Federal Deposit Ins. Corp. v. Bernstein
| Decision Date | 10 January 1992 |
| Docket Number | No. CV 89-2080,CV 91-1441.,CV 89-2080 |
| Citation | 786 F. Supp. 170 |
| Parties | FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of Guardian Bank, N.A., Plaintiff, v. Louis B. BERNSTEIN, et al., Defendants. In the Matter of the Application of Michael H. SOROKA, as Independent Receiver of the New York Guardian Mortgagee Corporation, Enforcing the Agreement with Federal National Mortgage Association. FEDERAL NATIONAL MORTGAGE ASSOCIATION, Plaintiff, v. Michael H. SOROKA, individually and in his capacity as the Independent Receiver for The New York Guardian Mortgagee Corporation, and the New York Guardian Mortgagee Corporation, Defendants. |
| Court | U.S. District Court — Eastern District of New York |
COPYRIGHT MATERIAL OMITTED
Reid & Priest, New York City, for plaintiff; Evan Widlitz, Linda Terner, of counsel.
Marc Wieman, New York City, for the F.D.I.C. (Corporate).
Louis B. Bernstein, pro se.
Gordon Hurwitz Butowsky Weitzen Shalov & Wein, New York City, for Michael H. Soroka, Independent Receiver of The New York Guardian Mortg. Corp.; Victor J. Rocco, Richard A. Roth, of counsel.
Cadwalader, Wickersham & Taft, New York City, for Federal Nat. Mortg. Ass'n; John J. Walsh, Kathryn L. Hoenig, of counsel.
Michael H. Soroka ("Soroka"), both individually and in his capacity as the Independent Receiver for the New York Guardian Mortgagee Corporation ("NYGMC"), moves this court for an order dismissing the complaint of the Federal National Mortgage Association ("FNMA") or, in the alternative, staying the FNMA action pending determination of the Application of Michael H. Soroka, as Independent Receiver of The New York Guardian Mortgagee Corporation, Enforcing the Agreement with FNMA (the "Receiver's Application"), filed with the court on February 13, 1991.
The dual proceedings before this court involve, essentially, the interpretation of a portfolio servicing contract entered into between the Independent Receiver and FNMA on August 13, 1990. The operative facts relating to this issue are fully set forth in both FNMA's complaint and in the various affidavits filed in connection with the Receiver's Application and FNMA's Cross-Application.
NYGMC and FNMA were parties to a Mortgage Selling and Servicing Agreement dated December 29, 1982 (the "1982 Servicing Agreement") pursuant to which NYGMC agreed to service approximately $1 billion in mortgages owned or held by FNMA. As a servicer for the FNMA mortgage portfolio, NYGMC was responsible for collecting and remitting required payments from the borrowers, including taxes, insurance, interest and principal; maintaining records with respect to each mortgage; and otherwise assuring that the mortgages were being performed in accordance with their terms. (Carpenter Aff. ¶ 3).
On June 21, 1989, the Office of the Comptroller of the Currency ("OCC") determined that Guardian Bank, N.A., an affiliate of NYGMC, was insolvent. The OCC immediately ordered Guardian Bank closed, took possession of its assets and appointed the Federal Deposit Insurance Corporation (the "FDIC") as the Receiver of Guardian Bank's assets. The next day, the FDIC commenced an action in this court against the Bank's officers and directors, alleging, inter alia, breaches of fiduciary duty, negligence, waste and violations of various state and federal statutes and regulations. The FDIC, through its agents, immediately took control of Guardian Bank's and NYGMC's files, including all the files relating to the portfolio of mortgages owned or held by FNMA and serviced by NYGMC pursuant to the Servicing Agreement.
The appointment of the FDIC and commencement of the FDIC action raised grave concerns regarding NYGMC's ability to continue servicing the FNMA mortgage portfolio. (Carpenter Aff. ¶ 6). To protect itself and its customers, FNMA immediately took steps to transfer servicing responsibilities to a more stable servicing agent and to terminate the existing Servicing Agreement with NYGMC. Accordingly, on June 26, 1989, FNMA terminated the Servicing Agreement and NYGMC's right to service FNMA mortgages and participation interests. .
FNMA and NYGMC immediately began negotiations to arrange for the orderly transfer of portfolio documents from NYGMC to FNMA. These discussions culminated in a verbal agreement, pursuant to which NYGMC agreed to transfer the servicing rights back to FNMA or its designee, in exchange for $8,799,187.1 FNMA and NYGMC also agreed that any liabilities FNMA incurred due to NYGMC's servicing errors or deficiencies and any extraordinary charges and expenses FNMA incurred due to the transfer would be offset against the $8,799,187 payment and that offsets in excess of $8,799,187 would be owed to FNMA. The specific categories of offsets were to be memorialized later in a written agreement.
FNMA soon approached Midlantic Home Mortgage Corporation ("Midlantic") about the possibility of Midlantic's taking over the mortgage servicing responsibilities of the FNMA portfolio. In October 1989, following four months of discussions, FNMA and Midlantic entered into an interim servicing agreement pursuant to which Midlantic agreed to take over servicing responsibilities from the period June 30, 1989 through December 1990 (the "Midlantic Agreement"). Midlantic demanded and the Midlantic Agreement provided for the payment of a one-time servicing fee of 50 basis points, over and above the normal servicing fee, to compensate Midlantic for taking over the management of the troubled FNMA portfolio. (Carpenter Aff. Ex. A, at 4). This fee, which amounted to approximately $4.5 million, was calculated based on the average principal balance outstanding at the end of each month of the Midlantic Agreement. Id.
On July 11, 1989, defendant Michael H. Soroka was appointed by this court to serve as the Independent Receiver for NYGMC. Shortly after his appointment and as part of his responsibilities, Soroka began to negotiate a formal written agreement memorializing the terms of the June 1989 portfolio transfer between NYGMC and FNMA and settling all claims and obligations between the parties. A primary purpose of these negotiations was to limit NYGMC's potential exposure to liabilities. Towards that end, the parties engaged in regular discussions concerning the nature and identity of the offsets that were to be deducted from the $8,799,187 purchase price.
Between August 1989 and August 1990, FNMA forwarded to Soroka a series of schedules which provided estimates for each "offset" category on an Account-by-Account basis. (Pearce Reply Aff. Ex. C). With respect to the offset entitled "Out-of-Pocket Transfer Expenses," FNMA's schedules consistently projected these expenses to be only $100,000. Although the negotiations endured for one full year, the estimated figures supplied by FNMA did not change.
Estimated
Date of FNMA Schedule Expenses
August 31, 1989 $100,000
October 17, 1989 100,000
October 26, 1989 100,000
November 22, 1989 100,000
February 26, 1990 100,000
April 3, 1990 100,000
April 20, 1990 100,000
August 14, 1990 100,000
August 27, 1990 100,000
(Pearce Reply Aff. Exs. B-E)
On or about August 13, 1990, after a year of negotiations, the parties executed a written agreement (the "Agreement") which memorialized the prior verbal agreement between FNMA and NYGMC. Under the terms of the Agreement: (1) FNMA and NYGMC settled all outstanding claims against each other; and (2) FNMA agreed to pay NYGMC $8,799,187 for the transfer of NYGMC's right to service FNMA loans and mortgages; and (3) the $8,799,187 termination fee is to be offset by the balances in 14 different categories enumerated in the Agreement (the "Accounts"). This court approved the Agreement, as executed by the parties, by order dated September 11, 1990.
Section 2.2 of the Agreement identifies and describes each of the 14 categories of Accounts, the balances of which were to be held back by FNMA and offset against the $8,799,187 purchase price. Account 8 provides for the holdback of "Transfer Expenses" incurred by FNMA and Midlantic in connection with the transfer of the FNMA portfolio from NYGMC to Midlantic. The "Transfer Expenses" described by Account 8 are defined to include the following categories of expenses:
Transfer Expenses. The balance in this Account shall equal the actual out-of-pocket expenses incurred by Fannie Mae and its agent, Midlantic Home Mortgage Corporation (the "Agent") in effecting the transfer of the loan portfolio from NYGMC to Fannie Mae as described in this Agreement which are in excess of the expenses customarily incurred by the purchaser of a loan portfolio and that resulted from the unique situation encountered in the transfer of the servicing rights under the Contract.
1. Payments Made by FNMA Under the Agreement
Sections 2.4 and 2.5 of the Agreement provide that FNMA is to pay the $8,799,187 purchase price, plus or minus the balances in the 14 Accounts, in two separate installments: the "First Adjusted Payment" (August 31, 1990) and the "Final Adjusted Payment" (January 31, 1990). To determine the amounts which were due on these dates, the Accounts were to be reconciled as of July 31, 1990 and December 31, 1990, respectively. (Sections 2.2, 2.4 and 2.5 of the Agreement, Walker Aff. Ex. B).
On November 13, 1990, FNMA forwarded NYGMC a check for $922,106.47 to reflect the first payment due under the Agreement. This payment represented 25% of the total estimated amount due and owing to NYGMC, with the balances in the 14 Accounts reconciled as of November 5, 1990. (Pearce Aff. ¶ 12 and Ex. E). The...
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