HSBC Mortgage Services, Inc. v. Equisouth Mortgage, Inc.
873 F. Supp. 2d 923
N.D. Ill.2012Background
- HSBC Mortgage Services and Equisouth Mortgage signed a flow loan agreement in 2001, under which HSBC would buy mortgages from Equisouth with repurchase rights for warranties.
- HSBC conditioned the agreement on nine representations by Equisouth and 38 warranties about the underlying mortgages, plus a personal guaranty by Morris Capouano.
- The agreement provided repurchase if any warranty as to mortgage condition was breached as determined by HSBC.
- Three mortgages—Ferro, Raspberry, Lozano—defaulted, leading HSBC to demand repurchase based on alleged material misrepresentations by mortgagors; Equisouth refused.
- Equisouth argued the warranty did not impose an absolute duty to guarantee underlying mortgages, pointing to a handwritten margin note reading 'knowingly' near Section 4.B.23, which was not initialed or dated.
- Defendants challenged the effect of the handwritten margin note, and the court held modification required a writing signed by both parties under Section 25; the margin note could not modify the contract.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Is Equisouth liable for repurchase of the three mortgages due to warranty breaches? | HSBC argues warranties were breached as determined by Buyer. | Equisouth contends knowledge (not absolute breach) governs liability and disputes the determinations. | Yes; liability established for repurchase under warranties. |
| Does the handwritten 'knowingly' margin notation modify the contract's warranty obligations? | Modification invalid; warranty remains absolute. | Margin note imposes a scienter requirement and should modify liability. | Modification ineffective; warranty remains absolute. |
| Is the Buyer’s discretion to determine breaches under Section 10 unconscionable? | Discretion is enforceable and supported by good faith; plaintiff acted reasonably. | Provision is unconscionable and improperly broad. | Not unconscionable; discretion sanctioned and exercised in good faith and reasonably. |
| Are damages issues (mitigation, Lozano calculation) properly resolved on summary judgment? | Damages and mitigation are straightforward and should be decided now. | Genuine issues exist about mitigation and Lozano payments; requires fact-finding. | Damages issues factual; summary judgment on these issues denied. |
| Are attorneys’ fees recoverable and, if so, in what amount? | Defendants owe fees for breach-related costs; amount requested should be awarded. | Fees should be limited due to case modest scope; exact amount contested. | Defendants liable for attorneys’ fees; amount deferred to a later date. |
Key Cases Cited
- Kohler v. Leslie Hindman, Inc., 80 F.3d 1181 (7th Cir. 1996) (satisfaction clause and exercise of discretion must be in good faith and reasonable)
- Streams Sports Club, Ltd. v. Richmond, 457 N.E.2d 1226 (Ill. 1983) (unconscionability limits of provisions; court treated as narrow in context)
- Cent. States, Southeast & Southwest Areas Pension Fund v. Waste Management of Michigan, Inc., 674 F.3d 630 (7th Cir. 2012) (contract interpretation and summary judgment principles in Seventh Circuit)
- Delapaz v. Richardson, 634 F.3d 895 (7th Cir. 2011) (prudential application of Local Rule 56.1 and evidentiary standards)
- Stevo v. Frasor, 662 F.3d 880 (7th Cir. 2011) (discretionary rulings and evidentiary considerations in summary judgment)