First Nat. Bank of Chicago v. Jefferson Mortg. Co.

• Court: U.S. Court of Appeals — Third Circuit
• Writing for the Court: Before ALDISERT and WEIS, Circuit Judges, and CHRISTENSEN; CHRISTENSEN
• Citation: First Nat. Bank of Chicago v. Jefferson Mortg. Co., 576 F.2d 479 (3rd Cir. 1978)
• Decision Date: 16 May 1978
• Docket Number: Nos. 77-1040 and 77-1505,s. 77-1040 and 77-1505
• Parties: 23 UCC Rep.Serv. 1282 The FIRST NATIONAL BANK OF CHICAGO, Appellant (Appellee and Cross-Appellant), v. JEFFERSON MORTGAGE COMPANY, Appellee (Appellee and Cross-Appellee), v. J. I. KISLAK MORTGAGE COMPANY, INC., Appellee (Appellant and Cross-Appellee). to 77-1507.

Page 479

576 F.2d 479

23 UCC Rep.Serv. 1282

The FIRST NATIONAL BANK OF CHICAGO, Appellant (Appellee and Cross-Appellant), v. JEFFERSON MORTGAGE COMPANY, Appellee (Appellee and Cross-Appellee), v. J. I. KISLAK MORTGAGE COMPANY, INC., Appellee (Appellant and Cross-Appellee).

Nos. 77-1040 and 77-1505 to 77-1507.

United States Court of Appeals Third Circuit.

Argued Dec. 9, 1977.

Decided Mar. 31, 1978.

As Amended May 16, 1978.

John C. Lifland, Stryker, Tams & Dill, Newark, N. J., for appellant The First National Bank of Chicago.

Richard L. Plotkin, Pitney, Hardin & Kipp, Morristown, N. J., for third party defendant-appellee J. I. Kislak Mortgage Co., Inc.

Donald S. Ryan, Schantz, Tropp & Ryan, Haddonfield, N. J., for appellee Jefferson Mortgage Co.

Before ALDISERT and WEIS, Circuit Judges, and CHRISTENSEN, District Judge. ^*

OPINION OF THE COURT

CHRISTENSEN, District Judge.

These consolidated appeals from the same diversity of citizenship case tried to the court involve an oral contract to sell mortgage-backed securities for $5,000,000. The case began rather simply.

The First National Bank of Chicago alleged in its complaint that through a mortgage broker, J. I. Kislak Mortgage Co., it entered into a contract by which it purchased from the defendant, Jefferson Mortgage Company certain 30 year mortgage-backed securities in the principal amount of $5,000,000 fully guaranteed as to payment of principal and interest by the Government National Mortgage Association, at a price of 96% of the principal amount, with delivery to be made in March, 1974; that thereafter it sent to defendant a letter confirming this contract of sale; that the market value of these securities had been increasing and that the securities at the time of filing the complaint on February 28, 1974, had a market value in excess of 100% of the principal amount; that on or about January 10, 1974, defendant denied the existence of the contract and repudiated its obligation and thereby breached the contract, and that plaintiff was ready, willing and able to perform its obligations by accepting the securities and paying the defendant the agreed price. A judgment for damages was sought against Jefferson Mortgage Company with interest and costs of suit.

An array of cross-fires and counter-attacks ensued: An answer was filed by the mortgage company denying the existence of any enforceable contract and asserting that the mortgage broker purporting to negotiate it was without authority to do so. A third party complaint for indemnity was interposed by the mortgage company against the broker in the event the mortgage company were called upon to respond in damages to the plaintiff. Another third party complaint for damages was introduced by the plaintiff Bank against the broker in the event it was denied damages from the mortgage company. A counter-claim also was lodged by the broker for judgment over against the mortgage company if the broker were determined to be liable to plaintiff. A second counterclaim was filed by the broker against the mortgage company to recover commissions on the sale of the securities irrespective of whether its efforts resulted in an enforceable contract.

The district court held that the broker had no authority from the mortgage company to enter into the oral contract on its behalf with the Bank, and consequently that no contract enforceable against the mortgage company was created. But a judgment was entered in favor of the Bank against the mortgage broker for breach of its implied warranty of authority for the same amount of damages as the court deemed the Bank would have been entitled to as against the mortgage company had the broker been authorized to close the contract orally.

To permit better understanding of this welter of claims and developing issues involving the law of contracts, securities, agency, anticipatory breach, measure of damages, and damage evidence, a more detailed sorting out of the parties and the subject matter of the action seems desirable at this point.

The First National Bank of Chicago (the Bank), plaintiff in the district court, appellee in No. 77-1040, cross-appellant in Nos. 77-1505 and 77-1507, and cross-appellee in No. 77-1506, is a national banking association with its principal place of business in Chicago, Illinois. During the relevant period it was buying from Wall Street dealers or mortgage brokers selling on commission, the type of securities with which this case is concerned, both for its investment account and resale to others.

Jefferson Mortgage Company (Jefferson), defendant below, appellee in Nos. 77-1505, 1506 and 1507, is a New Jersey corporation with its principal place of business in Cherry Hill, New Jersey. It is a mortgage banking company which obtained mortgage applications from purchasers of residences through real estate brokers, processed those applications through the Federal Housing Authority or the Veterans Administration, made commitments to the buyers, borrowed money from supplier banks for closing and sold the mortgages to investors.

J. I. Kislak Mortgage Company (Kislak), was a third party defendant in the district court, on this appeal the appellant in No. 77-1040, a cross-appellant in No. 77-1506, and an appellee in Nos. 77-1505 and 77-1507. It is a New Jersey corporation with principal place of business in Newark. As one of the largest mortgage brokers in the State it among other activities contacted companies engaged in the origination of mortgages to determine if they had mortgages for sale, in what form those mortgages would be sold and the terms and conditions upon which they were willing to sell them, thereupon relaying the resulting offers for sale to institutional investors, such as the Bank involved in this litigation. It was well acquainted with the GNMA market and had frequently dealt with the Bank in this market.

Government National Mortgage Association (GNMA) is not a party to this litigation but the securities which its activities generated played a central role. It is a wholly-owned corporate instrumentality of the United States within the Department of Housing and Urban Development. It was authorized by the National Housing Act, 12 U.S.C.A. § 1717(a)(2)(A), et seq., and 24 CFR Section 390.1, to guarantee timely payment of the principal of, and interest on, securities based on and backed by pools of mortgages insured by the Federal Housing Administration or guaranteed by the Veterans Administration. ¹

Both primary and secondary markets existed for GNMA (sometimes referred to as "Ginnie Mae") securities. The primary market involved sale by the issuer. Any transaction after the primary sale was considered to be in the secondary market. An "immediate sale" commonly called for delivery within thirty days. A "future sale" was considered to be any sale with a delivery date beyond thirty days. We are concerned in this case with a future sale of securities in the primary market.

A "full yield maintenance clause" was universally used in GNMA transactions with future delivery dates. The purpose of the clause was to assure the investor-purchaser upon delivery of the securities the same yield as had been contracted for despite any raising or lowering of FHA or VA interest rates in the meantime. Thus, also, would the issuer-seller be protected from default on the contract should FHA or VA rates change before delivery, through the option of delivering securities with an equivalent yield.

After a trial of several days and the submission by counsel of briefs and suggested findings, the district court filed a memorandum decision accompanied by painstakingly detailed supplementary findings of fact, with meticulous citations to the documentary and testimonial record. After careful consideration, we have concluded that all of these detailed findings, as distinguished from conclusions of law or mixed legal and evidential conclusions with reference to damages, are amply supported by substantial evidence. These ultimate issues at the outset recognized by the trial court as being sharply in dispute: whether or not Jefferson either authorized or ratified Kislak's action of making a contract by telephone, and therefore whether Jefferson or Kislak was responsible for the damages suffered by the Bank, and the amount of such damages. The trial court in its opinion then fairly summarized the facts central to the issue of liability in substance as follows:

The Bank's claim arose in a market whose customs were changing. At the time in question sales by mortgage bankers of whole loans had traditionally involved variables of which written documentation was ordinarily necessary, but the market in securities backed by mortgages had, not long before, shifted to the "securities way of dealing" by which contracts were made over the telephone.

In September, 1973, a representative of Kislak by the name of Brotman spoke to a representative of Jefferson by the name of Smith about the possibility of Jefferson's selling mortgage-backed GNMA bonds, through Kislak, the bonds to be issued in the future and sold before issuance on the futures market. The market for GNMA futures in September, 1973, was significantly higher than for whole loans. Neither Jefferson as an organization nor its representative as an individual possessed experience in the issuing or selling of GNMA bonds, and there was no explicit discussion between the representatives of Jefferson and Kislak about the proposed transaction's being made by telephone. The Jefferson representative made clear that he and his firm were unfamiliar with GNMA transactions, and would look to Kislak for guidance. However, when directed by Jefferson to "make a deal" at a given price, Kislak entered into a contract of sale with the Bank. The Bank promptly sent to Jefferson a letter in confirmation of that contract. ²

This confirmation letter accurately reflected the agreement between Kislak, as it purportedly acted for Jefferson, and...