United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
July 26, 2006
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk
No. 05-10826
WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION,
AS TRUSTEE FOR THE CERTIFICATE HOLDERS
OF FIRST UNION-LEHMAN BROTHERS-BANK OF
AMERICA COMMERCIAL MORTGAGE PASS-THROUGH
SERIES 1998-C2, AND ORIX CAPITAL MARKETS, LLC,
Plaintiffs-Appellants,
versus
WACHOVIA BANK, NATIONAL ASSOCIATION,
formerly known as First National Bank, doing business
as Wachovia Securities,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Texas
Before HIGGINBOTHAM, DAVIS, and STEWART, Circuit Judges.
PER CURIAM:*
Plaintiffs-Appellants Wells Fargo Bank Minnesota, NA (“Wells Fargo”), as trustee for the
holders of certain mortgage pass through certificates, and Orix Capital Markets, LLC, (“Orix”) filed
suit against defendant Wachovia Bank, NA, (“Wachovia”). The complaint alleged that Wachovia
*
Pursuant to 5th Cir. R. 47.5, the court has determined that this opinion should not be published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 circumstances set forth in 5th Cir. R. 47.5.4.
breached its contractual obligation to maintain and deliver certain loan origination documents when
it destroyed the documents. The complaint also requested damages, alleging that the breach was a
conversion and that the breach reduced the value of certificates associated with the origination
documents. After approximately two weeks of trial, the district court denied recovery on the breach
of contract and conversion claims against Wachovia. We affirm.
I. FACTUAL AND PROCEDURAL BACKGROUND
Wachovia was formerly known as “First Union National Bank, doing business as Wachovia
Securities.” First Union National Bank sold 271 multifamily and commercial mortgage loans to its
subsidiary, First Union Commercial Mortgage Securities, Inc. (“First Union Securities”). First Union
Securities similarly purchased commercial mortgage loans from Bank of America and Lehman
Brothers Capital. These were commercial mortgage backed securities transactions, through which
First Union Securities purchased mortgage loans pursuant to a Mortgage Loan Purchase Agreement
(“Purchase Agreement”) dated May 1, 1998.
Pursuant to a Pooling and Servicing Agreement (“Pooling Agreement”) also dated May 1,
1998, First Union Securities deposited the loans into a trust called the First Union-Lehman
Brothers-Bank of America Commercial Mortgage Trust (“FULBBA Trust”). First Union Securities
also assigned all of its right, title, and interest in and to the mortgage loans to the Trustee for the
benefit of the certificate holders of the FULBBA Series 1998-C2 Trust. The effects of the
transactions were to “cash out” Wachovia for the original mortgage loans and to create a pool of
loans–a securitized trust–in which investors could purchase certificates of interest, thus transferring
the risk of nonpayment to the certificate holders.
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The complaint filed against Wachovia in August 2002, as amended, asserted that Wachovia
did not deliver origination documents by the May 1998 closing as provided in the Purchase
Agreement. Instead, about four weeks after the closing, Wachovia destroyed these documents per
its policy. In 2002, Orix requested that Wachovia provide certain origination documents for all
Wachovia loans that were in the FULBBA Trust as required by the Purchase Agreement and Pooling
Agreement. Wachovia responded that it had previously provided the documents to Orix.
Wells Fargo, as trustee for the FULBBA Trust certificate holders, and Orix, individually and
as the Trust’s Master and Special Servicer, filed suit seeking damages for Wachovia’s failure to
deliver the documents and for Wachovia’s conversion of the documents. The February-March 2005
bench trial lasted eight days. Among the district court’s findings and conclusions were the following:
Wachovia represented and warranted under the Purchase Agreement that, at the time of the May
1998 closing, Wachovia had delivered to the Trustee specific documents that constitute the
“mortgage file” for each of the 271 Wachovia loans. These documents included the original Mortgage
Note, any endorsements thereto, original executed assignment of the mortgage, any related
assignment of leases, or any other recorded document, original assignment of unrecorded documents
related to the mortgage loan, and an original or copy of lender’s title insurance. The Purchase
Agreement also provided that for each loan Wachovia would deliver to the Master Servicer, by the
May 1998 closing date, all other documents and records that were (1) in its possession, (2) not
required to be delivered to the Trustee, and (3) neither attorney-client privileged materials nor
“internal credit analysis.” About four weeks after the closing, Wachovia discarded borrower-related
documents that should have been delivered or maintained under the Purchase Agreement; most of
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these documents were neither attorney-client privileged materials nor “internal credit analysis”
materials.
Based upon Orix’s acts, statements, and omissions during 2000-2005, the district court also
found little or no indication that the certificates or the loan pool were impaired due to the missing
documents. The district court concluded that, although Wachovia had breached the Purchase
Agreement, Pooling Agreement, and other agreements by destroying mortgage loan documents, Orix
and the Trust failed to prove damages proximately caused by the alleged breach of contract; the
damages alleged are speculative and remote as to both causation and amount. The district court also
determined that the plaintiffs’ claims for negligence, breach of the duty of good faith and fair dealing,
conversion, and spoilation all arise from the breach of contract claim, and are not viable because New
York law does not recognize independent actions for these claims when they arise from a breach of
contract. The district court questioned the plaintiffs’ standing to sue, but avoided ruling on that issue
because it found insufficient proof of damages.
Wells Fargo and Orix appeal the denial of recovery on their breach of contract and conversion
claims.
II. STANDARD OF REVIEW
It is well established that for bench trials, we review the district court’s factual findings for
clear error and review de novo its conclusions of law. Houston Exploration Co. v. Halliburton
Energy Servs., Inc., 359 F.3d 777, 779 (5th Cir. 2004); FDIC v. McFarland, 33 F.3d 532, 536 (5th
Cir. 1994); Gebreyesus v. F.C. Schaffer & Assocs., Inc., 204 F.3d 639, 642 (5th Cir. 2000). “A
finding is ‘clearly erroneous’ when although there is evidence to support it, the reviewing court on
the entire evidence is left with the definite and firm conviction that a mistake has been committed.”
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Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573 (1985) (alteration and quotation marks
omitted).
If the district court’s account of the evidence is plausible in light of the record viewed
in its entirety, the court of appeals may not reverse it even though convinced that had
it been sitting as the trier of fact, it would have weighed the evidence differently.
Where there are two permissible views of the evidence, the factfinder’s choice
between them cannot be clearly erroneous.
Id. at 573-74. “‘In applying the clearly erroneous standard to the findings of a district court sitting
without a jury, appellate courts must constantly have in mind that their function is not to decide
factual issues de novo.’” Id. at 573 (quoting Zenith Radio Corp. v. Hazeltine Research, Inc., 395
U.S. 100, 123 (1969)).
III. DISCUSSION
Wells Fargo and Orix assert that the district court’s finding that they did not establish the
“fact” of damage is clear error, and that the proper question is whether the value of the loan pool
Wachovia delivered to the Trust in May1998 (i.e., loans delivered without the contractually promised
documentation) was lower than the value of the loan pool Wachovia promised to deliver. Wells Fargo
and Orix contend that it is the value of the pool, and not the value of the individual certificates, that
is at issue. Wells Fargo and Orix also assert that the conversion claim arises from Wachovia’s
post-closing destruction of documents, and not from Wachovia’s failure-to-deliver-documents breach
of contract.
By contrast, Wachovia asserts, inter alia, that the real issue on appeal is whether in 1998 the
value to the original certificate holders would have been less had the certificate holders known certain
documents would later be discarded. Wachovia maintains that there is no clear error in the district
court’s ruling.
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After presentation of testimony and other evidence for eight days, the district court rejected
the claims for damages because Wells Fargo and Orix “offered no persuasive evidence that they
suffered any damages proximately caused by any alleged breach” of the various contracts by
Wachovia. The district court saw and heard eight days of testimony and other evidence. On the
record before us, we cannot say the district court’s findings were clearly erroneous.
We agree with the district court that the showing of damages was “speculative and remote.”
We recognize that, in general, a loan pool with a complete set of origination documents may be more
valuable than a loan pool without all the origination documents. Nevertheless, the record supports
the district court’s conclusion. For example, several ratings agencies–including Orix–reviewed the
loans yet did not criticize the loan origination process. Orix concluded that the collateral pool was
“above average in real estate quality” compared to other similar transactions and that the loans were
“generally well-underwritten” and secured by “relatively good properties.” Importantly, Orix’s due
diligence review occurred after the documents had been destroyed and, during its review, Orix never
inquired into the existence of the origination documents at issue. On this record, we find that the
presence or absence of the origination documents did not affect Orix’s decision to purchase the
certificates. Moreover, the record contains testimony that the market value of the loans increased
after the absence of the origination documents became public knowledge. This undermines the claim
that the documents had significant value.
Additionally, approximately eleven days before the instant trial, Orix announced an offering
of certificates in a new and larger loan pool. The new loan pool is comprised of certificates Orix owns
in 16 trusts–including the FULBBA Trust. The FULBBA 1998-C2 certificates account for almost
thirty per cent of the new loan pool. The preliminary offering memorandum published to potential
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investors in this new loan pool mentioned lawsuits involving the FULBBA Trust and included the
amount of attorneys’ fees the Trust had incurred , but did not mention defects in the documentation
or that such a defect negatively affected the value of the FULBBA Trust certificates. If the FULBBA
Trust certificates at bar would have had a lower value to the trust’s original certificate holders had
the original holders known about the missing origination documents, then it seems Orix would have
disclosed this as material information when repackaging the FULBBA Trust loans as part of the new
offering. Yet Orix did not disclose that the FULBBA Trust loan pool was tainted due to the absence
of origination documents. The district court properly found that this nondisclosure militated against
the claim that Wachovia’s failure to deliver the origination documents reduced the value of the
certificates’ underlying loan pool.
The district court’s finding that Wachovia destroyed documents that it was contractually
bound to deliver is supported by the record. The testimony and other evidence indicate that the
absence of the documents at issue did not negatively affect the value of the loan pool and associated
certificates, either initially or by the time of trial. Wells Fargo and Orix cannot prevail in their action
to recover damages for Wachovia’s breach of contract.
As to the conversion claim, the district court stated that “New York law does not recognize
an independent action for conversion arising from a breach of contract.” Wells Fargo and Orix agree
that this is a correct statement of New York law. They contend, however, that they are entitled to
damages from conversion because Wachovia had a duty to maintain the origination documents in
addition to the duty to deliver the documents. We disagree.
Wachovia Bank’s contractual obligation to deliver the documents necessarily involved a
contractual obligation to maintain the documents. The single act of destroying the origination
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documents is, at most, both breach and conversion. In the instant factual scenario, the distinction
between “delivering” documents and “maintaining” documents is artificial. New York law does not
recognize a separate claim for conversion arising from a breach of contract. See Priolo Commc’ns.,
Inc. v. MCI Telecomms. Corp., 669 N.Y.S.2d 376, 377 (N.Y. 1998) (“The plaintiff’s claim alleging
conversion merely restates its cause of action to recover damages for breach of contract and does not
allege a separate taking. A claim to recover damages for conversion cannot be predicated on a mere
breach of contract.”); MBL Life Assurance Corp. v. 555 Realty Co., 658 N.Y.S.2d 122, 124 (stating
“a claim of conversion cannot be predicated on a mere breach of contract” and holding that a
defendant is entitled to dismissal of a conversion action where “the plaintiff failed to submit evidence
demonstrating a wrong independent from the contract claim”). Accordingly, Wells Fargo and Orix
cannot prevail in their action to recover damages for conversion that arose from Wachovia’s breach
of contract.
IV. CONCLUSION
For the foregoing reasons, the district court’s judgement is AFFIRMED.
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