Court Opinion

ID: 7870
Source: CourtListenerOpinion
Date Created: 2010-04-25 05:32:10+00
Date Added: 2024-06-11T15:04:00.694323
License: Public Domain

United States Court of Appeals,

                               Fifth Circuit.

                               No. 94-10794.

 TEXAS DEPARTMENT OF HOUSING AND COMMUNITY AFFAIRS, f/k/a Texas
Housing Agency, Plaintiff-Appellant,

                                     v.

VEREX ASSURANCE, INC., et al., Defendants, Verex Assurance, Inc.,
Defendant-Appellee.

                               Nov. 9, 1995.

Appeal from the United States District Court for the Northern
District of Texas.

Before HIGGINBOTHAM      and    PARKER,   Circuit   Judges,   and    BROWN*,
District Judge.

     ROBERT M. PARKER, Circuit Judge:

     Plaintiff Texas Department of Housing and Community Affairs

appeals the district court's judgment in favor of Defendant Verex

Assurance, Inc.    We affirm in part, vacate in part, and remand.

                               I. BACKGROUND

     The plaintiff, Texas Department of Housing and Community

Affairs, formerly known as Texas Housing Agency ("THA"), is an

official governmental agency of the State of Texas.                  THA was

created to provide mortgage financing to low to moderate income,

first-time home buyers.         THA does not originate or underwrite

loans,   but   instead   contracts   with   certain   lenders   to    do   so

according to THA's guidelines.

     Norwest Mortgage, Inc. and the Charles Curry Company, both

     *
      District Judge of the Eastern District of Texas, sitting by
designation.

                                     1
mortgage lenders, entered into an "Origination, Sale, and Servicing

Agreement" with THA, whereby Norwest and Curry agreed to originate

certain loans, sell them to THA, and service them on behalf of THA.

Under this agreement, Norwest made two loans relevant to this

appeal:   one to Jimmy and Queenie Anderson and one to Theodore

Newhouse, both in connection with the purchase of real property in

Fort Worth, Texas.     Also relevant to this appeal, Curry made a loan

to Jeffrey and Chris Abbott in connection with the purchase of real

property in Arlington, Texas.

     THA's guidelines required Norwest and Curry to obtain private

mortgage insurance on each loan originated.          To comply with this

guideline,   Norwest    and   Curry   obtained    pre-qualification   from

Defendant Verex Assurance, Inc., a private mortgage insurer, in the

form of master policies for insurance.           The master policies gave

Norwest and Curry the ability to apply for mortgage insurance from

Verex on individual loans.      These master policies provided that in

return for the payment of premiums, and after review and approval

of the application for mortgage insurance on a particular loan,

Verex would insure the loan against default by the borrower.1

     As the applications and supporting documents on the Anderson,

Newhouse, and Abbott loans were collected, Norwest and Curry

submitted them to defendant Verex with applications for mortgage

insurance. The documents submitted to Verex regarding the Anderson

     1
      The policies at issue in the present        case covered 25% of
the amount due the insured in the event of        loss. Plaintiff THA
was also insured against loss under a pool        insurance policy from
Verex which is not at issue in the present        case.

                                      2
loan indicated that the sales price and appraised value of the

property was $29,000 and that the principal amount of the new loan

was $27,500.     The documents submitted regarding the Newhouse loan

indicated that the sales price and appraised value of the property

was $26,000 and that the principal amount of the new loan was

$24,700.      With regard to the Abbott loan, the documents indicated

that the sales price was $65,950, the appraised value was $66,000,

and the principal amount of the new loan was $62,650.                   The loan

documents     also   indicated   the   size      of   the   down   payments   the

purchasers were to make, and contained representations regarding

the source of the money that would be used to make the down

payments.

     Based on its review of these documents, Verex agreed to

provide mortgage insurance on the Anderson, Newhouse, and Abbott

loans and thus issued commitments for insurance on the respective

loans    to   Norwest   and   Curry.       The   certificates      of   insurance

identified the loans being insured and indicated the terms of the

transaction, including the loan amount, sales price, appraised

value, and the loan-to-value ratio.2             A Certificate of Insurance

was attached to each commitment for the lender's representative to

sign and return with the appropriate premium after the transaction

was consummated.        Each of the loans was consummated, and the

required premiums were tendered to Verex.             Shortly after each loan

was consummated, it was transferred to THA along with an assignment

     2
      Loan-to-value ratio is defined in the industry as the loan
amount divided by the lesser of the sales price or appraised
value of the property in question.

                                       3
of the insurance policies obtained from Verex.       Each of the loans

defaulted.   At the time of the defaults, plaintiff THA was the

holder of the mortgage loans.           Notice of default was properly

given, and claims were filed with Verex within the time allowed by

the master policies.

     As a result of the claims for coverage, Verex began an

investigation which included investigating the accuracy of the

representations made on the documents tendered to Verex by Norwest

and Curry.   Based on the discovery of certain misrepresentations,

Verex denied coverage. Consequently, Verex did not pay any amounts

on the claims for coverage on the Anderson, Newhouse, and Abbott

loans.   Instead, Verex notified THA that it was rescinding the

individual mortgage insurance policies.          Verex re-tendered to

Norwest, Curry, and THA all premiums tendered to it for insurance

on these three loans.

     In 1989, THA filed suit against Verex and GMAC Mortgage

Company, a party subsequently dismissed from the lawsuit, in state

court in Travis County, Texas.          GMAC removed the action to the

United States District Court for the Western District of Texas

based on diversity of citizenship.        Verex joined in GMAC's Notice

of Removal and filed a Motion to Transfer Venue and Brief in

Support to have the case transferred to the Northern District of

Texas.   That motion was granted.

     The case was tried to the court on plaintiff THA's Third

Amended Complaint beginning May 31, 1994.        THA asserted causes of

action for breach of contract and violation of the Texas Deceptive

                                    4
Trade Practices Act, and requested attorneys' fees.         Defendant

Verex asserted, inter alia, the defenses of conditions precedent,

fraudulent or negligent misrepresentation, and mutual mistake of

fact.     The district court granted judgment as a matter of law

against THA on its DTPA claims.   In addition, during the trial, the

district court held that Verex had not given proper notice under §

21.17 of the Texas Insurance Code of the misrepresentations related

to the Anderson and Newhouse loans, and that as a result the

misrepresentation defense as to those two loans was statutorily

barred.    The district court took the remaining claims and defenses

under advisement.

     On June 30, 1994, the district court entered an opinion and

order in favor of defendant Verex.       Specifically, the district

court held that under Texas law the sales prices, appraised values,

and loan-to-value ratios reflected in the commitments for insurance

issued by Verex were conditions precedent to the formation of the

insurance contracts in question.      The district court found that

because down payments had not been made as represented, the sales

prices were lower than represented and thus the loan-to-value

ratios exceeded the specified limit.       Therefore, the court held,

certain conditions precedent had not been met, and THA was not

insured for default on the loans in question.      THA's claims were

dismissed with prejudice, and this appeal followed.

                            II. ANALYSIS

A. SUBJECT MATTER JURISDICTION

        For the first time on appeal, THA argues that the district

                                  5
court did not have jurisdiction to decide the present case. Before

this Court can reach the merits of an appeal, we must determine

that the district court had subject matter jurisdiction over the

case.   Ziegler v. Champion Mortgage Co., 913 F.2d 228, 229 (5th

Cir.1990).   This action was removed to federal district court on

the basis of federal diversity jurisdiction under 28 U.S.C. § 1332.

In an action where a state is a party, there can be no federal

jurisdiction on the basis of diversity of citizenship because a

state is not a citizen for purposes of diversity jurisdiction.

Likewise, state agencies that are the alter ego of the state are

not citizens for the purposes of diversity jurisdiction.       "On the

other hand, if the agency is an independent one, separate and

distinct from the state, the district court can properly proceed to

the merits." Tradigrain, Inc. v. Mississippi State Port Authority,

701 F.2d 1131, 1132 (5th Cir.1983).        THA now contends that it is

the alter ego of the State of Texas.

          In determining whether the agency is an alter ego of the
     state or an independent agency, the essential question is
     whether the state is the real party in interest in the
     lawsuit. The resolution of this question is a matter of state
     law.

                       *   *   *       *    *   *

          If the agency's status is unclear, the court must look to
     any and all available sources for guidance. The court should
     consider whether the agency has been granted the right to hold
     and use property, whether it has the express authority to sue
     and be sued in its corporate name, the extent of its
     independent management authority, and "a factor that subsumes
     all others," the treatment of the agency by the state courts.
     When examining the extent of the agency's independent
     management authority, the court should look to whether the
     agency has the power to make its own hiring decisions, the
     power to enter into its own contracts, and the power to engage
     its own counsel. When examining the treatment of the agency

                                   6
     by the state courts, this court has taken note of the fact
     that the state has sued the agency in its own courts, and of
     a state court holding that the statute of limitations, which
     did not normally run against the state itself, ran against the
     agency. Other relevant factors might include: (1) whether
     the state is responsible for the agency's debt; (2) whether
     the agency is primarily concerned with local, as opposed to
     statewide problems; and (3) the degree of general financial
     autonomy of the agency. The source material for the court's
     analysis is found in the state's constitutional, statutory and
     decisional law.

          In a typical situation, some factors will suggest that
     the agency is a "citizen" while others will just as strongly
     suggest that the agency is merely an alter ego of the state.
     The court must balance these against each other in reaching
     its conclusion. It must never, however, lose sight of the
     primary question involved:   whether the state is the real
     party in interest in the lawsuit nominally brought [by or]
     against the agency.

Tradigrain, 701 F.2d at 1132-33 (internal citations omitted).

         We note that there is nothing in the Constitution of the

State of Texas or the State's case-law which directly addresses

THA's status.    Therefore, we begin our inquiry with the agency's

enabling    statute.    Tex.Rev.Civ.Stat.Ann.,   Art.   1269l-6   (West

1987)3.    THA concedes that under the enabling statute in effect at

the time of removal to federal court it had the right to hold and

     3
      The Texas Housing Agency Act, Tex.Rev.Civ.Stat.Ann., Art.
1269l-6 (West 1987), expired September 1, 1991, by its own terms.
The Texas Housing Agency and the Texas Department of Community
Affairs were abolished and their powers were transferred to the
Texas Department of Housing and Community Affairs by Tex. Acts
1991, 72nd Leg., ch. 762, § 1, and the statutes that governed the
abolished agencies were amended and transferred to a new statute,
Tex.Civ.Stat.Ann., Art. 4413(501) (West 1992), effective
September 1, 1991. This statute was repealed by Tex. Acts 1993,
73rd Leg., ch. 268, § 46(1) and its provisions were amended and
recodified at Tex.Gov't Code Ann. § 2306.001, et seq. (West
Supp.1995), effective September 1, 1993. However, our
determination of THA's status for purposes of removal
jurisdiction depends on the enabling statute that was in effect
at the time the action was commenced and removed. See Jackson v.
Allen, 132 U.S. 27, 10 S. Ct. 9, 33 L. Ed. 249 (1889).

                                  7
use property, and the right to sue and be sued in its corporate

name, and that the State of Texas was not responsible for the

agency's debts.     In addition, Verex points out that THA was

responsible for issuing its own bonds, preparing its own budget,

and handling its own finances.       THA also had the power to make

contracts, adopt by-laws, maintain offices, and make employment

decisions.   Thus, under the enabling statute, THA was granted some

of the generally recognized powers of an independent agency.    See

Tradigrain, 701 F.2d at 1133.

     Nevertheless, THA argues that it should be considered the

alter ego of the state.   In support of this contention, THA points

out that the agency's directors are appointed by the governor and

that the director chosen to serve as chairman does so only at the

governor's pleasure.   In addition, the agency is required to file

its annual budget and an audit of its books and accounts with the

governor and the state legislature each fiscal year.   The enabling

statute also exempts the income and property of the agency from

taxation by the state and all public agencies.    However, THA fails

to explain how these provision make it the alter ego of the State

rather than an independent agency.    THA also points out that it is

authorized to request and accept appropriations of the state

legislature. However, it is clear that under the enabling statute,

the legislature is not required to make such appropriations, nor is

the state treasury required to provide funds for the agency's debts

                                 8
or operations.4

      Finally, THA claims that the language of the enabling statute

creating the Texas Housing Agency clearly indicates that it is the

alter ego of the State.     Section 3(a) of Art. 1269l-6 provides

      There is hereby created and established a public and official
      governmental agency of the state, to be known as the Texas
      Housing Agency, and the state shall act by and through the
      agency in carrying out all the powers and duties conferred by
      this Act. The exercise by the agency of all powers and duties
      conferred by this Act shall constitute and be deemed and held
      to be an essential public and official governmental function
      and purpose of the state, acting by and through the agency, in
      promoting the general welfare and prosperity of the state and
      all its citizens.

This provision, however, merely serves to confirm what is conceded,

that THA was created by the State of Texas to exercise its

authority and discretion in performing certain functions on behalf

of the state.     THA argues that such language was crucial to our

holding in Tradigrain that the Mississippi State Port Authority was

the alter ego of the State of Mississippi.       However, the language

of   the   Mississippi   statute   also   indicated   the   legislature's

intention that the port authority enjoy sovereign immunity except

to the extent of liability insurance carried.          In addition, the

      4
      THA also argues that it "has the authority to issue bonds
that are the general obligation of the State." Art. 1269l-6, §
21(a). However, THA does not cite § 48 of the same enabling
statute which provides that "Subsection (a) of Section 21 of this
Act, to the extent it authorizes the issuance of general
obligation bonds, takes effect if and when the Texas Constitution
is amended to permit the issuance of such bonds as contemplated
by that provision of this Act." THA does not address if or when
the Texas Constitution was amended to make § 21(a) effective, but
acknowledges that THA is limited to issuing bonds permitted by
the Constitution of the State of Texas. Because we have not
located any provision of the Texas Constitution allowing THA to
issue general obligation bonds, we will not consider this
apparently contingent agency power.

                                    9
statute provided that the title to any property acquired by the

port authority vested in the State of Mississippi and that the

bonds issued to provide funds for the port authority became the

general obligations of the State of Mississippi.

     THA's argument, essentially, focusses on the aspects of its

creation and existence that make it an agency of the State of

Texas.    Although there are, necessarily, many ties between THA and

the State, this would be true with any state created agency no

matter how independent.        One factor that weighs in favor of a

finding that THA is the alter ego of the state is that the agency

was concerned    with    a   problem   that   was   statewide   rather   than

primarily local.        However, the fact that the agency had the

authority to hold and use property, the authority to sue and be

sued in its corporate name, the power to enter into its own

contracts, and the power to make its own hiring decisions, and the

fact that it managed its own finances and was responsible for its

own debts weigh in favor of finding that THA is an independent

agency.     Given THA's relative independence in controlling its

operations and managing its finances, we hold that the state was

not the real party in interest, and that THA is indeed a citizen

for purposes of our diversity jurisdiction.

B. CONDITIONS PRECEDENT UNDER TEXAS LAW

     Because the district court's jurisdiction in this case was

based on diversity of citizenship, it correctly held that it was

bound to apply the substantive law of the State of Texas under Erie

R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S. Ct. 817, 822, 82 L. Ed.
10
1188 (1938).     In ascertaining the law of the forum state, a federal

court "is bound to apply the law as interpreted by the state's

highest court."     Ladue v. Chevron U.S.A., Inc., 920 F.2d 272, 274

(5th Cir.1991).     However, a decision by an intermediate appellate

state court "is a datum for ascertaining state law which is not to

be disregarded by a federal court unless it is convinced by other

persuasive data that the highest court of the state would decide

otherwise."     West v. American Tel. & Tel. Co., 311 U.S. 223, 237,

61 S. Ct. 179, 183, 85 L. Ed. 139 (1940).

         To   succeed   with    the   affirmative   defense   of   conditions

precedent, the defendant must establish (1) that the contract

creates a condition precedent, and (2) that the condition precedent

was not performed.      Conditions precedent are those acts or events

that must occur before a contract arises or before performance

under an existing contract is required. In other words, conditions

precedent may "relate either to the formation of contracts or to

liability under them."         Hohenberg Bros. Co. v. George E. Gibbons &

Co., 537 S.W.2d 1, 3 (Tex.1976).            "When a promise is subject to a

condition precedent, there is no liability or obligation on the

promisor and there can be no breach of the contract by him until

and unless such condition or contingency is performed or occurs."

Reinert v. Lawson, 113 S.W.2d 293, 294 (Tex.Civ.App.—Waco, 1938, no

writ).

     THA contends that the contracts for insurance in question did

not contain conditions precedent, and, in the alternative, that the

district court's finding that the conditions weren't met is clearly

                                       11
erroneous.   We will address these arguments in order.

          In order to determine whether a condition precedent
     exists, the intention of the parties must be ascertained; and
     that can be done only by looking at the entire contract. In
     order to make performance specifically conditional, a term
     such as "if", "provided that", "on condition that", or some
     similar phrase of conditional language must normally be
     included.   If no such language is used, the terms will be
     construed as a covenant in order to prevent a forfeiture.
     While there is no requirement that such phrases be utilized,
     their absence is probative of the parties['] intention that a
     promise be made, rather than a condition imposed.

          In construing a contract, forfeiture by finding a
     condition precedent is to be avoided when another reasonable
     reading of the contract is possible. When the intent of the
     parties is doubtful or when a condition would impose an absurd
     or impossible result, the agreement will be interpreted as
     creating a covenant rather than a condition. Because of their
     harshness in operation, conditions are not favorites of the
     law.

Criswell v. European Crossroads Shopping Ctr., Ltd., 792 S.W.2d
945, 948 (Tex.1990) (internal citations omitted).     Contracts for

insurance are generally subject to the same rules of construction

as are other contracts and will be enforced as written where the

wording used can only be given one reasonable interpretation.

Ambiguous insurance contracts, however, will be interpreted against

the insurer.   National Union Fire Ins. Co. v. Hudson Energy Co.,

Inc., 811 S.W.2d 552, 555 (Tex.1991).

     The master policies issued by Verex to each lender, and the

commitments for insurance and certificates of insurance issued on

the individual loans make up the contracts between THA and Verex.5

The master policies begin with the language "Verex ... agrees to

     5
      The district court   held that these documents taken together
constituted the relevant   contracts and that the master policies
and commitments were not   merged into the certificates of
insurance. THA does not    challenge this holding on appeal.

                                 12
pay ... any loss by reason of the default in payments by a borrower

... subject to the following conditions...."                         Among the listed

conditions were the following:

1. APPLICATION AND COMMITMENT—The insured shall furnish the Company
     with an Application in connection with each mortgage loan for
     which coverage under this policy is desired.... Approval of
     the Application ... shall be in the form of a Commitment
     prescribing the terms of the coverage.

2. NOTICE AND CERTIFICATE—Within five (5) days after consummation
     of the mortgage loan transaction the insured shall forward
     notice thereof to the Company ... and the Company shall
     immediately issue and forward a Certificate to the insured,
     binding the Company according to the terms and conditions of
     the Commitment and of this policy.

                          *      *     *        *     *      *

4. TERMINATION BY COMPANY—The Company shall remain liable under
     this policy with respect to such Commitments or Certificates
     issued to the insured, as long as the terms and conditions
     herein contained are fully complied with.

      The commitments issued on each of the mortgages state:

      your application has been examined, and the Company hereby
      issues to you a Commitment for Insurance and tenders you a
      Certificate of Insurance for the loan herein described
      pursuant to the terms and conditions of your Verex Assurance,
      Inc. Master Policy, identified below, under the following
      terms and conditions....

Beneath     this   language    on    each        of    the       commitments   appeared

information identifying the loan and the terms of the coverage.

The certificates of insurance contained less information, but

similarly identified the insured loan and indicated that the

coverage was "subject to the terms and conditions of the Master

Policy specified below."

      The    specific   "terms       and        conditions"        Verex   claims   are

conditions precedent to coverage under the contracts for insurance

are   the    sales    price,     appraised            value,       and   the   required

                                           13
loan-to-value ratio.       Although there are no reported opinions of

the Texas     Supreme    Court   which   address    precisely    the    type    of

contract in question, at least one Texas Court of Appeals has held

that these terms and conditions did constitute conditions precedent

to coverage.    In Life Insurance Company of the Southwest v. Verex

Assurance, Inc.,6 the court held that the sales price, loan amount,

and loan-to-value ratio were preconditions to coverage under the

insurance policy.       THA argues, however, that we should not follow

this intermediate appellate court decision because it is clear that

the Texas Supreme Court would decide differently.               See Ladue, 920
F.2d 272.    We disagree.

         The Texas Supreme Court has said that "[i]n order to make

performance    specifically      conditional,      a   term   such     as   "if',

"provided that', "on condition that', or some similar phrase of

conditional language must normally be included."                Criswell, 792
S.W.2d at 948.      In the present case, the master policy clearly

indicated that Verex intended to be bound only "according to the

terms and conditions of the Commitment and of this policy."                    The

critical information regarding the value of the property and the

loan-to-value ratio was printed on the commitment immediately below

language that stated that the commitment was issued "under the

following terms and conditions."          Although these phrases do not

mirror those specifically listed in Criswell, we believe they do

constitute the type of conditional language the Texas Supreme Court

would find sufficient to create a condition precedent. Indeed, the

     6
      810 S.W.2d 416 (Tex.Ct.App.—Dallas, 1991, no writ).

                                     14
conditional    language    employed   by   Verex   is     susceptible    of   no

reasonable construction other than that the parties intended that

the policy stand or fall on the literal truth or falsity of the

described terms. Lane v. Travelers Indem. Co., 391 S.W.2d 399, 402

(Tex.1965).     Therefore, we will follow the holding of the Texas

Court of Appeals in Life Insurance Co. of the Southwest and hold

that the sales prices, appraised values, and loan-to-value ratios

specified in the contracts for insurance in the present case

constituted conditions precedent.

      THA contends, however, that even if the specified terms

constituted conditions precedent, the district court's finding that

they failed is clearly erroneous.            With regard to the Anderson

loan, the district court found that the Andersons made no down

payment to the seller, and that as a result the sales price was

less than specified.      The fact that the sales price was less than

specified also caused the actual loan-to-value ratio to exceed 95%.

With regard to the Newhouse loan, the district court found that the

down payment made to the seller was exaggerated by $1,050.00, and

that as a result the sales price was lower than specified.              As with

the Anderson loan, the district court found that the loan-to-value

ratio exceeded 95%.

     Jimmy    Anderson    testified   that    he   made    no   down   payment.

Theodore Newhouse testified that he paid only $250 as a down

payment.     In addition to the loan amounts, the respective sellers

were to receive down payments of $1500 and $1300 as a part of the

specified sales price.      Nothing in the record indicates that the

                                      15
respective sellers received these down payments from or on behalf

of Anderson or Newhouse.         On this record, the district court was

justified in concluding that the respective sellers did not in fact

receive the specified sales price, and that because the real sales

price was lower than represented, the actual loan-to-value ratio

was greater than the 95% specified.               These findings show the

failure of conditions precedent, and we cannot say that they are

clearly erroneous. Thus, the district court's judgment with regard

to   THA's   claims   on   the   Anderson   and   Newhouse    loans   must   be

affirmed.

      With regard to the Abbott loan, the district court found that

the borrowers made a down payment of only $3,192.50.             THA contends

that this finding has no support in the record.              According to the

district court's opinion, this amount was revealed by Verex's

investigation. However, it is not apparent from the record how the

district court arrived at this figure.             Indeed, on appeal Verex

offers no support for the district court's calculation. Finding no

support in the record, we agree with THA that this finding must be

deemed clearly erroneous.

       Verex contends, however, that a portion of the Abbotts' down

payment was borrowed from Chris Abbott's employer, and that the

sales price and loan-to-value ratio conditions precedent failed as

a result.     We may assume without finding that a portion of the

Abbotts' down payment was borrowed.               Verex's argument assumes

rather than explains a logical or definitional relationship between

the source of the borrower's down payment and the sales price

                                      16
received by the seller.       On the other hand, THA contends, without

dispute, that the seller in this transaction in fact received the

represented down payment, whether or not a portion of that amount

was borrowed.

     The   evidence    regarding      the   Anderson   and   Newhouse   loans

supported a finding that the required down payments were not made

to the sellers from any source.             Rather, the evidence indicated

that the sellers accepted less than the specified sales price as a

result of the reduced or nonexistent down payments.            This evidence

supported the conclusion that the sales price and loan-to-value

ratio conditions precedent failed as to the insurance coverage on

those loans. The same conclusion does not follow from the evidence

regarding the Abbott loan.

     It apparently is undisputed that the seller in the Abbott

transaction actually received $65,950.00, the specified sales price

for the subject property.       The fact that Chris Abbott obtained a

portion of the required down payment by borrowing it from his

employer does not change that fact so as to somehow create a

failure of the sales price or loan-to-value ratio conditions

precedent.      In other words, the source of the borrower's down

payment    is   not   an   inherent   element    of    the   sales   price   or

loan-to-value ratio conditions precedent expressed in the insurance

policy.    The loan application signed by the Abbotts, and thus the

documents provided to Verex, contained a representation that the

source of the down payment was to be "cash assets" of the borrowers

and that no part of the down payment was borrowed.            This, however,

                                      17
is not sufficient to make the source of the borrowers' down payment

a condition precedent to the insurance coverage.      Therefore, the

district court's judgment with regard to the Abbott loan cannot be

affirmed on this basis.

C. MUTUAL MISTAKE

      As an alternative basis for affirming the district court's

judgment, Verex urges on appeal the affirmative defense of mutual

mistake.   "Ordinarily, a mutual mistake sufficient to justify

rescission exists when both of the parties are laboring under the

same misconception as to a common fact, as ... when the parties

contract on the assumption of a matter material to the contract but

not expressed in it, and their common assumption is incorrect."

Volpe v. Schlobohm, 614 S.W.2d 615, 617-18 (Tex.Civ.App.—Texarkana,

1981, no writ).   "The mistake must relate to the subject matter of

the contract involved and not to a matter that is collateral or

incidental to that contract."   Durham v. Uvalde Rock Asphalt Co.,

599 S.W.2d 866, 870 (Tex.Civ.App.—San Antonio, 1980, no writ).

     Application of the defense of mutual mistake in this case is

complicated by the fact that two distinct contracts were involved

in each transaction:    the contract between the borrower and the

lender and the contract between the lender, and its assigns, and

the insurer Verex.   See Durham, 599 S.W.2d at 870.   We do not read

Texas law to rule out application of the defense in this context.

However, the relevant inquiry must be framed very carefully.    With

regard to the Abbott loan in particular, the question must be

whether the borrowers' representations in their loan application

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that the down payment was to come from "cash assets" and that no

part of the down payment was borrowed became mutual incorrect

assumptions material to the substance of the contract for insurance

between Curry and Verex.

     Because of its disposition, the district court did not address

this alternative defense and, therefore, did not make sufficient

findings of fact to allow this Court to conduct an appropriate

review.   Thus, with regard to Verex's liability on the Abbott loan

a remand is required.

                           III. CONCLUSION

     For the foregoing reasons, the judgment of the district court

is AFFIRMED as to THA's claims regarding the Anderson and Newhouse

loans, VACATED as to THA's claims regarding the Abbott loan, and

REMANDED for further proceedings consistent with this opinion.

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