Kolbe v. BAC Home Loans Servicing, LP , 695 F.3d 111 ( 2012 )

United States Court of Appeals
For the First Circuit
No. 11-2037
SUSAN LASS,
Plaintiff, Appellant,
v.
BANK OF AMERICA, N.A., and BAC HOME LOANS SERVICING, L.P.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge]
Before
Boudin, Lipez, and Thompson, Circuit Judges.
Kai H. Richter, with whom E. Michelle Drake, Nichols Kaster,
PLLP, Thomas W. Duffey, and Keane, Klein & Duffy were on brief, for
appellant.
John C. Englander, with whom Matthew G. Lindenbaum, Dennis
D'Angelo, and Goodwin Procter LLP were on brief, for appellees.
September 21, 2012
LIPEZ, Circuit Judge. Appellant Susan Lass is among a
number of homeowners in multiple states claiming that their
mortgage companies have wrongfully demanded an increase in flood
insurance coverage to levels beyond the amounts required by their
mortgages. In this case, unlike in the companion case we decide
today, Kolbe v. Bank of America, N.A., No. 11-2030, the pertinent
mortgage provision explicitly gives the lender discretion to
prescribe the amount of flood insurance. We nonetheless conclude
that the district court's dismissal of Lass's complaint must be
vacated. A supplemental document given to Lass at her real estate
closing, titled "Flood Insurance Notification," reasonably may be
read to state that the mandatory amount of flood insurance imposed
at that time would remain unchanged for the duration of the
mortgage. Given the ambiguity as to the lender's authority to
increase the coverage requirement, Lass is entitled to proceed with
her breach of contract and related claims.
I.
The following facts are drawn from the allegations in the
complaint. See Román-Oliveras v. P.R. Elec. Power Auth., 655 F.3d
43, 45 (1st Cir. 2011). Appellant Lass, a resident of Rehoboth,
Massachusetts, obtained a mortgage loan in the amount of $40,000 in
1994 from Residential Mortgage Corporation. Paragraph 5 of the
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mortgage agreement,1 titled "Hazard or Property Insurance," states
in pertinent part:
Borrower shall keep the improvements now
existing or hereafter erected on the Property
insured against loss by fire, hazards included
within the term "extended coverage" and any
other hazards, including floods or flooding,
for which Lender requires insurance. This
insurance shall be maintained in the amounts
and for the periods that Lender requires.
. . . If Borrower fails to maintain coverage
described above, Lender may, at Lender's
option, obtain coverage to protect Lender's
rights in the Property in accordance with
Paragraph 7.2
The amount of flood insurance required by the lender was specified
in a separate document labeled "Flood Insurance Notification" ("the
Notification"). It states, in part:
[A]t the closing the property you are
financing must be covered by flood insurance
in the amount of the principle [sic] amount
1
The mortgage agreement was executed on a standard form
issued by the Federal Home Loan Mortgage Corporation (FHLMC or
"Freddie Mac") and the Federal National Mortgage Association (FNMA
or "Fannie Mae") for single-family mortgages in Massachusetts.
These two entities are "government-sponsored enterprises"
("GSEs")overseen by the Department of Housing and Urban Development
("HUD").
2
Paragraph 7 provides, in part:
If Borrower fails to perform the covenants and agreements
contained in this Security Instrument[,] . . . then
Lender may do and pay for whatever is necessary to
protect the value of the Property and Lender's rights in
the Property.
Paragraph 7 also states that any costs incurred by the lender under
the paragraph "shall become additional debt of Borrower" secured by
the mortgage.
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financed, or the maximum amount available,
whichever is less. This insurance will be
mandatory until the loan is paid in full.
Federal law also required Lass to obtain flood insurance
coverage because her property is located in a special flood hazard
zone under the National Flood Insurance Act ("NFIA"). See 42
U.S.C. § 4012a(b)(1).3 The statutory coverage requirement is
framed in terms similar to the Notification. At the time of her
closing, Lass was obliged to purchase an amount of insurance that
tracked the lower of her principal balance or the maximum amount of
insurance available to her under the federal flood insurance
program ($250,000). Id.; see also id. § 4013(b)(2); 24 C.F.R.
§ 203.16a; 44 C.F.R. § 61.6.4 Lass at all times maintained flood
insurance at least equal to the full amount of her loan, $40,000.
In 2007, she voluntarily increased her coverage to $100,000.
The rights to Lass's mortgage eventually were acquired by
Bank of America ("the Bank"),5 and shortly thereafter, in November
3
Technically, the statute requires the lender to require the
borrower to obtain the insurance. See 42 U.S.C. § 4012a(b)(1).
4
The federal law requirement in fact decreases as the
mortgage balance decreases, with the statute setting the minimum
amount of insurance as the "outstanding" principal balance. There
is no contention that Lass was required to satisfy the $250,000
"available coverage" prong, and we therefore do not further refer
to that alternative in our discussion.
5
The Bank initially assumed the role of lender and BAC Home
Loans Servicing, L.P. assumed the role of servicer. The two
entities merged in 2011, and we thus refer to them collectively as
"the Bank."
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2009, the Bank sent Lass a form letter stating that the amount of
flood insurance on her property was inadequate and did not satisfy
"the terms of [her] mortgage/deed of trust and/or Federal law."
The letter stated that she needed an additional $145,086 in
coverage, so that she would have flood insurance in the same amount
as the hazard insurance that she had purchased, the latter amount
ordinarily reflecting the replacement value of the improvements on
the property. The letter stated that, if Lass did not obtain the
increased insurance by early January 2010, the Bank would purchase
it for her, perhaps through its affiliated entities and likely with
less coverage despite a possibly higher cost than insurance she
could buy herself. Lass contacted the Bank questioning the need
for more insurance, given her low principal balance,6 and was
incorrectly told that the new coverage requirements were mandated
by the Federal Emergency Management Agency ("FEMA").7 The Bank
sent a follow-up letter in mid-December, reiterating its intention
to purchase the additional insurance if Lass failed to do so.
In January 2010, the Bank purchased the additional flood
insurance on behalf of Lass, backdated to provide coverage as of
November 1, 2009, and it later charged her escrow account $748.10
6
By the time she filed this action, Lass's outstanding
balance had decreased to less than $28,000. The Bank's demand that
she increase her flood insurance by more than $145,000 would bring
the amount of insurance to more than $245,000.
7
FEMA recommends such coverage, but the mandatory coverage
requirements are set lower by the NFIA. See Section II.A. infra.
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for the premium. After notifying Lass in September 2010 that it
intended to renew the policy, the Bank purchased coverage in
November 2010 in the amount of $149,998, charging Lass's escrow
account $779.94. That second policy was replaced in March 2011
with a third lender-placed policy in the amount of $139,988,
resulting in a charge of $724.94 to Lass's escrow account. Lass
claims that the Bank or one of its affiliates received a commission
or "kickback" in connection with the latter two lender-placed
policies. Also in March 2011, however, following a television news
report about plaintiff's flood-insurance interactions with the
Bank, the Bank posted refunds to Lass's escrow account for the cost
of the first two lender-placed polices (also commonly known as
"force-placed" policies).
In April 2011, Lass filed a putative class action
complaint, later amended, alleging that the Bank had "unfairly,
unjustly, and unlawfully" forced her and other borrowers to
purchase excessive amounts of flood insurance and had improperly
profited through "kickbacks, commissions, or 'other compensation'"
paid in connection with the force-placed insurance. Am. Compl. ¶¶
3, 4. Her amended complaint contained five separate causes of
action, all of which the district court dismissed. The court
concluded that the mortgage agreement unambiguously entitled the
Bank to increase the required amount of flood insurance at its
discretion and, largely based on that determination, held that none
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of Lass's claims survived. On appeal, Lass challenges the
dismissal of four claims: breach of contract, breach of the implied
covenant of good faith and fair dealing, unjust enrichment, and
breach of fiduciary duty.8 She asserts that the mortgage and
Notification, in combination, at least created an ambiguity
concerning the Bank's authority to demand greater coverage and,
consequently, none of the claims should have been resolved at the
motion-to-dismiss stage.
II.
We review a district court's decision on a motion to
dismiss de novo. Román-Oliveras, 655 F.3d at 47. In so doing, we
accept the facts as set forth in the amended complaint and draw all
reasonable inferences in the plaintiff's favor. Cunningham v.
Nat'l City Bank, 588 F.3d 49, 51 (1st Cir. 2009). We also may
consider documents incorporated by reference in the complaint,
including the mortgage agreement and the Notification at issue
here, as well as matters appropriate for judicial notice. See
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322
(2007); Giragosian v. Ryan, 547 F.3d 59, 65 (1st Cir. 2008).
A. Breach of Contract
Lass's breach-of-contract claim depends on whether the
amount of flood insurance required at the time of the closing --
8
Lass does not appeal the dismissal of her claim alleging
violation of the Real Estate Settlement Procedures Act, 12 U.S.C.
§ 2607(a), (b).
-7-
the amount of Lass's loan -- was subject to change by the lender.
In arguing that the amount was fixed for the duration of the loan,
Lass points to the statement in the Notification that the insurance
required at the time of the closing "will be mandatory until the
loan is paid in full." The Bank, however, relies on Paragraph 5's
statement that flood insurance "shall be maintained in the amounts
and for the periods that Lender requires" in arguing that it had
the discretion to demand more insurance when, and if, it deemed
such an increase to be appropriate. The Bank asserts that the
Notification -- to the extent it is considered part of the mortgage
"contract" -- merely states that Lass must maintain the statutory
minimum amount of insurance for the duration of the loan, and does
not promise that the Bank will never exercise its discretion to
increase the insurance obligation. Lass's fallback position is
that the documents are at least susceptible to both interpretations
and, hence, ambiguous. The district court agreed with the Bank,
concluding that "[t]he notification can easily be read in
conjunction with the mortgage[,] which gives the lender the
discretion to set the required amount of flood insurance."
Thus, as in Kolbe, the question before us is whether the
district court correctly concluded that the plaintiff's mortgage
agreement unambiguously gives the lender the discretion to demand
an increase in flood insurance to an amount above the borrower's
initial obligation. Whether a contract is ambiguous is a question
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of law in Massachusetts. Bukuras v. Mueller Group, LLC, 592 F.3d
255, 261-62 (1st Cir. 2010) (citing Basis Tech. Corp. v.
Amazon.com, Inc., 878 N.E.2d 952, 958-59 (Mass. App. Ct. 2008)).
Language is ambiguous "only if it is susceptible of more than one
meaning and reasonably intelligent persons would differ as to which
meaning is the proper one." Gemini Investors Inc. v. AmeriPark,
Inc., 643 F.3d 43, 52 (1st Cir. 2011) (quoting Citation Ins. Co. v.
Gomez, 688 N.E.2d 951, 953 (Mass. 1998)) (internal quotation mark
omitted). In considering whether a contract is ambiguous, we read
the agreement "in a reasonable and practical way, consistent with
its language, background, and purpose." Bukuras, 592 F.3d at 262(quoting Cady v. Marcella, 729 N.E.2d 1125, 1130 (Mass. App. Ct.
2000)).
Lass argues that the Notification is part of the contract
and should be considered along with Paragraph 5. The district
court acknowledged that the supplemental document "appears to be
part of the mortgage contract, similar to a rider, although it is
not listed in the mortgage as an incorporated rider." The Bank
disagrees, asserting that the Notification should not be considered
part of the mortgage because it does not expressly bind both
parties and requires only the borrower's signature. Moreover, the
Bank argues that the Notification "cannot be used to create
ambiguity in the interpretation of paragraph 5," noting that "when
reading distinct but related documents that concern the same
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transaction . . . [construing such documents as one contract]
applies primarily in cases of uncertainty and cannot undo plain
language which makes perfect sense in context." Appellee's Brief
at 26-27 (quoting Happ v. Corning, Inc., 466 F.3d 41, 46 (1st Cir.
2006)).
The Bank's argument is unpersuasive. Paragraph 5 of the
mortgage gives the lender the discretion to fix the amount of flood
insurance, and the Notification was an essential part of the
transaction because it represented the exercise of that discretion
at the outset of the mortgage period. In effect, the Notification
completed the contract between the parties by specifying that, by
the time of the closing, Lass was obliged to obtain the amount of
flood insurance required by federal law, and no more. We thus see
no reason to depart from the well established principle that, when
the circumstances are appropriate, "instruments deriving from a
given transaction shall be read together." Gilmore v. Century Bank
& Trust Co., 477 N.E.2d 1069, 1073 (Mass. App. Ct. 1985) (noting
also that, in addition to "the formal factors that connect the two
agreements, . . . we lay stress on the sense of the thing"); see
also In re Olympic Mills Corp., 477 F.3d 1, 14 (1st Cir. 2007)
(noting that, without evidence of a contrary intention,
"instruments executed at the same time, by the same contracting
parties, for the same purpose, and in the course of the same
transaction will be considered and construed together as one
-10-
contract or instrument" (quoting 11 Richard A. Lord, Williston on
Contracts § 30:26 (4th ed. 1999))); Chase Commercial Corp. v. Owen,
588 N.E.2d 705, 707 (Mass. App. Ct. 1992) ("[I]f the three
documents were in essence part of one transaction, they must be
read together to effectuate the intention of the parties.").9
Hence, our inquiry encompasses both the mortgage and the
Notification.
We begin by rejecting Lass's argument that the mortgage
form itself cannot reasonably be read to give the lender discretion
to modify the flood insurance requirement during the life of the
loan. Paragraph 5 refers to "the amounts" and "the periods" of
coverage required by the lender, and the use of the plural form
suggests the possibility of changing obligations over time.10
Indeed, if Paragraph 5 constituted the entire agreement on flood
insurance, the Bank would have a compelling argument that the
9
We recognize that, unlike the Notification, the documents
construed together in some cases were signed by both parties to the
transaction. We do not understand the principle to be limited to
such circumstances. Here, as the district court observed, the
Notification was "similar to a rider," and, as we have explained,
it follows from "the sense of the thing" to treat it as part of the
mortgage agreement. Gilmore, 477 N.E.2d at 1073.
10
Although the language in Paragraph 5 of Lass's contract is
not as explicit as Paragraph 5 in the current version of the
standard Fannie Mae/Freddie Mac single-family form for
Massachusetts, which explicitly states that the lender's insurance
requirement "can change during the term of the Loan," see Am.
Compl. Exh. 3, ¶ 5, the language applicable here nonetheless
suggests comparable discretion.
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mortgage could only reasonably be interpreted to give it discretion
to increase the insurance obligation during the life of the loan.
As we have observed, however, the Notification is a
significant component of the analysis here. After setting out the
specific amount of flood insurance the borrower must obtain, the
Notification states that "[t]his insurance will be mandatory until
the loan is paid in full." The Notification does not identify the
specified amount as merely a mandatory minimum, and it says nothing
about the lender's discretion to change the insurance amount at any
point before "the loan is paid in full." We think it is plausible
that the original lender chose -- in an exercise of the discretion
afforded by Paragraph 5 -- to align Lass's flood insurance
obligation with the level of coverage deemed adequate under federal
law, and that it intended to make that amount the benchmark for the
entire mortgage period. We thus conclude that the Notification may
be reasonably construed to say that the specified amount is the
amount of insurance Lass was required to maintain until she paid
off her loan.
That construction is not, however, inevitable. As the
Bank argues, the "until the loan is paid in full" portion of the
Notification also may be reasonably understood as intended to
highlight the duty under federal law to maintain an amount of
insurance linked to the principal balance, regardless of the
lender's exercise of its discretion under Paragraph 5 to set a
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different, perhaps greater amount. See 42 U.S.C. § 4012a(e)(1)
(requiring lender to inform the borrower of federal flood insurance
requirements).11 The fact that the mortgage holders preceding Bank
of America did not vary from the federally mandated starting point
does not necessarily signify that they believed they lacked the
discretion to do so, and their decision to keep the amount constant
would not divest the Bank of any discretion afforded by Paragraph
5.12
None of the parties' other arguments persuades us that
the mortgage is only reasonably construed to allow -- or not to
allow -- the increased coverage demanded by the Bank. Lass points
to the sentence in Paragraph 5 authorizing the lender to obtain
insurance to protect "its rights" in the property, and argues that
it is well established under Massachusetts law that a lender's
11
Of course, as noted earlier, the NFIA requires flood
insurance in the amount of the outstanding principal balance, so
the amount of insurance mandated by law would have decreased as
Lass paid down her loan.
12
As in Kolbe, our dissenting colleague presents the Bank's
interpretation of the mortgage language but fails to give due
regard to the plaintiff's contrary perspective. For example, we
agree that it would be difficult to construe the mortgage language
itself to bar an increase in the required amount of flood
insurance. The Notification, however, states that the flood
insurance required at the closing -- which was in the amount of the
loan -- "will be mandatory until the loan is paid in full." The
fact that the mortgage permits changes in the flood insurance
obligation does not mean that the requirement can be changed at
will once the parties have agreed to a fixed amount for the life of
the loan. The question here is whether the lender in fact agreed
in the Notification to a fixed amount of coverage.
-13-
rights are limited to the amount of the outstanding debt.
Regardless of Massachusetts law, however, Paragraph 5 allows the
lender to obtain coverage "in accordance with Paragraph 7," which
in turn gives the lender authority not only to protect its own
rights but also "to protect the value of the Property."13
We are likewise unmoved by the Bank's assertion that
limiting flood insurance coverage to the amount required at Lass's
closing is unreasonable given that FEMA recommends insuring for the
full replacement value of the property. See Fed. Emergency Mgmt.
Agency, National Flood Insurance Program: Mandatory Purchase of
Flood Insurance Guidelines 27-28 (2007), available at
http://www.fema.gov/library/viewRecord.do?id=2954 (last visited
Sept. 18, 2012). As we noted in Kolbe, though replacement-value
coverage may be advisable, Congress in the NFIA appears to have
incorporated the view that it also would be reasonable for
mortgagees to require only an amount "equal to the outstanding
principal balance of the loan," 42 U.S.C. § 4012a(b)(1). Cf.
Hofstetter v. Chase Home Fin., LLC, 751 F. Supp. 2d 1116, 1127 n.3
(N.D. Cal. 2010) ("Simply because an agency recommends that lenders
maintain a certain amount of flood insurance coverage does not mean
13
To the extent the relationship between Paragraph 5's
"Lender's rights in the Property" reference and Paragraph 7's right
to protect the "value of the Property" is debatable, the
uncertainty reinforces our conclusion that an ambiguity exists
concerning the Bank's authority to increase the flood insurance
requirement.
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that lenders have carte blanche to do so without regard to the
terms of their loan agreements with borrowers."). Moreover, as we
also pointed out in Kolbe, some lenders may choose to set a fixed,
minimum flood insurance requirement to make home ownership
accessible to more people.
Finally, as in Kolbe, we decline at this stage of the
case to apply the principle of contra proferentem to construe
Lass's mortgage against the Bank as the "drafter" of the agreement.
The mortgage itself is on the standard Fannie Mae/Freddie Mac form
for single-family residences in Massachusetts, and the record does
not reveal how much control -- if any -- lenders have over its
terms, or whether the language is properly characterized as
"prescribed by law." See Restatement (Second) of Contracts § 206
cmt. b ("The rule that language is interpreted against the party
who chose it has no direct application to cases where the language
is prescribed by law, as is sometimes true with respect to
insurance policies, bills of lading and other standardized
documents."); see also Julia Patterson Forrester, Fannie
Mae/Freddie Mac Uniform Mortgage Instruments: The Forgotten Benefit
to Homeowners, 72 Mo. L. Rev. 1077, 1085 (2007) ("The Forgotten
Benefit") (stating that "Fannie Mae and Freddie Mac require that
loans they purchase be documented on their forms").14 Nor has
14
We note that the standard Fannie Mae/Freddie Mac form, which
contains terms negotiated by consumer advocates, has been described
as "exceptionally fair" to borrowers. See The Forgotten Benefit,
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evidence been cited concerning the origin of the "Flood Insurance
Notification." The name and logo of the original lender appear at
the top of the Notification document, but the name is typed onto a
blank line in the body of the document in a manner consistent with
a standardized form. As in Kolbe, Lass may choose to raise contra
proferentem, as appropriate, upon further development of the
record.
We thus conclude that, taken together, the mortgage and
the Notification are ambiguous as to the lender's authority to
demand increased flood coverage on Lass's property. The district
court therefore erred by rejecting Lass's proposed construction of
the mortgage as unreasonable, and her breach of contract claim must
be reinstated. Cf. Arnett v. Bank of America, N.A., No. 3:11-cv-
01372-SI, 2012 WL 2848425, at **5-9 (D. Or. July 11, 2012) (denying
motion for judgment on the pleadings based on ambiguity of similar
language in mortgage and supplemental flood insurance document).
B. Covenant of Good Faith and Fair Dealing
Lass alleges that multiple aspects of the Bank's conduct
in demanding increased flood insurance breached the covenant of
good faith and fair dealing that is implicit in every contract in
Massachusetts. See Uno Rests., Inc. v. Boston Kenmore Realty
Corp., 805 N.E.2d 957, 964 (Mass. 2004); Anthony's Pier Four, Inc.
72 Mo. L. Rev. at 1087; see also id. at 1085 ("The forms have been
modified over the years, but they retain the consumer-friendly
provisions negotiated in the early 1970s." (footnote omitted)).
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v. HBC Assocs., 583 N.E.2d 806, 820 (Mass. 1991). "[T]he purpose
of the implied covenant is to ensure that neither party interferes
with the ability of the other to enjoy the fruits of the contract
and that when performing the obligations of the contract, the
parties remain faithful to the intended and agreed expectations of
the contract." FAMM Steel, Inc. v. Sovereign Bank, 571 F.3d 93,
100 (1st Cir. 2009) (quoting Chokel v. Genzyme Corp., 867 N.E.2d
325, 329 (Mass. 2007)) (internal quotation marks omitted); see also
Nile v. Nile, 734 N.E.2d 1153, 1160 (Mass. 2000). To succeed with
a claim based on the implied covenant, the plaintiff must
"present[] evidence of bad faith or an absence of good faith."
T.W. Nickerson, Inc. v. Fleet Nat'l Bank, 924 N.E.2d 696, 706
(Mass. 2010) (stating also that "no evidence of an improper motive
. . . was presented at trial, and no facts presented at trial
support a finding of an absence of good faith"); see also Uno
Rests., 805 N.E.2d at 964 n.5; Nile, 734 N.E.2d at 1160 (stating
that a lack of good faith "may be inferred by evidence that the
[conduct] was unreasonable under all the circumstances"). Evidence
that the defendant acted "to gain an advantage for itself" can
support a claim for breach of the covenant. See T.W. Nickerson,
924 N.E.2d at 707.
Lass's complaint advances seven grounds for the implied
covenant claim, among them the Bank's demanding more flood
insurance than required by federal law or the mortgage agreement,
-17-
its purchase at Lass's expense of backdated insurance, and
charging borrowers for commissions or "other compensation" for
itself or its affiliates. See Am. Compl., ¶ 75. In keeping with
our analysis in Kolbe, we conclude that these allegations of
"unfair[], unjust[], and unlawful[]" conduct are sufficient to
state a claim for violation of the covenant of good faith and fair
dealing. See Am. Compl., ¶¶ 3, 4. If the Bank demanded flood
insurance coverage that exceeded the requirements of federal law
and the mortgage for the purpose of increasing profits for itself
or its affiliates, or if it unjustifiably charged borrowers for
backdated coverage and commissions, its conduct would be at odds
with "the intended and agreed expectations of the contract," FAMM
Steel, 571 F.3d at 100 (internal quotation mark omitted).15
The Bank argues that Lass's allegations are merely
conclusory assertions that fail to establish a plausible claim for
relief. See Ocasio-Hernández v. Fortuño-Burset, 640 F.3d 1, 12
(1st Cir. 2011). To the contrary, Lass points to specific facts
that, once developed with the aid of discovery, could support the
implied covenant claim: the Bank warned in its notice letters that
15
Although the demand for coverage beyond the amounts
specified in the mortgage and the other allegedly unauthorized
charges also provide the basis for Lass's breach-of-contract claim,
her implied covenant claim does not depend on a contractual breach.
Lass also argues that the Bank violated the covenant by
"unreasonably exercising in bad faith any purported discretionary
authority Defendants claim they were afforded under the loan and
mortgage documents." Am. Compl., ¶ 75(4).
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the cost of force-placed insurance may include commissions, and the
Bank in fact purchased three policies at Lass's expense, two of
them through a Bank subsidiary;16 the first policy was retroactive
to a date before the first notice letter, meaning that the Bank
bought coverage for a two-month period of time that had already
elapsed; and the required amount of insurance was undisputedly
beyond the NFIA requirements, and perhaps beyond the terms of the
mortgage agreement as well.
In arguing that the backdating claim is without merit,
the Bank cites an unpublished decision upholding the purchase of
retroactive lender-placed insurance. See Webb v. Chase Manhattan
Mortg. Corp., No. 2:05-cv-0548, 2008 WL 2230696, at *19 (S.D. Ohio
May 28, 2008). Although there may be circumstances in which such
a purchase is defensible, here the property already was covered by
$100,000 of flood insurance, an amount well in excess of the
outstanding loan balance.17 Moreover, whether a lender may purchase
force-placed insurance coverage during the 45-day notice period
required by the NFIA is a debatable question. See 42 U.S.C.
§ 4012a(e)(1), (2); Notice, Loans in Areas Having Special Flood
Hazards, 76 Fed. Reg. 64175, 64179-64181 (Oct. 17, 2011). A
16
The renewal coverage purchased in November 2010 and the
replacement policy purchased in March 2011 were both obtained
through Balboa Insurance Services, Inc., a subsidiary of the Bank.
17
In Webb, the property was no longer covered at all when the
plaintiff's policy lapsed. See 2008 WL 2230696, at *19.
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fortiori, the propriety of procuring a policy back-dated to before
notice was given is uncertain.18 The Bank also emphasizes that the
premiums for the first two force-placed policies were refunded to
Lass, and she thus suffered no "backdating" damages. The
complaint, however, alleges that Lass "has not recovered a penny of
the monthly overcharges that she has been forced to pay (much less
interest on those overcharges)," Am. Compl., ¶ 41, and the
reimbursement thus does not negate the implied covenant claim.
The allegations of self-dealing arising from the possible
payment of commissions to the Bank or its related entities also are
sufficiently specific to withstand motion-to-dismiss scrutiny.
Lass asserts, inter alia, that the Bank purchased unnecessary
insurance, at her expense, to generate a commission for the Bank or
its affiliate.19 As noted above, her complaint alleges that two of
18
Lass's complaint cites and includes as an exhibit an article
in American Banker magazine in which a spokesperson for the
National Association of Insurance Commissioners stated that
policies "'should not be back-dated to collect premiums for a time
period that has already passed.'" See Jeff Horwitz, Ties to
Insurers Could Land Mortgage Servicers in More Trouble, American
Banker (Nov. 9, 2010, 12:00 PM),
http://www.americanbanker.com/issues/175_216/ties-to-insurers-
servicers-in-trouble-1028474-1.html?nopagination=1&zkPrintable=1.
19
The allegations in the complaint include the following:
75. Defendants breached [the duty of good faith and
fair dealing] by, among other things: (1) misrepresenting
federal flood insurance requirements; (2) misrepresenting
the requirements of Plaintiff's Mortgage and other
mortgage agreements; (3) demanding and/or force-placing
more flood insurance than required by federal law or
necessary to protect their financial interest in
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the force-placed policies imposed by the Bank were obtained through
its subsidiary Balboa. These allegations easily meet the threshold
for a viable claim. See, e.g., Abels v. JPMorgan Chase Bank, N.A.,
678 F. Supp. 2d 1273, 1276, 1278-79 (S.D. Fla. 2009) (declining to
dismiss claim alleging breach of implied covenant where plaintiffs
asserted that defendant "engaged in self-dealing by purchasing
insurance from one of its own affiliates").
mortgaged properties; (4) unreasonably exercising in bad
faith any purported discretionary authority Defendants
claim they were afforded under the loan and mortgage
documents; (5) imposing contractual requirements that did
not exist or that exceeded the requirements disclosed in
the relevant contracts; (6) charging borrowers sham
"costs" for flood insurance that did not reflect the true
cost to Bank of America and/or its affiliates (or kicked
back to them) as commissions or "other compensation"; and
(7) purchasing backdated insurance.
76. Defendants willfully engaged in the foregoing
conduct in bad faith, for the purpose of (i) unfairly and
unconscionably maximizing revenue from borrowers; (ii)
generating commissions, interest, fees, and "other
compensation" for BOA and its affiliates; (iii) providing
a ready-made customer base for BOA's captive insurance
affiliates; (iv) gaining unwarranted contractual and
legal advantages; and (v) depriving Plaintiff and other
Over-Insurance Class members of their contractual and
legal rights to obtain a loan, extension of credit, or
credit renewal (or maintain the same) without having to
purchase flood insurance coverage in excess of the funds
extended to them.
77. Bank of America's financial incentives in
connection with force-placed insurance had led it "to
force-place excessive insurance and overcharge consumers
for policies that provide minimal benefit[.]" See
http://www.americanbanker.com/issues/175_216/ties-to-
insurers-servicers-in-trouble-1028474-
1.html?zkPrintable=1&nopagination=1 (last visited May 27,
2011).
-21-
Hence, as in Kolbe, we conclude that Lass's complaint
alleges sufficient facts to establish a breach of the covenant of
good faith and fair dealing that is "'plausible on its face,'"
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic
Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The claim must
therefore be reinstated.
C. Unjust Enrichment
To succeed with an unjust enrichment claim under
Massachusetts law, a plaintiff must show that the defendant
received, was aware of, and accepted or retained a benefit
conferred by the plaintiff "under circumstances which make such
acceptance or retention inequitable." Vieira v. First Am. Title
Ins. Co., 668 F. Supp. 2d 282, 294 (D. Mass. 2009); see also Cmty.
Builders, Inc. v. Indian Motorcycle Assocs., Inc., 692 N.E.2d 964,
979 (Mass. App. Ct. 1998) ("The benefit must be unjust, a quality
that turns on the reasonable expectations of the parties." (citing
Salamon v. Terra, 477 N.E.2d 1029 (Mass. 1985))). Lass focuses
this claim on the Bank's allegedly unjust retention of commissions
earned in connection with the force-placed insurance, and asserts
that such commissions were improper whether or not the Bank had
authority to purchase the additional insurance.
The Bank argues that there cannot be an unjust enrichment
claim when there is an existing contract governing the same subject
matter. Alternatively, it maintains that any benefit "retained"
-22-
could not be inequitable because Lass had notice of the
ramifications of failing to purchase additional flood insurance.
Neither of these arguments justifies dismissal of Lass's unjust
enrichment claim.
Although the Bank is correct that damages for breach of
contract and unjust enrichment are mutually exclusive, see Platten
v. HG Bermuda Exempted Ltd., 437 F.3d 118, 130 (1st Cir. 2006)
("Massachusetts law does not allow litigants to override an express
contract by arguing unjust enrichment."), it is accepted practice
to pursue both theories at the pleading stage, see, e.g., Vieira,
668 F. Supp. 2d at 294-95 (noting that Federal Rule of Civil
Procedure 8(d) "permits Plaintiffs to plead alternative and even
inconsistent legal theories, such as breach of contract and unjust
enrichment, even if Plaintiffs only can recover under one of these
theories"). The Bank argues that this flexibility in pleading does
not apply where, as here, the parties agree that there is a valid
contract between them. The mortgage, however, does not explicitly
address either commissions or, more generally, the Bank's
entitlement to profit from its forced placement of insurance.
Paragraph 7 states only that "the Lender may do and pay for
whatever is necessary to protect the value of the Property and
Lender's rights." Although Lass may be able to challenge the
payment of commissions to a Bank subsidiary as unnecessary and thus
a breach of Paragraph 7, we need not reject her equitable claim for
-23-
reimbursement now on the ground that she is limited to the contract
remedy. The case will in any event move forward, and the district
court will be in a better position once the record is more
developed to determine whether the unjust enrichment claim should
survive.20
Little need be said about the Bank's assertion that any
retention of a benefit was not inequitable as a matter of law
because Lass knew the consequences of failing to obtain additional
insurance on her own. If the mortgage did not permit the Bank to
force place insurance in an amount greater than the amount of
Lass's loan, the Bank's decision to do so -- with attendant benefit
to itself -- would seem to fit any notion of "unjust." Lass is
thus entitled to proceed with the unjust enrichment claim.
D. Breach of Fiduciary Duty
Finally, Lass claims that the Bank had a fiduciary duty
in connection with managing her escrow account and breached that
duty by charging her for excessive flood insurance and related
commissions. The Bank does not contest the existence of a duty,
but argues that no breach occurred because the mortgage agreement
permitted it to purchase the insurance and impose the costs through
20
The NFIA states that the lender "may charge the borrower for
the cost of premiums and fees incurred by the lender . . . in
purchasing the [force-placed] insurance." 42 U.S.C. § 4012a(e)(2).
We do not read this authorization for "fees" -- presumably paid to
third parties -- as necessarily authorizing "commissions" paid to
a Bank subsidiary. The latter might support an allegation of self-
dealing, while the former would not.
-24-
the escrow account. Our discussions of the other claims inevitably
lead to the conclusion that the dismissal of the fiduciary duty
claim also was premature. As we have described, the mortgage
agreement may not have authorized the forced placement of the
additional $145,000 in flood insurance coverage. Moreover, Lass
alleges that the Bank, in an act of self-dealing, improperly
accepted commissions for itself or a subsidiary in connection with
acquiring the additional insurance. Thus, as with the other
claims, the claim for breach of fiduciary duty must be reinstated.
For the foregoing reasons, the judgment of the district
court dismissing plaintiff's complaint is vacated, and the case is
remanded for further proceedings consistent with this opinion.
Costs are awarded to the appellant.
So ordered.
– Dissenting Opinion Follows --
-25-
BOUDIN, Circuit Judge, dissenting. On February 18, 1994,
plaintiff-appellant Susan Lass obtained a loan of $40,000 secured
by a mortgage on her home in Reheboth, Massachusetts, the mortgage
then being immediately assigned to Shawmut Mortgage Company. The
form agreement, used for mortgages in Massachusetts guaranteed by
Fannie Mae and Freddie Mac, provided in pertinent part:
5. Hazard or Property Insurance. Borrower
shall keep the improvements now existing or
hereafter erected on the Property insured
against loss by fire . . . and any other
hazards, including floods or flooding, for
which Lender requires insurance. This
insurance shall be maintained in the amounts
and for the periods that Lender requires. . .
. If Borrower fails to maintain coverage
described above, Lender may, at Lender's
option, obtain coverage to protect Lender's
rights in the Property in accordance with
paragraph 7.
. . .
7. Protection of Lender's Rights in the
Property. If Borrower fails to perform the
covenants and agreements contained in this
Security Instrument, . . . then Lender may do
and pay for whatever is necessary to protect
the value of the Property and Lender's rights
in the Property.
Another provision of Lass' mortgage provided that when
making monthly mortgage payments, Lass would also pay for separate
items, including property taxes and insurance premiums. The lender
would hold these payments, called "escrow items," in an escrow
account to cover such items when they were due.
On the same day that the mortgage was executed, Shawmut
provided Lass with a separate document on company letterhead
-26-
entitled "Flood Insurance Notification" (the "Notification"). This
document informed Lass that her property was located in a "special
flood hazard area" and that she would need to purchase flood
insurance in the following provision:
[A]t the closing the property you are
financing must be covered by flood insurance
in the amount of the principle [sic] amount
financed, or the maximum amount available,
whichever is less. This insurance will be
mandatory until the loan is paid in full.
Both the just quoted notice and the requirement that
Shawmut provide such notice to Lass are imposed by federal law in
aid of the government's subsidized flood insurance program. 42
U.S.C. §§ 4104a(a)(1),(a)(3) (2006). Failure to provide such
notice would have subjected Shawmut to a federal monetary penalty.
Id. § 4012a(f)(2). This coverage mandated by government directive
is required whether or not the lender requires insurance coverage
for flooding or any other hazards.
At some point prior to November 2009, defendant-appellee
Bank of America or one of its affiliated entities (for convenience
we refer only to Bank of America) acquired Lass' mortgage. Then,
pursuant to paragraph 5 of the mortgage, Bank of America sent Lass
on November 16, 2009, a form letter requiring her to purchase an
additional $145,086 of flood insurance, which would insure her home
up to its full replacement-cost value. The letter said that the
bank would purchase the insurance if Lass failed to do so within
-27-
seven weeks, but it urged that she buy it herself to avoid a more
expensive purchase by the bank.
Despite a follow up bank letter, Lass failed to increase
her coverage. The bank then obtained the insurance itself for the
period in question, while offering Lass a refund of any duplicative
premiums if she belatedly bought the insurance elsewhere, but Lass
again declined to do so. The same pattern--warning, refusal by
Lass and purchase by the bank of the additional insurance--occurred
in 2010, and the bank offered her a further opportunity to purchase
her own insurance after it extended the policy in 2011. In each
instance, the bank took the premiums out of the escrow account.
Lass responded with the present lawsuit against the bank
on April 1, 2011.21 As amended, her complaint charged breach of
contract, breach of the implied covenant of good faith and fair
dealing, unjust enrichment, breach of fiduciary duty, and a count
for violation of a federal statute that is not at issue on appeal.
On the bank's motion to dismiss, the district court dismissed all
of Lass' counts, ruling that no claim had been stated. Lass v.
Bank of America, N.A., No. 11-10570-NMG, 2011 WL 3567280, at *8 (D.
Mass. Aug. 11, 2011).
The explicit language of the mortgage entitled the bank
to require Lass to purchase the additional insurance even though it
21
The lawsuit is premised on the third of the three sets of
forced insurance and the increased mortgage payments resulting from
it, the bank having refunded the charges for the first two.
-28-
would exceed the unpaid balance of the loan. Under the agreement,
Lass had to maintain insurance against "loss by fire . . . and any
other hazards, including floods or flooding, for which Lender
requires insurance," and this shall be "in the amounts and for the
periods that the Lender requires." It is hard to imagine how the
obligation could be more clearly expressed.
Lass relies upon the separate "Flood Insurance
Notification" furnished by Shawmut on the day the mortgage was
signed, advising her that she had to provide flood insurance to
cover the "principle [sic] amount financed, or the maximum amount
available, whichever is less . . . until the loan is paid in full."
But the agreement says explicitly that flood insurance "shall be
maintained in the amounts and for the periods that Lender
requires," indicating that the lender can require a different
amount in a later period (emphasis added).
The separate Flood Insurance Notification, establishing
specific minimums (because the government so requires), does not
purport to qualify this unequivocal obligation to maintain any
hazard insurance in the amounts and for the periods the lender
requires. Nor does the Flood Insurance Notification in any way
conflict with or contradict this obligation: it merely establishes
a government required minimum for flood insurance regardless of
whether the lender requires insurance in a lesser amount or in no
amount at all.
-29-
Nor does the provision allowing the bank to purchase
insurance "to protect Lender's rights in the Property" require that
the insurance be limited to the unpaid balance. By virtue of its
provision of the loan and the risks of nonpayment, the lender has
an interest both in the loan amount and in the stream of interest
payments; both give it ample reason to insist on insurance that
goes beyond the unpaid balance of the loan and up to the
replacement cost. This is a practice is recommended by the Federal
Emergency Management Agency and not at all unusual.22
Because the loan agreement explicitly allows the lender
to increase the amount of flood insurance and to purchase the
insurance if the mortgagor refused, the bank's demand and purchase
cannot themselves violate the implied covenant. See Ayash v. Dana-
Farber Cancer Inst., 822 N.E.2d 667, 684 (Mass. 2005) ("This
implied covenant may not be invoked to create rights and duties not
otherwise provided for in the existing contractual relationship."
(internal quotation marks omitted)). Nor can Lass argue that the
22
National Flood Insurance Program: Mandatory Purchase of Flood
I n s u r a n c e G u i d e l i n e s 2 7 ( 2 00 7 ) ,
http://www.fema.gov/library/viewRecord.do?id=2954. See generally
Wells, Insuring to Value: Meeting a Critical Need (2d ed. 2007)
(advocating that property owners insure to the full replacement
cost of property); Klein, When Enough Is Not Enough: Correcting
Market Inefficiencies in the Purchase and Sale of Residential
Property Insurance, 18 Va. J. Soc. Pol'y & L. 345 (2011)
(suggesting that insuring to a value below replacement cost
constitutes "underinsurance," a widespread problem caused by market
inefficiencies).
-30-
request for insurance up to replacement cost is extravagant or
irrational. See note 22, above.
As an alternative argument, Lass asserts--offering
various legal theories--that the bank charged an excessive amount
for the insurance, and did so to generate commissions for itself as
the purchaser of the insurance. Lass alleges that Bank of America
charg[ed] borrowers sham 'costs' for flood
insurance that did not reflect the true cost
to Bank of America because a portion of such
'costs' were retained by Bank of America
and/or its affiliates (or kicked back to them)
as commissions or 'other compensation,' . . .
[and that Bank of America did so] for the
purpose of . . . generating commissions,
interest, fees, and 'other compensation' for
BOA and its affiliates.
Compl. ¶¶ 75, 76.
The bank repeatedly urged Lass to procure the additional
insurance for herself; indeed, she already had flood insurance and
could doubtless have increased her coverage--albeit for an
increased premium. Specifically, the bank sent Lass six letters
warning that bank-provided coverage might be more expensive than
insurance that Lass could obtain on her own and exhorting Lass to
buy her own insurance in terms such as "we urge you," "we continue
to encourage you," or "BAC Home Loans strongly encourages you."
Several of these exhortations were set off in boldface type for
emphasis. After each purchase, the bank even offered to cancel its
lender-placed insurance and refund any duplicative premiums if Lass
bought her own insurance.
-31-
Thus, the bank unquestionably had a legitimate interest
in having the higher coverage to protect its loan and it repeatedly
urged that Lass buy it herself. Given these circumstances, the
notion that it sought the additional coverage so as to obtain the
commission is unsupported by any facts alleged in the complaint
that would make the "improper motive" charge remotely "plausible."
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
Finally, Lass appears to claim that the bank overcharged
her for the insurance it obtained. Three theories are offered: the
covenant of good faith and fair dealing, unjust enrichment, and a
fiduciary duty claim based on the fact that the bank drew on the
escrow account to pay for the added insurance. In principle one
can imagine that a bank, having properly insisted on replacement
cost insurance and properly invoked its right to buy the insurance
because the borrower refused, might nevertheless create liability
for itself by imposing exorbitant or manifestly unfair charges.
However, Lass' mortgage authorized the bank to fix the
level of insurance, purchase it directly if Lass refused, and pay
for it out of the escrow account, so all three claims would require
some factual allegations that pointed to a lack of "good faith and
fair dealing" in the price charged, T.W. Nickerson, Inc. v. Fleet
Nat'l Bank, 924 N.E.2d 696, 704 (Mass. 2010)(covenant claim), an
"unjust" profit, Keller v. O'Brien, 683 N.E.2d 1026, 1029 (Mass.
-32-
1997) (unjust enrichment), or unconscionable self-dealing, NRT New
England, Inc. v. Moncure, 937 N.E.2d 999, 1004 (Mass. App. Ct.
2010) (escrow claim).
The only relevant allegation in the complaint, quoted
above, amounts to saying that the bank obtained a commission on the
placement of the insurance. Placing insurance in exchange for
commissions is what independent agents do all the time, and the
bank can hardly place insurance without incurring costs of its own.
Calling these "sham" costs or kickbacks is pure rhetoric, or "bald
allegations" to which the district court was not required to defer,
Iqbal, 556 U.S. at 681, especially because of the ease of pleading
real facts (if they existed).
Lass could have compared what the bank took out of the
escrow account as the cost of the additional insurance premium
including any commission with comparable insurance provided through
independent agents; possibly the discrepancies might have been
great enough to make it possible, absent adequate explanation by
the bank, to raise an inference that the bank was unduly profiting
or otherwise unreasonable in how it went about the placement of the
insurance. But the complaint provides nothing of the sort.
Finally, Lass complains that when the bank purchased
insurance for her in January 2010, it made the policy effective as
of November 1, 2009, charging her for over two months already
passed. The bank requested that she buy more insurance by letter
-33-
dated November 16, 2009, and the benefit of backdating the
insurance is itself unexplained. But the bank gave Lass a full
refund for the backdating policy before Lass initiated this
litigation.
To sum up, the lender's requirements in the loan
agreement as to hazard insurance were adequately, if not perfectly,
expressed (one has only to contrast paragraph 5 with the gibberish
typical in insurance policies); the bank's apparent choice to
insist on replacement cost as a matter of course is likely over-
rigid from a policy standpoint but that is a matter for regulators.
There is nothing to warrant further proceedings in this case.
-34-