United States Court of Appeals

Fifth Circuit



## FILED

December 17, 2003

Charles R. Fulbruge III

Clerk 

## In the 

# United States Court of Appeals

for the Fifth Circuit

_______________



### m 02-50954

_______________



### I N THE 

### M ATTER OF 

### :

H OMEOWNERS 

### M ORTGAGE AND 

### E QUITY



### , I NC



### .,

Debtor.



### J EFFREY 

### W. H URT



### ,

T RUSTEE OF THE L IQUIDATING T RUST OF H OMEOWNERS M ORTGAGE & E QUITY

, I NC

.,



### Appellant,

VERSUS



### F EDERAL 

### N ATIONAL 

### M ORTGAGE 

### A SSOCIATION

AND 

### H OME 

### S ECURITIZATION 

### T RUST 

### 1 (F ANNIE 

### M AE 

### ); U.S. B ANK



### ,

Appellees.

_________________________

Appeal from the United States District Court

for the Western District of Texas



### m A-01-CV-660-JN

_________________________2

Before J OLLY

, S MITH

, and E MILIO M. G ARZA

, Circuit Judges.

J ERRY E. S MITH , Circuit Judge:

After unilaterally terminating a contract it

entered into with Homeowners Mortgage and

Equity, Inc. (“Homeowners”), the Federal National Mortgage Association (“Fannie Mae”)

sought to enforce a provision of the contract

that required Homeowners to repurchase loans

that were in breach of the contract’s warranty

provision. The district court summarily affirmed the bankruptcy court’s decision that

Fan nie Mae was entitled to a claim against

Homeowners’ bankruptcy estate because Fannie Mae validly asserted that right despite the

fact that it had already terminated the contract.

Finding no error, we affirm.

I.

Fannie Mae, a

co ngressionally chartered

private corporati on, purchases mortgage loans

from original lenders in a secondary mortgage

market. Homeowners is a lender that offers

loans under title I of the National Housing Act

of 1934, which offers qualified borrowers the

chance to receive up to $25,000 for home

maintenance and improvement. After expanding into the secondary market for title I loans,

Fannie Mae entered into a Mortgage Selling

and Servicing Contract (“MSSC”) with Hom e

owners, pursuan t t o which Fannie Mae ultimately purchased $243 million of Homeowners’ title I loans. Homeowners retained the

right to con t inue to earn fees from servicing

the loans.

T h e MSSC does not place any obligation

o n Fannie Mae to purchase loans. Rather, it

serves only to define the relationship between

the parties and to create some of the terms and

conditions under which Fannie Mae would later agree to purchase loans. Thereafter, the

parties were to enter into a series of contracts,

known as Master Purchase Agreements

(“MPA’s”), each of which created a specific

o bligation to purchase a discreet amount o f

loans.

T he source of the present litigation is se c

tion IV o f t he MSSC, in which Homeowners

agreed that it would no t sell loans to Fannie

Mae with o ut first making several warranties

that collectively established that Homeowners

is an authorized lender and that the mortgages

it sold to Fannie Mae were valid and enforceable. Fannie Mae requires these warranties

before it will buy loans, because the substantial

volume of its business makes it impractical to

underwrite o r review specific loans before

agreeing to purchase them. The warranties are

Fannie Mae’s only assurance t hat the loans it

agrees to buy will be good investments.

The MSSC provides Fannie Mae with various remedies in th e event the warranties are

breached. Section IV.B. provides that Fannie

Mae has the right to require the lender to repurchase a mortgage if any warranty made by

the lender is untrue. This provision is nonexclusive, because it provides that Fannie Mae

can “also enforce any other available remedy.”

Se ct io n IV.C. states that an additional, nonexclusive remedy is the termination of the contract. Finally, section X provides that responsibilit ies and liabilit

ies of the lender sur vive

termination of the MSSC.

Fannie Mae terminated the MSSC, claiming

a breach of warranty, whereupon Fannie Mae

assumed the servicing rights that had been held

by Homeowners, drying up Homeowners’

principal source of income and forcing it into

chapter 11 bankruptcy. The appellant, Jeffrey

Hurt, was appointed trustee of the bankruptcy3

es t at e. He sued Fannie Mae, alleging three

counts of breach of contract, four claims

sounding in tort, and three bankruptcy claims

for fraudulent transfer, turnover, and equitable

subordination. Fannie Mae filed a proof of

claim to recover amounts it alleges are due to

it pursuant to the warranty, repu rchase, and

indemnity provisions of the MSSC.

The bankruptcy court held that the trustee

was e n titled to recover $4,800,000 under the

MSSC, but the court also awarded Fannie Mae

$21,528,294.50 arising from H o meowners’

repurchase obligations. This figure was further offset by credits for the value of Department of Housing and Urban Development insurance and the residual values of the loans,

resulting in a net judgment of $13,915,872.50

for Fannie Mae. The district court summarily

affirmed.

II.

The tru stee argues that the bankruptcy

court erroneously interpreted the MSSC when

i t held that Fannie Mae has the right t o exercise its repurchase rights after it already has

terminated the contract. Citing D enison Mattress Factory v. Spring-Air Co.

, 308 F.2d 403,

413 (5th Cir. 1962), the trustee contends the

repurchase right is merely a benefit of the contract that Fannie Mae cannot seek to obtain if

it also shirks its obligations u nder the terminated contract. For support, the trustee also

points to section IX of the MSSC, which provides that on termination of the contract, “the

entire relationship betw e en the Lender and

[Fannie Mae] ends.”

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

bankruptcy court and district court appl i ed.

Refinery Holding Co. v. TRMI Holdings, Inc. (In re El Paso Refin ery, LP) , 302 F.3d 343,

348 (5th Cir. 2002); West v. Balfour Beatty

Constr., Inc. (In re Miller), 290 F.3d 263, 266

n.2 (5th Cir. 2002). The parties agree that we

are to apply Texas law. “Interpretation of a

contract is a matter of law, as is the determination that a contract is ambiguous, and both are

reviewed de novo.” C

amden Iro n & Metal,

Inc. v. Krafsur (In re Newell Indus., Inc.)

, 336

F.3d 446, 448 (5th Cir. 2003). To determine

the parties’ intent, Texas law requir e s us to

harmonize the complete doc ument and give

effect to all its provisions. Kona Tech. Corp.

v. S. Pac. Transp. Co., 225 F.3d 595, 610 (5th

Cir. 2000).

The trustee’s argument is unavailing. When

read in its entirety, the MSSC s tates that the

right to require loan repurchase and the right

to t erminate the contract are remedies for a

breach of warranty; that these remedies are not

exclusive; and that they survive the termination

of the contract.

For the breach of warranty claim to survive

termination under sect i on X, the breach of

warranty must be a “[r]esponsibility or liabilit[y] of the lender that exist[s] before the termination of the Contract.” Texas law reads the

term “liabilit y” broadly to include “almost every character of

hazard or responsibility, absolute , contingent, or likely.” 1 Homeowners

was saddled with a co nt ingent liability from

the moment it sold non-compliant loa n s to

Fanni e Mae. Thereafter, there was the possibilit y that Fannie Mae would require Homeowners to fulfil its repurchase obligations. The

fact that Fannie Mae did not insist on this

1 Burnett v. Chase Oil & Gas, Inc.

, 700 S.W.2d

737, 742 (Tex. App. SS

Tyler 198 5, no writ); s ee

also Reconstruction Fin. Corp. v. Gosse tt , 111

S.W.2d 1066, 1073-74 (Tex. 1938).4

remedy before fir st exercising its right to a

non-exclusive, alternative remedy 

### SS the termination of the con tract 

### S

S neither extinguishes

Fannie Mae’s rights to the additional repurchase remedy nor makes Homeowners’ breach

of warranty any less a liability. Accordingly,

the bankruptcy court’s interpreta t ion of the

MSSC was not erroneous. 2

The trustee also avers that even if the repurchase right is enfo r ceable, the bankruptcy

court erred in a warding damages for this

breach of warranty, because there was no evidence that the breach harmed Fannie Mae.

This claim is without merit, however, because

the MSSC provides Fannie Mae with the right

to demand repurchase of any loans that violate

the MSSC’s warranty provisions, without regard to whether the loans ultimately go into

default.

III.

Next, the t rustee raises several challenges

to the factual basis for the bankruptcy court’s

concl u sion that Homeowners sold loans that

were in breach of its warranti es. None of

these claims merits reversal. The trustee challenges the bankr u ptcy

court’s decision to admit a summary document

into evidence, even t ho ugh it contained

hearsay impressions of Fannie Mae employees.

We review for abuse of discretion the decision

to admit a summary

do cument into evidence.

U nited States v. Tannehill , 49 F.3d 1049,

105 6 (5t h Cir. 1995). The bankruptcy court

emphasized its understanding that most of the

material in the summary was unrelia ble, and

the court assigned it lit t le weight.

Nevertheless, the summary contained some

o bjective statements of fact that the court

found useful, so its decisio n to adm it the

document was not an abuse of discretion.

Homeowners also r easons that the

bankruptcy court erred in finding that it sold

“mult i-family” loans in amounts that exceeded

the ma ximum amount provided for in the

MSSC’s warranty provision. The trustee

argues that one of the MPA’s gave

Ho meowners a variance to sell loans in a

larger amount than was provide d for in the

MSSC and that this variance appli es to l oans

sold under different MPA’s. This is a question

of contract interpretation that we review de

novo

. N ewell

, 336 F.3d at 448. The trustee’s

argument is erroneous as a m a tter of law,

because the MPA’s govern only the sale of a

few specific loans, and the one containing the

variance in question expired before

Homeowners sold the non-qualifying loans to

Fannie Mae. The bankruptcy court correctly

held th at t his expired MPA did not alter the

terms of the warranties applicable to loans sold

under different MPA’s.

The trustee argues that there is insufficient

evidence to find that Homeowners’ “Wilt shire

Boulevard” loan s were sold in breach of any

warrant y it made to Fannie Mae. This is a

question of fact subject to clear error review. 2 Homeowners asserts that the interpretation of

the contract that we now adopt conflicts with that

employed in Fannie Mae v. FDIC

, 970 F.2d 484

(8th Cir. 1992). We disagree. In that case, the issue was whethe

r a party that had an indemnity

obligation while servicing a loan under a contract

with an identically-worded section IX was required

to conti n ue indemnifying Fannie Mae after it had

been terminated as a servicer of the loan. I d. at

485. The court held that it was not, because the

indemnification obligation ar ose only during the

continuation of the lending agreement. I d. at 486-

87. In contrast, the repurchase obligation that we

recognize today arises under a different section of

the contract that creates a remedy for a o n e-time

breach of warranty.5

Concise Oil & Gas P’ship v. La. Intrastate

Corp.

, 986 F.2d 14 63, 1469 (5th Ci r. 1993).

The trustee’s argument is frivolous, because

Homeo w ners’ president acknowledged that

these loans were made to non-exi stent

borrowers. As a result, they are unenforceable

and in viol at ion of the warranty contained in

section IV.A.5. of the MSSC.

IV.

The trustee chal l enges the bankruptcy

court’s calculation of future damage s as part

of t he award to Fannie Mae. We review an

award of futur e damages for clear error.

Cra wf ord v. Falcon Drilling Co., Inc. , 131

F.3d 1120, 1129 (5th Cir. 1997). Under Texas

law, a claimant must show, with a reasonable

degree of probability, (1) tha t it will incur

future damages and (2) the a mount of such

damages. M CI Telecomm. Corp. v. Tex. Util.

Elec. Co.

, 995 S.W.2d 647, 654-55 (Tex.

1999).

The bankruptcy court awarded future damages only for those loans that it found were

likely to be both in breach of a warranty and in

default. To make this calculation, t he

bankruptcy court relied on a statistical analysis

that was performed by Homeowners’ expert.

Ho meowners has failed to show that its

expert’s calculations are clearly erroneous. Instead, its strongest argument is that the expert

classified only 1.87% of th e lo ans as highly

likely to breach a warranty, while the

bankrup t cy court calculated damages on the

basis of the st udy’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 in the amount cla imed. M CI

, 995 S.W.2d at

654-55. Because the 24.7% figure adopted by

the bankruptcy court included all the loans that

were likely to be breached, it was not clearly

erroneous for that court to conclude that this

measure best estim at ed Fannie Mae’s future

damages.

V.

Homeowners contends that the bankruptcy

court ab u sed its discretion in declining to

award it attorn e y’s fees. Homeowners

correctly poi nt s out that it need not be a net

prevailing party to recover attorney’s fees

under Texas law. S ee Gereb v. Smith-Jaye

, 70

S.W.3d 2 7 2, 273 (Tex. App. 

### SS San Antonio

2 002, no writ). Nevertheless, a decision to

award fees is within the sound discretion of the

bankruptcy court. F E D

. R. B A NKR . P. 7054.

The district court concluded that both parties

had pursued their claims in good faith and that

it was diffi cult to determine which was the

“prev ailing” party. In light of the fact that

Homeowners lost a net judgment of nearly $14

millio n dollars, it was no abuse of discretion to

decline to award fees.

T he judgment of the district court,

affirming the judgment of the bankruptcy

court, is AFFIRMED.