against "endless litigation over both real and imagined claims of
misinformation by disgruntled citizens, imposing an unpredictable drain
on the public fisc," (Richmond, 496 U.S. at 433, 110 S.Ct. 2465), it was
not the sole policy behind the doctrine. As the court in Dupuis noted,
"the primary factor that drove the conclusion in Merrill is . . .
Congress' ability to impose limits on what its creations may do."
Dupuis, 879 F. Supp. at 145. The court further noted that Congress
established Freddie Mac with specific powers, and Freddie Mac "has within
those powers explicitly limited the authority of its agents. Merrill
directs that a court must observe these limitations." Id. Other courts as
well have recognized this second policy underlying the Merrill doctrine.
See McCauley v. Thygerson, 732 F.2d 978, 982 (D.C.Cir. 1984) (respect
must be given for congressional intent within our constitutional system
of allocated powers); REW Enterprises, 49 F.3d at 167 (estopping an
agency from disavowing an unauthorized act would validate the agency's
improper infringement on the authority of a coordinate branch).
Accordingly, because the Merrill doctrine implicates policy
considerations beyond protection of the public treasury, the fact that
Freddie Mac now is privately owned under FIRREA is not grounds to deny
Freddie Mac the protection of the Merrill doctrine.
Because Freddie Mac is a federal instrumentality entitled to the
protection of the Merrill doctrine, it is not bound by the unauthorized
acts of its sellers/servicers that it relies upon to service the mortgage
that it owns. As approved Freddie Mac servicers, Community and Standard
were governed by the terms of the Guide and certain other "purchase
documents" as defined in § 1.2(a) of the Guide.*fn14 Pursuant to
§ 1.2(a), a seller who sells mortgages to Freddie Mac or a servicer
who contracts to provide services, is required to service those mortgages
for Freddie Mac in accordance with the standards set forth in the Guide.
Here, the court finds that the alleged actions of Community and
Standard occurred outside the scope of their express authority under the
Guide. First, the complaint alleges in Counts III, IV and V that Freddie
Mac's servicers engaged in conduct that violated the Pennsylvania CPL.
Accepting plaintiff's allegations as true for purposes of this motion to
dismiss, Freddie Mac's servicers violated the CPL by: (1) falsely
representing that the South View mortgage authorized the placement of
bill payments in escrow and that the mortgagors could be billed for
maintenance t)f those accounts (Count III); (2) concealing that the
servicers added loan advances to unpaid mortgages and charged interest
for loan advances predating disbursement (Count IV); and (3) concealing
that Freddie Mac was the owner of their mortgage (Count V).
However, Freddie Mac's seller/servicer guide expressly prohibits its
sellers/servicers from engaging in any conduct that violates any
applicable state or federal law. Section 53.8 provides that: "The Servicer
agrees to comply with the following laws, regulations, and orders . . .
 All other applicable federal and state laws, regulations and orders."
Section 51.4(a) of the Guide likewise mandates that "mortgages purchased
by Freddie Mac must be serviced by a Servicer in accordance with the
requirements of applicable law and the Purchase Documents." More
specifically, § 2.11 of the Guide expressly provides that "if a
Borrower inquires about the ownership of his or her Mortgage, and Freddie
Mac owns the Mortgage. the Seller/Servicer must inform the Borrower that
Freddie Mae owns the Mortgage once the Borrower's identity is verified."
Thus, by engaging in conduct that violated the Pennsylvania CPL, the
servicers were acting outside the scope of their express authority under
the Guide, which precludes Freddie Mac servicers from violating
applicable state law. Accordingly, assuming that the servicers' conduct
violating the Pennsylvania CPL, Freddie Mac, as a federal instrumentality
protected by the Merrill doctrine, cannot be held liable for their
unauthorized conduct. See, e.g., Deerman, 953 F. Supp. at 1400
(servicers' unauthorized failure to comply with New York Deceptive Acts
and Practices law not a valid basis for recovery against Freddie Mac).
Therefore, Counts III, IX and V alleging liability against Freddie Mac
for its servicers violations of the Pennsylvania CPL, are dismissed for
failing to state a claim upon which relief can be granted.
Similarly, Freddie Mac cannot be held vicariously liable for its
servicers breaches of contract. Count I of servicers' amended complaint
alleges that the mortgage contract was breached by the failure to
capitalize tax and insurance payments, by over billing to maintain tax
and insurance escrow accounts, and by paying lower interest on bill
payments held in escrow. Count II alleges that the mortgage contract was
breached by the adding' of loan advances to unpaid mortgage balances
without notice, charging interest for loan advances predating the dates
on which the loan advances were disbursed and failing to pay timely
interest that accrued during 1995 on money held in escrow. Both breach of
contract counts allege conduct that was engaged in by Freddie Mac's
services not Freddie Mac itself. Neither count alleges a single
affirmative act committed by Freddie Mac. Again it is the servicers not
Freddie Mac, who administer the mortgage accounts. "[T]he servicers
establish, maintain, compute, collect, adjust and disburse the escrow.
FHLMC does not maintain information on whether an escrow account exists
with any mortgage it has purchased nor does it maintain information on
monthly payments, account balances or possible overages. This information
remains with the servicer." Hashop v. FHLMC, 171 F.R.D. 208, 211
(N.D.Ill. 1997) (emphasis added). Accepting the allegations that the
servicers breached the contract as true for purposes of this motion to
dismiss, the conduct alleged in the complaint was outside the scope of
the servicers' actual authority.
Section 59.1 of the Guide governs escrow for taxes, ground rents,
assessments and other charges. The conduct alleged in the complaint
violate § 59.1 in several respects. First, § 59.1 expressly
provides that "if the amount held in escrow by the servicer, together with
the future monthly installments of escrow, exceeds the amount required to
pay charges as they fall due, the servicer must either repay the excess
promptly to the borrower . . . or credit the excess to the borrower by a
reduction in monthly escrow installments." Thus, to the extent plaintiffs
complaint alleges that the contract was breached by over billing to
maintain tax and insurance escrow accounts, such conduct clearly is
prohibited by § 59.1 and thus was outside the scope of the servicer's
Likewise, § 59.1 provides:
If the amount held in escrow by the servicer is deemed
insufficient to pay charges when due, the servicer
should obtain the necessary additional funds from the
borrower . . . or if there is insufficient time to
obtain the amount, the servicer must. pay any charges
due and reflect the shortage in the borrower s escrow
account. The servicer may either increase the
borrower's next payment to cover all of the advance or
schedule the repayment of such advance
over several months. The servicer may not collect the
advance by deducting from one or more monthly mortgage
Here, Count II of plaintiffs' amended complaint alleges that the servicer
breached the contract by adding loan advances to unpaid mortgage balances
and by charging interest for loan advances predating the date of
disbursement. Such conduct clearly is in violation of the mandates of
§ 59.1 which provides that advances are to be covered either by
increasing the borrower's next escrow payment or to schedule the
repayment over several months. Thus, the servicers, by engaging in
conduct prohibited by the Guide, acted outside the scope of their
authority, and Freddie Mac cannot be held liable for their unauthorized
conduct. See, e.g., Dupuis, 879 F. Supp. at 144 (Merrill doctrine
provided complete defense for Freddie Mac on all of plaintiff's contract
claims). Accordingly, Counts I and II alleging liability against Freddie
Mac for their servicers' breaches of contract, are dismissed for failing
to state a claim upon which relief can be granted.
The Supreme Court in Merrill stated that "Whatever the form in which
the Government functions, anyone entering into an arrangement with the
Government takes the risk of having accurately ascertained that he who
purports to act for the Government stays within the bounds of his
authority." Here, that concept applies to preclude plaintiffs from
holding Freddie Mac liable for the alleged breaches and misconduct
committed by its servicers outside the scope of their authority as
defined in the Guide.
Contrary to plaintiffs' assertions, the Merrill doctrine does not
permit Freddie Mac to violate its contractual obligations with impunity.
Had Freddie Mac itself engaged in or authorized the alleged conduct, it
could be held responsible therefor. However, the breaches and misconduct
alleged in plaintiffs' complaint were not committed by Freddie Mac, but
by its servicers outside the scope of their authority as established in
the Guide, and Merrill pre-cludes liability against Freddie Mac for its
servicers' unauthorized conduct. Although the Supreme Court recognized in
Merrill the potentially harsh effects of this concept, that harshness is
alleviated in this case by the fact that plaintiffs are not. left without
any recourse. Rather, recovery is sought, and may be had, against those
who actually engaged in the conduct at issue — the servicers.
Thus, the court finds that the Merrill doctrine provides a complete
defense to Freddie Mac from liability for any of the unauthorized acts of
its servicers as alleged in plaintiffs' complaint. Accordingly,
plaintiffs' amended complaint fails to state a claim against Freddie Mac,
and Freddie Mac's motion to dismiss is granted.
An appropriate order will follow.