Hurt v. Fed National Mtge, et al

United States Court of Appeals
Fifth Circuit
F I L E D
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
_________________________

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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 Federal Na-
tional 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 af-
firmed the bankruptcy court’s decision that
Fannie Mae was entitled to a claim against
Homeowners’ bankruptcy estate because Fan-
nie 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, 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 expand-
ing into the secondary market for title I loans,
Fannie Mae entered into a Mortgage Selling
and Servicing Contract (“MSSC”) with Home-
owners, pursuant to which Fannie Mae ulti-
mately purchased $243 million of Homeown-
ers’ 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 of the terms and
conditions under which Fannie Mae would la-
ter 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 sec-
tion 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 enforce-
able. 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 vari-
ous remedies in the event the warranties are
breached. Section IV.B. provides that Fannie
Mae has the right to require the lender to re-
purchase a mortgage if any warranty made by
the lender is untrue. This provision is non-
exclusive, because it provides that Fannie Mae
can “also enforce any other available remedy.”
Section IV.C. states that an additional, non-
exclusive remedy is the termination of the con-
tract. Finally, section X provides that respon-
sibilities and liabilities of the lender survive
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 bankruptcy

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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 fur-
ther offset by credits for the value of Depart-
ment of Housing and Urban Development in-
surance 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 exer-
cise its repurchase rights after it already has
terminated the contract. Citing Denison Mat-
tress 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 con-
tract that Fannie Mae cannot seek to obtain if
it also shirks its obligations under the termi-
nated contract. For support, the trustee also
points to section IX of the MSSC, which pro-
vides 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 of law, as is the determina-
tion 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 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 section X, the breach of
warranty must be a “[r]esponsibility or liabili-
t[y] of the lender that exist[s] before the termi-
nation of the Contract.” Texas law reads the
term “liability” broadly to include “almost ev-
ery character of hazard or responsibility, ab-
solute, 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 pos-
sibility that Fannie Mae would require Home-
owners 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.SSTyler 1985, no writ); see
also Reconstruction Fin. Corp. v. Gossett, 111
S.W.2d 1066, 1073-74 (Tex. 1938).

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remedy before first exercising its right to a
non-exclusive, alternative remedySSthe termi-
nation of the contractSSneither extinguishes
Fannie Mae’s rights to the additional repur-
chase remedy nor 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 re-
purchase right is enforceable, the bankruptcy
court erred in awarding damages for this
breach of warranty, because there was no evi-
dence 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 re-
gard 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 summary document
into evidence, even though it contained
hearsay impressions of Fannie 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 (5t h 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” loans in 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 of the warranties applicable to loans sold
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 is-
sue was whether a party that had an indemnity
obligation while servicing a loan under a contract
with an identically-worded section IX was required
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.

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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 (5th Cir. 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 dam-
ages 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 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
in the amount claimed. MCI, 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 estimated Fannie Mae’s future
damages.
V.
Homeowners contends that 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 Texas law. See Gereb v. Smith-Jaye, 70
S.W.3d 272, 273 (Tex. App.SSSan Antonio
2002, no writ). Nevertheless, a decision to
award fees is within the sound discretion of the
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
Homeowners lost 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.

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