Henry A. Bagelmann, Jr. And Mary Jo Bagelmann v. First National Bank and Iowa Bankers Mortgage Corporation , 823 N.W.2d 18 ( 2012 )

IN THE SUPREME COURT OF IOWA
No. 11–1484
Filed November 16, 2012
HENRY A. BAGELMANN, JR. and
MARY JO BAGELMANN,
Appellants,
vs.
FIRST NATIONAL BANK and
IOWA BANKERS MORTGAGE CORPORATION,
Appellees.
Appeal from the Iowa District Court for Bremer County, Bryan H.
McKinley, Judge.
Borrowers appeal summary judgment denying their tort and
contract claims arising out of alleged violations of the National Flood
Insurance Act by their lender and loan servicer. JUDGMENT OF THE
DISTRICT COURT AFFIRMED IN PART AND REVERSED IN PART;
CASE REMANDED FOR FURTHER PROCEEDINGS.
Bruce J. Toenjes of Nelson & Toenjes, Shell Rock, for appellants.
William D. Werger of Leslie, Collins, Gritters & Werger, PLLC,
Waverly, for appellee First National Bank.
Deborah M. Tharnish and Sarah K. Franklin of Davis, Brown,
Koehn, Shors & Roberts, P.C., Des Moines, for appellee Iowa Bankers
Mortgage Corporation.
2
MANSFIELD, Justice.
This case is part of the fallout from the June 2008 flooding that
caused so much destruction in our state. In 2001, the Bagelmanns
purchased a home in Waverly along the Cedar River. At the time, they
were told, incorrectly, that the property was not in a special flood hazard
area and that flood insurance would not be required as a condition of
their loan. The Bagelmanns received the same erroneous information
again in 2003 when they refinanced their loan to pay for remodeling. In
the spring of 2008, their loan servicer was advised that the property
actually was in a special flood hazard area. However, this information
was not passed along to the Bagelmanns until after their home had
flooded on June 10, 2008, and it was too late to buy flood insurance.
Although the Bagelmanns ultimately received a FEMA buyout equal to
the preflood appraised value of their home, they contend they suffered
substantial monetary damages. They have brought suit against the
2001/2003 lender as well as the 2008 loan servicer.
The district court granted summary judgment to the defendants,
and the plaintiffs have appealed. We agree with much of the district
court’s analysis and uphold its conclusions that: (1) the Bagelmanns
cannot use the requirements of the National Flood Insurance Act (NFIA)
as a basis for a state-law claim; (2) the defendants did not breach a
contract with the Bagelmanns (including the covenant of good faith and
fair dealing); and (3) the Bagelmanns do not have a viable negligent
misrepresentation claim. However, we find a claim could potentially exist
based on Restatement (Second) of Torts section 551(2) and reverse and
remand for further proceedings thereon.
3
I. Facts and Procedural Background.
This is an appeal from a grant of summary judgment, so we
“(1) view the facts in the light most favorable to the nonmoving party, and
(2) consider on behalf of the nonmoving party every legitimate inference
reasonably deduced from the record.” Van Fossen v. MidAmerican
Energy Co., 777 N.W.2d 689, 692–93 (Iowa 2009).
Henry and Mary Jo Bagelmann decided in August 2001 to move to
Waverly, Iowa. They came across a property for sale—1501 Horton Road,
adjacent to the Cedar River—and began the process of securing potential
financing. On or before August 8, 2001, the Bagelmanns met with
Beverly Leisinger, a mortgage loan officer at First National Bank of
Waverly (FNB). The Bagelmanns signed a loan application at that time.
Leisinger also informed the Bagelmanns that FNB would have to secure a
flood determination for the bank’s compliance with federal law
requirements. 1 Leisinger told the Bagelmanns that FNB used a specific
firm on a regular basis and told them the price. She said that she could
order the determination right away and share that information with
them.
FNB arranged for CBE-CIGNA Flood Services, a predecessor of
LandAmerica One Stop, Inc., to provide a flood zone determination.2
After examining Federal Emergency Management Agency (FEMA) flood
maps created in 1990, LandAmerica concluded, erroneously, that 1501
Horton Road was in “Flood Zone X” and did not require flood insurance.
Unfortunately, the property was actually in “Flood Zone AE,” an area
1Namely, the National Flood Insurance Act, 42 U.S.C. §§ 4001–4129 (2006).
2We will refer to LandAmerica and its predecessors collectively as
“LandAmerica.”
4
subject to the insurance requirement, not “Flood Zone X.” Unbeknownst
at the time, LandAmerica had looked at the wrong map—one that did not
include 1501 Horton Road at all.
On or about August 14, 2001, Leisinger received the written
“Standard Flood Hazard Determination” from LandAmerica stating that
flood insurance was not required. She shared this information with the
Bagelmanns. She told the Bagelmanns, “[W]e got the flood determination
report and you do not need flood insurance.” The Bagelmanns contend
they would not have moved forward with the transaction if they had
known 1501 Horton Road was in a special flood hazard area.
On or about August 16, 2001, the Bagelmanns made an offer to
purchase the property, and on August 17, the Bagelmanns executed a
purchase agreement with the seller for $238,500. The seller’s disclosure
statement noted that some water had seeped up into the crawlspace in
the 1999 flood. The disclosure statement also stated that the property
was not located in a flood plain.
Before closing, the Bagelmanns took several steps to investigate
the property themselves. Henry Bagelmann personally inspected the
crawlspace and reviewed photographs from 1999 to confirm the accuracy
of the seller’s disclosure about previous flooding. In addition, the
Bagelmanns consulted with their insurance agent, who reiterated (based
on the erroneous flood hazard determination) that they did not need to
obtain flood insurance. Finally, the Bagelmanns arranged for someone
to survey 1501 Horton Road to determine its elevation relative to a
nearby bridge. The house was higher than the bridge and therefore, the
Bagelmanns concluded, would be safe from floods because the state
would not likely build a bridge at a flood-prone elevation.
5
At closing, the Bagelmanns received a copy of LandAmerica’s flood
insurance determination. They also received and signed a notice
provided by FNB stating that the property was not in a special flood
hazard area and that flood insurance was not required, but cautioning
that the home may be “near a [special flood hazard area]” and that “you,
or your lender, may want to consider the advisability of obtaining flood
insurance at reduced rates.” The Bagelmanns were told to “make your
own determination as to whether you desire any such coverage.” The
Bagelmanns also paid FNB a $22 fee at closing for LandAmerica’s flood
hazard determination. This was listed on the settlement statement as
“FLOOD MONITORING TO THE CBE GROUP, INC.”
Two years later, in 2003, after having performed extensive
remodeling on their home, the Bagelmanns sought to refinance their
mortgage with FNB. Again, FNB hired LandAmerica to make the
federally required flood hazard determination, and again LandAmerica
erroneously placed 1501 Horton Road outside the special flood hazard
area. The Bagelmanns maintain they would not have remodeled their
home had they known it was in a flood hazard area. The settlement
statement shows the Bagelmanns paid an $18 fee for this flood hazard
determination. The fee was described as “FLOOD DETERMINATION TO
THE CBE GROUP, INC.” At the 2003 closing, the Bagelmanns received a
copy of LandAmerica’s flood insurance determination and signed another
notice advising them to consider purchasing flood insurance anyway,
and to make their own determination whether they desired such
coverage. 3
3The erroneous LandAmerica flood hazard determination that the Bagelmanns
received in 2003, unlike the one they had received in 2001, contained the following
bold-type disclaimer:
6
Shortly after closing on the 2003 refinancing, FNB assigned the
loan to the Iowa Banker’s Mortgage Company (IBMC), which in turn sold
the loan to Fannie Mae. IBMC remained the loan servicer. The
Bagelmanns knew FNB planned to assign the refinanced loan. After the
assignment, the Bagelmanns sent their loan payments to IBMC.
FEMA issued new flood insurance maps on March 4, 2008. After
reviewing the maps, on March 28, LandAmerica issued a new flood
hazard determination to IBMC, correctly placing 1501 Horton in a special
flood hazard area. The property’s status on the maps did not change
from 1990 to 2008; the only difference was that LandAmerica read the
correct map this time. In late May, LandAmerica transmitted lists of
properties with “changed” flood hazard determinations (including 1501
Horton Road) to FNB and IBMC. FNB and IBMC concede they knew by
then that the Bagelmanns’ property was in a special flood hazard area
and required flood insurance as a loan condition. IBMC acknowledges it
may have known this earlier; it cannot tell when it received the March 28
notice from LandAmerica.
On June 10, 2008, catastrophic flooding of the Cedar River
severely damaged the Bagelmanns’ home. The flooding also damaged or
destroyed some of their personal property. On June 12, IBMC mailed the
Bagelmanns a letter dated June 9 that said, “We have been informed that
your property has been reviewed and is now considered to be in a flood
zone.” The letter said, “Please contact your insurance agent immediately
and obtain the insurance. The insurance must cover your loan balance
_______________________________
This flood determination is provided solely for the use and benefit of the
entity named in Section 1, Box 1 [i.e., FNB] in order to comply with the
1994 Reform Act and may not be used for or relied upon by any other
entity or individual for any purpose, including but not limited to deciding
whether to purchase a property or determining the value of a property.
7
of $221,035.49.” The Bagelmanns received this letter on June 14. For
its part, FNB never sent the Bagelmanns a notice concerning the revised
flood hazard determination. Had the Bagelmanns been notified earlier
than June 14 that they were in a special flood hazard area, they contend
they would have purchased flood insurance (which could have been
bound immediately) and would have avoided a substantial loss on the
property.
Despite the fact that the property lacked flood insurance, FEMA
paid the Bagelmanns the preflood appraised value of $415,000 for their
property plus a $10,850 moving/relocation allowance. After netting the
mortgage payoff to Fannie Mae, the Bagelmanns received $190,647.33
for their home. However, even with the buyout, the Bagelmanns
maintain they suffered $418,872.98 in monetary damages that could
have been avoided.
LandAmerica is now in bankruptcy. 4 On September 29, 2010, the
Bagelmanns brought an action in the Bremer County District Court
asserting the following claims against FNB and IBMC: (1) breach of
contract against FNB for the initial incorrect flood hazard determinations
in 2001 and 2003; (2) breach of contract against both FNB and IBMC for
failing to make subsequent determinations and for failing to notify them
of the correct March 2008 determination before June 10, 2008;
(3) breach of contract against FNB and IBMC based on the theory that
the Bagelmanns were third-party beneficiaries of the loan assignment
agreement between FNB and IBMC; (4) negligence against FNB and IBMC
for the erroneous initial determinations, failing to make subsequent
correct determinations, and failing to timely notify them of the March
4The Bagelmanns filed a claim in the bankruptcy.
8
2008 determination; (5) negligent misrepresentation against FNB for the
erroneous flood hazard determinations in 2001 and 2003; (6) breach of
the covenant of good faith and fair dealing against IBMC; and (7) punitive
damages against IBMC.
Subsequently, both FNB and IBMC moved for summary judgment.
Both defendants disputed that they had ever contracted with the
Bagelmanns to provide them with accurate flood hazard determinations
or that the assignment of the mortgage from FNB to IBMC covered this
subject. Both disputed that they had any legal duty to provide accurate
flood hazard determinations. FNB also argued that its employees were
not negligent and any negligence was that of LandAmerica. Additionally,
citing numerous out-of-state authorities, IBMC argued that recognizing a
negligence cause of action against it would be inconsistent with
principles of federalism given the absence of a federal cause of action
under the NFIA for erroneous flood hazard determinations. Lastly, IBMC
argued that it could not be sued for breaching a covenant of good faith
and fair dealing unless there was an underlying contract on the subject.
The district court granted summary judgment to both defendants.
It first noted that there was no private right of action available under the
NFIA. Then, it observed that most states considering the matter have
rejected state common law claims by borrowers against lenders for
erroneous flood hazard determinations. It found that there was no
contract between the parties concerning flood hazard determinations.
Additionally, it found that plaintiffs’ good faith and fair dealing claim
could not succeed outside the context of a contract, and that plaintiff’s
claim for punitive damages failed because it was based entirely on the
good faith and fair dealing claim. Lastly, relying on the structure and
purpose of the NFIA, the absence of a private right of action under that
9
statute, and principles of federalism, it rejected plaintiffs’ negligence
claims. This appeal followed.
II. Standard of Review.
We review a district court’s grant of summary judgment for
correction of errors at law. Van Fossen, 777 N.W.2d at 692–93.
Summary judgment is proper when “the pleadings, depositions, answers
to interrogatories, and admissions on file, together with the affidavits, if
any, show that there is no genuine issue as to any material fact and that
the moving party is entitled to a judgment as a matter of law.” Iowa R.
Civ. P. 1.981(3).
III. Legal Analysis.
A. The National Flood Insurance Act. The National Flood
Insurance Act was originally enacted in 1968 with the goals of providing
affordable flood insurance to home owners living in high-risk areas and
easing the burden that flood disasters place on the federal treasury. 42
U.S.C. § 4002 (2006). The NFIA basically put the federal government in
the flood insurance business.
In 1973, the NFIA was amended to prohibit federally regulated
lending institutions from making any real estate loans in a special flood
hazard area unless the property was covered by flood insurance. Id.
§ 4012a(b). 5 Lenders were authorized to charge borrowers a “reasonable
5That provision states:
Each Federal entity for lending regulation . . . shall by regulation direct
regulated lending institutions not to make, increase, extend, or renew
any loan secured by improved real estate . . . located or to be located in
an area that has been identified by the Director as an area having special
flood hazards and in which flood insurance has been made available
under the National Flood Insurance Act of 1968, unless the building or
mobile home and any personal property securing such loan is covered for
the term of the loan by flood insurance in an amount at least equal to the
outstanding principal balance of the loan . . . .
10
fee” to cover the initial determination whether a home is in a special flood
hazard area, and subsequent “life-of-loan monitoring.” 12 C.F.R.
§ 339.8(a) (2010). When property is in such an area, the lender must
notify the borrower of the requirement to have flood insurance. 42
U.S.C. § 4012a(e)(1). 6 If the borrower fails to buy such insurance within
forty-five days of being notified, the lender is required to buy it for the
borrower and charge the costs back to the borrower. Id. § 4012a(e)(2).
Also, a lender that has a “pattern or practice” of violating the
requirements of this section shall be assessed civil penalties “by the
appropriate Federal entity.” Id. § 4012a(f)(1)–(2); see also id. § 4104a(1)
(providing that “[e]ach Federal entity for lending regulation . . . shall by
regulation require regulated lending institutions” to give advance notice
of the flood insurance requirement before closing on the loan); 12 C.F.R.
§ 339.3 (prohibiting federally insured state banks from making loans in
special flood hazard areas unless the property is covered by flood
insurance).
_______________________________
42 U.S.C. § 4012a(b).
6That provision states:
If, at the time of origination or at any time during the term of a loan
secured by improved real estate . . . located in an area that has been
identified by the Director (at the time of the origination of the loan or at
any time during the term of the loan) as an area having special flood
hazards and in which flood insurance is available under the National
Flood Insurance Act of 1968, the lender or servicer for the loan
determines that the building . . . securing the loan is not covered by flood
insurance or is covered by such insurance in an amount less than the
amount required for the property pursuant to paragraph (1), (2), or (3) of
subsection (b) of this section, the lender or servicer shall notify the
borrower under the loan that the borrower should obtain, at the
borrower’s expense, an amount of flood insurance for the building . . .
that is not less than the amount under subsection (b)(1) of this section,
for the term of the loan.
Id. § 4012a(e)(1).
11
Federal courts, including the Eighth Circuit, have uniformly found
that no express or implied federal private cause of action exists under
these provisions of the NFIA. In Hofbauer v. Northwestern National Bank
of Rochester, 700 F.2d 1197 (8th Cir. 1983), the court considered a fact
scenario somewhat similar to the present one. The Hofbauers had
purchased a home in Rochester, Minnesota, financed by Northwestern
National Bank. The bank failed to tell them the home was in a special
flood hazard area, the Hofbauers did not purchase flood insurance, and
later they suffered losses when their home flooded. The Hofbauers sued
the bank for violating the NFIA. Hofbauer, 700 F.2d at 1198–99.
The Eighth Circuit noted that no express right of action exists
under the statute. Id. at 1199. It added that other courts had previously
rejected an implied private right of action. Id. at 1200 (citing Arvai v.
First Fed. Sav. & Loan Ass’n, 698 F.2d 683 (4th Cir. 1983); Till v. Unifirst
Fed. Sav. & Loan Ass’n, 653 F.2d 152 (5th Cir. 1981); R.B.J. Apartments,
Inc. v. Gate City Sav. & Loan Ass’n, 315 N.W.2d 284 (N.D. 1982)).
Turning to its own analysis, the Eighth Circuit then pointed out that the
provisions in question “seem[] primarily concerned with protecting
lenders, not borrowers”; that they “do not directly require lenders to do
anything” and are “directed instead to those federal agencies that
supervise lenders”; that they contain “an administrative enforcement
mechanism”; and that other flood-insurance laws have an express
private right of action, showing that when Congress wanted to provide a
private remedy, it knew how to do so. Id. at 1200–01. For these reasons
the court found that no implied private right of action existed. Id.
Other decisions since Hofbauer have reinforced this conclusion.
See Paul v. Landsafe Flood Determination, Inc., 550 F.3d 511, 513 (5th
Cir. 2008) (stating that “the Act does not create an implied private right
12
of action for borrowers when a determination is erroneously made that
property is outside a flood zone”); Mid-America Nat’l Bank of Chi. v. First
Sav. & Loan Ass’n of S. Holland, 737 F.2d 638, 643 (7th Cir. 1984)
(“Absent any indication that Congress intended a federal cause of action
in favor of borrowers against lenders under Sections 4012a(b) and
4104a, this Court is not in a position to create such a cause of action.”).
But it should be noted that the Eighth Circuit did not terminate
the litigation in Hofbauer. Instead it granted the Hofbauers’ request to
remand the case back to state court, explaining,
[e]ven though the Hofbauers cannot assert a private cause of
action arising under federal law, the federal statutes may
create a standard of conduct which, if broken, would give
rise to an action for common-law negligence. That is a
question of Minnesota law best left to the courts of that
State.
700 F.2d at 1201.
We are confronted here with the question that the Eighth Circuit
left open in Hofbauer: Can a borrower sue a lender under state law in
negligence for failing to discharge a duty created by the NFIA? For the
reasons that follow, we believe the answer to this question is no.
B. State Law Negligence Duties Arising out of Failure to
Comply with the National Flood Insurance Act. The Bagelmanns
allege that FNB was negligent in its issuance of the flood hazard
determinations in 2001 and 2003, and that both FNB and IBMC were
negligent in failing to timely notify them of the March 2008
redetermination. A number of state courts, citing principles of
federalism, have barred state negligence claims based upon alleged
violations of the NFIA. In Highmark Federal Credit Union v. Hunter, a
homeowner whose house had flooded sued the lender for negligently
failing to warn her to purchase flood insurance. 814 N.W.2d 413, 414
13
(S.D. 2012). After recognizing that Hofbauer left this issue unresolved,
the court considered whether the homeowner could proceed under South
Dakota law. Id. at 416. The court noted that while the action was for
negligence, the underlying duty still arose from the NFIA. Id. The court
then concluded, “If the NFIA does not create a private right of action,
then it follows that an individual cannot use the NFIA to establish a duty
in an individual civil claim.” Id. at 418.
Other courts have reached the same result. See Wentwood
Woodside I, LP v. GMAC Commercial Mortg. Corp., 419 F.3d 310, 323 (5th
Cir. 2005) (holding that “section 4012a does not give rise to a private
right of action under Texas law for negligence per se”); Lukosus v. First
Tenn. Bank Nat’l Ass’n, 89 F. App’x 412, 412 (4th Cir. 2004) (rejecting
claims charging banks “with various common law offenses based on their
failure to provide proper flood certification”); Ellis v. Countrywide Home
Loans, Inc., 541 F. Supp. 2d 833, 838 (S.D. Miss. 2008) (making an Erie
guess that the Mississippi Supreme Court would decline to recognize
state common law claims against lenders for allegedly erroneous flood
hazard determinations); Duong v. Allstate Ins. Co., 499 F. Supp. 2d 700,
703–04 (E.D. La. 2007) (rejecting a claim under Louisiana law for failure
to make a correct flood hazard determination); Dollar v. NationsBank of
Ga., N.A., 534 S.E.2d 851, 853 (Ga. Ct. App. 2000) (holding that a bank
“had no duty to [its customer] to accurately make” a flood hazard
determination); Mid-America Nat’l Bank of Chi. v. First Sav. & Loan Ass’n
of S. Holland, 515 N.E.2d 176, 180 (Ill. App. Ct. 1987) (declining to adopt
the NFIA as the standard of care in a state negligent misrepresentation
action against lenders in light of “the separation of powers doctrine and
the principles of federalism which militated against Federal courts
formulating a private cause of action”); Jack v. City of Wichita, 933 P.2d
14787, 793 (Kan. Ct. App. 1997) (rejecting a borrower’s negligence claim
against a lender as without merit because “the [NFIA] do[es] not create a
duty which would support a claim for negligence” and because the
borrower–lender relationship “is not the sort of ‘special relationship’
which justifies imposing a duty”); Guyton v. FM Lending Servs., Inc., 681
S.E.2d 465, 473–75 (N.C. Ct. App. 2009) (declining to recognize a North
Carolina common law duty arising from the NFIA, but recognizing one
under that state’s Mortgage Lending Act); R.B.J. Apartments, 315 N.W.2d
at 289–90 (declining to allow a negligence cause of action based on
violation of the NFIA); Pippin v. Burkhalter, 279 S.E.2d 603, 604 (S.C.
1981) (“It is clear that the provisions are intended to protect a class of
loans supervised, approved, regulated or insured by the federal
government and all those associated with such loans. There can be no
implied cause of action in the purchaser.”).
The Bagelmanns cite no reported case that has recognized a state
law negligence claim by a borrower against a lender relating to an
erroneous flood hazard determination. Cf. Klecan v. Countrywide Home
Loans, Inc., 951 N.E.2d 1212, 1215–17 (Ill. App. Ct. 2011) (allowing state
law negligence action to go forward against a lender’s subsidiary that
performed the determination); Paul, 550 F.3d at 515–19 (allowing a state
law negligence action to proceed against the company that actually made
the flood hazard determination). 7
7In Small v. South Norwalk Savings Bank, which neither party referred to in their
briefing, the Connecticut Supreme Court upheld a negligence verdict in favor of a
homeowner against a lender for failing to disclose the property she had purchased was
located within a flood zone. 535 A.2d 1292, 1296–97 (Conn. 1988). However, as the
South Dakota Supreme Court noted in Highmark, the defendant in Small failed to file a
timely motion to set aside the verdict and thus the Connecticut Supreme Court’s review
was limited to plain error. See Highmark, 814 N.W.2d at 418; Small, 535 A.2d at 1295–
97.
15
Although “federalism” may not be the best label to apply, we agree
with the reasoning in the foregoing cases. 8 The circumstance they
present is not one where a legal duty (e.g., to manufacture a safe
product) would otherwise exist under state law, and where federal law is
only being invoked as a standard of conduct. Cf. Hofbauer, 700 F.2d at
1201 (allowing for the possibility that “the federal statutes may create a
standard of conduct which, if broken, would give rise to an action for
common-law negligence”). Rather, the alleged duty to advise customers
about flood insurance in these cases arose only because of federal law.
In the absence of a statute, banks normally would not have an
underlying obligation to tell customers whether they need flood
insurance or not. See Engstrand v. W. Des Moines State Bank, 516
N.W.2d 797, 799 (Iowa 1994) (“The banking-customer relationship does
not automatically create a fiduciary duty.”); Fed. Land Bank of Omaha v.
Woods, 480 N.W.2d 61, 67 (Iowa 1992) (holding that a bank did not have
a duty to learn of or disclose defects in title); see also Dollar, 534 S.E.2d
at 853 (noting that the lender and the borrower “were involved in an
arm’s length mortgage transaction” rather than a “confidential
relationship” regarding the need for flood insurance); Jack, 933 P.2d at
793 (observing that the borrower–lender relationship does not justify
imposing a duty to advise the borrower that insurance would be
needed). 9 We therefore agree it would be inconsistent with the lack of a
8“Federalism,central to the constitutional design, adopts the principle that both
the National and State Governments have elements of sovereignty the other is bound to
respect.” Arizona v. United States, ___ U.S. ___, ___, 132 S. Ct. 2492, 2500, 183 L. Ed.
2d 351, 368 (2012). Yet normally we think of preemption, in its various forms, as the
means by which national sovereignty is protected. Id. at ___, 132 S. Ct. at 2500–01,
183 L. Ed. 2d at 368–69.
9Asa general matter, Iowa has adopted the following rule governing a mortgage
lender’s duty of care to a borrower:
16
private right of action under the NFIA to authorize a negligence action
based upon a duty that exists only because of the NFIA. As the North
Carolina Court of Appeals has said:
[T]reating 42 U.S.C. § 4104a(a)(1) as creating an independent
state law duty would have the practical effect of recognizing
an implied private right of action under that statute in all
but name. Like other courts that have considered this
approach, we believe that it would inappropriately
circumvent the widely-accepted understanding that
Congress did not intend to create a federal private right of
action under 42 U.S.C. § 4104a(a)(1) to directly utilize that
statutory provision as the basis for a state law claim. As a
result, we believe that a state law claim of the type that
Plaintiffs have sought to assert against Defendant, if any,
must rest on a legal duty arising under one or more
provisions of state law totally independent of 42 U.S.C.
§ 4104a(a)(1).
Guyton, 681 S.E.2d at 474–75 (footnote omitted).
The NFIA protects borrowers to a certain degree, but its main focus
is on protecting regulated lenders and the federal government. This is
evident in the actual requirements the Act imposes. The insurance only
needs to be sufficient to cover the outstanding principal balance of the
loan. 42 U.S.C. § 4012a(b)(1). “If Congress had passed the statute
primarily for the benefit of borrowers, it would have required that they
insure their equity in the home.” Hofbauer, 700 F.2d at 1200. Moreover,
if the law were designed to offer broad protection to homeowners in flood
zones, it would not have limited the insurance requirement only to those
_______________________________
“Ordinarily, there is no duty on the part of a lender to inspect the
mortgaged property to determine that the borrower is obtaining that
which he may have been promised by the vendor or that which he
believes he is obtaining. Unless some further obligation is assumed, the
lender’s inspection of the premises to be mortgaged is made only to
ascertain whether the property has sufficient value to secure the loan
and is made by the lender for its benefit only.”
Fed. Land Bank of Omaha, 480 N.W.2d at 67 (quoting Fed. Land Bank of Baltimore v.
Fetner, 410 A.2d 344, 348 (Pa. 1979)).
17
homes financed by federally regulated lenders. 42 U.S.C. § 4012a(b)(1).
More specifically, the Act’s scope suggests that disclosure to borrowers
was not a principal goal. There is no requirement that lenders provide
any detail regarding flood risks, beyond a notification that a property is
in a flood zone and requires insurance. See id. §§ 4012a(e)(1),
4104a(a)(1).
If the lenders that the NFIA seeks to shield from financial harm
were subjected to common law liability derived from the Act, this could
be seen as undermining the purposes of the Act. Other state courts
share this concern:
The policy of protecting the Federal treasury would not be
furthered by holding federally insured lenders liable under
the Act. The statutes themselves do not directly confer any
benefit on borrowers, nor do they directly impose any burden
on lenders. The statutes, along with the regulation, are part
of a comprehensive administrative scheme. The proper
Federal agency has authority to issue cease and desist
orders against bank officials, terminate unsound practices,
impose administrative remedies including penalties, and
require affirmative action to prevent or correct violations.
The existence of such supervisory and enforcement authority
at the administrative level strongly suggests no broad private
remedies were intended. Furthermore, Congress expressly
provided for private rights of action under other provisions of
the Act. Congress balanced the competing interests of
borrowers, lenders, and the government through the use of
an administrative agency. Recognizing either a contract or
negligence action under the Act might upset this balance.
Lehmann v. Arnold, 484 N.E.2d 473, 481 (Ill. App. Ct. 1985) (citations
omitted) (declining to recognize a cause of action under Illinois law
against a lender for failing to comply with NFIA requirements).
C. The Bagelmanns’ Negligence Claims. None of this, however,
forecloses the possibility that an independent state law duty could exist
based upon something other than a violation of the NFIA. See Guyton,
681 S.E.2d at 475 (reversing dismissal of borrowers’ claims to the extent
18
they “alleged conduct on the part of Defendant sufficient to establish a
violation of a legal duty established under North Carolina state law
independent of 42 U.S.C. § 4104a(a)(1)”).
The Bagelmanns advance one candidate for such a duty, the
“assumed duty” provision of the Second Restatement of Torts. See
Restatement (Second) of Torts § 323 (1965). 10 The Bagelmanns argue
that FNB (at least) undertook to render a service to them when it started
to advise them regarding the requirement (or lack of a requirement) for
flood insurance. Hence, it was required to perform that service with due
care. See id.
The problem with this argument is that only when the defendant
“intends to render services to another that are necessary for the other’s
protection is liability under section 323 even possible.” Wright v. Brooke
Grp. Ltd., 652 N.W.2d 159, 177–78 (Iowa 2002) (holding that statements
by tobacco companies that they would report on the results of their
research into the health effects of cigarette smoking were not an
undertaking within the meaning of section 323). Here FNB, and later
IBMC, were not trying to render a service to the Bagelmanns for the
Bagelmanns’ protection. They were complying with a federal law that
required them to determine whether the property was in a special flood
10This section provides:
One who undertakes, gratuitously or for consideration, to render services
to another which he should recognize as necessary for the protection of
the other’s person or things, is subject to liability to the other for
physical harm resulting from his failure to exercise reasonable care to
perform his undertaking, if
(a) his failure to exercise such care increases the risk of such harm, or
(b) the harm is suffered because of the other’s reliance upon the
undertaking.
Restatement (Second) of Torts § 323, at 135 (1965).
19
zone and, if so, give notice and make certain that the property was
covered by flood insurance. See, e.g., Duong, 499 F. Supp. 2d at 704
(“Both Louisiana courts and federal courts agree that a flood zone
determination is undertaken for the benefit of the lender and not for the
benefit of the borrower.”); Dollar, 534 S.E.2d at 853 (noting that “[the
bank’s] determination as to whether or not [the borrower’s] residence was
in a flood hazard zone was made, not for [the borrower’s] benefit, but for
the purpose of protecting the bank’s interest in its collateral”). 11
A lender “undertakes” to notify a borrower regarding the need for
flood insurance because federal law requires it to do so. Hence, the
Bagelmanns’ section 323 argument becomes essentially another way to
try to convert the statutory requirements of the NFIA into a state
common law duty. If section 323 were a sufficient basis for imposing an
affirmative duty on lenders to exercise due care to notify borrowers
regarding the need for flood insurance, it could have been asserted in
any of the foregoing cases that rejected state common law claims. Based
on our prior reasoning, we do not believe section 323 constitutes an
independent ground for finding a state law duty here.
However, this case presents a wrinkle that did not exist in the
other state common law cases we have discussed above. Here the
Bagelmanns have provided evidence from which a fact finder could draw
an inference that FNB and IBMC knew (not merely should have known)
by at least late May 2008 that their property was in a flood zone, and
that prior representations to the contrary were incorrect. Is this a
circumstance that under Iowa law could give rise to a claim, even if the
11Neither party disputes that FNB’s representative told the Bagelmanns in their
initial meeting “that the Bank would have to secure a flood determination for the Bank’s
compliance with . . . federal law requirements.”
20
NFIA did not exist? Restatement (Second) of Torts section 551(2)
provides:
(2) One party to a business transaction is under a duty to
exercise reasonable care to disclose to the other before the
transaction is consummated,
....
(c) subsequently acquired information that he knows will
make untrue or misleading a previous representation that
when made was true or believed to be so . . . .
Restatement (Second) of Torts § 551(2), at 119 (1977).
In other words, under the Restatement, there is a duty to exercise
reasonable care to disclose information that a party to a not-yet-
consummated business transaction knows will make untrue or
misleading a previous representation. This duty, we believe, could not
apply to FNB, since in 2008 it no longer had a banking relationship with
the Bagelmanns. See Dahlgren v. First Nat’l Bank of Holdrege, 533 F.3d
681, 697 (8th Cir. 2008) (rejecting the application of Restatement section
551 to “a transaction occurring after the bank is no longer financing the
customer”). However, in Wright, we held a manufacturer of cigarettes
could be liable under section 551(2) for failing to disclose to a consumer
“subsequently acquired information that would prevent a prior statement
from being false or misleading.” 652 N.W.2d at 175–76.
In Guyton, the court recognized the plaintiffs’ theory that the
lender “actively and intentionally withheld the information that the
property lay in a flood plain . . . in order to induce Plaintiffs to purchase
the property” could be an independent state law basis for liability. 681
S.E.2d at 475. Here, by contrast, the Bagelmanns have not alleged
fraudulent conduct, merely negligent conduct. Yet, in light of the
existence of section 551(2), we are not prepared to say at this time that
21
they have no claim against IBMC over its failure to disclose the new flood
hazard determination before June 10, 2008.
We are not deciding that the Bagelmanns actually have a valid
§ 551(2) claim. Issues that have not been briefed to us need to be
addressed, including whether there was a “transaction” that was yet to
be “consummated.” Other legal or factual defenses may exist as well. It
would not be appropriate for us to decide these matters at the present
time.
Therefore, on the Bagelmanns’ negligence claim, we affirm the
grant of summary judgment to FNB, but reverse the grant of summary
judgment to IBMC and remand for further proceedings on a potential
claim based on Restatement (Second) of Torts section 551(2).
D. Negligent Misrepresentation. The Bagelmanns have asserted
a negligent misrepresentation claim against FNB only. They allege that
the erroneous flood hazard determinations they received from FNB in
2001 and 2003 amounted to negligent misrepresentations. Iowa has
adopted the definition of the tort of negligent misrepresentation found in
the Restatement (Second) of Torts. Pitts v. Farm Bureau Life Ins. Co., 818
N.W.2d 91, 111 (Iowa 2012). The elements are as follows:
(1) One who, in the course of his business, profession or
employment, or in any other transaction in which he has a
pecuniary interest, supplies false information for the
guidance of others in their business transactions, is subject
to liability for pecuniary loss caused to them by their
justifiable reliance upon the information, if he fails to
exercise reasonable care or competence in obtaining or
communicating the information.
(2) Except as stated in Subsection (3), the liability stated in
Subsection (1) is limited to loss suffered
(a) by the person or one of a limited group of persons
for whose benefit and guidance he intends to supply the
information or knows that the recipient intends to supply it;
and
22
(b) through reliance upon it in a transaction that he
intends the information to influence or knows that the
recipient so intends or in a substantially similar transaction.
(3) The liability of one who is under a public duty to give the
information extends to loss suffered by any of the class of
persons for whose benefit the duty is created, in any of the
transactions in which it is intended to protect them.
Restatement (Second) of Torts § 552, at 126–27 (1977).
FNB points out that some out-of-state decisions have rejected
negligent misrepresentation claims filed against lenders over erroneous
flood hazard determinations, applying the same rationale that has led to
the dismissal of general negligence claims. See, e.g., Duong, 499
F. Supp. 2d at 704; Mid-America Nat’l Bank of Chi., 515 N.E.2d at 180.
The Bagelmanns note, however, that a North Carolina appellate case
appears to recognize negligent misrepresentation as a potentially viable
ground for a borrower to recover from a lender based on a mistaken flood
hazard determination. See Guyton, 681 S.E.2d at 478–79 (ultimately
denying the claim because plaintiffs alleged only that defendant “acted
intentionally without ever advancing an alternative allegation that
Defendant acted unintentionally or negligently”).
The Bagelmanns analogize the present case to Larsen v. United
Federal Savings & Loan Ass’n of Des Moines, 300 N.W.2d 281 (Iowa
1981). Larsen was a negligent misrepresentation case where we upheld a
jury verdict against a lender whose employee had negligently prepared an
inflated appraisal. 300 N.W.2d at 283–85. The borrowers had overpaid
for the house in reliance on the appraisal. Id. We specifically found the
lender owed a duty to the borrower under the circumstances of that case.
Id. at 285–88. We observed:
Even though the appraisal might be made primarily for the
benefit of the lending institution, the appraiser should also
reasonably expect the home purchaser, who pays for the
23
appraisal and to whom the results are reported (and who has
access to the written report on request), will rely on the
appraisal to reaffirm his or her belief the home is worth the
price he or she offered for it. The purchaser of the home
should be among those entitled to rely on the accuracy of the
report and therefore should be entitled to sue for damages
resulting from a negligent appraisal.
Id. at 287.
Additionally, plaintiffs draw a parallel between this case and
Garren v. First Realty, Ltd., 481 N.W.2d 335 (Iowa 1992). In Garren, the
plaintiffs were not told the property they were buying was in a fringe
flood zone. 481 N.W.2d at 336. The property later was damaged by
flooding. Id. After settling with the appraiser, the mortgage lender, and
the sellers, the plaintiffs sued the real estate broker. Id. They obtained a
jury verdict, but it was reduced due to the apportionment of fault among
the settling parties. Id. at 337. The plaintiffs appealed the decision to
apportion fault. Id.
We held that fault was properly apportioned among those parties.
Id. at 339–40. The plaintiffs argued they had not relied upon the lender
and the appraiser to disclose flood zoning, but we found “it can be
properly inferred that plaintiffs relied on the lender and appraiser to
accurately appraise the property.” Id. at 340. As in Larsen, the plaintiffs
“paid the lender a fee to have the property appraised.” Id. “The
appraiser was required to determine whether the property was in a flood
zone.” Id. The plaintiffs certified in their loan application their
awareness of the appraisal amount. Id. Garren contains no mention of
flood insurance; like Larsen, it is a case where the theory of lender
liability was based on an inaccurate appraisal. Id.
The Bagelmanns contend that a flood hazard determination is
similar to an appraisal: While the document is prepared principally for
the lender, the borrower has to pay for it and should be able to bring a
24
negligent misrepresentation claim if it is inaccurate due to the fault of
the lender. 12
Yet we need not resolve whether Larsen and Garren control the
duty question here, because the summary judgment record contains no
evidence of FNB’s negligence with respect to the 2001 and 2003 flood
hazard determinations. FNB moved for summary judgment below on the
alternative ground that it had not been negligent. It maintained that
“[n]o FNB employees actually performed either of the flood certifications”
and “[n]o FNB employees had any knowledge or could have reasonably
known that the flood certifications were not accurate.” Before us, it
makes the same arguments:
There is no allegation FNB did not use reasonable care
in securing a flood determination from a third party
according to the applicable federal law . . . . The provider of
an erroneous flood determination may have a duty under
Section 552 of the Restatement Second that would allow a
negligent misrepresentation claim, but the lender that
ordered the determination and does not have reason to know
it is inaccurate certainly would not.
See DeVoss v. State, 648 N.W.2d 56, 61 (Iowa 2002) (“We have in a
number of cases upheld a district court ruling on a ground other than
the one upon which the district court relied provided the ground was
12Additionally, in Sturm v. Peoples Trust & Savings Bank, despite finding no
private right of action under federal law to sustain a borrower’s claim against a lender
over a loan disclosure, we nonetheless separately considered the borrower’s negligent
misrepresentation claim. 713 N.W.2d 1, 4–5 (Iowa 2006). There the plaintiffs alleged
that the HUD-1’s they had signed failed to comply with the applicable federal law, i.e.,
the Real Estate Settlement Procedures Act (RESPA), and amounted to negligent
misrepresentations. Id. at 2 (“The gist of the Sturms’ suit against Peoples is that the
loan papers were deficient under federal statutes and common law.”). After finding no
private right of action under RESPA, we went on to address the plaintiffs’ negligent
misrepresentation claim, noting the plaintiffs’ contention that it “provided a basis for
recovery independent of their statutory claim.” Id. at 4. We ultimately upheld the
dismissal of that claim on other grounds. Id. at 5. Thus, we did not decide the
question whether a negligent misrepresentation claim could proceed if the duty to issue
the HUD-1’s arose only because of RESPA.
25
urged in that court.”). We therefore may affirm summary judgment on
the negligent misrepresentation claim on this alternative ground.
Unlike in Larsen, where the bank’s own employee performed the
appraisal, here FNB hired a third party—LandAmerica—to make the
flood hazard determinations. 13 There is no evidence or allegation that
FNB acted negligently in retaining this company. Nor is there any
indication that FNB should have realized the information in
LandAmerica’s reports was incorrect. The only negligence alleged by the
Bagelmanns with respect to this time period—reading the wrong map
and reaching the wrong special flood hazard area conclusion—belongs to
another party. Accordingly, the district court properly granted summary
judgment to FNB on the Bagelmanns’ negligent misrepresentation claim.
E. Breach of Contract. We turn now to the Bagelmanns’ breach
of contract claims. If FNB or IBMC had entered into a contract to provide
the Bagelmanns with accurate flood hazard determinations, this could
result in the creation of an independent legal duty, notwithstanding the
absence of a private right of action under the NFIA.
The Bagelmanns are fairly clear as to what allegedly amounted to
breaches of contract, namely, the inaccurate 2001 and 2003 flood hazard
determinations and the failure to provide a correct determination before
June 10, 2008. However, they are less clear as to where the contracts
themselves can be found.
After reviewing their briefing, we believe the Bagelmanns are
potentially relying on the following transactions as relevant contracts:
(1) their $22 payment for the 2001 flood hazard determination, (2) their
13In Garren it appears the appraiser was not an employee of the lender.
However, the negligence of the lender was not at issue.
26
$18 payment for the 2003 determination, (3) the mortgages, and (4) the
assignment agreement between FNB and IBMC. We will address these in
order.
As the Bagelmanns note, in 2001 and 2003 they paid fees at
closing for written flood hazard determinations performed by a third
party that were later discovered to be incorrect. However, both the 2001
and the 2003 determinations stated that they were prepared by
LandAmerica when the Bagelmanns received them. The Bagelmanns
had been advised that FNB was ordering these reports from a third
party. 14 The settlement statements indicated that the fees for these
determinations were being paid to that third party. The Bagelmanns
have no evidence that FNB guaranteed or warranted the accuracy of
these third-party determinations. See, e.g., Cardozo v. True, 342 So. 2d
1053, 1057 (Fla. Dist. Ct. App. 1977) (stating that a bookseller does not
impliedly warrant the material communicated by the book’s author or
publisher). In fact, the 2003 determination said in bold type that the
determination was provided solely for the benefit of FNB and “may not be
used for or relied upon by any other entity or individual for any purpose,
including, but not limited to deciding whether to purchase a property or
determining the value of a property.”
The 2001 mortgage is not in the record. Regardless, it would have
been discharged at the time of the 2003 refinancing. The 2003 mortgage
was an integrated contract that authorized the lender to require the
borrower to pay for “flood zone determination.” However, as noted above,
there was no warranty or guaranty of the accuracy of the flood hazard
14The
Bagelmanns claim they were not aware that FNB had failed to make an
independent investigation of the flood hazard status. However, they do not cite any
communication with FNB as leading them to that conclusion.
27
determination. In fact, the flood hazard determination said it was “solely
for the use and benefit” of FNB and “may not be used for or relied upon
by any other entity or individual for any purpose.” The mortgage
contained no promise to notify the mortgagors of updated flood hazard
determinations. See Lass v. Bank of Am., N.A., 695 F.3d 129, 136 (1st
Cir. 2012) (indicating that the mortgage and the flood insurance
notification provided at closing should be read together as a single
contract); see also Sobi v. First S. Bank, Inc., 946 So. 2d 615, 616–617
(Fla. Dist. Ct. App. 2007) (noting that a construction loan agreement gave
the bank the right to require flood insurance but did not require it to
obtain a flood insurance certificate before funding construction draws).
The Bagelmanns have not shown a triable issue of fact as to whether
FNB (or IBMC) breached the 2001 or 2003 mortgages.
Finally, we cannot conclude that the Bagelmanns were third-party
beneficiaries of the assignment agreement between IBMC and FNB. A
third-party beneficiary claim requires that “ ‘the circumstances indicate
that the promisee intends to give the beneficiary the benefit of the
promised performance.’ ” Midwest Dredging Co. v. McAninch Corp., 424
N.W.2d 216, 224 (Iowa 1988) (quoting Restatement (Second) of Contracts
§ 302, at 439–40 (1981)). This one-page document does not include a
promise that IBMC would provide flood hazard determinations, let alone
indicate that such determinations would be for the benefit of the
Bagelmanns. The Bagelmanns argue, “Perhaps the biggest problem with
the District Court’s conclusion that there was no contract to notify the
Bagelmanns of changes in the flood hazard status is that IBMC did in
fact notify the Bagelmanns of the change in the flood hazard status in
June of 2008.” But as we have already discussed, federal law required
IBMC to do this. 42 U.S.C. § 4012a(e)(1).
28
We are unaware of any out-of-state case recognizing that a lender
had an independent contractual obligation to accurately perform an
NFIA-required flood hazard determination. Instead, a few cases have
rejected breach of contract claims, albeit with limited discussion and
analysis. See Lukosus v. First Tenn. Bank Nat’l Ass’n, No. 2:02CV00084,
2003 WL 21658263, at *1–2 & n.3 (W.D. Va. July 9, 2003) (dismissing
breach of contract claim), aff’d 89 F. App’x 412 (4th Cir. 2004); Lehmann,
484 N.E.2d at 481 (upholding dismissal of both negligence and breach of
contract claims and stating that “[r]ecognizing either a contract or
negligence action under the Act might upset” the balance struck by
Congress).
For the foregoing reasons, we affirm the entry of summary
judgment on the Bagelmanns’ breach of contract claims.
F. Covenant of Good Faith and Fair Dealing. The Bagelmanns
also allege that IBMC breached an implied covenant of good faith and fair
dealing when it delayed in telling them about the 2008 flood hazard
determination.
We agree with the district court that this claim cannot succeed as
a matter of law. An implied duty of good faith and fair dealing is
recognized in all contracts. Restatement (Second) of Contracts § 205, at
99; Fogel v. Trs. of Iowa Coll., 446 N.W.2d 451, 456 (Iowa 1989). But the
covenant does not “give rise to new substantive terms that do not
otherwise exist in the contract.” Mid-America Real Estate Co. v. Iowa
Realty Co., 406 F.3d 969, 974 (8th Cir. 2005) (quoting Mattes v. ABC
Plastics, Inc., 323 F.3d 695, 700 (8th Cir. 2003)).
As we have already discussed, the 2003 mortgage (the 2001
mortgage was no longer in effect as of 2008) authorized the mortgagee to
charge for a flood hazard determination. But this section of the mortgage
29
and the determination itself make clear that the determination was for
the mortgagee’s protection, not the mortgagors’. There was no promise to
notify (let alone update) the Bagelmanns concerning their flood zone
status, so any allegation of bad faith here lacks a contract term to which
it can be attached. We affirm the grant of summary judgment to IBMC
on this count. 15
IV. Conclusion.
For the above stated reasons, the judgment of the district court is
affirmed as to FNB. Regarding IBMC, we affirm as to all counts except
negligence (Count 4), where we reverse and remand for further
consideration of a possible claim based upon Restatement (Second) of
Torts section 551(2).
JUDGMENT OF THE DISTRICT COURT AFFIRMED IN PART
AND REVERSED IN PART; CASE REMANDED FOR FURTHER
PROCEEDINGS.
All justices concur except Zager, J., who takes no part.
15We also affirm the district court’s grant of summary judgment on the
Bagelmanns’ claim for punitive damages. That claim derives entirely from the breach of
the duty of good faith and fair dealing claim.