APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Nathaniel M. Gorton, U.S. District Judge]
The opinion of the court was delivered by: Lipez, Circuit Judge.
Before Boudin, Lipez, and Thompson, Circuit Judges.
Appellant Susan Lass is among a number of homeowners in multiple states claiming that their mortgage companies have wrongfully demanded an increase in flood insurance coverage to levels beyond the amounts required by their mortgages. In this case, unlike in the companion case we decide today, Kolbe v. Bank of America, N.A., No. 11-2030, the pertinent mortgage provision explicitly gives the lender discretion to prescribe the amount of flood insurance. We nonetheless conclude that the district court's dismissal of Lass's complaint must be vacated. A supplemental document given to Lass at her real estate closing, titled "Flood Insurance Notification," reasonably may be read to state that the mandatory amount of flood insurance imposed at that time would remain unchanged for the duration of the mortgage. Given the ambiguity as to the lender's authority to increase the coverage requirement, Lass is entitled to proceed with her breach of contract and related claims.
The following facts are drawn from the allegations in the complaint. See Roman-Oliveras v. P.R. Elec. Power Auth., 655 F.3d 43, 45 (1st Cir. 2011). Appellant Lass, a resident of Rehoboth, Massachusetts, obtained a mortgage loan in the amount of $40,000 in 1994 from Residential Mortgage Corporation. Paragraph 5 of the mortgage agreement,*fn1 titled "Hazard or Property Insurance," states in pertinent part:
Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire, hazards included within the term "extended coverage" and any other hazards, including floods or flooding, for which Lender requires insurance. This insurance shall be maintained in the amounts and for the periods that Lender requires. . . . If Borrower fails to maintain coverage described above, Lender may, at Lender's option, obtain coverage to protect Lender's rights in the Property in accordance with Paragraph 7.*fn2
The amount of flood insurance required by the lender was specified in a separate document labeled "Flood Insurance Notification" ("the Notification"). It states, in part:
[A]t the closing the property you are financing must be covered by flood insurance in the amount of the principle [sic] amount financed, or the maximum amount available, whichever is less. This insurance will be mandatory until the loan is paid in full.
Federal law also required Lass to obtain flood insurance coverage because her property is located in a special flood hazard zone under the National Flood Insurance Act ("NFIA"). See 42 U.S.C. § 4012a(b)(1).*fn3 The statutory coverage requirement is framed in terms similar to the Notification. At the time of her closing, Lass was obliged to purchase an amount of insurance that tracked the lower of her principal balance or the maximum amount of insurance available to her under the federal flood insurance program ($250,000). Id.; see also id. § 4013(b)(2); 24 C.F.R. § 203.16a; 44 C.F.R. § 61.6.*fn4 Lass at all times maintained flood insurance at least equal to the full amount of her loan, $40,000. In 2007, she voluntarily increased her coverage to $100,000.
The rights to Lass's mortgage eventually were acquired by Bank of America ("the Bank"),*fn5 and shortly thereafter, in November 2009, the Bank sent Lass a form letter stating that the amount of flood insurance on her property was inadequate and did not satisfy
"the terms of [her] mortgage/deed of trust and/or Federal law." The letter stated that she needed an additional $145,086 in coverage, so that she would have flood insurance in the same amount as the hazard insurance that she had purchased, the latter amount ordinarily reflecting the replacement value of the improvements on the property. The letter stated that, if Lass did not obtain the increased insurance by early January 2010, the Bank would purchase it for her, perhaps through its affiliated entities and likely with less coverage despite a possibly higher cost than insurance she could buy herself. Lass contacted the Bank questioning the need for more insurance, given her low principal balance,*fn6 and was incorrectly told that the new coverage requirements were mandated by the Federal Emergency Management Agency ("FEMA").*fn7 The Bank sent a follow-up letter in mid-December, reiterating its intention to purchase the additional insurance if Lass failed to do so.
In January 2010, the Bank purchased the additional flood insurance on behalf of Lass, backdated to provide coverage as of November 1, 2009, and it later charged her escrow account $748.10 for the premium. After notifying Lass in September 2010 that it intended to renew the policy, the Bank purchased coverage in November 2010 in the amount of $149,998, charging Lass's escrow account $779.94. That second policy was replaced in March 2011 with a third lender-placed policy in the amount of $139,988, resulting in a charge of $724.94 to Lass's escrow account. Lass claims that the Bank or one of its affiliates received a commission or "kickback" in connection with the latter two lender-placed policies. Also in March 2011, however, following a television news report about plaintiff's flood-insurance interactions with the Bank, the Bank posted refunds to Lass's escrow account for the cost of the first two lender-placed polices (also commonly known as "force-placed" policies).
In April 2011, Lass filed a putative class action complaint, later amended, alleging that the Bank had "unfairly, unjustly, and unlawfully" forced her and other borrowers to purchase excessive amounts of flood insurance and had improperly profited through "kickbacks, commissions, or 'other compensation'" paid in connection with the force-placed insurance. Am. Compl. ¶¶ 3, 4. Her amended complaint contained five separate causes of action, all of which the district court dismissed. The court concluded that the mortgage agreement unambiguously entitled the Bank to increase the required amount of flood insurance at its discretion and, largely based on that determination, held that none of Lass's claims survived. On appeal, Lass challenges the dismissal of four claims: breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and breach of fiduciary duty.*fn8 She asserts that the mortgage and Notification, in combination, at least created an ambiguity concerning the Bank's authority to demand greater coverage and, consequently, none of the claims should have been resolved at the motion-to-dismiss stage.
We review a district court's decision on a motion to dismiss de novo. Roman-Oliveras, 655 F.3d at 47. In so doing, we accept the facts as set forth in the amended complaint and draw all reasonable inferences in the plaintiff's favor. Cunningham v. Nat'l City Bank, 588 F.3d 49, 51 (1st Cir. 2009). We also may consider documents incorporated by reference in the complaint, including the mortgage agreement and the Notification at issue here, as well as matters appropriate for judicial notice. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007); Giragosian v. Ryan, 547 F.3d 59, 65 (1st Cir. 2008).
Lass's breach-of-contract claim depends on whether the amount of flood insurance required at the time of the closing -- the amount of Lass's loan -- was subject to change by the lender. In arguing that the amount was fixed for the duration of the loan, Lass points to the statement in the Notification that the insurance required at the time of the closing "will be mandatory until the loan is paid in full." The Bank, however, relies on Paragraph 5's statement that flood insurance "shall be maintained in the amounts and for the periods that Lender requires" in arguing that it had the discretion to demand more insurance when, and if, it deemed such an increase to be appropriate. The Bank asserts that the Notification -- to the extent it is considered part of the mortgage "contract" -- merely states that Lass must maintain the statutory minimum amount of insurance for the duration of the loan, and does not promise that the Bank will never exercise its discretion to increase the insurance obligation. Lass's fallback position is that the documents are at least susceptible to both interpretations and, hence, ambiguous. The district court agreed with the Bank, concluding that "[t]he notification can easily be read in conjunction with the mortgage[,] which gives the lender the discretion to set the required amount of flood insurance."
Thus, as in Kolbe, the question before us is whether the district court correctly concluded that the plaintiff's mortgage agreement unambiguously gives the lender the discretion to demand an increase in flood insurance to an amount above the borrower's initial obligation. Whether a contract is ambiguous is a question of law in Massachusetts. Bukuras v. Mueller Group, LLC, 592 F.3d 255, 261-62 (1st Cir. 2010) (citing Basis Tech. Corp. v. Amazon.com, Inc., 878 N.E.2d 952, 958-59 (Mass. App. Ct. 2008)). Language is ambiguous "only if it is susceptible of more than one meaning and reasonably intelligent persons would differ as to which meaning is the proper one." Gemini Investors Inc. v. AmeriPark, Inc., 643 F.3d 43, 52 (1st Cir. 2011) (quoting Citation Ins. Co. v. Gomez, 688 N.E.2d 951, 953 (Mass. 1998)) (internal quotation mark omitted). In considering whether a contract is ambiguous, we read the agreement "in a reasonable and practical way, consistent with its language, background, and purpose." Bukuras, 592 F.3d at 262 (quoting Cady v. Marcella, 729 N.E.2d 1125, 1130 (Mass. App. Ct. 2000)).
Lass argues that the Notification is part of the contract and should be considered along with Paragraph 5. The district court acknowledged that the supplemental document "appears to be part of the mortgage contract, similar to a rider, although it is not listed in the mortgage as an incorporated rider." The Bank disagrees, asserting that the Notification should not be considered part of the mortgage because it does not expressly bind both parties and requires only the borrower's signature. Moreover, the Bank argues that the Notification "cannot be used to create ambiguity in the interpretation of paragraph 5," noting that "when reading distinct but related documents that concern the same transaction . . . [construing such documents as one contract] applies primarily in cases of uncertainty and cannot undo plain language which makes perfect sense in context." Appellee's Brief at 26-27 (quoting Happ v. Corning, Inc., 466 F.3d 41, 46 (1st Cir. 2006)).
The Bank's argument is unpersuasive. Paragraph 5 of the mortgage gives the lender the discretion to fix the amount of flood insurance, and the Notification was an essential part of the transaction because it represented the exercise of that discretion at the outset of the mortgage period. In effect, the Notification completed the contract between the parties by specifying that, by the time of the closing, Lass was obliged to obtain the amount of flood insurance required by federal law, and no more. We thus see no reason to depart from the well established principle that, when the circumstances are appropriate, "instruments deriving from a given transaction shall be read together." Gilmore v. Century Bank & Trust Co., 477 N.E.2d 1069, 1073 (Mass. App. Ct. 1985) (noting also that, in addition to "the formal factors that connect the two agreements, . . . we lay stress on the sense of the thing"); see also In re Olympic Mills Corp., 477 F.3d 1, 14 (1st Cir. 2007) (noting that, without evidence of a contrary intention, "instruments executed at the same time, by the same contracting parties, for the same purpose, and in the course of the same transaction will be considered and construed together as one contract or instrument" (quoting 11 Richard A. Lord, Williston on ...