Union National Bank of Little Rock v. Federal National Mortgage Association
860 F.2d 847, 1988 WL 115035, 1988 U.S. App. LEXIS 14705 (1988)
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Rule of Law:
Summary judgment is inappropriate when reasonable minds could differ as to the import of evidence regarding a contract's modification, especially when extrinsic evidence, not barred by the parol evidence rule, creates a genuine issue of material fact concerning the parties' intent. Asserting a reasonable, albeit disputed, interpretation of a contract does not constitute Racketeer Influenced and Corrupt Organizations Act (RICO) violations or tortious interference with business relations.
Facts:
- Union National Bank of Little Rock (Union) is a federally chartered bank that originates and sells mortgage loans in the secondary market, often retaining the rights to service the loans for a fee.
- Federal National Mortgage Association (FNMA) is a federally chartered, privately owned mortgage bank that purchases mortgage loans from lenders and is a large participant in the secondary market.
- On January 3, 1983, Union and FNMA entered into an agreement (Contract) which approved Union as an FNMA lender, allowing it to sell and service mortgage loans for FNMA, and stipulated that it could be terminated by either party with or without cause.
- By May 13, 1985, FNMA informed Union of its intention to terminate the Contract 'for cause' due to dissatisfaction with Union's performance.
- In June 1985, Union and FNMA reached an agreement whereby Union would sell its servicing rights for 11,253 FNMA-owned mortgage loans to another approved lender (FirstSouth), but would retain servicing rights for approximately one million dollars in mortgage loans and continue as an FNMA approved lender, for which Union paid a transfer fee of $216,528.16.
- After the transfer, FNMA claimed eleven of the transferred loans were in default and that Union had breached warranties, requesting Union to repurchase them.
- Union refused to repurchase the loans, arguing that FirstSouth had assumed all responsibility for the transferred loans, releasing Union from liability, and also that the June 1985 agreement had modified the original contract to prevent termination without cause.
- On July 2, 1987, FNMA informed Union by letter that it intended to terminate the Contract, without cause, effective August 3, 1987.
Procedural Posture:
- On February 9, 1987, Union National Bank of Little Rock (Union) filed a petition in the district court requesting an injunction prohibiting FNMA from terminating the Contract.
- On February 10, 1987, Federal National Mortgage Association (FNMA) sent Union a letter informing it that the Contract was terminated for cause, effective immediately.
- FNMA then filed a motion to dismiss Union’s petition as moot in the district court.
- On February 17, 1987, the district court held an emergency hearing at which the parties agreed to an order staying the effect of the February 10 termination letter pending expedited adjudication.
- On March 9, 1987, FNMA filed a response to Union’s petition and a counterclaim seeking damages for Union’s breach of the Contract, and also a motion for summary judgment on its right to terminate for cause.
- Union sought leave to file a second amended complaint to add claims for violation of the Racketeer Influenced and Corrupt Organizations Act (RICO) and for tortious interference with business relations.
- FNMA filed a response opposing leave to file the amended complaint.
- On July 27, 1987, the district court held a hearing to consider the pending motions.
- On July 29, 1987, the district court issued an order granting Union’s motion to amend its complaint, granting FNMA’s motion for summary judgment, denying Union’s motion for a preliminary injunction as moot, and dismissing Union’s amended complaint.
- Union appealed the district court's decision to the United States Court of Appeals for the Eighth Circuit, where Union is the appellant and FNMA is the appellee.
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Issue:
Does a genuine issue of material fact exist regarding whether the parties modified their contract to preclude termination without cause, thereby making summary judgment inappropriate on that issue, and can FNMA's actions give rise to RICO or tortious interference claims?
Opinions:
Majority - Heaney, Circuit Judge
No, a genuine issue of material fact exists regarding whether the June 1985 agreement modified the original contract to preclude FNMA from terminating the agreement without cause, rendering summary judgment inappropriate on that issue. However, FNMA's actions do not give rise to RICO or tortious interference claims. The court found that under Arkansas law, a contractual right to terminate 'at will' or 'without cause' is subject to narrow limitations, primarily in the employment context related to public policy, which do not apply to this commercial contract dispute. While FNMA's behavior indicated 'cold-hearted economic competition,' it did not violate any recognized Arkansas public policy, thus the 'without cause' termination clause itself was not unenforceable as against public policy. However, the district court erred in granting summary judgment on the issue of contract modification. Evidence, including affidavits from Union's employees and FNMA's June 10, 1985 letter stating Union would 'continue as a Fannie Mae approved lender' and 'retain approximately one million in servicing,' presented conflicting 'rationally possible conclusions' regarding the parties' intent. One interpretation was that Union merely continued under the original contract's terms, including without-cause termination; another was that FNMA agreed not to withdraw approved status for some future period unless servicing became deficient, especially given Union's significant transfer fee payment and alleged below-market sale of its portfolio. This created a genuine issue of material fact that a jury must resolve. The court further held that the parol evidence rule did not bar this evidence because it concerned a subsequent modification and the 'Consent to Transfer' agreement was not a complete or unambiguous integration of all terms between Union and FNMA regarding termination. Lastly, the court affirmed the dismissal of Union’s RICO and tortious interference claims. FNMA’s demands were motivated by its interpretation of the agreement, and given the existence of genuine factual disputes over the contract’s interpretation, FNMA did not act in an extortionate or fraudulent manner to support a RICO claim. Similarly, asserting in good faith what it reasonably believes to be its rights under an agreement, even if mistaken, does not constitute an intentional interference with contractual or business relations necessary for a tortious interference claim.
Analysis:
This case clarifies the stringent standards for granting summary judgment, particularly in contract disputes where intent is ambiguous. It demonstrates that while 'at will' termination clauses in commercial agreements are generally enforceable under Arkansas law, a subsequent course of dealing or agreement can create a factual dispute regarding modification, thereby precluding summary judgment. The ruling also sets a precedent that parties asserting what they reasonably believe to be their contractual rights, even aggressively or under a disputed interpretation, are unlikely to be held liable for RICO violations or tortious interference, provided their actions are not objectively extortionate or fraudulent. This protects commercial actors from litigation over mere disagreements in contract interpretation, reserving such claims for genuinely illicit conduct.
