Woodside v. Pacific Union Financial, LLC

Filing 28

ORDER granting 17 Motion to Dismiss for Failure to State a Claim. The plaintiff's complaint is dismissed with prejudice. Signed by Judge Martin L.C. Feldman on 3/22/2018. (clc)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA

JOHN WOODSIDE, III

CIVIL ACTION

v.

NO. 17-12191

PACIFIC UNION FINANCIAL, LLC

SECTION "F"

ORDER AND REASONS
Before the Court is Pacific Union Financial, LLC’s motion to
dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). For
the following reasons, the motion is GRANTED.
Background
Home-mortgage lenders often require the borrower to maintain
insurance on the mortgaged property. When the borrower fails to
secure

his

own

insurance,

the

mortgage

agreement

typically

authorizes the lender to secure the insurance and pass the cost on
to

the

borrower.

This

case

is

about

whether

the

lender

is

authorized to select insurance, called lender-placed insurance,
that

is

significantly

more

expensive

than

the

insurance

the

borrower could obtain on his own.
On May 6, 2014, John Woodside bought a home in Madisonville,
Louisiana for $170,000. He obtained a $157,712 mortgage from
American National Mortgage Co., Inc., which was immediately sold
to Pacific Union Financial, LLC. Pacific Union currently services

1

the mortgage. The mortgage agreement requires that Woodside insure
his property “against any hazards, casualties, and contingencies,
including fire, for which Lender requires insurance,” and against
floods. Additionally, if Woodside fails to obtain insurance, “then
the Lender may do and pay whatever is necessary to protect the
value

of

the

Property

and

Lender’s

rights

in

the

Property,”

including obtaining insurance. Pacific Union would withdraw funds
from Woodside’s escrow account to purchase the LPI policy. The
parties agreed that Pacific Union may control and manage Woodside’s
escrow funds.
Woodside obtained a policy that insured the property from May
2, 2014 until May 5, 2015. The flood insurance policy provided
$207,000 in coverage; the annual premium was $788. On May 7, 2015,
Pacific Union sent a letter to Woodside stating that the policy
lapsed on May 2, 2015, and that it had not received an acceptable
renewal or replacement policy. The letter warned that if Pacific
Union did not receive proof of flood insurance within 45 days, it
would purchase coverage on Woodside’s expense, and that it would
cost “at least $8,196.62 annually.” 1 Accordingly, on June 23, 2015,

1

The notice stated in bolded font:
For your protection and ours, as required by your mortgage,
your property must be kept continuously insured. If we do not
receive replacement or renewal flood coverage within 45 days
of the date of this notice, we will purchase coverage at your
expense effective May 2, 2015. The insurance we buy may
provide less coverage and be more costly than your old policy.
It does not cover the following: loss, damage or theft of
2

Pacific Union notified Woodside that it had acquired lender-placed
insurance, also called force-placed insurance, for the property
through Ironshore Europe Limited. The LPI policy provided $155,646
in coverage and cost $8,196.62 per year. The notice informed
Woodside that the LPI policy would be cancelled as soon as Woodside
obtained an acceptable policy. Pacific Union paid itself $8,196.62
out of Woodside’s escrow account on August 14, 2015. The following
year, on March 16, 2016, Woodside obtained acceptable coverage.
Accordingly, Pacific Union cancelled the LPI policy and credited
Woodside’s escrow account $1,055.43, the prorated cost of the LPI
policy for the remaining months.
Woodside brought this proposed class action lawsuit against
Pacific Union on November 10, 2017. He alleges that Pacific Union
breached the explicit terms of the mortgage agreement, the implied
covenant for good faith and fair dealing, and its fiduciary duties
when it selected a LPI policy that was significantly more expensive

personal property or the contents of the dwelling. The total
cost of your insurance will be at least $8,196.62 annually.
You must pay us for any period during which the insurance we
buy is in effect but you do not have insurance. An insurance
document providing proof of increased coverage must be
received in order to have this lender placed insurance
coverage cancelled.
Pacific Union alleges that it also sent Woodside a second
letter, dated June 8, 2015, advising Woodside that it was the
“second and final notice.” The letter reiterated that if Woodside
did not obtain insurance, Pacific Union would purchase coverage at
Woodside’s expense for $8,196,62, effective May 2, 2015.
3

than the policy he had originally selected. On January 11, 2018,
Pacific Union moved to dismiss the complaint for failure to state
a claim, pursuant to Federal Rule of Civil Procedure 12(b)(6).

I.
Rule 12(b)(6) of the Federal Rules of Civil Procedure allows
a party to move for dismissal of a complaint for failure to state
a claim upon which relief can be granted. Such a motion is rarely
granted because it is viewed with disfavor. See Lowrey v. Tex. A
& M Univ. Sys., 117 F.3d 242, 247 (5th Cir. 1997)(quoting Kaiser
Aluminum & Chem. Sales, Inc. v. Avondale Shipyards, Inc., 677 F.2d
1045, 1050 (5th Cir. 1982)).
Under Rule 8(a)(2) of the Federal Rules of Civil Procedure,
a pleading must contain a "short and plain statement of the claim
showing that the pleader is entitled to relief." Ashcroft v. Iqbal,
556 U.S. 662, 678-79 (2009)(citing Fed. R. Civ. P. 8). "[T]he
pleading standard Rule 8 announces does not require 'detailed
factual allegations,' but it demands more than an unadorned, thedefendant-unlawfully-harmed-me accusation." Id. at 678 (citing
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)).
In considering a Rule 12(b)(6) motion, the Court “accept[s]
all well-pleaded facts as true and view[s] all facts in the light
most favorable to the plaintiff.” See Thompson v. City of Waco,
Texas, 764 F.3d 500, 502 (5th Cir. 2014) (citing Doe ex rel. Magee
4

v. Covington Cnty. Sch. Dist. ex rel. Keys, 675 F.3d 849, 854 (5th
Cir.

2012)(en

banc)).

But,

in

deciding

whether

dismissal

is

warranted, the Court will not accept as true legal conclusions.
Id. at 502-03 (citing Iqbal, 556 U.S. at 678).
To survive dismissal, “‘a complaint must contain sufficient
factual matter, accepted as true, to state a claim to relief that
is plausible on its face.’” Gonzalez v. Kay, 577 F.3d 600, 603
(5th Cir. 2009)(quoting Iqbal, 556 U.S. at 678)(internal quotation
marks omitted). “Factual allegations must be enough to raise a
right to relief above the speculative level, on the assumption
that all the allegations in the complaint are true (even if
doubtful

in

fact).”

Twombly,

550

U.S.

at

555

(citations

and

footnote omitted). “A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to draw the
reasonable

inference

that

the

defendant

is

liable

for

the

misconduct alleged.” Iqbal, 556 U.S. at 678 (“The plausibility
standard is not akin to a ‘probability requirement,’ but it asks
for more than a sheer possibility that a defendant has acted
unlawfully.”). The Court’s task “is to determine whether the
plaintiff stated a legally cognizable claim that is plausible, not
to evaluate the plaintiff’s likelihood of success.” Thompson v.
City of Waco, Texas, 764 F.3d 500, 503 (5th Cir. 2014)(citation
omitted). This is a “context-specific task that requires the
reviewing court to draw on its judicial experience and common
5

sense.” Iqbal, 556 U.S. at 679. “Where a complaint pleads facts
that are merely consistent with a defendant’s liability, it stops
short

of

the

line

between

possibility

and

plausibility

of

entitlement to relief.” Id. at 678 (internal quotations omitted)
(citing Twombly, 550 U.S. at 557). “[A] plaintiff’s obligation to
provide the ‘grounds’ of his ‘entitle[ment] to relief’”, thus,
“requires

more

than

labels

and

conclusions,

and

a

formulaic

recitation of the elements of a cause of action will not do.”
Twombly,

550

U.S.

at

555

(alteration

in

original)

(citation

omitted).
II.
In his proposed class action, Mr. Woodside does not allege
that Pacific Union has a right to impose a lender-placed insurance
policy. Instead, Woodside contends that Pacific Union’s selection
of the LPI policy, which costs ten times more than Woodside’s
previously obtained insurance, violates the explicit and implicit
terms of the contract, and is a breach of its fiduciary duty.

A. Breach of Contract
Woodside contends that Pacific Union breached the explicit
language of the mortgage agreement, and breached the agreement’s
implied covenant of good faith and fair dealing. He asserts that
Pacific Union breached the contract in three ways: (1) The mortgage
agreement restrained Pacific Union to obtain insurance “only to
6

the extent that was reasonably necessary to protect” Pacific
Union’s interest in the property. Pacific Union violated the
agreement

by

obtaining

an

“excessive,

unreasonable,

and

unnecessary” LPI policy that exceeds the amount necessary to
protect its interest. (2) Pacific Union receives a portion of the
borrowers’ insurance premium from the insurer, which Woodside
refers to as a “kickback.” Borrowers, including Woodside, are
forced to pay an amount that was greater than the cost of insurance
“designed to pad extensively Pacific Union’s bottom line—not to
reasonably

protect

assets

under

its

servicing

control.”

(3)

Pacific Union required Woodside to pay for retroactive coverage,
even though the time period in which the coverage applied to lapsed
and no loss occurred during the lapsed period. Woodside alleges
that

“backdating”

does

not

protect

Pacific

Union’s

property

interest because the time had already passed without incident, so
there is no risk of loss. Because retroactive coverage is not
necessary to protect the property, charging for those amounts is
beyond Pacific Union’s contractual authority.
Many of Woodside’s arguments are premised on the belief that
the contract permits Pacific Union to obtain coverage “only to the
extent ‘necessary’ to protect the property’s value.” The plaintiff
repeatedly asserts that the explicit terms of the contract required
Pacific Union to be “reasonable” in its selection of a LPI policy.

7

The Court finds it difficult to identify any language that supports
the plaintiff’s claim. The mortgage agreement provides:
If Borrower fails to make these payments or the payments
required by paragraph 2, or fails to perform any covenants
and agreements contained in this Security Instrument, . . .
then Lender may do and pay whatever is necessary to protect
the value of the Property and Lender’s rights in the Property,
including payment of taxes, hazard insurance and other items
mentioned in paragraph 2.
(Emphasis added). It does not require the lender to do only what
is necessary, nor does it require the lender to be “reasonable” in
its selection. The agreement confers broad discretion to the lender
to

obtain

insurance

when

necessary;

specifically,

when

the

borrower breaches his own contractual duty and fails to provide
his own insurance. Cohen v. American Sec. Ins. Co., 735 F.3d 601,
604, 611-12 (7th Cir. 2013)(holding that obtaining an LPI policy
that was five times more than the borrower’s purchased insurance
was authorized by similar contractual language that “gives the
lender

broad

discretion

to

act

to

protect

its

own

property

interest.”). Analyzing identical language, this Court has held,
“[n]othing in these terms requires the lender to purchase the
cheapest insurance or the insurance that provides the most value
for

the

borrower.”

Robinson

v.

Standard

Mortgage

Corp.,

191

F.Supp.3d 630, 642 (E.D. La. 2016) (Vance, J.). The contract does
not prevent Pacific Union from obtaining insurance (after the
borrower failed to obtain his own) that is more expensive than
what the borrower could have selected.
8

The plaintiff next alleges that the defendant breached the
explicit terms of the contract by receiving kickbacks from its
lender-placed insurance company. He claims that Pacific Union and
Ironshore entered into an exclusive arrangement where Ironshore
provided policies to Pacific Union’s borrowers, and Pacific Union
received a portion of the premium. Because Pacific Union had an
incentive to select a high-cost policy, Woodside asserts, its
interests were opposed to its borrowers. Further, he claims the
kickbacks

exceed

the

authority

authorized

under

the

contract

because they are not necessary to protect the lender’s interest in
the property.
Woodside uses the term “kickback” to describe a commission.
The Seventh Circuit, one of two circuit courts to address claims
attacking costly LPI policies, 2 held that a kickback occurs when

2

Two U.S. Courts of Appeals, the Seventh Circuit and the Eleventh
Circuit, and several district courts have addressed the LPI policy
issues attacked in Woodside’s complaint. See Cohen v. American
Sec. Ins. Co., 735 F.3d 601 (7th Cir. 2013)(holding that the
plaintiff’s claims alleging kickbacks, backdating, and excessive
charges failed to successfully allege a breach of contract or
implied covenant of good faith); Faez v. Wells Fargo Bank, N.A.,
745 F.3d 1098 (11th Cir. 2014) (dismissing the plaintiff’s
complaint for failing to state a claim when the plaintiff failed
to sufficiently allege a breach of the explicit terms of the
contract or the implied duty of good faith and fair dealing). The
mortgage agreements and factual circumstances are very similar, if
not identical, in each case. This Court is the only court in the
Fifth Circuit to have previously ruled on similar issues. See
Robinson v. Standard Mortgage Corp., 191 F.Supp.3d 630, 642 (E.D.
La. 2016) (Vance, J.) (holding that the plaintiff failed to
plausible allege racketeering activity). However, the claims in
that case were brought under the Racketeer Influence Corrupt
9

“an agent, charged with acting for the benefit of a principal,
accepts something of value from a third party in return for
steering the principal’s business to the third party. The defining
characteristic of a kickback is divided loyalties.” Cohen, 735
F.3d at 611 (emphasis added). The Cohen court held that because
the agreement made clear that the lender was not acting on behalf
of

the

borrower

or

his

interests,

but

instead

was

obtaining

insurance to solely protect its own interest, the lender did not
have divided loyalties. Id.; Robsinson, 191 F.Supp.3d at 642
(“[Lender] did not act on [Borrower]’s behalf when it force-placed
insurance coverage; it acted to protect its own interest in the
mortgaged property. . . . So although [Borrower] sprinkles her
complaint with the “kickback” label, the commissions and portfolio
monitoring

that

[the

insurer]

provided

to

[Lender]

were

not

kickbacks in any meaningful sense.”); see also Faez v. Wells Fargo
Bank, N.A., 745 F.3d 1098, 1110-11 (11th Cir. 2014). Its loyalty
was only to itself. Cohen, 735 F.3d at 611. Further, the court
held that “[n]othing in the loan agreement and related documents
prohibits

[Lender]

and

its

insurance-agency

affiliate

from

receiving a fee or commission when lender-placed insurance becomes
necessary.” Id. at 612.

Organizations Act. The Seventh Circuit, Eleventh Circuit, and this
Court each granted the defendants’ motions to dismiss for failure
to state a claim.
10

Likewise, the mortgage agreement and the related notices do
not prohibit Pacific Union from receiving a commission from the
insurer. Moreover, because Woodside’s mortgage agreement does not
limit Pacific Union to charge Woodside only the amount necessary
to obtain insurance, selecting a costly insurance policy does not
exceed the authority granted to Pacific Union. The contract grants
broad discretion to Pacific Union to protect its interest. Woodside
also alleges that Pacific Union’s interest was “diametrically
opposed” to his own, but that is not problematic if Pacific Union
does not purport to represent Woodside’s interests. And Pacific
Union does not. Woodside’s mortgage agreement contains the same
lender protections that the Cohen court relied on. It provides
that the flood and hazard insurance “shall be maintain in the
amount and for the period that Lender requires. . . [and that]
[a]ll

insurance

shall

be

carried

with

companies

approved

by

Lender.” It also states that the lender may obtain “whatever is
necessary to protect the value of the Property and Lender’s rights
in the Property.” (emphasis added). No language in the mortgage
agreement splits Pacific Union’s loyalty between protecting its
own property and obtaining an affordable LPI for the borrower, nor
does it explicitly or implicitly prohibit Pacific Union from
accepting a commission from Ironshore.
Woodside contends that Pacific Union violated the contract by
backdating the lender-placed insurance to the date of Woodside’s
11

lapse when no loss had occurred. The Seventh Circuit rejected this
claim,

holding

that

because

the

contract

required

continual

coverage, the lender was permitted to acquire coverage for the
property as soon as the insurance lapsed, including backdated
insurance. Cohen, 735 F.3d at 613. The court also found that
neither the lender nor the insurer could reasonably know whether
loss occurred during the lapsed period. Id. Likewise, Woodside’s
mortgage

agreement

requires

that

the

property

be

continually

insured. As soon as the borrower’s purchased insurance lapses, the
lender is authorized to obtain a LPI policy. Additionally, both
notices warn “[y]ou must pay us for any period during which the
insurance we buy is in effect but you do not have insurance.” 3 By
backdating the insurance, Pacific Union was acting within its
contractual authority to ensure that coverage applies from the
date the insurance lapsed. If Woodside’s property was damaged
during the time between when his property lapsed and when Pacific
Union paid for the LPI policy (following Woodside’s 45-day window
to obtain insurance), he would be insured. The agreement does not

3

The plaintiff also contends that he should not have to pay for
the insurance for the ten day period after his insurance lapse
because of the Lender’s Loss Payable Endorsement. The LLPE, or
“standard mortgage clause,” ensures that the lender has no risk of
loss for the ten days after insurance lapses. However, the contract
explicitly requires that the property have insurance coverage.
Pacific Union is within its right to charge for insurance as soon
as the insurance lapses even if a different provision, like LLPE,
could protect the lender from loss.
12

contemplate that insurance is not required if no loss occurred.
Further, Woodside does not allege how Pacific Union would know
whether loss did or did not occur on Woodside’s or any of its other
borrowers’ properties. Pacific Union’s interest is insuring its
property. It’d make little sense to fail to secure retroactive
coverage just because a borrower had not yet made a claim. Because
the

Court

disagrees

with

Woodside’s

interpretation

of

the

contract’s restrictions, and does not find the kickbacks and
backdating practices to be in violation of the contract, Woodside’s
claim

that

Pacific

Union

breached

the

explicit

terms

of

the

contract fail.
Lastly, Woodside alleges that Pacific Union breached the
implied covenant of good faith and fair dealing. He claims that it
acted in bad faith through the conduct already discussed—selecting
an expensive LPI policy, kickbacks, and backdating the policy—and
by failing to maintain borrowers’ existing insurance policies and
seek competitive bids for LPI policies. Pacific Union argues that
because it did not breach the contract, it cannot, as a matter of
law, be found to have breached the duty of good faith and fair
dealing. The Court agrees.
Louisiana law creates an implied obligation of good faith.
La. Civ. Code art. 1983 (“Contracts must be performed in good
faith.”);

Schaumburg

v.

State

Farm

Mut.

Auto.

Ins.

Co.,

421

Fed.Appx. 434, 439 (5th Cir. 2011)(unpublished)(“Under Louisiana
13

law,

every

contract

implies

an

obligation

of

good

faith

performance.”) But “[a] breach of the duty of good faith and fair
dealing requires a breach of a contract.” Schaumburg, 421 Fed.Appx.
at 439; Sartisky v. Louisiana Endowment for the Humanities, Civ.
No. 14-1125, 2015 WL 7777979, at *3 (“If the actions of a party
are permitted under the express terms of the agreement, that party
cannot as a matter of law be acting in breach of the implied
covenant of good faith and fair dealing.”). Moreover, the breach
must be effectuated with a “dishonest or morally questionable
motive.” Barbe v. A.A. Harmon & Co, 94-2423 (La. App. 4 Cir.
1/7/98); 705 So.2d 1210, 1220.
The Court has already determined that simply selecting a
costly LPI policy (when the contract authorizes it and the lender
disclosed the amount to be charged), accepting commissions, and
providing (and charging for) coverage as soon as the borrowerselected coverage lapses does not constitute a breach of the
mortgage agreement. The additional claims do not persuade the Court
to find differently. It is not the lender’s obligation to obtain
a LPI policy from the insurer that the lender originally selected—
it is entitled to select its own insurer. Likewise, it is not the
lender’s

obligation

to

price

shop

for

competitive

insurance

policies. It is the borrower’s obligation and responsibility to
obtain insurance, and to seek a price-competitive option. But when
they fail to take those steps, the lender does not act in bad faith
14

for not investing the time and resources to secure the best deal
for the borrower. See Cohen, 735 F.3d at 612 (holding that the
implied

duty

reasonable,”

of

good

but

to

faith
avoid

does

not

invoking

require
a

parties

contractual

to

“be

provision

“dishonestly to achieve a purpose contract to that for which the
contract had been made” and finding that the lender did not violate
this duty when it gave the borrower notices of the LPI and that
she could cancel at any time by securing her own insurance).
Because Woodside has not alleged facts that support a finding that
Pacific Union breached the contract, Pacific Union cannot as a
matter of law be acting in breach of the implied covenant of good
faith and dealing.

B. Fiduciary Duty
In Count II of the complaint, Woodside alleges that Pacific
Union

breached

its

fiduciary

duty

and

misappropriated

escrow

funds. Pacific Union breached this duty by using and depleting the
escrow accounts “to pay for unnecessary and duplicative insurance”
to generate additional profits. Pacific Union alleges that under
Louisiana law, it does not owe the plaintiff a fiduciary duty. 4
Again, the Court agrees.

4

Pacific Union also rejects the claims on substantive grounds. It
contends that because the underlying theories of this claim are
the same as the breach of contract claim (that the LPI policy
15

Louisiana law provides,
No financial institution . . . shall be deemed or
implied to be acting as a fiduciary, or have a fiduciary
obligation or responsibility to its customers or to
third
parties
other
than
shareholders
of
the
institution, unless there is a written agency or trust
agreement
under
which
the
financial
institution
specifically agrees to act and perform in the capacity
of a fiduciary. . . . This Section is not limited to
credit agreements and shall apply to all types of
relationships to which a financial institution may be a
party.
La. Stat. § 1124 (emphasis added). It is uncontested that the
mortgage

agreement

relationship”

never

arose.

explicitly

Furthermore,

stated

neither

that

party

a

“fiduciary

disputes

that

under Louisiana law, mortgage lenders do not owe a fiduciary duty
to their borrowers simply because of their status as a borrower;
without explicit language in the contract, there is no fiduciary
duty. See Leach v. Ameriquest Mortg. Servs., No. 06-1981, 2007 WL
2900480, at *2 (holding that “[p]laintiffs cannot assert a breach
of fiduciary duty, because no fiduciary relationship was formed”
by the mortgage agreement that authorized a lender to purchase
flood insurance). Instead, Woodside claims that the duty arose out
of the mortgage agreement in which Pacific Union agreed to hold,
manage, and control any escrow funds in trust. Because Pacific
Union agreed in writing to hold, manage, and control Woodside’s
escrow funds in trust, Woodside reasons, Pacific Union owes him

selection and the commission received was outside the lender’s
authorization), this fiduciary duty claim also fails.
16

the fiduciary duty owed by an escrow agent to an escrow account
holder.
The

existence

of

an

escrow

relationship

does

not

alter

Louisiana’s statutory requirements that a fiduciary duty only
exists if explicitly created by a written agreement. LaBauve v.
JPMorgan Chase Bank, N.A., Civ. Action No. 17-259, 2018 WL 1125660,
at *3-5 (M.D. La. Mar. 1, 2018) (unpublished) (holding that that
a mortgage agreement that entrusts the lender with managing and
controlling funds in the borrower’s escrow account does not create
a fiduciary relationship absent a written agreement where the
lender agreed to act as a fiduciary); Clarkston v. Allstate Ins.
Co., No. 06-4474, 2007 WL 128806, at *2 (E.D. La. Jan. 16,
2007)(Feldman,

J.)

(unpublished)

(rejecting

the

plaintiff’s

argument that the lender had a fiduciary duty because it handled
and administered escrow funds when no written agreement expressly
created a fiduciary duty”); Faez, 745 F.3d 1098, 1110 (11th Cir.
2014) (dismissing the borrower’s claim that the lender’s “use of
escrow

funds

to

pay

for

the

force-placed

insurance

breached

fiduciary duties” because the borrower could not provide “a legal
basis that a lender’s administration of escrow funds creates a
fiduciary relationship.”) Because Woodside does not allege that
Pacific Union agreed to be a fiduciary in any written document,
the plaintiff fails to allege sufficient facts that a fiduciary
relationship existed and that Pacific Union violated it.
17

Accordingly, IT IS ORDERED: that the defendant’s motion to
dismiss

is

GRANTED

and

the

defendant’s

motion

to

amend

the

complaint is DENIED. 5 The plaintiff’s complaint is dismissed with
prejudice.

New Orleans, Louisiana, March 22, 2018

_____________________________
MARTIN L. C. FELDMAN
UNITED STATES DISTRICT JUDGE

5

The plaintiff’s complaint was thorough and detailed, but it
alleged facts that simply do not have a legal basis. The plaintiff
gives no indication that an opportunity to amend would successfully
remedy the complaint’s defects.
18