Case: 13-10230        Date Filed: 02/10/2014      Page: 1 of 25


                                                                                  [PUBLISH]


                  IN THE UNITED STATES COURT OF APPEALS

                            FOR THE ELEVENTH CIRCUIT

                             __________________________

                                    No. 13-10230
                             __________________________

                        D.C. Docket No. 1:12-cv-003500-KD-M

FAIRE FEAZ,

                                                                          Plaintiff-Appellant,

                                            versus

WELLS FARGO BANK, N.A., et al.,

                                                                        Defendant-Appellees.

                             __________________________

                      Appeal from the United States District Court
                         for the Southern District of Alabama
                           __________________________

                                    (February 10, 2014)

Before CARNES, Chief Judge, DUBINA, Circuit Judge, and ROSENTHAL, *
District Judge.




       *
         Honorable Lee H. Rosenthal, United States District Judge for the Southern District of
Texas, sitting by designation.
             Case: 13-10230     Date Filed: 02/10/2014   Page: 2 of 25


ROSENTHAL, District Judge:

      We are asked in this appeal to interpret a covenant included in all contracts

for home mortgage loans guaranteed by the Federal Housing Administration. The

covenant requires borrowers to insure their homes against “any hazards for which

Lender requires insurance” and to “also insure . . . against loss by floods to the

extent required by” the Department of Housing and Urban Development, the

Federal Housing Administration’s parent agency.          The issue is whether the

covenant unambiguously permits mortgage lenders to require their borrowers to

obtain flood insurance beyond the amount the agency requires.            Courts have

divided over this question. Some courts have found the covenant ambiguous

because it does not clearly indicate whether the federally required flood-insurance

amount is a minimum or a maximum. Other courts have held that the covenant

unambiguously makes the federally required amount a minimum and allows

lenders to require borrowers to have more flood insurance than federal law

demands.

      We join those courts finding that the covenant unambiguously makes the

federally required flood-insurance amount the minimum, not the maximum, the

borrower must have. As a result, the borrower in this case, plaintiff-appellant Faire

Feaz, cannot prevail on her claims that her mortgage lender, defendant-appellee

Wells Fargo Bank, N.A., breached the mortgage-loan contract and violated

                                         2
             Case: 13-10230    Date Filed: 02/10/2014   Page: 3 of 25


extracontractual duties by requiring her to have more flood insurance than the

amount set by federal law. We therefore affirm the decision of the United States

District Court for the Southern District of Alabama (Kristi K. DuBose, Judge)

dismissing Feaz’s complaint for failure to state a claim. See Feaz v. Wells Fargo

Bank, No. 12-0350-KD-M, 

(S.D. Ala. Dec. 21, 2012), adopting

(S.D. Ala. Nov. 19, 2012).

I.    The Issue

      The contract-interpretation issue arises from the intersection of two federal

statutes. One is the National Housing Act (“NHA”), 12 U.S.C. §§ 1701, et seq.,

intended to promote home ownership. The other is the National Flood Insurance

Act (“NFIA”), 42 U.S.C. §§ 4001–4129, which promotes affordable flood

insurance. See 42 U.S.C. §§ 4001(a), 4002(b).

      The Housing Act authorized a new agency, the Federal Housing

Administration (“FHA”). See Korman v. Fed. Hous. Adm’r, 

, 745

n.5. (D.C. Cir. 1940) (citing Exec. Order No. 7058 (May 29, 1935), 12 U.S.C.

§ 1702). The Department of Housing and Urban Development (“HUD”) is the

FHA’s parent agency. 42 U.S.C. §§ 3534(a), 3535(a). The Act confers on the

Secretary of HUD the authority to prescribe terms for FHA-insured mortgage

contracts. 12 U.S.C. §§ 1702, 1708(a)(1), 1709(a).




                                        3
             Case: 13-10230     Date Filed: 02/10/2014   Page: 4 of 25


      The Flood Insurance Act requires a minimum amount of flood insurance

before a federal agency can provide “any financial assistance” for home purchases

in areas that present “special flood hazards.” 42 U.S.C. § 4012a(a). The Federal

Emergency Management Agency (“FEMA”) designates the “special flood

hazards” areas for this purpose. For homes in an area designated as presenting

“special flood hazards,” the NFIA prohibits “regulated lending institutions” from

“mak[ing], increase[ing], extend[ing], or renew[ing] any” mortgage unless the

home is covered “by flood insurance in an amount at least equal to the outstanding

principal balance of the loan or the maximum limit of coverage made available

under [the NFIA], whichever is less[.]”        42 U.S.C. § 4012a(b)(1)(A).       The

“maximum limit of coverage” under the NFIA is $250,000. 44 C.F.R. § 61.6.

      When the FHA guarantees a mortgage loan for a home located in a

designated special flood hazard area, HUD requires that the home be covered by

flood insurance in “an amount at least equal to either the outstanding balance of the

mortgage, less estimated land cost, or the maximum amount of the NFIP insurance

available with respect to the property improvements, whichever is less.” 24 C.F.R.

§ 203.16a(c). HUD implements this regulation through a standard-form covenant,

in language the Secretary prescribes for every FHA-insured mortgage-loan

contract. See 54 Fed. Reg. 27,596, 27,601 (June 29, 1989) (“Mortgagees must use




                                         4
             Case: 13-10230     Date Filed: 02/10/2014   Page: 5 of 25


the model form . . . , with only such adaptation as may be necessary to conform to

state or local requirements.”). The covenant states:

             Fire, Flood and Other Hazard Insurance. 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 periods 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.

This covenant is included in millions of mortgage contracts across

the country. It does not vary by lender or borrower.

      Despite the covenant’s uniformity and ubiquity, courts have disagreed about

its meaning. The disagreement is over whether the words directing the borrower to

have flood insurance “to the extent required by the Secretary” make the amount the

Secretary requires a minimum that the lender can exceed or a maximum that limits

what the lender can require.

      Some district courts have held that the covenant permits a mortgage lender

to require a borrower to obtain more flood insurance than the federally required

amount. District courts following this approach have held that a contract requiring

a borrower to maintain flood insurance in an amount that covered the home’s

replacement value did not give rise to a claim for breach of the contract and have



                                         5
                Case: 13-10230        Date Filed: 02/10/2014        Page: 6 of 25


granted motions to dismiss such claims. 1 An evenly divided First Circuit Court of

Appeals recently issued an en banc opinion adopting this approach, affirming the

district court’s decision and adopting the panel’s dissenting opinion. See Kolbe v.

BAC Home Loans Servicing LP, No. 11-cv-10312(NMG), 

(D.

Mass. Aug. 18, 2011), rev’d in relevant part, 

(1st Cir. 2012)

(Boudin, J., dissenting), rev’d en banc, — F.3d —, 

(1st Cir.

Sept. 27, 2013).

       Other district courts have disagreed and held that the covenant is

ambiguous.2 Under this approach, the federally required amount could be either a



       1
          See, e.g., Cannon v. Wells Fargo Bank N.A., 

, 1044 (N.D. Cal.
2013) (agreeing with “Wells Fargo that Plaintiffs’ excessive coverage claims are barred”);
McKenzie v. Wells Fargo Home Mortg., Inc., No. 11-cv-4965(JCS), 

, at *16
(N.D. Cal. Oct. 30, 2012) (“[A]s a matter of law, Defendants did not breach the contract by
simply requiring coverage above the outstanding principal loan balance.”); LeCroix v. U.S. Bank,
N.A., 11-cv-3236(DSD/JJK), 

, at *4 (D. Minn. June 20, 2012) (“There is,
however, no conflict or ambiguity within the Hazard Provision. . . . Therefore, the plain meaning
of the hazard provision provides U.S. Bank discretion to set the applicable amount of flood
insurance, and the complaint fails to state a claim for breach of contract.”).
       2
           See, e.g., Casey v. Citibank, N.A., 

, 262 (N.D.N.Y. 2013) (“[I]t is
reasonable to interpret the contract language to mean that [the borrower] need only maintain
flood insurance coverage in an amount equal to the outstanding principal balance of his loan . . .
.”); Morris v. Wells Fargo Bank, N.A., No. 2: 11-cv-474(DSC), 

, at *7 (W.D.
Pa. Sept. 7, 2012) (“Here, ‘to the extent required by the secretary’ in the third sentence
reasonably can be read to set a floor or ceiling on the amount of required flood insurance
coverage. . . . In contrast, the third sentence can be interpreted to limit the amount of flood
insurance to the lesser of the principal balance or the statutory cap. . . . At the very least,
plaintiff’s interpretation is tenable and she has alleged sufficient facts to survive a Rule 12(b)(6)
motion on her breach of contract claim.”); Arnett v. Bank of Am., N.A., 

,
1032 (D. Or. 2012) (“Because there are at least two plausible interpretations of the contract, the
court finds that the contract is ambiguous. Judgment on the pleadings, therefore, is
inappropriate.”); Skansgaard v. Bank of Am., N.A., 

, 948 (W.D. Wash. 2011)
(“Construing the language of the deed of trust in Plaintiff’s favor and giving full meaning to all
                                                 6
               Case: 13-10230        Date Filed: 02/10/2014      Page: 7 of 25


ceiling or a floor. Courts following this approach have denied motions to dismiss

and allowed the claims to proceed.

II.    The Proceedings Below

       The parties do not dispute the following facts. Feaz obtained a $61,928

FHA-insured mortgage from Magnolia Mortgage.                    FEMA had designated her

home’s location as a special flood hazard area. Feaz signed a standard-form FHA

Model Mortgage contract. That contract included the “fourth uniform covenant”

required by federal law. See 54 Fed. Reg. 27,596, 27,604 (June 29, 1989).

       Feaz’s mortgage contract also outlined how the monthly note and insurance

payments were to be paid. Feaz was to include in each monthly payment the

“premiums for insurance required under paragraph 4.” The payment instructions

continued:

              [in] any year in which the Lender must pay a mortgage
              insurance premium to the Secretary of Housing and
              Urban Development (“Secretary”), or in any year in
              which such premium would have been required if Lender
              still held the Security Instrument, each monthly payment
              shall also include either: (i) a sum for the annual
              mortgage insurance premium to be paid by Lender to the
              Secretary, or (ii) a monthly charge instead of a mortgage
              insurance premium if this Security Instrument is held by
              the Secretary, in a reasonable amount to be determined
              by the Secretary. Except for monthly charges by the



relevant provisions, Plaintiff has stated a claim for breach of contract.”); Wulf v. Bank of Am.,
N.A., 

, 594 (E.D. Pa. 2011) (“I find that, considering the language of the
mortgage, dismissal of the breach of contract claim is inappropriate.”).
                                               7
             Case: 13-10230    Date Filed: 02/10/2014   Page: 8 of 25


            Secretary, these items are called “Escrow Items” and the
            sums paid to Lender are called “Escrow Funds.”

If the borrower failed to make required payments or failed to perform any other

mortgage covenants, then the lender could “do and pay whatever [was] necessary

to protect the value of the Property and [the] Lender’s rights in the property,

including payments” of hazard insurance. Amounts the lender spent to protect its

interests became “an additional debt of [the Borrower] and [was to be] secured by

th[e] Security Instrument.”

      Feaz obtained $63,000 in flood insurance when she took out the loan from

her initial lender, Magnolia Mortgage. This was more than the loan’s principal

balance but less than the home’s replacement value. Magnolia did not ask for a

higher amount. In June 2003, Wells Fargo acquired the mortgage. Feaz renewed

her flood insurance in the same $63,000 amount for the next four years, without

any request for a higher amount.

      In June 2007, after Feaz made her annual insurance renewal, Wells Fargo

sent her a letter captioned “Flood Insurance Coverage Deficiency Notification.”

The letter required Feaz to increase her flood-insurance coverage to $250,000 or

the home’s replacement value, whichever was less. The letter warned Feaz that

flood insurance in this amount would be force-placed if she did not get it herself

and provide Wells Fargo proof that she had done so within 45 days.



                                        8
             Case: 13-10230     Date Filed: 02/10/2014   Page: 9 of 25


       Later that same month, Wells Fargo sent Feaz another letter captioned

“Notice of Temporary Flood Insurance Placed by Lender Due to Deficient

Coverage.” That letter stated that Feaz had to increase her flood insurance to the

amount of her home’s replacement value. Feaz received another letter on July 26,

2007, warning her that flood insurance would be force-placed if she did not

provide proof within 30 days that she had obtained the coverage. Feaz did not get

the higher insurance.    Wells Fargo did what it had warned in its deficiency-

notification letters and force-placed the insurance, passing the premium cost to

Feaz. This lawsuit followed.

       Feaz alleged that by demanding more flood insurance than the Secretary of

HUD requires and by force-placing the insurance when she failed to get it, Wells

Fargo breached the mortgage contract, breached an implied covenant of good faith

and fair dealing, breached certain fiduciary obligations, and unjustly enriched

itself. The District Court granted Wells Fargo’s motion to dismiss, and Feaz

appealed. The United States appeared as an amicus, vigorously arguing that the

covenant unambiguously allows mortgage lenders such as Wells Fargo to require a

borrower to obtain more flood insurance than federal law requires, and that this is

important to the goals of the federal housing policy.

III.   Discussion

       A.    The Breach of Contract Claim

                                          9
             Case: 13-10230     Date Filed: 02/10/2014   Page: 10 of 25


      Feaz’s breach of contract claim is grounded on the third sentence of the

fourth uniform covenant. It states: “Borrower shall also insure all improvements

on the Property . . . against loss by floods to the extent required by the Secretary.”

Feaz argues that it is reasonable to read these words as limiting the insurance

amount Wells Fargo requires to the amount the Secretary requires. Because the

Secretary of HUD requires flood-insurance coverage in the lesser of $250,000 or

the loan’s principal balance, Feaz argues that Wells Fargo cannot require her to get

more flood insurance than her loan’s principal balance, which is less than

$250,000.

      Feaz’s arguments, and the contract-interpretation principles she invokes, fail

to recognize the distinctive considerations that apply to interpreting standard-form

contract language that the federal government requires to implement national

statutory and regulatory schemes. When, as here, federal regulations implementing

statutory requirements mandate that every contract of a certain type contain

specified contract language drafted by the federal government, traditional

principles of contract interpretation are supplemented by additional considerations.

See Kolbe, 

, at *5–*6.

      Traditional contract-interpretation principles make contract interpretation a

question of law, decided by reading the words of a contract in the context of the

entire contract and construing the contract to effectuate the parties’ intent. Moore

                                         10
             Case: 13-10230    Date Filed: 02/10/2014   Page: 11 of 25


v. Pa. Castle Energy Corp., 

, 795–96 (11th Cir. 1996). That intent is

derived from the objective meaning of the words used. 

of

the parties’ subjective understanding is not consulted unless the contract is

ambiguous. 

contract contains a uniform, standard-form provision

required by the United States in every such contract across the country, two

considerations supplement those general principles: interpretation of the provision

cannot vary from place to place or from contract to contract; and the United States

drafted the language to implement congressional directives.         The individual

contracting parties neither drafted the standard-form language nor had the authority

to alter or omit that language through negotiation. The United States wrote the

standard-form covenants and required them to be included, verbatim, in each FHA-

insured mortgage-loan contract “with only such adaptation as may be necessary to

conform to state or local requirements.” See 54 Fed. Reg. 27,596, 27,601. Such

required standard-form language must be consistently interpreted in every contract

in which it appears.

      Our precedent follows this approach.      In a case interpreting boilerplate

contract language required in trust indentures, we held that “uniform interpretation

of standard contract language” was important because it “ensures effective

functioning of our financial markets, and begets stability.”     Akanthos Capital

Mgmt., LLC v. CompuCredit Holdings Corp., 

, 1298 (11th Cir.

                                        11
               Case: 13-10230        Date Filed: 02/10/2014       Page: 12 of 25


2012) (citing Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 

,

1048 (2d Cir. 1982)). The same is true of standard-form uniform contract language

in federally insured mortgage loans. Consistent interpretation of a standard-form

contract provision required for all FHA-insured mortgage loans across the country

is important to the effective and stable functioning of the mortgage market.

       Our approach is also consistent with other courts in recognizing that

individual contracting parties’ intent is not determinative. “Boilerplate provisions

are . . . not the consequence of the relationship of particular borrowers and lenders

and do not depend upon particularized intentions of the parties.” Sharon 

(quoting Broad v. Rockwell Int’l Corp., 

, 943 (5th Cir.

1981), cert. denied, 

, 

(1983)); see also, Kolbe, 

, at *5.3 Other courts also recognize that where, as here, the United

States drafts standard-form covenants and mandates their inclusion in all contracts

of a certain type to implement federal regulatory and statutory requirements, such

standard mandatory covenants must be interpreted to achieve the purpose and

       3
           Our circuit precedent is consistent with the contract interpretation approach set out in
the panel dissent in Kolbe and in the en banc opinion which adopted the dissent’s reasoning and
affirmed the district court. Kolbe, 

, at *8 (“We agree with the contract
interpretation offered by Judge Boudin in his panel dissent. We adopt and incorporate Judge
Boudin’s reasoning . . . . 

–29 (Boudin, J., dissenting)). Our circuit
precedent is different from the approach taken in the separate opinion of the equally divided First
Circuit en banc court in Kolbe. Kolbe, 

, at *33 (Torruella, Lipez, Thompson,
C.JJ.). That approach emphasized the private nature of the contract and looked to the subjective
understanding of the original mortgage lender and the borrower. That approach fails to
recognize that the language at issue is uniform across the country and does not vary with the
identity or intent of the individual contracting parties.
                                                12
             Case: 13-10230     Date Filed: 02/10/2014   Page: 13 of 25


policy behind the regulatory requirements behind those provisions. See, e.g., Ill.

Steel Co. v. Baltimore & Ohio R.R. Co., 

, 511, 

(1944);

Saavedra v. Donovan, 

, 499 (9th Cir. 1983); see also Honeywell v.

United States, 

, 595–96 (Ct. Cl. 1981).

      When federal regulations require contracts to include a uniform covenant

and prescribe its language, interpreting the covenant requires interpreting the

regulations themselves. As we do in construing statutes and regulations, we first

look to the language to discern whether the meaning is clear in light of the context

and purpose of the regulatory scheme. See Warshauer v. Solis, 

,

1335 (11th Cir. 2009) (“The starting point in statutory interpretation is the

language of the statute itself. . . . In determining whether a statute is plain or

ambiguous, we consider the language itself, the specific context in which that

language is used, and the broader context of the statute as a whole.” (quotation

omitted)).

      This approach leads us to conclude that the uniform covenant on flood

insurance is not ambiguous and that the only reasonable interpretation of Covenant

4 is that a mortgage lender may require the borrower to have more flood insurance

than the HUD-determined minimum.

      First, the text and traditional contract-interpretation principles. The first two

sentences of Covenant 4 allow the lender to set the required insurance amount for

                                          13
               Case: 13-10230        Date Filed: 02/10/2014       Page: 14 of 25


“any hazards.” The word “hazards” clearly includes floods. The third sentence of

Covenant 4 adds a separate and independent requirement that the borrower

maintain the federally required minimum amount of flood insurance in addition to

— not in lieu of — what the lender requires. If the lender requires more than the

HUD minimum, the borrower satisfies both by meeting the lender’s required

amount. If the lender requires less, the borrower must obtain the amount set by

HUD. In other words, the federally required amount is necessary. But if the

lender requires more, the federally required amount is not sufficient. Both the

lender and HUD set minimum amounts of required flood insurance. Neither sets a

ceiling. 4

       Other language in the mortgage contract supports this reading. Paragraph 7

of the standard-form mortgage contract allows the lender to “do and pay whatever

is necessary” to “protect the value of the Property and Lender’s rights” including

payment of “hazard insurance” if the borrower “fails to perform” any of the

covenants in the agreement. The “value of the Property” is not limited to the

loan’s principal balance. To the contrary, the lender’s exposure to the risk of loss

can, and often does, extend to the replacement value of the home. The United



       4
          As Judge Boudin pointed out, the general interpretive canon that resolves conflicting
specific and general provisions by making the specific provision control does not apply when, as
here, there is no conflict. See 

(Boudin, J., dissenting). The first and third
sentences do not conflict because both HUD’s and the lender’s flood-insurance requirements are
minimum requirements.
                                                14
              Case: 13-10230      Date Filed: 02/10/2014    Page: 15 of 25


States has recognized a lender’s interest in the full replacement value of the homes

that secure payments of its debts. See, e.g., 76 Fed. Reg. 64,175, 64,178 (Oct. 17,

2011) (“Lenders . . . need to be equally mindful of avoiding situations in which, as

a result of insuring at a level below [replacement cost value], they under-insure

property.”); 74 Fed. Reg. 35,914, 35,936 (July 21, 2009) (“Lenders are permitted

to require more flood insurance coverage than required by the regulation.”); 54

Fed. Reg. 29,666, 29,672 (July 13, 198) (“[L]enders should be aware that . . . they

have the discretion to require higher amounts of coverage than required by law if

they consider it necessary to protect the full amount of their interest . . . .”).

       As Judge Boudin stated in his panel dissent in Kolbe, “[t]he bank’s interest

is obvious enough; it seeks not merely repayment of the outstanding balance but

the maintenance of a loan on which it earns the designated interest for the period

agreed to—a goal served by providing funds to restore a damaged house that might

otherwise be abandoned.” 

(Boudin, Judge, dissenting).

The lender’s interest in a mortgage is not limited to the unpaid principal balance,

but rather extends to the continued receipt of the interest payments over the

lifetime of the loan. See Lass v. Bank of Am., N.A., 

, 143 (1st Cir.

2012) (Boudin, Judge, dissenting) (“[T]he lender has an interest both in the loan

amount and in the stream of interest payments; both give it ample reason to insist




                                            15
             Case: 13-10230    Date Filed: 02/10/2014   Page: 16 of 25


on insurance that goes beyond the unpaid balance of the loan and up to the

replacement cost.”).

      The NFIA and FHA regulations support this reading as well. The National

Flood Insurance Program (“NFIP”) makes government-subsidized flood insurance

available under special conditions. Without such a subsidy, flood insurance would

be prohibitively expensive. For homes in areas that FEMA deems to present

“special flood hazards,” the NFIA requires federally regulated lenders to have their

borrowers obtain flood insurance in an amount at least up to the loan’s principal

balance (or, if less, the maximum amount of NFIP insurance available for the

property). Covenant 4 of the HUD-required uniform provisions for FHA-insured

mortgages requires borrowers to obtain flood insurance “to the extent” HUD

requires. HUD regulations require the mortgagor and mortgagee to “obtain and

maintain” NFIP “flood insurance coverage on the property improvements during

such time as the mortgage is insured.” 24 C.F.R. § 203.16a(a)(2). The HUD

requirement is for flood insurance in “an amount at least equal to either the

outstanding balance of the mortgage . . . or the maximum amount of the NFIP

insurance available with respect to the property improvements, whichever is less.”

24 C.F.R. § 203.16a(c) (emphasis added). The words “at least” are consistent with

interpreting Covenant 4 to allow the lender to require more insurance than HUD

requires, and inconsistent with interpreting the covenant to prohibit more.

                                         16
             Case: 13-10230     Date Filed: 02/10/2014    Page: 17 of 25


      Second, the context.       The statutory and regulatory context of FHA

guarantees for home-mortgage loans makes it implausible to read Covenant 4 as

imposing a ceiling on the amount of flood insurance a lender may require. The

FHA’s mortgage-guarantee scheme makes the lender’s need for more flood

insurance than the unpaid principal balance acute, because the FHA places the risk

of flood losses on the lender.     If a borrower defaults on an FHA-guaranteed

mortgage, the lender conveys the mortgage or property title to the federal

government and collects on the guarantee to cover losses on the mortgage. 12

U.S.C. § 1710. If, however, a flood damages the property, the lender cannot

collect from the United States until it has repaired the damage or deducted the cost

of repairing the damage from the insurance benefits. 24 C.F.R. § 203.379. If the

insurance amount is limited to the unpaid principal balance, as opposed to the

property’s replacement value, the lender would not be able to insure against the

risk the regulatory scheme imposes because the cost of repairing the damage may

exceed the unpaid balance of the loan, which would result in the lender having to

pay more for repair than it could collect in insurance benefits.

      The lender’s need for more insurance than the federally required minimum is

underscored by another feature of how the federal flood-insurance regulatory

scheme intersects the FHA mortgage-insurance program. For homes outside areas

designated as presenting special flood hazards, HUD does not require the borrower

                                          17
               Case: 13-10230       Date Filed: 02/10/2014       Page: 18 of 25


to have any flood insurance at all. Adopting Feaz’s interpretation of Covenant 4’s

third sentence would forbid the lender from requiring the borrower to obtain more

flood insurance than HUD requires. That means that in any area outside the

special-flood-hazard designation, the lender could not require the borrower to

obtain any flood insurance at all. Yet homes in such areas may face significant

flood risk. As the First Circuit recently observed in Kolbe:

               There would be no reason to forbid the lender from
               requiring any flood insurance on such homes, yet allow
               the lender to require as much insurance as it wishes for
               other hazards that are extremely unlikely to occur, such
               as earthquakes or tornados in certain parts of the country.
               Such an irrational policy objective could not plausibly be
               attributed to HUD, and the United States’ brief confirms
               that HUD did not intend such a result.

, at *12

       Feaz’s interpretation would also prevent lenders from requiring adequate

flood insurance for homes with mortgages above $250,000. See 

prevent lenders from following the FEMA-recommended practice of adopting a

“sound flood insurance risk management approach” by following the “insurance

industry practice of insuring buildings to full” replacement cost value, 5 precisely

what Wells Fargo did in this case.6


       5
         FEMA, National Flood Insurance Program, Mandatory Purchase of Flood Insurance
Guidelines, 27-28 (Sept. 2007).
       6
         See McKenzie, 2012 WL, 5372120, at *15; 

. In McKenzie,
the court observed that by insuring buildings to full replacement cost value, the borrower and the
                                               18
               Case: 13-10230        Date Filed: 02/10/2014       Page: 19 of 25


       As in Kolbe, the United States argues in its amicus brief that interpreting

Covenant 4 to prevent a lender from requiring more flood insurance than the

federally required minimum would impair federal housing policy. Lenders unable

to require adequate flood insurance would predictably be reluctant to offer FHA-

insured mortgages in areas presenting any significant flood risk, or would pass on

their increased risk of loss in the form of higher interest rates. Either approach is

inconsistent with the FHA’s purpose of encouraging affordable home ownership

and with the NFIP’s purpose of encouraging adequate flood insurance. See 42

U.S.C. §§ 4001(a), 4002(b) (describing congressional findings as to NFIA’s goals

and purposes).

       The United States asserts that it consistently interprets the uniform language

HUD drafted to implement the FHA mortgage-insurance program and the federal

flood-insurance program. Its interpretation allows lenders to require more flood

insurance than HUD requires. As the Kolbe en banc opinion explained, if there

were doubts as to Covenant 4’s meaning, we would resolve those doubts by

deference to this interpretation. “Indeed, multiple courts of appeals have accorded

deference to agency interpretations of contract terms that were promulgated and




lender are both better protected and it is not reasonable to interpret the mortgage as precluding a
lender’s ability to follow FEMA’s recommendations. In Wulf, the court noted that it “seemed
incongruous that a lender would not be able to follow . . . FEMA’s recommendation in
connection with an FHA loan.”
                                                19
             Case: 13-10230    Date Filed: 02/10/2014   Page: 20 of 25


mandated by a federal regulation.” Kolbe, 

, at *16 (citing

; 

). But, as the Kolbe panel

noted, we do not have to identify the precise level of deference due to decide this

appeal.

      Feaz’s policy argument for reading Covenant 4 to prevent mortgage lenders

from requiring borrowers to obtain more flood insurance than federal law requires

fails to recognize the purpose and interaction of the housing and flood-insurance

regulations. Feaz agrees that the federal policy behind HUD and the FHA is to

promote affordable home ownership. She asserts, as did the borrowers in Kolbe

and similar cases, that allowing the lender to require flood insurance adequate to

cover the home’s replacement cost violates that policy because the result is to

increase the overall cost of home ownership for FHA borrowers. But it does not

follow that any increase to the cost offends the policy of promoting affordable

home ownership, or that every step to reduce the cost furthers the policy. To the

contrary, if lenders refuse to offer FHA-insured loans for the large areas of the

country that face some — but not extreme — flood risk, or for homes with

mortgages over $250,000, or if lenders pass on their increased flood-loss risk

exposure to consumers by charging greater interest for such loans, that reduces

rather than promotes affordable home ownership.




                                        20
             Case: 13-10230     Date Filed: 02/10/2014   Page: 21 of 25


      Feaz’s other arguments are no more persuasive.         She asserts that “any

hazard” in the title of Covenant 4 — “Fire, Flood and Other Hazard Insurance” —

and in the first sentence — “Borrower shall insure . . . against any hazards . . .

including fire” — cannot include floods because of the insurance-industry practice

of issuing homeowners’ policies that exclude floods.        The fact that industry

practice has evolved to exclude flood insurance from standard hazard insurance

policies explains why HUD documents separately list “flood insurance” and

“hazard insurance.” But this fact does not mean that floods are not hazards. To

the contrary, industry practice and HUD and NFIA regulations confirm the

common-sense understanding, reflected in Covenant 4, that while all hazards are

not floods, all floods are hazards.

      Feaz’s argument that allowing Wells Fargo to demand more flood insurance

than federal law requires will give it unfettered ability to impose unreasonable

charges has no support in this record. Wells Fargo required coverage only for the

replacement value of Feaz’s home, which is a properly insurable interest consistent

with good lending practices.

      We also find unpersuasive Feaz’s argument that Covenant 4 must be

ambiguous because courts have divided over whether it is ambiguous.           This

argument proves too much. First, it ignores the variation in the pleadings and

arguments presented in the different cases around the country. For example, a case

                                         21
               Case: 13-10230         Date Filed: 02/10/2014        Page: 22 of 25


Feaz cites, 

, denied the mortgage company’s motion to

dismiss, but did so because many of the arguments for dismissal had not been

presented.7 Second, this argument would make controlling the opinion of the first

court that decides whether a contract provision is ambiguous. And third, the

argument ignores the possibility that a court can be wrong, including in contract-

interpretation decisions.

       The District Court properly analyzed the motion to dismiss, taking as true

the allegations (which are undisputed) that Wells Fargo force-placed flood

insurance for the replacement value of Feaz’s home, more than the minimum HUD

requires, after Feaz failed to respond to the notices requiring her to obtain the

coverage and provide proof she had done so. The District Court found the contract

unambiguous and concluded that Feaz’s complaint failed to state a claim for

breach of contract. We affirm.

       B.      The Claims for Breach of Extracontractual Duties

       Under Alabama law, every contract imposes an implied duty of good faith

and fair dealing.        Feaz asserted four grounds for alleging that Wells Fargo

breached this duty. These claims fail as a matter of law. The District Court


       7
         For example, the district court stated that the “Court was informed at oral argument that
the language at issue is from an FHA form that is required for all FHA loans. The Court was
also told that FEMA recommends that lenders require full replacement value when lending in a
flood plain area. . . . . [N]one of this was briefed by the parties and the Court is reluctant to make
any conclusive decision on this point.” So, the district court had not even been made aware that
the language was a uniform covenant.
                                                 22
             Case: 13-10230    Date Filed: 02/10/2014   Page: 23 of 25


correctly dismissed Feaz’s claim that Wells Fargo breached the duty of good faith

and fair dealing by demanding more flood insurance than federal law or the

contract required, misrepresenting the required amount of flood insurance, and

imposing contract requirements that did not exist or exceeded the disclosed

requirements. These claims fail because the mortgage contract unambiguously

contemplated Wells Fargo’s actions. The District Court also correctly dismissed

the claim that Wells Fargo exercised bad faith in requiring a higher amount of

flood insurance and force placing it when the insured failed to comply. As we

previously noted, Wells Fargo has an interest in insuring the home up to its

replacement value. A bank does not act in bad faith when acting to protect its

legitimate interests through contractually authorized actions. The extracontractual-

duties claims fail for the same reasons that, as a matter of law, Wells Fargo did not

breach the contract by requiring Feaz to obtain flood insurance up to the home’s

replacement value.

      The District Court correctly noted that requiring insurance up to the

property’s full replacement cost is consistent with FEMA guidelines, as well as

guidance from the Comptroller of the Currency and the Federal Deposit Insurance

Corporation. Feaz, 

, at *9. It would be anomalous to find that

following good practices could violate an implied duty of good faith and fair




                                         23
             Case: 13-10230     Date Filed: 02/10/2014   Page: 24 of 25


dealing. Moreover, the notice that Feaz received gave her ample opportunity to

avoid the higher-cost force-placed insurance and warned her about the cost.

      The claim for breach of fiduciary duty fails as well. Under Alabama law, a

mortgage lender does not owe the borrower a general fiduciary duty. See Selman

v. CitiMortgage, Inc., 12-cv-441(WS-B), 

, at *10 (S.D. Ala.

March 5, 2013); Atkins v. GE Capital Mortg. Servs. Inc., 

, 1419

(M.D. Ala. 1998); K&C Dev. Corp. v. AmSouthBank, N.A., 

, 675

(Ala. 1992); see also Telfair v. First Mortg. Corp., 

(11th Cir. 2000)

(construing Georgia law); Gurley v. Bank of Huntsville, 

, 45 (Ala.

1977) (concluding that an escrow agent’s obligations and duties are generally

limited to those delineated in the escrow agreement).         Feaz alleges that the

deficiency notification Wells Fargo sent was deceptive and fraudulent because

neither federal law nor the mortgage-loan contract required her to have such flood

insurance; this allegation fails as a matter of law for the same reasons the breach of

contract claim fails. Feaz alleges that Wells Fargo’s use of escrow funds to pay for

the force-placed insurance breached fiduciary duties, but this assumes, without a

legal basis, that a lender’s administration of such “escrow funds” creates a

fiduciary relationship. See 

. The allegations that Wells

Fargo violated its fiduciary duty and committed fraud by charging Feaz a

commission, a “kickback,” or “other compensation” — any amount above the net

                                         24
             Case: 13-10230    Date Filed: 02/10/2014   Page: 25 of 25


cost to Wells Fargo of obtaining the force-placed flood insurance — also fails for

the same reasons and because Wells Fargo disclosed that Feaz would incur higher

costs if it force-placed the insurance for her. We agree with the Seventh Circuit

that “simply calling a commission a kickback doesn’t make it one. The defining

characteristic of a kickback is divided loyalties. But [the lender] was not acting on

behalf of [the borrower] or representing her interests. The loan agreement makes it

clear that the insurance requirement is for the lender’s protection.” Cohen v. Am.

Sec. Ins. Co., 

, 611 (7th Cir. 2013).

      The District Court properly dismissed the extracontractual claims.

V.    Conclusion

      The District Court’s decision dismissing the complaint for failing to state a

claim is Affirmed.




                                         25