Berger et al v. Bank of America, N.A. et al

Filing 59

Judge Nathaniel M. Gorton: ORDER entered. MEMORANDUM AND ORDER "In accordance with the foregoing, defendants' motion to dismiss (Docket No. 11 in 11-cv-10312-NMG) is ALLOWED." (Duong, Diep)

United States District Court
District of Massachusetts
________________________________
)
STANLEY KOLBE, individually and )
on behalf of all other persons
)
similarly situated,
)
Plaintiff,
)
Civil Action No.
)
11-10312-NMG
v.
)
)
BAC HOME LOANS SERVICING, L.P.
)
and BALBOA INSURANCE COMPANY,
)
Defendants.
)
________________________________ )
MEMORANDUM & ORDER
GORTON, J.
This is a putative class action lawsuit brought by plaintiff
Stanley Kolbe against Bank of America, N.A., successor by merger
to BAC Home Loans Servicing, LP (“BAC”) and Balboa Insurance
Company (“Balboa”) for breach of his mortgage contract and breach
of the implied covenant of good faith and fair dealing.1

Kolbe

alleges that defendants breached his mortgage contract by
requiring him to purchase more flood insurance than was required
under the terms of his mortgage (referred to as “force-placed
insurance”).

BAC services Kolbe’s loan and Balboa, a wholly-

owned subsidiary of Bank of America Corporation, is an insurance
company that allegedly contacted Kolbe on BAC’s behalf.

Before

the Court is defendants’ motion to dismiss.

1

BAC Home Loans Servicing, LP has recently been merged into
Bank of America, N.A..
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I.

Background
On October 6, 2008, Kolbe obtained a loan for $197,437

secured by a mortgage on his home, which is located in an area in
Atlantic City, New Jersey that is designated as a flood hazard
area under the National Flood Insurance Act, 42 U.S.C. §§ 40014129 (“NFIA”).

The NFIA prohibits federally-regulated lenders

from making, increasing, extending or renewing any loan secured
by real estate in a flood hazard area in which flood insurance is
available unless the property is covered by flood insurance.
U.S.C. §§ 4012a(b)(1).

42

If the lender is found to have a pattern

or practice of non-compliance, it is subject to civil penalties.
Id. § 4012a(f).
Kolbe obtained flood insurance in an unspecified amount
greater than the outstanding balance of his loan.

On October 18,

2009, however, and again on November 16, 2009, BAC allegedly sent
Kolbe a letter informing him that 1) he was required to increase
his flood insurance by $46,000 in order to match the amount of
his homeowner’s insurance coverage and 2) if he did not comply by
December 6, 2009, the insurance would be purchased for him and he
would be charged an estimated $237.

In response, Kolbe purchased

an additional $46,000 in flood insurance coverage.

He alleges

that the increased insurance requirement breached his mortgage
contract and that defendants acted in bad faith.

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II.

Procedural History
Kolbe filed his complaint on behalf of a putative class on

February 23, 2011.

Defendants thereafter filed a motion to

dismiss on April 23, 2011 which plaintiff opposed.

On May 24,

2011, the Court allowed Kolbe’s motion to consolidate the case
with related cases Berger v. Bank of America, et al (No. 10-cv11583) and Lass v. Bank of America, et al. (No. 11-cv-10570).

At

a motion hearing on June 8, 2011, however, Lass was severed but
the plaintiffs in the separate actions agreed to conduct joint
discovery.
III. Motion to Dismiss
A.

Legal Standard

To survive a motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to “state a claim to
relief that is plausible on its face.”
Twombly, 550 U.S. 544, 570 (2007).

Bell Atl. Corp. v.

In considering the merits of

a motion to dismiss, the Court may look only to the facts alleged
in the pleadings, documents attached as exhibits or incorporated
by reference in the complaint and matters of which judicial
notice can be taken.

Nollet v. Justices of the Trial Court of

Mass., 83 F. Supp. 2d 204, 208 (D. Mass. 2000), aff’d, 248 F.3d
1127 (1st Cir. 2000).

Furthermore, the Court must accept all

factual allegations in the complaint as true and draw all
reasonable inferences in the plaintiff’s favor.
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Langadinos v.

Am. Airlines, Inc., 199 F.3d 68, 69 (1st Cir. 2000).

If the

facts in the complaint are sufficient to state a cause of action,
a motion to dismiss the complaint must be denied.

See Nollet, 83

F. Supp. 2d at 208.
Although a court must accept as true all of the factual
allegations contained in a complaint, that doctrine is not,
however, applicable to legal conclusions.
S. Ct. 1937, 1949 (2009).

Ashcroft v. Iqbal, 129

Threadbare recitals of the legal

elements, supported by mere conclusory statements, do not suffice
to state a cause of action.

Id.

Accordingly, a complaint does

not state a claim for relief where the well-pled facts fail to
warrant an inference of any more than the mere possibility of
misconduct.
B.

Id. at 1950.

Breach of Contract

The contract at issue is Kolbe’s mortgage, which states, in
Paragraph 4:
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
period 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.
(emphasis added).
The parties do not dispute that “Secretary” in the third
quoted sentence refers to the Secretary of Housing and Urban

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Development.

The amount of flood insurance “required by the

Secretary” for property located in an area designated as an area
having special flood hazards is defined as:
an amount at least equal to the outstanding principal
balance of the loan or the maximum limit of coverage made
available under the Act with respect to the particular
type of property, whichever is less.
42 U.S.C. §§ 4012a(b)(1).

The maximum limit of coverage

available under the NFIA for a single-family home is $250,000.
Id. § 4013(b)(2) and 44 C.F.R. § 61.6.
1.

The Parties’ Positions

Kolbe contends that the phrase “any hazard” in the first
sentence of the subject policy provision quoted above does not
apply to floods and, thus, BAC does not have the discretion to
dictate the amount of flood insurance coverage he must obtain.
He asserts that the mortgage requires him to maintain flood
insurance coverage for his property in an amount equal to either
the outstanding balance on the loan or the $250,000 maximum flood
insurance available under the NFIA, whichever was less, because
that is the amount “required by the Secretary”.

He maintains

that the third sentence is independent and mutually exclusive
from the first two and, therefore, it is he, not BAC, who has the
discretion to determine the amount of flood insurance to carry
within the confines of the NFIA.

Because the outstanding balance

of Kolbe’s loan was less than $250,000, he based his decision
with respect to insurance coverage on the outstanding balance.
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In contrast, defendants contend that the proper
interpretation of Kolbe’s mortgage is that 1) the first and
second sentences of the subject policy provisions give BAC
discretion to determine the required amount of his flood
insurance coverage and 2) the third sentence incorporates the
requirements of the NFIA by setting a floor for the amount of
flood insurance.
2.

Analysis

Kolbe asserts the following arguments in support his
understanding of his mortgage contract:
1)

If flood insurance was addressed in the “all hazards”

sentence, then the third sentence of the policy provision would
be rendered superfluous; a result which is to be avoided when
interpreting a contract.

See Matter of Liquidation of Integrity

Ins. Co., 657 A.2d 902, 909 (N.J. Super. Ct. App. Div. 1995)
(“The contract is to be considered as a whole, and its provisions
are to be read together.”); Eprotec Pres., Inc. v. Engineered
Materials, Inc., Civ. A. No. 10-5097, 2011 WL 867542, at *5
(D.N.J. Mar. 9, 2011) (“Plaintiff cannot simply wish away
individual sentences of the arbitration clause because they are
inconvenient, particularly if by doing so they render the clause
meaningless.” (citations omitted)).
2)

When a clause uses the word “also”, that clause denotes

a separate and additional provision.

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See Dean v. Griffin Crane &

Steel, Inc., 935 So. 2d 186, 192-93 (La. Ct. App. 2006) (“The
indemnity obligation set forth in that sentence was obviously a
separate obligation from the unconditional indemnity . . . in the
following sentence, given the use of the adverb “also” in the
latter sentence”); Lawyers’ Fund for Client Prot. of State of
N.Y. v. Bank Leumi Trust Co. of New York, 727 N.E.2d 563, 566-67
(N.Y. 2000) (“It uses the word ‘also,’ indicating that what
follows is a separate, additional provision, not merely a
reiteration of what came before.”).
3) A specific provision, such as the third sentence, trumps
a more general provision contained in the first sentence.

See

Homesite Ins. Co. v. Hindman, 992 A.2d 804, 808 (N.J. Super. Ct.
App. Div. 2010).
4) In Wulf v. Bank of America, N.A. & BAC Home Loans
Servicing, L.P., the plaintiff’s mortgage contained identical
language to the flood insurance provision at issue here.

No. 10-

cv-5176, 2011 WL 2550853 (E.D. Pa. Apr. 15, 2011), adopted by
Wulf v. Bank of America, N.A. & BAC Home Loans Servicing, L.P.,
No. 10-cv-5176, 2011 WL 2550628 (E.D. Pa. June 27, 2011).

In a

Report and Recommendation which was subsequently adopted, the
Magistrate Judge concluded that the provisions relating to flood
insurance were ambiguous and, as such, dismissal was
inappropriate.
5) In interpreting a written agreement, ambiguities are

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construed against the party who drafted the agreement.

Daburlos

v. Commercial Ins. Co. of Newark, 521 F.2d 18, 26 (3d Cir. 1975);
City of Orange Tp. v. Empire Mortg. Servs., Inc., 775 A.2d 174,
181 (N.J. Super. Ct. App. Div. 2001).

Moreover, in considering a

motion to dismiss, the Court must make all inferences in the
plaintiff’s favor and, if a contract is ambiguous, the motion to
dismiss must be denied.

Aware, Inc. v. Centillium Commc’ns,

Inc., 604 F. Supp. 2d 306, 310 (D. Mass. 2009).
Despite those arguments, the Court agrees with defendants
that the phrase “any hazard” in the first sentence encompasses
flooding and, as such, the first and second sentences of the
subject policy provision give BAC discretion to determine the
amount of flood insurance coverage Kolbe must maintain within the
parameters set by the NFIA.

The Court concurs with the Alabama

Supreme Court’s interpretation in Custer v. Homeside Lending,
Inc., that “hazards” includes floods.
(Ala. 2003).

858 So. 2d 233, 237, 247

In that case, the mortgage stated that the

mortgagor would keep the secured 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[.]
Id. at 237.

The court concluded that the mortgage gave the

lender the right to require a higher amount of flood insurance
than the outstanding mortgage balance.

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Id.

The Court also concludes that the three relevant sentences
are not ambiguous and do not create a conflict.

The first two

sentences afford the insurer discretion to determine the amount
of hazard insurance that the mortgagor must maintain.

The third

sentence merely specifies the required minimum coverage for flood
insurance.

See, e.g., Hayes v. Wells Fargo Home Mortg., Civ. A.

No. 06-1791, 2006 WL 3193743, at *4 (E.D. La. Oct. 31, 2006) (The
NFIA establishes “a minimum with which the lender must comply and
does not prohibit a contractual agreement whereby the lender may
require coverage in an amount greater than the balance of the
loan secured by the property vulnerable to flooding.”).

The

specific only trumps the general when the two are clearly in
conflict and, here, the policy provisions can and should be read
together logically without conflict.

Burley v. Prudential Ins.

Co. of Am., 598 A.2d 936, 940 (N.J. Super. Ct. App. Div. 1991).
The Court finds that plaintiff’s proposed interpretation of
his mortgage is unreasonable and that the mortgage contract,
especially in light of the NFIA language, is eminently clear.
Thus, the contract is not ambiguous.

See Hayes, 2006 WL 3193743,

at *3 (“Only if the language can reasonably be read to have more
than one reasonable meaning can the language be said to be
ambiguous.” (emphasis in original)).
The Court’s interpretation is bolstered by an examination of
the purpose for which the NFIA was enacted, which was, inter
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alia, to ease the burden on the federal government of flood
disaster relief by providing private insurance money for
rebuilding damaged areas.

42 U.S.C. § 4001(a); C.E.R. 1988, Inc.

v. Aetna Cas. & Sur. Co., 386 F.3d 263 (3d Cir. 2004) (“The
Program was intended to minimize costs to taxpayers by limiting
the damage caused by flood disasters through prevention and
protective measures.” (internal quotation omitted)); United
States v. St. Bernard Parish, 756 F.2d 1116, 1122 (5th Cir. 1985)
(“the principal purpose in enacting the NFIA was to reduce
through the implementation of adequate land use controls and the
availability of subsidized flood insurance, the massive and ever
increasing burden of federal flood disaster assistance.”).
Upon enacting the NFIA, the House of Representatives issued
a report explaining the purpose of the new statute and its
concerns:
Communities along the seacoast or in a river basin become
completely immobilized following a major flood. Usually
they must depend on the Federal Government and voluntary
relief agencies to provide various forms of assistance.
Some State and local governments have limited programs to
assist a flood-stricken area, but disaster relief from
all of these sources is inadequate to provide for the
necessary restoration of heavily damaged areas. These
facts underline the need for a program which will make
insurance against flood damage available, encourage
persons to become aware of the risk of occupying the
flood
plains,
and
reduce
the
mounting
Federal
expenditures for disaster relief assistance.
Mid-Am. Nat. Bank of Chi. v. First Sav. & Loan Ass’n of South
Holland, 737 F.2d 638, 643 n.9 (7th Cir. 1984) (quoting H.R. Rep.

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No. 1585, 90th Cong., 2d Sess., reprinted in [1968] U.S. Code
Cong. & Ad. News 2873, 2966-2967).
The Court’s interpretation and defendants’ conduct is also
in accordance with the holding in Custer, in which the Supreme
Court of Alabama concluded that 1) the NFIA establishes a minimum
of required flood insurance and 2) to require insurance coverage
equal to the full replacement value of the property was not
unreasonable.

858 So.2d at 244-45 (“Congress would not be

adverse to the contractual procurement of force-placed insurance
covering the full value of the property.”).2

The phrase “at

least” in § 4012(b) of the NFIA means that the statute
establishes a minimum amount of flood insurance that borrowers
must obtain.

Id. at 245-46.

The Court concludes that it was, therefore, reasonable for
BAC to require flood insurance in an amount exceeding the
outstanding balance of plaintiff’s loan and equal to the full
replacement value of the property.

See id. at 247.

The mortgage

provision also gives the lender the right to change the amount of
required insurance as it deems necessary by stating that

2

In contrast, the case cited by plaintiff, Hofstetter v.
Chase Home Fin., LLC, 751 F. Supp. 2d 1116, 1120-21 (N.D. Cal.
2010), is inapposite because the court did not consider whether
language similar to the language in Kolbe’s mortgage gave the
mortgagee the right to increase its flood insurance requirement
beyond that required at closing. The issue was whether the
mortgagee had the right to add a flood insurance requirement to
the mortgage agreement after closing.
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insurance must be maintained “in the amounts and for the period
that Lender requires”.

As a result, there is no evidence of

breach of contract here and defendants’ motion to dismiss will be
allowed.
C.

Breach of the Covenant of Good Faith and Fair Dealing

A covenant of good faith and fair dealing is implied in
every contract in New Jersey.

Sons of Thunder, Inc. v. Borden,

Inc., 690 A.2d 575, 587 (N.J. 1997).

In order to prove breach of

the covenant of good faith and fair dealing, plaintiff must show
that defendant has acted with a bad faith motive or intention.
Cargill Global Trading v. Applied Dev. Co., 706 F. Supp. 2d 563,
580 (D.N.J. 2010).
Defendants argue that there is no evidence that they acted
in bad faith because BAC’s insurance requirement was based on the
Federal Emergency Management Agency (“FEMA”) policy that
homeowners should maintain flood insurance equal to the full
replacement value of the property.

The Court concurs and

concludes that requiring insurance coverage equal to the full
replacement value of the property was not unreasonable.
Custer, 858 So.2d at 244.

See

Thus, plaintiffs’ claim for breach of

the covenant of good faith and fair dealing will be dismissed.

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D.

Balboa

Because the Court finds that plaintiff has failed to state a
claim upon which relief can be granted, the question of whether
Balboa is properly a defendant is moot.
ORDER
In accordance with the foregoing, defendants’ motion to
dismiss (Docket No. 11) is ALLOWED.

So ordered.
/s/ Nathaniel M. Gorton
Nathaniel M. Gorton
United States District Judge
Dated August 18, 2011

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