Affordable Cmtys. Missouri v. Fed. Nat'l Mortg. Ass'n

• Decision Date: 09 May 2013
• Docket Number: No. 12–2334.,12–2334.
• Citation: 714 F.3d 1069
• Court: U.S. Court of Appeals — Eighth Circuit
• Parties: AFFORDABLE COMMUNITIES OF MISSOURI, Plaintiff–Appellant v. FEDERAL NATIONAL MORTGAGE ASSOCIATION, a federally chartered corporation, Defendant–Appellee EF & A Capital Corporation; EF & A Funding LLC, Defendants.

714 F.3d 1069

AFFORDABLE COMMUNITIES OF MISSOURI, Plaintiff–Appellant

v. FEDERAL NATIONAL MORTGAGE ASSOCIATION, a federally chartered corporation, Defendant–AppelleeEF & A Capital Corporation; EF & A Funding LLC, Defendants.

No. 12–2334.

United States Court of Appeals, Eighth Circuit.

Submitted: March 12, 2013.

Filed: May 9, 2013.

Glenn Eugene Davis, argued, Saint Louis, MO, for Appellant.

John Gerard Young, Jr., argued, Ryan A. Kemper, on the brief, Saint Louis, MO, for Appellee.

Before MURPHY, SMITH, and GRUENDER, Circuit Judges.

MURPHY, Circuit Judge.

Affordable Communities of Missouri purchased the Jefferson Arms Apartments, a senior independent living complex in St. Louis, Missouri, in 1993. In 1999 Affordable refinanced its debt on Jefferson Arms with a loan from Eichler, Fayne, and Associates (EFA) which would penalize Affordable if it voluntarily prepaid the debt. EFA sold the loan to Federal National Mortgage Association (Fannie Mae) but continued to service it. In 2005 the city of St. Louis threatened to condemn Jefferson Arms, and Affordable sold the property to another developer. EFA demanded that Affordable pay the prepayment penalty. Affordable disagreed that it was subject to the penalty, and it sued EFA and Fannie Mae for negligent misrepresentation, breach of contract, breach of the covenant of good faith and fair dealing, and unjust enrichment. After Affordable settled its claims against EFA, Fannie Mae moved to dismiss. The district court granted Fannie Mae's motion, concluding that EFA had not acted as Fannie Mae's agent in originating the loan and that the loan documents unambiguously authorized the prepayment penalty. Affordable appeals. We affirm in part, reverse in part, and remand for further proceedings.

I.

Affordable is a Nevada limited partnership that owned the Jefferson Arms Apartments, a senior independent living center in St. Louis, and its adjoining parking garage. Jefferson Arms had been built at the beginning of the twentieth century, and after purchasing it in 1993 Affordable invested significant funds renovating and modernizing the property.

In August 1998 Affordable contacted EFA seeking to refinance its existing secured debt on Jefferson Arms. EFA originates loans secured by mortgages on multifamily properties like Jefferson Arms, operating exclusively under Fannie Mae's delegated underwriting and servicing (DUS) program. Since federal law prohibits Fannie Mae from originating loans, see12 U.S.C. § 1719(a)(2)(B), it operates the DUS program to purchase loans on the secondary mortgage market. These loans were originated and serviced by lenders such as EFA. Fannie Mae imposes certain requirements on loans originated through the DUS program, and originators share with Fannie Mae the associated risk of loss on any such loans.

Representatives of EFA and Affordable met to discuss refinancing. The EFA representative explained that the DUS program penalized borrower prepayment because that would cause Fannie Mae to forfeit expected interest income on the loan. The EFA representative gave Affordable the choice between one of two prepayment penalties. One was a “yield maintenance” option which would impose a onetime fee upon prepayment. The second was a “defeasance” option which would allow Fannie Mae to use prepayment funds to purchase securities at the prevailing rate for mortgages on multifamily apartment buildings, and then to substitute those assets for its lien on Jefferson Arms. Both prepayment penalties would be calculated to ensure that Fannie Mae would collect no less if Affordable repaid the debt early. According to Affordable, the EFA representative indicated that “the defeasance option should cost a borrower less than the yield maintenance option.” Based on this advice, Affordable selected the defeasance option.

EFA agreed to lend Affordable approximately $8 million, and in April 1999 they executed loan documents consisting of a “Fannie Mae Multifamily Note” and a “Fannie Mae Multifamily Security Instrument.” The security instrument incorporated by reference an exhibit describing the defeasance provision, which stated that the penalty would not apply in the case of “a prepayment occurring as the result of any ... condemnation award under the Security Instrument.” Rather, in the event of condemnation, any proceeds from the sale would be transferred to Fannie Mae to satisfy the debt, and Affordable would not be liable for any additional fees. After executing the loan, EFA sold and assigned it to Fannie Mae in the secondary mortgage market.

In 2005, the city of St. Louis threatened to use its eminent domain power to acquire Jefferson Arms through condemnation. The city suggested that as an alternative to condemnation, Affordable could convey Jefferson Arms to another developer who would rehabilitate the property. Affordable agreed to sell Jefferson Arms to the new developer, noting in its sale documents that the property was being transferred in lieu of the threatened condemnation. Affordable then wrote to EFA to inform it of the sale and seek a release of its lien on the property. Since the sale had occurred in lieu of condemnation, Affordable contended that it was covered by the “condemnation award” exception in the loan documents and did not trigger the prepayment penalty.

Fannie Mae disagreed that the sale fell within any exception to the prepayment penalty, and EFA informed Affordable on behalf of Fannie Mae that the lien would not be released until the defeasance process was complete. To complete the process, Affordable was required to pay a “defeasance deposit” equal to one percent of the outstanding loan and to give Fannie Mae notice of the defeasance so it could purchase securities to substitute for the mortgage on Jefferson Arms. Fannie Mae determined that the appropriate substitute collateral was a Fannie Mae investment security with an interest rate of less than five percent. Since the interest rate on Affordable's loan was more than seven percent, Affordable was obligated to make up the difference. In July 2006 Affordable completed the defeasance process, obtained a release of the lien on Jefferson Arms, and sold the property to the new developer. Affordable alleges that it paid Fannie Mae approximately $500,000 through the defeasance process in addition to the outstanding loan balance.

In March 2011 Affordable sued EFA and Fannie Mae in state court for negligent misrepresentation, breach of contract, breach of the covenant of good faith and fair dealing, and unjust enrichment. Affordable contended that EFA had negligently misrepresented that the defeasance provision would cost less than the yield maintenance option, and that Fannie Mae was vicariously liable for the misrepresentation because EFA had acted as Fannie Mae's agent when it originated the loan. Affordable also argued that EFA and Fannie Mae had breached the security instrument by enforcing the prepayment penalty because the sale had occurred in lieu of condemnation, and such a sale was exempted under the defeasance provision of the loan documents. It sought to recover the $500,000 cost of the defeasance process.

The suit was removed to federal district court, and Affordable settled its claims against EFA in May 2012. Fannie Mae then moved to dismiss Affordable's claims against it. It argued that Affordable's negligent misrepresentation claim should be dismissed because Affordable had failed to plead facts showing that EFA was acting as Fannie Mae's agent when the alleged misrepresentation occurred. Fannie Mae also contended that Affordable's claims for breach of contract, breach of the covenant of good faith and fair dealing, and unjust enrichment should be dismissed because the loan documents had unambiguously authorized the prepayment penalty. The district court agreed with Fannie Mae and granted its motion to dismiss on all counts.

Affordable appeals, arguing that the district court erred by concluding that there had been no agency relationship between Fannie Mae and EFA when the loan was executed and by determining that the loan documents exempted only prepayments that were the result of an actual, not merely threatened, condemnation.

II.

We review the grant of a motion to dismiss de novo, taking the facts alleged in the complaint as true. Zutz v. Nelson, 601 F.3d 842, 848 (8th Cir.2010). To survive a motion to dismiss, a complaint “need not include detailed factual allegations,” C.N. v. Willmar Pub. Sch., Indep. Sch. Dist. No. 347, 591 F.3d 624, 629 (8th Cir.2010), but it must contain “enough facts to state a claim to relief that is plausible on its face,” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The plausibility standard requires a plaintiff to “plead[ ] factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

A.

Affordable first argues that the district court erred by concluding that EFA had not acted as Fannie Mae's agent when it originated the loan secured by Jefferson Arms. The parties agree that Missouri law governs. Three elements are required to demonstrate an agency relationship under Missouri law: (1) the agent has the power “to alter legal relationships between the principal and a third party,” (2) the agent is “a fiduciary of the principal,” and (3) the principal has “the right to control the conduct of the agent with respect to matters entrusted to the agent.” State ex rel. McDonald's Corp. v. Midkiff, 226 S.W.3d 119, 123 (Mo.2007). The “absence of any one of the three elements of agency defeats a claim that agency exists.” State ex rel. Bunting v. Koehr, 865 S.W.2d 351, 353 (Mo.1993). Affordable bears the burden of proving an agency relationship, and when there is no conflicting evidence the existence of such a relationship is a question of law. Jennings v. City of...