STEELE, Chief Justice:
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 Chancellor
Morgan Stanley is in the business of purchasing residential mortgage loans
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 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:
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
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.
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.
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
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, 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.
We review trial court rulings granting motions to dismiss de novo.
The only claims that CMC contests in this appeal are CMC's two breach of contract
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:
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 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.
We most recently reaffirmed this "conceivability" pleading standard as governing
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.
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 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.
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.
New York law implies an obligation of good faith and fair dealing into all contracts.
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.
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:
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
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.
In other words, CMC alleges that Morgan Stanley violated the implied covenant by "depriv[ing] [CMC] of the benefit of its bargain."
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.
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 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,
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 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.
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.