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### STATE OF MICHIGAN

COURT OF APPEALS

FLAGSTAR BANK FSB,

Plaintiff-Appellee, UNPUBLISHED November 22, 2016

v No. 328332 Oakland Circuit Court MONEY WISE INVESTMENT, INC, LC No. 2014-142707-CK

Defendant-Appellant.

Before: M. J. K ELLY , P.J., and M URRAY and B ORRELLO , JJ.

P ER C URIAM

. In this dispute relating to an indemnification claim, defendan t Money Wise Investment, Inc. (Money Wise) appeals by rig ht the trial court’s order gran ting summary disposition under MCR 2.116(C)(10) in favor of plaint iff Flagstar Bank FSB (Flags tar). For the reasons stated in this opinion, we affirm.

I. BASIC FACTS

In 1998, Money Wise entered into a contract with Flagstar (the broker agreement). Under the terms of the agreement, Money Wise would sell loans t o Flagstar, who then had the option of reselling those loan s on the secondary market.

In 2005, Money Wise originated a $169,520 mortgage loan to Att ef A. Girgis and Gisele H. Girgis (the Girgis loan). A few days later, pursuant to the broker agreement, Money Wise sold the promissory note and mortgage on the Girgis loan to Fla gstar. Subsequently, in 2006, Flagstar sold the loan to Fannie Mae on the secondary market. The Girgis loan eventually entered into default for non-payment, with the last payment rem itted in August 2009. Fannie Mae foreclosed on the property and it was sold.

In September 2013, Fannie Mae sent a letter to Flagstar demand ing reimbursement for its losses on the Girgis loan. Si gnificantly, Fannie Mae stated:

According to a recent credit report obtained by Fannie Mae, th e credit report represented four additiona l mortgages closed prior to th e subject transaction. These liabilities, which were not disclosed by th e borrower on the origination application, result ed in $271510 additional debt. The borrower failed to provide a factual financial statement regarding his financia l condition.-2- Additionally, we are unable to determine the impact on the borr ower’s available assets and reserves at the time of the subject loan closing. T hese undisclosed mortgages resulted in a misrepresentation of the borrower’s fin ancial condition and unacceptable additional layering of risk.

Fannie Mae provided details on each of the undisclosed mortgage s. Moreover, Fannie Mae asserted that the errors constituted a breach of Flagstar’s con tractual warranty that “no fraud or material misrepresentation has been committed by any party, inc luding the borrower . . . .” As a result, Fannie Mae stated the Gir gis loan was ineligible for de livery.

In March 2014, Flagstar repurchased the Girgis loan for $130,8 68.09, noting that the general problem was an underwri ting error and fraud. More spec ifically, Flagstar stated on a loss reimbursement form that there was “[u]ndisclosed debt, occ upancy misrepresentation and [failure to provide] a final inspection as required on the appr oval letter.” Nothing on the record indicates that Flagstar notifie d Money Wise about Fannie Mae’s demand for reimbursement until after it had already settled that claim. Instead, it appears t hat after settling with Fannie Mae, Flagstar sent a written demand for indemnification to Money Wis e, who refused to pay for Flagstar’s losses on the Girgis loan.

In September 2014, Flagstar filed a complaint against Money Wi se. Flagstar asserted that Money Wise had breached the broker agreement by selling a loan containing an “untrue statement of material facts” con trary to the warranty in § 2(f) of the agreement and by failing to indemnify Flagstar pursuant to the § 7 indemnity clause for the losses it incurred on the Girgis loan. 1

Flagstar moved for summary disposition pursuant to MCR 2.116(C )(10). Pertinent to this appeal, Money Wise argued in response that the indemnity clause required Flagstar to tender its defense of the case to Money Wise and that its failure to do so required Flagstar to now prove that it was actually liable to Fannie Mae on the underlying cla im before it would be entitled to indemnification from Money Wise. Money Wise contended that Fla gstar could not prove actual liability because the six-year statute of limitations for breac h of contract had expired on the underlying claim. Alternatively, Money Wise argued that when F lagstar sold the Girgis loan to Fannie Mae the sale acted as an assignment of Flagstar’s rights under the broker agreement, including the right to indemnif ication. As a result, Flagstar no longer had the right to seek indemnification for losses on the Girgis loan.

1 The § 7 indemnity clause provi ded that Money Wise would

indemnify, defend, and hold [Flagstar] harmless from and agains t any and all claims, losses, costs, or damages, including reasonable attorne y fees arising from the sale of any loan to [Flagstar] at such time and in such man ner as set forth in the Seller’s Guide.”-3- Flagstar responded that the September 2013 letter from Fannie Mae was sufficient to establish that it was actually liable to Fannie Mae on the unde rlying claim. Flagstar further argued that the statute of limitations did not bar Fannie Mae’s claim because the claim had not accrued until after Fannie Mae suffered a loss on the loan. Fi nally, addressing Money Wise’s alternative argument, Flagstar asserted that pursuant to the br oker agreement, it had only assigned its rights to the Girgis loan to Fannie Mae and it sti ll retained its right to indemnification under th e broker agreement.

After argument, the trial cour t granted Flagstar’s motion for summary disposition.

II. INDEMNIFICATION

A. STANDARD OF REVIEW

Money Wise argues on appeal that the trial court erred when it granted Flagstar’s motion for summary disposition. Specifi cally, Money Wise argues that Flagstar was required to prove actual liability to Fannie Mae, which it could not do because t he underlying claim was barred by the statute of limitations for breach of contract claims. This Court reviews de novo a trial court’s decision on a motion for summary disposition. Barnard Mfg Co, Inc v Gates Performance Engineering, Inc , 285 Mich App 362, 369; 775 NW2d 618 (2009).

B. ANALYSIS

The threshold question in any indemnification action is whethe r the indemnity clause applies to the underlying claim at issue. Miller-Davis Co v Ahrens Const, Inc , 495 Mich 161, 174; 848 NW2d 95 (2014). To answer this question, this court c onducts a “straightforward analysis of the facts and the contract terms.” Id . (citation and quotation marks omitted). However, in this case, the parties do not contend that the inde mnity clause does not apply to the underlying claim. Instead, Money Wise asserts that Flagstar mu st prove that it was actually liable for the underlying claim, whereas Flagstar asserts it mu st only prove that it was potentially liable for the underlying claim.

In Grand Trunk Western R R, Inc v Auto Warehousing Co , 262 Mich App 345, 354-355; 686 NW2d 756 (2004), this Court held that “if an indemnitee set tles a claim against it before seeking the approval of, or tendering the defense to, the indem nitor, then the indemnitee must prove its actualliability to the claimant to recover from the indemnitor.” (E mphasis in original). “However, the indemnitee who has settled a claim need show only potentialliability if the indemnitor had notice of the claim and refused to defend.” Id . at 355 (emphasis in original).

The trial court held that the actual liability standard from Grand Trunk did not apply because the contractual duty to defend in this case did not req uire Flagstar to tender its defense whereas the duty to defend in Grand Trunk did require the indemnitee to tender its defense before the duty to defend would be triggered. However, applica tion of the actual liability standard does not turn on whether the indemnity clause mandates the indemnitee tender its defense. Instead, the reasoning behind the standard was explai ned by the Sixth Circuit in Tankrederiet Gefion A/ S v Hyman-Michaels Co , 406 F 2d 1039, 1043-1044 (CA 6, 1969):-4- It certainly seems appropriate for B, the party desiring to set tle and possessing the facts pertaining to the settlemen t, to be required to tender C the choice of approving the settlement or of going forward with the defense i n exchange for a hold-harmless agreement. We assume that such a hold-harmless a greement would constitute C’s financially responsible guarantee that B w ould under no circumstances be forced to pay more than the sum for which it w as prepared to settle. If such a tender were refused and B settled, then we t hink the proofs required in the subsequent suit against C would appropriately b e potential liability and reasonableness of the settlement.

The ultimate problem with any other rule than that which the D istrict Judge laid down here is that potentially it would allow B (the original defendants) to spend C’s (the third-party defendant) money without the fina l judgment of a court or C’s agreement. Deciding whether to try a case to judg ment or to settle it involves elements of legal evaluation, of financial capacity to take risk, and of appetite for court room conflict which vary widely among litigants. We hold that under the facts of this case B cannot compel C to accept B’s ev aluation of these critical factors. Any other rule would deny C any opportunity to contest B’s liability to A—a liability whi ch C may be required to pay.

We adopted the Tankrederiet court’s reasoning in Ford v Clark Equip Co , 87 Mich App 270, 277; 274 NW2d 33 (1978), noting that:

The policy of this state is to encourage settlements of suits. The settlement of a suit benefits both parties and the public. If this policy is to be effective, the burden on the defendant who settles after a tender of the defense to the contractual indemnitor is refused must not be too heavy. W e, therefore, hold that to recover on the contract of indemnity, [the indemnitee] need show only its potential, as opposed to its actual, liability to [the underlyi ng claimant]. [Emphasis added; citations omitted.]

Applying the rule from Grand Trunk and Ford , it is plain that because Flagstar did not seek approval from or tender its defense to Money Wise before s ettling with Fannie Mae on the underlying claim, Flagstar must p rove it was actually liable to Fannie Mae before it can recover from Money Wise.

The burden of establishing poten tial liability is lighter than the burden of establishing actual liability. See id . In Grand Trunk , we explained:

Potential liability actually means nothing more than that the indemnitee acted reasonably in settling the underlying suit. The reasonab leness of the settlement consists of two compon ents, which are interrelated. The fact finder must look at the amount paid in settlement of the claim in ligh t of the risk of exposure. The risk of exposure is the probable amount of a jud gment if the original plaintiff were to prevai l at trial, balanced against t he possibility that the original defendant would have prevailed. If the amount of the settlement is reasonable in light of the fact finder’s analysis of these fact ors, the indemnitee-5- will have cleared this hurdle. [ Grand Trunk , 262 Mich App at 355-356, quoting Ford , 87 Mich at 278.]

The burden of proving potential liability can be satisfied if t he indemnitee can establish a genuine issue of material fact r egarding whether the underlying claim would have been successful. Grand Trunk , 262 Mich App at 358.

In contrast, actual liability is liability that exists “in fac t or reality” and is “not false or apparent.” See Merriam-Webster’s Co llegiate Dictionary (11th ed). As such, in order to prove actual liability, the indemnitee must establish that it would h ave lost on the underlying claim had it brought that claim to trial. A n indemnitor can make that sh owing by presenting evidence that the underlying claimant would have been entitled to summary dis position on the claim had such a motion been brought.

It is well-established that when reviewing a motion for summar y disposition under MCR 2.116(C)(10), a court considers “affidavits, pleadings, deposit ions, admissions, and other documentary evidence submitted by the parties in the light most favorable to the party opposing the motion.” Greene v A P Prods, Ltd , 475 Mich 502, 507; 717 NW2d 855 (2006) (citation and quotation marks omitted). Likewise, it is well-established tha t such a motion should be granted “if there is no genuine issue as to any material fact and the m oving party is entitled to judgment as a matter of law.” MEEMIC Ins Co v DTE Energy Co , 292 Mich App 278, 280; 807 NW2d 407 (2011). In making that determi nation, the court may not ma ke factual findings on disputed factual issues during a motion for summary disposition and may not make credibility determinations. Burkhardt v Bailey , 260 Mich App 636, 647; 680 NW2d 453 (2004).

Here, the underlying cause of a ction is breach of contractual warranty. The contract allegedly breached is not included in the lower court record. Instead, the only proof that a warranty existed was Fannie Mae’s assertion in its September 20 13 letter to Flagstar demanding reimbursement for the breach of that warranty. Further, the on ly proof that the contractual warranty was breached is Fannie Ma e’s assertion that the warran ty was breached. 2 Likewise, the only proof that there was fraud or misrepresentation on the ori gination application is, again, Fannie Mae’s letter stating that a “recent” credit report showe d that the Girgises had four undisclosed mortgages that were taken out before the subject mo rtgage closing.

Nevertheless, even without the u nderlying documents, the Septe mber 2013 letter is sufficient to establish (1) that the underlying loan applicatio n contained misrepresentations, (2) that the misrepresentations rendered the loan ineligible for de livery to Fannie Mae, and (3) that the misrepresentation on the application resulted in a breach o f Flagstar’s warranty to Fannie Mae. Accepting these facts, Flagstar submitted sufficient unre butted evidence to show that it was actually liable to Fannie Mae. Money Wise presented no con trary evidence and instead asserts that the failure to disclose the additional mortgages m ay not have been a material breach, especially considering that the mortgage was in good standing f or three and a half years before

2 A loss reimbursement statement submitted by Flagstar also sugg ests the agreement between Flagstar and Fannie Mae was breached because of an underwriting problem and fraud.-6- default. However, an indemnitor “may not rely on general alleg ations or denials to overcome a motion for summary disposition.” Grand Trunk , 262 Mich at 358. Moreover, “[i]f a party opposing a motion for summary disposition fails to present evid entiary proofs establishing the existence of a material factual dispute, summary disposition is properly granted.” Id . at 360. Accordingly, on these facts Flagstar met its initial burden of showing that it was actually liable on the underlying claim.

However, if the underlying suit would have been successfully d efended, then the indemnitee cannot recover on the indemnity claim. Id . at 357. Money Wise argues that Flagstar could have successfully defended against Fannie Mae’s claim for breach of contractual warranty by raising the statute of limitations as a defense. The statut e of limitations for breach of contract is six years. MCL 600.5807(8). Further, generally, a breach o f contract claim accrues on the date of the breach, Seyburn, Kahn, Ginn, Bess, Deitch and Serlin, PC v Bakshi , 483 Mich 345, 355; 771 NW2d 411 (2009), which suggests that the breach in thi s case occurred in 2006 and the limitations period expired i n 2012, one year before Fannie Mae demanded reimbursement.

However, a claim “for damages based on a warranty of quality o r fitness the claim accrues at the time the breach of warranty is discovered or rea sonably should be discovered.” MCL 600.5833. The record shows that the Girgis loan did not en ter into default until 2009. And the demand letter, written in 2013, reflects that a “recent cre dit report” revealed the four additional mortgages. Accordingly, given that there was no nee d to obtain a credit report before the Girgises defaulted on the loan 2009, it appears that the earliest Fannie Mae should have discovered the breach of warranty was 2009. Moreover, given th at the 2013 letter refers to a “recent credit report,” it appears that Fannie Mae actually dis covered the claim sometime in 2013. Thus, on this record, the six-year limitations period ac crued between 2009 and 2013, and the statute of limitations would not have run until sometime be tween 2015 or 2018. Fannie Mae could have therefore filed a timely claim for relief in 2013 if Flagstar had not determined that it was obligated to reimburse it fo r its losses on the Girgis loan

.

III. ASSIGNMENT OF RIGHTS

A. STANDARD OF REVIEW

Money Wise argues that under the plain language of the broker agreement, Flagstar assigned all of its rights under the agreement—including its ri ght to indemnification—to Fannie Mae when it sold the Girgis loan. We review de novo the proper interpretation and application of a contract. Cohen v Auto Club Ins Ass’n , 463 Mich 525, 528; 620 NW2d 840 (2001).

B. ANALYSIS

In interpreting a contract, this Court looks to the plain and ordinary meaning of the words of the contract. Northline Excavating, Inc v Livingston Co , 302 Mich App 621, 627; 839 NW2d 693. “We cannot read words into the plain language of a contra ct.” Id . at 628. “The cardinal rule in the interpre tation of contracts is to ascertain the int ention of the parties.” Radu v Herndon & Herndon Investigations, Inc , 302 Mich App 363, 374; 838 NW2d 720 (2013) (citation and quotation marks omitted). Further, a contract must be construe d as a whole, with “all its parts . . . harmonized so far as reasonably possible[.]” Comerica Bank v Cohen , 291 Mich App 40, 46;-7- 805 NW2d 544 (2010) (citation and quotation marks omitted). If possible, every word should be given effect and no part should “be taken as eliminated or stri cken by some other part unless such a result is fairly inescapable.” Id . (citation and quotation marks omitted).

Here, the broker ag reement provides:

[Flagstar] shall have the right to assign this Agreement and i ts duties, obligations, or rights hereunder upon written notice to [Money Wise]. In the event that [Flagstar] sells or assigns all or part of its inter est in any mortgage loans that are subject to this Agreement to a third party, suchthird party shall succeed to all rights of [Flagstar] hereunder with respect to s uch mortgage loans.

This provision clearly contemplat es two different situations wh ere Flagstar could assign its rights. The first sentence provi des that Flagstar can assign i ts rights, duties, and obligations under the broker agreement only after providing written notice to Money Wise. The second sentence provides that the sale to a third party of all or part of Flagstar’s interest in any mortgage acts as an assignment of Flagstar’s rights with respect to the mortgage loan that was sold. If the sale of a mortgage automatically assigned all of Flagstar’s rig hts under the broker agreement to the third party, then the written notice requirement in the fir st sentence would be nothing more than surplusage. Thus, based on the plain language of the cont ract, Flagstar’s sale of the Girgis loan to Fannie Mae only assigned the rights “with respect to [t hat] mortgage loan.” It did not assign Flagstar’s rights under the broker agreement, which coul d only be assigned after providing written notice to Money Wise.

The trial court did not err i n granting summary disposition.

Affirmed.

/s/ Michael J. Kelly /s/ Christopher M. Murray /s/ Stephen L. Borrello