Palma v. Verex Assurance, Inc.

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 95-20034

NANCY ABSHIRE PALMA,

Plaintiff-Appellant,

VERSUS

VEREX ASSURANCE, INC.,

Defendant-Appellee.

Appeal from the United States District Court
for the Southern District of Texas
April 16, 1996

Before DAVIS, PARKER, and BUNTON*, Circuit Judges.

ROBERT M. PARKER, Circuit Judge:

I. FACTS

On November 28, 1983, plaintiff-appellant Nancy Palma

("Palma") borrowed $121,300 from City Federal Savings & Loan ("City

Federal") to purchase a condominium. As a condition of the loan,

Palma was required to purchase mortgage insurance to protect City

District Judge of the Western District of Texas, sitting by
designation.

1
Federal from a loss in the event she defaulted on the loan. The

mortgage insurance was purchased by City Federal from defendant-

appellee Verex Assurance, Inc. ("Verex"). The premiums were paid

with Palma's money, which had been placed in an escrow account.

Palma lived in the condominium until November of 1986, when

she moved out of the property and used it as rental property. In

1988, Palma defaulted on her obligation to repay the note. After

the default City Federal foreclosed on the condominium. On May 3,

1988, the property was sold at public auction for $30,800 to City

Federal, the mortgage holder. After the foreclosure there remained

a principal balance of $115,825.14 due and owing to City Federal

under the terms of the note. On June 23, 1989, Verex paid City

Federal $51,122.47 pursuant to the mortgage insurance policy and

received an assignment of the entire deficiency due on Palma's

note.

On April 1, 1991, Verex, as subsequent assignee of City

Federal, demanded that Palma repay $117,521.98 as the "deficiency

balance due." This amount included accrued interest and costs of

foreclosure, as well as a credit for the proceeds received from the

foreclosure of the condominium. The amount demanded did not

include a credit for the proceeds Verex paid to City Federal under

the mortgage guarantee insurance policy.

We have had difficulty in sorting out the record concerning

the economic facts of the claims in this litigation and have been

unable to resolve some apparent inconsistencies. However, we

believe we can at least get in the ballpark with a summary that

2
approaches accuracy.

Palma paid $121,300 for the house. She made mortgage payments

and payments for the mortgage insurance for approximately four

years. However, after four years of mortgage payments and a

$30,800 credit to her balance from the foreclosure proceeds, she

still owed $115,825.14. The difference apparently was attributable

to charges assessed against Palma by City Federal’s attorneys. To

state it another way, Palma was assessed foreclosure costs that in

effect wiped out the $30,800 credit from the foreclosure proceeds.

However, the story is far from over. By the time the court granted

Verex’s motion for summary judgment and ruled against Palma on her

wrongful foreclosure claim she was assessed additional attorneys’

fees for Verex’s lawyers in the astonishing amount of $225,750.

This additional amount raised the judgment against Palma to a total

of $419,898.12.

II. PROCEEDINGS BELOW

Palma filed suit in state district court alleging that Verex's

pursuit of the deficiency was in violation of the terms of the

mortgage insurance policy. Based upon diversity jurisdiction Verex

removed the suit to the Southern District of Texas and filed a

counterclaim for the deficiency and attorneys' fees.

Palma then sought to have her claims against Verex certified

as a class action. The case was referred to a magistrate judge for

pretrial management. The magistrate initially recommended that

some of Palma's claims be certified in a class action but set aside

that recommendation after reconsidering Palma’s standing. The

3
magistrate found Palma was not a third-party beneficiary of the

insurance contract and recommended that class certification be

denied as to any and all claims based upon an assertion of third-

party beneficiary status. The magistrate then recommended that

Verex's motion for summary judgment be granted and recommended the

dismissal of all of Palma's claims except those alleging debt

collection violations, violations of the Deceptive Trade Practices

Act ("DTPA"), and wrongful foreclosure. The district court adopted

the magistrate's recommendations thereby denying class

certification of the dismissed claims and granting Verex’s motion

for summary judgment of all claims, except wrongful foreclosure.

The case proceeded to trial on Palma's wrongful foreclosure

claim. After a one day bench trial the district court issued its

findings of facts and conclusions of law and entered final judgment

in favor of Verex. The judgment awarded Verex $419,898.12. Palma

appealed.

III. ANALYSIS

A. STANDING & ART. 21.21

The district court granted Verex’s motion for summary judgment

as to Palma’s claims based upon alleged violations of the Texas

Insurance Code after concluding that Palma did not have standing to

assert those claims under art. 21.21(16) of the Texas Insurance

Code.2 We review the district court’s grant of summary judgment de

The actual analysis of all issues disposed of by summary
judgment was conducted by the magistrate. However, we will refer
to the analysis as though it were conducted by the trial court
because it adopted the magistrate’s recommendations.

4
novo. Thomas v. Price, 975 F.2d 231, 235 (5th Cir. 1992).

The district court’s jurisdiction in this case was based on

diversity of citizenship and it correctly held that it was bound to

apply the substantive law of the State of Texas. Erie R. Co. v.

Tompkins, 304 U.S. 64, 78, 58 S. Ct. 817, 822, 82 L. Ed. 1188

(1938). We begin our review of the district court’s decision by

examining the applicable law.

Art. 21.21(16) of the Texas Insurance Code provides:

Any person who has sustained actual damages as a result
of another’s engaging in an act or practice declared in
§ 4 of this Article . . . [to be] unfair or deceptive
acts . . . in the business of insurance or in any
practice defined by § 17.46 of the Business and Commerce
Code . . . as an unlawful trade practice may maintain an
action against the person . . . engaging in such acts.
(emphasis added).

Although “any person” would appear to be sufficiently broad to

permit Palma to have standing, it appears to have been narrowly

construed. This court, interpreting the laws of Texas, has held

that “absent privity of contract or some sort of reliance by the

person bringing the claim on the words or deeds of the insurer, a

suit will not lie under art. 21.21.” Warfield v. Fidelity and

Deposit Co., 904 F.2d 322, 327 (5th Cir. 1990). In reaching this

holding the court analyzed two decisions from the Texas courts of

appeal that had addressed standing under art. 21.21. The first

case was Chaffin v. Transamerica Ins. Co., 731 S.W.2d 728, 731

(Tex. App.--Houston [14th Dist.] 1987, writ ref’d n.r.e.). The

court, discussing Chaffin, stated that the Texas court “held that

the term ‘person’ in art. 21.21 means either an insured or a

5
beneficiary of the policy.” Warfield, 904 F.2d at 326. The second

case was Hermann Hosp. v. National Standard Ins. Co., 776 S.W.2d

249, 252 (Tex. App.--Houston [1st Dist.] 1989, writ denied). The

court noted that Hermann broadened standing under art. 21.21 to

include persons who had relied on representations of the insured.

Warfield, 904 F.2d at 327. Despite expressly recognizing that

Chaffin extended standing to beneficiaries of insurance policies,

Warfield limited standing to those with privity of contract or

those who had relied on the words or deeds of the insurer. This

analysis was later recognized as “the new test” for determining

standing under art. 21.21. In Re Burzynski, 989 F.2d 733, 741 (5th

Cir. 1993).

The Texas Supreme Court recently addressed standing under art.

21.21 in the context of a claim asserted under an automobile

liability policy by a third-party claimant in a direct action

against an insurer arising out of an accident with the insured. In

that type of action, the court held that third-party claimants are

not entitled to standing under art. 21.21. Allstate Ins. Co. v.

Watson, 876 S.W.2d 145, 150 (Tex. 1994). The court found that the

following factors weighed against granting standing to the third-

party claimant:

A third-party claimant has no contract with the insurer
or the insured, has not paid any premiums, has no legal
relationship to the insurer or special relationship of
trust with the insurer, and in short, has no basis upon
which to expect or demand the benefit of the extra-
contractual obligations imposed on insurers under art.
21.21 with regard to their insureds.

Id. at 149. The court then noted that although it had previously

6
extended standing to third-party beneficiaries of automobile

insurance policies, it refused to extend standing to third-party

claimants of those policies under art. 21.21. Id. at 150 (citing

Dairyland County Mut. Ins. Co. v. Childress, 650 S.W.2d 770 (Tex.

1983)).3

Due to the unique nature of the mortgage insurance policy in

the instant case, Palma, unlike the third-party claimant in Watson,

satisfies most of the the factors discussed by the Texas Supreme

Court that weighed against standing in that case. Palma had a

contract with the insured, City Federal, in the form of a mortgage.

Palma paid the premiums for the mortgage insurance. Additionally,

Palma is designated by name in the certificate of insurance issued

by Verex to City Federal. The considerations that weighed against

standing in Watson weigh in favor of granting Palma standing in the

instant case. However, because the court did not expressly state

that these factors were to be used when deciding whether a party

was entitled to standing under art. 21.21 we must determine what

the Texas Supreme Court would do if it were presented with the

issue before us.

“When presented with an unsettled point of state law, our role

under Erie is to determine how the [Texas] Supreme Court would

resolve the issue if presented with it.” Coatings Mfrs., Inc. v.

In Dairyland the court held that for purposes of recovering
attorney’s fees under an automobile insurance policy, a third party
who has obtained a judgment against an insured is an intended
third-party beneficiary of the automobile insurance policy and is
entitled to standing in order to enforce the policy provisions.
Dairyland County Mut. Ins. Co., 650 S.W.2d at 775-76.

7
DPI, Inc., 926 F.2d 474, 479 (5th Cir. 1991). The factors

discussed by the Texas Supreme Court in Watson that weighed against

extending standing to the third-party claimant in that case are

present in the instant case. This, combined with the unique nature

of mortgage insurance, we believe impacts on our analysis of

standing under art. 21.21. Consequently, we conclude that if the

Texas Supreme Court were presented with the question before us it

would hold that standing under art. 21.21 is satisfied by not only

those who can establish privity of contract or reliance on a

representation of the insurer, but also by those who can establish

that they were an intended third-party beneficiary of the insurance

contract.4 Therefore, we must determine whether Palma was an

intended third-party beneficiary of the contract between Verex and

City Federal in order to determine if the district court was

correct when it found that Palma lacked standing to sue under art.

21.21.

1. THIRD-PARTY BENEFICIARY STATUS

But see, Pineda v. P.M.I. Mtg. Ins. Co., 843 S.W.2d 660, 665
(Tex. App.--Corpus Christi 1992) writ denied per curiam, 851
S.W.2d 191 (Tex. 1993). In Pineda, the Corpus Christi court
stated, “[T]he [borrowers] were neither insureds under the
[mortgage insurance] policy, nor in contractual privity with the
[insurer]. Nor were they beneficiaries under the policy of
insurance to . . . the lender.” Id. Although the Texas Supreme
Court denied writ, it stated that it was neither appoving or
disapproving of the appellate court’s decision. Pineda v. P.M.I.
Mtg. Ins. Co., 851 S.W.2d 191 (Tex. 1993). While we are not bound
by the holdings of state appellate courts, we are not to disregard
them unless we are convinced by other persuasive data that the
Texas Supreme Court would rule otherwise. West v. American Tel. &
Tel. Co., 311 U.S. 223, 237, 61 S. Ct. 179, 183, 85 L. Ed. 139
(1940). Watson’s discussion of factors that weighed against
standing under art. 21.21 in that case presents us with such data.

8
 Under Texas law, in order for Palma to qualify as a third-

party beneficiary of the insurance contract she must prove three

things: (1) that she was not privy to the written agreements

between Verex and City Federal; (2) that the contract was made at

least in part for her benefit; and (3) that the contracting parties

intended for Palma to benefit by their written agreements. Talman

Home Fed. Sav. & Loan Ass’n of Illinois v. American Bankers Ins.,

924 F.2d 1347, 1350 (5th Cir. 1991)(internal citations omitted).

It is undisputed that Palma was not privy to the contract

entered into between Verex and City Federal, thereby satisfying the

first element of the analysis. Whether the contract was made for

her benefit is derived solely from the language of the contract.

Id.

Condition 15 of the contract for mortgage insurance states:

15. NO RIGHT OF SUBROGATION AGAINST THE BORROWER. The
Borrower shall not be liable to the Company for any loss
paid to the Insured pursuant to this policy; provided,
however, that the real estate shall consist of a single-
family dwelling occupied by the Borrower; otherwise, the
Company reserves the right to make a claim against the
Borrower for any loss paid or deficiency suffered by the
Company.

This language benefits the borrower only, in this case Palma.

However, the very next condition in the contract states:

16. TO WHOM PROVISIONS APPLICABLE. The provisions of
this policy shall inure to the benefit of and be binding
upon the Company and the Insured and their successors and
assigns.

Under Texas law, contracts for insurance are generally

enforced as written; however, ambiguous insurance contracts are

interpreted against the insurer. National Union Fire Ins. Co. v.

9
Hudson Energy Co., Inc., 811 S.W.2d 552, 555 (Tex. 1991). The

interpretation of an insurance contract, including whether it is

ambiguous, is a legal determination subject to de novo review.

Truehart v. Blandon, 884 F.2d 223, 226 (5th Cir. 1989). Therefore,

we must examine Condition 15 and Condition 16 in order to determine

if an ambiguity exists.

Condition 15 is written for the sole benefit of the borrower.

The policy specifies additional beneficiaries in Condition 16 which

states that the policy provisions are written for the benefit of

Verex and City Federal. Neither condition is mutually exclusive.

However, if these two provisions create an ambiguity it is to be

construed against Verex. National Union Fire Ins. Co., 811 S.W.2d

at 555. In any event, we find no ambiguity created by Conditions

15 and 16. We also find that the insurance contract was actually

made, in part, for the benefit of Palma.

Finally, we must determine if Verex and City Federal intended

the contract to benefit Palma. The intent of the contracting

parties is discerned from the four corners of the instrument. See

Talman, 924 F.2d at 1350 (“It is the intention and purpose of the

contracting parties, as disclosed within the four corners of the

instrument, which should control”)(internal citation omitted).

One Texas court has stated that “[w]here a stranger contends

that it was intended that the provisions of a contract should inure

to his benefit such intention must be clearly apparent. If there

is any doubt concerning the intent in this regard as it appears

from the contract itself, such doubt should be construed against

10
such intent.” Republic Nat’l Bank v. Nat’l Bankers Life Ins. Co.,

427 S.W.2d 76, 80 (Tex. Civ. App.--Dallas 1968, writ ref’d n.r.e.);

see Talman, 924 F.2d at 1351 (quoting Republic Nat’l Bank). Palma

is not a stranger to the insurance contract between Verex and City

Federal; she is specifically identified as the borrower in the

contract itself. Consequently, the Talman decision does not affect

our analysis.

The contract for insurance was clearly intended, in part, to

benefit Palma.5 Consequently, the three elements having been

satisfied, we find that Palma is an intended third-party

beneficiary of the contract for mortgage insurance entered into

between Verex and City Federal.

Having determined that Palma is an intended third-party

beneficiary, it would appear that a reversal of the trial court’s

grant of summary judgment on this issue is all that remains for us

to do. However, in finding of fact seven the trial court

alternatively found that even if Palma were a third-party

beneficiary she could not enforce the contract for insurance. This

alternative finding was based upon the district court’s

interpretation of language contained within Condititon 15 of the

contract for insurance relating to whether the contract’s validity

was dependent upon Palma occupying the property.

2. OWNER OCCUPANCY

We review conclusions of law de novo and findings of fact for

See “CONTRACTUAL RIGHTS AND ASSIGNMENT”, infra, for a
discussion of the benefits conferred on Palma.

11
clear error. Switzer v. Wal-Mart Stores, Inc., 52 F.3d 1294, 1298

(5th Cir. 1995). The district court classified its alternative

determination of the applicability of Condition 15, which focused

upon occupancy, as a finding of fact. However, because this

finding was based upon an interpretation of the policy it is

reviewed as a conclusion of law. Harbor Ins. Co. v. Urban Constr.

Co., 990 F.2d 195, 199 (5th Cir. 1993). Consequently, we conduct

a de novo review.

Condition 15 states that the borrower is not liable to Verex

“for any loss paid to the Insured pursuant to this policy;

provided, however, that the real estate shall consist of a single-

family dwelling occupied by the Borrower.” (emphasis added).

Consequently, we must determine whether Palma was required to

occupy the property at the time of default in order to be entitled

to the protection afforded to borrowers by Condition 15.

Condition 15 provides us with no guidance as to when occupancy

is to be determined. If occupancy is determined at the time the

contract was entered into, then Palma is clearly within the

language of Condition 15. However, if occupancy is determined at

the time of default, then the district court correctly found that

Palma was afforded no protection. The ambiguity is apparent and it

must be interpreted against Verex. National Union Fire Ins. Co.,

811 S.W.2d at 555. Therefore, we hold that occupancy is determined

at the time the contract of insurance was entered into and the

policy was issued. As a result of this determination, we find that

the district court erred in its alternative finding, and we hold

12
that Palma satisfied the language of the policy by occupying the

dwelling at the time the contract of insurance was entered into and

the policy was issued. The impact of the court’s error, concerning

Palma’s ability to enforce the terms of the contract, is discussed

below.

B. ASSIGNMENT OF THE DEFICIENCY BALANCE

Palma contends that the assignment of the deficiency balance

to Verex violated her contractual rights, specific statutes, and/or

the public policy of the State of Texas. We will address each of

these arguments.

1. CONTRACTUAL RIGHTS AND ASSIGNMENT

Palma, by virtue of her status as a third-party beneficiary,

is a borrower who has contractual rights. See Temple Eastex, Inc.

v. Old Orchard Creek Partners, Ltd., 848 S.W.2d 724, 730 (Tex.

App.--Dallas 1992, writ denied). She is entitled to enforce the

conditions contained in the insurance policy that affect her. See

id. (the “third-party beneficiary” . . . is entitled to rely upon

and to enforce all of the contract’s provisions.”). Although the

trial court erroneously found that Palma was not entitled to

enforce the conditions contained in the contract for insurance, it

proceeded to interpret the conditions contained in the contract for

insurance in order to determine the amount of the deficiency that

Verex was entitled to collect.

In finding of fact number five, the trial court found that

Palma was entitled to a credit of $30,800 - the amount of proceeds

received at foreclosure. In finding of fact number six, the trial

13
court found that “the deficiency debt due and owing, after applying

all lawful and proper credits, is $115,825.14.” This is the amount

that the trial court determined that City Federal was entitled to

collect from Palma - the same amount that was ultimately assigned

to Verex. The trial court classified these findings as “findings

of fact”, but they were based upon the trial court’s interpretation

of conditions contained in the contract for insurance.

Consequently, we conduct a de novo review in order to determine if

the trial court erred when it determined the amount of the

deficiency due and owing by Palma. See Harbor Ins. Co., 990 F.2d

at 199.

a. Condition 10 and Bidding Requirements

When City Federal elected to collect mortgage insurance

proceeds, the contract for insurance imposed bidding requirements

upon City Federal. These bidding requirements therefore impacted

the amount that might remain as a deficiency after foreclosure on

Palma’s property. The relevant conditions of the policy form read

as follows:

10. PROCEDURE UNDER FAULT ... The Insured shall also
furnish to the Company, at least (15) days prior to the
foreclosure sale, if any, a statement indicating the
amount anticipated to be due, at the time of sale, to the
Insured under the terms of the policy and shall be
required to bid, at the sale, the amount due to the
Insured under the terms of the policy (emphasis added) .
. . .

11. COMPUTATION OF LOSS - The amount of loss payable to
the Insured shall be limited to the principal balance due
pursuant to the mortgage agreement, accumulated interest
computed through the date of the tender of conveyance, as
hereinafter set forth (penalty interest excluded), real
estate taxes and hazard insurance premiums necessarily
advanced.

14
 13. OPTION TO PAY A PERCENTAGE OF THE AMOUNT DUE - In
lieu of conveyance of the title to the mortgage premises
and payment in accordance with Condition 11, the Company
shall have the option of paying the percentage of the
amount due to the Insured in accordance with the amount
of coverage selected and paid for as indicated on the
face of the Certificate, or subsequent Certificate
amendments, and shall have no claim to said real estate,
such payment to be full and final discharge of the
Company’s liability.

Palma contends that under the provisions quoted above, if City

Federal intended to collect the mortgage insurance proceeds it was

required to bid the total amount of the debt due at foreclosure,

thereby eliminating the deficiency balance on the note.

The trial court considered Palma’s “full-debt bid argument”

but rejected it. In finding of fact number one the court found

that Condition 10 did not require the lender to pay as its bid at

foreclosure sale the full amount of the loan. However, the trial

court did not specify what Condition 10 did require of City

Federal.

b. “Full-Debt Bid Argument”

If City Federal intended to collect the proceeds of the

mortgage insurance policy after foreclosure, Condition 10 required

it to bid “the amount due to [City Federal] under the terms of the

policy.” Palma contends that the amount due under the terms of the

policy is to be determined by looking at the language contained in

Condition 11, entitled “Computation of Loss”. If we were to adopt

the reasoning proferred by Palma, we would be requiring lenders who

entered into contracts prior to February 24, 1984,6 to bid the

On this date the Texas Board of Insurance issued Board Order
44262, in which the language governing bidding requirements was

15
entire amount due under the terms of the mortgage if they intended

to collect mortgage proceeds after foreclosure.

The approach urged by Palma is contrary to the law as it

existed at the time in question. If a debtor wanted to challenge

the amount bid by the lender at foreclosure the law in Texas

required the debtor to establish: (1) that the amount of proceeds

received from sale at foreclosure was “grossly inadequate”, and (2)

an irregularity in the foreclosure sale. Only after a finding of

both “gross inadequacy” and irregularity would the court prohibit

the proceeds from being used in calculating the deficiency.

Thompson v. Chrysler First Business Credit Corp., 840 S.W.2d 25, 33

(Tex. App.--Dallas 1992, no writ). Although this approach was

amended by statute in early 1991,7 the amendment does not affect

our decision concerning what amount the lender was legally

obligated to bid prior to the statutory change.

Condition 10 requires the lender to bid either: (1) the full

amount of the balance due on the note, as defined in Condition 11,

or (2) no less than twenty-five percent of the balance. Either of

these approaches was permitted under the terms of the contract for

insurance, as long as the amount bid was not “grossly inadequate”

deleted.

This judge-made rule was changed by statute in April of 1991,
when the Texas legislature enacted § 51.003 of the Texas Property
Code, which among other changes, permitted the borrower to request
that the court in which the action is pending to determine the fair
market value of the real [foreclosed] property as of the date of
the foreclosure sale. If the court determines that the fair market
value exceeded the foreclosure price at the time of foreclosure,
the person against whom the deficiency is sought is entitled to an
offset equal to the excess amount.

16
and there had been no irregularity in the foreclosure sale.

By requiring the lender to bid a minimum of twenty-five

percent of the total amount due before being entitled to collect

insurance proceeds, the borrower was afforded some degree of

assurance that he would be receiving a fair credit on his

deficiency balance. The lender still had to bid an amount that

complied with Texas law, and this amount might be more than the

minimum twenty-five percent, but in no event should it have been

less. The lender could also bid an amount that was both less than

twenty-five percent and not violative of Texas law, as long as he

did not intend to collect mortgage guaranty insurance proceeds.

Only when the lender intended to collect insurance proceeds would

he be obligated under the terms of the contract to bid a minimum of

twenty-five percent, assuming that this amount was neither “grossly

inadequate” nor the result of an irregularitiy in the foreclosure

sale.

In the instant case, City Federal purchased the property at

foreclosure for $30,800.8 This amount was then credited against

Palma entered into an earnest money contract with a third
party on April 7, 1988, wherein the parties agreed to a purchase
price of $60,000. City Federal refused to approve the sale. Then,
on November 28, 1983, the property was purchased at foreclosure by
City Federal for $30,800. City Federal then collected insurance
proceeds of $51,122.47 and subsequently sold the property for
approximately $57,000 just two months later. Verex then was
assigned the right to pursue Palma on the deficiency remaining on
the note.
At trial, the general counsel for Verex, Thomas Anderson,
stated that Verex occasionally advised lenders as to what amount to
bid at foreclosure, but could not remember for certain if they had
advised City Federal in the instant case. This is a peculiar
practice, in light of the fact that Verex and City Federal
disregarded the terms of the insurance contract that dictated

17
Palma’s deficiency balance. The trial court found that the amount

bid by City Federal was not “grossly inadequate”. It is not

necessary for us to determine whether the trial court erred when it

found that the amount bid by City Federal was not “grossly

inadequate” because it is clear that the trial court erred when it

found that there had been no violation of Condition 10 of the

contract.

If the trial court had interpreted Condition 10 as written, it

would have found that City Federal was required to submit a minimum

bid of twenty-five percent, or $37,139.72.9 The trial court’s

error in interpreting Condition 10 was compounded when it failed to

properly credit the deficiency balance that would have remained

after foreclosure. Palma was entitled to a credit of $37,139.72 in

proceeds from the sale at foreclosure, leaving a deficiency balance

of $111,447.16.10 As discussed below the trial court further erred

when it failed to credit this deficiency with the insurance

proceeds received by City Federal.

bidding at foreclosure.
It is apparent that a mortgage insurer, who intends to receive
an assignment to pursue borrowers for deficiencies, has an interest
in the property being sold at foreclosure for the lowest price
possible. After all, the insurer is obligated by contract to pay
proceeds to the insured. If he can minimize the amount received at
foreclosure, then the amount of the remaining deficiency will be
larger. This is one of the dangers that the policy language
protected against, and it provides support to our interpretation of
the contractual conditions at issue in the instant case.

Total indebtedness at time of foreclosure x .25, or:
$148,558.88 x .25 = $37,139.72.

Total indebtedness at time of foreclosure - sale proceeds, or:
$148,588.88 - $37,139.72 = $111,447.16

18
 c. Condition 15 and Waiver of Subrogation

Condition 15 waived Verex’s rights to pursue Palma “for any

loss paid to the insured pursuant to this policy.” The amount paid

to City Federal was $51,122.47. It is clear that Palma was

entitled to enforce the waiver of subrogation rights present in

Condition 15, which entitled her to a credit of $51,122.47 on the

amount assigned by City Federal to Verex.11 The trial court should

have properly credited the deficiency balance owed by Palma with

the amount paid by Verex to City Federal. If it had done so it

would have found that the deficiency assignable to Verex was

$60,326.69.12

The errors commited by the trial court in determining the

amount of the deficiency balance caused it to further err in

finding of fact number eight. In finding of fact number eight the

trial court stated that “Verex is the assignee of the deficiency

claimed, and has the right to recover it under the lawful

But cf. Hunt v. Jefferson Sav. & Loan Ass’n, 756 S.W.2d 762,
765 (Tex. App.--Dallas 1988, writ denied), cert. denied, 489 U.S.
1079, 109 S. Ct. 1532, 103 L. Ed. 2d 837 (1989). In Hunt, the
court found that the borrower was not entitled to an offset for
mortgage insurance proceeds received by the lender. The instant
case is distinguishable because we are not offsetting the amount
recoverable by the lender. Instead, we are crediting the insurance
proceeds against the amount assigned by the lender to the insurer
because the insurance contract prohibits the insurer from
recovering those proceeds. Additionally, since the time that Hunt
was written the Texas legislature has enacted § 51.003(d), which
requires the lender to credit a borrower’s deficiency balance with
any mortgage insurance proceeds that are received. This enactment
essentially reverses Hunt.

$148,588.88 (total indebtedness at time of foreclosure)
- $ 37,139.72(minimum bid required by Condition 10)
- $ 51,122.47(Condition 15 limit on subrogation rights)
$ 60,326.69 (amount assignable to City Federal)

19
assignment agreement.” This finding is erroenous because the

assignment agreement violated the express terms of the contract,

thereby violating Palma’s rights as a third-party beneficiary. As

a result of the errors present in the trial court’s finding of

facts, we must reverse the judgment of the trial court.

2. ILLEGAL ASSIGNMENT

Palma contends that the assignment agreement entered into

between City Federal and Verex was illegal because it violated art.

21.21A of the Texas Insurance Code, which provides, in part:

Section 1. No insurer . . . may make any contract of
insurance or agreement as to such contract other than as
expressed in the policy issued thereon. . . .

Section 3. If any person violates any of the provisions
of this Article, the person shall, in addition to any
other penalty specifically provided, be guilty of a Class
A misdemeanor.

Section 4. The commissioner, upon giving 10 days’ notice
of hearing by certified mail, and upon hearing, may
suspend or cancel the certificate, charter, permit, or
license to engage in the business of insurance of any
society, association, corporation, or person violating
the provisions of this Article.

The agreement entered into between Verex and City Federal

clearly violated the original contract for insurance. The

assignment agreement gave Verex the right to pursue Palma for the

entire amount of the deficiency balance. This amount included the

amount which Verex had paid to City Federal in insurance proceeds,

which, as previously stated, violated Condition 15's limitation on

Verex‘s subrogation rights. Under art. 21.21A the agreement was

“other than as expressed in the policy” and was therefore illegal.

“It is a familiar law of contracts that an illegal agreement is

20
unenforceable.” DiFrancesco v. Houston Gen. Ins. Co., 858 S.W.2d

595, 598 (Tex.App--Texarkana 1993, no writ). The illegality of the

agreement giving Verex the right to pursue Palma for the deficiency

provides an independent ground for reversing the judgment of the

trial court.

3. PUBLIC POLICY

Our decision to reverse the judgment of the trial court is

strenghted by public policy considerations. The public policy of

the State of Texas may be derived from its constitution, statutes,

and judicial decisions. Dairyland County Mut. Ins. Co. v.

Wallgren, 477 S.W.2d 341, 342 (Tex. Civ. App.--Fort Worth 1972,

writ ref’d n.r.e.). Terms and conditions in the contract for

insurance, which have been prescribed and approved by the Insurance

Board, represent the public policy of the state. Id. However,

actions by the Board which are contrary to relevant statutes or

decisions of the courts do not represent public policy. See

American Liberty Ins. Co. v. Ranzau, 481 S.W.2d 793, 796-97 (Tex.

1972) (“the Board may not act contrary to but only consistent with,

and in furtherance of, the express statutory purposes.”); Nat’l

County Mut. Fire Ins. Co. v. Johnson, 829 S.W.2d 322, 326 (Tex.

App.--Austin 1992, writ denied)(Insurance Board’s actions which are

contrary to express legislative policy do not represent public

policy).

In the instant case there are no statutes or judicial

decisions for the time period in question that provide us with

guidance for determining the public policy as it relates to the

21
propriety of the assignment agreement entered into between Verex

and City Federal.13 However, because the language contained in the

contract for insurance was expressly approved and adopted by the

Texas Board of Insurance, we have a basis for discerning Texas’

public policy as it relates to the actions of Verex. See Wallgren,

supra.

On May 11, 1970, the Texas Board of Insurance issued Board

Order 13772. As required by statute, Verex incorporated every

condition contained in the order into its policy for mortgage

insurance. Included in the order were Conditions 10 and 15, which

as previously discussed, were both violated by City Federal and

Verex. Condition 10 was violated when City Federal failed to place

a proper bid at foreclosure, which resulted in a larger deficiency

than would have existed if City Federal had placed a proper bid.

Verex then pursued Palma for this incorrect deficiency without

crediting it with the amount of insurance proceeds paid to City

It is clear that the current public policy of Texas clearly
prohibits the assignment agreement at issue. The current statute,
which partially governs mortgage guaranty insurance, in part
provides:
No policy of mortgage guaranty insurance shall contain
a provision which allows subrogation rights or any other
claim by the insurer against the borrower for a
deficiency arising from a foreclosure sale of a single-
family dwelling occupied by the borrower as the principal
residence of the borrower.
Tex. Ins. Code Ann. Art. 21.50 § 1A(c) (Vernon 1996)(emphasis
added). Assignment of the right to pursue Palma for a deficiency
falls squarely within the prohibition restricting insurers from
pursuing borrowers for deficiencies via “subrogation rights or any
other claim”. However, because the contract for insurance between
Verex and City Federal was entered into in late 1983 we must
determine what the public policy of Texas, as it relates to
mortgage guaranty insurance, was at that time.

22
Federal. Their failure to credit the deficiency balance resulted

in a violation of Condition 15. The violations of Conditions 10

and 15 were violations of the public policy of the State of Texas

and they provide an independent basis for reversing the judgment of

the trial court.

C. CLASS CERTIFICATION

Palma contends that the district court improperly considered

the merits of the case when determining whether the case should be

certified as a class action. There were approximately sixteen

separate issues disposed of by the trial court’s judgment,

including the trial court’s decision not to certify Palma’s claims

in a class action. However, the only issues addressed by Palma on

appeal are: (1) the trial court’s grant of summary judgment based

upon its finding of lack of standing to sue under art. 21.21, (2)

the trial court’s judgment denying Palma relief for wrongful

foreclosure, and (3) the trial court’s judgment on Verex’s

deficiency claim and the related claim for attorneys’ fees.

Because she did not raise the other claims on appeal, the trial

court’s disposition of those other claims is final. See Matter of

Texas Mortgage Servs. Corp., 761 F.2d 1068, 1073 (5th Cir. 1985)

(“issues not raised on appeal in the brief of the Appellant may be

considered waived, and they cannot be noticed or entertained by the

Court of Appeals”). The finality of those other rulings precludes

her from qualifying as a class representative in the event a class

is subsequently certified wherein the class representative asserts

claims that are the same or substantially similar to those asserted

23
by Palma which were not appealed. See Fed. R. Civ. P. 23(a) (class

representative must “fairly and adequately protect the interests of

the class”). Therefore, we need not determine whether the trial

court erred when it denied class certification.

IV. CONCLUSION

Palma requests this court to reverse the judgment of the trial

court. However, the only issues that have been adequately briefed

are those that relate to wrongful foreclosure, Verex’s counterclaim

for the deficiency and attorneys’ fees, and the grant of summary

judment to Verex on the issue of standing under art.21.21.

Accordingly, our reversal of the trial court’s judgment is limited

to those issues. All issues not raised are waived and the judgment

is final as to those other issues. Therefore, the judgment of the

trial court is REVERSED in part, AFFIRMED in part, and the case is

REMANDED for further proceedings consistent with this opinion.

DAVIS, W. EUGENE, Dissenting:

I disagree with the majority's legal conclusion that Palma is

a third-party beneficiary of Verex's policy. I therefore dissent.

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 The majority holds that Clause 15 of the policy makes Palma a

third-party beneficiary to the insurance contract. Clause 15

provides:

NO RIGHT OF SUBROGATION AGAINST THE BORROWER.

The Borrower shall not be liable to the Company for any
loss paid to the Insured pursuant to this policy;
provided, however, that the real estate shall consist of
a single-family dwelling occupied by the Borrower;
otherwise, the Company reserves the right to make a claim
against the Borrower for any loss paid or deficiency
suffered by the Company.

I agree with the majority that, when its conditions are met, Clause

15 is designed to afford a waiver of subrogation from the insurer

to the borrower. It is clear to me, however, that in this case all

of the conditions were not met; the real estate which served as

collateral for the subject loan was not a "single family dwelling

occupied by the borrower" at the time of the loss.

The majority disposes of the occupation condition by

concluding that the policy is ambiguous-- one reasonable

interpretation is that the occupation requirement must be met at

the time the policy issues; another is that it must be met at the

time of the loss. Having declared Clause 15 ambiguous, the

majority then resolves the ambiguity against the insurer. The

majority concludes that Palma, therefore, is a third-party

beneficiary even though, at the time she defaulted on the loan, she

had long since ceased to live on the premises.

Unlike the majority, I find no ambiguity in Clause 15. It

focuses the reader on the relevant time period: "the borrower shall

not be liable to the company for any loss paid to the insured

25
pursuant to this policy." This phrase orients the clause toward

the time when the insured suffers a loss. And the earliest such a

loss can occur is the date on which the borrower defaults. In sum,

I read Clause 15 to give the borrower the right to insist that the

insurer waive any right of subrogation against her for any

insurance proceeds paid to the insured if, but only if, the

borrower occupied the premises at the time of the default. Thus,

Palma is not a beneficiary because she did not occupy the premises

when she defaulted. Therefore, she has no right to claim a waiver

of subrogation.

Even if we assume, however, that this clause is ambiguous as

to when the borrower must occupy the premises, I would still

conclude that Palma is not a third-party beneficiary. Texas law

requires that one claiming to be a third-party beneficiary

establish that the parties to the contract clearly intended to

benefit her. In Corpus Christi Bank & Trust v. Smith, 525 S.W.2d

501, 503-04 (Tex. 1975), the Texas Supreme Court summarized this

well-established rule as follows:

The intention of the contracting parties is of
controlling significance to a determination that a third
party may enforce the contract provision. In deriving
intent, we must begin with the presumption that parties
contract for themselves, and a contract will not be
construed as having been made for the benefit of third
parties unless it clearly appears that such was the
intention of the contracting parties. (citations
omitted).

Contrary to the majority's conclusion, Palma cannot bootstrap a

finding of third-party beneficiary status from an ambiguous

provision. The contract must clearly demonstrate that the parties

26
intended to benefit her.

Republic National Bank v. National Banker's Life Insurance

Co., 427 S.W.2d 76 (Tex. Civ. App.--Dallas 1968, writ ref'd

n.r.e.), relied upon by the majority, does not purport to announce

a different rule. In that case, an intermediate Texas court stated

the third-party beneficiary rule as follows: "Where a stranger

contends that it was intended that the provisions of a contract

should inure to his benefit such intention must be clearly

apparent. If there is any doubt concerning the intent in this

regard as it appears from the contract itself, such doubt should be

construed against such intent." Id. at 80. A stranger to a

contract is one who is not a party to the contract. As evidenced

by her efforts to achieve third-party beneficiary status, Palma was

not a party to this insurance contract between Verex and City

Federal. If there is any lingering doubt on this point, the Texas

cases interpreting mortgage guaranty insurance policies unanimously

hold that a borrower is not a party to such contracts. Pineda v.

PMI Mortgage Ins. Co., 843 S.W.2d 660 (Tex. App.--Corpus Christi

1992), writ denied per curiam, 851 S.W.2d 191 (Tex. 1993); Shields

v. Atlantic Fin. Mortgage Corp., 799 S.W.2d 441, 444 (Tex. App.--El

Paso 1990, no writ); Hunt v. Jefferson Savings & Loan Assoc., 756

S.W.2d 762, 765 (Tex. App.--Dallas 1988, writ denied), cert.

denied, 489 U.S. 1079, 109 S. Ct. 1532, 103 L. Ed. 2d 837 (1989).

In conclusion, because Palma was not occupying the premises at

the time the insured suffered the loss, Palma cannot clearly

establish that she is a third-party beneficiary of Clause 15. And,

27
without third-party beneficiary status, Palma may not claim the

benefit of the policy's waiver of subrogation clause. I would

therefore affirm the district court's judgment.

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