FDIC v. Transworld Mortgage

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT
_______________

No. 95-20682
_______________

FEDERAL DEPOSIT INSURANCE CORPORATION,
statutory successor to the
Resolution Trust Corporation,
as receiver of Commonwealth Federal Savings Association,
Commonwealth Mortgage Corporation of America,
and COMMONWEALTH MORTGAGE CORPORATION OF AMERICA,
as liquidating trustee of Commonwealth Mortgage
Corporation of America, L.P.,
a terminated limited partnership,

Plaintiff-Counter-Defendant-
Appellee-Cross-Appellant,

VERSUS

TRANSWORLD MORTGAGE CORPORATION,
ROUSSEAU MORTGAGE CORPORATION,
and
MONDRIAN MORTGAGE CORPORATION,

Defendants-Counter-Claimants-
Appellants-Cross-Appellees.

_________________________

Appeals from the United States District Court
for the Southern District of Texas
(CA-H-94-1825)
_________________________

July 1, 1997

Before DAVIS, SMITH, and DUHÉ, Circuit Judges.

JERRY E. SMITH, Circuit Judge:*

*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion
should not be published and is not precedent except under the limited circum-
stances set forth in 5TH CIR. R. 47.5.4.
 Transworld Mortgage Corporation appeals, and the Federal

Deposit Insurance Corporation (“FDIC”) cross-appeals, a judgment

awarding monetary damages to both parties and injunctive relief to

the FDIC. We affirm in part, reverse in part, and vacate in part.

I.

This is primarily a breach of contract case stemming from a

sale of residential mortgage servicing rights. The mortgage

companies from which prospective homeowners obtain mortgages

typically sell their loans to investors. When a loan is sold, the

mortgage company frequently enters into an agreement with the

investor to service the loan on the investor's behalf. That is,

the mortgage company, as servicer, agrees to collect the home-

owner's monthly payments of principal and interest and forward them

to the investor.

In the usual arrangement, the servicer also agrees to collect

escrow funds to pay taxes and insurance; when a homeowner misses

payments, the servicer often is required to advance funds to pay

these expenses. Similarly, when a homeowner defaults on his

obligation, the servicer may be required to advance funds to pay

for expenses associated with foreclosure. These funds are referred

to as “advances.”

Commonwealth Savings Association, a Texas savings and loan

institution, failed in 1989, emerged from receivership as Common-

2
wealth Federal Savings Association (“Commonwealth Federal”), and

failed again in 1991. The Resolution Trust Corporation (“RTC”)1

placed it into a second receivership and assumed control of one of

its subsidiaries, Commonwealth Mortgage Corporation of America

(“CMCA”), the general partner of Commonwealth Mortgage Company of

America, L.P. (“CMCA-LP”).

The RTC subsequently undertook to liquidate the assets of

CMCA-LP, consisting principally of servicing rights to mortgages

and advances on servicing-related expenses. Transworld Mortgage

Corporation (“Transworld”) was the highest bidder and thus began to

discuss the terms of sale of CMCA-LP's servicing rights with the

RTC in July 1990.

After extensive negotiations and an apparently rushed due

diligence review, the parties entered into four related contracts:

(1) a May 2, 1991, Comprehensive Asset Purchase and Sale Agreement

(the “CAPSA”) by which CMCA-LP bought most of Commonwealth

Federal’s physical assets and Commonwealth Federal bought various

CMCA-LP assets that were not to be transferred to Transworld,

including $100 million in advances; (2) a May 3, 1991, Purchase and

Sale Agreement (the “PSA”) whereby CMCA-LP sold its servicing

rights and physical assets to Transworld; (3) a June 1, 1991, Loan

Servicing Agreement (the “LSA”) whereby Transworld agreed to

service certain of Commonwealth Federal’s loans in exchange for a

1
Since these events, the RTC has been statutorily succeeded by the FDIC.

3
fee; and (4) a June 1, 1991, Management Agreement for Collection of

Receivables (the “Collection Agreement”) whereby Transworld agreed

to “collect” both CMCA-LP’s “Outstanding Advances” and any new

advances that came into existence as a result of servicing the

defaulted loans. Most of the parties' disputes revolve around the

interpretation of these contracts, particularly the latter three.

The Collection Agreement obligated Transworld to collect

advances for three years, after which time it could resign, with or

without cause. During the three-year period of its obligation,

Transworld collected approximately $70 million of CMCA-LP's

Outstanding Advances and assessed a $10 million fee. As the three-

year period came to a close, however, the relationship between the

parties began to sour. Transworld saw that the cost of collecting

the remaining advances would be greater than the fees it projected

it would earn, and it consequently gave the RTC the required thirty

days' notice of its decision not to extend the Collection Agree-

ment.

The RTC simultaneously became dissatisfied with Transworld's

default administration, collection, accounting, and remitting

practices. Following Transworld's termination of the Collection

Agreement, a dispute arose as to whether Transworld was entitled

temporarily to retain certain RTC funds.

II.

The RTC filed suit in May 1994, alleging numerous violations

4
of the agreements. Transworld counterclaimed for monies owed under

the contracts and fraudulent inducement. After a thirteen-day

bench trial, the district court found in some respect for each side

under the contracts, awarding the RTC approximately $10 million and

Transworld approximately $360,000, both sums in addition to

interest and attorney's fees. The court also awarded the RTC

extensive injunctive relief, prohibiting Transworld from any

further use of RTC funds and requiring a detailed accounting of the

funds previously used. Both sides now appeal.

III.

Transworld avers that the district court erred in failing to

award it three sets of fees for its collections of advances:

(1) fees for collecting the positive and negative escrow funds kept

by CMCA-LP; (2) fees for collecting advances on Commonwealth

Federal’s so-called “020 loans;” and (3) fees associated with

collections on the Outstanding Advances for loans Commonwealth

Federal sold to GE Capital. These claims present issues of

contractual interpretation, and we therefore review the district

court's conclusions de novo.2 E.g., National Union Fire Ins. Co.

v. Care Flight Air Ambulance Serv., 18 F.3d 323, 325 (5th Cir.

2
The FDIC argues that, because the district court made a factual finding
that Transworld had failed to “collect” the funds at issue, the proper standard
of review is clear error. This is incorrect. Whether Transworld “collected” the
funds is a mixed question of law and fact, and the district court's factual
findings were predicated upon its legal ones in this regard. Because we disagree
with the district court's interpretation of the term “collect,” its factual
findings under its interpretation are inapposite.

5
1994).

A.

Transworld argues that it is owed collection fees for work it

performed in reconciling CMCA-LP's escrow funds. Two types of

funds were reconciled: “positive” escrow funds, which contained

reimbursement for advances of which CMCA-LP was apparently unaware,

and “negative” escrow funds, which in the aggregate also contained

money but appeared not to because of accounting errors. Trans-

world's reconciliation revealed approximately $5,000,000 in the

positive escrow accounts and $500,000 in the negative ones. As

compensation for this, Transworld assessed CMCA-LP fees of

$2,092,205 and $145,000, respectively.

As article VII of the Collection Agreement entitles Transworld

to fees based on its collection of “Outstanding Advances,” our

first task is to determine whether the monies in the positive and

negative escrow accounts fall within the contractual definition of

that term. The district court found that they did not. Our

analysis of the contract leads us to disagree.

The relevant provision is straightforward. The Collection

Agreement defines an “Outstanding Advance” as

the outstanding amount as of the applicable Transfer
Date, that has been advanced by [CMCA-LP] from its funds
in connection with its servicing of the Mortgage Loans
(including without limitation principal, interest, taxes,
ground rents, assessments, foreclosure related advances,
insurance premiums and other expenses) and for which
[CMCA-LP], as Servicer has a contractual right of

6
 reimbursement from Mortgagors, Insurers, Investors or
otherwise, all of which are detailed on Exhibit A
attached hereto and made a part hereof.

As Transworld points out, the positive and negative escrow funds

are listed in Exhibit A. Because the FDIC offers no persuasive

argument to refute the obvious conclusion that the parties meant

the funds to be within the definition of “Outstanding Advances,” we

hold that they are so included.

The district court also found, however, that the positive and

negative escrow funds were not “actually collected” by Transworld,

in the sense that the money at issue was already in the accounts

prior to Transworld's reconciliation. The correctness of this

determination hinges on the meaning of the term “collect,” which

the Collection Agreement does not define.

Transworld urges us to apply the common dictionary definition

of the term: to gather or assemble. See WEBSTER'S THIRD NEW INT'L

DICTIONARY 444 (1986). The district court implicitly adopted, and

the FDIC now explicitly argues for, on the other hand, the meaning

typically used in financial and commercial settings: to call for

and receive payment.

Although the financial definition appeals to us in the

abstract, to employ it here would render the relevant portion of

the Collection Agreement a virtual nullity. It is undisputed that

the funds in the escrow accounts already had been remitted to

CMCA-LP when Transworld reconciled and combined them into a pair of

7
lump-sum payments. It is also undisputed that article VII of the

Collection Agreement entitles Transworld to a fee for collecting

the sums in the accounts. If CMCA-LP had already “collected” the

money in the escrow funds, why would it have agreed to pay

Transworld to do something that had already been done?

The FDIC's proposed construction is unreasonable and would

strip this provision of meaning. See Canutillo Indep. Sch. Dist.

v. National Union Fire Ins. Co., 99 F.3d 695, 706 (5th Cir. 1996).

To accept it would require us to conclude not only that CMCA-LP

agreed to pay Transworld for something that had already been done,

but also that it agreed to pay for the “collection” of already-

collected money that became Transworld’s under the PSA. Trans-

world’s interpretation of “collect” is the only one that makes

sense within the contractual framework, and we adopt it.

The FDIC protests that Transworld already has been paid for

collecting the escrow funds with a $950 per-loan fee provided for

in the PSA. Setting aside for the moment the inconsistency between

this argument and the previous one, we are not persuaded. The $950

fee was provided for in the PSA, article 4.3(ii)(g) of which

characterizes it as a “credit” against the purchase price of

certain loans. By its own terms, the PSA directs that Transworld's

collection of advances and compensation therefor are to be governed

not by it but by the Collection Agreement. Moreover, under other

provisions of the PSA, CMCA-LP was expressly obligated to perform

8
the reconciliation that the FDIC now claims it paid for with the

$950 fee.

The FDIC's interpretation is simply implausible. Considerably

more likely, we think, is Transworld’s contention that the $950 fee

was irrelevant to its compensation for straightening out CMCA-LP’s

unkempt books.

This leads us to conclude that the district court erred in

awarding the FDIC the $2,237,205 Transworld withheld on the

positive and negative escrow accounts. Accordingly, we reverse and

render judgment in favor of Transworld in this amount.

B.

Transworld contends that the district court erred in failing

to award it fees for the collection and remittance of Commonwealth

Federal's 020 loans. The court's denial of recovery was based on

its conclusion that the Collection Agreement does not apply to

loans wholly owned by Commonwealth Federal. The majority of this

dispute involves questions of contractual interpretation reviewable

de novo.

The district court's interpretation of the contracts was

correct. By its own terms, the Collection Agreement governs

advances on only those loans for which the servicing rights were

sold in the PSA. Transworld protests that the advances on the 020

loans fit within the Collection Agreement's definition of “Out-

9
standing Advances” and therefore must be governed by it.

As Transworld stipulated at trial, however, the PSA did not

effect a sale of servicing rights to the 020 loans. Rather, those

rights were sold under the LSA, which provides that “[n]o addi-

tional compensation other than that provided for hereunder shall be

payable to [Transworld] for the services described herein except as

set forth elsewhere in this Agreement . . . .” Notably, the LSA

does not require Transworld to collect Outstanding Advances on the

020 loans.

The degree to which the 020 advances fit within the Collection

Agreement's definition of “Outstanding Advances” makes this one of

the more difficult interpretative issues. Notwithstanding this

fit, however, we think that the fact that the 020 loan servicing

rights were not sold under the PSA must exclude them from the

Collection Agreement's coverage at the outset. Since the Collec-

tion Agreement does not apply, there is no contractual language

obligating Transworld to collect advances on the 020 loans, and

therefore no contractual obligation on the FDIC's part to pay a fee

for such collection.

Yet the parties seem to have thought otherwise, at least at

the time the relevant events were taking place. Transworld, after

all, collected and remitted to the RTC $7 million in advances on

the 020 loans. Because of this, it now argues, in the alternative,

that it should recover a collection fee of $2,095,576 under a

10
theory of quantum meruit. The district court rejected this

contention on the basis that “[t]he contracts, which describe the

fee arrangements between the parties, control.”

It is true that, on its face, the “no additional compensation”

language of the LSA appears to define the whole of Transworld’s

compensation for services rendered on the 020 loans. But the

crucial qualification comes later in the sentenceSS“no additional

compensation” shall be paid “for the services described herein.”

Collecting advances was not one of the services described

within the LSA; it was described in the Collection Agreement, which

Transworld (and the RTC, insofar as it did not object to the $7

million payment) appear to have thought covered the 020 loans.

Because the collection of advances is not a service “described

herein,” the LSA does not bar payment of fees for it per se. But

neither is it explicitly authorized under the Collection Agreement.

In light of the parties' behavior, the contractual language on

which the district court relied does not bar recovery in quantum

meruit. The inquiry into whether quantum meruit is appropriate in

any particular circumstance is a fact-intensive one, however.

Because the district court rejected this theory based on its view

of the parties' contracts, the record before us lacks sufficient

factual development for us to express a view on the merits of this

issue. Consequently, we affirm the district court's conclusions as

to Transworld's recovery under the LSA and the Collection Agree-

11
ment, but we remand for reconsideration of the appropriateness of

quantum meruit.

C.

Transworld's next contention is that the district court

erroneously denied it recovery of fees relating to its collection

of advances on loans Commonwealth Federal sold to GE Capital. For

purposes of our analysis here, these are in virtually all respects

identical to the fees associated with the 020 loans discussed

above. Because the servicing rights to the GE Capital loans were

not sold through the PSA, the collection of advances on them was

not covered by the Collection Agreement.

As with the 020 loans, however, it appears from the record

that Transworld may have rendered valuable services for which it

has not been compensated. Again expressing no opinion on the

ultimate resolution of this issue, we affirm the district court's

interpretation of the applicable contracts and remand for reconsid-

eration of whether Transworld is entitled to recover under quantum

meruit.

IV.

Transworld challenges the award to the FDIC of $791,000 for

Transworld's failure to collect advances as required by the

Collection Agreement. The basis for the award was the finding that

12
the Collection Agreement imposed a duty on Transworld to comply

with all laws, rules, and regulations applicable to its servicing

of the RTC's loans, and that Transworld had violated that duty on

numerous occasions.

Some of the loans that Transworld contracted to service were

subject to Federal Housing Administration, Department of Housing

and Urban Development (“HUD”), and Department of Veterans Affairs

(“VA”) regulations. The district court held that by failing to

follow the regulations requiring it to (1) perform work-outs with

mortgagors; (2) promptly proceed to foreclosure; (3) process claims

in accordance with VA and HUD procedures; (4) pay Commonwealth

Federal certain collected funds; and (5) properly advance foreclo-

sures so as to avoid loan curtailment, Transworld breached its

contract and caused substantial losses to the RTC.

We begin, as we must, with the language of the contract.

Gallup v. St. Paul Ins. Co., 515 S.W.2d 249, 250 (Tex. 1974).

Article III of the Collection Agreement requires Transworld to

“seek to collect” Outstanding Advances and Default Portfolio

Advances in conformity with

all applicable state, federal and other governmental
laws, rules and regulations and the requirements of any
Insurer or Investor, with respect to the servicing of the
Mortgage Loans and the collection of the Outstanding
Advances and Default Portfolio Advances, including the
giving of all necessary and appropriate notices and the
submission of claims.

Similarly, in Article V(a) Transworld agreed to “make reasonable

13
efforts to collect and recover all Outstanding Advances and Default

Portfolio Advances . . . as if [Transworld] were the owner

thereof.”

Transworld attempts to escape from this language by arguing

that because it was obligated only to “seek to collect,” it cannot

be held liable for an actual failure to collect unless the FDIC

demonstrates that it did not use “reasonable efforts.” Transworld

points to the contingent nature of its obligation to collect

advances and to language in the Collection Agreement placing the

risk of loss of the Outstanding Advances on the RTC.

In large part, this argument misses the point. It is true

that Transworld was bound only to attempt to collect the Outstand-

ing Advances rather than actually to collect them. But the “seek

to collect” language in the Collection Agreement is closely

followed by the requirement that Transworld abide by the relevant

governmental regulations.

The basis of Transworld's liability in the district court was

its failure to comply with these regulations in the course of those

efforts. The finding that it did not abide by the relevant

standards is a factual one that Transworld does not challenge on

appeal. The conclusion that the Collection Agreement's “seek to

collect” language did not excuse it from the industry standards is

a legal one in which we see no error. As we agree with the

district court's interpretation of the Collection Agreement, we

accordingly affirm the award of $791,000 to the FDIC.

14
 V.

Transworld claims that it is entitled to indemnity under the

PSA for two types of losses it sustained in the course of perform-

ing its contractual obligations. The first is losses arising from

Transworld's “buydowns” of defaulted loans guaranteed by the VA;

the second is losses Transworld claims it incurred in settling a

lawsuit brought by a class of parties in bankruptcy. The district

court denied relief on both claims.

According to the PSA, a buydown is a

waiver by [Transworld] of a portion of the indebtedness
of a VA guaranteed Loan, which can take the form of a
reduction of the Principal, a credit to escrow or
unapplied funds accounts, the forgiveness of Accrued
Interest or any combination of the foregoing, [] in order
to induce the VA to pay to the mortgage holder the
remaining amount of the indebtedness owed under the Loan
and acquire title to the Collateral.

The PSA provides that Transworld is indemnified for any buydowns

initiated within two years of its effective date. The first

dispute thus hinges on precisely what “initiates” a buydown within

the meaning of the contract. Transworld claims that, because every

buydown involves a foreclosure, a buydown is initiated when the

property is referred to an attorney for foreclosure. The FDIC,

pointing out that not every foreclosure leads to a buydown,

contends that a buydown is not initiated until Transworld receives

a no-bid notice from the VA and informs the VA of its intention to

waive part of the indebtedness.

There is little support for Transworld's position. Although

15
the PSA and the VA's loan servicing guide state the rather

unremarkable proposition that referral of a loan to an attorney for

foreclosure initiates foreclosure proceedings, nothing in either

indicates that a referral initiates a buydown. This makes perfect

sense, for many such referrals result in foreclosures that do not

involve a buydown. Transworld's reliance on the testimony of a

witness who stated that a foreclosure was “one of the first steps”

in the buydown process is thus misplacedSSone might just as easily

say that the original extension of the loan initiates the buydown,

as it is also a necessary step in the process. The district

court's rejection of Transworld's first indemnity claim was not

erroneous.

The second claim fares no better. In 1993, a group of debtors

brought a class action against Transworld in bankruptcy court in

Pennsylvania. The class action plaintiffs alleged misconduct in

foreclosure tactics used by both Transworld but also by CMCA-LP.

Transworld settled the suit without paying either actual or

punitive damages; instead, it agreed to reimburse the class

members' legal fees and pay for an audit of their loan files.

Transworld thus claims that the PSA entitles it to indemnity for

the portion of these expenses attributable to CMCA-LP's conduct,

which it alleges total $299,954.27 plus costs and prejudgment

interest.

This argument turns on whether the losses claimed were caused

by Transworld's or CMCA-LP's negligence, for Transworld is entitled

16
to indemnity only for the latter. Based on what little evidence

pertaining to this claim was presented at trial, the district court

made a factual finding that the losses were “a direct result of

Transworld's violations of bankruptcy law.” Although we think this

one of the closer issues in the case, our review of the record

reveals nothing to convince us that this finding was clearly

erroneous, and we accordingly affirm the judgment.

VI.

Transworld asserts that the district court erred in concluding

that it violated the Collection Agreement by continuing to use the

RTC's uncollected advances and other funds after the agreement was

terminated. The FDIC contends, and the court found, that upon the

termination of the Collection Agreement, Transworld lost its right

to use RTC funds to service a group of loans known as the Default

Servicing Portfolio, the sole exception being that article V(e)

entitled Transworld to draw upon a three-month “set aside” reserve.

The court awarded the RTC $4,325,729 on this claim and entered an

injunction requiring Transworld to account for and deliver the

amounts improperly used. As the issues surrounding this claim deal

almost exclusively with interpretation of the Collection Agreement,

our standard of review is de novo.

Article V of the Collection AgreementSSthe provision that

authorized Transworld to use RTC funds for Default Portfolio

17
AdvancesSSbegins with a limitation: “Until the earlier to occur of

(i) the termination of this Agreement and (ii) the collection of

all Outstanding Advances and Default Portfolio Advances, [Trans-

world] shall . . . .” The remainder of article V describes

Transworld's obligations and the circumstances under which it may

use RTC funds to satisfy Default Portfolio Advances. Because the

first sentence modifies everything that follows, the FDIC argues,

Transworld's right to use the funds ended on termination of the

agreement.

But article V must be read in conjunction with the remainder

of the agreement. The more specific provision dealing with

termination is article XI, which provides:

Upon termination of this Agreement, [Transworld] will
account for and deliver to [CMCA-LP] all funds then held
in the Collection Account and Operating Account, less
only the compensation due [Transworld] hereunder and set
aside other sums then due or available to [Transworld]
for payment of Default Portfolio Advances, and will
deliver to [CMCA-LP] all records and documents that it
may have in its possession relating to each such Advance,
except to the extent such Advance relates to a Mortgage
Loan for which [Transworld] maintains the Servicing
Rights. [Transworld] shall return to [CMCA-LP] any
remaining amounts after [Transworld] is no longer
obligated to make any Default Portfolio Advances.

In essence, Transworld’s argument is that this language means what

it says: The funds at issue were “other sums . . . available to

[Transworld] for payment of Default Portfolio Advances,” and thus

did not need to be returned until the obligation to make Default

Portfolio Advances ceased.

Transworld's argument is persuasive. The FDIC, in contrast,

18
urges us to read a requirement into the Collection Agreement that

simply is not there: that its obligation to fund Default Portfolio

Advances and Transworld's commensurate right to draw upon its funds

end when the contract is terminated. However much article V might

suggest this when viewed in isolation, we find this interpretation

impossible to reconcile with the language of article XI. The

FDIC's and the district court’s reading of the Collection Agreement

render the above-quoted portion of article XI a nullity.3

Accordingly, the district court erred in holding that

Transworld converted the funds it retained after the termination of

the Collection Agreement. This aspect of the judgment is reversed,

and the injunction entered against Transworld is dissolved in all

respects.

VII.

Transworld claims that the district court erred in denying its

counterclaim of fraud in the inducement of the Collection Agree-

ment, the PSA, and the LSA. The court's rejection of this claim

hinged on its finding that “[n]either party intentionally or

negligently made representations that the other relied upon that

are not subsumed by the terms of the agreements.” As this is a

3
The FDIC protests that Transworld's reading of articles V and XI itself
creates a nullity out of a provision of article X permitting Transworld to
purchase advances by mutual agreement of the parties. We do not agree. As
Transworld points out in its reply brief, a purchase of advances might very well
make sense if, following termination of the Collection Agreement, Transworld were
to find itself saddled with collection obligations for which it was no longer
being paid.

19
finding of fact, we review it for clear error. FED. R. CIV.

P. 52(a).

Transworld raises an issue of pure law as well, however: that

the district court based its factual conclusions on an erroneous

interpretation of the applicable law. Specifically, Transworld

contends that the district court should not have relied upon

Southwestern Bell Tel. Co. v. DeLanney, 809 S.W.2d 493 (Tex. 1991),

for the proposition that a fraudulent breach of duty must arise

independently of a contract between the parties, because Southwest-

ern Bell is a negligence case rather than a fraud case. See id.

at 494-95. Rather, Transworld argues, the proper standard is that

fraud in the inducement may be shown by parol evidence, even in the

face of an “as-is” or “merger” clause in the contract. See, e.g.,

Dallas Farm Mach. Co. v. Reaves, 307 S.W.2d 233, 239 (Tex. 1957).

This is correct; the district court evaluated Transworld's

claim under the wrong legal standard. Such errors normally lead us

to reverse, in accordance with our caselaw holding that judgments

based on factual findings derived from a misunderstanding of

substantive law cannot stand. See, e.g., Mobil Exploration &

Producing U.S., Inc. v. Cajun Constr. Servs., 45 F.3d 96, 99 (5th

Cir. 1995).

It is difficult to see how the factual findings at issue here

are “derived from” the district court's error of substantive law,

however, as some of the more important ones do not depend upon it.

20
The court found, at the very least, that neither party relied on

whatever misrepresentations the other might have made. This

presumably includes misrepresentations both inside and outside

Transworld's exercise of due diligence, so the parties' vigorous

debate about the Texas law of investigation-related reliance is not

dispositive.

Reasonable reliance, of course, is a necessary element of

fraud under Texas law. Norman v. Apache Corp., 19 F.2d 1017, 1022

(5th Cir. 1994). Even assuming arguendo that the various misrepre-

sentations of which Transworld complains actually occurred, its

fraud claim is vitiated by a factual finding that does not depend

on the district court's misapprehension of substantive lawSSthe

finding that it did not rely on the misrepresentations.

Our review of the record once again reveals a fairly close

question as to whether this finding is clearly erroneous. What

tips the balance to the FDIC is the relative sophistication of the

parties and the extensiveness of the investigation that Transworld

did conduct, however hurriedly. Recognizing that this investiga-

tion cannot bar Transworld's fraud claim per se, see Roberts v.

United N. Mex. Bank, 14 F.3d 1076, 1081 & n.6 (5th Cir. 1994), we

nonetheless think it highly relevant to whether the district court

clearly erred in holding that Transworld failed to demonstrate

reliance by a preponderance of the evidence.

Given this deferential standard of review, we do not see that

21
the district court committed such error. As reliance is an

essential element of Transworld's fraud claim, we affirm this

aspect of the judgment.

VIII.

Transworld challenges the award of prejudgment interest on the

damages awarded the RTC for Transworld's breach of the Collection

Agreement. Specifically, Transworld maintains, the district court

erred both in setting the rate at 10% and in ordering that the

interest would accrue from June 1, 1994. As the FDIC concedes that

the proper date is June 12, 1994 (the date on which the Collection

Agreement actually terminated), we need concern ourselves only with

the interest rate. Its correctness turns on interpretation of the

contract and is thus an issue of law reviewable de novo. See,

e.g., National Union, 18 F.3d at 325.

Under Texas law, a contract that does not specify a prejudg-

ment interest rate is subject to a rate of 6% on damages that may

be ascertained from the face of the contract. TEX. REV. CIV. STAT.

ANN. art. 5069-1.03 (West 1987). Damages not ascertainable with a

reasonable degree of certainty are subject to a prevailing market

rate, currently set at its floor of 10%. TEX. REV. CIV. STAT. ANN.

art. 5069-1.05(2) (West Supp. 1997); Perry Roofing Co. v. Olcott,

744 S.W.2d 929, 930 (Tex. 1988). We have read these rules and the

Texas cases interpreting them to mean that damages must be

22
ascertainable from the face of the contract in order for the 6%

rate to apply. See Atchison, Topeka & Santa Fe Ry. v. Sherwin-

Williams Co., 963 F.2d 746, 751-52 & n.14 (5th Cir. 1992).

As the FDIC points out, the district court's calculation of

damages went well outside the boundaries that Texas law draws upon

the 6% rate. In determining the damages caused by Transworld's

breach of its standard of performance, for example, the court heard

testimony by accountants and reviewed extracontractual documents

pertaining to the curtailment of the advances. Because this

information was necessary to determine the damage award, the court

properly applied a rate of 10%. Accordingly, we vacate the award

of prejudgment interest and remand with instructions that it be

re-entered as accruing from June 12, 1994.

IX.

The FDIC raises two claims by cross-appeal: that the district

court's award of $136,000 to Transworld for auditing a group of

adjustable rate mortgages violated the statute of frauds, and that

a second award of $177,789.81 for shortages in the Federal Home

Loan Mortgage Corporation (“FHLMC”) account was erroneous because

of laches and Transworld's failure to mitigate. We find little

merit in these arguments.

As to the first claim, our review of the various agreements

persuades us that the district court correctly found them to be

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sufficient to satisfy the statute of frauds. As to the second, the

award to Transworld was predicated on a series of factual findings,

supported, for example, by testimony regarding Transworld's efforts

to collect the funds in question within a reasonable amount of

time. Nothing in the record suggests that the findings were

clearly erroneous, and we accordingly affirm in this regard.

X.

For the foregoing reasons, we REVERSE the award of damages for

improper assessment of collection fees on the positive and negative

escrow funds and RENDER judgment for Transworld in the amount of

$2,237,205. We AFFIRM the judgment regarding fees for collection

of advances on the 020 and GE Capital loans and REMAND for

reconsideration of whether Transworld should recover in quantum

meruit. We further AFFIRM the award to the FDIC for Transworld's

breach of its standard of performance, AFFIRM the judgment

regarding denial of contractual indemnity, REVERSE the damages

award and finding that Transworld converted the RTC’s funds, VACATE

the accompanying injunction, AFFIRM the denial of recovery for

fraud in the inducement, VACATE the award of prejudgment interest,

REMAND for recalculation of such interest from the date of June 12,

1994, and AFFIRM the judgment regarding the awards to Transworld

for auditing the ARM's and for shortages in the FHLMC account.

It is so ordered.

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