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

_______________

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

_________________________
2

Before JOLLY, SMITH, and EMILIO M. GARZA,

Circuit Judges.

JERRY E. SMITH, Circuit Judge:

After unilaterally terminating a contract it

entered into with Homeowners Mortgage and

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

sought to enforce a provision of the contract

thatrequiredHomeownersto repurchase loans

that were in breach of the contract’s warranty

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

Fannie 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 congressionally chartered

private corporation, purchasesmortgage 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 ServicingContract(“MSSC”) withHomeowners, pursuant to which Fannie Mae ultimately purchased $243 million of Homeowners’ title I loans. Homeowners retained the

right to continue to earn fees from servicing

the loans.

The MSSC does not place any obligation

on Fannie Mae to purchase loans. Rather, it

serves only to define the relationship between

the parties and to create some ofthe 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

obligation to purchase a discreet amount of

loans.

The source of the present litigation is section IV of the MSSC, in which Homeowners

agreed that it would not sell loans to Fannie

Mae without 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 or review specific loans before

agreeing to purchase them. The warranties are

Fannie Mae’s only assurance that the loans it

agrees to buy will be good investments.

The MSSC provides Fannie Mae with various remedies in the 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 providesthat Fannie Mae

can “also enforce any other available remedy.”

Section IV.C. states that an additional, nonexclusive remedy isthe termination ofthe contract. Finally, section X provides that responsibilities and liabilities of the lender survive

termination of the MSSC.

Fannie Mae terminated theMSSC, claiming

a breach of warranty, whereupon Fannie Mae

assumed the servicing rightsthat 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 bankruptcy
3

estate. 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, repurchase, and

indemnity provisions of the MSSC.

The bankruptcy court held that the trustee

was entitled to recover $4,800,000 under the

MSSC, but the court also awarded Fannie Mae

$21,528,294.50 arising from Homeowners’

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 trustee argues that the bankruptcy

court erroneously interpreted the MSSC when

it held that Fannie Mae has the right to exercise its repurchase rights after it already has

terminated the contract. Citing Denison 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 under 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 between 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 applied.

Refinery Holding Co. v. TRMI Holdings, Inc.

(In re El Paso Refinery, 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 oflaw, asisthe determination that a contract is ambiguous, and both are

reviewed de novo.” Camden Iron & Metal,

Inc. v. Krafsur(In re Newell Indus., Inc.), 336

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

the parties’ intent, Texas law requires us to

harmonize the complete document 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 states that the

right to require loan repurchase and the right

to terminate the contract are remedies for a

breach ofwarranty; that these remedies are not

exclusive; and that theysurvive the termination

of the contract. 

For the breach of warranty claim to survive

termination under section 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 “liability” broadly to include “almost every character of hazard or responsibility, absolute, contingent, or likely.”1

 Homeowners

was saddled with a contingent liability from

the moment it sold non-compliant loans to

Fannie Mae. Thereafter, there was the possibility that Fannie Mae would require Homeownersto fulfilitsrepurchase 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.SSTyler 1985, no writ); see

also Reconstruction Fin. Corp. v. Gossett, 111

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

remedy before first exercising its right to a

non-exclusive, alternative remedySSthe termination of the contractSSneither extinguishes

Fannie Mae’s rights to the additional repurchase remedynor makes Homeowners’ breach

of warranty any less a liability. Accordingly,

the bankruptcy court’s interpretation of the

MSSC was not erroneous.2

The trustee also avers that even if the repurchase right is enforceable, the bankruptcy

court erred in awarding 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 loansthat violate

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

default.

III.

Next, the trustee raises several challenges

to the factual basis for the bankruptcy court’s

conclusion that Homeowners sold loans that

were in breach of its warranties. None of

these claims merits reversal.

The trustee challenges the bankruptcy

court’s decision to admit a summarydocument

into evidence, even though it contained

hearsayimpressions ofFannie Mae employees.

We review for abuse of discretion the decision

to admit a summary document into evidence.

United States v. Tannehill, 49 F.3d 1049,

1056 (5th Cir. 1995). The bankruptcy court

emphasized its understanding that most of the

material in the summary was unreliable, and

the court assigned it little weight.

Nevertheless, the summary contained some

objective statements of fact that the court

found useful, so its decision to admit the

document was not an abuse of discretion.

Homeowners also reasons that the

bankruptcy court erred in finding that it sold

“multi-family” loansin amounts that exceeded

the maximum amount provided for in the

MSSC’s warranty provision. The trustee

argues that one of the MPA’s gave

Homeowners a variance to sell loans in a

larger amount than was provided for in the

MSSC and that this variance applies to loans

sold under different MPA’s. This is a question

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,

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 that this expired MPA did not alter the

terms ofthe warranties applicable to loanssold

under different MPA’s.

The trustee argues that there is insufficient

evidence to find that Homeowners’ “Wiltshire

Boulevard” loans 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 whether a party that had an indemnity

obligation while servicing a loan under a contract

with an identically-worded section IX wasrequired

to continue indemnifying Fannie Mae after it had

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

continuation of the lending agreement. Id. 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 one-time

breach of warranty.
5

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

Corp., 986 F.2d 1463, 1469 (5th Cir. 1993).

The trustee’s argument is frivolous, because

Homeowners’ president acknowledged that

these loans were made to non-existent

borrowers. As a result, they are unenforceable

and in violation of the warranty contained in

section IV.A.5. of the MSSC.

IV.

The trustee challenges the bankruptcy

court’s calculation of future damages as part

of the award to Fannie Mae. We review an

award of future damages for clear error.

Crawford v. Falcon Drilling Co., Inc., 131

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

law, a claimant must show, with a reasonable

degree of probability, (1) that it will incur

future damages and (2) the amount of such

damages. MCI 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, the

bankruptcy court relied on a statistical analysis

that was performed by Homeowners’ expert.

Homeowners has failed to show that its

expert’s calculations are clearlyerroneous. Instead, 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

in the amount claimed. MCI, 995 S.W.2d at

654-55. Because the 24.7% figure adopted by

the bankruptcy court included allthe loansthat

were likely to be breached, it was not clearly

erroneous for that court to conclude that this

measure best estimated Fannie Mae’s future

damages.

V.

Homeowners contendsthat the bankruptcy

court abused its discretion in declining to

award it attorney’s fees. Homeowners

correctly points out that it need not be a net

prevailing party to recover attorney’s fees

under Texaslaw. See Gereb v. Smith-Jaye, 70

S.W.3d 272, 273 (Tex. App.SSSan Antonio

2002, no writ). Nevertheless, a decision to

award feesis within the sound discretion ofthe

bankruptcy court. FED. R. BANKR. P. 7054.

The district court concluded that both parties

had pursued their claims in good faith and that

it was difficult to determine which was the

“prevailing” party. In light of the fact that

Homeownerslost a net judgment of nearly $14

million dollars, it was no abuse of discretion to

decline to award fees.

The judgment of the district court,

affirming the judgment of the bankruptcy

court, is AFFIRMED.