Texas Dept. of Housing and Community Affairs v. Verex Assur., Inc.

• Decision Date: 09 November 1995
• Docket Number: No. 94-10794,94-10794
• Citation: 68 F.3d 922
• Parties: TEXAS DEPARTMENT OF HOUSING AND COMMUNITY AFFAIRS, f/k/a Texas Housing Agency, Plaintiff-Appellant, v. VEREX ASSURANCE, INC., et al., Defendants, Verex Assurance, Inc., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 922

68 F.3d 922

TEXAS DEPARTMENT OF HOUSING AND COMMUNITY AFFAIRS, f/k/a Texas Housing Agency, Plaintiff-Appellant, v. VEREX ASSURANCE, INC., et al., Defendants, Verex Assurance Inc., Defendant-Appellee.

No. 94-10794.

United States Court of Appeals Fifth Circuit.

Nov. 9, 1995.

Rehearing Denied Dec. 19, 1995.

William C. Davidson, Joseph & Thornhill, Austin, TX, for appellant.

William Louis Kirkman, Joel P. Smyer, Bourland, Kirkman & Seidler, Ft. Worth, TX, for appellee.

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

Before HIGGINBOTHAM and PARKER, Circuit Judges, and BROWN ^*, District Judge.

ROBERT M. PARKER, Circuit Judge:

Plaintiff Texas Department of Housing and Community Affairs appeals the district court's judgment in favor of Defendant Verex Assurance, Inc. We affirm in part, vacate in part, and remand.

I. BACKGROUND

The plaintiff, Texas Department of Housing and Community Affairs, formerly known as Texas Housing Agency ("THA"), is an official governmental agency of the State of Texas. THA was created to provide mortgage financing to low to moderate income, first-time home buyers. THA does not originate or underwrite loans, but instead contracts with certain lenders to do so according to THA's guidelines.

Norwest Mortgage, Inc. and the Charles Curry Company, both mortgage lenders, entered into an "Origination, Sale, and Servicing Agreement" with THA, whereby Norwest and Curry agreed to originate certain loans, sell them to THA, and service them on behalf of THA. Under this agreement, Norwest made two loans relevant to this appeal: one to Jimmy and Queenie Anderson and one to Theodore Newhouse, both in connection with the purchase of real property in Fort Worth, Texas. Also relevant to this appeal, Curry made a loan to Jeffrey and Chris Abbott in connection with the purchase of real property in Arlington, Texas.

THA's guidelines required Norwest and Curry to obtain private mortgage insurance on each loan originated. To comply with this guideline, Norwest and Curry obtained pre-qualification from Defendant Verex Assurance, Inc., a private mortgage insurer, in the form of master policies for insurance. The master policies gave Norwest and Curry the ability to apply for mortgage insurance from Verex on individual loans. These master policies provided that in return for the payment of premiums, and after review and approval of the application for mortgage insurance on a particular loan, Verex would insure the loan against default by the borrower. ¹

As the applications and supporting documents on the Anderson, Newhouse, and Abbott loans were collected, Norwest and Curry submitted them to defendant Verex with applications for mortgage insurance. The documents submitted to Verex regarding the Anderson loan indicated that the sales price and appraised value of the property was $29,000 and that the principal amount of the new loan was $27,500. The documents submitted regarding the Newhouse loan indicated that the sales price and appraised value of the property was $26,000 and that the principal amount of the new loan was $24,700. With regard to the Abbott loan, the documents indicated that the sales price was $65,950, the appraised value was $66,000, and the principal amount of the new loan was $62,650. The loan documents also indicated the size of the down payments the purchasers were to make, and contained representations regarding the source of the money that would be used to make the down payments.

Based on its review of these documents, Verex agreed to provide mortgage insurance on the Anderson, Newhouse, and Abbott loans and thus issued commitments for insurance on the respective loans to Norwest and Curry. The certificates of insurance identified the loans being insured and indicated the terms of the transaction, including the loan amount, sales price, appraised value, and the loan-to-value ratio. ² A Certificate of Insurance was attached to each commitment for the lender's representative to sign and return with the appropriate premium after the transaction was consummated. Each of the loans was consummated, and the required premiums were tendered to Verex. Shortly after each loan was consummated, it was transferred to THA along with an assignment of the insurance policies obtained from Verex. Each of the loans defaulted. At the time of the defaults, plaintiff THA was the holder of the mortgage loans. Notice of default was properly given, and claims were filed with Verex within the time allowed by the master policies.

As a result of the claims for coverage, Verex began an investigation which included investigating the accuracy of the representations made on the documents tendered to Verex by Norwest and Curry. Based on the discovery of certain misrepresentations, Verex denied coverage. Consequently, Verex did not pay any amounts on the claims for coverage on the Anderson, Newhouse, and Abbott loans. Instead, Verex notified THA that it was rescinding the individual mortgage insurance policies. Verex re-tendered to Norwest, Curry, and THA all premiums tendered to it for insurance on these three loans.

In 1989, THA filed suit against Verex and GMAC Mortgage Company, a party subsequently dismissed from the lawsuit, in state court in Travis County, Texas. GMAC removed the action to the United States District Court for the Western District of Texas based on diversity of citizenship. Verex joined in GMAC's Notice of Removal and filed a Motion to Transfer Venue and Brief in Support to have the case transferred to the Northern District of Texas. That motion was granted.

The case was tried to the court on plaintiff THA's Third Amended Complaint beginning May 31, 1994. THA asserted causes of action for breach of contract and violation of the Texas Deceptive Trade Practices Act, and requested attorneys' fees. Defendant Verex asserted, inter alia, the defenses of conditions precedent, fraudulent or negligent misrepresentation, and mutual mistake of fact. The district court granted judgment as a matter of law against THA on its DTPA claims. In addition, during the trial, the district court held that Verex had not given proper notice under Sec. 21.17 of the Texas Insurance Code of the misrepresentations related to the Anderson and Newhouse loans, and that as a result the misrepresentation defense as to those two loans was statutorily barred. The district court took the remaining claims and defenses under advisement.

On June 30, 1994, the district court entered an opinion and order in favor of defendant Verex. Specifically, the district court held that under Texas law the sales prices, appraised values, and loan-to-value ratios reflected in the commitments for insurance issued by Verex were conditions precedent to the formation of the insurance contracts in question. The district court found that because down payments had not been made as represented, the sales prices were lower than represented and thus the loan-to-value ratios exceeded the specified limit. Therefore, the court held, certain conditions precedent had not been met, and THA was not insured for default on the loans in question. THA's claims were dismissed with prejudice, and this appeal followed.

II. ANALYSIS

A. SUBJECT MATTER JURISDICTION

For the first time on appeal, THA argues that the district court did not have jurisdiction to decide the present case. Before this Court can reach the merits of an appeal, we must determine that the district court had subject matter jurisdiction over the case. Ziegler v. Champion Mortgage Co., 913 F.2d 228, 229 (5th Cir.1990). This action was removed to federal district court on the basis of federal diversity jurisdiction under 28 U.S.C. Sec. 1332. In an action where a state is a party, there can be no federal jurisdiction on the basis of diversity of citizenship because a state is not a citizen for purposes of diversity jurisdiction. Likewise, state agencies that are the alter ego of the state are not citizens for the purposes of diversity jurisdiction. "On the other hand, if the agency is an independent one, separate and distinct from the state, the district court can properly proceed to the merits." Tradigrain, Inc. v. Mississippi State Port Authority, 701 F.2d 1131, 1132 (5th Cir.1983). THA now contends that it is the alter ego of the State of Texas.

In determining whether the agency is an alter ego of the state or an independent agency, the essential question is whether the state is the real party in interest in the lawsuit. The resolution of this question is a matter of state law.

* * * * * *

If the agency's status is unclear, the court must look to any and all available sources for guidance. The court should consider whether the agency has been granted the right to hold and use property, whether it has the express authority to sue and be sued in its corporate name, the extent of its independent management authority, and "a factor that subsumes all others," the treatment of the agency by the state courts. When examining the extent of the agency's independent management authority, the court should look to whether the agency has the power to make its own hiring decisions, the power to enter into its own contracts, and the power to engage its own counsel. When examining the treatment of the agency by the state courts, this court has taken note of the fact that the state has sued the agency in its own courts, and of a state court holding that the statute of limitations, which did not normally run against the state itself, ran against the agency. Other relevant factors might include: (1) whether the state is responsible for the agency's debt; (2) whether the agency is primarily concerned with local, as opposed to statewide problems; and (3) the degree of general financial autonomy of the agency. The source material for the court's analysis is found in the state's constitutional, statutory and decisional law.

In a typical situation, some factors will...