Daily Development for
Tuesday, February 18, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

BROKERS; MORTGAGE BROKERS; COVENANT OF GOOD FAITH AND FAIR DEALING: Clause in a contract between lender and mortgage broker providing that broker "*may* submit completed Mortgage Loan Applications" to lender gives rise to duty of good faith and fair dealing on part of broker to provide equal opportunity to lender to attract loan applications in competition with other potential lenders.

Sterling Nat'l Mortgage Co. v. Mortgage Corner, Inc., 97 F. 3d 39 (3rd Cir. 1996).

The deal with the original lender was that the broker's sales agents would expose a variety of loan packages from various lenders to potential borrowers, and the borrowers would select the loan package they wanted. In fact, however, the mortgage broker was a subsidiary of another lender, and it actively encouraged its sales people to route loans to that lender, ultimately instructing them not to send loans to the plaintiff in this action (although the broker did not take advantage of a 30 day termination clause in its contract with plainitiff).

The outside lender sued for breach of contract and tortious interference. The trial court had granted summary judgment for the mortgage broker, concluding that there was no duty implicit in the contract to provide any loans to the plaintiff. The contract simply stated that the broker "may" submit loan applications.

On appeal, as to breach of contract claims, held: Reversed.

The appeals court concluded that the term "may" was inherently ambiguous and that the plaintiff was entitled to bring forward evidence to demonstrate that it was mandatory, not optional, language. Further, even if the parties intended an optional meaning to the word, the mortgage broker nevertheless had the duty under the doctrine of good faith and fair dealing not to "tilt" the playing field in favor of its parent.

Note: The court includes an interesting analysis of some earlier Connecticut authority on the issue of good faith and fair dealing in real estate matters.

Comment: This case just didn't pass the "smell" test for the court. Of course the broker expected that the outside lender would anticipate a "fair chance" at the broker's customers. If it wasn't prepared to give that chance, the broker should not have proferred a contract relationship to the lender without disclosing the fact that the lender was wasting its time.

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