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National Financial Support Services, LLC v. U.S. Mortgage Corporation

A-3987-04T2 (N.J. Super. App. Div. 2007) (Unpublished)

CONTRACTS — The purchase price need not be expressly stated in a contract for it to be enforceable so long as the agreement sets forth a formula to determine that price if the purchase price can be calculated from an objectively based formula.

A corporation originated and serviced mortgage loans on behalf of credit unions. The corporation entered into a purchase agreement to sell its servicing business. Because the buyer was unable to fund the entire purchase price and start up operations, the agreement provided for two closings. At the initial closing, the buyer would pay a portion of the purchase price, and there would be a transfer of ownership of the mortgage servicing rights to the buyer, with the seller keeping a security interest and continuing to perform the servicing for a monthly fee. The balance was payable by a promissory note, with the last payment due at the final closing.

The buyer was not able to raise the remaining balance owed by the date of the final closing. The parties then revised the agreement and extended the closing date. The revised agreement removed the buyer’s prior right to reassign the assets to the seller, which had been the buyer’s only protection for its investment. It also required the seller to provide the buyer with monthly status updates on all accounts serviced, as well as more detailed information at the buyer’s request.

The buyer began negotiating with a potential investor, and the buyer requested reports from the seller for the investor’s due diligence. The buyer and the investor entered an agreement wherein the investor would provide financing in exchange for an 85% ownership interest in the business. The buyer was to pay the investor a given amount as part of the transfer of ownership interest. The parties agreed upon dates by which the investor would provide a commitment to fund the payments due to the seller, and the buyer would provide updated reports to the investor. The parties later disregarded many of the debt requirements and deadlines they had agreed upon, but they continued negotiations.

Months after the agreed deadline, the investor notified the buyer that if it did not receive all reports within the week, the negotiations would be called off. The newly imposed deadline passed, and the investor told the buyer that it had not received critical reports regarding the status of the buyer’s servicing portfolio, and it was therefore ending negotiations. The buyer notified the seller of the termination of negotiations with the investor, and demanded that the seller return the amounts that the buyer had paid to date. The seller refused to return the payments. The buyer then requested, and the seller provided, additional servicing documents in an attempt to revive the transaction with the investor. The buyer was unable to revive the transaction. The seller then notified the buyer that it was declaring a default and demanding the balance of the contract price based on the buyer’s failure to complete the final closing and pay the promissory note. The buyer brought an action against the seller seeking rescission of the purchase agreement, and for recovery of its principal payments to the seller. The seller counterclaimed for breach of contract and demanded payment of the contract price.

The lower court entered partial summary judgment, dismissing all counts of the buyer’s complaint except the one for breach by failure to produce reports, and declining to grant the seller a judgment on the counterclaim. The case went to trial, and the jury reached a verdict in favor of the seller. It found that the buyer had committed a breach of contract by failing to pay the notes it issued, that the breach was a proximate cause of harm to the seller, and that the seller did not commit a breach that justified the buyer’s failure to pay the notes. The lower court entered final judgment dismissing the remaining count and the counterclaim.

On appeal, the Appellate Division affirmed the lower court’s decision. The buyer argued that the purchase agreement did not satisfy the requirements of a binding contract because there was material uncertainty regarding the nature and price of the mortgage servicing rights to be sold. The Court rejected this argument and agreed with the lower court, concluding that the parties were sophisticated business entities who entered contracts that expressed the reasonable expectations of the parties to transfer the seller’s mortgage servicing rights in exchange for consideration. The Court noted that a contract is enforceable as long as there is agreement on the essential terms. By agreeing on the essential terms of the purchase agreement, and manifesting an intention to be bound by those terms, these parties created an enforceable contract.

The Court further explained that the plain language of the agreement and the parties’ conduct demonstrated that the agreement was sufficiently definite in terms of determining the portfolio purchased and the purchase price. The purchase price was not unknown because the purchase agreement set forth a formula to determine it. The Court noted that an open price term that is calculated from an objectively based determination is enforceable. With regard to the buyer’s conduct, the Court found that the buyer acted as if there were enforceable contracts in effect. Prior to litigation, the buyer never claimed that it was unable to determine what it had purchased or that the terms were not sufficiently definite. The buyer acted in accordance in the agreement until it was unable to obtain financing. The Court concluded that the fact that the final closing never took place did not render the agreement unenforceable.

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