Wells Fargo Bank, N.A. v. Fonder

2015 S.D. 66

WELLS FARGO BANK, N.A., Plaintiff, v. MATTHEW R. FONDER, CARALYNN C. FONDER,and any person in possession, Defendants, Third-Party Plaintiffs and Appellants, v. WELLS FARGO INSURANCE, INC. FLOOD SERVICES, Third-Party Defendant and Appellee.

#27130

SUPREME COURT OF THE STATE OF SOUTH DAKOTA

ARGUED JANUARY 14, 2015

July 29, 2015

#27130-aff in pt, rev in pt & rem-JMK

APPEAL FROM THE CIRCUIT COURT OF THE SIXTH JUDICIAL CIRCUIT STANLEY COUNTY, SOUTH DAKOTA

THE HONORABLE JOHN L. BROWN Judge

PATRICK J. GLOVER of

Meierhenry Sargent LLP

Sioux Falls, South Dakota

Attorneys for defendants, third-

party plaintiffs and appellants.

LAUREN P. MCKENNA of

Fox Rothschild LLP

Philadelphia, Pennsylvania

and

MARGO D. NORTHRUP of

Riter, Rogers, Wattier & Northrup, LLP

Pierre, South Dakota

Attorneys for third-party

defendant and appellee.

KERN, Justice

[¶1.] Matthew and Caralynn Fonder appeal the circuit court's dismissal of their third-party claim against Wells Fargo Insurance, Inc. Flood Services (WFFS). The circuit court dismissed the claim pursuant to SDCL 15-6-12(b)(5) for failure to state a claim upon which relief can be granted. We affirm in part, reverse in part, and remand.

Facts and Procedural History

[¶2.] On May 12, 2011, the Fonders purchased a home north of Fort Pierre in Stanley County, South Dakota, situated near the Missouri River. The Fonders obtained a mortgage from Wells Fargo Bank, N.A. (the Bank). Prior to financing and in accordance with the National Flood Insurance Act (NFIA), the Bank selected WFFS to conduct a flood hazard determination on the Fonders' home at the Fonders' expense. WFFS determined the home was not in a Special Flood Hazard Area (SFHA).¹ Because of WFFS's determination, the Bank did not require the Fonders to obtain flood insurance, the Fonders did not purchase flood insurance, and the Bank did not obtain flood insurance at the Fonders' expense.

[¶3.] On or about June 1, 2011, only a few weeks after the Fonders moved into their home, the Missouri River flooded, forcing the Fonders to evacuate. Over the next several months, the home's main level filled with three to five feet ofstanding water, rendering the home uninhabitable. The flood destroyed the Fonders' home. The Fonders' insurance company retained Factual Data Flood to conduct a flood determination on the Fonders' property on July 8, 2011. Factual Data Flood determined that the home was in fact located in a SFHA. The Fonders also had the Federal Emergency Management Agency (FEMA) perform a flood determination, and FEMA also determined the Fonders' home was in a SFHA.

[¶4.] On February 3, 2012, the Bank filed a complaint to foreclose on the Fonders' home. Through that foreclosure action and by stipulation of the parties, the Fonders initiated suit against WFFS on May 20, 2013, seeking to recover damages sustained as a result of their reliance on WFFS's erroneous flood determination. The Fonders asserted claims of negligence, breach of fiduciary duty, and negligent infliction of emotional distress. WFFS answered and moved the circuit court to dismiss the cross-claim pursuant to SDCL 15-6-12(b)(5) for failure to state a claim upon which relief can be granted. On October 30, 2013, the Fonders moved the court to amend their third-party complaint to assert a claim of negligent misrepresentation. The circuit court held a hearing on the motions on December 11, 2013. The court granted WFFS's motion to dismiss, relying on Highmark Federal Credit Union v. Hunter, 2012 S.D. 37, 814 N.W.2d 413. The court also dismissed the Fonders' motion to amend their cross-claim because it determined WFFS did not owe the Fonders a duty. The Fonders appeal.

[¶5.] The Fonders raise two issues in this appeal:

1. Whether the circuit court erred in dismissing the Fonders' claim pursuant to SDCL 15-6-12(b)(5).

2. Whether the circuit court erred in denying the Fonders' motion to amend their third-party complaint.

Standard of Review

[¶6.] A motion to dismiss for failure to state a claim pursuant to SDCL 15-6-12(b)(5) tests the legal sufficiency of the pleading. Sisney v. Best Inc., 2008 S.D. 70, ¶ 8, 754 N.W.2d 804, 809. We "accept the [pleading's] material allegations as true and construe them in a light most favorable to the pleader to determine whether the allegations allow relief." Id. "Because that determination tests the legal sufficiency of the pleading, we review the matter de novo." Id.

Decision

[¶7.] 1. Whether the circuit court erred in dismissing the Fonders' claim pursuant to SDCL 15-6-12(b)(5).

Highmark Federal Credit Union v. Hunter

[¶8.] The circuit court dismissed the Fonders' claims based on the belief that our ruling in Highmark precluded the claim.² In Highmark, Hunter (the homeowner and mortgagor) sued Highmark (the bank and mortgagee) on a theory of negligence when Highmark allegedly failed to inform Hunter that she needed topurchase flood insurance. 2012 S.D. 37, ¶ 4, 814 N.W.2d at 414-15. Hunter signed a document entitled "Standard Flood Hazard Determination" that stated Hunter's home was in a SFHA and that "flood insurance must be maintained for the term of the loan." Id. ¶ 2, 814 N.W.2d at 414. Hunter, however, elected not to purchase flood insurance. Id. Hunter also alleged that Highmark was negligent when it failed to purchase flood insurance for her and add the premium to her mortgage payment pursuant to 42 U.S.C. § 4012a(e) of the NFIA.³ Id. ¶¶ 4, 8, 814 N.W.2d at 415. Hunter's home was later damaged in a flood. Id. ¶ 1, 814 N.W.2d at 414. Hunter argued Highmark's alleged failures constitute negligence as a matter of law. Id. ¶ 4, 814 N.W.2d at 415. The circuit court granted summary judgment for Highmark, and we affirmed. Id. ¶ 20, 814 N.W.2d at 418.

[¶9.] Because Hunter asserted a negligence claim, we first sought to determine whether the NFIA imposed a standard of conduct (i.e., a duty) on the lender. See id. ¶¶ 9-13, 814 N.W.2d at 415-16. We acknowledged that it was a matter of state law to determine whether the NFIA gave rise to a duty in a state-based, common-law negligence claim. Id. ¶ 11, 814 N.W.2d at 416 (citing Hofbauer v. Nw. Nat'l Bank of Rochester, 700 F.2d 1197, 1201 (8th Cir. 1983)). We held that Congress enacted the NFIA "to protect lenders and the federal treasury[,]" not to create private causes of action for borrowers against lenders. Id. ¶ 15, 814 N.W.2d at 417 (emphasis added). We explained that the NFIA did not provide a privateright of action for an individual to enforce the NFIA's provisions. Id. ¶ 16. Therefore, "it follow[ed] that an individual cannot use the NFIA to establish a duty in an individual civil claim." Id. We finally pointed out that separation-of-powers and federalism concerns are implicated by creating a private cause of action under the NFIA. Id. ¶ 17, 814 N.W.2d at 418 ("The separation-of-powers doctrine and principles of federalism militate against the adoption of the federal statute as the standard of care in a state negligence action when no private cause of action, either explicit or implicit, exists in the federal statute." (quoting R.B.J. Apartments, Inc. v. Gate City Sav. & Loan Ass'n, 315 N.W.2d 284, 290 (N.D. 1982)).

[¶10.] The Fonders argue that Highmark is both factually and legally distinguishable from their case. They contend that this is a case of first impression for this Court. In Highmark, both Hunter and Highmark were notified that the home Hunter was purchasing was located in a SFHA. 2012 S.D. 37, ¶ 2, 814 N.W.2d at 414. The Fonders, however, were notified that the home they were purchasing was not located in a SFHA, and they relied on that determination. In Highmark, Hunter made a counterclaim against Highmark for negligence, Highmark being the lender in the transaction. Id. The Fonders have brought this action against WFFS, an independent, third-party, flood-determination company. The Fonders did not bring an action against the lender in their case because they admitted Highmark was controlling.

[¶11.] The Fonders also submit that the legal question before this Court is distinguishable. The question before this Court in Highmark was whether "Highmark was negligent in failing to warn [Hunter] to purchase flood insuranceand in failing to purchase the insurance at [Hunter's] expense." Id. ¶ 1. More specifically, the legal question was whether the lender owed a duty to the borrower under the NFIA to ensure that there was flood insurance on the property when Highmark was aware that the property was located in a SFHA. See id. The Fonders assert the legal question now before the Court is "whether a negligence action against an independent third-party flood-determination company can arise under South Dakota common law when it was reasonably foreseeable that the Fonders would rely on WFFS's flood determination when deciding whether or not to purchase flood insurance." We agree with the Fonders that the legal question before this Court is distinguishable from the one in Highmark.

[¶12.] Here, the Fonders pleaded a common-law, professional-negligence action. They did not assert that the flood-determination company owed them a duty under the NFIA, or that there was a breach of any duty under the NFIA. However, as the Fonders correctly point out, there is a split of authority on whether the NFIA precludes state, common-law-negligence causes of action.⁴ We now analyze whetherSouth Dakota law allows for independent, common-law-negligence claims against flood-determination companies.

Whether the Fonders can assert a claim based solely on South Dakota common law.

[¶13.] The first step in deciding whether the Fonders may assert a common-law negligence cause of action against WFFS is to determine whether the NFIA precludes such causes of action. See Cruey v. First Am. Flood Data Servs., Inc., 174 F. Supp. 2d 525, 528 (E.D. Ky. 2001); Klecan, 951 N.E.2d at 1215. To ascertain whether the NFIA precludes common-law negligence causes of action and, simultaneously, immunizes WFFS from liability to borrowers, we look at the...