Liberty Bank v. Talman Home Mortg. Corp.
| Decision Date | 18 July 1989 |
| Docket Number | No. 88-2633,88-2633 |
| Citation | 877 F.2d 400 |
| Parties | LIBERTY BANK and Its Successor in Interest, the Federal Deposit Insurance Corp., Plaintiffs-Appellees Cross-Appellants, v. TALMAN HOME MORTGAGE CORPORATION, Defendant Talman Home Federal Savings & Loan Association, Defendant-Appellant Cross-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Stephen W. Smith, James C. Slaughter, Houston, Tex., for defendant-appellant cross-appellee.
William B. Allison, Geoffrey H. Bracken, Houston, Tex., for plaintiffs-appellees cross-appellants.
Appeals from the United States District Court for the Southern District of Texas.
Before THORNBERRY, WILLIAMS and DAVIS, Circuit Judges.
Talman Home Federal Savings & Loan Association appeals an adverse summary judgment requiring it to repurchase three mortgage loans as a remedy for its breach of a loan participation agreement with appellee Liberty Bank. We find that the district court incorrectly interpreted the loan participation agreement and as a result erred in ordering that the loans must be repurchased. We reverse the judgment of the district court, remanding the case for a determination of whether Liberty Bank already has been compensated completely in common law damages for Talman's breach of the Participation Agreement.
On April 9, 1976, appellee Liberty Bank's predecessor-in-interest (Parmer Properties, Inc.) purchased a participation interest in several mortgage loans from appellant Talman Home Federal's predecessor-in-interest (Unity Savings Association). 1 These notes were secured by mortgage trust deeds and insured by the Federal Housing Administration. As amended in 1979, the Participation Agreement covered three notes: the Clifton Plaza note, the Warren Manor note, and the Merrifield Estates note.
Under the terms of the amended Participation Agreement, Liberty Bank acquired a 97% interest in the Clifton and Warren Manor notes, and a 93.887% interest in the Merrifield Estate note. Liberty Bank's participation interest, still in effect, entitles it to a proportionate share in the proceeds of the payments made on the underlying loans. Talman Federal retains the loans in its name and collects the monthly payments from the mortgage loan debtors on the 1st of each month. On the 25th of each month, Talman is required to wire transfer to Liberty Bank an amount equal to Liberty's proportionate share in the note payments, minus a service fee retained by Talman.
Talman Federal's obligation to make the participation payments to Liberty Bank is expressly conditioned on Talman's collection of the installments from the mortgage debtors. Paragraph 2 of the Participation Agreement states:
... In the event of default by any mortgage loan debtor in the payment of the principal or interest to Seller [Talman] on any participated loan, then as to such loan Seller shall not be required to remit principal or interest until collected from the mortgage loan debtor. The representations or warranties herein above described or otherwise contained in this Agreement shall in no event be construed as a warranty or guarantee by Seller as to future payments by mortgage debtors and the sale of a participating interest by Seller to Purchaser [Liberty] pursuant to this Agreement, shall be without recourse.
The central disputed issue on appeal is the proper interpretation of Paragraph 10 of the Participation Agreement. This clause reads, in relevant part:
In case of default in the payment of any note, or the covenants of any mortgage or trust deed securing such note after the issuance by Seller of any Participation Certificate covering such note as provided herein, the Seller shall, within Thirty (30) days from the date of said default, at its option, either (i) repurchase Purchaser's participation interest in said note for an amount equal to the unpaid balance of principal, plus accrued interest, owing on said defaulted note to date of repurchase or (ii) replace the said Participation Certificate with a Participation Certificate covering an equal amount in dollars in other Seven Percent (7.0%) to Eight Percent (8.0%) promissory notes of equal standing and dignity with the note(s) being replaced so that Purchaser shall receive a return of interest equal to that set out hereinabove, ... Provided however, the option to replace a note shall expire Ten (10) years after date hereof, and thereafter Seller must repurchase any loan remaining in default for Thirty (30) days or more.
Liberty Bank contends that this paragraph provides a remedy for any breach of the payment terms of the Participation Agreement by Talman. Talman argues that the provision is an alternative promise by Talman that is triggered only when an underlying mortgage loan is in default.
On several occasions in 1983 and 1984, Talman failed to remit participation payments to Liberty on time. All of the late payments were on the Clifton note. Most of the late payments were due to accounting errors, lost checks, and the like. Talman claimed, for example, that the June 1983 payment from Clifton was misapplied, and that the July, 1983 check from Clifton was lost in the mail. Liberty did not receive its participation payments for these months until August 24, 1983. Similarly, the November and December, 1983 participation payments were not tendered to Liberty until January 11, 1984. Talman admitted that it had erred in failing to apply the November payment to Liberty's account, and that it had been delayed in processing the December payment.
In January, 1984, however, it was a default by the Clifton mortgage loan debtor that caused a delay in Liberty's receipt of its participation payment from Talman. 2 On February 1, 1984, Talman wrote the Department of Housing and Urban Development, declaring that the Clifton note was in default. On February 14, 1984, the Clifton debtor tendered the overdue January payment to Talman. In March, 1984, Liberty agreed to accept the November, December, and January participation payments due for the Clifton note under a Reservation of Rights agreement.
In sum, in the summer and fall of 1984, Talman was late four times in tendering to Liberty its participation payments on the Clifton note. Various reasons were given for these delays, but the mortgage loan debtor was not in default. In January, 1984, the Clifton mortgage debtor was in default. But the January participation payment, along with all the other late payments, was ultimately received by Liberty. Since that time, all subsequent participation payments for the Clifton note have been remitted to Liberty in a timely manner.
The Participation Agreement guarantees a 6 percent net interest return to Liberty on all participated loans for the first 10 years of the Agreement, regardless of the interest actually charged or collected by Talman. This rate was to increase to 7 percent in April, 1986. Talman did not pay the stepped-up interest rate for almost a year after it was due, despite requests from Liberty. In March, 1987, however, Talman paid Liberty $33,198.56, representing the 1 percentage interest shortfall for the period in question. Liberty accepted the payment under its Reservation of Rights agreement. Talman continues to pay 7 percent interest to Liberty.
Liberty Bank filed suit against Talman in Texas state court on March 1, 1984, alleging that Talman had breached the Participation Agreement by making late payments on the Clifton note. Liberty contended that Talman was required by the contract to repurchase the Clifton note as a remedy for its breach. Talman immediately removed the case to federal district court on diversity of jurisdiction grounds. 3 On April 8, 1986, Liberty moved for summary judgment. Liberty later filed a supplemental motion for summary judgment, arguing that Talman's failure to pay the stepped-up interest rate when due also was a breach of the Participation Agreement and required repurchase of all three underlying notes.
The district court granted both summary judgment motions. The court concluded that the late payments on the Clifton note and the failure to pay stepped-up interest were breaches of the Participation Agreement. The court decided that Paragraph 10 of the Agreement provided the remedy for these breaches, and ruled that Talman's option to replace the notes under this paragraph had expired. Talman was ordered to repurchase the Clifton, Warren Manor, and Merrifield Estate notes for $3,651,198.02, which represented Liberty Bank's total outstanding share of the three notes as of August, 1987. 4
Liberty sought to recover equitable prejudgment interest at a rate of 10 percent. The district court held that a Texas statutory rate of 6 percent applied. Because Talman had already paid Liberty interest in excess of that amount, no prejudgment interest was awarded.
The court ordered entry of final judgment, and its ruling was certified for appeal pursuant to Fed.R.Civ.P. 54(b). 5 Talman appeals the adverse summary judgment. Liberty cross appeals, contesting the failure to award 10 percent prejudgment interest.
Talman concedes that it was late in making participation payments on the Clifton note to Liberty, and that at least one of these delays was due to a default by the Clifton mortgage loan debtor. Talman also admits that it failed to pay the stepped-up interest rate when due. Talman contends, however, that the district court erred in ruling that these acts were breaches of the Participation Agreement that required Talman to repurchase all three loans under Paragraph 10 of that contract. This is a question of contract interpretation, which is an issue of law to be determined by the court. 6 Because this is a legal issue, we review the case de novo. City of Austin v. Decker Coal Co.,...
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