ROBERT W. GETTLEMAN, District Judge.
Counter-plaintiff Townstone Financial ("Townstone") has brought a three-count counterclaim against counter-defendant Fifth Third Mortgage Company ("Fifth Third"). Count I alleges that Fifth Third breached the contract between Townstone and Fifth Third by failing to properly underwrite the loan at issue in this case. Count II alleges that Fifth Third breached its contract with Townstone by breaching the implied covenant of good faith and fair dealing. Count III alleges negligence against Fifth Third related to the underwriting of the loan. Fifth Third has moved to dismiss the counterclaim pursuant to Fed. R. Civ. P. 12(b)(6). For the reasons set forth below, Fifth Third's motion to dismiss the counterclaim is granted.
On October 2, 2011, Townstone and Fifth Third entered into a Correspondent Lending Agreement (the "Agreement"), in which Townstone agreed to sell mortgage loans originated by Townstone to Fifth Third. The Agreement incorporates the terms of Fifth Third's Correspondent Seller Guide (the "Guide"), which outlines the process by which sellers submit loans and are approved for purchase. According to the Guide, Townstone is a non-delegated correspondent lender, which means that Fifth Third, not Townstone, is responsible for underwriting loans that Townstone sells to Fifth Third. Townstone provides a credit package to Fifth Third for each loan, and, in turn, Fifth Third completes the underwriting and issues an approval to purchase the loan. Once the purchase has been approved, Townstone prepares the closing documents and corrects any deficiencies that Fifth Third has requested. Additionally, the Agreement states multiple circumstances under which Townstone must repurchase the loans sold to Fifth Third. One of these enumerated circumstances is that Townstone agrees to repurchase the loan from Fifth Third if Fifth Third is obligated to repurchase the loan from Fannie Mae.
On September 11, 2012, Townstone closed a mortgage loan with borrower Phyllis Mitzen and submitted the credit package to Fifth Third. Fifth Third required Townstone to submit an updated appraisal on Mitzen's mortgaged property, which Townstone did. Fifth Third purchased the loan on October 2, 2012. On December 24, 2012, Fifth Third sold the loan to Fannie Mae. On August 7, 2013, Fannie Mae demanded that Fifth Third repurchase the loan due to two deficiencies: (1) the debt-to-income ratio had been improperly calculated, and the true ratio made the loan ineligible for purchase by Fannie Mae, and (2) because the updated appraisal showed a decline in value of the mortgaged property, a new appraisal was required but was not provided to Fannie Mae. Upon repurchasing the Mitzen loan from Fannie Mae, Fifth Third demanded that Townstone repurchase the loan. Townstone has refused to repurchase the loan because it alleges that Fifth Third, as underwriter, was responsible for ensuring that the documents in Mitzen's loan satisfied Fannie Mae's lending guidelines, including ensuring that the borrower's debt-to-income is acceptable.
On March 17, 2014, Fifth Third filed a lawsuit against Townstone for breach of contract, alleging that Townstone is in default because it refused to repurchase the Mitzen loan. Fifth Third is seeking actual damages of $420,781.17, the cost for Fifth Third to repurchase the loan, along with additional damages incurred. Townstone filed an answer and a counterclaim, alleging that Fifth Third breached the contract for failing to properly underwrite the loan, for violating the implied covenant of good faith and fair dealing, and that Fifth Third was negligent in failing to properly underwrite the loan. Fifth Third has moved to dismiss the counterclaim.
Fifth Third has moved to dismiss under Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted. The purpose of such a motion is to test the sufficiency of the counterclaim, not rule on its merits.
Townstone alleges that Fifth Third breached the Agreement by failing to properly underwrite the Mitzen loan because Fifth Third had the responsibility under the Guide to ensure that the loan documents satisfied Fannie Mae's guidelines. Because the Guide designated Townstone as a "non-delegated correspondent lender," Townstone argues that Fifth Third had the unconditional and exclusive duty to properly underwrite the loans.
Fifth Third argues that the Agreement is unambiguous that, even though Fifth Third was the underwriter, Townstone is required to repurchase the Mitzen loan, and therefore Townstone's claim for breach of contract is precluded by the express terms of the Agreement.
In considering a counterclaim, the court considers not only the counterclaim itself, but also the documents that are attached or are critical to the pleading.
Townstone is unable to point to any section of the Agreement or the Guide that states that it is Fifth Third's responsibility to ensure that the loans satisfy Fannie Mae's guidelines. Instead, Townstone relies on the provisions of the Guide that articulate Fifth Third's obligation to underwrite the loan. However, Section 1.3 of the Agreement specifically states that "[t]he fact that [Fifth Third] has reviewed the Loan File either prior to the Closing Date or after the Closing Date or both, does not affect any of [Townstone's] obligations or [Fifth Third's] rights including repurchase or indemnification rights under this Agreement." The Agreement further states at § 3.1 that Townstone "agrees to repurchase any Loan File sold to [Fifth Third] pursuant to the agreement within thirty calendar days of receipt of written notice from [Fifth Third] of any of the following circumstances[:] . . . 3.1.8 If [Fifth Third] is obligated to repurchase the Loan File from . . . Fannie Mae." These two provisions, read in concert, demonstrate that the parties intended Townstone to assume loans that Fifth Third was required to repurchase from Fannie Mae, regardless of the fact that Fifth Third reviewed and approved the loan file.
Further, Section 3.1.4 states that Townstone is required to repurchase a loan if the mortgage is past due and Townstone, not Fifth Third, is the underwriter. This subsection specifically states that repurchase on the past due loan is required only if Townstone was the underwriter. Therefore, the parties clearly contemplated situations where the risk would shift depending on which party underwrote the loan. Reading Section 3.1.8 in conjunction with Section 3.1.4 clearly indicates that the parties allocated the risk of a forced repurchase from Fannie Mae onto Townstone regardless of whether Fifth Third was the underwriter.
The court agrees that the express terms of the Agreement preclude Townstone's claim that Fifth Third breached the contract for improperly underwriting the Mitzen loan. Accordingly, Fifth Third's motion to dismiss Count I is granted.
In Count Two, Townstone alleges that Fifth Third breached its obligations under the Agreement by breaching the implied covenant of good faith and fair dealing in its attempt to enforce the terms of the Agreement against Townstone despite Fifth Third's own allegedly negligent underwriting practices. Fifth Third argues in response that there is no cause of action for breach of covenant of good faith and fair dealing under Ohio law.
Townstone cites
Although Ohio law recognizes a cause of action for breach of contract for breach of good faith and fair dealing, Townstone has not alleged facts sufficient to state such a claim. Townstone alleges that Fifth Third breached its duty of good faith and fair dealing by negligently performing the underwriting of the Mitzen loan. Negligence, however, is not equivalent to a failure to act in good faith.
Townstone argues that Fifth Third breached its duty of care to Townstone by negligently failing to ensure that the Mitzen loan met Fannie Mae's lending guidelines. Fifth Third asserts that the economic loss doctrine, which requires there to be physical injury when one asserts negligence, precludes the negligence claim. Fifth Third relies on Ohio Supreme Court precedent in
Townstone relies on two cases from Ohio appellate courts to argue that Ohio law authorizes negligence claims related to breach of contract, and that Count III may survive the motion to dismiss. First, Townstone relies on
For the reasons discussed above, Fifth Third's motion to dismiss the counterclaim is granted. The parties are directed to file a Joint Status Report consistent with this court's form on or before September 22, 2014. This matter remains set for status on September 30, 2014.