Author: LegalEase Solutions 

Introduction

Pinnacle Mortgage Group Inc. (“Pinnacle”) signed an agreement on November 7, 2000, with Flagstar Bank (“Flagstar”).  The agreement requires the repurchase of a loan if Flagstar is required to repurchase the loan from Fannie Mae.  A closing occurred on February 24, 2003 and Flagstar was reportedly required to repurchase the loan from Fannie Mae.  Flagstar did not ask Pinnacle to repurchase the loan.  In April 2008, Flagstar demanded its damages due to repurchasing the loan and sued Pinnacle for damages in the amount of $26,000.

Question Presented

1. What are the defenses available to Pinnacle based upon the lapse in time?
2. Does Flagstar’s delay in seeking damages indicate a knowing waiver of its rights under the agreement?

Short Answer

1. Pinnacle may assert the defense of laches. However, in order to prevail, Pinnacle must show that it has been prejudiced.

2.     Pinnacle may assert the defense of waiver.  However, in order to prevail, Pinnacle must establish Flagstar engaged in a course of affirmative conduct evidencing a knowing waiver of its rights.

Discussion

1. Flagstar’s unreasonable delay in asserting their claim is prejudicial and may be barred by the doctrine of laches.

Laches may bar a legal claim even if the statutory period of limitations has not yet expired.  Tenneco Inc. v. Amerisure Mut. Ins. Co., 281 Mich. App. 429, 457 (Mich Ct. App. 2008).   A party may raise the equitable defense of laches to remedy the general inconvenience resulting from delay in the assertion of a legal right which it is practicable to assert.   Public Health Dep’t v. Rivergate Manor, 452 Mich. 495, 508 (Mich. 1996).  It is applicable in cases in which there is an unexcused or unexplained delay in commencing an action and a corresponding change of material condition that results in prejudice to a party.  Id.

In this regard, it is the effect, rather than the fact, of the passage of time that may trigger the defense of laches.  Twp. of Yankee Springs v. Fox, 264 Mich. App. 604, 612 (Mich. Ct. App. 2004).  The defendant must prove a lack of due diligence on the part of the plaintiff which resulted in some prejudice to the defendant.  Gallagher v. Keefe, 232 Mich. App. 363, 369-370 (Mich. Ct. App. 1998) (the application of the doctrine of laches requires the passage of time combined with a change in condition that would make it inequitable to enforce a claim against the defendant).  See also Lothian v. Detroit, 414 Mich. 160, 168 (Mich. 1982) (when a plaintiff is charged with laches, the court must consider the prejudice occasioned by the delay); Iverson Indus. v. Metal Mgmt. Ohio, Inc., 525 F. Supp. 2d 911 (E. D. Mich. 2007) (a party asserting laches must show: (1) lack of diligence by the party against whom the defense is asserted, and (2) prejudice to the party asserting it).  See also Burnette Foods, Inc. v. Michigan Agric. Mktg. & Bargaining Bd., 1998 Mich. App. LEXIS 2745 (Mich. Ct. App. 1998) (unpublished).

In Burnette, supra, appellant food company brought an action to review a decision by the appellee Board, which eighteen months earlier had accredited a cooperative marketing association as the bargaining unit for red tart cherry producers.  Id. at 7.  The court found that prior to bringing suit, appellant had entered into a contract with the cooperative marketing association for the purchase of red tart cherries.  Id. at 8.  The court further found that during the eighteen month period prior to appellant commencing its action, other purchasers of red tart cherries had entered into similar contracts with the cooperative marketing association.  Id.  As a result, the court held that permitting the appellant to assert its claim now would be inequitable because it would upset these established business relationships, causing prejudice to bona fide purchasers.  Id.  Accordingly, the appellant’s claim was properly barred by the doctrine of laches.  Id.

Similarly, in Chamberlain v. Nipigon, 1998 Mich. App. LEXIS 1584 (Mich. Ct. App. May 26, 1998) (unpublished) plaintiffs appealed the trial court’s dismissal of their fraud and misrepresentation claims arising from a 400-foot water frontage issue with defendant, a neighboring property owner.  Id. at 1-4.  According to the court, plaintiffs were aware of a 40-foot shortfall in the water frontage as early as 1987 or 1988.  Id. at 3.  The parties then entered into negotiations and settlement was reached at that time.  Id.  However, it was not until 1993, when plaintiffs undertook plans to develop a resort on their property, that they filed this lawsuit.  Id.  The court held that plaintiff’s action was barred by laches because of the plaintiffs’ delay in bringing the lawsuit as well as because of the prejudice it would cause to the defendant.  Id. at 4-5.

In Sedger v. Kinnco, Inc., 177 Mich. App. 69, 73 (Mich. Ct. App. 1988), plaintiff buyer paid defendant seller $63,072 in 1981 for the purchase of eighteen drill collars for an oil drilling project.  Id. at 70-71.  Defendant had in fact obtained the collars from a third party.  Id.  Plaintiff agreed that the drill collars would be stored at the third party’s facility in Texas for eventual pick up and shipment to their intended location.  Id. at 71.  However, plaintiff did nothing further regarding the collars until April of 1983, when it filed for bankruptcy.  Id.  On April 29, 1983, plaintiff advised the defendant that the drill collars could not be located.  Id.  Apparently, the third party had stopped doing business and disappeared.  Id.  Plaintiff then brought a breach of contract action against defendant.  Id.

The trial court found that defendant had performed all the terms and conditions of the original agreement, and that defendant had been prejudiced by plaintiff’s dilatory conduct.  Sedger v. Kinnco, Inc., 177 Mich. App. at 71.  As a result, the trial court barred plaintiff’s claim pursuant to the equitable doctrine of laches.  Id.  On appeal, the court noted that in determining whether a party is guilty of laches, each case must be determined on its own particular facts.  Id.  The court further affirmed the trial court’s holding by finding that defendant was indeed prejudiced by plaintiff’s negligent delay, and was not responsible for plaintiff’s dilatory conduct.  Id. at 72-73.  See also Trombley v. Capac State Sav. Bank, 1997 Mich. App. Lexis 532 (Mich. Ct. App. 1997) (unpublished) (dismissing a claim for rescission based upon laches where plaintiff waited ten years, a witness had now died and plaintiff never objected to a deed being recorded by defendant).

In Iverson Indus. v. Metal Mgmt. Ohio, Inc., 525 F. Supp. 2d 911, 914-915 (E.D. Mich. 2007), plaintiff Iverson and defendant Metal Management entered into a two year fixed term contract whereby Iverson agreed to sell all of its scrap metal exclusively to Metal Management, and in exchange Metal Management guaranteed its pricing according to a formula tied to an industry publication.  Two years after the contract term expired, plaintiff complained to defendant about the market prices it was paying for the scrap metal.  Id.  Plaintiff then filed a breach of contract action when the parties could not agree on a price.  Id.  Defendant responded by arguing plaintiff’s claims are barred by the doctrine of laches.  Id. at 919.  In rejecting the laches argument, the Court noted that the defendant failed to show that it changed its position in reliance on the plaintiff’s failure to assert its rights under the contract, or that it would be more difficult to defend against the claim that the parties intended to continue their agreement as to pricing.  Id. at 920.  Moreover, the plaintiff brought its action within the allowable statute of limitation for a breach of contract claim.  Id.  As such, the defense of laches was not established.  Id.

Lastly, in Ruegsegger v. Bangor Township Relief Drain, 127 Mich. App. 28, 32 (Mich. Ct. App. 1983), a contract provision contained in a right-of-way required defendants to clear concrete rubble from certain portions of plaintiff’s property.  Id. at 29.  Defendants, however, failed to remove all the concrete rubble and plaintiff filed suit seeking specific performance.  Id. at 30.  Subsequently, defendant argued the defense of laches.  Id. at 32-33.  On appeal, the court observed that during the period between defendants vacating the property and plaintiff’s filing suit, plaintiff had made numerous inquiries to defendants’ agents and was repeatedly assured that the clearing would be carried out.  Id.  However, when plaintiff ultimately inquired to defendant themselves, he was told that defendants had no intention of clearing the property.  Id. at 33.  The court held that because of plaintiff’s diligent inquiries, defendants could not avail themselves of the defense of laches.  Id. In this regard, any prejudice to defendants resulted from their own inability to properly perform the contract.  Id.

In the instant case, for Pinnacle to be successful in asserting a laches defense, it has to establish more than just the passage of time between the time Flagstar was forced to repurchase from Fannie Mae and Flagstar commencing its action.  In this regard, Pinnacle must also show prejudice as a result of Flagstar’s failure to demand Pinnacle repurchase the loan pursuant to its contract with Pinnacle.  Nothing in the facts as presented reflect that Flagstar notified Pinnacle about this matter or requested Pinnacle repurchase the loan pursuant to the agreement between them.  Therefore, Flagstar did fail to assert a right it had under the contract.  The issue, then, becomes whether Pinnacle was prejudiced by Flagstar’s failure to demand repurchase of the loan.  If Flagstar’s failure to assert its right to require Pinnacle to repurchase is found to be a lack of due diligence that resulted in prejudice to Pinnacle, laches can attach.

2. Flagstar’s unreasonable delay in asserting their claim signifies a course of conduct indicating a knowing waiver.

Michigan law states that waiver of a contractual right “may be shown by proof of express language of agreement or inferably established by such declaration, act, and conduct of the party against whom it is claimed as are inconsistent with a purpose to exact strict performance.”  Innovative Case, Inc. v. Tweddle Litho Co., 147 Fed. Appx. 467, 472 (6th Cir. Mich. 2005).  See also Guardian Alarm Co. v. May, 24 Fed. Appx. 464, 469 (6th Cir. Mich. 2001); Fitzgerald v. Hubert Herman, Inc., 23 Mich. App. 716, 718-719 (Mich. Ct. App. 1970).  A waiver is a voluntary and intentional abandonment of a known right.  Iverson Indus. v. Metal Mgmt. Ohio, Inc., 525 F. Supp. 2d 911, 921 (E.D. Mich. 2007).  See also Johnson Controls, Inc. v. Jay Industries, Inc., 459 F.3d 717, 725 (6th Cir. 2006); Guardian Alarm Co. v. May, 24 Fed. Appx. 464, 470 (6th Cir. Mich. 2001); Roberts v. Mecosta County Gen. Hosp., 466 Mich. 57, 65 (Mich. 2002).

A course of affirmative conduct, particularly coupled with oral or written representations, can amount to waiver.  Quality Prods. & Concepts Co. v. Nagel Precision Inc., 469 Mich. 362, 379 (Mich. 2003).  With respect to those situations where a course of conduct is the alleged basis for modification, the requirement of mutual assent is satisfied “when a course of conduct establishes by clear and convincing evidence that a contracting party, relying on the terms of the prior contract, knowingly waived enforcement of those terms.”  Id. at 374.  See also Roudabush v. Charles E. Lippert & Lippert Cedar Dev. Co., 2005 Mich. App. LEXIS 1749 (Mich. Ct. App. July 21, 2005) (unpublished).  See also Quality Prods., 469 Mich. 362; Buckeye Elec. Co., 168 Fed. Appx. 34, 37.

Nevertheless, although course of conduct can constitute a waiver, there must be “evidence that [the other party] intentionally relinquished its rights.  Iverson Indus., 525 F. Supp. 2d at 921.  Therefore, the right to enforce a contract “may be lost by waiver or acquiescence where by failing to act one leads another to believe that he is not going to insist upon the covenant, and another is damaged thereby; or where there has been acquiescence…equity will ordinarily refuse aid.”  Bigham v. Winnick, 288 Mich. 620 (Mich. 1939).

In the instant case, the 2001 agreement between Flagstar and Pinnacle Finance provided for Pinnacle to repurchase the loan if Flagstar was required to repurchase from Fannie Mae.  Although Flagstar failed to exercise the right to demand repurchase under the contract, there are not facts as presented that Flagstar engaged in an “affirmative conduct” or “knowingly waived” its rights under the contract.  Moreover, there is nothing to suggest that Pinnacle relied on Flagstar’s failure to seek repurchase to its detriment.  If any party was damaged by Flagstar’s failure to seek repurchase from Pinnacle, it was Flagstar itself.  Therefore, waiver does not appear to be a viable defense for Pinnacle.

Conclusion

Pinnacle can potentially raise the defense of laches, provided it can establish prejudice as a result of Flagstar not seeking repurchase earlier.  However, there does not appear to be a basis for Pinnacle asserting the defense of waiver.