Kolbe v. BAC Home Loans Servicing, LP
2013 U.S. App. LEXIS 20191
1st Cir.2013Background
- Kolbe borrowed $197,437 in October 2008 to buy a New Jersey home secured by an FHA-insured mortgage; Covenant 4 requires hazard insurance and floods “to the extent required by the Secretary” of HUD; NFIA mandates flood coverage at least the lesser of the loan balance or $250,000; Taylor Bean originally held the loan and later went bankrupt, with Bank of America servicing Kolbe’s loan; in 2009 the Bank demanded Kolbe add $46,000 in flood insurance to reach replacement cost, threatening lender-placed insurance if not complied; Kolbe purchased the extra coverage and filed a putative class action alleging breach of Covenant 4 and breach of the implied covenant of good faith and fair dealing; the district court dismissed the claims, the panel vacated, and the case was reheard en banc to address uniform contract interpretation in light of a government-promulgated standard covenant.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Covenant 4 is ambiguous on flood-insurance amount. | Kolbe argues flood insurance is capped at HUD minimum. | Bank argues first two sentences empower any hazard coverage; third sentence sets HUD minimum. | Ambiguity exists; discovery allowed on contract meaning. |
| Whether the government’s interpretation (Auer deference) should govern the contract interpretation. | Even if ambiguous, private understanding should control absent conflict with policy. | Government interpretation controls uniform HUD covenant language. | Auer deference discussed but not controlling; discovery allowed to determine private understanding. |
| Whether Kolbe can state a plausible breach-of-contract claim based on alleged over-insurance. | Paragraph 4, read with other covenants, permits a cap at the HUD minimum; Bank breached by requiring excess insurance. | Bank’s reading is within Covenant 4; no breach. | Kolbe states a plausible breach-of-contract claim; district court erred in dismissing. |
| Whether Kolbe’s implied covenant claim survives. | Bad-faith motive and potential self-dealing alleged in over-insurance demand. | No viable bad-faith theory given the record; decisions were reasonable. | Implied covenant claim survives plausibility standards; not defeated at the pleading stage. |
Key Cases Cited
- Illinois Steel Co. v. Baltimore & Ohio R.R. Co., 320 U.S. 508 (1944) (uniform contract term interpretation under federal law)
- Honeywell, Inc. v. United States, 661 F.2d 182 (Ct. Cl. 1981) (agency interpretation of its regulations gives controlling weight in contracts)
- Paul Revere Life Ins. Co. v. Haas, 644 A.2d 1098 (N.J. 1994) (statutory provision interpreted irrespective of contracting parties' understanding)
- Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039 (2d Cir. 1982) (uniform contracts interpreted to treat alike across cases; extrinsic evidence limited)
- Auer v. Robbins, 519 U.S. 452 (1997) (deference to agency interpretation of its own regulation)