Hurt v. Federal National Mortgage Ass'n

United States Court of Appeals
Fifth Circuit
F I L E D
December 17, 2003
In the
Charles R. Fulbruge III
United States Court of Appeals Clerk
for the Fifth Circuit
_______________

m 02-50954
_______________

IN THE MATTER OF:
HOMEOWNERS MORTGAGE AND EQUITY, INC.,

Debtor.

JEFFREY W. HURT,
TRUSTEE OF THE LIQUIDATING TRUST OF HOMEOWNERS MORTGAGE & EQUITY, INC.,

Appellant,

VERSUS

FEDERAL NATIONAL MORTGAGE ASSOCIATION
AND HOME SECURITIZATION TRUST 1 (FANNIE MAE); U.S. BANK,

Appellees.

_________________________

Appeal from the United States District Court
for the Western District of Texas
m A-01-CV-660-JN
_________________________
Before JOLLY, SMITH, and EMILIO M. GARZA, ter agree to purchase loans. Thereafter, the
Circuit Judges. parties were to enter into a series of contracts,
known as Master Purchase Agreements
JERRY E. SMITH, Circuit Judge: (“MPA’s”), each of which created a specific
obligation to purchase a discreet amount of
After unilaterally terminating a contract it loans.
entered into with Homeowners Mortgage and
Equity, Inc. (“Homeowners”), the Federal Na- The source of the present litigation is sec-
tional Mortgage Association (“Fannie Mae”) tion IV of the MSSC, in which Homeowners
sought to enforce a provision of the contract agreed that it would not sell loans to Fannie
that required Homeowners to repurchase loans Mae without first making several warranties
that were in breach of the contract’s warranty that collectively established that Homeowners
provision. The district court summarily af- is an authorized lender and that the mortgages
firmed the bankruptcy court’s decision that it sold to Fannie Mae were valid and enforce-
Fannie Mae was entitled to a claim against able. Fannie Mae requires these warranties
Homeowners’ bankruptcy estate because Fan- before it will buy loans, because the substantial
nie Mae validly asserted that right despite the volume of its business makes it impractical to
fact that it had already terminated the contract. underwrite or review specific loans before
Finding no error, we affirm. agreeing to purchase them. The warranties are
Fannie Mae’s only assurance that the loans it
I. agrees to buy will be good investments.
Fannie Mae, a congressionally chartered
private corporation, purchases mortgage loans The MSSC provides Fannie Mae with vari-
from original lenders in a secondary mortgage ous remedies in the event the warranties are
market. Homeowners is a lender that offers breached. Section IV.B. provides that Fannie
loans under title I of the National Housing Act Mae has the right to require the lender to re-
of 1934, which offers qualified borrowers the purchase a mortgage if any warranty made by
chance to receive up to $25,000 for home the lender is untrue. This provision is non-
maintenance and improvement. After expand- exclusive, because it provides that Fannie Mae
ing into the secondary market for title I loans, can “also enforce any other available remedy.”
Fannie Mae entered into a Mortgage Selling Section IV.C. states that an additional, non-
and Servicing Contract (“MSSC”) with Home- exclusive remedy is the termination of the con-
owners, pursuant to which Fannie Mae ulti- tract. Finally, section X provides that respon-
mately purchased $243 million of Homeown- sibilities and liabilities of the lender survive
ers’ title I loans. Homeowners retained the termination of the MSSC.
right to continue to earn fees from servicing
the loans. Fannie Mae terminated the MSSC, claiming
a breach of warranty, whereupon Fannie Mae
The MSSC does not place any obligation assumed the servicing rights that had been held
on Fannie Mae to purchase loans. Rather, it by Homeowners, drying up Homeowners’
serves only to define the relationship between principal source of income and forcing it into
the parties and to create some of the terms and chapter 11 bankruptcy. The appellant, Jeffrey
conditions under which Fannie Mae would la- Hurt, was appointed trustee of the bankruptcy

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estate. He sued Fannie Mae, alleging three (In re El Paso Refinery, LP), 302 F.3d 343,
counts of breach of contract, four claims 348 (5th Cir. 2002); West v. Balfour Beatty
sounding in tort, and three bankruptcy claims Constr., Inc. (In re Miller), 290 F.3d 263, 266
for fraudulent transfer, turnover, and equitable n.2 (5th Cir. 2002). The parties agree that we
subordination. Fannie Mae filed a proof of are to apply Texas law. “Interpretation of a
claim to recover amounts it alleges are due to contract is a matter of law, as is the determina-
it pursuant to the warranty, repurchase, and tion that a contract is ambiguous, and both are
indemnity provisions of the MSSC. reviewed de novo.” Camden Iron & Metal,
Inc. v. Krafsur (In re Newell Indus., Inc.), 336
The bankruptcy court held that the trustee F.3d 446, 448 (5th Cir. 2003). To determine
was entitled to recover $4,800,000 under the the parties’ intent, Texas law requires us to
MSSC, but the court also awarded Fannie Mae harmonize the complete document and give
$21,528,294.50 arising from Homeowners’ effect to all its provisions. Kona Tech. Corp.
repurchase obligations. This figure was fur- v. S. Pac. Transp. Co., 225 F.3d 595, 610 (5th
ther offset by credits for the value of Depart- Cir. 2000).
ment of Housing and Urban Development in-
surance and the residual values of the loans, The trustee’s argument is unavailing. When
resulting in a net judgment of $13,915,872.50 read in its entirety, the MSSC states that the
for Fannie Mae. The district court summarily right to require loan repurchase and the right
affirmed. to terminate the contract are remedies for a
breach of warranty; that these remedies are not
II. exclusive; and that they survive the termination
The trustee argues that the bankruptcy of the contract.
court erroneously interpreted the MSSC when
it held that Fannie Mae has the right to exer- For the breach of warranty claim to survive
cise its repurchase rights after it already has termination under section X, the breach of
terminated the contract. Citing Denison Mat- warranty must be a “[r]esponsibility or liabili-
tress Factory v. Spring-Air Co., 308 F.2d 403, t[y] of the lender that exist[s] before the termi-
413 (5th Cir. 1962), the trustee contends the nation of the Contract.” Texas law reads the
repurchase right is merely a benefit of the con- term “liability” broadly to include “almost ev-
tract that Fannie Mae cannot seek to obtain if ery character of hazard or responsibility, ab-
it also shirks its obligations under the termi- solute, contingent, or likely.”1 Homeowners
nated contract. For support, the trustee also was saddled with a contingent liability from
points to section IX of the MSSC, which pro- the moment it sold non-compliant loans to
vides that on termination of the contract, “the Fannie Mae. Thereafter, there was the pos-
entire relationship between the Lender and sibility that Fannie Mae would require Home-
[Fannie Mae] ends.” owners to fulfil its repurchase obligations. The
fact that Fannie Mae did not insist on this
We review the bankruptcy court’s findings
of fact for clear error and its conclusions of
law de novo, using the same standards that the 1
Burnett v. Chase Oil & Gas, Inc., 700 S.W.2d
bankruptcy court and district court applied. 737, 742 (Tex. App.SSTyler 1985, no writ); see
Refinery Holding Co. v. TRMI Holdings, Inc. also Reconstruction Fin. Corp. v. Gossett, 111
S.W.2d 1066, 1073-74 (Tex. 1938).

3
remedy before first exercising its right to a The trustee challenges the bankruptcy
non-exclusive, alternative remedySSthe termi- court’s decision to admit a summary document
nation of the contractSSneither extinguishes into evidence, even though it contained
Fannie Mae’s rights to the additional repur- hearsay impressions of Fannie Mae employees.
chase remedy nor makes Homeowners’ breach We review for abuse of discretion the decision
of warranty any less a liability. Accordingly, to admit a summary document into evidence.
the bankruptcy court’s interpretation of the United States v. Tannehill, 49 F.3d 1049,
MSSC was not erroneous.2 1056 (5t h Cir. 1995). The bankruptcy court
emphasized its understanding that most of the
The trustee also avers that even if the re- material in the summary was unreliable, and
purchase right is enforceable, the bankruptcy the court assigned it little weight.
court erred in awarding damages for this Nevertheless, the summary contained some
breach of warranty, because there was no evi- objective statements of fact that the court
dence that the breach harmed Fannie Mae. found useful, so its decision to admit the
This claim is without merit, however, because document was not an abuse of discretion.
the MSSC provides Fannie Mae with the right
to demand repurchase of any loans that violate Homeowners also reasons that the
the MSSC’s warranty provisions, without re- bankruptcy court erred in finding that it sold
gard to whether the loans ultimately go into “multi-family” loans in amounts that exceeded
default. the maximum amount provided for in the
MSSC’s warranty provision. The trustee
III. argues that one of the MPA’s gave
Next, the trustee raises several challenges Homeowners a variance to sell loans in a
to the factual basis for the bankruptcy court’s larger amount than was provided for in the
conclusion that Homeowners sold loans that MSSC and that this variance applies to loans
were in breach of its warranties. None of sold under different MPA’s. This is a question
these claims merits reversal. of contract interpretation that we review de
novo. Newell, 336 F.3d at 448. The trustee’s
argument is erroneous as a matter of law,
2
Homeowners asserts that the interpretation of because the MPA’s govern only the sale of a
the contract that we now adopt conflicts with that few specific loans, and the one containing the
employed in Fannie Mae v. FDIC, 970 F.2d 484 variance in question expired before
(8th Cir. 1992). We disagree. In that case, the is- Homeowners sold the non-qualifying loans to
sue was whether a party that had an indemnity Fannie Mae. The bankruptcy court correctly
obligation while servicing a loan under a contract held that this expired MPA did not alter the
with an identically-worded section IX was required terms of the warranties applicable to loans sold
to continue indemnifying Fannie Mae after it had
under different MPA’s.
been terminated as a servicer of the loan. Id. at
485. The court held that it was not, because the
indemnification obligation arose only during the The trustee argues that there is insufficient
continuation of the lending agreement. Id. at 486- evidence to find that Homeowners’ “Wiltshire
87. In contrast, the repurchase obligation that we Boulevard” loans were sold in breach of any
recognize today arises under a different section of warrant y it made to Fannie Mae. This is a
the contract that creates a remedy for a one-time question of fact subject to clear error review.
breach of warranty.

4
Concise Oil & Gas P’ship v. La. Intrastate in the amount claimed. MCI, 995 S.W.2d at
Corp., 986 F.2d 1463, 1469 (5th Cir. 1993). 654-55. Because the 24.7% figure adopted by
The trustee’s argument is frivolous, because the bankruptcy court included all the loans that
Homeowners’ president acknowledged that were likely to be breached, it was not clearly
these loans were made to non-existent erroneous for that court to conclude that this
borrowers. As a result, they are unenforceable measure best estimated Fannie Mae’s future
and in violation of the warranty contained in damages.
section IV.A.5. of the MSSC.
V.
IV. Homeowners contends that the bankruptcy
The trustee challenges the bankruptcy court abused its discretion in declining to
court’s calculation of future damages as part award it attorney’s fees. Homeowners
of the award to Fannie Mae. We review an correctly points out that it need not be a net
award of future damages for clear error. prevailing party to recover attorney’s fees
Crawford v. Falcon Drilling Co., Inc., 131 under Texas law. See Gereb v. Smith-Jaye, 70
F.3d 1120, 1129 (5th Cir. 1997). Under Texas S.W.3d 272, 273 (Tex. App.SSSan Antonio
law, a claimant must show, with a reasonable 2002, no writ). Nevertheless, a decision to
degree of probability, (1) that it will incur award fees is within the sound discretion of the
future damages and (2) the amount of such bankruptcy court. FED. R. BANKR. P. 7054.
damages. MCI Telecomm. Corp. v. Tex. Util. The district court concluded that both parties
Elec. Co., 995 S.W.2d 647, 654-55 (Tex. had pursued their claims in good faith and that
1999). it was difficult to determine which was the
“prevailing” party. In light of the fact that
The bankruptcy court awarded future dam- Homeowners lost a net judgment of nearly $14
ages only for those loans that it found were million dollars, it was no abuse of discretion to
likely to be both in breach of a warranty and in decline to award fees.
default. To make this calculation, the
bankruptcy court relied on a statistical analysis The judgment of the district court,
that was performed by Homeowners’ expert. affirming the judgment of the bankruptcy
Homeowners has failed to show that its court, is AFFIRMED.
expert’s calculations are clearly erroneous. In-
stead, its strongest argument is that the expert
classified only 1.87% of the loans as highly
likely to breach a warranty, while the
bankruptcy court calculated damages on the
basis of the study’s conclusion that 24.7% of
the loans deviated from the relevant standards
and were likely to breach.

It was not error for the bankruptcy court to
rely on this larger figure, because Fannie Mae
was required only to prove a reasonable
probability that it would incur future damages

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