Kolbe v. BAC Home Loans Servicing, LP, 1st Cir. (2013)

7/26/2019 Kolbe v. BAC Home Loans Servicing, LP, 1st Cir. (2013)

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United States Court of AppealsFor the First Circuit

No. 11- 2030

STANLEY KOLBE,

Pl ai nt i f f , Appel l ant ,

v.

BAC HOME LOANS SERVI CI NG, LP, d/ b/ a BANK OF AMERI CA, N. A. ; BALBOA I NSURANCE COMPANY,

Def endant s, Appel l ees.

APPEAL FROM THE UNI TED STATES DI STRI CT COURT

FOR THE DI STRI CT OF MASSACHUSETTS

[ Hon. Nat hani el M. Gor t on, U. S. Di st r i ct J udge]

Bef or eLynch, Chi ef J udge,

Tor r uel l a, Li pez, Howar d, Thompson, and Kayat t a,Ci r cui t J udges.

Edward F. Haber , wi t h whom Todd S. Heyman, Adam M. Stewar t ,Mi chel l e H. Bl auner , and Shapi r o Haber & Ur my LLP were on br i ef ,f or appel l ant .

J ohn C. Engl ander , wi t h whom Mat t hew G. Li ndenbaum, Denni sD' Angel o, Wi l l i am M. J ay, and Goodwi n Pr oct er LLP wer e on br i ef ,f or appel l ees.

Mar k R. Freeman, Appel l at e St af f At t or ney, Uni t ed St ates

Depar t ment of J ust i ce, wi t h whom Nancy D. Chr i st opher , Associ at eGener al Counsel f or Li t i gat i on, Wi l l i amC. Lane, Assi st ant Gener alCounsel f or I nsur ed Housi ng and Communi t y Devel opment Li t i gat i on,Br uce S. Al br i ght , Seni or Tr i al At t or ney, U. S. Depar t ment ofHousi ng and Ur ban Af f ai r s, St uar t F. Del er y, Pr i nci pal Deput yAssi st ant , At t or ney Gener al , Car men M. Or t i z, Uni t ed St at esAt t or ney, Mi chael S. Raab, Appel l at e St af f At t or ney, Uni t ed St at esDepar t ment of J ust i ce, wer e on br i ef , f or t he Uni t ed St at es ami cuscur i ae.


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Frank G. Bur t , Deni se A. Fee and J or den Bur t LLP on br i ef f orPr oper t y Casual t y I nsur er s Associ at i on of Amer i ca' s ami cus cur i ae.

El i zabet h J . Cabr aser , Kel l y M. Der mody, Dani el M. Hut chi nson,Li sa J . Ci sner os, Li ef Car br aser Hei mann & Ber nst ei n LLP, on br i eff or Nat i onal Consumer Law Cent er and AARP ami ci cur i ae.

St uar t T. Rossman on br i ef f or Nat i onal Consumer Law Cent er

ami cus cur i ae.J ean Const ant i ne- Davi s and AARP Foundat i on Li t i gat i on on br i ef

f or AARP ami cus cur i ae.Ri char d L. Neumei er , Mor r i son Mahoney Mi l l er LLP, J an T.

Chi l t on, Mi chael J . St ei ner and Sever son & Wer son PC on br i ef f orMort gage Banker s Associ at i on and Amer i can Fi nanci al Ser vi cesAssoci at i on ami ci cur i ae.

Opi ni on En Banc

September 27, 2013


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The j udgment of di smi ssal enter ed by t he di st r i ct cour t

i s af f i r med by an equal l y di vi ded en banc cour t . See Savar d v.

Rhode I sl and, 338 F. 3d 23, 25 ( 1st Ci r . 2003) ( en banc) .

Opi ni ons f ol l ow.

LYNCH, Chief Judge, with whom HOWARD, Circuit Judge, and

KAYATTA, Circuit Judge, join. The r esul t of t he evenl y di vi ded

vot e of t he en banc cour t i s t o af f i r m t he di str i ct cour t ' s

di smi ssal of t he compl ai nt f or f ai l ur e t o st at e a cl ai m. See

Savar d v. Rhode I sl and, 338 F. 3d 23, 25 ( 1st Ci r . 2003) ( en banc) .

Thi s opi ni on expl ai ns why we t hi nk t hat r esul t i s cor r ect and

r equi r ed by l aw.

I .

Thi s i s a cont r act di sput e over t he t er ms of a mor t gage

cont r act bet ween t he bor r ower , pl ai nt i f f - appel l ant St anl ey Kol be,

and t he ser vi cer of hi s l oan, def endant - appel l ee BAC Home Loans

Ser vi ci ng, LP ( "BAC" or " t he Bank") . Kol be sued t he Bank i n a

put at i ve cl ass act i on f or damages al l eged t o have ar i sen out of t he

Bank' s r equi r ement t hat he mai nt ai n f l ood i nsur ance i n an amount

suf f i ci ent t o cover t he r epl acement val ue of hi s home. Kol be

cont ends t hat t he Bank, under Covenant 4 of hi s mor t gage cont r act ,

cannot r equi r e more than t he f eder al l y mandat ed mi ni mum f l ood

i nsur ance, whi ch i s t he l esser of t he pr i nci pal bal ance of t he l oan

or $250, 000 i n speci al f l ood hazar d ar eas, and $0 i n al l ot her

areas. The mor t gage i s i nsured by t he Feder al Housi ng

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Admi ni st r at i on ( "FHA") , and Covenant 4 i s a st andar d uni f or m

covenant pr escr i bed by t he FHA pur suant t o f eder al l aw. See 24

C. F. R. 203. 17 ( 2012) ; Requi r ement s f or Si ngl e Fami l y Mort gage

I nst r ument s, 54 Fed. Reg. 27, 596, 27, 603- 07 ( J une 29, 1989)

( herei naf t er "Mor t gage Requi r ement s" ) . The Covenant was

promul gat ed af t er not i ce and comment r ul emaki ng.

We concl ude t hat Kol be has f ai l ed t o st at e a cl ai m f or

br each of cont r act . Thr ee i nt er r el at ed st r ands of r easoni ng

suppor t our concl usi on. The f i r st i s st r ai ght f or war d appl i cat i on

of t he t ypi cal pr i nci pl es of cont r act i nt er pr et at i on. When

i nt er pr et i ng a wr i t t en cont r act , we l ook at t ext , cont ext , and

pur pose t o di scover whet her a pr of f er ed r eadi ng of t he cont r act i s

r easonabl e. For cont r act l anguage mandat ed by a f ederal

r egul at i on, t hi s cont ext i ncl udes t he r egul at i on and t he f eder al

pol i cy under l yi ng t he r egul at or y scheme. As a pur el y t extual

mat t er , t he Bank of f er s t he most nat ur al r eadi ng of t he di sput ed

l anguage. Yet even i f an ar gument exi st s that Kol be' s textual

r eadi ng i s pl ausi bl e, cont ext conf i r ms t hat t he Bank' s r eadi ng i s

cor r ect and Kol be' s r eadi ng i s i ncor r ect . As we wi l l descr i be,

par t i cul ar l y under our t hi r d st r and of r easoni ng, Kol be' s readi ng

woul d hi nder f eder al housi ng pol i cy and conf l i ct wi t h ot her

gui dance f r om t he f eder al gover nment r egar di ng f l ood i nsur ance.

I nt er pr et i ng t he t ext i n cont ext , as we woul d do wi t h any cont r act ,

we concl ude t hat t he Bank' s r eadi ng i s corr ect .

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Second, we appl y speci al pr i nci pl es f or i nt er pr et i ng

uni f or m cont r act l anguage. Covenant 4 i s a uni f or m cl ause used i n

mi l l i ons of mor t gages nat i onwi de by many di f f er ent l ender s, so we

gi ve i t one uni f or m meani ng r at her t han mul t i pl e i nconsi st ent

meani ngs. Ext r i nsi c evi dence of t he par t i es' uni que i nt ent i ons

r egar di ng a uni f or m cl ause i s gener al l y uni nf or mat i ve because

unl i ke i ndi vi dual l y t ai l or ed cont r acts, uni f or m cl auses do not

der i ve f r omt he negot i at i ons of t he speci f i c par t i es t o a cont r act .

I nst ead, cour t s seek t o det er mi ne t he uni f or mmeani ng of t he cl ause

as a mat t er of l aw, a t ask appr opr i at e f or t he mot i on t o di smi ss

st age. Kol be cannot avoi d di smi ssal on t he gr ounds t hat hi s

speci f i c under st andi ng or t he act i ons of t he par t i es cr eat e an

ambi gui t y.

Thi r d, t he f act t hat t he Covenant was draf t ed and

mandat ed by the Uni t ed St at es requi r es t hat i t s meani ng be t hat

meant by t he Uni t ed St ates when i t dr af t ed t he r egul at i on. The

r ol e t hat t he Covenant pl ays i n an i mport ant r egul atory scheme

r equi r es t hat r esul t . The l anguage of t he Covenant was not dr af t ed

or negot i at ed by the part i es and was not t he r esul t of gi ve- and-

t ake i n t he market pl ace. Rather , i t was cr eated and mandat ed i n

or der t o f ur t her i mpor t ant f eder al pol i ci es. Whi l e on t he

Covenant ' s pl ai n l anguage and cont ext , we thi nk t he meani ng i s

cl ear , wer e t her e doubt , we woul d def er t o t he posi t i on ar t i cul at ed

t o us by the Uni t ed St at es i n i t s ami cus br i ef ; i n t hi s case, t he

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Uni t ed St at es' posi t i on r ei nf or ces our concl usi on r eached i n

appl yi ng t he f i r st t wo pr i nci pl es.

I n i t s ami cus br i ef t o t he en banc cour t , t he Uni t ed

St at es has st at ed t hat Kol be' s i nt er pr et at i on i s i ncor r ect f or a

number of r easons, i ncl udi ng t hat i t " l acks any anchor i n t he

st at ut or y scheme. " Br i ef f or t he Uni t ed St at es as Ami cus Cur i ae

Support i ng Appel l ees at 2, Kol be v. BAC Home Loans Ser vi ci ng, LP,

No. 11- 2030 [ her ei naf t er "Uni t ed St at es Br i ef "] . Fur t her , t he

Uni t ed St at es says t hat Kol be' s i nt er pr et at i on "serves no pr act i cal

end, and . . . woul d ser i ousl y under mi ne f eder al housi ng pol i cy. "

I d. The Uni t ed St at es' posi t i on as set f or t h i n t he br i ef i s

ent i t l ed t o def er ence; i t i s wel l - r easoned and i s ent i r el y

consi st ent wi t h i t s pr i or i nt er pr et at i ons of t he cl ause expr essed

i n var i ous f eder al publ i cat i ons.

Thi s i s an i ssue f or j udges t o deci de. The l aw does not

al l ow a j ur y t o deci de t hat f eder al pol i cy i s ot her wi se, or t hat

t he cont r act l anguage r equi r ed by t he Uni t ed St at es does not have

t he emi nent l y r easonabl e meani ng ur ged by t he Uni t ed St at es,

consi st ent wi t h t he pol i ci es t hat br ought about t he Covenant i n t he

f i r st i nstance.

As we wi l l di scuss, Kol be has al so f ai l ed t o st at e a

cl ai m f or br each of t he covenant of good f ai t h and f ai r deal i ng.

The di st r i ct cour t cor r ect l y di smi ssed al l of Kol be' s cl ai ms.

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I I .

Kol be owns a home i n At l ant i c Ci t y, New J er sey i n a

speci al f l ood hazar d area. On Oct ober 6, 2008, he borr owed

$197, 437 f r om Tayl or , Bean & Whi t aker Mort gage Corp. ( "Tayl or

Bean") i n a mor t gage l oan secur ed by hi s home. The l oan was

guar ant eed by t he FHA, a par t of t he Depar t ment of Housi ng and

Ur ban Devel opment ( "HUD") .

The mor t gage agreement cont ai ned a set of Uni f or m

Covenant s t hat are requi r ed by HUD r egul at i ons t o be i n every FHA-

i nsured mor t gage. 1 One of t he Uni f or m Covenant s i ncl uded i n t he

mor t gage i s t he f ol l owi ng pr ovi si on, whi ch i s at i ssue:

4. Fi r e, Fl ood and Ot her Hazard I nsur ance.Bor r ower shal l i nsur e al l i mpr ovement s on t heProper t y, whet her now i n exi st ence orsubsequent l y er ect ed, agai nst any hazar ds,casual t i es, and cont i ngenci es, i ncl udi ng f i r e,f or whi ch Lender requi r es i nsur ance. Thi si nsurance shal l be mai nt ai ned i n the amount s

and f or t he per i ods t hat Lender r equi r es.Bor r ower shal l al so i nsur e al l i mpr ovement s ont he Proper t y, whet her now i n exi st ence orsubsequent l y er ect ed, agai nst l oss by f l oodst o t he extent r equi r ed by the Secr et ary.

The "Secr et ar y" r ef er r ed t o i n Covenant 4 i s t he Secr et ar y of HUD.

Thi s case present s t he i ssue of whether t he amount of f l ood

i nsur ance r equi r ed by HUD i s a f l oor or a cei l i ng.

1 See 24 C. F. R. 203. 17 ( r equi r i ng an FHA- i nsured mort gage t o"be i n a f or m meet i ng the requi r ement s of t he Commi ssi oner " ) ;Requi r ement s f or Si ngl e Fami l y Mort gage I nst r ument s, 54 Fed. Reg.27, 596, 27, 603- 07 ( J une 29, 1989) ( FHA model mor t gage f orm) .

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Kol be' s home i s i n an area desi gnat ed by t he Federal

Emergency Management Agency ( "FEMA") as havi ng "speci al f l ood

hazar ds, " and as such HUD r equi r ed ( and st i l l r equi r es) t hat f l ood

i nsurance must be mai nt ai ned i n "an amount at l east equal t o ei t her

t he outst andi ng bal ance of t he mor t gage . . . or t he maxi mumamount

of t he NFI P i nsur ance avai l abl e wi t h r espect t o t he pr oper t y

i mpr ovement s, whi chever i s l ess. " 24 C. F. R. 203. 16a( c) ( emphasi s

added) . 2 The or i gi nal mor t gage hol der , Tayl or Bean, never r equi r ed

Kol be t o mai nt ai n gr eat er f l ood i nsurance t han t he mi ni mum

f eder al l y requi r ed amount , and at al l t i mes, Kol be mai nt ai ned f l ood

i nsur ance i n excess of t he out st andi ng l oan bal ance.

Tayl or Bean decl ar ed bankr upt cy and ceased operat i ons i n

August 2009. At some poi nt , t he Bank became t he ser vi cer of

Kol be' s l oan. 3 I n November 2009, t he Bank sent Kol be a l et t er

not i f yi ng hi m t hat i t was r equi r i ng hi m t o pur chase an addi t i onal

$46, 000 i n f l ood i nsurance cover age; t he Bank has asser t ed, and

Kol be has not di sput ed, t hat t hi s addi t i onal i nsur ance woul d br i ng

Kol be' s t ot al f l ood i nsur ance cover age t o t he r epl acement cost of

2 At al l r el evant t i mes, t he maxi mum amount of NFI P i nsuranceavai l abl e f or a si ngl e f ami l y home i n a speci al f l ood hazar d ar eawas $250, 000. See 42 U. S. C. 4013( b) ( 2) . Because t he bal ance ofKol be' s l oan was al ways l ess t han $250, 000, t he mi ni mum amount of

f l ood i nsurance requi r ed by HUD was al ways t he pr i nci pal bal ance ofKol be' s l oan.

3 BAC Home Loans Ser vi ci ng was a whol l y owned subsi di ar y ofBank of Amer i ca, N. A. , whi ch i t sel f i s a whol l y owned subsi di ar y ofBank of Amer i ca Corpor at i on, t he publ i cl y t r aded company. BAC HomeLoans Ser vi ci ng has merged i nto Bank of Amer i ca, N. A.

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t he pr oper t y. Kol be al l eges t hat t he Bank had a nat i onwi de pol i cy

of r equi r i ng f l ood i nsur ance at a l evel t hat of t en exceeds t he

pr i nci pal bal ance of t he l oan.

The l et t er not i f i ed Kol be t hat i f he di d not purchase t he

r equi r ed f l ood i nsur ance wi t hi n about si x weeks, t he Bank woul d

pur chase t he i nsur ance at hi s expense and char ge hi m f or t he cost ,

a pr act i ce known as " l ender - pl aced i nsur ance" ; t he l et t er ur ged

Kol be t o avoi d l ender - pl aced i nsur ance by pur chasi ng hi s own

i nsur ance. A second l et t er r ei t er at ed t he r equi r ement . Kol be

pur chased t he i nsur ance on hi s own; t hus t he Bank never had t o

pur chase l ender - pl aced i nsur ance on hi s behal f .

I I I .

On Febr uar y 23, 2011, Kol be f i l ed a cl ass act i on

compl ai nt i n t he di st r i ct cour t agai nst t he Bank al l egi ng i t

br eached t he mor t gage cont r act and vi ol at ed t he i mpl i ed covenant of

good f ai t h and f ai r deal i ng by requi r i ng t he addi t i onal f l ood

i nsur ance. The f i r st count of Kol be' s compl ai nt al l eged br each of

Covenant 4 of t he mor t gage cont r act . Under Kol be' s theory, t he

Covenant pr ecl uded t he Bank f r om r equi r i ng Kol be t o mai nt ai n any

f l ood i nsurance i n excess of t he amount r equi r ed by t he Secr et ar y

of HUD, whi ch i n Kol be' s case was t he pr i nci pal bal ance of t he

l oan. See 24 C. F. R. 203. 16a( c) . The second count al l eged a

br each of t he i mpl i ed covenant of good f ai t h and f ai r deal i ng.

Thi s count al l eged t hat " [ b] y r equi r i ng Pl ai nt i f f . . . t o mai nt ai n

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and pay f or f l ood i nsurance cover age i n excess of t he cover age

r equi r ed by [ hi s] mort gage agr eement [ ] , Def endant s act ed i n bad

f ai t h and br eached t he i mpl i ed covenant of good f ai t h and f ai r

deal i ng . . . . " Kol be sought t o r epr esent a put at i ve cl ass of al l

ot her bor r owers wi t h si mi l ar mort gages owned or servi ced by t he

Bank who were r equi r ed t o purchase f l ood i nsurance above t he amount

of t he out st andi ng bal ance of t hei r l oans. 4 Kol be al so sought a

j ury t r i al as t o al l cl ai ms.

On August 18, 2011, t he di st r i ct cour t gr ant ed t he Bank' s

mot i on t o di smi ss al l cl ai ms. The cour t concl uded t hat t he f i r st

t wo sent ences i n Covenant 4, whi ch al l owed t he Bank t o r equi r e

i nsur ance f or " any hazards . . . i n t he amount s and f or t he per i ods

t hat Lender r equi r es, " unambi guousl y gave t he Bank t he r i ght t o

choose t he amount of f l ood i nsur ance i t r equi r ed. Kol be v. BAC

Home Loans Ser vi ci ng, L. P. , No. 11- 10312- NMG, 2011 WL 3665394, at

*3- 5 ( D. Mass. Aug. 18, 2011) . The di st r i ct cour t al so di smi ssed

t he count f or br each of t he covenant of good f ai t h and f ai r deal i ng

because i t concl uded t hat t he Bank' s f l ood i nsurance r equi r ement

was based on FEMA pol i cy gui del i nes and was not unr easonabl e. I d.

at *5.

4 The compl ai nt al so named as a def endant Bal boa I nsuranceCompany ( "Bal boa" ) , a subsi di ar y of t he Bank. Kol be al l eged t hatBal boa pr epar ed and sent t he l et t er s r equi r i ng t he addi t i onal f l oodi nsur ance. The di st r i ct cour t di smi ssed al l cl ai ms agai nst Bal boa,but Kol be di d not pr ess t he cl ai ms agai nst Bal boa i n i t s br i ef i ngr el at ed t o t he r ehear i ng en banc, so t hose cl ai ms ar e not at i ssue.

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Kol be appeal ed, and a di vi ded panel of t he Fi r st Ci r cui t

vacat ed t he di smi ssal . See Kol be v. BAC Home Loans Servi ci ng, LP,

695 F. 3d 111, 113- 14 ( 1st Ci r . 2012) . The panel maj or i t y hel d t hat

bot h Kol be' s i nt er pr et at i on and t he Bank' s i nt er pr et at i on of t he

cont r act coul d be f ound r easonabl e by a t r i er of f act , and

t her ef or e t hat t he di st r i ct cour t er r ed i n di smi ssi ng t he br each of

cont r act cl ai m. I d. at 122. The panel maj or i t y al so hel d t hat t he

br each of good f ai t h cl ai m coul d go f or war d ei t her on t he t heor y

t hat t he Bank i nt ent i onal l y br eached t he cont r act , or t hat t he Bank

demanded great er i nsurance based on t he i mproper mot i vat i on of

pot ent i al pr of i t f r om pl acement of l ender - pl aced i nsur ance wi t h

af f i l i at ed compani es. I d. at 123- 24. J udge Boudi n di ssent ed,

ar gui ng t hat t he cont r act and f eder al pol i cy pl ai nl y al l owed t he

Bank t o r equi r e more f l ood i nsur ance and t here was no i ndependent

cl ai m under t he i mpl i ed covenant . I d. at 126- 29 ( Boudi n, J . ,

di ssent i ng) . We gr ant ed r ehear i ng en banc, and vacated t he panel ' s

deci si on. Or der , Kol be v. BAC Home Loans Ser vi ci ng, LP, No. 11-

2030 ( 1st Ci r . Nov. 1, 2012) . 5

5 Thi s case " i nvol ves a quest i on of except i onal i mpor t ance. "1st Ci r . R. 35( a) ( 2) . The di sput ed pr ovi si on appear s i n each oft he near l y 7. 8 mi l l i on FHA- i nsured mort gages nat i onwi de. Manycl ass act i on l awsui t s pr esent i ng pr eci sel y t he same i ssue as t hi s

case have been f i l ed i n f eder al di st r i ct cour t s t hr oughout t hecount r y, pr oduci ng a set of shar pl y conf l i ct i ng di st r i ct cour topi ni ons. Mor eover , t hi s case bear s on t he i nt er sect i on bet weent wo compl ex st at utory and regul at ory schemes: t he FHA mor t gagei nsurance progr ammeant t o pr omot e home owner shi p, and t he Nat i onalFl ood I nsur ance Pr ogr am ( "NFI P") meant t o f aci l i t at e f l oodi nsur ance.

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I V.

To i nt er pret Kol be' s mor t gage agreement , we st ar t wi t h

t he l egal r ul es appl i cabl e t o t he const r uct i on of t hi s par t i cul ar

cont r act l anguage.

Cont r act I nt er pr et at i on i n Li ght of Cont ext and Pur pose

I n al l cont r act s, cour t s must const r ue cont r act l anguage

i n l i ght of t he pur poses t he l anguage was meant t o achi eve, and i n

t he cont ext of t he rel evant commer ci al or r egul at or y schemes wi t hi n

whi ch t he cont r act i s si t uated. See Si monson v. Z Cr anbur y Assocs.

P' shi p, 695 A. 2d 222, 224 ( N. J . 1997) ( " [ A] cont r act shoul d not be

const r ued l i t er al l y so as t o def eat t he pr obabl e i nt ent i on of t he

par t i es; r at her , par t i cul ar wor ds or cl auses may be qual i f i ed by

t he cont ext and gi ven t he meani ng t hat compor t s wi t h t he pr obabl e

i nt ent i on. " ( i nt er nal quot at i on mar ks and ci t at i on omi t t ed) ) ;

OneBeacon I ns. Co. v. Geor gi a- Paci f i c Cor p. , 474 F. 3d 6, 7 ( 1st

Ci r . 2007) ( "The i ssue bei ng one of cont r act i nt er pr et at i on, we

l ook t o l anguage and ot her common i ndi ci a ( e. g. , cont ext , i nf er r ed

pur pose) . " ) ; Rest at ement ( Second) of Cont r act s 202 cmt . b ( "The

meani ng of words . . . commonl y depends on t hei r cont ext . . . .

When t he par t i es have adopt ed a wr i t i ng as a f i nal expr essi on of

t hei r agr eement , i nt er pr et at i on i s di r ect ed t o t he meani ng of t hat

wr i t i ng i n t he l i ght of t he ci r cumst ances. ") . I n par t i cul ar ,

cont r act l anguage must be i nt er pr et ed i n t he cont ext of appl i cabl e

st at ut es and r egul at i ons. See 5 Cor bi n on Cont r act s 24. 26, at

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271 ( r ev. ed. 1998) ( "Words and ot her symbol s must al ways be

i nt er pr et ed i n t he l i ght of t he sur r oundi ng ci r cumst ances, and t he

exi st i ng st at ut es and rul es of l aw ar e al ways among these

ci r cumst ances. " ) .

The t ypi cal pr i nci pl es of cont r act i nt er pret at i on ar e

suppl ement ed by two addi t i onal set s of r ul es of cont r act

const r uct i on par t i cul ar l y rel evant t o Covenant 4: t hose f or

const r uct i on of uni f or m cl auses, and t hose f or const r uct i on of

cont r act l anguage dr af t ed by t he Uni t ed St ates and r equi r ed by

f eder al l aw t o be i n t he cont r act . Al t hough t hese pr i nci pl es ar e

appl i cat i ons of t he gener al r ul e t hat cont r act s ar e i nt er pr et ed i n

l i ght of cont ext , t he met hodol ogy var i es somewhat f r om t hat used

when i nt er pr et i ng a cont r act wi t h uni que l anguage negot i ated by t he

t wo par t i es. 6

6 When t wo par t i es draf t a cont r act wi t h l anguage speci f i c t ot hei r t r ansact i on, t he r el evant expect at i ons t o assess are t hose oft he i ndi vi dual par t i es t o t he cont r act , but even t hose must beassessed agai nst backgr ound and pur pose. I f t her e i s t r ueambi gui t y even agai nst a backgr ound whi ch i nf orms t he meani ng oft he l anguage, cour t s wi l l l ook to ext r i nsi c evi dence of t hepar t i es' mani f est i nt ent i ons and expect at i ons t o di scer n t he

cont r act ' s meani ng. I t i s t he cour t t hat deci des whet her suchambi gui t y i s pr esent . As a cor ol l ar y t o t hi s pr i nci pl e, when ani ndi vi dual l y t ai l or ed cont r act i s ambi guous, i t i s i nappr opr i at ef or a cour t t o r esol ve a cont r act di sput e on t he pl eadi ngs, becauset he out come wi l l depend on ext r i nsi c evi dence t hat wi l l sur f ace atdi scover y or at t r i al . See, e. g. , C. A. Acqui si t i on Newco, LLC v.DHL Exp. ( USA) , I nc. , 696 F. 3d 109, 113 ( 1st Ci r . 2012) .

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Uni f or m Cl auses

When a cont r act uses uni f or m l anguage t hat i s cont ai ned

i n a l ar ge number of cont r act s, as i s t he case her e, i t i s a wel l -

est abl i shed common l aw pr i nci pl e of cont r act i nt er pr et at i on t hat

such cont r act s ar e "i nt er pr et ed wher ever r easonabl e as t r eat i ng

al i ke al l t hose si mi l ar l y si t uat ed, wi t hout r egar d t o t hei r

knowl edge or under st andi ng of t he st andar d t er ms of t he wr i t i ng. "

Rest at ement ( Second) of Cont r act s 211( 2) . A var i et y of st at e and

f eder al cour t s have acknowl edged t hi s pr i nci pl e. 7

Because uni f or m cont r act s ar e i nt er pr et ed uni f or ml y

acr oss cases whenever i t i s r easonabl e t o do so, ext r i nsi c evi dence

about what a part i cul ar part y i nt ended or expect ed when si gni ng t he

cont r act i s gener al l y i r r el evant . See, e. g. , Shar on St eel Cor p. v.

Chase Manhat t an Bank, N. A. , 691 F. 2d 1039, 1048 ( 2d Ci r . 1982)

( "Boi l er pl at e pr ovi si ons are t hus not t he consequence of t he

r el at i onshi p of par t i cul ar bor r ower s and l ender s and do not depend

upon par t i cul ar i zed i nt ent i ons of t he par t i es t o an i ndent ur e.

Ther e ar e no adj udi cat i ve f act s r el at i ng t o t he par t i es t o t he

l i t i gat i on f or a j ur y t o f i nd and t he meani ng of boi l er pl at e

7 See, e. g. , Vedachal am v. Tat a Consul t ancy Ser vs. , Lt d. , 18Wage & Hour Cas. 2d ( BNA) 1677, 2012 WL 1110004, at *9 ( N. D. Cal .

Apr . 2, 2012) ; Peopl es v. Sebr i ng Capi t al Cor p. , 52 Fed. R. Ser v.3d 197, 2002 WL 406979, at *8 ( N. D. I l l . Mar . 15, 2002) ; Fi r eman' sFund I ns. Cos. v. Ex- Cel l - O Cor p. , 702 F. Supp. 1317, 1326 ( E. D.Mi ch. 1988) ; Ander son v. Dougl as & Lomason Co. , 540 N. W. 2d 277,284- 85 ( I owa 1995) ; Ki noshi t a v. Canadi an Pac. Ai r l i nes, Lt d. , 724P. 2d 110, 117 ( Haw. 1986) ; Car pent er v. Suf f ol k Frankl i n Savi ngsBank, 346 N. E. 2d 892, 897 (Mass. 1976) .

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pr ovi si ons i s, t her ef or e, a mat t er of l aw r at her t han f act. ") ; 2

Far nswor t h, Far nswor t h on Cont r act s, 7. 11, at 304- 05 ( 3d ed.

2004) ( "Thi s r ul e pl ai nl y subor di nates t he meani ng t hat an

i ndi vi dual par t y may have at t ached t o t he cont r act l anguage to t he

goal of equal i t y of t r eat ment f or par t i es t hat ar e si mi l ar l y

s i t uat ed. ") .

The i ssue of i nt er pret i ng f or m cont r act l anguage

f r equent l y ar i ses i n t he cont ext of cl ass acti on cer t i f i cat i on. 8

Sever al f eder al cour t s have cer t i f i ed cl asses f or cont r act di sput es

over f or m cont r act s because t he f or m cont r act s ar e i nt er pr et ed

uni f orml y across members of t he cl ass, and t hus t he outcome does

not depend on ext r i nsi c evi dence t hat woul d be di f f er ent f or each

put at i ve cl ass member . See, e. g. , Vedachal am v. Tat a Consul t ancy

Ser vs. , Lt d. , 18 Wage & Hour Cas. 2d ( BNA) 1677, 2012 WL 1110004,

at *9 ( N. D. Cal . Apr . 2, 2012) ( "[ I ] n const r ui ng t he f or m cont r act

bet ween Def endants and cl ass member s, t he Cour t need not del ve i nto

t he act ual knowl edge of i ndi vi dual cl ass member s. " ) ; Peopl es v.

Sebr i ng Capi t al Corp. , 52 Fed. R. Serv. 3d 197, 2002 WL 406979, at

*8 ( N. D. I l l . Mar . 15, 2002) ( "The cour t al so r ej ect s t he br oader

8 I n f eder al cour t , r equi r ement s f or a cl ass act i on i ncl udecommonal i t y of l egal or f act ual quest i ons, t hat t he cl assr epr esent at i ve' s cl ai ms and def enses be t ypi cal of t hose of t hecl ass, and ( f or one cat egor y of cl ass act i ons) t hat commonquest i ons pr edomi nat e over quest i ons af f ect i ng onl y i ndi vi dualmember s. Fed. R. Ci v. P. 23( a) ( 2) - ( 3) , ( b) ( 3) .

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not i on t hat i t wi l l gener al l y have t o exami ne t he par t i es' i nt ent

on a t r ansact i on- by- t r ansact i on basi s. ") .

I t i s undi sput ed t hat Covenant 4 i s a Uni f or m Covenant

r equi r ed by HUD f or al l FHA- i nsured mort gages, accor di ng t o a

r egul at i on t hat went i nt o ef f ect af t er not i ce and comment .

Requi r ement s f or Si ngl e Fami l y Mort gage I nst r ument s, 53 Fed. Reg.

25, 434 ( J ul y 6, 1988) ; see al so Mort gage Requi r ement s, 54 Fed. Reg.

at 27, 596 ( f i nal not i ce i ssued af t er r ecei vi ng comment s) . I n

essence, HUD' s r egul at i on r equi r es t hat ever y FHA- i nsured mort gage

cont ai n a cor e of Uni f or m Covenant s, whi l e al l owi ng t he par t i es t o

an i ndi vi dual mort gage t o add non- uni f orm covenant s at t he end of

t he cont r act . For exampl e, Kol be' s mor t gage cont ai ns about f our

pages of Uni f orm Covenant s and one page of non- uni f orm covenant s.

That Kol be' s mor t gage cont r act cont ai ns uni f or m HUD

covenant s i s appar ent on i t s f ace. Af t er i nf or mat i on about t he

addr ess and l ocat i on of Kol be' s home, t he t hi r d par agr aph st at es,

"THI S SECURI TY I NSTRUMENT combi nes uni f orm covenants f or nat i onal

use and non- uni f or m covenant s wi t h l i mi t ed var i at i ons by

j ur i sdi ct i on t o const i t ut e a uni f or m secur i t y i nst r ument cover i ng

r eal pr opert y. " The mor t gage t hen r eads, "UNI FORM COVENANTS.

Borr ower and Lender covenant and agr ee as f ol l ows. " Fol l owi ng t hi s

headi ng are si xt een numbered covenant s, i ncl udi ng t he di sput ed

Covenant 4 and Covenant 7, whi ch al so has si gni f i cance t o t hi s

case. These Uni f or m Covenant s f or m t he hear t of t he mor t gage

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cont r act , cover i ng such t opi cs as pr i nci pal and i nt er est payment s,

i nsur ance and t axes, car e of t he pr oper t y, gr ounds f or accel er at i on

of debt , and t he l i abi l i t y of co- si gner s.

Af t er t he Uni f orm Covenant s, t he mort gage r eads, "NON-

UNI FORM COVENANTS. Bor r ower and Lender f ur t her covenant and agr ee

as f ol l ows. " The mor t gage t hen i ncl udes f i ve non- uni f or m

covenant s. The bot t om l ef t cor ner of ever y page of t he cont r act

cont ai ns t he l abel i n capi t al , bol df ace t ype: "NEW J ERSEY FHA

MORTGAGE. " Upon r eadi ng t he mor t gage, i t woul d have been cl ear t o

Kol be or any reasonabl e person t hat t he mor t gage cont ai ned

nat i onwi de Uni f or mCovenant s, i ncl udi ng Covenant 4. I t al so woul d

have been cl ear t hat t hi s was an FHA mor t gage, such t hat f ederal

pol i cy and r egul atory pr onouncement s woul d be r el evant t o i t s

i nt er pr et at i on.

Language Dr af t ed By The Gover nment

When deal i ng wi t h uni f orm cont r act l anguage i mposed by

t he Uni t ed St at es, i t i s t he meani ng of t he Uni t ed St at es t hat

cont r ol s. I n i nt er pr et i ng such a gover nment mandated t er m, a

cour t ' s assessment of cont ext and pur pose i s i nf ormed by the

t r adi t i onal t ool s of l egi sl at i ve and r egul at or y const r ucti on. Thi s

i s a mat t er of l aw t o be determi ned by a cour t . When t he Uni t ed

St at es mandat es t hat pr i vat e par t i es use uni f or m l anguage f or a

cer t ai n t ype of cont r act , t he Uni t ed St at es i s enact i ng a pol i cy

t hat al l par t i es t o t hat t ype of cont r act shoul d be subj ect t o

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i dent i cal obl i gat i ons. Those obl i gat i ons ar e t he ones t he Uni t ed

St at es i nt ended t hemt o be, as det er mi ned by a cour t , r egar dl ess of

t he per sonal i nt er pr et at i on of f er ed by a par t y. 9 I f such cont r act s

were subj ect ed t o di f f erent meani ngs dependi ng merel y on whether a

par t i cul ar par t y' s i nt er pr et at i on was pl ausi bl e, i t woul d not onl y

under mi ne t he ef f i ci ency benef i t s of st andar di zat i on, but i t woul d

al so under mi ne t he f eder al pol i cy t hat mot i vat ed t he Uni t ed St at es

t o i mpose uni f or m cont r act ual obl i gat i ons on par t i es i n t he f i r st

pl ace. Thi s case demonst r at es t he necessi t y of t hese pr i nci pl es.

The di sput ed cont r act l anguage i s a Uni f or m Covenant r equi r ed by

9 Mor eover , any concer n t hat uni f or mcont r act l anguage wi l l beused by a powerf ul par t y such as a bank t o f orce undesi r abl e t er mson a l ess power f ul par t y such as a homeowner i s l essened where t hel anguage i s i mposed on bot h t he bank and t he homeowner by a t hi r dpar t y, t he Uni t ed St at es.

Under t he doct r i ne of " cont r a pr of er ent em, " ambi gui t i es i n acont r act dr af t ed by one par t y wi l l be i nt er pr et ed agai nst t he

dr af t i ng par t y; t he "r at i onal e behi nd t hat met hod of i nt er pr et at i oni s t hat ' [ w] her e one par t y chooses t he t er m of a cont r act , he i sl i kel y t o pr ovi de mor e car ef ul l y f or t he pr ot ect i on of hi s owni nt er est s t han f or t hose of t he ot her par t y. ' " Paci f i co v.Paci f i co, 920 A. 2d 73, 78 ( N. J . 2007) ( quot i ng 5 Cor bi n onCont r act s 24. 27) ; see al so Rest atement ( Second) of Cont r act s 206. A cor ol l ar y of t hi s doct r i ne i s t hat i nsur ance pol i ci es ar ei nt er pr et ed agai nst t he i nsur er and i n l i ne wi t h t he "r easonabl eexpect at i ons" of t he i nsur ed, si nce t he i nsur er t ypi cal l y dr af t st he pol i cy. See Haber v. St . Paul Guar di an I ns. Co. , 137 F. 3d 691,697 ( 2d Ci r . 1998) ; Vi l l a v. Shor t , 947 A. 2d 1217, 1226 ( N. J .2008) .

When the gover nment mandat es t he speci f i c cont r act l anguage,nei t her par t y can di r ect l y i mpact t he l anguage t hr ough super i orbar gai ni ng power . Thus, "[ t ] he r ul e t hat l anguage i s i nt er pr et edagai nst t he par t y who chose i t has no di r ect appl i cat i on t o caseswhere t he l anguage i s pr escr i bed by l aw. " Rest at ement ( Second) ofCont r act s 206, cmt . b; accor d Lass v. Bank of Am. , N. A. , 695 F. 3d129, 137 ( 1st Ci r . 2012) .

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f eder al l aw f or t he near l y 7. 8 mi l l i on FHA- i nsur ed mor t gages

nat i onwi de; 10 we t her ef or e seek t o f i nd, t o t he extent r easonabl e,

one uni f ormmeani ng, r ather t han separate meani ngs t hat mi ght var y

f r om l ender t o l ender , or even f r om bor r ower t o bor r ower .

As one comment at or put s i t , " i f t he speci f i ed pr ovi si on

i s expr essl y i ncl uded i n t he cont r act i n t he exact t er ms r equi r ed,

t he pr ovi si on must be i nt er pr et ed and gi ven ef f ect i n accor dance

wi t h t he i nt ent i on of t he l egi sl at ur e, r egar dl ess of what t he

cont r act i ng part i es may have under st ood i t t o mean. " 5 Corbi n on

Cont r act s 24. 26, at 278.

Numer ous f eder al and st ate cour t s, i ncl udi ng t he Supr eme

Cour t , have af f i r med t hese pr i nci pl es. I n I l l i noi s St eel Co. v.

Bal t i more & Ohi o Rai l r oad Co. , 320 U. S. 508 ( 1944) , t he Supr eme

Cour t adj udi cat ed a cont r act di sput e i nvol vi ng a uni f or m bi l l of

l adi ng t hat had been i mposed by t he I nterst at e Commerce Commi ss i on.

The Supreme Cour t not ed t hat " [ s] i nce t he cl auses of t he uni f or m

bi l l of l adi ng gover n t he r i ght s of t he par t i es t o an i nt er st at e

shi pment and are pr escr i bed by Congress and t he Commi ss i on i n t he

exer ci se of t he commer ce power , t hey have t he f orce of f eder al l aw

and quest i ons as t o t hei r meani ng ar i se under t he l aws and

Const i t ut i on of t he Uni t ed St at es. " I d. at 511. The Supr eme Cour t

10 Of f i ce of Ri sk Anal ysi s and Regul at or y Af f ai r s, Feder alHousi ng Admi ni st r at i on, Mont hl y Repor t t o the FHA Commi ssi oner onFHA Busi ness Act i vi t y, FHA Por t f ol i os Summary ( J anuary 2013) ,avai l abl e at http: / / portal . hud. gov/ hudportal / documents/ huddoc?i d=j an13. pdf .

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t hen appr oached t he i ssue as a quest i on of r egul at or y const r uct i on,

and deci ded t he pur pose and ef f ect of t he cl ause i t sel f . See i d.

at 513- 16.

Si mi l ar l y, i n Honeywel l , I nc. v. Uni t ed St at es, 661 F. 2d

182 ( Ct . Cl . 1981) , t he Cour t of Cl ai ms ( t he pr edecessor t o the

Feder al Ci r cui t ) const r ued a f eder al pr ocur ement r egul at i on t hat

had been i ncorporated i nt o a gover nment cont r act . The cour t hel d

t hat under t he r ul es f or "r egul at i on i nt er pr et at i on, " t he agency' s

i nt er pr et at i on r ecei ved "cont r ol l i ng wei ght "; t he cour t r ej ect ed

t he not i on t hat i t shoul d "const r ue[ ] [ t he l anguage] i n or der t o

gi ve i t t he ef f ect i nt ended by bot h par t i es. " I d. at 186. See

al so Saavedr a v. Donovan, 700 F. 2d 496, 499 ( 9t h Ci r . 1983) ( not i ng

t hat when a f eder al r egul at i on mandated cont r act t er ms, t he

cont r act ual par t y "had a l egal dut y t o conf or m t o t he act ual wage

det er mi nat i on, not j ust a cont r act ual dut y t o conf or m t o pl ausi bl e

i nt er pr et at i ons of cont r act pr ovi si ons embodyi ng t he wage

det er mi nat i on" ) ; Ll oyd v. Ci nci nnat i Checker Cab Co. , 36 N. E. 2d 67,

69 ( Ohi o App. 1941) ( " [ S] uch st at ut or y pr ovi si ons [ r equi r ed t o be

i n t he cont r act ] ar e r ead i nt o t he bond or cont r act ' r egar dl ess of

t he i nt ent i on of t he par t i es. ' The l i abi l i t y t hus creat ed i s

obvi ousl y, t her ef or e, not a cont r actual l i abi l i t y i nvol vi ng a

meet i ng of t he mi nds, but a pur el y st at ut or y obl i gat i on. ") .

These pr i nci pl es have al so been adopt ed i n New J er sey.

See above, note 6. I n Paul Rever e Li f e I nsur ance Co. v. Haas, 644

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A. 2d 1098 ( N. J . 1994) , t he Supr eme Cour t of New J er sey i nt er pr et ed

an i nsur ance cont r act wi t h a pr ovi si on r equi r ed by st at e st at ut e.

The cour t r ej ect ed an ar gument t hat i t shoul d consi der t he

under st andi ng of t he i nsur ed i n i nt er pr et i ng t he requi r ed

pr ovi si on; r at her , t he cour t st at ed, "A speci f i c pr ovi si on

i nt egr at ed i nt o t he cont r act by f or ce of a st at ut e, as a mat t er of

publ i c pol i cy, must be i nt er pr et ed and gi ven ef f ect i n accor dance

wi t h t he i nt ent i on of t he l egi sl at ur e, i r r espect i ve of how t he

cont r act or s under st ood i t . " I d. at 1106 ( quot i ng Saf f or e v. At l .

Cas. I ns. Co. , 121 A. 2d 543, 548 ( N. J . 1956) ( quot i ng 3 Cor bi n on

Cont r act s 551, at 200- 01 ( 1960) ) ) ( i nt er nal quot at i on mar ks

omi t t ed) . Al t hough Hass deal t wi t h a st at e st at ut e, t her e i s no

r eason t he same pr i nci pl e woul d not appl y wi t h f ul l f or ce t o a

pr ovi si on r equi r ed by a f eder al r egul at i on.

Thi s cour t t heref or e must exami ne t he t ext of t he

Covenant i n l i ght of t he pur poses f or whi ch t he Uni t ed St at es

i mposed t he l anguage and t he cont ext of t he r el evant r egul atory

scheme. Thi s i s i n keepi ng wi t h t he basi c common l aw pr i nci pl e

t hat cont r act l anguage shoul d be i nt er pr et ed i n l i ght of pur poses

and cont ext , appl i ed t o the par t i cul ar ci r cumst ance of uni f or m

cont r act l anguage i mposed by t he Uni t ed St at es.

Such an i nqui r y i s appr opr i at e f or t he mot i on t o di smi ss

st age because i nt er pr et i ng r egul at or y t ext i n l i ght of gover nment

pur poses i s a mat t er of l aw t hat i s emphat i cal l y t he pr ovi nce of

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j udges, not j ur i es. See Nor t hshor e Mi n. Co. v. Sec' y of Labor , 709

F. 3d 706, 708 ( 8t h Ci r . 2013) ( "Thi s di sput e i nvol ves t he

i nt er pr et at i on of MSHA r egul at i ons, a mat t er of l aw t hat we revi ew

de novo. " ) ; Mar i ne Pol ymer Techs. , I nc. v. HemCon, I nc. , 672 F. 3d

1350, 1358 ( Fed. Ci r . 2012) ( "St at ut or y i nt er pr et at i on i s a mat t er

of l aw t hat we consi der de novo. " ) ; cf . Mar bur y v. Madi son, 5 U. S.

( 1 Cr anch) 137, 177 ( 1803) ( " I t i s emphat i cal l y t he pr ovi nce and

dut y of t he j udi ci al depar t ment t o say what t he l aw i s. " ) ;

Di eder i ch v. Amer i can News Co. , 128 F. 2d 144, 146 ( 10t h Ci r . 1942)

( "The power of t he j udge t o pass upon quest i ons of l aw i s j ust as

much an essent i al par t of t he pr ocess of t r i al by j ur y . . . as i s

t he power of t he j ur y to pass upon quest i ons of f act . " ) .

V.

Wi t h t hese pr i nci pl es i n mi nd, we t ur n t o t he Covenant at

i ssue. I n per f or mi ng our t ask of det er mi ni ng t he uni f or m meani ng

of t he Covenant as a mat t er of l aw, we f i r st exami ne the t ext i n

l i ght of i t s cont ext , t hen l ook t o t he Uni t ed St at es'

i nt er pr et at i on. We r epeat t he l anguage of Covenant 4 f or

conveni ence, di vi di ng i t i nt o i t s t hr ee sent ences:

4. Fi r e, Fl ood and Ot her Hazard I nsur ance.( 1) Bor r ower shal l i nsur e al l i mpr ovement s ont he Proper t y, whet her now i n exi st ence or

subsequent l y er ect ed, agai nst any hazar ds,casual t i es, and cont i ngenci es, i ncl udi ng f i r e,f or whi ch Lender r equi r es i nsur ance. ( 2) Thi si nsurance shal l be mai nt ai ned i n the amount sand f or t he per i ods t hat Lender r equi r es. ( 3)Bor r ower shal l al so i nsur e al l i mpr ovement s ont he Proper t y, whet her now i n exi st ence or

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subsequent l y er ect ed, agai nst l oss by f l oodst o t he extent r equi r ed by the Secr et ar y [ ofHUD] .

The Bank ar gues t hat i n al l owi ng t he l ender t o r equi r e i t s chosen

amount of i nsur ance f or "any hazards, " t he f i r st t wo sent ences

cl ear l y gi ve t he Bank t he aut hor i t y to choose t he r equi r ed amount

of f l ood i nsur ance. 11 Kol be ar gues t hat t he onl y pr ovi si on

addr essi ng f l ood i nsur ance i n Covenant 4 i s t he t hi r d sent ence, and

t hus t he Bank coul d not r equi r e more f l ood i nsurance t han t he

amount r equi r ed by HUD, whi ch ( i n Kol be' s case) was t he pr i nci pal

l oan bal ance.

We agr ee wi t h t he cont r act i nt er pr et at i on of f er ed by

J udge Boudi n i n hi s panel di ssent . We adopt and i ncor porat e J udge

Boudi n' s reasoni ng and expand. See Kol be, 695 F. 3d at 127- 29

( Boudi n, J . , di ssent i ng) . The Bank of f er s t he onl y pl ausi bl e

r eadi ng of t he uni f or m t ext , agai nst t he cont ext . As we di scuss

l at er , t hi s r eadi ng i s conf i r med by t he i nt ent of t he Uni t ed

11 The l anguage of Covenant 4 gr ant s aut hor i t y t o the l ender ;t he Bank i s t he ser vi cer of Kol be' s l oan, and t he i dent i t y of t hel ender i s unknown. That di st i nct i on does not mat t er ." [ T] ypi cal l y, a mor t gage ser vi cer act s as t he agent of t hemort gagee t o ef f ect col l ect i on of payment s on t he mort gage l oan. "R. G. Fi n. Cor p. v. Ver gar a- Nuez, 446 F. 3d 178, 187 ( 1st Ci r .2006) . I n addi t i on, a HUD r egul at i on st at es that " t he act i ons of[ a mor t gagee' s] ser vi cer shal l be consi der ed t o be t he act i ons of

t he mort gagee. " 24 C. F. R. 203. 502( a) . I n t he absence of anycont r ar y al l egat i ons i n t he compl ai nt , we wi l l pr esume t hat asservi cer , t he Bank was act i ng as t he l ender ' s agent wi t h t hel ender ' s f ul l aut hor i t y. I ndeed, i f t he Bank wer e not t he l ender ' sagent , t he br each of cont r act cl ai m agai nst t he Bank woul d cl ear l yf ai l because the l ender and not t he Bank i s a f or mal par t y to t hecontract.

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St at es. Si mpl y put , t he f i r st t wo sent ences al l ow t he Bank t o

choose t he amount of i nsurance f or any hazar ds, and t hat i ncl udes

f l ood i nsur ance because f l oods ar e hazar ds. Di ct i onar y def i ni t i ons

conf i r mt he common under st andi ng that f l oods ar e hazar ds, 12 and even

t he panel maj or i t y acknowl edged t hat " [ f ] l oods unquest i onabl y ar e

a t ype of hazar d, and t hey ar e t hus l i t er al l y wi t hi n t he scope of

t he f i r st sent ence. " Kol be, 695 F. 3d at 117 ( maj or i t y opi ni on) .

Al t hough t he t hi r d sent ence al so addr esses f l ood

i nsurance, i t adds an i ndependent r equi r ement : t hat t he borr ower

mai nt ai n HUD' s mi ni muml evel of f l ood i nsur ance i n addi t i on t o the

l ender ' s mi ni mum. Because bot h HUD' s and t he l ender ' s f l ood

i nsurance r equi r ement s are mi ni mumr equi r ement s, t hey are per f ect l y

consi st ent , and t he bor r ower can meet bot h r equi r ement s by

mai nt ai ni ng f l ood i nsur ance i n the amount of t he hi gher

r equi r ement . Cont r ar y t o Kol be' s ar gument s, t her e i s no need t o

r ead t he f i r st t wo sent ences t o excl ude f l oods i n or der t o avoi d

12 Webst er ' s Thi r d New I nt er nat i onal Di ct i onar y 1041 (2002)( def i ni ng "hazar d" as "a thi ng or condi t i on t hat mi ght oper at eagai nst success or saf et y: a possi bl e sour ce of per i l , danger ,dur ess, or di f f i cul t y") ; The Amer i can Her i t age Di ct i onar y of t heEngl i sh Language 806 ( 4t h ed. 2000) ( def i ni ng "hazar d" as "apossi bl e sour ce of danger " ) ; The Random House Di ct i onar y of t heEngl i sh Language 878 ( 2d ed. unabr i dged 1987) ( def i ni ng hazard as

"an unavoi dabl e danger or r i sk, even t hough of t en f or eseeabl e" ) ;Bl ack' s Law Di ct i onary 786, 1253 ( Br yan A Garner ed. , 9t h ed. 2009)( def i ni ng "hazar d" as "[ d] anger or per i l ; esp. , a cont r i but i ngf act or t o a per i l , " and def i ni ng per i l as "I nsur ance. The cause ofa r i sk of l oss t o per son or pr oper t y; esp. , t he cause of r i sk suchas f i r e, acci dent , t hef t , f or ger y, ear t hquake, f l ood, or i l l ness"( emphasi s added) ) .

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maki ng any pr ovi si on super f l uous, or t o resol ve a conf l i ct bet ween

a speci f i c pr ovi si on and a gener al pr ovi si on under pr i nci pl es of

cont r act i nt er pr et at i on. 13

The Bank' s i nt er pret at i on i s al so mor e consi st ent wi t h

anot her covenant of t he cont r act , Covenant 7, as we expl ai n i n

anot her sect i on bel ow. Thi s Covenant empowers t he l ender t o

pur chase i nsur ance t o "pr ot ect t he val ue of t he Pr oper t y, "

suggest i ng t hat t he l ender ' s economi c i nt er est s ar e not l i mi t ed t o

t he pr i nci pal bal ance of t he l oan.

Kol be al so ar gues t hat t he t i t l e of Covenant 4- - "Fi r e,

Fl ood and Ot her Hazard I nsur ance" - - suppor t s hi s r eadi ng. Kol be

ar gues t hat t he t i t l e si gni f i es t hat t he par agr aph deal s separ at el y

wi t h f i r e i nsur ance and f l ood i nsur ance. Because t he f i r st

sent ence r ef er s t o "hazar ds . . . i ncl udi ng f i r e, " but does not

ment i on f l oods, whi l e t he t hi r d sent ence si ngl es out f l ood

i nsur ance, Kol be concl udes t hat onl y t he f i r st sent ence deal s wi t h

13 Accor di ng t o a canon of cont r act i nt er pr et at i on, a speci f i cpr ovi si on wi l l somet i mes cont r ol t he meani ng of a more gener alpr ovi si on on t he same subj ect . Thi s i s a usef ul r ul e of t humbwher e t wo cl auses conf l i ct , because i n t hat ci r cumst ance i t wi l l benecessar y t o di sr egar d one pr ovi si on or t he ot her . See 2

Far nswor t h on Cont r act s 7. 11, at 297 ( " I f , however , t wopr ovi si ons i n a cont r act so cl ear l y conf l i ct t hat bot h cannot begi ven f ul l ef f ect , i t i s assumed t hat t he mor e speci f i c t hepr ovi si on, t he mor e l i kel y i t i s t o r ef l ect t he par t i es'i nt ent i on. ") . Yet when t wo pr ovi si ons ar e consi st ent , di sr egar di ngt he mor e gener al pr ovi si on i s not necessary t o r esol ve a conf l i ct ,and i n f act woul d f ai l t o gi ve f ul l ef f ect t o each pr ovi si on.

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f i r e i nsur ance and onl y t he t hi r d sent ence deal s wi t h f l ood

i nsur ance.

Thi s ar gument i s a non sequi t ur . The f i r st sentence

cover s "any hazar ds, . . . i ncl udi ng f i r e" ( emphasi s added) . I n

t he cont ext of a sent ence cover i ng "any hazar ds, " t he l i st i ng of

f i r e as an exampl e cl ear l y does not i mpl y an excl usi on of other

hazar ds. I t woul d be unnat ur al and i l l ogi cal t o r ead "any hazar ds,

. . . i ncl udi ng f i r e" t o mean "al l hazar ds except f l oods. " The

gover nment f l ood i nsurance r equi r ement i s ment i oned separatel y i n

t he f i nal sent ence t o compl y wi t h Nat i onal Fl ood I nsur ance Act

( NFI A) and HUD l egal r equi r ement s r egardi ng f l ood i nsurance. See

42 U. S. C. 4104a( a) ( 3) ; 24 C. F. R. 203. 16a( a) ( 2) . The t i t l e

mer el y r ef l ect s t hat f l ood and f i r e ar e t wo ki nds of hazar ds t hat

ar e speci f i cal l y ment i oned i n t he Covenant . I f anyt hi ng, t he

phr asi ng of t he t i t l e suppor t s the Bank. By usi ng t he phr ase

"Ot her Hazar d I nsur ance" af t er l i st i ng f i r e and f l ood, t he t i t l e

says t hat bot h f i r e and f l ood ar e i nst ances of hazar ds, whi ch l eads

t o t he concl usi on t hat f l ood i nsur ance i s i ncl uded i n t he f i r st

sent ence.

We concl ude t hat t he Bank' s r eadi ng of t he t ext , i s t he

onl y pl ausi bl e r eadi ng i n t he r el evant cont ext . 14 For cont r act

14 I ndeed, Kol be' s i nt er pr et at i on woul d l ead t o unr easonabl er esul t s, such as pr event i ng l ender s f r om r equi r i ng any f l oodi nsur ance i n homes at moder at e f l ood r i sk, and i s cont r ar y t ogover nment pol i cy as we descr i be bel ow.

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l anguage mandat ed by a f eder al r egul at i on that i mpl i cat es t he

f eder al mor t gage i nsur ance and f l ood i nsur ance pr ogr ams, t hi s

cont ext i ncl udes t he br oader r egul atory schemes and t he f eder al

pol i cy under l yi ng t hose schemes. I n essence, when t hi s covenant i s

under st ood i n cont ext agai nst i t s pur poses and f eder al housi ng

pol i cy, t he onl y r easonabl e i nt er pr et at i on of t hi s l anguage i s t hat

of f ered by t he Bank. An exami nat i on of t he cont ext r emoves any

cl ai m of ambi gui t y.

Covenant 4 t r aces i t s or i gi ns t o a HUD r egul at i on t hat

bear s di r ect l y on t he quest i on at hand. The r egul at i on i s t i t l ed

"Mort gagor and mort gagee requi r ement f or mai nt ai ni ng f l ood

i nsur ance. " 24 C. F. R. 203. 16a. I n per t i nent par t , that

r egul at i on st at es t hat bot h the mor t gagee and the mor t gagor must

"obt ai n and . . . mai nt ai n NFI P f l ood i nsur ance cover age on t he

pr oper t y i mpr ovement s dur i ng such t i me as t he mort gage i s i nsured. "

I d. 203. 16a( a) ( 2) . As t o t he amount s, t he r egul at i on st at es:

"The f l ood i nsurance must be mai ntai ned such t i me as t he mor t gage

i s i nsur ed i n an amount at l east equal t o ei t her t he out st andi ng

bal ance of t he mort gage, l ess est i mated l and cost s, or t he maxi mum

amount of t he NFI P i nsur ance avai l abl e wi t h r espect t o t he pr oper t y

i mpr ovement s, whi chever i s l ess. " I d. 203. 16a(c) ( Emphasi s

added. ) .

And t her e i s good r eason why HUD r equi r ed l ender s and

bor r ower s t o "mai nt ai n" f l ood i nsur ance i n "at l east " cer t ai n

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amount s, and not i n "no more" t han cer t ai n amount s, as Kol be woul d

have i t . As t he Uni t ed St at es sai d at or al ar gument 15:

And t her e are good r easons f or that . The

f i r st i s t hat i n a nor mal case [ t he] bor r owerdef aul t s, t he bank f or ecl oses on t he pr oper t y-- assi gns i t t o HUD and t hen wal ks away. AndHUD pays t hem t he i nsur ance pr oceeds of t hemort gage i nsur ance. Then HUD i s r esponsi bl ef or sel l i ng t he pr oper t y and r ei mbur ses t hemort gage i nsur ance f und wi t h t he pr oceeds oft he sal e. But of cour se i f t he house has beendest r oyed by a f l ood- - t her e i s not hi ng f or HUDt o sel l . And so t her e i s no way t o r ei mbur set he mor t gage i nsur ance f und and that i s whyHUD r egul at i ons have speci f i cal l y pr ovi ded

si nce 1971, t hat f l ood damage has t o ber epai r ed by the l ender bef or e t he pr oper t y canbe r e- conveyed.

I n i t s br i ef , t he Uni t ed St at es al so expl ai ns t he

unr easonabl e consequences t hat woul d r esul t f r omKol be' s r eadi ng.

I n r esponse, Kol be ar gues t hat f eder al pol i cy suppor t s hi s

i nt er pr et at i on. He al so ar gues t hat t he posi t i on of t he Uni t ed

St at es ar t i cul at ed i n t he br i ef i s ent i t l ed t o no def er ence because

( a) i t i s st at ed i n an ami cus br i ef , and ( b) i n hi s vi ew, i t i s

i nconsi st ent wi t h t he posi t i on t he Uni t ed St at es t ook ear l i er .

Bef ore addr essi ng t he pol i cy ar gument s, we pr ovi de

backgr ound on t he rel evant r egul atory schemes t o expl ai n t he

argument s and our concl usi on.

15 We acknowl edge t hat t he panel di d not have bef ore i t anyexpl i ci t ar t i cul at i on of t he posi t i on of t he Uni t ed St at es, but t heen banc cour t now has t hi s ar t i cul at i on.

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Feder al Fl ood I nsur ance and Housi ng Pol i cy

Two f eder al st at ut or y and r egul at or y schemes f act or i nt o

t hi s case: t he Nat i onal Fl ood I nsur ance Act ( "NFI A" ) and t he FHA' s

mor t gage i nsur ance pr ogr am. I n 1968, Congr ess passed t he NFI A, 42

U. S. C. 4001- 4129, t o make f l ood i nsurance avai l abl e and t o

pr omot e t he use of f l ood i nsur ance i n ar eas of t he count r y wi t h

f l ood r i sk, see i d. 4002( b) ( decl ar at i on of congr essi onal

pur pose) . Congr ess f ound t hat f l oods caused subst ant i al economi c

and per sonal har dshi ps, but t hat i t was not economi cal f or pr i vat e

i nsur ance compani es t o pr ovi de f l ood i nsur ance. I d. 4001( a) , ( b) .

To r emedy t he si t uat i on, Congr ess aut hor i zed a programi n whi ch t he

Uni t ed St at es woul d par t ner wi t h pr i vat e i nsur ance compani es t o

pr ovi de f l ood i nsur ance. I d. 4001( b) - ( d) .

Under t he Nat i onal Fl ood I nsur ance Pr ogr am ( NFI P) , t he

Uni t ed St at es makes f l ood i nsur ance avai l abl e i n st at es and

communi t i es t hat agr ee t o par t i ci pat e i n t he pr ogr am. 42

U. S. C. 4012( c) . I n f l ood- pr one ar eas ( i . e. , t hose deemed "ar eas

havi ng speci al f l ood hazards" by FEMA) wher e f l ood i nsurance i s

avai l abl e, t he NFI A r equi r es f eder al l y r egul at ed l ender s not t o

make mor t gage l oans unl ess t he bor r ower obt ai ns f l ood i nsur ance at

l east up t o t he f ul l pr i nci pal bal ance of t he l oan ( or i n t he

maxi mumamount avai l abl e, i f t hat i s l ess) . I d. 4012a( b) ( 1) . I n

addi t i on, f eder al f i nanci al assi st ance f or homes i n speci al f l ood

hazard ar eas i s f or bi dden unl ess t he home i s cover ed by f l ood

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i nsur ance at l east equal t o t he l esser of t he l oan bal ance or t he

maxi mum amount avai l abl e. I d. 4012a(a) . Al t hough t he i nsurance

i s pr ovi ded by pr i vat e i nsur er s t o t he ext ent possi bl e, i d.

4011( c) , t he Uni t ed St at es suppor t s t he pr ogr amby of f er i ng subsi dy

payment s and r ei nsur ance t o the pr i vat e i nsur er s, i d. 4054, 4055.

The FHA was cr eat ed i n 1935 as a r esul t of t he Nat i onal

Housi ng Act of 1934, 12 U. S. C. 1701 et seq. . The FHA pr omot es

af f ordabl e home ownershi p by pr ovi di ng mor t gage i nsur ance t o

pr i vat e l ender s, cf . i d. 1709; Mi ssi on/ U. S. Depar t ment of Housi ng

and Ur ban Devel opment ( HUD) , ht t p: / / por t al . hud. gov/

hudpor t al / HUD?sr c=/ about / mi ssi on ( l ast vi si t ed May 16, 2013)

( mi ssi on st at ement of HUD t o "cr eat e st r ong, sust ai nabl e, i ncl usi ve

communi t i es and qual i t y af f or dabl e homes f or al l " ) . I f a bor r ower

def aul t s on an FHA- i nsur ed mor t gage, t he l ender can convey the

mor t gage or t i t l e t o t he pr oper t y t o HUD and col l ect i nsur ance

benef i t s f r omt he Uni t ed St at es t o compensat e f or any l osses on t he

mort gage. See 12 U. S. C. 1710. However , i f t he pr oper t y has

suf f er ed damage f r om "f i r e, f l ood, ear t hquake, hur r i cane, or

t or nado, " t hen t he l ender cannot col l ect i nsur ance benef i t s f r om

t he Uni t ed St ates unl ess i t has r epai r ed t he damage or t aken a

deduct i on f r omt he i nsur ance benef i t s f or t he cost of r epai r i ng t he

damage. 24 C. F. R. 203. 379 ( emphasi s added) . Ef f ect i vel y, t hi s

scheme al l ocat es t he r i sk of most def aul t s on FHA- i nsured mort gages

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t o t he Uni t ed St at es, but i t al l ocat es t he r i sk of cer t ai n hazar d

l osses ( i ncl udi ng f l ood l osses) t o t he l ender .

Pol i cy Ar gument s

Gi ven t hi s backgr ound and cont ext , i t i s not sur pr i si ng

t hat t he Uni t ed St at es i s abl e t o conf i r m t hat HUD has " never

endorsed such a pol i cy" of const r ui ng Covenant 4 as "a f eder al

cei l i ng f or f l ood i nsur ance cover age r at her t han a f l oor . " The

Uni t ed St at es expl ai ns t hat Kol be' s r eadi ng conf l i ct s wi t h t he

over al l st r uct ur e of FHA mort gage i nsurance. HUD' s mort gage

i nsur ance pr ogr ampl aces t he r i sk of f l ood and ot her hazar d l osses

on t he l ender , see 24 C. F. R. 203. 379, and so gi ves t he l ender t he

aut hor i t y t o det er mi ne t he amount of f l ood i nsur ance necessar y t o

pr ot ect i t s i nvest ment . As t he Uni t ed St at es descri bes, "[ t ] hat i s

t he pur pose of Par agr aph 4: because t he l ender ul t i matel y bears t he

r i sk of uni nsur ed hazard l osses, FHA' s st andar d mor t gage cont r act

al l ows t he l ender t o speci f y the t ypes and amount s of al l hazard

i nsur ance- - i ncl udi ng f l ood i nsur ance- - t hat t he bor r ower must

car r y. " Uni t ed St at es Br i ef at 15.

I n addi t i on, Kol be' s i nt er pr et at i on of Covenant 4 woul d

l ead t o anomal ous and unt oward r esul t s. Under Kol be' s r eadi ng of

Covenant 4, t he onl y sent ence addr essi ng f l ood i nsur ance i s t he

t hi r d sent ence, whi ch obl i gat es t he bor r ower t o mai nt ai n i nsur ance

i n t he amount r equi r ed by t he Secr et ary of HUD. But HUD onl y

r equi r es f l ood i nsur ance i n speci al f l ood hazar d ar eas. Thus,

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under Kol be' s r eadi ng, a l ender coul d not r equi r e a penny of f l ood

i nsur ance f or homes i n moder at e f l ood r i sk ar eas. Speci al f l ood

hazard ar eas ar e def i ned as ar eas subj ect t o at l east a one per cent

chance of f l oodi ng i n any gi ven year , whi ch equat es t o a twent y- si x

per cent chance of f l oodi ng over t he cour se of a t hi r t y year

mor t gage. 16 Homes i n moder at e f l ood r i sk zones, whi l e f al l i ng shor t

of t he r i sk t hr eshol d f or a speci al f l ood hazar d ar ea, may

nonet hel ess f ace si gni f i cant f l ood r i sk. I n f act , over t went y

per cent of NFI P f l ood- i nsur ance cl ai ms and about one t hi r d of

f eder al di sast er r el i ef payment s f or f l oodi ng ar e r el at ed t o

pr oper t i es out si de of speci al f l ood hazar d ar eas. Nat i onal Fl ood

I nsur ance Pr ogr am, Fl ood Fact s, ht t p: / / www. f l oodsmar t . gov/

f l oodsmar t / pages/ f l ood_f act s. j sp. Ther e woul d be no r eason t o

f or bi d t he l ender f r omr equi r i ng any f l ood i nsur ance on such homes,

yet al l ow t he l ender t o r equi r e as much i nsur ance as i t wi shes f or

ot her hazards t hat ar e ext r emel y unl i kel y t o occur , such as

ear t hquakes or t or nados i n cer t ai n par t s of t he count r y. Such an

i r r at i onal pol i cy obj ecti ve coul d not pl ausi bl y be at t r i but ed t o

HUD, and t he Uni t ed St at es' br i ef conf i r ms t hat HUD di d not i nt end

such a r esul t .

The r esul t urged by Kol be woul d ser i ousl y i mpai r f eder al

housi ng pol i cy as ar t i cul at ed by t he Uni t ed St at es. Kol be' s

16See 44 C. F. R. 59. 1; Nat i onal Fl ood I nsurance Pr ogr am, Whati s a Speci al Fl ood Hazard Ar ea ( SFHA) ?, ht t p: / / www. f l oodsmar t . gov/f l oodsmar t / pages/ f aqs/ what - i s- a- speci al - f l ood- hazar d- ar ea. j sp.

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i nt er pr et at i on woul d pr event l ender s i n some cases f r om r equi r i ng

adequat e f l ood i nsur ance, par t i cul ar l y f or homeowner s wi t h

mor t gages above $250, 000 ( t he maxi mumf ederal r equi r ement ) or homes

out si de of speci al f l ood hazard ar eas, wher e t he Uni t ed St ates does

not r equi r e any f l ood i nsur ance. Uni t ed St at es Br i ef at 21- 22.

Kol be' s i nt er pr et at i on woul d not onl y f r ust r at e HUD pol i cy, but i t

"i s i mpossi bl e t o r econci l e wi t h Congr ess' s obj ect i ve i n t he

[ NFI A] , whi ch was not t o pr ohi bi t t he use of f l ood i nsur ance i n

f eder al l y i nsur ed housi ng but t o encour age i t . " I d. at 24. The

Uni t ed St at es f i nds i t f or eseeabl e t hat l ender s woul d r eact t o

Kol be' s i nt er pr et at i on by "decl i n[ i ng] t o of f er FHA- i nsur ed l oans

i n ar eas f aci ng even mar gi nal f l ood r i sks, or char g[ i ng]

subst ant i al l y gr eat er i nt er est r at es f or such l oans, " t hus

hi nder i ng af f or dabl e home owner shi p. I d. at 24.

Kol be and suppor t i ng ami ci posi t t hat f eder al housi ng

pol i cy coul d suppor t t hei r cont r act readi ng. These pol i cy

argument s r evol ve ar ound t he f act t hat a pr i mary purpose of HUD and

t he FHA i s t o pr omot e af f ordabl e home ownershi p. Because f l ood

i nsur ance can be expensi ve, a pr ovi si on l i mi t i ng t he l ender ' s

abi l i t y t o requi r e f l ood i nsur ance coul d r educe one component of

t he i ni t i al cost of home owner shi p f or FHA bor r ower s.

Thi s ar gument t hat t he pol i cy of l ower i ng housi ng cost s

suppor t s Kol be' s i nt er pr et at i on i s anchor ed i n specul at i on r at her

t han the recor d of t he Covenant ' s act ual cont ext and pur pose.

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Moreover , i t s economi c assumpt i ons do not bear scr ut i ny.

Rest r i ct i ng t he amount of f l ood i nsur ance onl y r educes t he buyer ' s

mont hl y payment i f t he l ender , so r est r i ct ed, f ai l s t o f act or t he

i ncreased r i sk i nt o t he i nt er est r at e char ged. Kol be al so i gnor es

t he f act t hat t he pur chase of f l ood i nsur ance r esul t s i n ei t her an

i ncr ease i n home owner shi p cost s ( i n t he event of no f l ood) or a

decr ease i n home owner shi p cost s ( i n t he event of a f l ood) . And

Kol be of f ers no evi dence that t he FHA somehow consi dered t he r i sk-

adj ust ed bal ance of t he ef f ect s on cost s t o be det r i ment al t o

consumers. I n shor t , t he not i on t hat t he FHA want ed t o make sur e

t hat consumer s coul d under - i nsur e f or f l ood l oss i s compl et e and

i mpr obabl e specul at i on. 17 And t hi s i nt er pr et at i on by t he Uni t ed

St ates was pr ovi ded bef ore Kol be ent er ed i nt o hi s mort gage wi t h

Tayl or Bean, as di scussed bel ow.

Kol be f ur t her di smi sses t he Uni t ed St at es' br i ef as a

"newl y mi nt ed i nt er pr et at i on [ t hat ] i s f l at l y i nconsi st ent " wi t h

past HUD pr act i ce. Thi s i s si mpl y not so. Ear l i er HUD

pr onouncement s support t he Uni t ed St ates' pr esent assert i ons and

t he Bank' s i nt er pr et at i on, and ar e i nconsi st ent wi t h Kol be' s

i nt er pr et at i on.

Kol be' s i nconsi st ency ar gument i s l argel y based on HUD

handbooks and gui dance document s t hat l i st " f l ood i nsurance" and

17 The Covenant woul d al so be a poor way even t o l ower up f r onthousi ng cost s, as i t woul d pr ovi de much mor e benef i t f or t hose abl et o af f ord t he most expensi ve homes.

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"hazard i nsur ance" as separ at e cat egor i es. 18 Kol be argues t hat

t hese document s show t hat HUD has l ong t r eat ed hazar d i nsurance and

f l ood i nsur ance separ at el y, r ef l ect i ng a br oader i ndust r y pr act i ce

of excl udi ng f l ood cover age f r om hazar d i nsur ance pol i ci es.

Because HUD and i ndust r y pr act i ce t r eat hazar d i nsurance and f l ood

i nsur ance as separ at e cat egor i es, Kol be asser t s t hat t he ment i on of

hazar ds i n t he f i r st sent ence shoul d be r ead t o excl ude f l oods.

The panel maj or i t y f ound t hi s separat i on t o be si gni f i cant . I t i s,

but t he di f f er ence r ei nf or ces t he Bank' s r eadi ng.

Kol be' s ar gument conf uses t he quest i on at i ssue. The

quest i on i s not whet her t he cat egor y of "hazard i nsur ance" i ncl udes

" f l ood i nsur ance" ; t he quest i on i s whet her f l oods ar e hazar ds, and

t hus whet her a ref er ence i n Covenant 4 t o "any hazar ds" i ncl udes

f l oods. On t hi s quest i on, bot h HUD pr act i ce and t he pat t er n of

i ndust r y usage f avor t he Bank and t he Uni t ed St ates'

i nt er pr et at i on, not Kol be' s.

We expl ai n why. I n t he mi ddl e of t he t went i et h cent ur y,

i nsur ance compani es began i ssui ng compr ehensi ve hazard i nsur ance

18A HUD handbook on i nsur ed mor t gages l i st s "hazard i nsur ance"and " f l ood i nsur ance pr emi ums" as separat e i t ems t hat must be pai di nt o an escr ow account . See HUD Handbook 4330. 1, ch. 2, 2- 1( D) ,

avai l abl e at ht t p: / / por t al . hud. gov/ hudpor t al / HUD?sr c=/pr ogr am_of f i ces/ admi ni st r at i on/ hudcl i ps/ handbooks/ hsgh/ 4330. 1. AHUD gui debook on set t l ement cost s separatel y l i st s "Hazar dI nsur ance Premi um" and "Fl ood I nsur ance" as separat e set t l ementcost s. See "Buyi ng Your Home" ( J une 1997) , Sect i on I I I , avai l abl eat ht t p: / / por t al . hud. gov/ hudpor t al / doc ument s / huddoc ? i d=DOC12893. pdf .

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pol i ci es that cover ed agai nst a wi de var i et y of r i sks. Cr ust o, The

Kat r i na Fund: Repai r i ng Br eaches i n Gul f Coast I nsur ance Levees, 43

Harv. J . on Legi s. 329, 334 ( 2006) . These compr ehensi ve hazar d

i nsur ance pol i ci es consi st of "named per i l " pol i ci es t hat onl y

cover an enumer at ed l i st of hazar ds, and "al l - r i sk" pol i ci es t hat

cover al l physi cal hazar ds except t hose speci f i cal l y excl uded.

Thomas & Randal l , New Appl eman on I nsur ance Law 41. 02[ 1] [ a] , at

41- 15 ( l i br ar y ed. 2011) . 19 Mor e r ecent l y, al l - r i sk pol i ci es have

ecl i psed named per i l pol i ci es as t he most common f ormof homeowner s

i nsur ance. I d. 42. 02[ 1] , at 42- 60. Yet vi r t ual l y al l st andar d

hazar d i nsur ance pol i ci es, i ncl udi ng al l - r i sk pol i ci es, cont ai n a

speci f i c "f l ood excl usi on" pr ovi si on t hat excl udes f l oodi ng and

wat er damage f r om cover age. I d. 43. 02[ 3] [ a] , at 43- 14.

The f act t hat HUD document s l i st " f l ood i nsur ance" and

"hazar d i nsur ance" as separ at e cat egor i es r ef l ect s t he r eal i t y that

homeowners who want f l ood i nsur ance wi l l need t o pur chase i t

separ at el y f r om an al l - r i sk hazar d i nsur ance pol i cy. I t does not

suppor t an i nf er ence t hat HUD i s st at i ng t hat f l oods are not

hazar ds; r at her , i t i s st at i ng t he opposi t e. The r eason t hat such

an expr ess f l ood excl usi on i s necessar y i n a hazard i nsur ance

19 I n i nsur ance i ndust r y par l ance, t he t er ms "hazar d, " " per i l , "and " r i sk" ar e of t en used i nt er changeabl y. See Bl ack' s LawDi ct i onar y 786, 1442 ( Br yan A Gar ner ed. , 9t h ed. 2009) ( def i ni ng"hazar d" as " Danger or per i l " and def i ni ng "r i sk" as "I nsur ance.The t ype of l oss cover ed by a pol i cy; a hazar d f r om a speci f i edsour ce") .

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pol i cy cover i ng al l r i sks i s because f l oodi ng i s consi der ed a r i sk

( or al t er nat i vel y, a hazard) , and t hus woul d be cover ed by t he

hazard i nsur ance pol i cy absent such an excl usi on.

HUD r egul at i ons and t he NFI A conf i r m t he i ndust r y

under st andi ng t hat f l oods ar e hazar ds. For exampl e, HUD r equi r es

f l ood i nsur ance on FHA- i nsur ed mor t gages i n "area[ s] havi ng speci al

f l ood hazar ds. " 24 C. F. R. 203. 16a( b) ; see al so 42 U. S. C.

4012a( a) ( mandat i ng t hat f eder al l y regul at ed l ender s r equi r e f l ood

i nsur ance on homes i n "ar ea[ s] havi ng speci al f l ood hazards" ) .

Ot her HUD pr onouncement s, i ncl udi ng a di f f er ent part of

t he 1994 HUD Handbook ci t ed by Kol be, al so suppor t t he Uni t ed

St at es' i nt er pr et at i on but cont r adi ct Kol be' s i nt er pr et at i on. As

we have not ed, under Kol be' s i nt er pr et at i on, a l ender cannot

r equi r e any more f l ood i nsur ance t han what HUD r equi r es, whi ch

woul d mean zer o f l ood i nsurance out si de of speci al f l ood hazard

areas. Yet HUD has been qui t e cl ear on mul t i pl e occasi ons t hat

l ender s can r equi r e f l ood i nsur ance out si de of speci al f l ood hazar d

areas.

For exampl e, i n a 1990 l et t er t o mor t gagees of FHA-

i nsur ed l oans, t he FHA Commi ssi oner wr ot e, " [ l ] ender s are f r ee t o

consi der r equi r i ng f l ood i nsur ance i n par t i ci pat i ng communi t i es on

t he basi s of t hei r own busi ness j udgement , even i f t he bui l di ng

t hat i s t he secur i t y f or a l oan i s l ocat ed out si de of an SFHA

[ speci al f l ood hazard ar ea] . " Mor t gage Let t er 90- 16, 1990 WL

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10022448, at *2. A handbook i ssued by HUD i n 1994 st at es, " I n

areas desi gnated B and C ( wi t h suf f i xes) [ on FEMA maps] , [ f l ood]

i nsurance i s avai l abl e but not r equi r ed by HUD ( al t hough mort gagees

may r equi r e i t under t he same t erms and condi t i ons as t hose t hat

appl y t o other dwel l i ng i nsurance) . " HUD Handbook 4330. 1, 2-

11( E) ( 2) ( emphasi s added) .

Qui t e si gni f i cant l y, FEMA r ecommended i n i t s 2007

gui del i nes t hat l ender s do pr eci sel y what t he Bank di d: r equi r e

homeowners i n speci al f l ood hazard areas t o mai nt ai n r epl acement

cost f l ood i nsurance. See FEMA, Nat i onal Fl ood I nsurance Progr am:

Mandat ory Pur chase of Fl ood I nsurance Gui del i nes 27 (2007) . 20 We

wi l l not r ead HUD r egul at i ons as pr event i ng l ender s f r omf ol l owi ng

FEMA f l ood i nsur ance gui del i nes wi t h r espect t o FHA- i nsur ed

mor t gages. See Mor t gage Let t er 90- 16, 1990 WL 10022448, at *1

( " [ W] e want t o br i ng HUD pol i cy i n conf ormance wi t h that of

FEMA. " ) .

Kol be rai sed anot her exampl e of pur port ed i nconsi st ency

at oral argument . Kol be not es t hat t he 1994 HUD Handbook st at es

t hat a l ender "may not i nsi st on mor e [ i nsur ance] cover age than i s

20 The 2007 gui del i nes wer e i n ef f ect at t he t i me t hat Kol be

ent er ed i nt o hi s mort gage and at t he t i me t he Bank r equi r ed t headdi t i onal f l ood i nsur ance. The Uni t ed St at es has not i f i ed t hi scour t i n a l et t er t hat FEMA has r esci nded t he 2007 gui del i nes asout dat ed, but t hat " i t r emai ns t he pol i cy of FEMA t hat . . .pr udent mor t gage l enders may of t en wi sh t o r equi r e bor r owers t ocar r y more than t he mi ni mum amount of f l ood i nsur ance cover ager equi r ed by f eder al l aw . . . . "

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necessary t o pr ot ect i t s i nvest ment . " HUD Handbook 4330. 1, 2-

11( B) . He argues t hat onl y i nsurance i n t he amount of t he

pr i nci pal l oan bal ance i s necessar y t o pr ot ect t he l ender ' s

i nvest ment ; t hus, t hi s handbook l i mi t ed t he l ender ' s di scr et i on and

t her eby conf l i ct s wi t h t he concl usi on of t he Uni t ed St at es' br i ef .

Kol be' s ar gument f ai l s f or sever al r easons, i ncl udi ng

t hat i t s f act ual pr emi se i s unt r ue. Fi r st , hi s ar gument conf l i ct s

wi t h Covenant 7 of t he mort gage cont r act . Covenant 7 i s t he f orce-

pay pr ovi si on t hat not onl y al l ows t he l ender t o pr ot ect i t sel f

when t he bor r ower f ai l s t o compl y wi t h hi s obl i gat i ons, i ncl udi ng

t hose under Covenant 4, but al so al l ows t he l ender t o charge t he

bor r ower f or t he r esul t i ng cost i ncur r ed by vi r t ue of t he

bor r ower ' s br each. I t pr ovi des that " [ i ] f Bor r ower . . . f ai l s t o

per f or m any . . . covenant s and agr eement s cont ai ned i n t hi s

Secur i t y I nst r ument , . . . t hen Lender may do and pay whatever i s

necessary to pr ot ect val ue of t he Pr oper t y and Lender ' s r i ght s i n

t he Pr oper t y, i ncl udi ng payment of t axes, hazar d i nsur ance . . . .

Any amount s di sbursed by Lender under t hi s paragr aph shal l become

an addi t i onal debt of Bor r ower . . . . " The t wo covenant s must

t her ef or e be read toget her i n a manner t hat al i gns dut y, br each,

and r emedy. That al i gnment appear s per f ect l y and pl ai nl y i f

Covenant 4 i s r ead, as we r ead i t , t o al l ow t he l ender t o r equi r e

t he bor r ower t o pr ocur e f l ood i nsur ance up t o an amount necessary

t o pr ot ect t he val ue of t he pr oper t y. Conver sel y, under Kol be' s

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vi ew, t he Covenant 4 dut y i s onl y t o buy f l ood i nsurance i n amount s

t hat wi l l of t en be f ar l ess t han t hat necessar y t o pr ot ect t he

val ue of t he pr oper t y, but t he r emedy f or a br each of t hat dut y,

under t he pl ai n l anguage of Covenant 7, i s t hat t he borr ower may be

r equi r ed t o r ei mbur se t he l ender f or t he cost of f l ood i nsur ance

f or t he f ul l amount necessary t o pr ot ect t he val ue of t he pr oper t y.

Second, FEMA' s gui del i nes conf i r mt he f act , descr i bed by

t he Uni t ed St at es i n i t s ami cus br i ef , t hat t he l ender has an

economi c i nt erest i n t he borr ower mai nt ai ni ng r epl acement cost

f l ood i nsur ance. Fi nal l y, i t i s a mat t er of common sense t hat a

l ender has an i nt er est not onl y i n t he pr i nci pal bal ance of t he

l oan but i n mai nt ai ni ng a per f or mi ng l oan t hat wi l l pr ovi de a

st r eam of i nt er est payment s; i f t he bor r ower has enough i nsur ance

t o r ebui l d hi s home i n t he event of a f l ood, i t i s mor e l i kel y t hat

t he borr ower wi l l r emai n cur r ent on t he l oan and cont i nue to make

payment s.

We agai n expl ai n why t hr ee st r ands of r easoni ng suppor t

our concl usi on. Usi ng t he or di nar y t ool s of cont r act

i nt er pr et at i on, we vi ew t he t ext of Covenant 4 i n t he cont ext of

f eder al housi ng pol i cy. Thi s exami nat i on convi nces us t hat t he

Bank' s i nt er pr et at i on i s cor r ect . Because t hi s covenant i s a

uni f or m cl ause, we det er mi ne i t s uni f or m meani ng as a mat t er of

l aw, and do not al l ow Kol be t o var y f r omt hat meani ng on t he basi s

of ext r i nsi c evi dence uni que t o hi s tr ansact i on. Thi s l eads i nt o

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t he t hi r d st r and: t he f act t hat t hi s l anguage was dr af t ed and

i mposed by t he Uni t ed St at es i n a r egul at i on. On t hi s recor d, we

t hi nk t he Covenant ' s pur pose i s pl ai n.

We have no doubt s about t he meani ng of Covenant 4 under

any of t he t hr ee t est s, but i f we di d, we woul d r esol ve t hose

doubt s by def er r i ng t o t he Uni t ed St at es' r easonabl e

i nt er pr et at i on. See Auer v. Robbi ns, 519 U. S. 452, 461 ( 1997) .

Under t he doct r i ne of "Auer def er ence, " we accept an agency' s

i nt er pr et at i on of i t s own r egul at i on "unl ess ' pl ai nl y er r oneous or

i nconsi st ent wi t h t he r egul at i on. ' " I d. ( quot i ng Rober t son v.

Met how Val l ey Ci t i zens Counci l , 490 U. S. 332, 359 ( 1989) ) . 21

Al t hough Covenant 4 appear s i n a cont r act between pr i vat e

par t i es, i t der i ves f r om a dul y enact ed HUD r egul at i on, i n whi ch

HUD promul gat ed t he l anguage and mandat ed t hat pr i vate par t i es

i ncl ude t he l anguage i n mor t gage cont r act s f or FHA- i nsur ed

mort gages. See Mor t gage Requi r ement s, 54 Fed. Reg. at 27, 603- 07.

Auer def er ence appl i es her e j ust as i t does t o any ot her agency

i nt er pr et at i on of a r egul at i on. I ndeed, mul t i pl e cour t s of appeal s

21 Al t hough t he Supr eme Cour t commonl y r ef er s t o t hi s doct r i neas " Auer def er ence, " see, e. g. , Decker v. Nw. Envt l . Def . Ct r . , 133S. Ct . 1326, 1337 ( 2013) , t he doct r i ne act ual l y or i gi nat ed decadesear l i er i n Bowl es v. Semi nol e Rock & Sand Co. , 325 U. S. 410, 414

( 1945) ( "[ T] he ul t i mat e cri t er i on i s t he admi ni st r at i vei nt er pr et at i on [ of t he r egul at i on] , whi ch becomes of cont r ol l i ngwei ght unl ess i t i s pl ai nl y er r oneous or i nconsi st ent wi t h t her egul at i on. ") . We f ol l ow t he Supr eme Cour t ' s l ead i n r ef er r i ng t oAuer def erence, but we not e t hat t he doct r i ne has a much l ongerpedi gr ee, and many of t he deci si ons appl yi ng i t wer e i ssued wel lbef ore Auer .

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have accor ded def er ence t o agency i nt er pr et at i ons of cont r act t er ms

t hat were pr omul gat ed and mandat ed by a f ederal r egul at i on.

See Saavedra v. Donovan, 700 F. 2d 496, 499 ( 9t h Ci r . 1983)

( accor di ng "def er ence t o an agency' s r easonabl e and conf ormi ng

i nt er pr et at i on of i t s own r egul at i on") ; Honeywel l I nc. v. Uni t ed

St at es, 661 F. 2d 182, 185 ( Ct . Cl . 1981) ( "[ I ] n const r ui ng

admi ni st r at i ve r egul at i ons, t he ul t i mat e cri t er i on i s t he

admi ni st r at i ve i nt er pr et at i on, whi ch becomes of cont r ol l i ng wei ght

unl ess i t i s pl ai nl y er r oneous or i nconsi st ent wi t h t he r egul at i on.

. . . The f act t hat a r egul at i on may be i ncor por at ed i nt o a

cont r act does not r equi r e a di f f er ent r ul e f or r egul at i on

i nt er pr et at i on. " ) . 22

Appl yi ng Auer def er ence, i t i s a si mpl e mat t er t o uphol d

t he Uni t ed St at es' i nt er pr et at i on of Covenant 4, whi ch accor ds wi t h

t he Bank' s i nt er pr et at i on. Far f r om bei ng "pl ai nl y er r oneous or

i nconsi st ent wi t h t he r egul at i on, " t he Uni t ed St at es'

i nt er pr et at i on i s consi st ent wi t h t he most nat ur al r eadi ng of t he

r egul at i on' s t ext . Fur t her , i t i s suppor t ed by per suasi ve

ar t i cul at i ons of f eder al pol i cy as di scussed ear l i er and cont ai ned

i n t he Uni t ed St at es' br i ef .

Kol be i nsi st s t hat Auer def er ence i s i nappr opr i at e,

ci t i ng t o Chr i st opher v. Smi t hKl i ne Beecham Cor p. , 132 S. Ct . 2156

22 I n our case, mor eover , t he Uni t ed St at es i s not a par t y tot he l i t i gat i on, hence one possi bl e r eason f or hesi t at i ng t o def ert o i t s posi t i on i s absent .

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( 2012) , a case i n whi ch the Supr eme Cour t r ej ect ed and ref used t o

ext end Auer def er ence t o a Uni t ed St at es br i ef t hat was

i nconsi st ent wi t h past agency pr act i ce and t he gover ni ng st at ut e.

The agency i n Chr i st opher submi t t ed a br i ef decl ar i ng an i ndust r y

pr act i ce i l l egal , but t he Cour t not ed t hat t hi s br i ef was

i nconsi st ent wi t h decades of decl i ni ng t o br i ng enf or cement

act i ons, whi ch creat ed a j ust i f i ed expect at i on t hat t he pr act i ce

di d not vi ol at e t he r el evant r egul at i ons. See i d. at 2167- 68.

Thi s case i s di st i ngui shabl e f r om Chr i st opher . Not hi ng

i n HUD' s past pr act i ce i s i nconsi st ent wi t h t he posi t i on

ar t i cul at ed i n i t s br i ef . To t he cont r ar y, HUD has decl ar ed i n t he

past t hat l ender s can r equi r e f l ood i nsurance above HUD

r equi r ement s out si de of speci al f l ood hazard ar eas, whi ch suppor t s

t he posi t i on i n i t s br i ef but i s i nconsi st ent wi t h Kol be' s

posi t i on. Chr i st opher pr ovi des no suppor t f or r ej ect i ng Auer

def er ence i n t hi s case.

We st r ess t hat Auer def er ence i s not necessary t o our

concl usi on. Even i f Kol be wer e cor r ect t hat Chr i st opher gover ns

t hi s case, he woul d st i l l l ose. I n Chr i st opher , whi l e r ej ecti ng

Auer def erence, t he Cour t gr ant ed t he agency a l esser measur e of

def er ence der i ved f r om Ski dmore v. Swi f t & Co. , 323 U. S. 134, 140

( 1944) : "def er ence pr opor t i onal t o t he ' t hor oughness evi dent i n

[ t he agency' s] consi der at i on, t he val i di t y of i t s r easoni ng, i t s

consi st ency wi t h ear l i er and l at er pr onouncement s, and al l t hose

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f act or s whi ch gi ve i t power t o per suade. ' " Chr i st opher , 132 S. Ct .

at 2169 ( quot i ng Uni t ed St ates v. Mead Corp. , 533 U. S. 218, 228

( 2001) ) . Her e, t he Uni t ed St at es' br i ef cont ai ned t hor ough

consi der at i on and val i d r easoni ng, was consi st ent wi t h ot her HUD

pr onouncement s, and was per suasi ve of i t s own f orce. The l esser

Ski dmor e def er ence easi l y woul d have suf f i ced t o sust ai n i t s

i nt er pr et at i on. I ndeed, we woul d agr ee wi t h t he Uni t ed St at es'

i nt er pr et at i on even i f we gave i t no def er ence at al l . Kol be has

f ai l ed t o st at e a cl ai m f or br each of cont r act. 23

23 Kol be has br i ef l y ar t i cul at ed t wo ot her t heor i es f or br eachof cont r act . Fi r st , Kol be ar gues t hat t he cont r act di d not al l owt he l ender t o i ncr ease th

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