Kolbe v. BAC Home Loans Servicing, LP

United States Court of Appeals For the First Circuit

No. 11-2037 SUSAN LASS, Plaintiff, Appellant, v. BANK OF AMERICA, N.A., and BAC HOME LOANS SERVICING, L.P., 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.

Kai H. Richter, with whom E. Michelle Drake, Nichols Kaster, PLLP, Thomas W. Duffey, and Keane, Klein & Duffy 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. Appellant Susan Lass is among a

number of homeowners in multiple states claiming that their

mortgage companies have wrongfully demanded an increase in flood

insurance coverage to levels beyond the amounts required by their

mortgages. In this case, unlike in the companion case we decide

today, Kolbe v. Bank of America, N.A., No. 11-2030, the pertinent

mortgage provision explicitly gives the lender discretion to

prescribe the amount of flood insurance. We nonetheless conclude

that the district court's dismissal of Lass's complaint must be

vacated. A supplemental document given to Lass at her real estate

closing, titled "Flood Insurance Notification," reasonably may be

read to state that the mandatory amount of flood insurance imposed

at that time would remain unchanged for the duration of the

mortgage. Given the ambiguity as to the lender's authority to

increase the coverage requirement, Lass is entitled to proceed with

her breach of contract and related claims.

I.

The following facts are drawn from the allegations in the

complaint. See Román-Oliveras v. P.R. Elec. Power Auth., 655 F.3d

43, 45 (1st Cir. 2011). Appellant Lass, a resident of Rehoboth,

Massachusetts, obtained a mortgage loan in the amount of $40,000 in

1994 from Residential Mortgage Corporation. Paragraph 5 of the -2- mortgage agreement,1 titled "Hazard or Property Insurance," states

in pertinent part:

Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire, hazards included within the term "extended coverage" and any other hazards, including floods or flooding, for which Lender requires insurance. This insurance shall be maintained in the amounts and for the periods that Lender requires. . . . If Borrower fails to maintain coverage described above, Lender may, at Lender's option, obtain coverage to protect Lender's rights in the Property in accordance with Paragraph 7.2

The amount of flood insurance required by the lender was specified

in a separate document labeled "Flood Insurance Notification" ("the

Notification"). It states, in part:

[A]t the closing the property you are financing must be covered by flood insurance in the amount of the principle [sic] amount 1 The mortgage agreement was executed on a standard form issued by the Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac") and the Federal National Mortgage Association (FNMA or "Fannie Mae") for single-family mortgages in Massachusetts. These two entities are "government-sponsored enterprises" ("GSEs")overseen by the Department of Housing and Urban Development ("HUD"). 2 Paragraph 7 provides, in part:

If Borrower fails to perform the covenants and agreements contained in this Security Instrument[,] . . . then Lender may do and pay for whatever is necessary to protect the value of the Property and Lender's rights in the Property.

Paragraph 7 also states that any costs incurred by the lender under the paragraph "shall become additional debt of Borrower" secured by the mortgage.

-3- financed, or the maximum amount available, whichever is less. This insurance will be mandatory until the loan is paid in full.

Federal law also required Lass to obtain flood insurance

coverage because her property is located in a special flood hazard

zone under the National Flood Insurance Act ("NFIA"). See 42

U.S.C. § 4012a(b)(1).3 The statutory coverage requirement is

framed in terms similar to the Notification. At the time of her

closing, Lass was obliged to purchase an amount of insurance that

tracked the lower of her principal balance or the maximum amount of

insurance available to her under the federal flood insurance

program ($250,000). Id.; see also id. § 4013(b)(2); 24 C.F.R.

§ 203 .16a; 44 C.F.R. § 61.6.4 Lass at all times maintained flood

insurance at least equal to the full amount of her loan, $40,000.

In 2007, she voluntarily increased her coverage to $100,000.

The rights to Lass's mortgage eventually were acquired by

Bank of America ("the Bank"),5 and shortly thereafter, in November 3 Technically, the statute requires the lender to require the borrower to obtain the insurance. See 42 U.S.C. § 4012a(b)(1). 4 The federal law requirement in fact decreases as the mortgage balance decreases, with the statute setting the minimum amount of insurance as the "outstanding" principal balance. There is no contention that Lass was required to satisfy the $250,000 "available coverage" prong, and we therefore do not further refer to that alternative in our discussion. 5 The Bank initially assumed the role of lender and BAC Home Loans Servicing, L.P. assumed the role of servicer. The two entities merged in 2011, and we thus refer to them collectively as "the Bank."

-4- 2009, the Bank sent Lass a form letter stating that the amount of

flood insurance on her property was inadequate and did not satisfy

"the terms of [her] mortgage/deed of trust and/or Federal law."

The letter stated that she needed an additional $145,086 in

coverage, so that she would have flood insurance in the same amount

as the hazard insurance that she had purchased, the latter amount

ordinarily reflecting the replacement value of the improvements on

the property. The letter stated that, if Lass did not obtain the

increased insurance by early January 2010, the Bank would purchase

it for her, perhaps through its affiliated entities and likely with

less coverage despite a possibly higher cost than insurance she

could buy herself. Lass contacted the Bank questioning the need

for more insurance, given her low principal balance,6 and was

incorrectly told that the new coverage requirements were mandated

by the Federal Emergency Management Agency ("FEMA").7 The Bank

sent a follow-up letter in mid-December, reiterating its intention

to purchase the additional insurance if Lass failed to do so.

In January 2010, the Bank purchased the additional flood

insurance on behalf of Lass, backdated to provide coverage as of

November 1, 2009, and it later charged her escrow account $748.10 6 By the time she filed this action, Lass's outstanding balance had decreased to less than $28,000. The Bank's demand that she increase her flood insurance by more than $145,000 would bring the amount of insurance to more than $245,000. 7 FEMA recommends such coverage, but the mandatory coverage requirements are set lower by the NFIA. See Section II.A. infra.

-5- for the premium. After notifying Lass in September 2010 that it

intended to renew the policy, the Bank purchased coverage in

November 2010 in the amount of $149,998, charging Lass's escrow

account $779.94. That second policy was replaced in March 2011

with a third lender-placed policy in the amount of $139,988,

resulting in a charge of $724.94 to Lass's escrow account. Lass

claims that the Bank or one of its affiliates received a commission

or "kickback" in connection with the latter two lender-placed

policies. Also in March 2011, however, following a television news

report about plaintiff's flood-insurance interactions with the

Bank, the Bank posted refunds to Lass's escrow account for the cost

of the first two lender-placed polices (also commonly known as

"force-placed" policies).

In April 2011, Lass filed a putative class action

complaint, later amended, alleging that the Bank had "unfairly,

unjustly, and unlawfully" forced her and other borrowers to

purchase excessive amounts of flood insurance and had improperly

profited through "kickbacks, commissions, or 'other compensation'"

paid in connection with the force-placed insurance. Am. Compl. ¶¶

3, 4. Her amended complaint contained five separate causes of

action, all of which the district court dismissed. The court

concluded that the mortgage agreement unambiguously entitled the

Bank to increase the required amount of flood insurance at its

discretion and, largely based on that determination, held that none -6- of Lass's claims survived. On appeal, Lass challenges the

dismissal of four claims: breach of contract, breach of the implied

covenant of good faith and fair dealing, unjust enrichment, and

breach of fiduciary duty.8 She asserts that the mortgage and

Notification, in combination, at least created an ambiguity

concerning the Bank's authority to demand greater coverage and,

consequently, none of the claims should have been resolved at the

motion-to-dismiss stage.

II.

We review a district court's decision on a motion to

dismiss de novo. Román-Oliveras, 655 F.3d at 47 . In so doing, we

accept the facts as set forth in the amended complaint and draw all

reasonable inferences in the plaintiff's favor. Cunningham v.

Nat'l City Bank, 588 F.3d 49, 51 (1st Cir. 2009). We also may

consider documents incorporated by reference in the complaint,

including the mortgage agreement and the Notification at issue

here, as well as matters appropriate for judicial notice. See

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322

(2007); Giragosian v. Ryan, 547 F.3d 59, 65 (1st Cir. 2008).

A. Breach of Contract Lass's breach-of-contract claim depends on whether the

amount of flood insurance required at the time of the closing -- 8 Lass does not appeal the dismissal of her claim alleging violation of the Real Estate Settlement Procedures Act, 12 U.S.C. § 2607 (a), (b).

-7- the amount of Lass's loan -- was subject to change by the lender.

In arguing that the amount was fixed for the duration of the loan,

Lass points to the statement in the Notification that the insurance

required at the time of the closing "will be mandatory until the

loan is paid in full." The Bank, however, relies on Paragraph 5's

statement that flood insurance "shall be maintained in the amounts

and for the periods that Lender requires" in arguing that it had

the discretion to demand more insurance when, and if, it deemed

such an increase to be appropriate. The Bank asserts that the

Notification -- to the extent it is considered part of the mortgage

"contract" -- merely states that Lass must maintain the statutory

minimum amount of insurance for the duration of the loan, and does

not promise that the Bank will never exercise its discretion to

increase the insurance obligation. Lass's fallback position is

that the documents are at least susceptible to both interpretations

and, hence, ambiguous. The district court agreed with the Bank,

concluding that "[t]he notification can easily be read in

conjunction with the mortgage[,] which gives the lender the

discretion to set the required amount of flood insurance."

Thus, as in Kolbe, the question before us is whether the

district court correctly concluded that the plaintiff's mortgage

agreement unambiguously gives the lender the discretion to demand

an increase in flood insurance to an amount above the borrower's

initial obligation. Whether a contract is ambiguous is a question -8- of law in Massachusetts. Bukuras v. Mueller Group, LLC, 592 F.3d

255, 261-62 (1st Cir. 2010) (citing Basis Tech. Corp. v.

Amazon.com, Inc., 878 N.E.2d 952, 958-59 (Mass. App. Ct. 2008)).

Language is ambiguous "only if it is susceptible of more than one

meaning and reasonably intelligent persons would differ as to which

meaning is the proper one." Gemini Investors Inc. v. AmeriPark,

Inc., 643 F.3d 43, 52 (1st Cir. 2011) (quoting Citation Ins. Co. v.

Gomez, 688 N.E.2d 951 , 953 (Mass. 1998)) (internal quotation mark

omitted). In considering whether a contract is ambiguous, we read

the agreement "in a reasonable and practical way, consistent with

its language, background, and purpose." Bukuras, 592 F.3d at 262

(quoting Cady v. Marcella, 729 N.E.2d 1125, 1130 (Mass. App. Ct.

2000)).

Lass argues that the Notification is part of the contract

and should be considered along with Paragraph 5. The district

court acknowledged that the supplemental document "appears to be

part of the mortgage contract, similar to a rider, although it is

not listed in the mortgage as an incorporated rider." The Bank

disagrees, asserting that the Notification should not be considered

part of the mortgage because it does not expressly bind both

parties and requires only the borrower's signature. Moreover, the

Bank argues that the Notification "cannot be used to create

ambiguity in the interpretation of paragraph 5," noting that "when

reading distinct but related documents that concern the same -9- transaction . . . [construing such documents as one contract]

applies primarily in cases of uncertainty and cannot undo plain

language which makes perfect sense in context." Appellee's Brief

at 26-27 (quoting Happ v. Corning, Inc., 466 F.3d 41, 46 (1st Cir.

2006)).

The Bank's argument is unpersuasive. Paragraph 5 of the

mortgage gives the lender the discretion to fix the amount of flood

insurance, and the Notification was an essential part of the

transaction because it represented the exercise of that discretion

at the outset of the mortgage period. In effect, the Notification

completed the contract between the parties by specifying that, by

the time of the closing, Lass was obliged to obtain the amount of

flood insurance required by federal law, and no more. We thus see

no reason to depart from the well established principle that, when

the circumstances are appropriate, "instruments deriving from a

given transaction shall be read together." Gilmore v. Century Bank

& Trust Co., 477 N.E.2d 1069, 1073 (Mass. App. Ct. 1985) (noting

also that, in addition to "the formal factors that connect the two

agreements, . . . we lay stress on the sense of the thing"); see

also In re Olympic Mills Corp., 477 F.3d 1, 14 (1st Cir. 2007)

(noting that, without evidence of a contrary intention,

"instruments executed at the same time, by the same contracting

parties, for the same purpose, and in the course of the same

transaction will be considered and construed together as one -10- contract or instrument" (quoting 11 Richard A. Lord, Williston on

Contracts § 30:26 (4th ed. 1999))); Chase Commercial Corp. v. Owen, 588 N.E.2d 705, 707 (Mass. App. Ct. 1992) ("[I]f the three

documents were in essence part of one transaction, they must be

read together to effectuate the intention of the parties.").9

Hence, our inquiry encompasses both the mortgage and the

Notification.

We begin by rejecting Lass's argument that the mortgage

form itself cannot reasonably be read to give the lender discretion

to modify the flood insurance requirement during the life of the

loan. Paragraph 5 refers to "the amounts" and "the periods" of

coverage required by the lender, and the use of the plural form

suggests the possibility of changing obligations over time.10

Indeed, if Paragraph 5 constituted the entire agreement on flood

insurance, the Bank would have a compelling argument that the 9 We recognize that, unlike the Notification, the documents construed together in some cases were signed by both parties to the transaction. We do not understand the principle to be limited to such circumstances. Here, as the district court observed, the Notification was "similar to a rider," and, as we have explained, it follows from "the sense of the thing" to treat it as part of the mortgage agreement. Gilmore, 477 N.E.2d at 1073 . 10 Although the language in Paragraph 5 of Lass's contract is not as explicit as Paragraph 5 in the current version of the standard Fannie Mae/Freddie Mac single-family form for Massachusetts, which explicitly states that the lender's insurance requirement "can change during the term of the Loan," see Am. Compl. Exh. 3, ¶ 5, the language applicable here nonetheless suggests comparable discretion.

-11- mortgage could only reasonably be interpreted to give it discretion

to increase the insurance obligation during the life of the loan.

As we have observed, however, the Notification is a

significant component of the analysis here. After setting out the

specific amount of flood insurance the borrower must obtain, the

Notification states that "[t]his insurance will be mandatory until

the loan is paid in full." The Notification does not identify the

specified amount as merely a mandatory minimum, and it says nothing

about the lender's discretion to change the insurance amount at any

point before "the loan is paid in full." We think it is plausible

that the original lender chose -- in an exercise of the discretion

afforded by Paragraph 5 -- to align Lass's flood insurance

obligation with the level of coverage deemed adequate under federal

law, and that it intended to make that amount the benchmark for the

entire mortgage period. We thus conclude that the Notification may

be reasonably construed to say that the specified amount is the

amount of insurance Lass was required to maintain until she paid

off her loan.

That construction is not, however, inevitable. As the

Bank argues, the "until the loan is paid in full" portion of the

Notification also may be reasonably understood as intended to

highlight the duty under federal law to maintain an amount of

insurance linked to the principal balance, regardless of the

lender's exercise of its discretion under Paragraph 5 to set a -12- different, perhaps greater amount. See 42 U.S.C. § 4012a(e)(1)

(requiring lender to inform the borrower of federal flood insurance

requirements).11 The fact that the mortgage holders preceding Bank

of America did not vary from the federally mandated starting point

does not necessarily signify that they believed they lacked the

discretion to do so, and their decision to keep the amount constant

would not divest the Bank of any discretion afforded by Paragraph

5.12 None of the parties' other arguments persuades us that

the mortgage is only reasonably construed to allow -- or not to

allow -- the increased coverage demanded by the Bank. Lass points

to the sentence in Paragraph 5 authorizing the lender to obtain

insurance to protect "its rights" in the property, and argues that

it is well established under Massachusetts law that a lender's 11 Of course, as noted earlier, the NFIA requires flood insurance in the amount of the outstanding principal balance, so the amount of insurance mandated by law would have decreased as Lass paid down her loan. 12 As in Kolbe, our dissenting colleague presents the Bank's interpretation of the mortgage language but fails to give due regard to the plaintiff's contrary perspective. For example, we agree that it would be difficult to construe the mortgage language itself to bar an increase in the required amount of flood insurance. The Notification, however, states that the flood insurance required at the closing -- which was in the amount of the loan -- "will be mandatory until the loan is paid in full." The fact that the mortgage permits changes in the flood insurance obligation does not mean that the requirement can be changed at will once the parties have agreed to a fixed amount for the life of the loan. The question here is whether the lender in fact agreed in the Notification to a fixed amount of coverage.

-13- rights are limited to the amount of the outstanding debt.

Regardless of Massachusetts law, however, Paragraph 5 allows the

lender to obtain coverage "in accordance with Paragraph 7," which

in turn gives the lender authority not only to protect its own

rights but also "to protect the value of the Property."13 We are likewise unmoved by the Bank's assertion that

limiting flood insurance coverage to the amount required at Lass's

closing is unreasonable given that FEMA recommends insuring for the

full replacement value of the property. 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). As we noted in Kolbe, though replacement-value

coverage may be advisable, Congress in the NFIA appears to have

incorporated the view that it also would be reasonable for

mortgagees to require only an amount "equal to the outstanding

principal balance of the loan," 42 U.S.C. § 4012a(b)(1). Cf.

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 13 To the extent the relationship between Paragraph 5's "Lender's rights in the Property" reference and Paragraph 7's right to protect the "value of the Property" is debatable, the uncertainty reinforces our conclusion that an ambiguity exists concerning the Bank's authority to increase the flood insurance requirement.

-14- that lenders have carte blanche to do so without regard to the

terms of their loan agreements with borrowers."). Moreover, as we

also pointed out in Kolbe, some lenders may choose to set a fixed,

minimum flood insurance requirement to make home ownership

accessible to more people.

Finally, as in Kolbe, we decline at this stage of the

case to apply the principle of contra proferentem to construe

Lass's mortgage against the Bank as the "drafter" of the agreement.

The mortgage itself is on the standard Fannie Mae/Freddie Mac form

for single-family residences in Massachusetts, and the record does

not reveal how much control -- if any -- lenders have over its

terms, or whether the language is properly characterized as

"prescribed by law." See Restatement (Second) of Contracts § 206

cmt. 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."); see also Julia Patterson Forrester, Fannie

Mae/Freddie Mac Uniform Mortgage Instruments: The Forgotten Benefit

to Homeowners, 72 Mo. L. Rev. 1077 , 1085 (2007) ("The Forgotten

Benefit") (stating that "Fannie Mae and Freddie Mac require that

loans they purchase be documented on their forms").14 Nor has 14 We note that the standard Fannie Mae/Freddie Mac form, which contains terms negotiated by consumer advocates, has been described as "exceptionally fair" to borrowers. See The Forgotten Benefit, -15- evidence been cited concerning the origin of the "Flood Insurance

Notification." The name and logo of the original lender appear at

the top of the Notification document, but the name is typed onto a

blank line in the body of the document in a manner consistent with

a standardized form. As in Kolbe, Lass may choose to raise contra

proferentem, as appropriate, upon further development of the

record.

We thus conclude that, taken together, the mortgage and

the Notification are ambiguous as to the lender's authority to

demand increased flood coverage on Lass's property. The district

court therefore erred by rejecting Lass's proposed construction of

the mortgage as unreasonable, and her breach of contract claim must

be reinstated. Cf. Arnett v. Bank of America, N.A., No. 3:11-cv-

01372-SI, 2012 WL 2848425, at **5-9 (D. Or. July 11, 2012) (denying

motion for judgment on the pleadings based on ambiguity of similar

language in mortgage and supplemental flood insurance document).

B. Covenant of Good Faith and Fair Dealing Lass alleges that multiple aspects of the Bank's conduct

in demanding increased flood insurance breached the covenant of

good faith and fair dealing that is implicit in every contract in

Massachusetts. See Uno Rests., Inc. v. Boston Kenmore Realty

Corp., 805 N.E.2d 957, 964 (Mass. 2004); Anthony's Pier Four, Inc.

72 Mo. L. Rev. at 1087; see also id. at 1085 ("The forms have been modified over the years, but they retain the consumer-friendly provisions negotiated in the early 1970s." (footnote omitted)).

-16- v. HBC Assocs., 583 N.E.2d 806, 820 (Mass. 1991). "[T]he purpose

of the implied covenant is to ensure that neither party interferes

with the ability of the other to enjoy the fruits of the contract

and that when performing the obligations of the contract, the

parties remain faithful to the intended and agreed expectations of

the contract." FAMM Steel, Inc. v. Sovereign Bank, 571 F.3d 93,

100 (1st Cir. 2009) (quoting Chokel v. Genzyme Corp., 867 N.E.2d

325, 329 (Mass. 2007)) (internal quotation marks omitted); see also

Nile v. Nile, 734 N.E.2d 1153 , 1160 (Mass. 2000). To succeed with

a claim based on the implied covenant, the plaintiff must

"present[] evidence of bad faith or an absence of good faith."

T.W. Nickerson, Inc. v. Fleet Nat'l Bank, 924 N.E.2d 696, 706

(Mass. 2010) (stating also that "no evidence of an improper motive

. . . was presented at trial, and no facts presented at trial

support a finding of an absence of good faith"); see also Uno

Rests., 805 N.E.2d at 964 n.5; Nile, 734 N.E.2d at 1160 (stating

that a lack of good faith "may be inferred by evidence that the

[conduct] was unreasonable under all the circumstances"). Evidence

that the defendant acted "to gain an advantage for itself" can

support a claim for breach of the covenant. See T.W. Nickerson, 924 N.E.2d at 707 .

Lass's complaint advances seven grounds for the implied

covenant claim, among them the Bank's demanding more flood

insurance than required by federal law or the mortgage agreement, -17- its purchase at Lass's expense of backdated insurance, and

charging borrowers for commissions or "other compensation" for

itself or its affiliates. See Am. Compl., ¶ 75. In keeping with

our analysis in Kolbe, we conclude that these allegations of

"unfair[], unjust[], and unlawful[]" conduct are sufficient to

state a claim for violation of the covenant of good faith and fair

dealing. See Am. Compl., ¶¶ 3, 4. If the Bank demanded flood

insurance coverage that exceeded the requirements of federal law

and the mortgage for the purpose of increasing profits for itself

or its affiliates, or if it unjustifiably charged borrowers for

backdated coverage and commissions, its conduct would be at odds

with "the intended and agreed expectations of the contract," FAMM

Steel, 571 F.3d at 100 (internal quotation mark omitted).15 The Bank argues that Lass's allegations are merely

conclusory assertions that fail to establish a plausible claim for

relief. See Ocasio-Hernández v. Fortuño-Burset, 640 F.3d 1, 12

(1st Cir. 2011). To the contrary, Lass points to specific facts

that, once developed with the aid of discovery, could support the

implied covenant claim: the Bank warned in its notice letters that 15 Although the demand for coverage beyond the amounts specified in the mortgage and the other allegedly unauthorized charges also provide the basis for Lass's breach-of-contract claim, her implied covenant claim does not depend on a contractual breach. Lass also argues that the Bank violated the covenant by "unreasonably exercising in bad faith any purported discretionary authority Defendants claim they were afforded under the loan and mortgage documents." Am. Compl., ¶ 75(4).

-18- the cost of force-placed insurance may include commissions, and the

Bank in fact purchased three policies at Lass's expense, two of

them through a Bank subsidiary;16 the first policy was retroactive

to a date before the first notice letter, meaning that the Bank

bought coverage for a two-month period of time that had already

elapsed; and the required amount of insurance was undisputedly

beyond the NFIA requirements, and perhaps beyond the terms of the

mortgage agreement as well.

In arguing that the backdating claim is without merit,

the Bank cites an unpublished decision upholding the purchase of

retroactive lender-placed insurance. See Webb v. Chase Manhattan

Mortg. Corp., No. 2:05-cv-0548, 2008 WL 2230696 , at *19 (S.D. Ohio

May 28, 2008). Although there may be circumstances in which such

a purchase is defensible, here the property already was covered by

$100,000 of flood insurance, an amount well in excess of the

outstanding loan balance.17 Moreover, whether a lender may purchase

force-placed insurance coverage during the 45-day notice period

required by the NFIA is a debatable question. See 42 U.S.C.

§ 4012a(e)(1), (2); Notice, Loans in Areas Having Special Flood

Hazards, 76 Fed. Reg. 64175 , 64179-64181 (Oct. 17, 2011). A 16 The renewal coverage purchased in November 2010 and the replacement policy purchased in March 2011 were both obtained through Balboa Insurance Services, Inc., a subsidiary of the Bank. 17 In Webb, the property was no longer covered at all when the plaintiff's policy lapsed. See 2008 WL 2230696 , at *19.

-19- fortiori, the propriety of procuring a policy back-dated to before

notice was given is uncertain.18 The Bank also emphasizes that the

premiums for the first two force-placed policies were refunded to

Lass, and she thus suffered no "backdating" damages. The

complaint, however, alleges that Lass "has not recovered a penny of

the monthly overcharges that she has been forced to pay (much less

interest on those overcharges)," Am. Compl., ¶ 41, and the

reimbursement thus does not negate the implied covenant claim.

The allegations of self-dealing arising from the possible

payment of commissions to the Bank or its related entities also are

sufficiently specific to withstand motion-to-dismiss scrutiny.

Lass asserts, inter alia, that the Bank purchased unnecessary

insurance, at her expense, to generate a commission for the Bank or

its affiliate.19 As noted above, her complaint alleges that two of 18 Lass's complaint cites and includes as an exhibit an article in American Banker magazine in which a spokesperson for the National Association of Insurance Commissioners stated that policies "'should not be back-dated to collect premiums for a time period that has already passed.'" See Jeff Horwitz, Ties to Insurers Could Land Mortgage Servicers in More Trouble, American Banker (Nov. 9, 2010, 12:00 PM), http://www.americanbanker.com/issues/175_216/ties-to-insurers- servicers-in-trouble-1028474-1.html?nopagination=1&zkPrintable=1. 19 The allegations in the complaint include the following:

75. Defendants breached [the duty of good faith and fair dealing] by, among other things: (1) misrepresenting federal flood insurance requirements; (2) misrepresenting the requirements of Plaintiff's Mortgage and other mortgage agreements; (3) demanding and/or force-placing more flood insurance than required by federal law or necessary to protect their financial interest in -20- the force-placed policies imposed by the Bank were obtained through

its subsidiary Balboa. These allegations easily meet the threshold

for a viable claim. 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").

mortgaged properties; (4) unreasonably exercising in bad faith any purported discretionary authority Defendants claim they were afforded under the loan and mortgage documents; (5) imposing contractual requirements that did not exist or that exceeded the requirements disclosed in the relevant contracts; (6) charging borrowers sham "costs" for flood insurance that did not reflect the true cost to Bank of America and/or its affiliates (or kicked back to them) as commissions or "other compensation"; and (7) purchasing backdated insurance.

76. Defendants willfully engaged in the foregoing conduct in bad faith, for the purpose of (i) unfairly and unconscionably maximizing revenue from borrowers; (ii) generating commissions, interest, fees, and "other compensation" for BOA and its affiliates; (iii) providing a ready-made customer base for BOA's captive insurance affiliates; (iv) gaining unwarranted contractual and legal advantages; and (v) depriving Plaintiff and other Over-Insurance Class members of their contractual and legal rights to obtain a loan, extension of credit, or credit renewal (or maintain the same) without having to purchase flood insurance coverage in excess of the funds extended to them.

77. Bank of America's financial incentives in connection with force-placed insurance had led it "to force-place excessive insurance and overcharge consumers for policies that provide minimal benefit[.]" See http://www.americanbanker.com/issues/175_216/ties-to- insurers-servicers-in-trouble-1028474- 1.html?zkPrintable=1&nopagination=1 (last visited May 27, 2011).

-21- Hence, as in Kolbe, we conclude that Lass's complaint

alleges sufficient facts to establish a breach of the covenant of

good faith and fair dealing that is "'plausible on its face,'"

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic

Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The claim must

therefore be reinstated.

C. Unjust Enrichment To succeed with an unjust enrichment claim under

Massachusetts law, a plaintiff must show that the defendant

received, was aware of, and accepted or retained a benefit

conferred by the plaintiff "under circumstances which make such

acceptance or retention inequitable." Vieira v. First Am. Title

Ins. Co., 668 F. Supp. 2d 282, 294 (D. Mass. 2009); see also Cmty.

Builders, Inc. v. Indian Motorcycle Assocs., Inc., 692 N.E.2d 964,

979 (Mass. App. Ct. 1998) ("The benefit must be unjust, a quality

that turns on the reasonable expectations of the parties." (citing

Salamon v. Terra, 477 N.E.2d 1029 (Mass. 1985))). Lass focuses

this claim on the Bank's allegedly unjust retention of commissions

earned in connection with the force-placed insurance, and asserts

that such commissions were improper whether or not the Bank had

authority to purchase the additional insurance.

The Bank argues that there cannot be an unjust enrichment

claim when there is an existing contract governing the same subject

matter. Alternatively, it maintains that any benefit "retained"

-22- could not be inequitable because Lass had notice of the

ramifications of failing to purchase additional flood insurance.

Neither of these arguments justifies dismissal of Lass's unjust

enrichment claim.

Although the Bank is correct that damages for breach of

contract and unjust enrichment are mutually exclusive, see Platten

v. HG Bermuda Exempted Ltd., 437 F.3d 118, 130 (1st Cir. 2006)

("Massachusetts law does not allow litigants to override an express

contract by arguing unjust enrichment."), it is accepted practice

to pursue both theories at the pleading stage, see, e.g., Vieira, 668 F. Supp. 2d at 294-95 (noting that Federal Rule of Civil

Procedure 8(d) "permits Plaintiffs to plead alternative and even

inconsistent legal theories, such as breach of contract and unjust

enrichment, even if Plaintiffs only can recover under one of these

theories"). The Bank argues that this flexibility in pleading does

not apply where, as here, the parties agree that there is a valid

contract between them. The mortgage, however, does not explicitly

address either commissions or, more generally, the Bank's

entitlement to profit from its forced placement of insurance.

Paragraph 7 states only that "the Lender may do and pay for

whatever is necessary to protect the value of the Property and

Lender's rights." Although Lass may be able to challenge the

payment of commissions to a Bank subsidiary as unnecessary and thus

a breach of Paragraph 7, we need not reject her equitable claim for -23- reimbursement now on the ground that she is limited to the contract

remedy. The case will in any event move forward, and the district

court will be in a better position once the record is more

developed to determine whether the unjust enrichment claim should

survive.20 Little need be said about the Bank's assertion that any

retention of a benefit was not inequitable as a matter of law

because Lass knew the consequences of failing to obtain additional

insurance on her own. If the mortgage did not permit the Bank to

force place insurance in an amount greater than the amount of

Lass's loan, the Bank's decision to do so -- with attendant benefit

to itself -- would seem to fit any notion of "unjust." Lass is

thus entitled to proceed with the unjust enrichment claim.

D. Breach of Fiduciary Duty Finally, Lass claims that the Bank had a fiduciary duty

in connection with managing her escrow account and breached that

duty by charging her for excessive flood insurance and related

commissions. The Bank does not contest the existence of a duty,

but argues that no breach occurred because the mortgage agreement

permitted it to purchase the insurance and impose the costs through 20 The NFIA states that the lender "may charge the borrower for the cost of premiums and fees incurred by the lender . . . in purchasing the [force-placed] insurance." 42 U.S.C. § 4012a(e)(2). We do not read this authorization for "fees" -- presumably paid to third parties -- as necessarily authorizing "commissions" paid to a Bank subsidiary. The latter might support an allegation of self- dealing, while the former would not.

-24- the escrow account. Our discussions of the other claims inevitably

lead to the conclusion that the dismissal of the fiduciary duty

claim also was premature. As we have described, the mortgage

agreement may not have authorized the forced placement of the

additional $145,000 in flood insurance coverage. Moreover, Lass

alleges that the Bank, in an act of self-dealing, improperly

accepted commissions for itself or a subsidiary in connection with

acquiring the additional insurance. Thus, as with the other

claims, the claim for breach of fiduciary duty must be reinstated.

For the foregoing reasons, the judgment of the district

court dismissing plaintiff's complaint is vacated, and the case is

remanded for further proceedings consistent with this opinion.

Costs are awarded to the appellant.

So ordered.

– Dissenting Opinion Follows -- -25- BOUDIN, Circuit Judge, dissenting. On February 18, 1994,

plaintiff-appellant Susan Lass obtained a loan of $40,000 secured

by a mortgage on her home in Reheboth, Massachusetts, the mortgage

then being immediately assigned to Shawmut Mortgage Company. The

form agreement, used for mortgages in Massachusetts guaranteed by

Fannie Mae and Freddie Mac, provided in pertinent part:

5. Hazard or Property Insurance. Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire . . . and any other hazards, including floods or flooding, for which Lender requires insurance. This insurance shall be maintained in the amounts and for the periods that Lender requires. . . . If Borrower fails to maintain coverage described above, Lender may, at Lender's option, obtain coverage to protect Lender's rights in the Property in accordance with paragraph 7. . . . 7. Protection of Lender's Rights in the Property. If Borrower fails to perform the covenants and agreements contained in this Security Instrument, . . . then Lender may do and pay for whatever is necessary to protect the value of the Property and Lender's rights in the Property.

Another provision of Lass' mortgage provided that when

making monthly mortgage payments, Lass would also pay for separate

items, including property taxes and insurance premiums. The lender

would hold these payments, called "escrow items," in an escrow

account to cover such items when they were due.

On the same day that the mortgage was executed, Shawmut

provided Lass with a separate document on company letterhead -26- entitled "Flood Insurance Notification" (the "Notification"). This

document informed Lass that her property was located in a "special

flood hazard area" and that she would need to purchase flood

insurance in the following provision:

[A]t the closing the property you are financing must be covered by flood insurance in the amount of the principle [sic] amount financed, or the maximum amount available, whichever is less. This insurance will be mandatory until the loan is paid in full.

Both the just quoted notice and the requirement that

Shawmut provide such notice to Lass are imposed by federal law in

aid of the government's subsidized flood insurance program. 42

U.S.C. §§ 4104a(a)(1),(a)(3) (2006). Failure to provide such

notice would have subjected Shawmut to a federal monetary penalty.

Id. § 4012a(f)(2). This coverage mandated by government directive

is required whether or not the lender requires insurance coverage

for flooding or any other hazards.

At some point prior to November 2009, defendant-appellee

Bank of America or one of its affiliated entities (for convenience

we refer only to Bank of America) acquired Lass' mortgage. Then,

pursuant to paragraph 5 of the mortgage, Bank of America sent Lass

on November 16, 2009, a form letter requiring her to purchase an

additional $145,086 of flood insurance, which would insure her home

up to its full replacement-cost value. The letter said that the

bank would purchase the insurance if Lass failed to do so within -27- seven weeks, but it urged that she buy it herself to avoid a more

expensive purchase by the bank.

Despite a follow up bank letter, Lass failed to increase

her coverage. The bank then obtained the insurance itself for the

period in question, while offering Lass a refund of any duplicative

premiums if she belatedly bought the insurance elsewhere, but Lass

again declined to do so. The same pattern--warning, refusal by

Lass and purchase by the bank of the additional insurance--occurred

in 2010, and the bank offered her a further opportunity to purchase

her own insurance after it extended the policy in 2011. In each

instance, the bank took the premiums out of the escrow account.

Lass responded with the present lawsuit against the bank

on April 1, 2011.21 As amended, her complaint charged breach of

contract, breach of the implied covenant of good faith and fair

dealing, unjust enrichment, breach of fiduciary duty, and a count

for violation of a federal statute that is not at issue on appeal.

On the bank's motion to dismiss, the district court dismissed all

of Lass' counts, ruling that no claim had been stated. Lass v.

Bank of America, N.A., No. 11-10570-NMG, 2011 WL 3567280 , at *8 (D.

Mass. Aug. 11, 2011).

The explicit language of the mortgage entitled the bank

to require Lass to purchase the additional insurance even though it 21 The lawsuit is premised on the third of the three sets of forced insurance and the increased mortgage payments resulting from it, the bank having refunded the charges for the first two.

-28- would exceed the unpaid balance of the loan. Under the agreement,

Lass had to maintain insurance against "loss by fire . . . and any

other hazards, including floods or flooding, for which Lender

requires insurance," and this shall be "in the amounts and for the

periods that the Lender requires." It is hard to imagine how the

obligation could be more clearly expressed.

Lass relies upon the separate "Flood Insurance

Notification" furnished by Shawmut on the day the mortgage was

signed, advising her that she had to provide flood insurance to

cover the "principle [sic] amount financed, or the maximum amount

available, whichever is less . . . until the loan is paid in full."

But the agreement says explicitly that flood insurance "shall be

maintained in the amounts and for the periods that Lender

requires," indicating that the lender can require a different

amount in a later period (emphasis added).

The separate Flood Insurance Notification, establishing

specific minimums (because the government so requires), does not

purport to qualify this unequivocal obligation to maintain any

hazard insurance in the amounts and for the periods the lender

requires. Nor does the Flood Insurance Notification in any way

conflict with or contradict this obligation: it merely establishes

a government required minimum for flood insurance regardless of

whether the lender requires insurance in a lesser amount or in no

amount at all.

-29- Nor does the provision allowing the bank to purchase

insurance "to protect Lender's rights in the Property" require that

the insurance be limited to the unpaid balance. By virtue of its

provision of the loan and the risks of nonpayment, the lender has

an interest both in the loan amount and in the stream of interest

payments; both give it ample reason to insist on insurance that

goes beyond the unpaid balance of the loan and up to the

replacement cost. This is a practice is recommended by the Federal

Emergency Management Agency and not at all unusual.22 Because the loan agreement explicitly allows the lender

to increase the amount of flood insurance and to purchase the

insurance if the mortgagor refused, the bank's demand and purchase

cannot themselves violate the implied covenant. See Ayash v. Dana-

Farber Cancer Inst., 822 N.E.2d 667, 684 (Mass. 2005) ("This

implied covenant may not be invoked to create rights and duties not

otherwise provided for in the existing contractual relationship."

(internal quotation marks omitted)). Nor can Lass argue that the 22 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 00 7 ) , http://www.fema.gov/library/viewRecord.do?id=2954. See generally Wells, Insuring to Value: Meeting a Critical Need (2d ed. 2007) (advocating that property owners insure to the full replacement cost of property); 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) (suggesting that insuring to a value below replacement cost constitutes "underinsurance," a widespread problem caused by market inefficiencies).

-30- request for insurance up to replacement cost is extravagant or

irrational. See note 22, above.

As an alternative argument, Lass asserts--offering

various legal theories--that the bank charged an excessive amount

for the insurance, and did so to generate commissions for itself as

the purchaser of the insurance. Lass alleges that Bank of America charg[ed] 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,' . . . [and that Bank of America did so] for the purpose of . . . generating commissions, interest, fees, and 'other compensation' for BOA and its affiliates.

Compl. ¶¶ 75, 76.

The bank repeatedly urged Lass to procure the additional

insurance for herself; indeed, she already had flood insurance and

could doubtless have increased her coverage--albeit for an

increased premium. Specifically, the bank sent Lass six letters

warning that bank-provided coverage might be more expensive than

insurance that Lass could obtain on her own and exhorting Lass to

buy her own insurance in terms such as "we urge you," "we continue

to encourage you," or "BAC Home Loans strongly encourages you."

Several of these exhortations were set off in boldface type for

emphasis. After each purchase, the bank even offered to cancel its

lender-placed insurance and refund any duplicative premiums if Lass

bought her own insurance.

-31- Thus, the bank unquestionably had a legitimate interest

in having the higher coverage to protect its loan and it repeatedly

urged that Lass buy it herself. Given these circumstances, the

notion that it sought the additional coverage so as to obtain the

commission is unsupported by any facts alleged in the complaint

that would make the "improper motive" charge remotely "plausible."

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl.

Corp. v. Twombly, 550 U.S. 544, 570 (2007)).

Finally, Lass appears to claim that the bank overcharged

her for the insurance it obtained. Three theories are offered: the

covenant of good faith and fair dealing, unjust enrichment, and a

fiduciary duty claim based on the fact that the bank drew on the

escrow account to pay for the added insurance. In principle one

can imagine that a bank, having properly insisted on replacement

cost insurance and properly invoked its right to buy the insurance

because the borrower refused, might nevertheless create liability

for itself by imposing exorbitant or manifestly unfair charges.

However, Lass' mortgage authorized the bank to fix the

level of insurance, purchase it directly if Lass refused, and pay

for it out of the escrow account, so all three claims would require

some factual allegations that pointed to a lack of "good faith and

fair dealing" in the price charged, T.W. Nickerson, Inc. v. Fleet

Nat'l Bank, 924 N.E.2d 696, 704 (Mass. 2010)(covenant claim), an

"unjust" profit, Keller v. O'Brien, 683 N.E.2d 1026, 1029 (Mass.

-32- 1997) (unjust enrichment), or unconscionable self-dealing, NRT New

England, Inc. v. Moncure, 937 N.E.2d 999, 1004 (Mass. App. Ct.

2010) (escrow claim).

The only relevant allegation in the complaint, quoted

above, amounts to saying that the bank obtained a commission on the

placement of the insurance. Placing insurance in exchange for

commissions is what independent agents do all the time, and the

bank can hardly place insurance without incurring costs of its own.

Calling these "sham" costs or kickbacks is pure rhetoric, or "bald

allegations" to which the district court was not required to defer,

Iqbal, 556 U.S. at 681 , especially because of the ease of pleading

real facts (if they existed).

Lass could have compared what the bank took out of the

escrow account as the cost of the additional insurance premium

including any commission with comparable insurance provided through

independent agents; possibly the discrepancies might have been

great enough to make it possible, absent adequate explanation by

the bank, to raise an inference that the bank was unduly profiting

or otherwise unreasonable in how it went about the placement of the

insurance. But the complaint provides nothing of the sort.

Finally, Lass complains that when the bank purchased

insurance for her in January 2010, it made the policy effective as

of November 1, 2009, charging her for over two months already

passed. The bank requested that she buy more insurance by letter -33- dated November 16, 2009, and the benefit of backdating the

insurance is itself unexplained. But the bank gave Lass a full

refund for the backdating policy before Lass initiated this

litigation.

To sum up, the lender's requirements in the loan

agreement as to hazard insurance were adequately, if not perfectly,

expressed (one has only to contrast paragraph 5 with the gibberish

typical in insurance policies); the bank's apparent choice to

insist on replacement cost as a matter of course is likely over-

rigid from a policy standpoint but that is a matter for regulators.

There is nothing to warrant further proceedings in this case.

-34-