Commonwealth Mortg. Corp. v. First Nationwide Bank

• Decision Date: 30 May 1989
• Docket Number: No. 88-1212,88-1212
• Citation: 873 F.2d 859
• Parties: COMMONWEALTH MORTGAGE CORP., Plaintiff-Counter Defendant-Appellant, v. FIRST NATIONWIDE BANK, Defendant-Counter Plaintiff-Third Party Plaintiff-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 859

873 F.2d 859

COMMONWEALTH MORTGAGE CORP., Plaintiff-Counter Defendant-Appellant, v. FIRST NATIONWIDE BANK, Defendant-Counter Plaintiff-Third

Party Plaintiff-Appellee.

No. 88-1212.

United States Court of Appeals, Fifth Circuit.

May 30, 1989.

Larry M. Lesh, David F. Blanke, Cynthia Keely Timms, Dallas, Tex., for Commonwealth Mortg. Corp.

Charles A. Gall, John C. Eichman, Theodore W. Daniel, Dallas, Tex., for defendant-counter plaintiff-third party plaintiff-appellee.

Patrick F. McManemin, Anissa D. White, Dallas, Tex., for third party defendant-appellant.

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

Before WILLIAMS, HIGGINBOTHAM and SMITH, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Commonwealth Mortgage Corporation sold a construction loan made to Bali Industries, Inc. to Saint Louis Federal Savings & Loan Association. ¹ It turns out that there was a landfill beneath the surface of the land on which Bali was to build a condominium complex. A suit and trial followed. A jury returned a verdict in favor of Saint Louis Federal and against Commonwealth for breach of contract, fraud, and violations of the Texas Deceptive Trade Practices Act. The district court entered judgment requiring Commonwealth to repurchase the loan and awarding additional damages pursuant to the DTPA. Commonwealth appeals, challenging the submission of certain questions to the jury and the jury's failure to accept two of its defenses. Commonwealth also appeals the trial court's failure to deliver several requested jury instructions and its decision to award DTPA additional damages. We reverse the award of additional damages, but otherwise affirm the district court's judgment in all respects.

I

From late 1982 through early 1983, Saint Louis Federal purchased fifteen construction loans from Commonwealth. In each transaction, Commonwealth provided Saint Louis Federal with a loan package, containing information about the project to be financed. Officers of the two companies would visit the site of the proposed development. Saint Louis Federal did not meet with the borrowers, but analyzed each transaction based on the information provided by Commonwealth. When Saint Louis Federal agreed to purchase a loan, the parties would sign a Commitment Letter. Later, when the loan was actually sold, the parties would execute a Whole Loan Sale and Servicing Agreement. After closing, Commonwealth serviced the loans, periodically reporting to Saint Louis Federal the status of each project and requesting reimbursement for funds disbursed under the various loan agreements.

The Bali loan, the concern of this lawsuit, was made to Bali Industries, Inc. The loan was guaranteed by Faye Hiller, Bali's owner, and by another entity she owned, 4515 Corporation. The Bali loan was to finance construction of a 226-unit condominium complex on a 19-acre tract of land near White Rock Lake in Dallas. Saint Louis Federal signed a Commitment Letter on December 2, 1982. The parties executed a sale and servicing agreement on December 6. A new Commitment Letter was executed on December 23, reflecting minor changes in the transaction. Saint Louis Federal began funding the loan on December 15.

The loan agreement provided for a total loan to Bali of $13,355,200, allocated to various purposes. Of the total, $1,335,520 was designated as "Contingency and Other Allocation," a special fund designed "to meet such other costs and expenses incurred in connection with the construction of the improvements as Lender shall approve." However, disbursement from this contingency fund was conditioned on the borrower obtaining an unconditional letter of credit or other collateral satisfactory to the lender to cover the requested amount.

The Commitment Letter executed by Saint Louis Federal and Commonwealth contained several representations which served as the basis for Saint Louis Federal's breach of warranty claims at trial. The Whole Loan Sale and Servicing Agreement included a repurchase provision:

Seller, upon Buyer's request, agrees to repurchase any mortgage covered by this agreement within 18 months after date of Buyer's remittance if any misstatement of material fact, intentional or otherwise, is disclosed by actual inspection by Buyer or its representative, or otherwise, for an amount equal to its then unpaid principal based on the same percentage rate at which it originally was purchased, plus accrued interest and costs incurred by Buyer....

This repurchase provision formed the basis for Saint Louis Federal's breach of contract claim.

In addition to the information contained in the loan package provided by Commonwealth, the parties discussed the Bali loan on two occasions. In November 1982, Steve Williams, Commonwealth's Senior Vice President of Loan Production, met with two Saint Louis Federal representatives, Gil Wolf and Bob Rowlinson, and flew with them over the site. On December 2, the day before the first Commitment Letter was signed, Williams and Ralph Senter, an Executive Vice President at Commonwealth, flew to Saint Louis for a second meeting with Saint Louis Federal concerning the Bali loan.

At trial, Saint Louis Federal complained that Commonwealth misled it about the condition of the property, the background of Ms. Hiller, and the use of the loan proceeds. Ms. Hiller received a report on the property in October of 1982 indicating a serious landfill problem with the site:

Explosive Gases

Most of this site is underlain by variable depths of trash and debris. This fill is apparently burning in one area of the site. Construction over such fills involves considerable risks and is not advised.

Settlements in the fills can affect not only structures, but also area paving.

Such fills generate combustible gases. A summary of explosimeter readings made in the borings is included in the Appendix. All readings were positive except for number 11. These gases can accumulate under structures, clay layers, and even paving.

The recommendations provided below are presented for use if construction proceeds. Such systems have performed in a reasonably satisfactory manner on similar sites; however, the debris at these sites was not burning.

The report recommended steps to reduce problems should the developer proceed. Ms. Hiller testified that she read portions of the report to Steve Williams at Commonwealth as soon as she received it, and gave him a copy in November of 1982. Thus, the jury was free to conclude that Williams knew of the landfill problem before the first meeting with Saint Louis Federal.

Bob Rowlinson's testimony indicated that Saint Louis Federal knew there was some fill in the site of a "minor nature" before closing. Gil Wolf's loan submission sheet, prepared for Saint Louis Federal after the first meeting with Commonwealth, states that "the back part [of the property] has some filled ground but certainly buildable." Wolf testified in his deposition that it was "the Commonwealth people" who said the project was "buildable," but he could not recall precisely who made the statement. Ralph Senter admitted that at the second meeting in Saint Louis, he and Williams told Saint Louis Federal that the "location was excellent" and that the project was "viable" in an economic sense, though he could not remember using the word "buildable." However, Senter admitted that "if a project wasn't buildable, it wouldn't be viable." Senter also indicated that he and Williams "went over [Saint Louis Federal's] site inspection with them" and agreed with it. Williams testified only that Commonwealth had told Saint Louis Federal the project was "feasible."

Rowlinson and Wolf became concerned about Hiller's background and experience as a developer, and asked Williams to provide some documentation of her abilities. Williams wrote a letter on December 12, 1982, stating, "I have known Faye for several years prior to our dealing with her on project construction." The letter then gave a positive assessment of Hiller's abilities as a developer. Williams also attached a copy of Ms. Hiller's resume to the letter. According to the resume, Hiller had studied Business and Finance for two years at the University of Hawaii and, from "1976 to present," had been the owner and general manager of 4515 Corporation. The resume contained a list entitled "Construction," which included several multi-unit apartment complexes in the Dallas area.

Williams admitted that he had met Hiller in the fall of 1981, only a few months before Commonwealth first loaned her money. Hiller testified that she had never attended the University of Hawaii and had included that item on her resume because Williams suggested "that if we showed some college ... it would look a lot better." She also testified that 4515 Corporation was not actually incorporated until 1980. While Hiller had owned another corporation called Southwest Industries since 1976, that company had gone bankrupt in 1981. Of the "construction" projects listed on her resume, most involved rehabilitation of previously constructed apartment complexes. Hiller had never attempted a project of the same magnitude as the one proposed to Saint Louis Federal. In fact, her only multifamily construction projects were still being constructed under different loans from Commonwealth. One of her Commonwealth loans was declared in default the month after Williams wrote to Saint Louis Federal. Hiller testified at trial that she had told Commonwealth about the apartments she rehabilitated and "explained to them the years" she had been in construction.

Saint Louis Federal's third area of complaint involved the use of $50,000 of the loan proceeds. Because of the landfill problem, Hiller obtained a $50,000 reduction in the price of the property. Williams and Hiller decided that the money saved should be placed in an escrow account for Hiller's use in paying the closing costs on other loans provided by Commonwealth. Williams...