Emc Mortg. Corp. v. Davis

• Decision Date: 27 June 2005
• Docket Number: No. 03-04-00260-CV.,03-04-00260-CV.
• Citation: 167 S.W.3d 406
• Parties: EMC MORTGAGE CORPORATION, Appellant, v. Fred E. DAVIS and Sherry A. Davis, Appellees.
• Court: Texas Supreme Court

167 S.W.3d 406

EMC MORTGAGE CORPORATION, Appellant, v. Fred E. DAVIS and Sherry A. Davis, Appellees.

No. 03-04-00260-CV.

Court of Appeals of Texas, Austin.

May 12, 2005.

Rehearing Overruled June 27, 2005.

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Marcy Hogan Greer, Stacy L. Keaton, Fulbright & Jaworski L.L.P., Austin, TX, Michael A. Swartzendruber, Fulbright & Jaworski L.L.P., Dallas, TX, Kelly Harvey, Kelly Harvey, P.C., Houston, TX, for appellant.

Jon Michael Smith, Kincaid, Horton & Smith, Joe K. Longley, Longley & Maxwell, L.L.P., Austin, TX, for appellees.

Before Chief Justice LAW, Justices PATTERSON and PURYEAR.

OPINION

W. KENNETH LAW, Chief Justice.

EMC Mortgage Corporation appeals from the district court's judgment after a jury trial awarding Fred E. Davis and Sherry A. Davis damages and attorney's fees based on EMC's anticipatory repudiation of a loan agreement between the Davises and a previous owner of a promissory note. The Davises entered into an agreement to purchase a home. The promissory note specified that the agreement was subject to a balloon payment but did not specify the amount or due date of the balloon payment. However, the balloon-payment obligation was specified in various disclosure notices signed at the same time as the note. When the Davises sought to refinance their debt and pay off the loan, EMC took the position that the Davises were not entitled to pay off the loan for the amount listed as a balloon payment because the note did not specify the terms of a balloon-payment obligation and because the balloon payment-obligation described in the various disclosure agreements would have resulted in a windfall for the Davises.

Subsequently, the Davises refinanced their home, paid off their loan with EMC for the amount requested by EMC, and sued EMC for anticipatory repudiation of the loan. The district court denied cross motions for summary judgment. In a letter to counsel explaining the ruling, the judge concluded that the agreement between the parties was ambiguous and the note was internally inconsistent. The jury found that the agreement was subject to a balloon-payment obligation as set forth on the face of the note and described in the disclosure agreements and that EMC repudiated the loan agreement and awarded the Davises $182,954.74 in damages and $91,400 in attorney's fees. We will affirm the decision of the district court.

FACTUAL AND PROCEDURAL BACKGROUND

In 1989, the Davises bought a foreclosed home in Austin, Texas, from ICA Mortgage Corporation for $435,000 of which $390,500 was financed. The Davises applied for and obtained a loan from Imperial Savings for $390,500. The loan was transferred from Imperial Savings to several subsequent holders, and eventually the loan was transferred to EMC on October 1, 2001.

Under the terms of the note, the Davises agreed to pay $390,500 at an interest rate of 10% per year and agreed to make monthly payments of $3,426.92 starting on July 1, 1989. Also, under the terms of the note, the Davises could pay the loan back early without any penalty. The note further states that if the Davises still owed money on June 1, 2019, referred to as the "maturity date," then they would have to pay any outstanding amount owed on that date.

At the top of the note, in capital letters centered in the document, is the following language: "THE TERMS OF THIS NOTE CONTAIN PROVISIONS FOR A BALLOON PAYMENT AT MATURITY." The note does not specify the amount or the due date of the balloon payment.

ICA Mortgage Corporation's counterproposal to the original earnest money contract, which was incorporated and made part of the original earnest money contract, states that the finance payments were based on a thirty-year amortization period with all principal and accrued interest due on or before fifteen years after the note was executed. In addition, the residential loan application filled out by the Davises also describes a thirty-year amortization period and a fifteen-year term. Further, Imperial Savings's instructions that were given to the closing agent specified that a balloon-payment disclosure was required for the closing of the loan.

In addition to the note, the Davises signed the following items at the same time the note was executed: (1) a deed of trust; (2) a balloon-payment disclosure, stating that the Davises had received notice of the balloon-payment obligation; and (3) a regulation-Z disclosure, a federally required truth-in-lending disclosure.

Both the balloon-payment disclosure and the regulation-Z disclosure state that the loan requires 179 payments of $3,426.92 and a final payment of $140,296.42, which would be due in June 2004. In addition, the regulation-Z disclosure states that the total amount that will have been paid after all payments were made would be $753,715.10. When the sum of 179 payments of $3426.92 is added to the final payment of $140,296.42, the total is $753,715.10.

During the years of the agreement, the Davises had received mortgage statements indicating that they owed a principal amount on the loan that was well over $300,000. Over the years, the note was transferred several times to different lenders. However, prior to EMC acquiring the note, none of the lenders sought to alter the terms of the agreement as understood by the Davises or took the position that the agreement was not subject to a balloon payment of $140,296.42 due in June 2004. Wanting confirmation of the interest rate and the balloon-payment provision of the agreement, the Davises wrote to EMC's predecessor, Bank of America Mortgage. In response to the Davises' request, Bank of America Mortgage sent a letter to the Davises confirming that the interest rate for the loan was 10% and that there was a balloon-payment obligation of $140,296.42 that would be due on June 1, 2004. When EMC became the holder of the note, EMC refused to allow the Davises to pay off the note by making monthly payments until June 2004 and then paying $140,296.42 as a balloon payment. Rather, EMC took the position that in June 2004 the Davises would still owe $318,899.09.

In July 2002, Mr. Davis contacted EMC asking for a final, early payoff amount because the Davises wanted to refinance their home with another lender. EMC informed Mr. Davis that the final payoff amount would be $337,828.85. The Davises paid the balance due based upon the amount specified by EMC and refinanced their loan.

The Davises then sued EMC claiming that EMC had breached the contract, that EMC's conduct constituted statutory fraud, and that refusing to release the lien for the amount listed in the disclosure was an anticipatory repudiation of the loan by EMC. Further, the Davises sought a declaratory judgment stating that the contract required a balloon payment of $140,296.42 that was due in June 2004.

Both parties moved for summary judgment; the Davises claimed that the note was ambiguous, but EMC argued that the note was not ambiguous. The district court denied EMC's motion for summary judgment and granted the Davises' motion in part, finding that the contract was ambiguous. The case proceeded to trial on the Davises' allegation that EMC had repudiated the loan agreement.

At trial, an accountant, Tom Glass, testified that, as a result of paying the amount specified by EMC, the Davises had suffered financial damages in the amount of $182,954.74. In making this calculation, Glass testified that he considered all the monthly payments the Davises had paid over the years, the balloon payment, and how much EMC benefitted in unearned interest by the Davises paying the loan off early. First, Glass claimed that multiplying the monthly payment listed in the note and the disclosures, $3,426.92, by the 179 payments listed in the disclosures and adding the balloon payment listed in both disclosures, $140,296.42, produces a total of $753,715.10, which is the amount listed in the regulation-Z disclosure as the total of all payments. Next, Glass testified that because the Davises paid 159 monthly payments of $3,426.92 and a pay-off amount of $337,371.70 after refinancing (a total of $882,251.48), they overpaid EMC by $128,536.88. Finally, Glass testified that, because the Davises paid off their loan approximately two years early, EMC was overcompensated in the payoff by $54,417.86 in unearned interest. The unearned interest and the overpayment together provide the $182,954.74 damage figure.

On cross-examination, Glass testified that if the $390,500 principal is amortized over thirty years, then the Davises would still owe $333,666.04 as principal even after making 159 payments. Glass also testified that, at the time the note was fully paid off, the Davises had only reduced their principal obligation by about $60,000. In addition, Glass testified that if the total listed in the regulation-Z disclosure, $753,715.10, represented the total amount paid, then that figure would consist of approximately $540,000 in interest to be paid over the fifteen-year period and approximately $200,000 in principal debt reduction—substantially less than the $390,500 principal amount listed in the note.

EMC also elicited testimony from expert witness Charles Granger, a public accountant, who testified that a $390,500 loan that has been amortized over a thirty-year period at a 10% interest rate with monthly payments of $3,426.92 would have a balloon payment of $322,325.79 if paid after fifteen years. Granger explained that the balloon payment would be so large because the monthly payments paid up until the fifteen-year point would consist of mostly payments on the interest that would accumulate over a thirty-year term and because most of the principal reduction in a loan occurs in the last half or the last third of a loan. Finally, Mr. Granger testified that, under the terms of the agreement, if the Davises paid off the loan after 159 payments, the Davises would have an outstanding principal balance of $333,665.82.

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