In re Homeowners Mortgage and Equity, Inc.

Decision Date17 December 2003
Docket NumberNo. 02-50954.,02-50954.
Citation354 F.3d 372
PartiesIn the Matter of HOMEOWNERS MORTGAGE AND EQUITY, INC., Debtor. Jeffrey W. Hurt, Trustee of the Liquidating Trust of Homeowners Mortgage & Equity, Inc., Appellant, v. Federal National Mortgage Association and Home Securitization Trust 1 (Fannie Mae), U.S. Bank, Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

Gary C. Miller (argued), D. Michael Dalton, Elizabeth Ann Wiley, Andrews & Kurth, Richard P. Keeton (argued), Nickens, Keeton, Lawless, Farrell & Flack, Houston, TX, for Appellant.

Jeffrey Scott Levinger (argued), Carrington, Coleman, Sloman & Blumenthal, Dallas, TX, for Federal. Nat. Mortg. Ass'n and Home Securitization Trust 1.

Wayne W. Bost, Winstead, Sechrest & Minick, Austin, TX, for United States Bank.

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

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 National 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 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.


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 expanding into the secondary market for title I loans, Fannie Mae entered into a Mortgage Selling and Servicing Contract ("MSSC") with Homeowners, 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 of the 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 discrete 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 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 contract. Finally, section X provides that responsibilities 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 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.


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 of law, as is the 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 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 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 Homeowners to fulfil its repurchase obligations. The fact that Fannie Mae did not insist on this remedy before first exercising its right to a non-exclusive, alternative remedy — the termination of the contract — neither extinguishes Fannie Mae's rights to the additional repurchase 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 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 loans that violate the MSSC's warranty provisions, without regard to whether the loans ultimately go into default.



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