Armstrong v. Federal Nat. Mortg. Ass'n, 84-2271

• Decision Date: 21 July 1986
• Docket Number: No. 84-2271,84-2271
• Citation: 796 F.2d 366
• Parties: F.G. ARMSTRONG, Trustee of Equity Liquidating Trust, Plaintiff-Appellant, v. FEDERAL NATIONAL MORTGAGE ASSOCIATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 366

796 F.2d 366

F.G. ARMSTRONG, Trustee of Equity Liquidating Trust Plaintiff-Appellant, v. FEDERAL NATIONAL MORTGAGE ASSOCIATION, Defendant-Appellee.

No. 84-2271.

United States Court of Appeals Tenth Circuit.

July 21, 1986.

W. Chris Coleman (McAfee & Taft, A Professional Corporation, with him on brief, of counsel), Oklahoma City, Okl., for plaintiff-appellant.

Linda G. Scoggins, of Spradling, Alpern, Friot & Gum, Okl., City, Oklahoma, (Jeffrey H. Contreras with her on brief), for defendant-appellee.

Before SEYMOUR, TACHA and McWILLIAMS, Circuit Judges.

McWILLIAMS, Circuit Judge.

F.G. Armstrong, Trustee of Equity Liquidating Trust, formerly Equity Mortgage Co., Inc. (Equity), brought suit against Federal National Mortgage Association ^MA in the United States District Court for the Western District of Oklahoma. Equity sought recovery of the sum of $25,802.53, which sum, according to Equity, was "wrongfully extracted" from it by FNMA. This alleged wrongful extraction resulted from FNMA imposing a "transfer fee" in connection with Equity's sale of its loan-servicing business to Mager Mortgage Co. (Mager). Jurisdiction is based on diversity of citizenship. 28 U.S.C. Sec. 1332. Trial of the case was to a jury, which returned a verdict in favor of Equity and against FNMA in the amount asked for, namely, $25,802.53. Thereafter, FNMA filed a motion for judgment n.o.v., which motion, after hearing, was granted. The trial court held, in effect, that, under the contract between the parties, FNMA had a right, as a matter of law, to impose a transfer fee in connection with the sale by Equity of its business to Mager. Accordingly, the trial court set aside the verdict of the jury and entered judgment for FNMA. Equity appeals. We affirm.

Equity was a mortgage company in Blackwell, Oklahoma, engaged in the business of making loans for the purchase of residential properties, and taking, in exchange, mortgages on such homes. The funds used for the loans did not actually come from Equity, but from so-called "secondary investors," such as FNMA, an agency of the federal government. FNMA invests in the home mortgage market by purchasing home mortgages from qualified financial institutions, such as Equity, who originate the mortgages. Accordingly, FNMA, as the secondary, or real, investor would purchase a note and mortgage from Equity.

FNMA would thereafter enter into a servicing contract with Equity whereby Equity, for a fee, would "service" the loan. Servicing a loan includes generally keeping track of the mortgaged property, making certain the payments on the note are kept current, inspecting the mortgaged property, making certain that the property is insured, that taxes are paid on time, and the like. Equity not only serviced loans for mortgages sold to FNMA, but also serviced loans for other secondary investors to whom they had sold mortgages, including insurance companies, banks, and county bond authorities. There was a written "Servicing Contract" between Equity and FNMA, about which more will be said later.

In the fall of 1981, the shareholders in Equity decided to liquidate and accordingly began to search for a purchaser of their entire portfolio of loans, including the loans and mortgages which they serviced for FNMA. These efforts to sell culminated in a sale in July, 1982, by Equity of its entire portfolio to Mager. It was in connection with this sale that FNMA demanded payment of a transfer fee in exchange for its consent to the transfer. The amount originally requested was approximately $52,000, which sum, after negotiation between the parties, was reduced to $25,802.53. Equity then paid FNMA the sum of $25,802.53, under protest. Equity's position was that its payment was under "economic duress," since the purchaser of its portfolio, Mager, would only take the entire portfolio, not Equity's portfolio less the servicing contracts it had with FNMA. ¹ In this regard, FNMA's position was that this was a "voluntary payment" by Equity resulting from a negotiated settlement of the dispute. In our view, Equity's letter protesting the payment protected Equity's right to later challenge imposition of the transfer fee.

As indicated, there was a written servicing contract between Equity and FNMA. This was a pre-printed form prepared by FNMA. The Servicing Contract itself makes no mention of a transfer fee. However, and most importantly, the contract does provide that Equity may not transfer or assign its interest in the servicing contract unless it has the written consent of FNMA.

Paragraph 1 of the Servicing Contract between Equity and FNMA provides, inter alia, as follows:

Each of the following documents is hereby incorporated in and made part of this Contract, provided that Servicer is authorized by paragraph 15 of this Contract to service the type(s) of mortgages covered by such document: the FNMA Home Mortgage Servicing Contract Supplement; and the FNMA Conventional Multifamily Servicing Contract Supplement. Such supplements, as published and distributed by FNMA, and as they shall exist and be amended or supplemented from time to time by FNMA, including all amendments and supplements thereto and all instruments succeeding or superseding the aforesaid supplements in whole or in part, in every form whatsoever, are collectively referred to in this Contract as the "Servicing Supplement." (emphasis added)

Paragraph 7 of the Servicing Contract provides as follows:

7. NO ASSIGNMENT OF CONTRACT; CONDITIONS UPON CONTINUATION. This Contract shall be construed as being in the nature of a personal service agreement and accordingly may not be assigned by Servicer under any circumstances. Servicer also may not assign its responsibility for servicing individual mortgages except as provided in paragraph 8 of this Contract. Servicer hereby acknowledges and agrees that servicer has paid no monetary consideration to FNMA for FNMA's approval of Servicer as a qualified mortgage servicer except for an application fee intended to reimburse FNMA for expenses incurred in reviewing Servicer's application for approval, that this Contract has no value to Servicer except for the compensation to be paid, and any termination fee which may be paid, to Servicer by FNMA pursuant to the terms of this Contract and, furthermore, that Servicer may continue to enjoy the benefits to be derived from this Contract only so long as there is no substantial change in the ownership or legal status of Servicer, except as such change is approved by FNMA. (emphasis added)

Paragraph 8 of the Servicing Contract provides as follows:

8. ASSIGNMENT OF RESPONSIBILITY FOR SERVICING MORTGAGES. Servicer, at any time prior to FNMA's giving Servicer notice of termination pursuant to paragraph 10 of this Contract, upon obtaining FNMA's prior written consent, may assign its responsibility for servicing all or any part of the FHA/VA mortgages which Servicer is then servicing for FNMA. Any assignment shall be made to a transferee servicer which is acceptable to FNMA for the servicing of the mortgages assigned and which has entered into a servicing contract with FNMA. Servicer and the transferee servicer shall execute such documents and perform such acts as FNMA reasonably may require to evidence and perfect such assignment. Servicer may not assign its responsibility for servicing conventional mortgages except as permitted by FNMA, as provided in the Servicing Supplement. (emphasis added)

Prior to July, 1981, FNMA did not impose a transfer fee when one of its servicers assigned or transferred its interest or responsibility under a servicing contract to another. Also, FNMA's consent to an assignment of this sort was apparently given, as a matter of course, once FNMA determined, to its satisfaction, that the one to whom the sale was being made was a responsible and capable servicer. However, in July, 1981, there was a change in policy, and FNMA began to charge a transfer fee in connection with transfers of for-profit servicing responsibilities initiated by lenders such as Equity. ² To that end, in October, 1981, FNMA sent out FNMA Program Announcement No. 3 advising lenders that FNMA would thereafter impose a transfer fee for such transfers of servicing. This document notified lenders that it amended the FNMA Home Mortgage Servicing Contract Supplement to the same extent as if incorporated in the Supplement. It is agreed that long before Equity sold its business to Mager, it received a copy of the FNMA announcement, and, although inquiry was invited, made no inquiry.

As stated, Equity sold its business to Mager in July, 1982, although negotiations between the parties took place over a period of several months preceding the signing of the papers. By letter of August 9, 1982, Equity notified FNMA of its intent to transfer its interest under the Servicing Contract with FNMA to Mager, subject to FNMA's approval. Equity specifically asked FNMA to approve the proposed sale by August 15, 1982, and to advise if any fees, charges, or other requirements were necessary.

By its agreement with Mager, Equity transferred to Mager all of its (Equity's) servicing contracts which constituted some 2,100 individual loans, of which some 500 were being serviced for FNMA, and totalled approximately $66,000,000 in unpaid principal, of which FNMA-held mortgages represented some $17,000,000. Under its contract with Mager, Equity was to receive approximately 1.72% of the principal value of the mortgage portfolio which it was then servicing, which was roughly $1,121,900.

In response to Equity's letter of August...