Kolbe v. BAC Home Loans Servicing, LP , 695 F.3d 129 ( 2012 )

United States Court of Appeals
For the First Circuit
No. 11-2030
STANLEY KOLBE,
Plaintiff, Appellant,
v.
BAC HOME LOANS SERVICING, LP, d/b/a BANK OF AMERICA, N.A.;
BALBOA INSURANCE COMPANY,
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.
Edward F. Haber, with whom Todd S. Heyman, Adam M. Stewart,
Michelle H. Blauner, and Shapiro Haber & Urmy LLP 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. This putative class action is one
of a number of breach-of-contract suits being brought against
financial institutions nationwide by mortgagors who claim that they
were improperly forced to increase flood insurance coverage on
their properties.1 The plaintiff in this case, Stanley Kolbe,
asserts that Bank of America's demand that he increase his flood
coverage by $46,000 breached both the terms of his mortgage
contract and the contract's implied covenant of good faith and fair
dealing. The district court concluded that the pertinent provision
of the mortgage unambiguously permitted the lender to require the
increased flood coverage and, hence, it granted the defendants'
motion to dismiss the complaint.
Having closely examined the mortgage language at issue
and the relevant context, we are persuaded that the mortgage is
reasonably susceptible to an understanding that supports Kolbe's
breach of contract and implied covenant claims. We therefore
vacate the judgment of dismissal in favor of the Bank.2
I.
The following facts are drawn from the allegations in the
complaint. See Román-Oliveras v. P.R. Elec. Power Auth., 655 F.3d
1We address another one of these actions in a separate
decision also issued today, Lass v. Bank of America, N.A., No. 11-
2037.
2
Federal jurisdiction in this case is premised on the court's
diversity jurisdiction over class actions alleging aggregated
damages in excess of $5 million. See 28 U.S.C. § 1332(d).
-2-
43, 45 (1st Cir. 2011). In October 2008, appellant Kolbe borrowed
$197,437 from a mortgage company to finance the purchase of his
home in Atlantic City, New Jersey. The loan is guaranteed by the
Federal Housing Administration ("FHA"), an agency within the
Department of Housing and Urban Development ("HUD"), and Kolbe's
mortgage in all material respects tracks the FHA's Model Mortgage
Form for single-family homes. See FHA Single Family Origination
Handbook 4165.1, App'x II, available at
http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4165.1/416
51hbHSGH.doc (last visited Sept. 18, 2012); see also 24 C.F.R.
§ 203.17(a)(2)(i) (stating that FHA mortgages "shall be in a form
meeting the requirements of the [Federal Housing] Commissioner").
Paragraph 4 of both the model mortgage form and Kolbe's agreement
describes the borrower's obligation to maintain hazard insurance,
in pertinent part, as follows:
4. Fire, Flood and Other Hazard Insurance.
Borrower shall insure all improvements on the
Property, whether now in existence or
subsequently erected, against any hazards,
casualties, and contingencies, including fire,
for which Lender requires insurance. This
insurance shall be maintained in the amounts
and for the periods that Lender requires.
Borrower shall also insure all improvements on
the Property, whether now in existence or
subsequently erected, against loss by floods
to the extent required by the Secretary [of
HUD].
Federal law required Kolbe to obtain flood insurance
because his property is located in an area designated as a special
-3-
flood hazard zone under the National Flood Insurance Act ("NFIA").
See 42 U.S.C. §§ 4001-4129.3 The minimum amount of such insurance
also is mandated by law. Under the NFIA, the flood coverage for a
residential property securing a mortgage issued by a federally
regulated lender must be in an amount at least equal to the
outstanding principal balance of the loan, or $250,000, whichever
is less. Id. §§ 4012a(b)(1), 4013(b)(2); 24 C.F.R. § 203.16a;
44 C.F.R. § 61.6. Kolbe's complaint states that he purchased
coverage in an unspecified amount in excess of the minimum. See
Compl. ¶ 26.
In August 2009, Kolbe's original mortgage company went
bankrupt, and appellee Bank of America took over Kolbe's loan.4
Through appellee Balboa Insurance Company, the Bank sent Kolbe
notices in October and November 2009 stating that he was required
to increase his flood insurance by $46,000 so that the total
coverage would equal the replacement cost of his property as
identified in his homeowner's insurance policy. The Bank warned
that it would purchase the additional insurance itself, at an
3
Technically, the statute requires the lender to require the
borrower to obtain the insurance. See 42 U.S.C. § 4012a(b)(1).
4
BAC Home Loans Servicing, LP, a wholly owned subsidiary of
Bank of America, N.A., was the entity that originally took over the
mortgage. BAC has now been merged into the Bank, and we thus refer
to the defendant mortgage holder as "Bank of America" or "the
Bank." Defendant Balboa Insurance Company also is a subsidiary of
Bank of America. For convenience, we at times refer only to "the
Bank" when describing acts allegedly performed by both defendants.
-4-
estimated cost to Kolbe of $237, if he did not acquire the
insurance by December 6. The Bank further advised that the
insurance it would purchase -- commonly known as "force-placed" or
"lender-placed" insurance," see, e.g., Williams v. Certain
Underwriters at Lloyd's of London, 398 F. App'x 44, 45 (5th Cir.
2010) (per curiam) -- might cost more and would likely be less
comprehensive than coverage Kolbe could obtain on his own. In
response to these notices, Kolbe bought the additional $46,000 in
flood insurance.
In February 2011, Kolbe filed this action against Bank of
America and Balboa on behalf of himself and others similarly
situated for breach of the mortgage contract and breach of the
contract's implied covenant of good faith and fair dealing. He
claimed that his mortgage contract did not permit the Bank to
demand increased coverage, and he alleged that the Bank had
implemented a nationwide policy of compelling borrowers to maintain
greater flood insurance than required by their mortgages or federal
law. Kolbe's complaint asserted that the Bank was profiting from
this improper policy because it often arranged for force-placed
insurance to be purchased through its own affiliated companies and
brokers.
The defendants moved to dismiss the complaint on the
ground that Paragraph 4 of the mortgage unambiguously gives the
lender the discretion to determine the amount of flood insurance
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the borrower must carry. In its written decision, the district
court agreed that the hazard-insurance provision can only be
reasonably interpreted to afford discretion to the lender. The
court concluded that the reference to "any hazards" in the first
sentence of the paragraph encompasses flooding,5 and, consequently,
it held that the second sentence gives the lender the right to
require that flood insurance, like other types of hazard coverage,
"be maintained in the amounts and for the periods that [the] Lender
requires." The court then considered the paragraph's third
sentence, which explicitly refers to flood insurance, and held that
it "merely specifies the required minimum coverage for flood
insurance" under federal law -- i.e., it imposes a floor on the
Bank's discretion to set the amount of flood insurance.
On appeal, Kolbe insists that Paragraph 4 addresses flood
insurance solely by means of the third sentence -- which explicitly
references such coverage -- and not by means of the generally
phrased "all hazards" language in the first sentence.
Alternatively, he maintains that this understanding is one of two
reasonable constructions of the paragraph. Kolbe asserts that his
interpretation supports his claim that the Bank breached the
mortgage agreement and violated the contract's implied covenant of
5
As reproduced above, the first sentence states: "Borrower
shall insure all improvements on the Property, whether now in
existence or subsequently erected, against any hazards, casualties,
and contingencies, including fire, for which Lender requires
insurance."
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good faith and fair dealing by compelling him (and others similarly
situated) to purchase flood insurance in excess of the outstanding
loan balance. Hence, Kolbe argues that the district court erred in
dismissing his complaint for failure to state a claim.
II.
The issue in this case is one of straightforward contract
interpretation. Appellant Kolbe asserts that the hazard and flood
insurance sentences in Paragraph 4 are independent and, indeed,
mutually exclusive. Appellees maintain that the flood insurance
sentence is subordinate to the general hazard sentence, merely
limiting the Bank's discretion by incorporating the minimum
coverage required by federal law. Kolbe, in other words, argues
that the contract does not permit the Bank to demand insurance
beyond the amount "required by the Secretary," while appellees
argue that the Bank may require any amount so long as the
Secretary's minimum is met.
Whether the contract language at issue here is ambiguous
is a question of law, Nye v. Ingersoll Rand Co., 783 F. Supp. 2d
751, 759 (D.N.J. 2011),6 and, accordingly, our review of the
district court's interpretation is de novo, Sumitomo Mach. Corp.
of Am., Inc. v. AlliedSignal, Inc., 81 F.3d 328, 332 (3d Cir.
6
The parties agree that New Jersey law governs the state-law
issue of contract interpretation because Kolbe's residence is
located there, and Paragraph 14 of the mortgage provides that
"federal law and the law of the jurisdiction in which the Property
is located" govern.
-7-
1996).7 A contract is ambiguous if it "is susceptible of more than
one meaning or if it is subject to reasonable alternative
interpretations." United States v. Pantelidis, 335 F.3d 226, 235
(3d Cir. 2003) (citation omitted) (internal quotation marks
omitted); see also Chubb Custom Ins. Co. v. Prudential Ins. Co. of
Am., 948 A.2d 1285, 1289 (N.J. 2008). Under New Jersey law,
extrinsic evidence of context may be considered in determining
ambiguity if "such evidence provides 'objective indicia that, from
the linguistic reference point of the parties, the terms of the
contract are susceptible of different meanings.'" Am. Cyanamid Co.
v. Fermenta Animal Health Co., 54 F.3d 177, 181 (3d Cir. 1995)
(quoting Mellon Bank, N.A. v. Aetna Business Credit, Inc., 619 F.2d
1001, 1011 (3d Cir. 1980)). We must "consider all of the relevant
evidence that will assist in determining the intent and meaning of
the contract." Conway v. 287 Corporate Ctr. Assocs., 901 A.2d 341,
346 (N.J. 2006); see also SmithKline Beecham Corp. v. Rohm & Haas
Co., 89 F.3d 154, 159 (3d Cir. 1996) (stating that New Jersey law
requires "courts [to] interpret a contract considering 'the
objective intent manifested in the language of the contract in
light of the circumstances surrounding the transaction'" (quoting
Dome Petroleum Ltd. v. Employers Mut. Liab. Ins. Co., 767 F.2d 43,
47 (3d Cir. 1985))).
7
Our review of a district court's dismissal of a complaint is
likewise de novo. See Román-Oliveras, 655 F.3d at 47.
-8-
A. Breach of Contract
1. The Language
Kolbe argues that the first three sentences of Paragraph
4 plainly address hazard insurance and flood insurance separately
-- with hazard insurance covered by the first two sentences and
flood insurance covered by the third -- and that only the amount of
hazard insurance is left to the discretion of the lender. For
convenience, we again reproduce the pertinent language in full:
4. Fire, Flood and Other Hazard Insurance.
Borrower shall insure all improvements on the
Property, whether now in existence or
subsequently erected, against any hazards,
casualties, and contingencies, including fire,
for which Lender requires insurance. This
insurance shall be maintained in the amounts
and for the periods that Lender requires.
Borrower shall also insure all improvements on
the Property, whether now in existence or
subsequently erected, against loss by floods
to the extent required by the Secretary [of
HUD].
Multiple characteristics of the provision suggest that
Kolbe's interpretation is correct. Importantly, the paragraph is
structured to address two different categories of insurance, with
the first and third sentences containing identical introductory
language directing the borrower to insure "all improvements on the
Property, whether now in existence or subsequently erected." The
repetition arguably denotes two parallel statements of coverage,
each establishing a particular coverage requirement for the same
property. The first two sentences also are distinct from the third
-9-
because they address insurance required by the lender, while the
third sentence addresses insurance required by the Secretary. The
second sentence, referring to "This insurance," is written as a
modification of the first sentence, addressing the required amount
of the previously identified form of insurance. By contrast, the
next sentence, referring to flood coverage, contains its own
specification of amount -- "the extent required by the Secretary."
The view that Paragraph 4 imposes independent
requirements for hazard and flood insurance is lent force by the
title for the paragraph, which breaks out "fire" and "flood" from
all other hazards. Each of those two specifically identified
hazards is then explicitly referenced, separately, in one of the
two parallel sentences. The fact that both "fire" and "flood" are
mentioned in the title, but the "all hazards" sentence refers only
to "fire," further supports the view that the flood coverage was
handled by the separate, linguistically parallel third sentence.
Moreover, the word "also" in the flood-insurance sentence
reinforces the independence of the two requirements by suggesting
a separate, additional obligation -- i.e., in addition to the
hazard insurance that is left to the lender's discretion for most
types of hazards, the debtor must obtain flood insurance in the
requisite amount. Indeed, if the flood-insurance sentence were
meant merely to limit the discretion afforded in the prior
sentence, it arguably would have been framed in direct relation to
-10-
that sentence. For example, it could have said: "Notwithstanding
any requirements of the Lender, flood insurance must be obtained as
required by the Secretary." The sentence as drafted, however, is
not framed as a qualification on the previous sentence, but as an
independent, further requirement.
Bank of America argues that the first sentence in
Paragraph 4, which applies generally to coverage against "hazards,
casualties, and contingencies," must be understood to include flood
insurance because flooding is embraced by any reasonable
understanding of those terms. Thus, the Bank asserts, the mortgage
contract allows it to demand flood coverage as it chooses pursuant
to the sentence stating that the hazard (or casualty or
contingency) insurance "shall be maintained in the amounts and for
the periods that Lender requires." The third sentence, according
to the Bank, minimally cabins its discretion by requiring flood
insurance at least "to the extent required by the Secretary."
We think appellant has the better argument based on the
language and format of the paragraph. Nevertheless, we acknowledge
that the Bank's interpretation can also be deemed reasonable.
Floods unquestionably are a type of hazard, and they are thus
literally within the scope of the first sentence. Moreover, the
third sentence can be reasonably understood to declare the
borrower's obligation to obtain flood insurance as required by the
NFIA regardless of whether the lender requires any other form of
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hazard insurance, but not to override the lender's exercise of
discretion to require more.
Because the language is not decisive, we consider what
the available extrinsic evidence tells us about the meaning of the
provision.
2. The Extrinsic Evidence
As a preliminary matter, we note that the mortgage and
certain public materials outside the complaint may properly be part
of our inquiry in reviewing the district court's disposition of a
motion to dismiss. See, e.g., Giragosian v. Ryan, 547 F.3d 59, 65
(1st Cir. 2008) (stating that a district court may consider
"documents incorporated by reference [in the complaint], matters of
public record, and other matters susceptible to judicial notice"
without converting a motion to dismiss into a motion for summary
judgment (internal quotation marks omitted) (alteration in
original)). We therefore refer liberally to publicly available HUD
materials.
The debate over the clarity of Paragraph 4 centers on
whether the reference to "any hazards" may reasonably be read to
exclude the serious hazard of flooding. Kolbe argues that flood
damage ordinarily is not covered by standard homeowners' hazard
insurance policies, and that it therefore is reasonable to conclude
that such coverage is excluded from the mortgage contract's hazard
insurance requirement. The Bank responds that the absence of any
-12-
explicit exclusion for flood coverage in the "any hazards" sentence
is the best evidence that flooding is a hazard within the meaning
of that sentence.
Kolbe's view is advanced by the distinctive treatment
routinely given to flood insurance by HUD, the agency responsible
for FHA programs. Kolbe's mortgage contract contains standard HUD
language specifying the mortgagor's insurance obligations.8
Appellant points out that HUD's handbook for the "Administration of
Insured Home Mortgages" treats hazard insurance and flood insurance
separately. For example, in a list of items linked to a home sale
that must be escrowed, hazard insurance is listed as the first item
and flood insurance is listed as the sixth item. See HUD Handbook
4330.1, ch. 2, § 2-1(D), available at
http://portal.hud.gov/hudportal/HUD?src=/program_offices/administ
ration/hudclips/handbooks/hsgh/4330.1 (last visited Sept. 18,
2012). The HUD handbook also contains a section labeled "Payment
of Bills and Taxes from Escrow Accounts" that lists the two types
of coverage separately. See id. ch. 2, § 2-8(D) (Hazard Insurance)
& (E) (Flood Insurance); see also id. at § 2-11(E) (separately
listing "Dwelling Insurance," "Flood Insurance," and "Homeowner's
Policies" under "Types of Coverage"). Similarly, HUD's sample
settlement statement for a home purchase separately itemizes
8
Paragraph 4 is one of sixteen "uniform covenants" included
in the FHA Model Mortgage Form for single-family homes. See FHA
Single Family Origination Handbook 4165.1, App'x II, supra.
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"Hazard Insurance Premium" on Line 903 and "Flood Insurance" on
Line 904. See "Buying Your Home" (June 1997), Section III,
a v a i l a b l e a t
http://portal.hud.gov/hudportal/documents/huddoc?id=DOC_12893.pdf
(last visited Sept. 18, 2012).
HUD's practice of treating flood coverage separately
reflects Congress's specific concern about such insurance, which
led to the enactment of the NFIA in 1968. Following years of major
floods that required "unforeseen disaster relief measures and . . .
placed an increasing burden on the Nation's resources," Congress
identified a widespread gap in private flood insurance coverage.
42 U.S.C. § 4001(a); see also H.R. Rep. No. 90-1585 (1968),
reprinted in 1968 U.S.C.C.A.N. 2873, 2966-2967 (noting that
"[h]eavy losses over the years from hurricanes in the coastal areas
and from storms in inland areas of the Nation dramatize the lack of
insurance protection against flood damage"). The legislators found
that it was "uneconomic" for private insurers to make flood
insurance available "on reasonable terms and conditions,"
42 U.S.C. § 4001(b)(1), and they sought to bridge the gap through
a cooperative program between the federal government and the
insurance industry, id. § 4001(b)(2).9 Thus, in effect, Congress
9
Congress anticipated that the National Flood Insurance
Program ("NFIP") authorized by the NFIA would rely on a pool of
insurance companies "to assume a reasonable proportion of
responsibility for the adjustment and payment of claims for
losses." 42 U.S.C. § 4051(a)(2); see also id. § 4011 (authorizing
-14-
found that floods were not customarily among the hazards protected
by standard homeowners' insurance policies. See Mitchell F.
Crusto, The Katrina Fund: Repairing Breaches in Gulf Coast
Insurance Levees, 43 Harv. J. on Legis. 329, 335 (2006) ("The
insurance industry has generally excluded flood damage in a
homeowners policy because flood insurance is not commercially
viable."); US Gov't Accountability Office, GAO 07-1078, National
Flood Insurance Program: FEMA's [Federal Emergency Management
Agency] Management and Oversight of Payments for Insurance Company
Services Should be Improved, at 8 (2007) (noting that "flooding is
generally excluded from homeowner policies that typically cover
damage from other losses, such as wind, fire, and theft").10
the program). Federal funds would subsidize the program. Id.§§ 4054(a) (directing the Administrator of the Federal Emergency
Management Agency to make periodic payments to the pool to ensure
that "flood insurance [is] available on reasonable terms and
conditions"); 4055(a) (authorizing reinsurance provided by the
government for losses in excess of the pool's assumption of
responsibility); see also Suopys v. Omaha Prop. & Cas., 404 F.3d
805, 807 (3d Cir. 2005) (noting that "[t]he NFIP is underwritten by
the United States Treasury in order to provide flood insurance
below actuarial rates").
10
HUD also recognizes the standard industry practice in
guidance about flood insurance requirements that is provided on its
website:
Generally, homeowner and other property casualty
insurance policies do not provide coverage for potential
financial loss that may be caused by flooding damage.
Many of the private insurance companies are now marketing
policies offered by the National Flood Insurance Program
along with their own property casualty insurance
policies.
-15-
HUD's practice of treating flood insurance independently
is pertinent to our interpretation of Paragraph 4 of the FHA's
model language, see Pacifico v. Pacifico, 920 A.2d 73, 78 (N.J.
2007) (noting that the terms of a contract are to be examined "in
light of the common usage and custom"); Kearny PBA Local No. 21 v.
Town of Kearny, 405 A.2d 393, 400 (N.J. 1979) (listing custom and
usage among the "interpretative devices" for discovering
contractual intent), and Kolbe's interpretation has particular
force where, as here, the mortgage separately addresses flood-
insurance coverage. By contrast, if there were no explicit
reference to flooding as a specific harm requiring insurance
coverage, the assertion that flooding is not embraced by a
reference to "any hazards" would be considerably less potent. That
was the situation in Custer v. Homeside Lending, Inc., 858 So.2d
233 (Ala. 2003), on which the district court relied in rejecting
the ambiguity of the language in Kolbe's mortgage.11 The explicit
http://portal.hud.gov/hudportal/HUD?src=/program_offices/comm_pla
nning/environment/review/qa/floodinsurance (last visited Sept. 18,
2012).
11
The comparable provision in Custer stated:
"7. That [the Mortgagor] will keep the improvements now
existing or hereafter erected on the mortgaged property,
insured as may be required from time to time by the
Mortgagee against loss by fire and other hazards,
casualties and contingencies in such amounts and for such
periods as may be required by the Mortgagee and will pay
promptly, when due, any premiums on such insurance
provision for payment of which has not been made
hereinbefore."
-16-
attention to flood insurance in Kolbe's mortgage materially
distinguishes that case from this one.
The Bank, however, reasonably asserts that it makes no
sense to read floods out of the "any hazards" sentence because it
would be unreasonable to bar a mortgage provider from requiring
more than the limited amount of insurance required by federal law,
i.e., the amount of the outstanding loan balance. It argues that
lenders have an interest in ensuring the long-term performance of
mortgage loans by protecting the replacement value of the property,
as it sought to do in this instance. It cites FEMA guidelines
advising lenders to require replacement-value insurance. 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). Interagency guidance makes explicit that lenders
may demand more flood insurance coverage than is required by law,
stating that "[e]ach lender has the responsibility to tailor its
own flood insurance policies and procedures to suit its business
needs and protect its ongoing interest in the collateral." 74 Fed.
Reg. 35914, 35936 (July 21, 2009), 2009 WL 2143410 (F.R.) (Question
16);12 see also Notice, Loans in Areas Having Special Flood Hazards,
Custer, 858 So.2d at 237 (emphasis in original).
12
The FHA is not one of the agencies that issued the guidance.
They were: Office of the Comptroller of the Currency, Treasury; the
Board of Governors of the Federal Reserve System; the Federal
-17-
76 Fed. Reg. 64175, 64182 (Oct. 17, 2011) (Question 9) (noting
that, "[i]n cases involving certain residential . . . properties,
insurance policies should be written to, and the insurance loss
payout would be the equivalent of, [replacement cost]").
We acknowledge that lenders may have good reason to
require full replacement coverage. Nonetheless, in mandating
minimum coverage in an amount "equal to the outstanding principal
balance of the loan," 42 U.S.C. § 4012a(b)(1), Congress in the NFIA
appears to have incorporated an assumption that, at times, a more
limited amount of flood insurance may be reasonable and
appropriate. The view that the amount of mandatory insurance
should be kept to a minimum also is reflected in the insurance
coverage section of HUD's Handbook, which provides that "[t]he
mortgagee may not insist on more coverage than is necessary to
protect its investment." HUD Handbook 4330.1, ch. 2, § 2-11(B),
supra.13
Indeed, it is plausible that the FHA, which prescribes
Paragraph 4 as a "uniform convenant[] for national use," App'x at
31 (Kolbe mortgage), would have sought to balance the need for
Deposit Insurance Corporation; the Office of Thrift Supervision,
Treasury; the Farm Credit Administration, and the National Credit
Union Administration.
13
Of course, this statement may not mean that the insurance
should be limited to the amount of the outstanding balance because,
as discussed above, a lender may deem replacement-value coverage
"necessary to protect its investment."
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privately funded disaster relief with a concern that insurance
costs not become a barrier to home ownership. HUD's mission,
carried out through the FHA and other programs, is in part "to
create strong, sustainable, inclusive communities and quality
affordable homes for all." See HUD Mission,
http://portal.hud.gov/hudportal/HUD?src=/about/mission (last
visited Sept. 18, 2012). From the perspective of facilitating
"affordable homes," Paragraph 4 as construed by Kolbe could
reasonably be understood to reflect a policy choice to cap
mandatory flood insurance at the amount of the outstanding loan
balance.14 See generally S. Rep. No. 87-281 (1961), reprinted in
1961 U.S.C.C.A.N. 1923, 1925-26 (discussing amendments to the
National Housing Act of 1934 ("NHA") that, inter alia, created "a
new FHA mortgage insurance program" to further "the national
housing policy of 'a decent home and suitable living environment
for every American family'"); Cienega Gardens v. United States, 503
F.3d 1266, 1270 (Fed. Cir. 2007) (noting that the 1961 amendments
were designed to "'meet[] the housing needs of moderate-income
families'" (quoting S. Rep. No. 87-281, reprinted in 1961
U.S.C.C.A.N. at 1926)).
14
Indeed, the model Paragraph 4 used in Kolbe's FHA mortgage
does not mandate any insurance for hazards other than floods, as it
leaves any such requirement to the lender's discretion. See HUD
Handbook 4330.1, ch. 2, § 2-8(D), supra ("While HUD does not
require mortgagors to carry hazard insurance, the mortgage does
permit mortgagees to require it.").
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The dissent invokes the industry practice of limiting
"all-risk" policies by means of express flood-exclusion provisions
to argue that, absent such an exclusion in the FHA model mortgage,
"any hazards" in the first sentence of Paragraph 4 can only
reasonably be read to include flooding. That view, however,
reflects the dissent's basic flaw of ignoring the reasonable
arguments in Kolbe's favor. It is plausible that HUD responded to
the standard industry practice of treating floods as a distinct
hazard by developing a mortgage document that deals with flood
coverage separately from the coverage for other hazards. Indeed,
as discussed above, the repetitive format of the "any hazards" and
flood-insurance sentences in Paragraph 4 suggests parallel,
independent obligations. Hence, contrary to the dissent's
assertion, the general industry practice is no more helpful to the
Bank's position than it is to Kolbe's.15
The extrinsic evidence thus leaves us in much the same
place as our examination of Paragraph 4's text and structure. The
HUD documents showing that the agency routinely treats hazard and
flood insurance independently are persuasive evidence in support of
Kolbe's assertion that Paragraph 4 separately addresses the two
types of insurance and fixes the required amount of flood insurance
15
It bears repeating that we are reviewing the grant of a
motion to dismiss. The Bank will have the opportunity to develop
a record in support of its position and, if appropriate, to seek
summary judgment.
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at the statutory minimum amount. At the same time, however, the
FEMA guidelines recommending replacement value coverage support the
Bank's view that Paragraph 4 is not reasonably construed to prevent
lenders from fully protecting their investments and, hence, must be
read to give the lender discretion to increase the requirement
above the statutory minimum.
The question, of course, is not what amount of flood
insurance a lender reasonably could require, but what this
particular HUD mortgage provision in fact permits the lender to
demand. See 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 that lenders have carte blanche to
do so without regard to the terms of their loan agreements with
borrowers."). As to that question, we conclude that a rational
jury could construe Paragraph 4 in favor of either Kolbe or the
Bank. Though the text of Paragraph 4 and the extrinsic evidence
both provide strong support for Kolbe's interpretation, his reading
is not the only reasonable one.16 See Morris v. Wells Fargo Bank,
N.A., No. 2:11-cv-00474 (W.D. Pa. Sept. 7,2012) (denying motion to
dismiss breach of contract claim involving same language) (stating
16
Indeed, the dissent plausibly marshals support for the
Bank's interpretation of the mortgage language. It fails, however,
to give comparable respect to the factors that favor Kolbe's
interpretation.
-21-
that, "[a]t the very least, plaintiff's interpretation is
tenable"); Wulf v. Bank of America, 798 F. Supp. 2d 586, 588 (E.D.
Pa. 2011) (same); Skansgaard v. Bank of America, No. C11-988 RJB,
slip op. at 4 (W.D. Wash. Oct. 13, 2011) (same). Kolbe has
therefore stated a plausible breach of contract claim, and, hence,
the district court erred in dismissing his complaint on the ground
that the mortgage unambiguously permitted the Bank to demand the
additional $46,000 in coverage. See Ocasio-Hernández v. Fortuño-
Burset, 640 F.3d 1, 12 (1st Cir. 2011) (holding that "an adequate
complaint must provide fair notice to the defendants and state a
facially plausible legal claim" (citing Ashcroft v. Iqbal, 556 U.S.
662 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544(2007)).17
B. The Covenant of Good Faith and Fair Dealing
Kolbe alleges that the defendants acted in bad faith and
consequently breached the implied covenant of good faith and fair
17
Kolbe argues that any ambiguity in the mortgage should be
construed against the Bank as the "drafter" of the agreement. The
Bank argues in response that the doctrine giving the advantage to
the non-drafting party in a dispute over language does not apply
where the language at issue is prescribed by law. See Restatement
(Second) of Contracts § 206(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."). Kolbe acknowledges that the
"FHA required that the Mortgage Agreement conform to its
requirements," Compl. ¶ 18, and we thus reject the doctrine as a
basis for judgment against the Bank at this stage of the case.
Kolbe remains free to re-argue the issue as warranted upon further
development of the facts.
-22-
dealing by demanding flood insurance in an amount in excess of the
coverage required by his mortgage. The covenant, implied in every
contract in New Jersey, imposes a duty on each party to refrain
from "'destroying or injuring the right of the other party to
receive the fruits of the contract.'" Sons of Thunder, Inc. v.
Borden, Inc., 690 A.2d 575, 587 (N.J. 1997) (quoting Palisades
Props., Inc. v. Brunetti, 207 A.2d 522, 531 (N.J. 1965)); see also
Kalogeras v. 239 Broad Ave., L.L.C., 997 A.2d 943, 953 (N.J. 2010);
Restatement (Second) of Contracts § 205 (1981) ("Every contract
imposes upon each party a duty of good faith and fair dealing in
its performance and its enforcement.").
The New Jersey Supreme Court has described good faith
conduct as "conduct that does not 'violate community standards of
decency, fairness or reasonableness,'" Brunswick Hills Racquet
Club, Inc. v. Route 18 Shopping Ctr. Assocs., 864 A.2d 387, 395
(N.J. 2005) (internal quotation mark omitted) (quoting Restatement
(Second) of Contracts § 205 cmt. a), and that is "'consisten[t]
with the justified expectations of the other party,'" Wilson v.
Amerada Hess Corp., 773 A.2d 1121, 1126 (N.J. 2001) (quoting
Restatement (Second) of Contracts § 205 cmt. a). In New Jersey, a
showing of "'bad motive or intention' is vital to an action for
breach of the covenant." Brunswick Hills Raquet Club, 864 A.2d at
225 (quoting Wilson, 773 A.2d at 1130).
-23-
The Bank asserts that no jury could find that the Bank
acted in bad faith by taking the objectively reasonable step of
requiring insurance in the amount recommended by FEMA. We agree
that, given the ambiguity in Paragraph 4, requiring replacement-
value coverage would on its own fall short of demonstrating bad
faith. Kolbe's claim, however, does not rest solely on the demand
for increased coverage. The Bank warned Kolbe that if he failed to
purchase additional coverage, force-placed insurance would be
obtained, possibly through entities related to Bank of America, at
a premium that "may be more expensive and will likely provide less
coverage than . . . you can obtain on your own." App'x at 43
(Notice to Kolbe, Oct. 18, 2009).
This ultimatum could constitute bad faith under either of
two scenarios. The first would be if the Bank, notwithstanding our
conclusion that Paragraph 4 is ambiguous, had in fact believed that
the mortgage required flood insurance coverage only in the amount
of the outstanding principal balance of the mortgage (or $250,000,
if that were the lower amount) and, hence, did not authorize the
Bank's demand for additional coverage at additional expense to the
borrower. Evidence that the Bank made the demand despite this
belief, so that it might have the opportunity to gain financially
from the purchase of insurance through its related entities, would
plainly suggest the "bad motive or intention" that is at the core
of a breach of the implied covenant. See Brunswick Hills Raquet
-24-
Club, 864 A.2d at 225. A finding of bad faith also would be
supportable if the Bank had recognized the ambiguity in Paragraph
4 and, instead of acting out of concern for protecting its security,
had seized upon the ambiguity as a money-making opportunity. Again,
a decision to demand additional insurance for the purpose of
generating business for its affiliated insurance companies, and
thereby increase Bank profits, would reflect the improper motive
necessary to demonstrate a breach of the covenant of good faith and
good dealing.
We conclude that the allegations plausibly support such
a contention of improper motivation: Kolbe alleges that the Bank
demanded flood insurance in excess of his obligations under the
contract, see Compl. ¶¶ 13, 25-26, 32,18 that it did so in bad
18
These paragraphs allege, in pertinent part, as follows:
13. Defendants have a nationwide policy and
practice of requiring mortgagors of mortgages on real
estate located in geographic areas designated by the
United States government as having "special flood
hazards" to maintain flood insurance coverage in an
amount equal to the lesser of an amount established by
Defendants or the maximum flood insurance coverage
available under the National Flood Insurance Act of 1968
. . . . Defendants apply and enforce Defendants' Flood
Insurance Coverage Requirement even if it exceeds the
mortgagor's flood insurance coverage obligations and
Defendant BAC Home Loans' flood insurance rights under
the mortgage agreements.
25. [P]ursuant to the . . . provision of the
Mortgage Agreement and the applicable FHA regulations,
Plaintiff was required to maintain flood insurance
coverage for the Property in an amount equal to the
lesser of the outstanding balance on the Loan (less
-25-
faith, id. ¶ 55,19 and that the Bank or its related entities would
profit through the purchase of force-placed insurance, id. ¶¶ 15,
16.20 These allegations, in effect, amount to a claim that the
estimated land costs) or the $250,000 maximum flood
insurance available under the Flood Insurance Act.
26. At all times . . . Plaintiff has maintained
flood insurance coverage on the Property in excess of the
outstanding balance of the Loan . . . . That flood
insurance coverage was greater than the amount of flood
insurance that Plaintiff was contractually obligated to
maintain on the Property pursuant to the Mortgage
Agreement and the above-referenced applicable FHA
regulations.
32. Defendants' requirement that Plaintiff purchase
additional flood insurance was neither required by, nor
permitted by, the Mortgage Agreement. . . . [T]he
Mortgage Agreement requires Plaintiff to maintain flood
insurance coverage of at least the outstanding balance of
the Loan less estimated land costs. Plaintiff was
already maintaining this level of flood insurance
coverage on the Property when the Defendants sent him the
October 18 and November 16, 2009 letters. Accordingly,
Plaintiff was fully satisfying his flood insurance
coverage obligation under the Mortgage Agreement and
fully fulfilling the Defendant BAC Home Loans' flood
insurance coverage rights under the Mortgage Agreement.
19
Paragraph 55 alleges:
By requiring Plaintiff and the Class to maintain and
pay for flood insurance coverage in excess of the
coverage required by their mortgage agreements,
Defendants acted in bad faith and breached the implied
covenant of good faith and fair dealing contained in the
mortgage agreements.
20
These paragraphs allege:
15. Defendants enforce Defendants' Flood Insurance
Coverage Requirement by demanding that the mortgagors
obtain the amount of flood insurance coverage required by
Defendants. If the mortgagors fail to comply with
-26-
Bank's motivation for demanding additional flood insurance coverage
was to increase corporate profits by funneling new coverage to its
own affiliates.21 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"); cf. Artuso v. Vertex
Pharm., Inc., 637 F.3d 1, 9 (1st Cir. 2011) (holding that
"plaintiff's implied covenant claims founder because his complaint
contains only a threadbare allegation that 'the defendant terminated
Defendants' demand, Defendants purchase flood insurance
coverage so that the total insurance coverage on the real
estate will meet Defendants' Flood Insurance Coverage
Requirement. Defendants then charge the mortgagors for
the cost of that additional insurance by either deducting
the insurance premiums from the escrow accounts
maintained by the mortgagors with Defendant BAC Home
Loans or by increasing the mortgagors' monthly mortgage
payments.
16. Defendants or their corporate subsidiaries or
affiliates profit when Defendants buy insurance for
mortgagors. Defendants often purchase the insurance from
Defendants' own affiliated insurance companies, including
Defendant Balboa, and/or place the insurance through
Defendants' own affiliated insurance brokers.
Defendants' affiliated insurance brokers receive
commissions on these insurance transactions and
Defendants' affiliated insurance companies, including
Balboa, receive the insurance premiums involuntarily paid
by the mortgagors.
21
Appellant argues that this alleged self-dealing would breach
the implied covenant even if the mortgage gave the Bank the
authority to require increased amounts of flood insurance.
-27-
[him] in bad faith . . . unaccompanied by any factual allegations
that might give rise to an inference of bad-faith conduct").22
The Bank contends that such a self-dealing claim fails as
a matter of law because Kolbe responded to the Bank's ultimatum by
purchasing the insurance himself, and the Bank therefore did not
benefit from Kolbe's acquisition of additional insurance. The Bank
cites no cases in support of its implicit contention that bad-faith
conduct designed to provide an opportunity for self-dealing cannot
constitute a breach of the implied covenant of good faith and fair
dealing under New Jersey law. Kolbe's decision under duress to
avoid the higher cost of force-placed insurance would seem an
inadequate defense if the Bank's motivation were improper. In any
event, in the absence of developed argument from the Bank, no more
needs to be said on this issue at this early stage of the case.
We thus conclude that the complaint alleges sufficient
facts to establish a breach of the covenant of good faith and fair
dealing that is "'plausible on its face,'" Iqbal, 556 U.S. at 678(quoting Twombly, 550 U.S. at 570). Hence, the claim should not
have been dismissed.
22
The equivalent allegations in the other flood insurance case
we decide today, Lass v. Bank of America, N.A., No. 11-2037, are
more explicit. The plaintiff there alleged that the Bank had
breached the covenant of good faith and fair dealing by, inter
alia, "charging 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.'"
Compl. ¶ 75, App'x at 45.
-28-
III.
Defendants argue that the district court's judgment in
favor of Balboa should be affirmed even if the complaint is
reinstated against Bank of America. We agree. Balboa's alleged
involvement in the matters underlying Kolbe's lawsuit was limited
to preparing and sending the letters notifying Kolbe that he needed
to purchase additional flood insurance. See Compl. ¶ 29. Those
letters were sent on the letterhead of the Bank's predecessor, BAC
Home Loans Servicing, LP. The complaint is devoid of allegations
showing a contractual relationship between Kolbe and Balboa, and
Kolbe's bald assertion that Balboa "acted on its own behalf" in "all
of the actions described herein," id. ¶ 21, is inadequate to state
a plausible claim against the insurer for breach of contract or
breach of the implied covenant of good faith and fair dealing.23
Hence, we affirm dismissal of the complaint against Balboa.
IV.
For the foregoing reasons, the judgment of the district
court is affirmed in part, vacated in part, and remanded for further
proceedings consistent with this opinion. Costs are awarded to the
appellant.
So ordered.
23
Of course, the allegations concerning Balboa's role in
providing force-placed insurance at the Bank's behest remain
relevant to the implied covenant claim against the Bank.
-29-
– Dissenting Opinion Follows --
-30-
BOUDIN, Circuit Judge, dissenting. On October 6, 2008,
the plaintiff-appellant Stanley Kolbe took out a $197,437 loan
secured by a mortgage on Kolbe's home in Atlantic City, New Jersey,
in an area designated by the government as subject to flooding. The
mortgage was guaranteed by an agency within the Department of
Housing and Urban Development ("HUD"), and as required, the mortgage
used a standard form that had been approved by HUD, 24 C.F.R. §
200.80 (2012). The mortgage contained the following provision:
4. Fire, Flood and Other Hazard Insurance.
Borrower shall insure all improvements on the
Property, whether now in existence or
subsequently erected, against any hazards,
casualties, and contingencies, including fire,
for which Lender requires insurance. This
insurance shall be maintained in the amounts
and for the periods that Lender requires.
Borrower shall also insure all improvements on
the Property, whether now in existence or
subsequently erected, against loss by floods to
the extent required by the Secretary [of HUD].
The first two sentences, referring to "any hazards,
casualties, and contingencies," empower the lender to set the
"amounts and periods" of insurance for all such threats. The third
sentence reflects a requirement imposed by the government under a
federal program by which it subsidizes flood insurance in flood
prone areas: in aid of that program, lenders are restricted in
making loans unless the borrower agrees to maintain flood insurance
in the minimum amounts set by the government regardless of whether
the lender independently requires flood insurance. 42 U.S.C. §§
4012(c), 4012a(b)(1) (2006).
-31-
When Kolbe's original mortgage holder went bankrupt in
2009, the mortgage passed into the hands of entities associated with
Bank of America (and for convenience we refer only to that bank).
Within a couple of months the bank wrote to Kolbe requiring that he
purchase an additional $46,000 in flood insurance. The letters
advised that if he did not purchase such insurance within a set
period, the bank would purchase it for him and charge him for the
cost but that this might well be more expensive than if he obtained
the insurance on his own behalf.
Kolbe complied, purchasing the insurance out of an escrow
account maintained on his behalf by the bank for insurance and
similar purposes, and not long after filed the current class action
in federal district court. His complaint, alleging breach of
contract and breach of the implied covenant of good faith and fair
dealing, claimed that it was unlawful for the bank to require flood
insurance in any amount exceeding that required by the government
under the flood insurance program already mentioned and reflected
in the third sentence of paragraph quoted above.
The district court, without certifying a class, granted
the bank's motion to dismiss. Fed. R. Civ. P. 12(b)(6). The court
found that the original loan agreement clearly permitted the bank
to require more insurance for "any hazard," the Secretary of HUD's
flood insurance requirement reflecting merely a minimum imposed by
the government; and the court ruled that no facts alleged in the
-32-
complaint about the bank's motive, or the additional insurance
required by the bank, impugned the bank's good faith. Kolbe v. BAC
Home Loans Servicing, L.P., No. 11-10312-NMG, 2011 WL 3665394 (D.
Mass. Aug. 18, 2011). This appeal followed.
The insurance required by the government, under the third
sentence of the above quoted paragraph 4 in the mortgage, equated
to the outstanding unpaid balance on the loan, i.e., $197,437 less
whatever payments Kolbe had already made to reduce the principal
balance. The additional $46,000 requested by the bank apparently
aimed to raise the total insurance to the approximate replacement
cost of Kolbe's house if it were destroyed in a flood--a familiar
although not invariable practice in mortgage lending and reflected
in government guidance by the Federal Emergency Management Agency.24
The bank's interest is obvious enough: it seeks not merely
repayment of the outstanding balance but the maintenance of a loan
on which it earns the designated interest for the period agreed to--
a goal served by providing funds to restore a damaged house that
might otherwise be abandoned. Further, despite the mortgage and any
24
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 0 0 7 ) ,
http://www.fema.gov/library/viewRecord.do?id=2954. Replacement
cost insurance has been endorsed as necessary to prevent
"underinsurance," whereby property owners are left with
insufficient resources to rebuild their property in the wake of a
catastrophe. See generally Wells, Insuring to Value: Meeting a
Critical Need (2d ed. 2007); 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).
-33-
clause in the insurance contract entitling the lender to insurance
proceeds, other claims, such as priority tax claims, may supercede
the bank's own right to insurance proceeds and leave it without full
coverage for the balance due. N.J. Stat. Ann. § 54:5-9 (West 2012).
See generally Alexander, Tax Liens, Tax Sales, and Due Process, 75
Ind. L.J. 747, 770-71 & nn. 129-130 (2000).
The first two sentences of the relevant paragraph of the
mortgage agreement (block quoted above) unambiguously give the bank
the right to require more flood insurance by empowering it to
require insurance in the amount it specifies for "any hazards." A
flood qualifies as a hazard, commonly defined as "an unavoidable
danger or risk, even though often foreseeable." The Random House
Dictionary of the English Language 879 (2d ed. unabridged 1987).
The third sentence is directed to what the government sets as a
minimum amount of flood insurance for its own reasons and neither
qualifies nor contradicts the right of the bank--explicitly
reserved--to set a different amount that is higher than the
government minimum.
Kolbe says that because the third sentence specifically
deals with flood insurance, this specific provision should
implicitly limit the first two sentences to exclude floods. But a
specific provision trumps a general provision only when the two are
in conflict, so it is necessary to disregard or limit one or the
other. See Farnsworth, 2 Farnsworth on Contracts § 7.11, at 297 (3d
-34-
ed. 2004). Here, the two provisions are consistent: one lists the
bank's requirements, and the other lists the government's
requirements and, since they are both minimum requirements, both can
be met by flood insurance in the amount of the higher requirement.
Relatedly, Kolbe asserts that if the first two sentences
are read to include floods, the third sentence will be rendered
meaningless surplusage, a result that should be avoided because the
third sentence uses the word "also." But this too is false; HUD's
requirement applies even if the lender requires less or no flood
insurance, and the reference to HUD's requirements was specifically
required by federal law, see 24 C.F.R. § 203.16a(a)(2), which is
presumably why they were made the subject of a separate sentence.
Without some such warning, the bank would itself be subject to
monetary penalties under the flood insurance regime. 42 U.S.C. §
4012a(f)(2).
Kolbe argues that the phrase "any hazards" should be read
to exclude floods because in the insurance industry, hazard
insurance is traditionally seen as a category separate from flood
insurance. The contention rests on a confusion about industry
practice. Many homeowners' hazard insurance policies, known as
"all-risk" policies, cover against all physical risks unless
specifically excluded, Thomas & Randall, New Appleman on Insurance
Law § 41.02[1][a], at 41-15, § 41.02[1][a], at 41-15 (library ed.
2011), and then contain an express "flood exclusion" provision that
-35-
excludes flooding and water damage from coverage, id. ch. 43, at 43-
2, 43-14.
Thus, the standard all-risk policy does treat floods as
a hazard but excludes it from the policy as a hazard that the policy
does not choose to insure. Consider, for example, typical language
of a flood exclusion:
We will not pay for loss or damage caused
directly or indirectly by any of the following.
Such loss or damage is excluded regardless of
any other cause or event that contributes
concurrently or in any sequence to the loss.
. . . .
. . . Water
. . . Flood, surface water, waves,
tides, tidal waves, overflow of any body of
water, or their spray, all whether driven by
wind or not . . .
In re Katrina Canal Breaches Litig., 495 F.3d 191, 199 (5th Cir.
2007), cert. denied, 552 U.S. 1182 (2008) (quoting policy language).
In other words, the standard policy excludes flood
insurance, and relegates the insured to seek special insurance for
floods, because the policy explicitly says that floods are not
covered by the policy. By contrast, nothing in the loan agreement
says that the bank's authority to fix the amount of insurance for
"any hazards" excludes floods. The reference to standard hazard
policies, which do contain such an exclusion, is helpful to the bank
and not to Kolbe--by confirming that "hazard" includes "flood"
unless expressly excluded--as if any such help were needed.
-36-
Similarly, while some HUD documents list "hazard
insurance" and "flood insurance" separately,25 this merely reflects
the reality that because of the express exclusions in all-risk
policies, a homeowner who wants flood insurance will have to obtain
it separately. But the fact that a separate policy must be
purchased is irrelevant: the mortgage holder has an explicit right
to require increased insurance for "any" hazard regardless of how
the policy for the hazard in question is packaged or procured. In
fact, both the statute creating the federal flood insurance program
and a handbook from the Federal Emergency Management Agency refer
to "special flood hazards." 42 U.S.C. § 4012a(a); Compl. ex. 2, at
4.
Turning to the good faith count, the governing law in New
Jersey requires proof of bad motive for a claim of breach of the
implied covenant. Wilson v. Amerada Hess Corp., 773 A.2d 1121, 1130
(N.J. 2001). Kolbe's main position in the district court was that
the contract by its terms limits the bank to the amount of flood
insurance required by the federal government, so anything more is
25
For example, HUD's handbook on insured mortgages lists items
that must be included in an escrow account, including "hazard
insurance" and "flood insurance premiums." HUD Handbook 4330.1,
c h . 2 , § 2 - 1 ( D ) ,
http://portal.hud.gov/hudportal/documents/huddoc?id=43301c2HSGH.p
df. Similarly, HUD's guide brochure on settlement costs related to
home purchases lists "Hazard Insurance Premium" and "Flood
Insurance" as separate settlement costs. U.S. Dept. of Housing and
Urban Dev., Buying Your Home: Settlement Costs and Helpful
Information 16 (June 1997), available at
http://portal.hud.gov/hudportal/documents/huddoc?id=DOC_12893.pdf.
-37-
necessarily an act of bad faith. This claim depends on the premise
that Bank of America breached the contract, which as discussed
above, is self-evidently wrong.
On appeal, Kolbe now suggests that "the only reason
Defendants demanded additional flood insurance was an improper
effort to self-deal . . . collecting for [them]sel[ves] or [their]
affiliates insurance brokerage commissions and excessive premiums."
Appellants' Br. at 14-15. The complaint contains no such allegation
and so any such claim is forfeit. In re New Motor Vehicles Canadian
Exp. Antitrust Litig., 533 F.3d 1, 5-6 (1st Cir. 2008). Anyway, as
already noted, the bank has self-evident commercial reasons for
wanting a margin of protection over and above the unpaid principal
balance and it asked Kolbe to buy the insurance himself.
This appeal calls for little more than a per curiam
affirmance of a plainly correct disposition by the district court.
It is one thing to read ambiguous language in favor of the borrower;
it is quite another to disregard clear language that has only one
sensible reading supported by salient practical reasons for why that
reading was intended. Language of the same ilk appears to be common
in loan agreements. To let this case proceed will be the source of
great mischief.
-38-