Kolbe v. Bac Home Loans Servicing, LP

738 F.3d 432

Stanley KOLBE, Plaintiff, Appellant,

v.BAC HOME LOANS SERVICING, LP, d/b/a Bank of America, N.A.; Balboa Insurance Company, Defendants, Appellees.

No. 11–2030.

United States Court of Appeals, First Circuit.

Sept. 27, 2013.

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, William M. Jay, and Goodwin Procter LLP were on brief, for appellees.

Mark R. Freeman, Appellate Staff Attorney, United States Department of Justice, with whom Nancy D. Christopher, Associate General Counsel for Litigation, William C. Lane, Assistant General Counsel for Insured Housing and Community Development Litigation, Bruce S. Albright, Senior Trial Attorney, U.S. Department of Housing and Urban Affairs, Stuart F. Delery, Principal Deputy Assistant, Attorney General, Carmen M. Ortiz, United States Attorney, Michael S. Raab, Appellate Staff Attorney, United States Department of Justice, were on brief, for the United States amicus curiae.

Frank G. Burt, Denise A. Fee and Jorden Burt LLP on brief for Property Casualty Insurers Association of America's amicus curiae.

Elizabeth J. Cabraser, Kelly M. Dermody, Daniel M. Hutchinson, Lisa J. Cisneros, Lief Carbraser Heimann & Bernstein LLP, on brief for National Consumer Law Center and AARP amici curiae.

Stuart T. Rossman on brief for National Consumer Law Center amicus curiae.

Jean Constantine–Davis and AARP Foundation Litigation on brief for AARP amicus curiae.

Richard L. Neumeier, Morrison Mahoney Miller LLP, Jan T. Chilton, Michael J. Steiner and Severson & Werson PC on brief for Mortgage Bankers Association and American Financial Services Association amici curiae.

Before LYNCH, Chief Judge, TORRUELLA, LIPEZ, HOWARD, THOMPSON, and KAYATTA, Circuit Judges.

Opinion En Banc

LYNCH, Chief Judge, with whom HOWARD, Circuit Judge, and KAYATTA, Circuit Judge, join.

The judgment of dismissal entered by the district court is affirmed by an equally divided en banc court. See Savard v. Rhode Island, 338 F.3d 23, 25 (1st Cir.2003) (en banc).

Opinions follow.

The result of the evenly divided vote of the en banc court is to affirm the district court's dismissal of the complaint for failure to state a claim. See Savard v. Rhode Island, 338 F.3d 23, 25 (1st Cir.2003) (en banc). This opinion explains why we think that result is correct and required by law.

I.

This is a contract dispute over the terms of a mortgage contract between the borrower, plaintiff-appellant Stanley Kolbe, and the servicer of his loan, defendant-appellee BAC Home Loans Servicing, LP (“BAC” or “the Bank”). Kolbe sued the Bank in a putative class action for damages alleged to have arisen out of the Bank's requirement that he maintain flood insurance in an amount sufficient to cover the replacement value of his home. Kolbe contends that the Bank, under Covenant 4 of his mortgage contract, cannot require more than the federally mandated minimum flood insurance, which is the lesser of the principal balance of the loan or $250,000 in special flood hazard areas, and $0 in all other areas. The mortgage is insured by the Federal Housing Administration (“FHA”), and Covenant 4 is a standard uniform covenant prescribed by the FHA pursuant to federal law. See24 C.F.R. § 203.17 (2012); Requirements for Single Family Mortgage Instruments, 54 Fed.Reg. 27,596, 27,603–07 (June 29, 1989) (hereinafter “Mortgage Requirements”). The Covenant was promulgated after notice and comment rulemaking.

We conclude that Kolbe has failed to state a claim for breach of contract. Three interrelated strands of reasoning support our conclusion. The first is straightforward application of the typical principles of contract interpretation. When interpreting a written contract, we look at text, context, and purpose to discover whether a proffered reading of the contract is reasonable. For contract language mandated by a federal regulation, this context includes the regulation and the federal policy underlying the regulatory scheme. As a purely textual matter, the Bank offers the most natural reading of the disputed language. Yet even if an argument exists that Kolbe's textual reading is plausible, context confirms that the Bank's reading is correct and Kolbe's reading is incorrect. As we will describe, particularly under our third strand of reasoning, Kolbe's reading would hinder federal housing policy and conflict with other guidance from the federal government regarding flood insurance. Interpreting the text in context, as we would do with any contract, we conclude that the Bank's reading is correct.

Second, we apply special principles for interpreting uniform contract language. Covenant 4 is a uniform clause used in millions of mortgages nationwide by many different lenders, so we give it one uniform meaning rather than multiple inconsistent meanings. Extrinsic evidence of the parties' unique intentions regarding a uniform clause is generally uninformative because unlike individually tailored contracts, uniform clauses do not derive from the negotiations of the specific parties to a contract. Instead, courts seek to determine the uniform meaning of the clause as a matter of law, a task appropriate for the motion to dismiss stage. Kolbe cannot avoid dismissal on the grounds that his specific understanding or the actions of the parties create an ambiguity.

Third, the fact that the Covenant was drafted and mandated by the United States requires that its meaning be that meant by the United States when it drafted the regulation. The role that the Covenant plays in an important regulatory scheme requires that result. The language of the Covenant was not drafted or negotiated by the parties and was not the result of give-and-take in the marketplace. Rather, it was created and mandated in order to further important federal policies. While on the Covenant's plain language and context, we think the meaning is clear, were there doubt, we would defer to the position articulated to us by the United States in its amicus brief; in this case, the United States' position reinforces our conclusion reached in applying the first two principles.

In its amicus brief to the en banc court, the United States has stated that Kolbe's interpretation is incorrect for a number of reasons, including that it “lacks any anchor in the statutory scheme.” Brief for the United States as Amicus Curiae Supporting Appellees at 2, Kolbe v. BAC Home Loans Servicing, LP, No. 11–2030 [hereinafter “United States Brief”]. Further, the United States says that Kolbe's interpretation “serves no practical end, and ... would seriously undermine federal housing policy.” Id. The United States' position as set forth in the brief is entitled to deference; it is well-reasoned and is entirely consistent with its prior interpretations of the clause expressed in various federal publications.

This is an issue for judges to decide. The law does not allow a jury to decide that federal policy is otherwise, or that the contract language required by the United States does not have the eminently reasonable meaning urged by the United States, consistent with the policies that brought about the Covenant in the first instance.

As we will discuss, Kolbe has also failed to state a claim for breach of the covenant of good faith and fair dealing. The district court correctly dismissed all of Kolbe's claims.

II.

Kolbe owns a home in Atlantic City, New Jersey in a special flood hazard area. On October 6, 2008, he borrowed $197,437 from Taylor, Bean & Whitaker Mortgage Corp. (“Taylor Bean”) in a mortgage loan secured by his home. The loan was guaranteed by the FHA, a part of the Department of Housing and Urban Development (“HUD”).

The mortgage agreement contained a set of Uniform Covenants that are required by HUD regulations to be in every FHA-insured mortgage.¹ One of the Uniform Covenants included in the mortgage is the following provision, which is at issue:

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.

The “Secretary” referred to in Covenant 4 is the Secretary of HUD. This case presents the issue of whether the amount of flood insurance required by HUD is a floor or a ceiling.

Kolbe's home is in an area designated by the Federal Emergency Management Agency (“FEMA”) as having “special flood hazards,” and as such HUD required (and still requires) that flood insurance must be maintained in “an amount at least equal to either the outstanding balance of the mortgage ... or the maximum amount of the NFIP insurance available with respect to the property improvements, whichever is less.” 24 C.F.R. § 203.16a(c) (emphasis added). ² The original mortgage holder, Taylor Bean, never required Kolbe to maintain greater flood insurance than the minimum federally required amount, and at all times, Kolbe maintained flood insurance in excess of the outstanding loan balance.

Taylor Bean declared bankruptcy and ceased operations in August 2009. At some point, the Bank became the servicer of Kolbe's loan.³ In November 2009, the Bank sent Kolbe a letter notifying him that it was requiring him to purchase an additional $46,000 in flood insurance coverage; the Bank has asserted, and Kolbe has not disputed, that this additional insurance would bring Kolbe's total flood insurance coverage to the replacement cost of the property. Kolbe alleges that the Bank had a nationwide policy of requiring flood insurance at a level that...