. 
 
18 See id.  See also Ct. Ch. R. 9(c) (“Conditions precedent.—In pleading the performance or 
occurrence of conditions precedent, it is sufficient to aver generally that all conditions precedent 
have been performed or have occurred.  A denial of performance or occurrence shall be made 
specifically and with particularity.”). 
 
16 
 
CMC’s pleadings regarding notice satisfy the minimal standards required at this 
early stage of litigation. 
B. 
THE VICE CHANCELLOR ERRONEOUSLY DISMISSED  
CMC’S IMPLIED COVENANT OF GOOD FAITH AND 
FAIR DEALING CLAIM. 
 
 
The Vice Chancellor dismissed CMC’s claim that Morgan Stanley breached 
the implied covenant of good faith and fair dealing on the basis that the factual 
basis for the claim was the same as, and was therefore subsumed by, CMC’s 
breach of contract claims.19  CMC pleaded various additional facts, however, that 
provide a separate basis for its implied covenant of good faith and fair dealing 
claim.  Therefore, the claim should not have been dismissed. 
 
New York law implies an obligation of good faith and fair dealing into all 
contracts.20  New York’s implied covenant “requires that no party to [a] contract . . 
. do anything which will destroy or injure the right of another party to receive the 
                                          
 
19 Central Mortgage Co., 2010 WL 3258620, at *10 (“[B]ecause there is ‘no difference between 
the factual underpinnings of [CMC’s] breach of contract claims and its claim for breach of the 
implied covenant of good faith and fair dealing,’ Count IV is dismissed.”) (quoting Sauer v. 
Xerox Corp., 95 F.Supp.2d 125, 132 (W.D.N.Y. 2000)). 
 
20 Wells Fargo Bank NW, N.A. v. Sundowner Alexandria, LLC, 2010 WL 3238948, at *4 
(S.D.N.Y. Aug. 16, 2010). 
 
17 
 
benefits of the contract.”21  A party may breach the implied covenant even if it is 
not in breach of the underlying contract.22 
Importantly for this case, under New York law a party may maintain a claim 
for breach of the implied covenant of good faith and fair dealing only if the factual 
allegations underlying the implied covenant claim differ from those underlying an 
accompanying breach of contract claim.23  Thus, where a claim for breach of the 
implied covenant is duplicative of a breach of contract claim, the implied covenant 
claim is subject to dismissal.24  On the other hand, when a claim for breach of the 
implied covenant depends on facts apart from those that might support a breach of 
contract claim, then the claim is not duplicative and is not subject to dismissal.25 
 
In this case, CMC pleaded two separate breach of contract claims in addition 
to its claim that Morgan Stanley breached the implied covenant of good faith and 
fair dealing.  The essence of its first breach of contract claim is simple.  As CMC 
explained in Paragraph 97 of its Complaint: 
                                          
 
21 Chase Manhattan Bank, N.A. v. Keystone Distribs. Inc., 873 F.Supp. 808, 815 (S.D.N.Y. 
1994). 
 
22 Id. 
23 Siradas v. Chase Lincoln First Bank, N.A., 1999 WL 787658, at *8 (S.D.N.Y. 1999) (citing 
Geler v. Nat’l Westminster Bank USA, 770 F.Supp. 210, 215 (S.D.N.Y. 1991)). 
 
24 Fantozzi v. Axsys Techs., Inc., 2007 WL 2454109, at *2 (S.D.N.Y. Aug. 20, 2007). 
25 See, e.g., id. at *3. 
18 
 
Morgan Stanley has materially breached the contract by selling the 
servicing of nearly fifty (so-far-confirmed) non-Agency mortgages. 
 
In other words, in its first breach of contract claim, CMC pleaded that (1) the 
contract required Morgan Stanley to sell CMC only “Agency mortgages,” and (2) 
Morgan Stanley failed to perform that obligation.  The essence of its second breach 
of contract claim is also simple.  As CMC explained in Paragraph 108 of its 
Complaint: 
Morgan Stanley [made] multiple independent breaches of its 
representations and warranties, including without limitation its failure 
to provide true, complete, and accurate information regarding the 
loans . . . . 
 
In other words, in its second breach of contract claim, CMC pleaded that (1) 
Morgan Stanley represented and warranted in the contract that it would perform 
various obligations, including providing true, complete, and accurate information 
regarding the loans, and (2) Morgan Stanley failed to perform that which it 
represented it would do. 
 
In its claim for breach of the implied covenant, CMC does not allege that 
merely because Morgan Stanley breached the terms of its agreements with CMC it 
therefore also breached the implied covenant.26  Instead, CMC relevantly alleges in 
Paragraph 123 of its Complaint: 
                                          
 
26 Contra Washington v. Kellwood Co., 2009 WL 855652, at *6 (S.D.N.Y. Mar. 24, 2009) 
(granting motion to dismiss a claim for breach of the implied covenant because “a claim for good 
19 
 
[Morgan Stanley’s] actions have impeded [CMC’s] right to receive 
the benefits that [CMC] reasonably expected under the contract. 
 
In other words, CMC alleges that Morgan Stanley violated the implied covenant by 
“depriv[ing] [CMC] of the benefit of its bargain.”27  That is a different claim from 
the two breach of contract claims.  A different factual basis supports that claim in 
CMC’s pleadings. 
Elsewhere in its Complaint, CMC alleges that Morgan Stanley (1) had 
courted CMC by inviting CMC to tour its due diligence facility in Boca Raton, 
Florida, (2) told CMC that it had hired a company known for mortgage due 
diligence to review each loan file to make sure it satisfied applicable Agency 
underwriting criteria, and (3) eventually disclosed to CMC that it had not 
performed the promised due diligence on the first batch of loans for which CMC 
purchased servicing rights.28  These factual allegations adequately provide the 
basis for CMC’s implied covenant claim that Morgan Stanley engaged in a “bait 
and switch” by inducing CMC to buy servicing rights to its detriment. 
Critically, these facts do not support either of CMC’s breach of contract 
claims.  With respect to its first breach of contract claim—that Morgan Stanley 
                                                                                                                                        
faith and fair dealing based on the ‘breach of the terms of each agreement’ is necessarily 
duplicative of a breach of contract claim”). 
 
27 Sauer, 95 F.Supp.2d at 132. 
28 Specifically, CMC pleaded these facts at Paragraphs 26, 28, and 52 of its Complaint. 
20 
 
breached the contract by selling servicing rights on non-Agency mortgages—CMC 
nowhere alleges that the contract required Morgan Stanley to conduct certain due 
diligence on the mortgages.  As for its second breach of contract claim—that 
Morgan Stanley breached its representations and warranties including its promise 
to provide true, complete, and accurate information about the loans—CMC also 
does not plead that the representations and warranties required specific due 
diligence.  Indeed, the Master Agreement contained no representation or warranty 
by Morgan Stanley that it would perform due diligence—much less of a specific 
type or at a specific facility—on the loans.  To be sure, Morgan Stanley 
represented and warranted that it would provide CMC with information related to 
the mortgage loans that is “true, complete, and accurate in all material respects.”  
For Morgan Stanley to promise to give CMC true, complete, and accurate 
information is different, however, than for it to promise to perform a certain 
specific kind of due diligence.  Morgan Stanley made the former promise in the 
contract—a promise that serves as part of the basis for CMC’s second breach of 
contract claim.  CMC alleges that Morgan Stanley made the latter promise outside 
the contract—a fact that serves as part of the basis for CMC’s claim for breach of 
the implied covenant. 
Because the claims are not duplicative, the Vice Chancellor erroneously 
dismissed CMC’s claim for breach of the implied covenant on that basis.  We do 
21 
 
not address whether CMC’s pleading with respect to the implied covenant could 
survive summary judgment or prevail at trial.  We hold only that CMC’s implied 
covenant claim is sufficiently distinct from its breach of contract claims and 
sufficiently well pleaded to survive Morgan Stanley’s Motion to Dismiss. 
IV. 
CONCLUSION 
 
For the foregoing reasons, we reverse the Vice Chancellor’s judgment 
dismissing all three of CMC’s claims, and remand this case to the Court of 
Chancery for further proceedings consistent with this Opinion.