American Bankers Mortg. Corp. v. Federal Home Loan Mortg. Corp.

• Decision Date: 12 February 1996
• Docket Number: No. 94-55967,94-55967
• Citation: 75 F.3d 1401
• Parties: , 96 Cal. Daily Op. Serv. 958, 96 Daily Journal D.A.R. 1592 AMERICAN BANKERS MORTGAGE CORPORATION, Plaintiff-counter-defendant-Appellant. v. FEDERAL HOME LOAN MORTGAGE CORPORATION, d/b/a Freddie Mac, Defendant-counter-plaintiff-Appellee, and Countrywide Credit Industries, Inc., Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1401

75 F.3d 1401

64 USLW 2526, 96 Cal. Daily Op. Serv. 958,

96 Daily Journal D.A.R. 1592

AMERICAN BANKERS MORTGAGE CORPORATION, Plaintiff-counter-defendant-Appellant. v. FEDERAL HOME LOAN MORTGAGE CORPORATION, d/b/a Freddie Mac,

Defendant-counter-plaintiff-Appellee,

and

Countrywide Credit Industries, Inc., Defendant-Appellee.

No. 94-55967.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Nov. 14, 1995.

Decided Feb. 12, 1996.

James L. Lysaght, Lysaght, Lysaght & Kramer, Lake Success, New York, for plaintiff-counter-defendant-appellant.

Diane M. Ennist, Federal Home Loan Mortgage Corporation, McLean, Virginia, for defendant-counter-plaintiff-appellee.

Appeal from the United States District Court for the Central District of California; William J. Rea, District Judge, Presiding.

Before: FLETCHER, CANBY, and HAWKINS, Circuit Judges.

FLETCHER, Circuit Judge:

American Bankers Mortgage Corporation ("ABM") appeals a district court judgment dismissing certain of its claims for failure to state a claim, granting summary judgment against it on its remaining claims, and granting summary judgment for the Federal Home Loan Mortgage Corporation ("Freddie Mac") on certain of its counterclaims. We have jurisdiction under 28 U.S.C. § 1291 and affirm.

FACTUAL BACKGROUND

Freddie Mac, a federally chartered corporation, purchases home mortgages from lenders and sells securities to the public to fund the purchases. Mortgages are only purchased from, and serviced by, approved seller/servicers under the terms of contracts, the most important document of which is the Sellers' & Servicers' Guide, a two-volume looseleaf publication. The Guide sets forth standards and requirements with which a seller/servicer must comply in order to sell mortgages to, and service mortgages for, Freddie Mac. For example, seller/servicers must provide certain complete and accurate reports to Freddie Mac, maintain certain accounting records, maintain specified underwriting and quality control procedures, and maintain delinquency rates within certain limits. The Guide provides that Freddie Mac may terminate a seller/servicer's approval at its discretion for breach of any representation or warranty required of it by the Guide.

ABM, a mortgage banking corporation organized and licensed under California law, became an approved Freddie Mac seller/servicer in October 1983. In December 1991 ABM notified Freddie Mac of the reporting problem and made several attempts to persuade Freddie Mac to allow it to remedy its failure to comply with Guide standards and requirements, but in February 1992 Freddie Mac suspended ABM's seller/servicer eligibility pending an investigation and then terminated ABM's status as a seller/servicer for 13 enumerated reasons, including ABM's failure to submit accurate delinquency reports, its violation of its obligation not to misstate or omit any material fact in any representation to Freddie Mac, its unacceptably high delinquency rate, its failure to maintain adequate quality control, and its commingling of funds. At the time Freddie Mac gave oral notice of termination, it apparently repossessed documents relating to over 3,000 loans, allegedly including some loans being serviced by ABM for owners other than Freddie Mac. ABM alleges that Freddie Mac transferred the servicing of its loans to Countrywide Credit Industries. Freddie Mac also seized a custodial account held by ABM for Freddie Mac containing over $4 million, $500,000 of which allegedly did not belong to Freddie Mac.

                outside auditors found that ABM was underreporting to Freddie Mac delinquencies on the mortgages it serviced.   Although ABM claims that the reporting requirement was unclear as to the definition of reportable delinquencies, the auditor found underreporting even under the interpretation most favorable to ABM.   In October 1991, for example, ABM should have reported 98 delinquencies under its interpretation rather than the 20 it did report, and the outside auditor (and Freddie Mac) read the Guide to require that some 220 loans should have been reported as delinquent.   ABM later admitted the underreporting and provided figures for November and December 1991 indicating that 244 and 247 delinquencies, respectively, had gone unreported under Freddie Mac's interpretation of the Guide requirements.   The company asserted that the underreporting resulted entirely from unauthorized action by a single employee, ABM's executive vice-president and servicing manager.   The audit also found that ABM's custodial bank account for Freddie Mac contained improperly commingled funds in violation of the Guide requirements
                

In March 1992, ABM filed with Freddie Mac an appeal of its termination as allowed by the Guide, conceding the validity of "many" of the reasons for termination given in the February notice but asserting that the violations resulted from oversight rather than intentional or reckless management conduct. Freddie Mac denied the appeal in April 1992.

In June 1992, Freddie Mac demanded that ABM pay it $1,269,963.46 allegedly due Freddie Mac on the mortgages formerly serviced by ABM, but ABM has not paid any portion of this sum.

PROCEEDINGS BELOW

In March 1993, ABM filed a complaint in the Central District of California against Freddie Mac and Countrywide Credit alleging breach of contract, tortious breach of an implied covenant of good faith and fair dealing, violation of Fifth Amendment due process rights, conversion, and forfeiture. On May 12, 1993 the district court granted Freddie Mac's motion to dismiss for failure to state a claim the counts of tortious breach and due process violations. A motion by ABM to reconsider the dismissal was denied in September 1993.

On May 28, 1993, Freddie Mac filed a counterclaim for breach of contract, negligent misrepresentation, conversion, specific recovery of personal property, and the establishment of a constructive trust.

After discovery ended in January 1994, Freddie Mac and Countrywide moved in February 1994 for summary judgment in their favor on the remaining counts of ABM's complaint and on the breach of contract and specific recovery counts of the counterclaim. On June 8, 1994 the District court granted the motion, dismissing most of ABM's claims against both defendants and awarding Freddie Mac $1,947,076.47, together with interest and costs. On June 9, 1994, the court entered a stipulation and order by which the parties voluntarily dismissed ABM's one remaining claim for conversion of $500,000 and Freddie Mac's three remaining claims; Freddie

Mac agreed to set the $500,000 off against its $1.9 million award, which it apparently viewed as largely uncollectible.

STANDARD OF REVIEW

Dismissal for failure to state a claim on which relief can be granted is reviewed de novo. Stone v. Travelers Corp., 58 F.3d 434, 436-37 (9th Cir.1995). A grant of summary judgment is also reviewed de novo. Jesinger v. Nevada Fed. Credit Union, 24 F.3d 1127, 1130 (9th Cir.1994).

DISCUSSION

I. Freddie Mac's Actions Were Not Subject to the Fifth Amendment

Appellant asserts that the district court erred in concluding that its allegation that Freddie Mac violated its Fifth Amendment rights by terminating its eligibility without due process failed to state a claim. Because the Fifth Amendment Due Process Clause applies only to the federal government, Public Utilities Commission v. Pollak, 343 U.S. 451, 461, 72 S.Ct. 813, 820, 96 L.Ed. 1068 (1952), Freddie Mac is not restricted by that Clause unless it is part of the federal government or its actions constituted federal action. We conclude that neither is the case.

A. Freddie Mac Is Not a Government Entity

The Supreme Court's recent decision in Lebron v. National Railroad Passenger Corp., --- U.S. ----, 115 S.Ct. 961, 130 L.Ed.2d 902 (1995), provides the appropriate framework for analysis of Freddie Mac's governmental status. The Court there held that "where ... the Government creates a corporation by special law, for the furtherance of governmental objectives, and retains for itself permanent authority to appoint a majority of the directors of that corporation, the corporation is part of the Government for purposes of the First Amendment." Id. at ---- - ----, 115 S.Ct. at 974-75. Since Freddie Mac is a corporation chartered by Congress, the two relevant criteria for judging Freddie Mac's status as a federal entity for Fifth Amendment purposes are the extent to which its objectives are governmental and the extent to which the government directs and controls the corporation's pursuit of those objectives.

1. Objectives

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) wrote the purposes of Freddie Mac into law for the first time. ¹ In the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, Congress emphasized the public nature of these purposes. ² The congressional

                purposes for Freddie Mac are clearly designed to serve the public interest by increasing the availability of mortgages on housing for low- and moderate-income families and by promoting nationwide access to mortgages.   At least one Court of Appeals has held that Freddie Mac "certainly furthers an important federal mission, and does act as a federal agency or instrumentality in this sense".  Mendrala v. Crown Mortgage Co., 955 F.2d 1132, 1139 (7th Cir.1992) (finding Freddie Mac nonetheless not a federal agency for claims under the Federal Tort Claims Act).   The Mendrala court also found Freddie Mac's purposes sufficiently governmental to qualify the corporation to enjoy protection from estoppel under the doctrine of Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380, 68 S.Ct. 1, 92 L.Ed. 10 (1947):  "The FHLMC has a public statutory mission:  to maintain the secondary mortgage market and assist in meeting low- and moderate-income housing goals."  955 F.2d at 1140-41 (footnote omitted) (emphasis added).   Thus, Freddie Mac's purposes are

...