Kolbe v. BAC Home Loans Servicing, LP

United States Court of Appeals
For the First Circuit

No. 11-2030

STANLEY KOLBE,

Plaintiff, Appellant,

v.

BAC HOME LOANS SERVICING, LP, d/b/a BANK OF AMERICA, N.A.;
BALBOA INSURANCE COMPANY,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Nathaniel M. Gorton, U.S. District Judge]

Before
Lynch, Chief Judge,
Torruella, Lipez, Howard, Thompson, and Kayatta,
Circuit Judges.

Edward F. Haber, with whom Todd S. Heyman, Adam M. Stewart,
Michelle H. Blauner, and Shapiro Haber & Urmy LLP were on brief,
for appellant.
John C. Englander, with whom Matthew G. Lindenbaum, Dennis
D'Angelo, William M. Jay, and Goodwin Procter LLP were on brief,
for appellees.
Mark R. Freeman, Appellate Staff Attorney, United States
Department of Justice, with whom Nancy D. Christopher, Associate
General Counsel for Litigation, William C. Lane, Assistant General
Counsel for Insured Housing and Community Development Litigation,
Bruce S. Albright, Senior Trial Attorney, U.S. Department of
Housing and Urban Affairs, Stuart F. Delery, Principal Deputy
Assistant, Attorney General, Carmen M. Ortiz, United States
Attorney, Michael S. Raab, Appellate Staff Attorney, United States
Department of Justice, were on brief, for the United States amicus
curiae.
 Frank G. Burt, Denise A. Fee and Jorden Burt LLP on brief for
Property Casualty Insurers Association of America's amicus curiae.
Elizabeth J. Cabraser, Kelly M. Dermody, Daniel M. Hutchinson,
Lisa J. Cisneros, Lief Carbraser Heimann & Bernstein LLP, on brief
for National Consumer Law Center and AARP amici curiae.
Stuart T. Rossman on brief for National Consumer Law Center
amicus curiae.
Jean Constantine-Davis and AARP Foundation Litigation on brief
for AARP amicus curiae.
Richard L. Neumeier, Morrison Mahoney Miller LLP, Jan T.
Chilton, Michael J. Steiner and Severson & Werson PC on brief for
Mortgage Bankers Association and American Financial Services
Association amici curiae.

Opinion En Banc

September 27, 2013
 The judgment of dismissal entered by the district court

is affirmed by an equally divided en banc court. See Savard v.

Rhode Island, 338 F.3d 23, 25 (1st Cir. 2003) (en banc).

Opinions follow.

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

KAYATTA, Circuit Judge, join. The result of the evenly divided

vote of the en banc court is to affirm the district court's

dismissal of the complaint for failure to state a claim. See

Savard v. Rhode Island, 338 F.3d 23, 25 (1st Cir. 2003) (en banc).

This opinion explains why we think that result is correct and

required by law.

I.

This is a contract dispute over the terms of a mortgage

contract between the borrower, plaintiff-appellant Stanley Kolbe,

and the servicer of his loan, defendant-appellee BAC Home Loans

Servicing, LP ("BAC" or "the Bank"). Kolbe sued the Bank in a

putative class action for damages alleged to have arisen out of the

Bank's requirement that he maintain flood insurance in an amount

sufficient to cover the replacement value of his home. Kolbe

contends that the Bank, under Covenant 4 of his mortgage contract,

cannot require more than the federally mandated minimum flood

insurance, which is the lesser of the principal balance of the loan

or $250,000 in special flood hazard areas, and $0 in all other

areas. The mortgage is insured by the Federal Housing

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Administration ("FHA"), and Covenant 4 is a standard uniform

covenant prescribed by the FHA pursuant to federal law. See 24

C.F.R. § 203.17 (2012); Requirements for Single Family Mortgage

Instruments, 54 Fed. Reg. 27,596, 27,603-07 (June 29, 1989)

(hereinafter "Mortgage Requirements"). The Covenant was

promulgated after notice and comment rulemaking.

We conclude that Kolbe has failed to state a claim for

breach of contract. Three interrelated strands of reasoning

support our conclusion. The first is straightforward application

of the typical principles of contract interpretation. When

interpreting a written contract, we look at text, context, and

purpose to discover whether a proffered reading of the contract is

reasonable. For contract language mandated by a federal

regulation, this context includes the regulation and the federal

policy underlying the regulatory scheme. As a purely textual

matter, the Bank offers the most natural reading of the disputed

language. Yet even if an argument exists that Kolbe's textual

reading is plausible, context confirms that the Bank's reading is

correct and Kolbe's reading is incorrect. As we will describe,

particularly under our third strand of reasoning, Kolbe's reading

would hinder federal housing policy and conflict with other

guidance from the federal government regarding flood insurance.

Interpreting the text in context, as we would do with any contract,

we conclude that the Bank's reading is correct.

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 Second, we apply special principles for interpreting

uniform contract language. Covenant 4 is a uniform clause used in

millions of mortgages nationwide by many different lenders, so we

give it one uniform meaning rather than multiple inconsistent

meanings. Extrinsic evidence of the parties' unique intentions

regarding a uniform clause is generally uninformative because

unlike individually tailored contracts, uniform clauses do not

derive from the negotiations of the specific parties to a contract.

Instead, courts seek to determine the uniform meaning of the clause

as a matter of law, a task appropriate for the motion to dismiss

stage. Kolbe cannot avoid dismissal on the grounds that his

specific understanding or the actions of the parties create an

ambiguity.

Third, the fact that the Covenant was drafted and

mandated by the United States requires that its meaning be that

meant by the United States when it drafted the regulation. The

role that the Covenant plays in an important regulatory scheme

requires that result. The language of the Covenant was not drafted

or negotiated by the parties and was not the result of give-and-

take in the marketplace. Rather, it was created and mandated in

order to further important federal policies. While on the

Covenant's plain language and context, we think the meaning is

clear, were there doubt, we would defer to the position articulated

to us by the United States in its amicus brief; in this case, the

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United States' position reinforces our conclusion reached in

applying the first two principles.

In its amicus brief to the en banc court, the United

States has stated that Kolbe's interpretation is incorrect for a

number of reasons, including that it "lacks any anchor in the

statutory scheme." Brief for the United States as Amicus Curiae

Supporting Appellees at 2, Kolbe v. BAC Home Loans Servicing, LP,

No. 11-2030 [hereinafter "United States Brief"]. Further, the

United States says that Kolbe's interpretation "serves no practical

end, and . . . would seriously undermine federal housing policy."

Id. The United States' position as set forth in the brief is

entitled to deference; it is well-reasoned and is entirely

consistent with its prior interpretations of the clause expressed

in various federal publications.

This is an issue for judges to decide. The law does not

allow a jury to decide that federal policy is otherwise, or that

the contract language required by the United States does not have

the eminently reasonable meaning urged by the United States,

consistent with the policies that brought about the Covenant in the

first instance.

As we will discuss, Kolbe has also failed to state a

claim for breach of the covenant of good faith and fair dealing.

The district court correctly dismissed all of Kolbe's claims.

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 II.

Kolbe owns a home in Atlantic City, New Jersey in a

special flood hazard area. On October 6, 2008, he borrowed

$197,437 from Taylor, Bean & Whitaker Mortgage Corp. ("Taylor

Bean") in a mortgage loan secured by his home. The loan was

guaranteed by the FHA, a part of the Department of Housing and

Urban Development ("HUD").

The mortgage agreement contained a set of Uniform

Covenants that are required by HUD regulations to be in every FHA-

insured mortgage.1 One of the Uniform Covenants included in the

mortgage is the following provision, which is at issue:

4. Fire, Flood and Other Hazard Insurance.
Borrower shall insure all improvements on the
Property, whether now in existence or
subsequently erected, against any hazards,
casualties, and contingencies, including fire,
for which Lender requires insurance. This
insurance shall be maintained in the amounts
and for the periods that Lender requires.
Borrower shall also insure all improvements on
the Property, whether now in existence or
subsequently erected, against loss by floods
to the extent required by the Secretary.

The "Secretary" referred to in Covenant 4 is the Secretary of HUD.

This case presents the issue of whether the amount of flood

insurance required by HUD is a floor or a ceiling.

1
See 24 C.F.R. § 203.17 (requiring an FHA-insured mortgage to
"be in a form meeting the requirements of the Commissioner");
Requirements for Single Family Mortgage Instruments, 54 Fed. Reg.
27,596, 27,603-07 (June 29, 1989) (FHA model mortgage form).

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 Kolbe's home is in an area designated by the Federal

Emergency Management Agency ("FEMA") as having "special flood

hazards," and as such HUD required (and still requires) that flood

insurance must be maintained in "an amount at least equal to either

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

of the NFIP insurance available with respect to the property

improvements, whichever is less." 24 C.F.R. § 203.16a(c) (emphasis

added).2 The original mortgage holder, Taylor Bean, never required

Kolbe to maintain greater flood insurance than the minimum

federally required amount, and at all times, Kolbe maintained flood

insurance in excess of the outstanding loan balance.

Taylor Bean declared bankruptcy and ceased operations in

August 2009. At some point, the Bank became the servicer of

Kolbe's loan.3 In November 2009, the Bank sent Kolbe a letter

notifying him that it was requiring him to purchase an additional

$46,000 in flood insurance coverage; the Bank has asserted, and

Kolbe has not disputed, that this additional insurance would bring

Kolbe's total flood insurance coverage to the replacement cost of

2
At all relevant times, the maximum amount of NFIP insurance
available for a single family home in a special flood hazard area
was $250,000. See 42 U.S.C. § 4013(b)(2). Because the balance of
Kolbe's loan was always less than $250,000, the minimum amount of
flood insurance required by HUD was always the principal balance of
Kolbe's loan.
3
BAC Home Loans Servicing was a wholly owned subsidiary of
Bank of America, N.A., which itself is a wholly owned subsidiary of
Bank of America Corporation, the publicly traded company. BAC Home
Loans Servicing has merged into Bank of America, N.A.

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the property. Kolbe alleges that the Bank had a nationwide policy

of requiring flood insurance at a level that often exceeds the

principal balance of the loan.

The letter notified Kolbe that if he did not purchase the

required flood insurance within about six weeks, the Bank would

purchase the insurance at his expense and charge him for the cost,

a practice known as "lender-placed insurance"; the letter urged

Kolbe to avoid lender-placed insurance by purchasing his own

insurance. A second letter reiterated the requirement. Kolbe

purchased the insurance on his own; thus the Bank never had to

purchase lender-placed insurance on his behalf.

III.

On February 23, 2011, Kolbe filed a class action

complaint in the district court against the Bank alleging it

breached the mortgage contract and violated the implied covenant of

good faith and fair dealing by requiring the additional flood

insurance. The first count of Kolbe's complaint alleged breach of

Covenant 4 of the mortgage contract. Under Kolbe's theory, the

Covenant precluded the Bank from requiring Kolbe to maintain any

flood insurance in excess of the amount required by the Secretary

of HUD, which in Kolbe's case was the principal balance of the

loan. See 24 C.F.R. § 203.16a(c). The second count alleged a

breach of the implied covenant of good faith and fair dealing.

This count alleged that "[b]y requiring Plaintiff . . . to maintain

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and pay for flood insurance coverage in excess of the coverage

required by [his] mortgage agreement[], Defendants acted in bad

faith and breached the implied covenant of good faith and fair

dealing . . . ." Kolbe sought to represent a putative class of all

other borrowers with similar mortgages owned or serviced by the

Bank who were required to purchase flood insurance above the amount

of the outstanding balance of their loans.4 Kolbe also sought a

jury trial as to all claims.

On August 18, 2011, the district court granted the Bank's

motion to dismiss all claims. The court concluded that the first

two sentences in Covenant 4, which allowed the Bank to require

insurance for "any hazards . . . in the amounts and for the periods

that Lender requires," unambiguously gave the Bank the right to

choose the amount of flood insurance it required. Kolbe v. BAC

Home Loans Servicing, L.P., No. 11-10312-NMG, 2011 WL 3665394, at

*3-5 (D. Mass. Aug. 18, 2011). The district court also dismissed

the count for breach of the covenant of good faith and fair dealing

because it concluded that the Bank's flood insurance requirement

was based on FEMA policy guidelines and was not unreasonable. Id.

at *5.

4
The complaint also named as a defendant Balboa Insurance
Company ("Balboa"), a subsidiary of the Bank. Kolbe alleged that
Balboa prepared and sent the letters requiring the additional flood
insurance. The district court dismissed all claims against Balboa,
but Kolbe did not press the claims against Balboa in its briefing
related to the rehearing en banc, so those claims are not at issue.

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 Kolbe appealed, and a divided panel of the First Circuit

vacated the dismissal. See Kolbe v. BAC Home Loans Servicing, LP,

695 F.3d 111, 113-14 (1st Cir. 2012). The panel majority held that

both Kolbe's interpretation and the Bank's interpretation of the

contract could be found reasonable by a trier of fact, and

therefore that the district court erred in dismissing the breach of

contract claim. Id. at 122. The panel majority also held that the

breach of good faith claim could go forward either on the theory

that the Bank intentionally breached the contract, or that the Bank

demanded greater insurance based on the improper motivation of

potential profit from placement of lender-placed insurance with

affiliated companies. Id. at 123-24. Judge Boudin dissented,

arguing that the contract and federal policy plainly allowed the

Bank to require more flood insurance and there was no independent

claim under the implied covenant. Id. at 126-29 (Boudin, J.,

dissenting). We granted rehearing en banc, and vacated the panel's

decision. Order, Kolbe v. BAC Home Loans Servicing, LP, No. 11-

2030 (1st Cir. Nov. 1, 2012).5

5
This case "involves a question of exceptional importance."
1st Cir. R. 35(a)(2). The disputed provision appears in each of
the nearly 7.8 million FHA-insured mortgages nationwide. Many
class action lawsuits presenting precisely the same issue as this
case have been filed in federal district courts throughout the
country, producing a set of sharply conflicting district court
opinions. Moreover, this case bears on the intersection between
two complex statutory and regulatory schemes: the FHA mortgage
insurance program meant to promote home ownership, and the National
Flood Insurance Program ("NFIP") meant to facilitate flood
insurance.

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 IV.

To interpret Kolbe's mortgage agreement, we start with

the legal rules applicable to the construction of this particular

contract language.

Contract Interpretation in Light of Context and Purpose

In all contracts, courts must construe contract language

in light of the purposes the language was meant to achieve, and in

the context of the relevant commercial or regulatory schemes within

which the contract is situated. See Simonson v. Z Cranbury Assocs.

P'ship, 695 A.2d 222, 224 (N.J. 1997) ("[A] contract should not be

construed literally so as to defeat the probable intention of the

parties; rather, particular words or clauses may be qualified by

the context and given the meaning that comports with the probable

intention." (internal quotation marks and citation omitted));

OneBeacon Ins. Co. v. Georgia-Pacific Corp., 474 F.3d 6, 7 (1st

Cir. 2007) ("The issue being one of contract interpretation, we

look to language and other common indicia (e.g., context, inferred

purpose)."); Restatement (Second) of Contracts § 202 cmt. b ("The

meaning of words . . . commonly depends on their context. . . .

When the parties have adopted a writing as a final expression of

their agreement, interpretation is directed to the meaning of that

writing in the light of the circumstances."). In particular,

contract language must be interpreted in the context of applicable

statutes and regulations. See 5 Corbin on Contracts § 24.26, at

-12-
271 (rev. ed. 1998) ("Words and other symbols must always be

interpreted in the light of the surrounding circumstances, and the

existing statutes and rules of law are always among these

circumstances.").

The typical principles of contract interpretation are

supplemented by two additional sets of rules of contract

construction particularly relevant to Covenant 4: those for

construction of uniform clauses, and those for construction of

contract language drafted by the United States and required by

federal law to be in the contract. Although these principles are

applications of the general rule that contracts are interpreted in

light of context, the methodology varies somewhat from that used

when interpreting a contract with unique language negotiated by the

two parties.6

6
When two parties draft a contract with language specific to
their transaction, the relevant expectations to assess are those of
the individual parties to the contract, but even those must be
assessed against background and purpose. If there is true
ambiguity even against a background which informs the meaning of
the language, courts will look to extrinsic evidence of the
parties' manifest intentions and expectations to discern the
contract's meaning. It is the court that decides whether such
ambiguity is present. As a corollary to this principle, when an
individually tailored contract is ambiguous, it is inappropriate
for a court to resolve a contract dispute on the pleadings, because
the outcome will depend on extrinsic evidence that will surface at
discovery or at trial. See, e.g., C.A. Acquisition Newco, LLC v.
DHL Exp. (USA), Inc., 696 F.3d 109, 113 (1st Cir. 2012).

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Uniform Clauses

When a contract uses uniform language that is contained

in a large number of contracts, as is the case here, it is a well-

established common law principle of contract interpretation that

such contracts are "interpreted wherever reasonable as treating

alike all those similarly situated, without regard to their

knowledge or understanding of the standard terms of the writing."

Restatement (Second) of Contracts § 211(2). A variety of state and

federal courts have acknowledged this principle.7

Because uniform contracts are interpreted uniformly

across cases whenever it is reasonable to do so, extrinsic evidence

about what a particular party intended or expected when signing the

contract is generally irrelevant. See, e.g., Sharon Steel Corp. v.

Chase Manhattan Bank, N.A., 691 F.2d 1039, 1048 (2d Cir. 1982)

("Boilerplate provisions are thus not the consequence of the

relationship of particular borrowers and lenders and do not depend

upon particularized intentions of the parties to an indenture.

There are no adjudicative facts relating to the parties to the

litigation for a jury to find and the meaning of boilerplate

7
See, e.g., Vedachalam v. Tata Consultancy Servs., Ltd., 18
Wage & Hour Cas. 2d (BNA) 1677, 2012 WL 1110004, at *9 (N.D. Cal.
Apr. 2, 2012); Peoples v. Sebring Capital Corp., 52 Fed. R. Serv.
3d 197, 2002 WL 406979, at *8 (N.D. Ill. Mar. 15, 2002); Fireman's
Fund Ins. Cos. v. Ex-Cell-O Corp., 702 F. Supp. 1317, 1326 (E.D.
Mich. 1988); Anderson v. Douglas & Lomason Co., 540 N.W. 2d 277,
284-85 (Iowa 1995); Kinoshita v. Canadian Pac. Airlines, Ltd., 724
P.2d 110, 117 (Haw. 1986); Carpenter v. Suffolk Franklin Savings
Bank, 346 N.E.2d 892, 897 (Mass. 1976).

-14-
provisions is, therefore, a matter of law rather than fact."); 2

Farnsworth, Farnsworth on Contracts, § 7.11, at 304-05 (3d ed.

2004) ("This rule plainly subordinates the meaning that an

individual party may have attached to the contract language to the

goal of equality of treatment for parties that are similarly

situated.").

The issue of interpreting form contract language

frequently arises in the context of class action certification.8

Several federal courts have certified classes for contract disputes

over form contracts because the form contracts are interpreted

uniformly across members of the class, and thus the outcome does

not depend on extrinsic evidence that would be different for each

putative class member. See, e.g., Vedachalam v. Tata Consultancy

Servs., Ltd., 18 Wage & Hour Cas. 2d (BNA) 1677, 2012 WL 1110004,

at *9 (N.D. Cal. Apr. 2, 2012) ("[I]n construing the form contract

between Defendants and class members, the Court need not delve into

the actual knowledge of individual class members."); Peoples v.

Sebring Capital Corp., 52 Fed. R. Serv. 3d 197, 2002 WL 406979, at

*8 (N.D. Ill. Mar. 15, 2002) ("The court also rejects the broader

8
In federal court, requirements for a class action include
commonality of legal or factual questions, that the class
representative's claims and defenses be typical of those of the
class, and (for one category of class actions) that common
questions predominate over questions affecting only individual
members. Fed. R. Civ. P. 23(a)(2)-(3), (b)(3).

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notion that it will generally have to examine the parties' intent

on a transaction-by-transaction basis.").

It is undisputed that Covenant 4 is a Uniform Covenant

required by HUD for all FHA-insured mortgages, according to a

regulation that went into effect after notice and comment.

Requirements for Single Family Mortgage Instruments, 53 Fed. Reg.

25,434 (July 6, 1988); see also Mortgage Requirements, 54 Fed. Reg.

at 27,596 (final notice issued after receiving comments). In

essence, HUD's regulation requires that every FHA-insured mortgage

contain a core of Uniform Covenants, while allowing the parties to

an individual mortgage to add non-uniform covenants at the end of

the contract. For example, Kolbe's mortgage contains about four

pages of Uniform Covenants and one page of non-uniform covenants.

That Kolbe's mortgage contract contains uniform HUD

covenants is apparent on its face. After information about the

address and location of Kolbe's home, the third paragraph states,

"THIS SECURITY INSTRUMENT combines uniform covenants for national

use and non-uniform covenants with limited variations by

jurisdiction to constitute a uniform security instrument covering

real property." The mortgage then reads, "UNIFORM COVENANTS.

Borrower and Lender covenant and agree as follows." Following this

heading are sixteen numbered covenants, including the disputed

Covenant 4 and Covenant 7, which also has significance to this

case. These Uniform Covenants form the heart of the mortgage

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contract, covering such topics as principal and interest payments,

insurance and taxes, care of the property, grounds for acceleration

of debt, and the liability of co-signers.

After the Uniform Covenants, the mortgage reads, "NON-

UNIFORM COVENANTS. Borrower and Lender further covenant and agree

as follows." The mortgage then includes five non-uniform

covenants. The bottom left corner of every page of the contract

contains the label in capital, boldface type: "NEW JERSEY FHA

MORTGAGE." Upon reading the mortgage, it would have been clear to

Kolbe or any reasonable person that the mortgage contained

nationwide Uniform Covenants, including Covenant 4. It also would

have been clear that this was an FHA mortgage, such that federal

policy and regulatory pronouncements would be relevant to its

interpretation.

Language Drafted By The Government

When dealing with uniform contract language imposed by

the United States, it is the meaning of the United States that

controls. In interpreting such a government mandated term, a

court's assessment of context and purpose is informed by the

traditional tools of legislative and regulatory construction. This

is a matter of law to be determined by a court. When the United

States mandates that private parties use uniform language for a

certain type of contract, the United States is enacting a policy

that all parties to that type of contract should be subject to

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identical obligations. Those obligations are the ones the United

States intended them to be, as determined by a court, regardless of

the personal interpretation offered by a party.9 If such contracts

were subjected to different meanings depending merely on whether a

particular party's interpretation was plausible, it would not only

undermine the efficiency benefits of standardization, but it would

also undermine the federal policy that motivated the United States

to impose uniform contractual obligations on parties in the first

place. This case demonstrates the necessity of these principles.

The disputed contract language is a Uniform Covenant required by

9
Moreover, any concern that uniform contract language will be
used by a powerful party such as a bank to force undesirable terms
on a less powerful party such as a homeowner is lessened where the
language is imposed on both the bank and the homeowner by a third
party, the United States.
Under the doctrine of "contra proferentem," ambiguities in a
contract drafted by one party will be interpreted against the
drafting party; the "rationale behind that method of interpretation
is that '[w]here one party chooses the term of a contract, he is
likely to provide more carefully for the protection of his own
interests than for those of the other party.'" Pacifico v.
Pacifico, 920 A.2d 73, 78 (N.J. 2007) (quoting 5 Corbin on
Contracts § 24.27); see also Restatement (Second) of Contracts
§ 206. A corollary of this doctrine is that insurance policies are
interpreted against the insurer and in line with the "reasonable
expectations" of the insured, since the insurer typically drafts
the policy. See Haber v. St. Paul Guardian Ins. Co., 137 F.3d 691,
697 (2d Cir. 1998); Villa v. Short, 947 A.2d 1217, 1226 (N.J.
2008).
When the government mandates the specific contract language,
neither party can directly impact the language through superior
bargaining power. Thus, "[t]he rule that language is interpreted
against the party who chose it has no direct application to cases
where the language is prescribed by law." Restatement (Second) of
Contracts § 206, cmt. b; accord Lass v. Bank of Am., N.A., 695 F.3d
129, 137 (1st Cir. 2012).

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federal law for the nearly 7.8 million FHA-insured mortgages

nationwide;10 we therefore seek to find, to the extent reasonable,

one uniform meaning, rather than separate meanings that might vary

from lender to lender, or even from borrower to borrower.

As one commentator puts it, "if the specified provision

is expressly included in the contract in the exact terms required,

the provision must be interpreted and given effect in accordance

with the intention of the legislature, regardless of what the

contracting parties may have understood it to mean." 5 Corbin on

Contracts § 24.26, at 278.

Numerous federal and state courts, including the Supreme

Court, have affirmed these principles. In Illinois Steel Co. v.

Baltimore & Ohio Railroad Co., 320 U.S. 508 (1944), the Supreme

Court adjudicated a contract dispute involving a uniform bill of

lading that had been imposed by the Interstate Commerce Commission.

The Supreme Court noted that "[s]ince the clauses of the uniform

bill of lading govern the rights of the parties to an interstate

shipment and are prescribed by Congress and the Commission in the

exercise of the commerce power, they have the force of federal law

and questions as to their meaning arise under the laws and

Constitution of the United States." Id. at 511. The Supreme Court

10
Office of Risk Analysis and Regulatory Affairs, Federal
Housing Administration, Monthly Report to the FHA Commissioner on
FHA Business Activity, FHA Portfolios Summary (January 2013),
available at http://portal.hud.gov/hudportal/documents/ huddoc?id=jan13.pdf.

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then approached the issue as a question of regulatory construction,

and decided the purpose and effect of the clause itself. See id.

at 513-16.

Similarly, in Honeywell, Inc. v. United States, 661 F.2d

182 (Ct. Cl. 1981), the Court of Claims (the predecessor to the

Federal Circuit) construed a federal procurement regulation that

had been incorporated into a government contract. The court held

that under the rules for "regulation interpretation," the agency's

interpretation received "controlling weight"; the court rejected

the notion that it should "construe[] [the language] in order to

give it the effect intended by both parties." Id. at 186. See

also Saavedra v. Donovan, 700 F.2d 496, 499 (9th Cir. 1983) (noting

that when a federal regulation mandated contract terms, the

contractual party "had a legal duty to conform to the actual wage

determination, not just a contractual duty to conform to plausible

interpretations of contract provisions embodying the wage

determination"); Lloyd v. Cincinnati Checker Cab Co., 36 N.E.2d 67,

69 (Ohio App. 1941) ("[S]uch statutory provisions [required to be

in the contract] are read into the bond or contract 'regardless of

the intention of the parties.' The liability thus created is

obviously, therefore, not a contractual liability involving a

meeting of the minds, but a purely statutory obligation.").

These principles have also been adopted in New Jersey.

See above, note 6. In Paul Revere Life Insurance Co. v. Haas, 644

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A.2d 1098 (N.J. 1994), the Supreme Court of New Jersey interpreted

an insurance contract with a provision required by state statute.

The court rejected an argument that it should consider the

understanding of the insured in interpreting the required

provision; rather, the court stated, "A specific provision

integrated into the contract by force of a statute, as a matter of

public policy, must be interpreted and given effect in accordance

with the intention of the legislature, irrespective of how the

contractors understood it." Id. at 1106 (quoting Saffore v. Atl.

Cas. Ins. Co., 121 A.2d 543, 548 (N.J. 1956) (quoting 3 Corbin on

Contracts § 551, at 200-01 (1960))) (internal quotation marks

omitted). Although Hass dealt with a state statute, there is no

reason the same principle would not apply with full force to a

provision required by a federal regulation.

This court therefore must examine the text of the

Covenant in light of the purposes for which the United States

imposed the language and the context of the relevant regulatory

scheme. This is in keeping with the basic common law principle

that contract language should be interpreted in light of purposes

and context, applied to the particular circumstance of uniform

contract language imposed by the United States.

Such an inquiry is appropriate for the motion to dismiss

stage because interpreting regulatory text in light of government

purposes is a matter of law that is emphatically the province of

-21-
judges, not juries. See Northshore Min. Co. v. Sec'y of Labor, 709

F.3d 706, 708 (8th Cir. 2013) ("This dispute involves the

interpretation of MSHA regulations, a matter of law that we review

de novo."); Marine Polymer Techs., Inc. v. HemCon, Inc., 672 F.3d

1350, 1358 (Fed. Cir. 2012) ("Statutory interpretation is a matter

of law that we consider de novo."); cf. Marbury v. Madison, 5 U.S.

(1 Cranch) 137, 177 (1803) ("It is emphatically the province and

duty of the judicial department to say what the law is.");

Diederich v. American News Co., 128 F.2d 144, 146 (10th Cir. 1942)

("The power of the judge to pass upon questions of law is just as

much an essential part of the process of trial by jury . . . as is

the power of the jury to pass upon questions of fact.").

V.

With these principles in mind, we turn to the Covenant at

issue. In performing our task of determining the uniform meaning

of the Covenant as a matter of law, we first examine the text in

light of its context, then look to the United States'

interpretation. We repeat the language of Covenant 4 for

convenience, dividing it into its three sentences:

4. Fire, Flood and Other Hazard Insurance.
(1) Borrower shall insure all improvements on
the Property, whether now in existence or
subsequently erected, against any hazards,
casualties, and contingencies, including fire,
for which Lender requires insurance. (2) This
insurance shall be maintained in the amounts
and for the periods that Lender requires. (3)
Borrower shall also insure all improvements on
the Property, whether now in existence or

-22-
 subsequently erected, against loss by floods
to the extent required by the Secretary [of
HUD].

The Bank argues that in allowing the lender to require its chosen

amount of insurance for "any hazards," the first two sentences

clearly give the Bank the authority to choose the required amount

of flood insurance.11 Kolbe argues that the only provision

addressing flood insurance in Covenant 4 is the third sentence, and

thus the Bank could not require more flood insurance than the

amount required by HUD, which (in Kolbe's case) was the principal

loan balance.

We agree with the contract interpretation offered by

Judge Boudin in his panel dissent. We adopt and incorporate Judge

Boudin's reasoning and expand. See Kolbe, 695 F.3d at 127-29

(Boudin, J., dissenting). The Bank offers the only plausible

reading of the uniform text, against the context. As we discuss

later, this reading is confirmed by the intent of the United

11
The language of Covenant 4 grants authority to the lender;
the Bank is the servicer of Kolbe's loan, and the identity of the
lender is unknown. That distinction does not matter.
"[T]ypically, a mortgage servicer acts as the agent of the
mortgagee to effect collection of payments on the mortgage loan."
R.G. Fin. Corp. v. Vergara-Nuñez, 446 F.3d 178, 187 (1st Cir.
2006). In addition, a HUD regulation states that "the actions of
[a mortgagee's] servicer shall be considered to be the actions of
the mortgagee." 24 C.F.R. § 203.502(a). In the absence of any
contrary allegations in the complaint, we will presume that as
servicer, the Bank was acting as the lender's agent with the
lender's full authority. Indeed, if the Bank were not the lender's
agent, the breach of contract claim against the Bank would clearly
fail because the lender and not the Bank is a formal party to the
contract.

-23-
States. Simply put, the first two sentences allow the Bank to

choose the amount of insurance for “any hazards,” and that includes

flood insurance because floods are hazards. Dictionary definitions

confirm the common understanding that floods are hazards,12 and even

the panel majority acknowledged that "[f]loods unquestionably are

a type of hazard, and they are thus literally within the scope of

the first sentence." Kolbe, 695 F.3d at 117 (majority opinion).

Although the third sentence also addresses flood

insurance, it adds an independent requirement: that the borrower

maintain HUD's minimum level of flood insurance in addition to the

lender's minimum. Because both HUD's and the lender's flood

insurance requirements are minimum requirements, they are perfectly

consistent, and the borrower can meet both requirements by

maintaining flood insurance in the amount of the higher

requirement. Contrary to Kolbe's arguments, there is no need to

read the first two sentences to exclude floods in order to avoid

12
Webster's Third New International Dictionary 1041 (2002)
(defining "hazard" as "a thing or condition that might operate
against success or safety: a possible source of peril, danger,
duress, or difficulty"); The American Heritage Dictionary of the
English Language 806 (4th ed. 2000) (defining "hazard" as "a
possible source of danger"); The Random House Dictionary of the
English Language 878 (2d ed. unabridged 1987) (defining hazard as
"an unavoidable danger or risk, even though often foreseeable");
Black's Law Dictionary 786, 1253 (Bryan A Garner ed., 9th ed. 2009)
(defining "hazard" as "[d]anger or peril; esp., a contributing
factor to a peril," and defining peril as "Insurance. The cause of
a risk of loss to person or property; esp., the cause of risk such
as fire, accident, theft, forgery, earthquake, flood, or illness"
(emphasis added)).

-24-
making any provision superfluous, or to resolve a conflict between

a specific provision and a general provision under principles of

contract interpretation.13

The Bank's interpretation is also more consistent with

another covenant of the contract, Covenant 7, as we explain in

another section below. This Covenant empowers the lender to

purchase insurance to "protect the value of the Property,"

suggesting that the lender's economic interests are not limited to

the principal balance of the loan.

Kolbe also argues that the title of Covenant 4--"Fire,

Flood and Other Hazard Insurance"--supports his reading. Kolbe

argues that the title signifies that the paragraph deals separately

with fire insurance and flood insurance. Because the first

sentence refers to "hazards . . . including fire," but does not

mention floods, while the third sentence singles out flood

insurance, Kolbe concludes that only the first sentence deals with

13
According to a canon of contract interpretation, a specific
provision will sometimes control the meaning of a more general
provision on the same subject. This is a useful rule of thumb
where two clauses conflict, because in that circumstance it will be
necessary to disregard one provision or the other. See 2
Farnsworth on Contracts § 7.11, at 297 ("If, however, two
provisions in a contract so clearly conflict that both cannot be
given full effect, it is assumed that the more specific the
provision, the more likely it is to reflect the parties'
intention."). Yet when two provisions are consistent, disregarding
the more general provision is not necessary to resolve a conflict,
and in fact would fail to give full effect to each provision.

-25-
fire insurance and only the third sentence deals with flood

insurance.

This argument is a non sequitur. The first sentence

covers "any hazards, . . . including fire" (emphasis added). In

the context of a sentence covering "any hazards," the listing of

fire as an example clearly does not imply an exclusion of other

hazards. It would be unnatural and illogical to read "any hazards,

. . . including fire" to mean "all hazards except floods." The

government flood insurance requirement is mentioned separately in

the final sentence to comply with National Flood Insurance Act

(NFIA) and HUD legal requirements regarding flood insurance. See

42 U.S.C. § 4104a(a)(3); 24 C.F.R. § 203.16a(a)(2). The title

merely reflects that flood and fire are two kinds of hazards that

are specifically mentioned in the Covenant. If anything, the

phrasing of the title supports the Bank. By using the phrase

"Other Hazard Insurance" after listing fire and flood, the title

says that both fire and flood are instances of hazards, which leads

to the conclusion that flood insurance is included in the first

sentence.

We conclude that the Bank's reading of the text, is the

only plausible reading in the relevant context.14 For contract

14
Indeed, Kolbe's interpretation would lead to unreasonable
results, such as preventing lenders from requiring any flood
insurance in homes at moderate flood risk, and is contrary to
government policy as we describe below.

-26-
language mandated by a federal regulation that implicates the

federal mortgage insurance and flood insurance programs, this

context includes the broader regulatory schemes and the federal

policy underlying those schemes. In essence, when this covenant is

understood in context against its purposes and federal housing

policy, the only reasonable interpretation of this language is that

offered by the Bank. An examination of the context removes any

claim of ambiguity.

Covenant 4 traces its origins to a HUD regulation that

bears directly on the question at hand. The regulation is titled

"Mortgagor and mortgagee requirement for maintaining flood

insurance." 24 C.F.R. § 203.16a. In pertinent part, that

regulation states that both the mortgagee and the mortgagor must

"obtain and . . . maintain NFIP flood insurance coverage on the

property improvements during such time as the mortgage is insured."

Id. § 203.16a(a)(2). As to the amounts, the regulation states:

"The flood insurance must be maintained such time as the mortgage

is insured in an amount at least equal to either the outstanding

balance of the mortgage, less estimated land costs, or the maximum

amount of the NFIP insurance available with respect to the property

improvements, whichever is less." Id. § 203.16a(c) (Emphasis

added.).

And there is good reason why HUD required lenders and

borrowers to "maintain" flood insurance in "at least" certain

-27-
amounts, and not in "no more" than certain amounts, as Kolbe would

have it. As the United States said at oral argument15:

And there are good reasons for that. The
first is that in a normal case [the] borrower
defaults, the bank forecloses on the property-
-assigns it to HUD and then walks away. And
HUD pays them the insurance proceeds of the
mortgage insurance. Then HUD is responsible
for selling the property and reimburses the
mortgage insurance fund with the proceeds of
the sale. But of course if the house has been
destroyed by a flood--there is nothing for HUD
to sell. And so there is no way to reimburse
the mortgage insurance fund and that is why
HUD regulations have specifically provided
since 1971, that flood damage has to be
repaired by the lender before the property can
be re-conveyed.

In its brief, the United States also explains the

unreasonable consequences that would result from Kolbe's reading.

In response, Kolbe argues that federal policy supports his

interpretation. He also argues that the position of the United

States articulated in the brief is entitled to no deference because

(a) it is stated in an amicus brief, and (b) in his view, it is

inconsistent with the position the United States took earlier.

Before addressing the policy arguments, we provide

background on the relevant regulatory schemes to explain the

arguments and our conclusion.

15
We acknowledge that the panel did not have before it any
explicit articulation of the position of the United States, but the
en banc court now has this articulation.

-28-
Federal Flood Insurance and Housing Policy

Two federal statutory and regulatory schemes factor into

this case: the National Flood Insurance Act ("NFIA") and the FHA's

mortgage insurance program. In 1968, Congress passed the NFIA, 42

U.S.C. §§ 4001-4129, to make flood insurance available and to

promote the use of flood insurance in areas of the country with

flood risk, see id. § 4002(b) (declaration of congressional

purpose). Congress found that floods caused substantial economic

and personal hardships, but that it was not economical for private

insurance companies to provide flood insurance. Id. § 4001(a),(b).

To remedy the situation, Congress authorized a program in which the

United States would partner with private insurance companies to

provide flood insurance. Id. § 4001(b)-(d).

Under the National Flood Insurance Program (NFIP), the

United States makes flood insurance available in states and

communities that agree to participate in the program. 42

U.S.C. § 4012(c). In flood-prone areas (i.e., those deemed "areas

having special flood hazards" by FEMA) where flood insurance is

available, the NFIA requires federally regulated lenders not to

make mortgage loans unless the borrower obtains flood insurance at

least up to the full principal balance of the loan (or in the

maximum amount available, if that is less). Id. § 4012a(b)(1). In

addition, federal financial assistance for homes in special flood

hazard areas is forbidden unless the home is covered by flood

-29-
insurance at least equal to the lesser of the loan balance or the

maximum amount available. Id. § 4012a(a). Although the insurance

is provided by private insurers to the extent possible, id. §

4011(c), the United States supports the program by offering subsidy

payments and reinsurance to the private insurers, id. § 4054, 4055.

The FHA was created in 1935 as a result of the National

Housing Act of 1934, 12 U.S.C. § 1701 et seq.. The FHA promotes

affordable home ownership by providing mortgage insurance to

private lenders, cf. id. § 1709; Mission/U.S. Department of Housing

and Urban Development (HUD), http://portal.hud.gov/

hudportal/HUD?src=/about/mission (last visited May 16, 2013)

(mission statement of HUD to "create strong, sustainable, inclusive

communities and quality affordable homes for all"). If a borrower

defaults on an FHA-insured mortgage, the lender can convey the

mortgage or title to the property to HUD and collect insurance

benefits from the United States to compensate for any losses on the

mortgage. See 12 U.S.C. § 1710. However, if the property has

suffered damage from "fire, flood, earthquake, hurricane, or

tornado," then the lender cannot collect insurance benefits from

the United States unless it has repaired the damage or taken a

deduction from the insurance benefits for the cost of repairing the

damage. 24 C.F.R. § 203.379 (emphasis added). Effectively, this

scheme allocates the risk of most defaults on FHA-insured mortgages

-30-
to the United States, but it allocates the risk of certain hazard

losses (including flood losses) to the lender.

Policy Arguments

Given this background and context, it is not surprising

that the United States is able to confirm that HUD has "never

endorsed such a policy" of construing Covenant 4 as "a federal

ceiling for flood insurance coverage rather than a floor." The

United States explains that Kolbe's reading conflicts with the

overall structure of FHA mortgage insurance. HUD's mortgage

insurance program places the risk of flood and other hazard losses

on the lender, see 24 C.F.R. § 203.379, and so gives the lender the

authority to determine the amount of flood insurance necessary to

protect its investment. As the United States describes, "[t]hat is

the purpose of Paragraph 4: because the lender ultimately bears the

risk of uninsured hazard losses, FHA's standard mortgage contract

allows the lender to specify the types and amounts of all hazard

insurance--including flood insurance--that the borrower must

carry." United States Brief at 15.

In addition, Kolbe's interpretation of Covenant 4 would

lead to anomalous and untoward results. Under Kolbe's reading of

Covenant 4, the only sentence addressing flood insurance is the

third sentence, which obligates the borrower to maintain insurance

in the amount required by the Secretary of HUD. But HUD only

requires flood insurance in special flood hazard areas. Thus,

-31-
under Kolbe's reading, a lender could not require a penny of flood

insurance for homes in moderate flood risk areas. Special flood

hazard areas are defined as areas subject to at least a one percent

chance of flooding in any given year, which equates to a twenty-six

percent chance of flooding over the course of a thirty year

mortgage.16 Homes in moderate flood risk zones, while falling short

of the risk threshold for a special flood hazard area, may

nonetheless face significant flood risk. In fact, over twenty

percent of NFIP flood-insurance claims and about one third of

federal disaster relief payments for flooding are related to

properties outside of special flood hazard areas. National Flood

Insurance Program, Flood Facts, http://www.floodsmart.gov/

floodsmart/pages/flood_facts.jsp. There would be no reason to

forbid the lender from requiring any flood insurance on such homes,

yet allow the lender to require as much insurance as it wishes for

other hazards that are extremely unlikely to occur, such as

earthquakes or tornados in certain parts of the country. Such an

irrational policy objective could not plausibly be attributed to

HUD, and the United States' brief confirms that HUD did not intend

such a result.

The result urged by Kolbe would seriously impair federal

housing policy as articulated by the United States. Kolbe's

16
See 44 C.F.R. § 59.1; National Flood Insurance Program, What
is a Special Flood Hazard Area (SFHA)?, http://www.floodsmart.gov/
floodsmart/pages/faqs/what-is-a-special-flood-hazard-area.jsp.

-32-
interpretation would prevent lenders in some cases from requiring

adequate flood insurance, particularly for homeowners with

mortgages above $250,000 (the maximum federal requirement) or homes

outside of special flood hazard areas, where the United States does

not require any flood insurance. United States Brief at 21-22.

Kolbe's interpretation would not only frustrate HUD policy, but it

"is impossible to reconcile with Congress's objective in the

[NFIA], which was not to prohibit the use of flood insurance in

federally insured housing but to encourage it." Id. at 24. The

United States finds it foreseeable that lenders would react to

Kolbe's interpretation by "declin[ing] to offer FHA-insured loans

in areas facing even marginal flood risks, or charg[ing]

substantially greater interest rates for such loans," thus

hindering affordable home ownership. Id. at 24.

Kolbe and supporting amici posit that federal housing

policy could support their contract reading. These policy

arguments revolve around the fact that a primary purpose of HUD and

the FHA is to promote affordable home ownership. Because flood

insurance can be expensive, a provision limiting the lender's

ability to require flood insurance could reduce one component of

the initial cost of home ownership for FHA borrowers.

This argument that the policy of lowering housing costs

supports Kolbe's interpretation is anchored in speculation rather

than the record of the Covenant's actual context and purpose.

-33-
Moreover, its economic assumptions do not bear scrutiny.

Restricting the amount of flood insurance only reduces the buyer's

monthly payment if the lender, so restricted, fails to factor the

increased risk into the interest rate charged. Kolbe also ignores

the fact that the purchase of flood insurance results in either an

increase in home ownership costs (in the event of no flood) or a

decrease in home ownership costs (in the event of a flood). And

Kolbe offers no evidence that the FHA somehow considered the risk-

adjusted balance of the effects on costs to be detrimental to

consumers. In short, the notion that the FHA wanted to make sure

that consumers could under-insure for flood loss is complete and

improbable speculation.17 And this interpretation by the United

States was provided before Kolbe entered into his mortgage with

Taylor Bean, as discussed below.

Kolbe further dismisses the United States' brief as a

"newly minted interpretation [that] is flatly inconsistent" with

past HUD practice. This is simply not so. Earlier HUD

pronouncements support the United States' present assertions and

the Bank's interpretation, and are inconsistent with Kolbe's

interpretation.

Kolbe's inconsistency argument is largely based on HUD

handbooks and guidance documents that list "flood insurance" and

17
The Covenant would also be a poor way even to lower up front
housing costs, as it would provide much more benefit for those able
to afford the most expensive homes.

-34-
"hazard insurance" as separate categories.18 Kolbe argues that

these documents show that HUD has long treated hazard insurance and

flood insurance separately, reflecting a broader industry practice

of excluding flood coverage from hazard insurance policies.

Because HUD and industry practice treat hazard insurance and flood

insurance as separate categories, Kolbe asserts that the mention of

hazards in the first sentence should be read to exclude floods.

The panel majority found this separation to be significant. It is,

but the difference reinforces the Bank's reading.

Kolbe's argument confuses the question at issue. The

question is not whether the category of "hazard insurance" includes

"flood insurance"; the question is whether floods are hazards, and

thus whether a reference in Covenant 4 to "any hazards" includes

floods. On this question, both HUD practice and the pattern of

industry usage favor the Bank and the United States'

interpretation, not Kolbe's.

We explain why. In the middle of the twentieth century,

insurance companies began issuing comprehensive hazard insurance

18
A HUD handbook on insured mortgages lists "hazard insurance"
and "flood insurance premiums" as separate items that must be paid
into an escrow account. See HUD Handbook 4330.1, ch.2, § 2-1(D),
available at http://portal.hud.gov/hudportal/HUD?src=/
program_offices/administration/hudclips/handbooks/hsgh/4330.1. A
HUD guidebook on settlement costs separately lists "Hazard
Insurance Premium" and "Flood Insurance" as separate settlement
costs. See "Buying Your Home" (June 1997), Section III, available
at http://portal.hud.gov/hudportal/documents/huddoc?id
=DOC12893.pdf.

-35-
policies that covered against a wide variety of risks. Crusto, The

Katrina Fund: Repairing Breaches in Gulf Coast Insurance Levees, 43

Harv. J. on Legis. 329, 334 (2006). These comprehensive hazard

insurance policies consist of "named peril" policies that only

cover an enumerated list of hazards, and "all-risk" policies that

cover all physical hazards except those specifically excluded.

Thomas & Randall, New Appleman on Insurance Law § 41.02[1][a], at

41-15 (library ed. 2011).19 More recently, all-risk policies have

eclipsed named peril policies as the most common form of homeowners

insurance. Id. § 42.02[1], at 42-60. Yet virtually all standard

hazard insurance policies, including all-risk policies, contain a

specific "flood exclusion" provision that excludes flooding and

water damage from coverage. Id. § 43.02[3][a], at 43-14.

The fact that HUD documents list "flood insurance" and

"hazard insurance" as separate categories reflects the reality that

homeowners who want flood insurance will need to purchase it

separately from an all-risk hazard insurance policy. It does not

support an inference that HUD is stating that floods are not

hazards; rather, it is stating the opposite. The reason that such

an express flood exclusion is necessary in a hazard insurance

19
In insurance industry parlance, the terms "hazard," "peril,"
and "risk" are often used interchangeably. See Black's Law
Dictionary 786, 1442 (Bryan A Garner ed., 9th ed. 2009) (defining
"hazard" as "Danger or peril" and defining "risk" as "Insurance.
The type of loss covered by a policy; a hazard from a specified
source").

-36-
policy covering all risks is because flooding is considered a risk

(or alternatively, a hazard), and thus would be covered by the

hazard insurance policy absent such an exclusion.

HUD regulations and the NFIA confirm the industry

understanding that floods are hazards. For example, HUD requires

flood insurance on FHA-insured mortgages in "area[s] having special

flood hazards." 24 C.F.R. § 203.16a(b); see also 42 U.S.C. §

4012a(a) (mandating that federally regulated lenders require flood

insurance on homes in "area[s] having special flood hazards").

Other HUD pronouncements, including a different part of

the 1994 HUD Handbook cited by Kolbe, also support the United

States' interpretation but contradict Kolbe's interpretation. As

we have noted, under Kolbe's interpretation, a lender cannot

require any more flood insurance than what HUD requires, which

would mean zero flood insurance outside of special flood hazard

areas. Yet HUD has been quite clear on multiple occasions that

lenders can require flood insurance outside of special flood hazard

areas.

For example, in a 1990 letter to mortgagees of FHA-

insured loans, the FHA Commissioner wrote, "[l]enders are free to

consider requiring flood insurance in participating communities on

the basis of their own business judgement, even if the building

that is the security for a loan is located outside of an SFHA

[special flood hazard area]." Mortgage Letter 90-16, 1990 WL

-37-
10022448, at *2. A handbook issued by HUD in 1994 states, "In

areas designated B and C (with suffixes) [on FEMA maps], [flood]

insurance is available but not required by HUD (although mortgagees

may require it under the same terms and conditions as those that

apply to other dwelling insurance)." HUD Handbook 4330.1, 2-

11(E)(2) (emphasis added).

Quite significantly, FEMA recommended in its 2007

guidelines that lenders do precisely what the Bank did: require

homeowners in special flood hazard areas to maintain replacement

cost flood insurance. See FEMA, National Flood Insurance Program:

Mandatory Purchase of Flood Insurance Guidelines 27 (2007).20 We

will not read HUD regulations as preventing lenders from following

FEMA flood insurance guidelines with respect to FHA-insured

mortgages. See Mortgage Letter 90-16, 1990 WL 10022448, at *1

("[W]e want to bring HUD policy in conformance with that of

FEMA.").

Kolbe raised another example of purported inconsistency

at oral argument. Kolbe notes that the 1994 HUD Handbook states

that a lender "may not insist on more [insurance] coverage than is

20
The 2007 guidelines were in effect at the time that Kolbe
entered into his mortgage and at the time the Bank required the
additional flood insurance. The United States has notified this
court in a letter that FEMA has rescinded the 2007 guidelines as
outdated, but that "it remains the policy of FEMA that . . .
prudent mortgage lenders may often wish to require borrowers to
carry more than the minimum amount of flood insurance coverage
required by federal law . . . ."

-38-
necessary to protect its investment." HUD Handbook 4330.1, 2-

11(B). He argues that only insurance in the amount of the

principal loan balance is necessary to protect the lender's

investment; thus, this handbook limited the lender's discretion and

thereby conflicts with the conclusion of the United States' brief.

Kolbe's argument fails for several reasons, including

that its factual premise is untrue. First, his argument conflicts

with Covenant 7 of the mortgage contract. Covenant 7 is the force-

pay provision that not only allows the lender to protect itself

when the borrower fails to comply with his obligations, including

those under Covenant 4, but also allows the lender to charge the

borrower for the resulting cost incurred by virtue of the

borrower's breach. It provides that "[i]f Borrower . . . fails to

perform any . . . covenants and agreements contained in this

Security Instrument, . . . then Lender may do and pay whatever is

necessary to protect value of the Property and Lender's rights in

the Property, including payment of taxes, hazard insurance . . . .

Any amounts disbursed by Lender under this paragraph shall become

an additional debt of Borrower . . . ." The two covenants must

therefore be read together in a manner that aligns duty, breach,

and remedy. That alignment appears perfectly and plainly if

Covenant 4 is read, as we read it, to allow the lender to require

the borrower to procure flood insurance up to an amount necessary

to protect the value of the property. Conversely, under Kolbe's

-39-
view, the Covenant 4 duty is only to buy flood insurance in amounts

that will often be far less than that necessary to protect the

value of the property, but the remedy for a breach of that duty,

under the plain language of Covenant 7, is that the borrower may be

required to reimburse the lender for the cost of flood insurance

for the full amount necessary to protect the value of the property.

Second, FEMA's guidelines confirm the fact, described by

the United States in its amicus brief, that the lender has an

economic interest in the borrower maintaining replacement cost

flood insurance. Finally, it is a matter of common sense that a

lender has an interest not only in the principal balance of the

loan but in maintaining a performing loan that will provide a

stream of interest payments; if the borrower has enough insurance

to rebuild his home in the event of a flood, it is more likely that

the borrower will remain current on the loan and continue to make

payments.

We again explain why three strands of reasoning support

our conclusion. Using the ordinary tools of contract

interpretation, we view the text of Covenant 4 in the context of

federal housing policy. This examination convinces us that the

Bank's interpretation is correct. Because this covenant is a

uniform clause, we determine its uniform meaning as a matter of

law, and do not allow Kolbe to vary from that meaning on the basis

of extrinsic evidence unique to his transaction. This leads into

-40-
the third strand: the fact that this language was drafted and

imposed by the United States in a regulation. On this record, we

think the Covenant's purpose is plain.

We have no doubts about the meaning of Covenant 4 under

any of the three tests, but if we did, we would resolve those

doubts by deferring to the United States' reasonable

interpretation. See Auer v. Robbins, 519 U.S. 452, 461 (1997).

Under the doctrine of "Auer deference," we accept an agency's

interpretation of its own regulation "unless 'plainly erroneous or

inconsistent with the regulation.'" Id. (quoting Robertson v.

Methow Valley Citizens Council, 490 U.S. 332, 359 (1989)).21

Although Covenant 4 appears in a contract between private

parties, it derives from a duly enacted HUD regulation, in which

HUD promulgated the language and mandated that private parties

include the language in mortgage contracts for FHA-insured

mortgages. See Mortgage Requirements, 54 Fed. Reg. at 27,603-07.

Auer deference applies here just as it does to any other agency

interpretation of a regulation. Indeed, multiple courts of appeals

21
Although the Supreme Court commonly refers to this doctrine
as "Auer deference," see, e.g., Decker v. Nw. Envtl. Def. Ctr., 133
S. Ct. 1326, 1337 (2013), the doctrine actually originated decades
earlier in Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414
(1945) ("[T]he ultimate criterion is the administrative
interpretation [of the regulation], which becomes of controlling
weight unless it is plainly erroneous or inconsistent with the
regulation."). We follow the Supreme Court's lead in referring to
Auer deference, but we note that the doctrine has a much longer
pedigree, and many of the decisions applying it were issued well
before Auer.

-41-
have accorded deference to agency interpretations of contract terms

that were promulgated and mandated by a federal regulation.

See Saavedra v. Donovan, 700 F.2d 496, 499 (9th Cir. 1983)

(according "deference to an agency's reasonable and conforming

interpretation of its own regulation"); Honeywell Inc. v. United

States, 661 F.2d 182, 185 (Ct. Cl. 1981) ("[I]n construing

administrative regulations, the ultimate criterion is the

administrative interpretation, which becomes of controlling weight

unless it is plainly erroneous or inconsistent with the regulation.

. . . The fact that a regulation may be incorporated into a

contract does not require a different rule for regulation

interpretation.").22

Applying Auer deference, it is a simple matter to uphold

the United States' interpretation of Covenant 4, which accords with

the Bank's interpretation. Far from being "plainly erroneous or

inconsistent with the regulation," the United States'

interpretation is consistent with the most natural reading of the

regulation's text. Further, it is supported by persuasive

articulations of federal policy as discussed earlier and contained

in the United States' brief.

Kolbe insists that Auer deference is inappropriate,

citing to Christopher v. SmithKline Beecham Corp., 132 S. Ct. 2156

22
In our case, moreover, the United States is not a party to
the litigation, hence one possible reason for hesitating to defer
to its position is absent.

-42-
(2012), a case in which the Supreme Court rejected and refused to

extend Auer deference to a United States brief that was

inconsistent with past agency practice and the governing statute.

The agency in Christopher submitted a brief declaring an industry

practice illegal, but the Court noted that this brief was

inconsistent with decades of declining to bring enforcement

actions, which created a justified expectation that the practice

did not violate the relevant regulations. See id. at 2167-68.

This case is distinguishable from Christopher. Nothing

in HUD's past practice is inconsistent with the position

articulated in its brief. To the contrary, HUD has declared in the

past that lenders can require flood insurance above HUD

requirements outside of special flood hazard areas, which supports

the position in its brief but is inconsistent with Kolbe's

position. Christopher provides no support for rejecting Auer

deference in this case.

We stress that Auer deference is not necessary to our

conclusion. Even if Kolbe were correct that Christopher governs

this case, he would still lose. In Christopher, while rejecting

Auer deference, the Court granted the agency a lesser measure of

deference derived from Skidmore v. Swift & Co., 323 U.S. 134, 140

(1944): "deference proportional to the 'thoroughness evident in

[the agency's] consideration, the validity of its reasoning, its

consistency with earlier and later pronouncements, and all those

-43-
factors which give it power to persuade.'" Christopher, 132 S. Ct.

at 2169 (quoting United States v. Mead Corp., 533 U.S. 218, 228

(2001)). Here, the United States' brief contained thorough

consideration and valid reasoning, was consistent with other HUD

pronouncements, and was persuasive of its own force. The lesser

Skidmore deference easily would have sufficed to sustain its

interpretation. Indeed, we would agree with the United States'

interpretation even if we gave it no deference at all. Kolbe has

failed to state a claim for breach of contract.23

23
Kolbe has briefly articulated two other theories for breach
of contract. First, Kolbe argues that the contract did not allow
the lender to increase the amount of required flood insurance
during the pendency of the loan. This contention is belied by the
language of the contract, which requires the borrower to maintain
insurance "in the amounts and for the periods that Lender
requires," implying that the lender can require different amounts
of insurance in different periods.
Second, Kolbe argues that because Taylor Bean only required
the principal balance amount of flood insurance, its conduct
suggests that it believed it could not require additional flood
insurance. This argument is off base. This uniform contract has
a uniform meaning that does not depend on the intent of the
specific parties. But even if it did, Taylor Bean's decision not
to require more insurance more likely reflects a business judgment
that more insurance was not economically necessary, rather than a
legal judgment that it could not require more insurance. Moreover,
the United States has explained that the purpose of Covenant 4 is
to allow individual lenders to make business judgments about how
much flood insurance to require. United States Brief at 2. That
is precisely what happened here, with Taylor Bean requiring the
amount of the principal balance and the Bank requiring replacement
cost value.

-44-
 VI.

The claim for breach of the covenant of good faith and

fair dealing also fails. In every contract, there exists an

implied covenant of good faith and fair dealing. Kalogeras v. 239

Broad Ave., L.L.C., 997 A.2d 943, 953 (N.J. 2010). Under this

covenant, "neither party shall do anything which will have the

effect of destroying or injuring the right of the other party to

receive the fruits of the contract." Id. (quoting Palisades

Props., Inc. v. Brunetti, 207 A.2d 522, 531 (N.J. 1965)) (internal

quotation marks omitted). In addition, where a contract grants a

party discretion, the party must exercise that discretion

reasonably. Wilson v. Amerada Hess Corp., 773 A.2d 1121, 1130

(N.J. 2001). Kolbe's complaint contains only a single allegation

that the Bank breached the implied covenant: "By requiring

Plaintiff and the Class to maintain and pay for flood insurance

coverage in excess of the coverage required by their mortgage

agreements, Defendants acted in bad faith and breached the implied

covenant of good faith and fair dealing contained in the mortgage

agreements." This allegation is wholly dependent on the premise

that the Bank breached the contract, and it therefore fails with

the failure of the breach of contract claim.

By failing to allege it in his complaint, Kolbe has

waived any other claim regarding the covenant of good faith. Even

if we were to assume in Kolbe's favor that he preserved this

-45-
argument, raised for the first time on appeal, that "the only

reason Defendants demanded additional flood insurance was an

improper effort to self-deal . . . collecting for itself or its

affiliates insurance brokerage commissions and excessive premiums,"

it fails. Kolbe's self-dealing claim fails the standard of

plausibility necessary to survive a motion to dismiss. Ashcroft v.

Iqbal, 556 U.S. 662, 678 (2009). Kolbe's allegations do not

support a plausible inference that he personally has suffered any

injury or that the Bank has abused him.

The Bank sent Kolbe a letter in which it urged him to

purchase his own insurance.24 This letter gave Kolbe about six

weeks notice to purchase his own insurance. It warned Kolbe of the

potential negative consequences of lender-placed insurance, stating

that the insurance "may be more expensive and will likely provide

less coverage than was previously in effect or that you can obtain

on your own," as well as mentioning the potential commissions. The

letter implored him to purchase his own insurance: "We encourage

you to act now and obtain flood insurance in the necessary amounts

to avoid incurring the cost of our buying Lender-Placed Insurance."

The Bank followed up a month later with a second letter, again

24
The letter told Kolbe that the Bank had recently discovered
the flood insurance coverage was not adequate, and the additional
coverage required was $46,000. If Kolbe did not agree that the
property was in a special flood hazard area, as the mortgage
documents reflected, Kolbe was to notify the Bank. Kolbe did not
and has not ever disputed that his property is in a special flood
hazard area.

-46-
notifying Kolbe of the insurance requirement and stating that he

could avoid lender-placed insurance by purchasing his own

insurance.25 The Bank's disclosure and warning hardly support a

claim of abusive self-dealing.

Of course, Kolbe did purchase his own insurance,

presumably at a fair market rate. The Bank did not force-place any

insurance, and thus did not collect any commissions or premiums

from Kolbe. Kolbe did not suffer any harm; the only "injury" he

claims to have suffered is from the cost of obtaining his own

insurance. But, as we have said, the requirement that he do so was

legal, and so there was no injury. He may not raise a claim,

apparently on behalf of others, that affiliates of the Bank

collected and profited from commissions or premiums on lender-

placed insurance. Further, even as to that issue, Kolbe's

complaint makes no allegation that plausibly suggests that his

lender required he obtain additional flood insurance beyond an

amount necessary to protect the lender's legitimate interests, or

that it required him to purchase anything at all from the lender or

anyone associated with the lender. To the contrary, the very

letters to which Kolbe points in his complaint make clear that, in

requiring the additional coverage, the lender urged Kolbe–twice–to

25
Kolbe appended only the first page of the letter to his
complaint, and the full letter does not appear in the district
court or appellate record. It is unclear whether the later pages
of the letter also include the same warnings about the negative
aspects of lender-placed insurance that are in the first letter.

-47-
obtain the insurance on his own from someone other than the lender.

In short, taking Kolbe's allegations on their face, they fail to

make out any claim for a breach of the lender's contractual

commitments, express or implied.

Kolbe and supporting amici have attempted to turn this

case into a broader hearing on alleged abuses in the practice of

lender-placed insurance.26 That is a separate problem, and one

independent of the clause we have construed.

Accepting Kolbe's allegations as true, he ended up with

more insurance than he would have chosen to purchase on his own,

but he unquestionably received value for the additional cost:

sufficient insurance to rebuild his home in the event of a flood.

We take judicial notice that the Atlantic Coast suffered a major

flood last fall from Hurricane Sandy; the damage was so significant

that Congress appropriated $9.7 billion to replenish the NFIP's

insurance fund, and an additional $51 billion to aid storm victims.

Final Passage by Congress to $51 Billion in Storm Aid, N.Y. Times,

Jan. 29, 2013, at A21; Congress Approves $9.7 Billion in Insurance

Aid for Hurricane Victims, N.Y. Times, Jan. 5, 2013, at A14.

Kolbe's hometown of Atlantic City sustained significant damage.

Empty of Gamblers and Full of Water, Atlantic City Reels, N.Y.

26
Kolbe and supporting amici have argued at various points
during the appeal that lender-placed insurance involves frequent
abuse by banks that place insurance policies at excessive prices
and then split the profits with insurers. That is not the case
that Kolbe has pled or could plead.

-48-
Times, Oct. 30, 2012, at A1. This event served as a sad reminder

of the value of replacement cost flood insurance for homeowners,

particularly in flood-prone areas. Further, the Bank did not act

unreasonably in requiring this insurance. The Bank was following

FEMA's guidance, and as discussed above, the increased insurance

protected the Bank's reasonable and legitimate economic interests.

Kolbe's complaint fails to state a claim for relief, and

the district court correctly granted the motion to dismiss.

VII.

This opinion does not attempt to respond to the opposing

opinion written by Judge Lipez for himself and two of our

colleagues. Rather, the opinion of Judge Kayatta does respond, and

I join him.

-49-
 LIPEZ, Circuit Judge, with whom TORRUELLA, Circuit Judge,

and THOMPSON, Circuit Judge, join. Appellant Stanley Kolbe claims

that he and his mortgage lender agreed in 2008 that his obligation

to buy flood insurance was capped at the amount of his outstanding

principal balance, consistent with their common understanding of a

uniform covenant included in all mortgages insured by the Federal

Housing Administration ("FHA"). Five years later, in an amicus

brief submitted to the en banc court in this case, the federal

government announced for the first time that the covenant at issue

must be read to give lenders the discretion to increase the flood

insurance requirement at any time. Our colleagues conclude that

the government's interpretation retroactively nullifies the bargain

allegedly struck by Kolbe and his lender, even though that

agreement rested on a reasonable construction of the provision and,

importantly, is consistent with federal law.

Our colleagues' judgment constitutes extraordinary

intervention into the contractual dealings of two private parties.

In effect, they conclude that a federal agency, through court

intervention, may rewrite an agreement even though the agency is

not a party to the deal, and has no role in its enforcement, simply

because a different agreement would better serve the government's

newly clarified priorities. There is no justification for such a

wholesale abandonment of common law contract principles by our

colleagues. Regrettably, the even division of views on the en banc

-50-
court means that the decision of the district court dismissing

Kolbe's breach of contract and good faith and fair dealing claims

against Bank of America will be reinstated.

At bottom, this is a straightforward motion-to-dismiss

case. Kolbe asserts that he and his original lender, Taylor, Bean

& Whitaker Mortgage Corp. ("Taylor Bean"), agreed that Kolbe was

required to maintain only the statutory minimum amount of flood

insurance on his property throughout the duration of his mortgage.

Taking that factual assertion as true, as we must, Bank of

America's demand that Kolbe increase his flood coverage provides

the basis for a plausible claim that the Bank committed a breach of

contract. Kolbe likewise alleges facts that would permit a jury to

find that the Bank made its demand to serve its own financial

interests, in violation of the implied covenant of good faith and

fair dealing. Whatever the ultimate resolution of his contentions,

Kolbe has done enough to defeat the Bank's motion to dismiss and,

hence, is entitled to move forward with his case, including

discovery.

As we shall explain, denying him that opportunity is

indefensible.

I.

We will not here reprise the textual analysis of

Paragraph 4 of Kolbe's mortgage that appears in the majority panel

opinion previously vacated by the en banc court. See App'x. The

-51-
discussion there makes plain that the provision is ambiguous, and

its lack of clarity is underscored by the lack of consensus in the

decisions of other courts. Compare, e.g., Morris v. Wells Fargo

Bank N.A., No. 2:11-cv-00474, 2012 WL 3929805, at *7-8 (W.D. Pa.

Sept. 7, 2012) (denying motion to dismiss breach of contract claim

involving same language) (stating that, "[a]t the very least,

plaintiff's interpretation is tenable"), and Wulf v. Bank of Am.,

798 F. Supp. 2d 586, 588 (E.D. Pa. 2011) (same), with, e.g.,

McKenzie v. Wells Fargo Home Mortg., Inc., No. 3:11-cv-04965-JCS,

2012 WL 5372120, at **13-15 (N.D. Cal. Oct. 30, 2012) (adopting

reasoning of Kolbe panel dissent). Our colleagues, who acknowledge

the "set of sharply conflicting district court opinions" on this

issue across the country,27 nonetheless reject the notion of

ambiguity and assert that appellee Bank of America offers "the only

plausible reading in the relevant context."

27
Indeed, at the en banc oral argument, one of our opposing
colleagues explicitly acknowledged the poor drafting after another
member of the court made the following observations:

It seems self-evident that this was a lousy job of
drafting by somebody. You have this court divided, you
have courts around the country divided on this. . . .
There are five ways in which this provision could have
been written to completely avoid this controversy. . . .
It seems preposterous to suggest this is plain language.

Government counsel shortly thereafter came to the podium and was
told by our colleague:

[W]e don't need to repeat [the above] characterization of
the drafting job on this, but you might want to convey
that sentiment when you return to Washington.

-52-
 The problem is that this conclusion of non-ambiguity is

procured by means of hindsight,28 with substantial weight given to

the government's newly announced view and the policies offered to

justify it. We do not minimize the importance of the government's

interpretation of Paragraph 4. We acknowledge that the additional

context revealed in the government's amicus brief sheds helpful

light on the meaning that was intended when the covenant was

crafted by the Department of Housing and Urban Development in the

1980s. Our disagreement is not with our colleagues' lengthy

exegesis on the nature of contract construction as applied to

uniform clauses and language drafted by the United States. Rather,

those principles are inapplicable to the specific issue before us.29

Our colleagues insist that what the government says with

clarity in 2013 overrides the meaning that Kolbe and his lender

ascribed to Paragraph 4 five years earlier. Yet the government's

28
We repeat the panel majority's reminder that this appeal
concerns the grant of a motion to dismiss. Vacating that ruling
would not deny the Bank the opportunity to develop a record in
support of its position and, if appropriate, to seek summary
judgment. Kolbe, however, is entitled to an equivalent opportunity
to prove his case.
29
To the extent the panel majority suggested that the
construction of Paragraph 4, a uniform covenant promulgated for all
FHA-insured mortgages, is generally a question of fact to be
decided by a jury, we disclaim that view. As we shall explain, the
question for a factfinder in this case is the nature of the
agreement reached by the two contracting parties, i.e., did they
agree that the flood insurance requirement would remain at the
statutorily required minimum (in this instance, the amount of the
outstanding principal balance) for the duration of the mortgage?

-53-
effort now to dispel the confusion generated by its poorly drafted

language cannot erase the ambiguity that confronted Kolbe and his

lender when they signed their mortgage agreement. As the panel

majority explained, the textual signals in Paragraph 4 point in

both directions, and there is nothing implausible about a federal

agency charged with promoting home ownership choosing to adopt

Congress's benchmark for flood insurance coverage as a way to

balance affordability and risk avoidance.30 The government's

clarification does not magically eliminate the mixed message

communicated by the language and structure of Paragraph 4. It

therefore does not change the fact that Kolbe and his lender could

have agreed that the phrase requiring flood insurance "to the

extent required by the Secretary" fixed Kolbe's obligation at the

statutory minimum for the duration of the loan.31

30
The same balance could plausibly explain Congress's decision
to impose the minimum flood insurance requirement only for homes in
areas at high risk for flooding ("special flood hazard areas") and
not for those facing only a moderate, lesser, risk.
31
Our colleagues suggest that Kolbe's construction of
Paragraph 4 cannot be correct because, inter alia, it conflicts
with the language of Covenant 7, another standard HUD paragraph.
Covenant 7 allows the lender to "do and pay whatever is necessary
to protect the value of the Property," including payment of taxes
and hazard insurance, and the lender is authorized to charge the
borrower for any disbursements made for such purposes. The
proffered inconsistency is that the lender is authorized by
Covenant 7 to protect the property's "value" and not only "the
Lender's rights in the Property" -- arguably suggesting that the
lender has an interest in flood insurance beyond the amount of the
outstanding principal balance.
Covenant 7, however, does not undermine Kolbe's interpretation
of the flood insurance requirement. The need to protect the

-54-
 Hence, the pivotal issue -- the one that sharply

separates our view from that of our colleagues -- is not whether

the text of Paragraph 4 is ambiguous, but whether the government's

belated clarification should be decisive in this case. Our

colleagues answer that question in the affirmative. In other

words, even if they conceded the covenant's ambiguity, they would

still refuse to allow Kolbe's lawsuit to proceed. They maintain

that the government's newly offered construction of Paragraph 4 not

only governs mortgage agreements entered into subsequent to the

pronouncement, see Auer v. Robbins, 519 U.S. 452, 457-58 (1997)

(holding that agency's interpretation of its own regulations is

owed deference), but also operates retroactively to supersede the

shared understanding of private parties who previously entered into

mortgages containing the flawed language. Accordingly, ambiguity

aside, they conclude that the district court properly dismissed

Kolbe's complaint alleging that Bank of America, the successor-in-

interest to Taylor Bean, improperly forced Kolbe to purchase

additional flood insurance.

"value" of the property would be triggered whether the borrower
failed to secure flood insurance at the statutory minimum or in
some greater amount. Covenant 7's purpose is to authorize the
lender to act if the borrower defaults, i.e., if the borrower
"fails to perform any . . . covenants and agreements contained in
[the] Security Instrument." The scope of the authority to act
depends on the nature of the default. The critical issue thus
remains the amount of flood insurance the lender may require under
Paragraph 4.

-55-
 Our colleagues identify three separate strands of

reasoning to support their conclusion, all of which essentially

reduce to the same proposition: the government's explanation of

uniform contract terms that it promulgated trumps any other shared

understanding of those terms by private contracting parties.

Whatever the force of that principle in other circumstances, we

strongly disagree that the government may reach back in time to

override lawful agreements between two private parties who shared

the same understanding of their mutual commitment. Cf. Christopher

v. SmithKline Beecham Corp., 132 S. Ct. 2156, 2168 (2012) ("It is

one thing to expect regulated parties to conform their conduct to

an agency's interpretations once the agency announces them; it is

quite another to require regulated parties to divine the agency's

interpretations in advance . . . ."). Federal law does not demand

such a result, and our responsibility to respect private contracts

should preclude such a substantial departure from legal norms.

II.

Even under the Bank's and government's view of Paragraph

4, lenders may exercise their discretion to do what Kolbe maintains

that Taylor Bean did here: issue a HUD-insured home loan contingent

on the borrower's maintaining flood insurance throughout the

mortgage period in an amount equal to the loan's outstanding

principal balance, i.e., at the statutory minimum for loans less

-56-
than $250,000.32 This is so because Paragraph 4 does not bar

lenders from committing to a specific amount of required coverage

for the duration of the mortgage. The pertinent sentence in the

uniform covenant states only that the hazard insurance required by

the lender "shall be maintained in the amounts and for the periods

that Lender requires." The lender could thus choose the statutory

minimum as its required "amount[]" for the entire "period[]" of the

loan.

The conflict in this case arises from the fact that,

under the construction of Paragraph 4 advanced by Kolbe, specifying

the amount and period was unnecessary because the uniform covenant

itself capped the flood insurance requirement at the statutory

minimum, while under the Bank's construction, the covenant allows

the lender to change the amount at any time. We presume that our

colleagues would reach a different conclusion if Kolbe and Taylor

Bean had signed a supplemental document setting the minimum amount

of insurance as the amount required for the entire loan period. In

that case, the lender would have expressly exercised the discretion

to which the Bank claims entitlement by choosing an amount of

coverage that Congress, in the National Flood Insurance Act, deemed

adequate. Our colleagues nonetheless contend that federal policy

32
Flood coverage for a residential property securing a
mortgage issued by a federally regulated lender must be in an
amount at least equal to the outstanding principal balance of the
loan, or $250,000, whichever is less. See 42 U.S.C.
§§ 4012a(b)(1), 4013(b)(2); 24 C.F.R. § 203.16a; 44 C.F.R. § 61.6.

-57-
bars us from enforcing an agreement containing those terms -- based

on the parties' joint understanding of Paragraph 4, rather than on

a separate written document -- against Taylor Bean's successor-in-

interest, Bank of America. We elaborate below on why we believe

our colleagues are wrong.

A. Integrity of Contracts

If we applied ordinary contract principles to this case,

the ambiguity in Paragraph 4 would foreclose dismissal of the

complaint because Kolbe would be entitled to show that his

understanding of the provision reflects the actual intention of the

contracting parties. The New Jersey Supreme Court "permit[s] a

broad use of extrinsic evidence to achieve the ultimate goal of

discovering the intent of the parties," Conway v. 287 Corporate

Ctr. Assocs., 901 A.2d 341, 347 (N.J. 2006), and we could not

achieve that goal here without giving Kolbe the opportunity to

develop the facts in support of his claim that Taylor Bean

understood Paragraph 4 as he did.33 The New Jersey high court has

described the court's contract-interpretation role as follows:

33
Although the meaning of Paragraph 4 is a question of federal
law, we use New Jersey's general framework for contract
interpretation. The mortgage itself provides that it is governed
by "federal law and the law of the jurisdiction in which the
Property is located." App. at 34, ¶ 14. Cf. LPP Mortg., Ltd. v.
Sugarman, 565 F.3d 28, 31 (1st Cir. 2009) (noting that, even where
"federal common law governs as to contractual issues," courts
typically borrow from state law and apply ordinary contract
principles).

-58-
 In the quest for the common intention
of the parties to a contract the court must
consider the relations of the parties, the
attendant circumstances and the objects they
were trying to attain. An agreement must be
construed in the context of the circumstances
under which it was entered into and it must be
accorded a rational meaning in keeping with
the express general purpose.

Tessmar v. Grosner, 128 A.2d 467, 471 (N.J. 1957); see also, e.g.,

Pacifico v. Pacifico, 920 A.2d 73, 77 (N.J. 2007) ("[I]t is a basic

rule of contractual interpretation that a court must discern and

implement the common intention of the parties.").

If, as Kolbe maintains, the evidence demonstrated that

both he and Taylor Bean understood Paragraph 4 to cap his flood

insurance obligation at the amount "required by the Secretary" --

i.e., at the statutory minimum -- application of traditional

contract law principles would end the matter. Where there is no

dispute between the contracting parties about which of two

reasonable interpretations of their agreement is correct, the

parties' shared understanding surely would govern -- barring some

collateral reason to depart from ordinary principles. See Conway,

901 A.2d at 347 ("'The polestar of construction is the intention of

the parties to the contract . . . .'" (quoting Atl. N. Airlines v.

Schwimmer, 96 A.2d 652, 656 (1953))). The Bank, as Taylor Bean's

successor-in-interest, would stand in the original lender's shoes,

and would be bound by that shared understanding.

-59-
 The Bank and our colleagues assert that this is an

instance where ordinary contract principles do not apply because

the language under scrutiny derives from a government source and

must be interpreted uniformly in every instance. The Bank cites

federal and New Jersey case law to support its contention that the

government's construction of government-generated contractual

language, whether derived directly from a statute or drafted by an

agency to carry out its regulatory mission, prevails even over the

mutually agreed upon understanding of the parties. The Bank, in

other words, asserts that the government's wishes about how the

parties should have understood the ambiguous language override the

parties' actual understanding of the language.

In so arguing, the Bank (and our colleagues) inexplicably

treat this case as indistinguishable from the cases on which they

rely to establish the principle of uniformity. From multiple

perspectives, however, this case is unlike that precedent. Most

significantly, each of the decisions highlighted by the Bank

involved a dispute between the contracting parties about the

meaning of language in their agreement. See Ill. Steel Co. v.

Balt. & Ohio R.R. Co., 320 U.S. 508, 508-509 (1944); Honeywell Inc.

v. United States, 661 F.2d 182, 185-86 (Ct. Cl. 1981); Paul Revere

Life Ins. Co. v. Haas, 644 A.2d 1098, 1103 (N.J. 1994). Hence,

some principle of contract interpretation was necessary to resolve

the conflict. When such a dispute is between parties of unequal

-60-
bargaining power, the stalemate is usually resolved by adopting the

meaning most favorable to the non-drafting party, a method of

interpretation known as contra proferentem. See Pacifico, 920 A.2d

at 78. That principle also operates in specific contexts. See,

e.g., Kieffer v. Best Buy, 14 A.3d 737, 743 (N.J. 2011) (stating

that ambiguity in an indemnity provision is construed against the

indemnitee); Marcinczyk v. N.J. Police Training Comm'n, 5 A.3d 785,

789 (N.J. 2010) (stating that ambiguity in exculpatory contracts

"must be resolved against the drafter of the agreement" (quoting

Gershon v. Regency Dining Ctr., Inc., 845 A.2d 720, 726 (N.J. App.

Div. 2004))); Simonetti v. Selective Ins. Co., 859 A.2d 694, 698

(N.J. Super. Ct. App. Div. 2004) (stating that ambiguity in an

insurance contract "must be resolved against the insurer").

Similarly, when government-generated language is ambiguous in a

dispute between contracting parties, courts are inclined to defer

to the government's interpretation of its own language. See, e.g.,

US Bank, N.A. v. Hough, 42 A.3d 870, 877 (N.J. 2012) (noting that

"we defer to an agency's interpretation of . . . [a] regulation,

within the sphere of [its] authority, unless the interpretation is

'plainly unreasonable'" (alterations in original) (internal

quotation marks omitted)).

But given the paramount importance of the parties'

intentions in resolving contract disputes, it is a considerably

more dramatic departure from basic contract law to accept the

-61-
government's interpretation of ambiguous language as decisive

where both parties to a private contract manifested a contrary,

consistent understanding of the language. The allegations in

Kolbe's complaint permit a finding that such an understanding

existed. See, e.g., Marcinczyk, 5 A.3d at 788-89 ("[P]arties

bargaining at arms-length may generally contract as they wish,

subject only to traditional defenses such as fraud, duress,

illegality or mistake." (citations omitted)). So long as the

parties' agreement does not violate important policy objectives, we

cannot accept that the government's interpretive authority may

intrude so deeply into private contractual agreements. Cf. Shaw v.

City of Jersey City, 811 A.2d 404, 411 (N.J. 2002) (adopting

construction of statute that is "consistent with both legislative

design and the reasonable expectations of [the insured]" (emphasis

added)). As we discuss in the next section, Kolbe's construction

of Paragraph 4 of his mortgage agreement does not conflict with the

policies embodied in the National Flood Insurance Act.

The private nature of Kolbe's mortgage agreement also

distinguishes this case from some of those cited by the Bank and

our colleagues. In Honeywell, which arose in the unique context of

military contracts, the United States was one of the parties and

the language interpreted was purely regulatory, and not

incorporated into a contract. See 661 F.2d at 184 (noting dispute

concerning Armed Services Procurement Regulation 15-205.34). The

-62-
decision resulted from the appeal of a ruling by the Armed Services

Board of Contract Appeals -- a far cry from this private contract

action. Similarly, in Saavedra v. Donovan, 700 F.2d 496, 499-500

(9th Cir. 1983), cited by our colleagues, the court rejected a

government contractor's claim in an enforcement proceeding that his

failure to pay government-required fringe benefits was attributable

to ambiguous language in the contracts.34 The decision in Lloyd v.

Cincinnati Checker Cab Co., 36 N.E.2d 67 (Ohio Ct. App. 1941), also

cited by our colleagues, is similarly inapt. The defendant there

had sought to set off an insurance claim against a statutory

assessment it owed because its insurer (a mutual assessment

company) had been liquidated and taken over by the Ohio

Superintendent of Insurance. The court held that the assessment

was a non-contractual obligation of the defendant owed to the state

as trustee for the insurer's creditors and was thus "not a

contractual liability involving a meeting of the minds." Id. at 69

("The debt of the defendant herein involved is a debt created by

force of statute, not a debt created by any voluntary act of the

parties.").

Our colleagues also rely on Sharon Steel Corp. v. Chase

Manhattan Bank, N.A., 691 F.2d 1039 (2d Cir. 1982), for the

proposition that "uniform contracts are interpreted uniformly

34
It is also significant that Saavedra is another instance
where the contracting parties did not share a common understanding
of their agreement.

-63-
across cases whenever it is reasonable to do so." This principle,

they say, means that "extrinsic evidence about what a particular

party intended or expected when signing the contract is generally

irrelevant." However, the context of Sharon Steel, which involved

the debt securities market, was markedly different from this

personal mortgage dispute. The case concerned boilerplate language

in "successor obligor clauses" in debenture indentures, and the

Second Circuit emphasized that "uniformity in interpretation is

important to the efficiency of capital markets." Id. at 1048.

Kolbe's and his lender's allegedly common understanding of his

personal loan has no equivalent implications.

Indeed, the very cases that gave birth to the

interpretive principles that the Bank and our colleagues invoke

also involve contexts far removed from the mortgage relationship of

Kolbe and Taylor Bean. In Auer, the plaintiffs were officers of

the St. Louis Police Department who brought suit against the city's

Board of Police Commissioners seeking overtime pay they claimed was

owed under a provision of the Fair Labor Standards Act. See 519

U.S. at 455. The Board argued that the officers were not entitled

to such pay based on a statutory exemption. See id. The Supreme

Court deferred to the Secretary of Labor's interpretation of

applicable regulations, which was provided in an amicus brief

requested by the Court. Unlike here, there was no contract

provision in dispute that was reasonably subject to a common

-64-
understanding by the contracting parties. The circumstances in

Bowles v. Seminole Rock & Sand Co., 325 U.S. 410 (1945), noted by

our colleagues as the origin of the concept of Auer deference, are

even more distant from the breach-of-contract case before us. The

dispute there was between a government official -- the

Administrator of the Office of Price Administration -- and a

manufacturer of crushed stone that was subject to a maximum price

regulation. In determining the permissible price the manufacturer

could charge pursuant to the regulation, the Court stated that it

"must necessarily look to the administrative construction of the

regulation if the meaning of the words used is in doubt." Id. at

414.

It is also noteworthy that, in all three of the cases

cited by the Bank, the courts concluded that the disputed language

was not ambiguous. In Haas, which involved an insurance dispute,

the New Jersey Supreme Court disagreed that "an ordinary insured"

would read the policy as the plaintiff contended. 644 A.2d at

1107. In Honeywell, the court stated that "the language and

purpose of the regulation is plain." 661 F.2d at 186. In Illinois

Steel, the Supreme Court concluded that "the reasonable

construction" of a clause in a uniform bill of lading approved by

the Interstate Commerce Commission was the one urged by the

petitioner. 320 U.S. at 515.

-65-
 It is a broad leap from these precedents to say that the

government, through the intervention of the courts, may invalidate

the contracting parties' joint adoption of one of two reasonable

constructions of their private contractual relationship. We

reiterate that we are not saying that the meaning of the FHA's

uniform covenants is a question of fact to be resolved by a jury.

We agree with our colleagues that, as a general proposition,

"[w]hen dealing with uniform contract language imposed by the

United States, it is the meaning of the United States that

controls." We further agree that that meaning is determined as a

matter of law by the court. The issue here, however, is not the

meaning of the provision in the abstract. Where one of the

contracting parties supportably alleges that both signatories

reasonably understood the provision differently from the

government, and where that alleged understanding does not conflict

with the pertinent federal scheme, the plaintiff is entitled to a

factfinder's determination on whether there was a contractual

breach. Briefly stated, there is no justification for interfering

with basic contract law principles where the contracting parties'

meeting of the minds is consistent with federal policy.

Of course, it may be difficult for a mortgage holder to

prove that he and his lender had a common understanding of a

government-promulgated uniform provision that differs from the

government's interpretation. As our colleagues point out, it is

-66-
not enough in this case that Taylor Bean did not increase Kolbe's

flood insurance requirement during the time that it held the

mortgage. That stability may reflect only the lender's choice at

the time, not a commitment for constancy throughout the loan

period. Notwithstanding the difficulties, however, Kolbe is

entitled to move forward with his contract claim because, as we now

explain, allowing it would not contravene federal policy.

B. Federal Policy

We do not doubt that, more often than not, it would be

advisable for borrowers to obtain more than the minimum amount of

flood insurance. Such coverage is not, however, what federal law

requires. The mandate from Congress is that lenders ensure

coverage in an amount at least "equal to the outstanding principal

balance of the loan," up to $250,000. 42 U.S.C. § 4012a(b)(1).

Our colleagues' policy concerns, therefore, cannot be directed

toward a lender's decision to impose the minimum amount of flood

insurance prescribed by statute -- which explicitly is allowed --

but necessarily must question the lender's exercise of discretion

to give up the right to increase that amount during the life of the

loan.

Neither the Bank nor the United States has demonstrated

that federal law would be offended by such arrangements. The

National Flood Insurance Act was designed, in part, to reduce the

heavy cost to the federal government for disaster relief, and the

-67-
resulting federal scheme thus placed on lenders the duty to ensure

that flood insurance is obtained for properties purchased through

HUD-guaranteed mortgages. In its brief, the government points out

that HUD enforces that duty, inter alia, by withholding payment on

mortgage-insurance claims filed by lenders until the damage from

floods (as well as fire, hurricane and tornado) has been repaired.

See 24 C.F.R. § 203.379(a), (c). According to the United States,

"[t]his rule, by design, creates a strong incentive for the lender

to ensure that the borrower maintains sufficient insurance to cover

any form of hazard-related damage that may arise."

The rule does not tell lenders they must secure more than

the minimum amount of flood protection, however, or that they may

not agree to a fixed amount. The decision on how much to require,

and when, is left up to individual lenders. Indeed, the government

explicitly tells us that "HUD has organized its mortgage insurance

program on the premise that lenders can and should make [the]

determinations" on the "appropriate amount of flood insurance

necessary to protect their investments." Brief, at 2. Thus, even

accepting the government's construction of Paragraph 4, lenders are

not foreclosed from making commitments that the government,

operating with different priorities from banks and mortgage

companies, may see as against the lenders' self-interest.

Dismissing Kolbe's complaint is to ignore the possibility that

-68-
Taylor Bean made a permissible choice different from the one the

government expected.35

Taylor Bean, of course, is no longer in the picture, and

Bank of America now bears the burden of agreements made by its

predecessor. The change in lenders should not compromise Kolbe's

contractual arrangement with Taylor Bean. Although the government

could choose to adopt a regulation barring lenders from binding

possible successors-in-interest to a fixed flood-insurance

requirement at the statutory minimum, it has not done so by means

of Paragraph 4.

The government also claims that, "[i]f Kolbe's

interpretation were to prevail, it is not difficult to foresee that

lenders would simply decline to offer FHA-insured loans in areas

facing even marginal flood risks, or charge substantially greater

interest rates for such loans." But that prediction is of no

relevance to the evaluation of Kolbe's breach-of-contract claim.

The issue before us is not future conduct, but the understanding of

two parties who entered into a mortgage agreement before the

government clarified Paragraph 4's ambiguous language.

Prospectively, borrowers and lenders are on notice that Paragraph

35
Kolbe's theory is that Taylor Bean did not, in fact, make
a choice because both he and the lender understood Paragraph 4 to
set a ceiling on the flood insurance requirement. The pertinent
point here is that, even under the Bank's interpretation, federal
law permitted Taylor Bean to impose that requirement for the entire
loan period. Hence, Kolbe's interpretation is not inconsistent
with federal policy.

-69-
4, as interpreted by the government, affords lenders the right to

increase their borrowers' flood insurance requirement at any time,

at the lenders' discretion. Kolbe reasonably maintains that

Paragraph 4 meant something different to him and Taylor Bean.

Moreover, the prediction that lenders would start

charging higher interest rates or abandon FHA mortgages on

properties at risk for flooding is entirely speculative and not

borne out by the available facts. There is no evidence that

lenders have routinely required more than the statutorily

prescribed minimum amount of flood insurance.36 Indeed, Kolbe has

pointed to evidence indicating that they routinely have not made

such a demand. For all we know, lenders may be promising a fixed,

minimum flood insurance obligation as a way to sell themselves over

competitors. On the other hand, if lenders have routinely read

Paragraph 4 as Kolbe does, and have only reluctantly made

commitments consistent with that understanding, the government can

take steps to clarify its intentions by promulgating revised, or

additional, regulations.

Although our colleagues appear to fear that allowing

Kolbe's lawsuit to proceed would trigger a catastrophe in light of

"the nearly 7.8 million FHA-insured mortgages nationwide," we fail

36
We note that, to the extent the absence of such evidence
reflects the lenders' understanding that Paragraph 4 bars them from
demanding more than the minimum amount of insurance, Kolbe's
ambiguity argument is strengthened.

-70-
to see how Kolbe's claim would significantly change the balance of

risks nationwide among individual homeowners, lenders, and the

government. As noted above, the system tolerates lenders limiting

their borrowers' flood insurance obligation to the amount "required

by the Secretary," as that practice has been followed by at least

some number of mortgage providers. In addition, it is a fair

assumption that many homeowners -- like Kolbe -- already maintain

flood insurance in excess of their outstanding loan balances, and

-- to the extent that they are financially able -- more homeowners

can be expected to increase their coverage in the face of the

recent major flooding highlighted by our colleagues. Certainly,

lenders may urge their borrowers to fully protect their equity, and

it defies commonsense to presume that most homeowners will act

against their own best interests. In any event, homeowners and

lenders will be protected from the most drastic outcome, as the

required insurance coverage will take care of the outstanding

mortgage debt (up to $250,000). See 42 U.S.C. § 4013(b)(2).

In sum, HUD allows the lender to set the statutory

minimum (i.e., the amount of the outstanding principal balance or

$250,000, whichever is less) as the required amount of flood

insurance for the entire duration of a mortgage. Because Paragraph

4 of Kolbe's mortgage agreement reasonably may be read to say that

no greater amount will be demanded of him, Kolbe should be allowed

to demonstrate that he and Taylor Bean in fact shared such an

-71-
understanding of their accord and that, consequently, Bank of

America's threat of force-placed insurance was a breach of his

mortgage contract.

III.

In the opposing opinion authored by Judge Kayatta, our

colleagues cast our approach to this case as a threat to breach-of-

contract class actions and as contrary to the principles applicable

to government-mandated, standard contract provisions. We address

below why our colleagues' hypothesized concern about contract-based

class actions is misguided. As for the supposed conflict with the

rules governing standard provisions, our discussion above

demonstrates why those principles are inapt in a context where both

contracting parties may have had the same understanding of the

pertinent, ambiguous language. Contrary to our colleagues'

assumption, we do not know at this point in the litigation whether

any such understandings were stated or unstated or, indeed, whether

Kolbe and Taylor Bean construed Paragraph 4 the same way.

Ascertaining those facts is the purpose of the discovery that our

colleagues prevent Kolbe from undertaking.

Although we have chosen to rely primarily on the original

panel decision on the issue of ambiguity, we add a few observations

prompted by Judge Kayatta's opinion before turning to the class

action discussion.

-72-
A. Ambiguity

In finding the language of Paragraph 4 unambiguous, our

colleagues point to passing references in HUD materials as evidence

that Kolbe (and Taylor Bean) could not have reasonably construed

the language as Kolbe proposes. A "reasonable" consumer, however,

could not have been expected to unearth and rely on such indirect,

scant references. Although FEMA, by contrast, explicitly

recommends that lenders require replacement cost insurance -- a

fact deemed "[q]uite significant[]" by our colleagues -- that

recommendation is unsurprising given FEMA's emergency response

role. No matter how clear FEMA's recommendation, FEMA's view

cannot eliminate the ambiguity in Paragraph 4, which originated

with a different agency -- the FHA -- charged with a different

primary mission -- to promote affordable home ownership. In

addition, the rejection of ambiguity at the motion-to-dismiss stage

cannot turn on whether one construction reflects the best policy as

determined by current government officials; the question before us

is whether the language is reasonably susceptible to both

interpretations. On its face, Paragraph 4 is ambiguous, and, as

the panel majority explained, the extrinsic clues that were

available when Kolbe signed his mortgage agreement did not

eliminate the ambiguity.

-73-
B. Class Actions

Our colleagues claim that we have gone beyond the literal

text of Kolbe's complaint in an "overly creative manner" and, in

doing so, have "run[] the risk of materially harming the interests

of consumers in a broad variety of actions." This criticism

misfires on multiple levels.

1. Beyond the Complaint

Our colleagues disregard the progression of Kolbe's

action beyond its original filing. Although his complaint was

drafted from the perspective that Paragraph 4 unambiguously limits

the flood insurance obligation to the statutory requirement -- and,

hence, has only one reasonable meaning -- his response to the

Bank's motion to dismiss introduced the alternative argument that

the motion also must be denied if the court found the paragraph to

be ambiguous. See Pl.'s Opp. to Defs.' Motion to Dismiss (filed

May 9, 2011) ("Plaintiff's Opposition"), at 13.37 Nothing in

37
Kolbe's Opposition stated, in part:

Plaintiff respectfully submits for all of the
reasons discussed above, that the Court should conclude
that paragraph four of the Mortgage unambiguously
provides that Plaintiff was not obligated to maintain
more flood insurance coverage on his Property than the
outstanding balance of his loan and hence the Defendants'
motion to dismiss should be denied.

Plaintiff acknowledges, however, that the Court
could conclude, as did the Magistrate Judge in Wulf, that
some of the provisions of the Mortgage at issue are
ambiguous. Of course, if the Court reached that

-74-
Kolbe's complaint foreclosed such an evolution of his argument, and

the narrowing of a complaint's scope to support an alternative

litigating position is hardly unusual. Cf., e.g., Rodríguez-Suris

v. Montesinos, 123 F.3d 10, 20 (1st Cir. 1997) (citing McCalden v.

Calif. Library Ass'n, 955 F.2d 1214 (9th Cir. 1990), for the

proposition that "allegations should not be construed as an

admission against inconsistent claims"); Fed. R. Civ. P. 8(e)

("Pleadings must be construed so as to do justice."). Both the

district court and the original panel accepted this alternative

view of Kolbe's contentions. The district court expressly

addressed the argument, albeit rejecting it:

The Court also concludes that the three
relevant sentences are not ambiguous and do
not create a conflict. . . . The Court finds
that plaintiff's proposed interpretation of
his mortgage is unreasonable and that the
mortgage contract, especially in light of the
NFIA language, is eminently clear. Therefore,
the contract is not ambiguous.

conclusion the Defendant's Motion to Dismiss would still
have to be denied. See, e.g., Aware, Inc. v. Centillium
Commc'ns, Inc., 604 F. Supp. 2d 306, 310 (D. Mass. 2009)
("If the language of a contract is ambiguous a motion to
dismiss must be denied."). See also Curtis v. Treloar,
No. 96-1239, 1998 WL 1110448, at *4 (D.N.J. Aug. 27,
1998) ("If we determine that the contract is ambiguous,
then we must deny defendants' motion for summary
judgment, as the interpretation of an ambiguous term in
a contract is generally a question of fact.").

Kolbe then went on to argue that any ambiguity in the contract must
be construed against the defendants. See Plaintiff's Opposition at
13-15.

-75-
The panel majority on appeal focused on ambiguity, concluding that

"the mortgage is reasonably susceptible to an understanding that

supports Kolbe's breach of contract and implied covenant claims."

In addition, at the en banc oral argument, Kolbe's

counsel emphasized the need to ascertain Kolbe's and Taylor Bean's

intent at the time they entered into the mortgage contract. Among

other statements, Kolbe's counsel asserted that "[t]he government's

position does not control what the parties' intent was. The

ultimate issue in any breach of contract case is what was the

intent of the parties when they entered into the contract."

Although this statement on its own is overly broad in the context

of government-promulgated uniform provisions, it nonetheless

reflects Kolbe's consistent backup argument that Paragraph 4's

ambiguity requires fact-finding on the parties' understanding of

the language. Confining Kolbe to his literal allegations would

thus unfairly ignore the actual case history.

Our colleagues further suggest that we should not expand

Kolbe's allegations beyond the literal words of his complaint

because that pleading was carefully crafted to promote class

certification. But the class that Kolbe and his counsel originally

contemplated -- all FHA borrowers from whom Bank of America had

demanded an amount of flood insurance in excess of the principal

balance -- appears to be no longer viable. The government's

intervention means that Paragraph 4 ordinarily must be read to

-76-
permit lenders to demand flood coverage up to the property's

replacement value. Under Kolbe's backup theory of ambiguity,

however, his claims do survive for a smaller class of aggrieved

borrowers -- those whose original lenders understood and

implemented Paragraph 4 consistently with Kolbe's proposed

construction. By invoking ambiguity, Kolbe himself, and not the

authors of this opinion, promoted this narrower version of his

breach-of-contract claim. Our colleagues are wrong to deny Kolbe

his choice of a viable litigation strategy.

To be sure, the need to inquire into the lender's

understanding may impact when, or if, Kolbe will be able to obtain

class certification. A more limited class also may impact whether

Kolbe's counsel -- or any other plaintiff -- will be interested in

proceeding with the case. Such consequences, however, are not

properly our concern. We should not be deciding whether the case

is worth the investment. We decide only whether Kolbe has stated

claims against Bank of America. If he has, it will be up to him to

choose whether to proceed even if he is unable to represent a

class. As the case now stands, Kolbe has proffered a reasonable

construction of Paragraph 4 that is consistent with his claims and,

hence, the district court should have denied the Bank's motion to

dismiss.

-77-
 2. Future Class Actions

Our colleagues appear to take the position that allowing

Kolbe's case to move forward will compromise the entire universe of

possible class actions involving contracts. They warn that counsel

for consumers "in a broad variety of actions" would have difficulty

drafting pleadings that could survive defense opposition to class

certification because defendants would invoke the possibility of

"subjective and unspoken understandings that could vary from

[person to person]." At a minimum, they suggest that our approach

would delay class status rulings "until after extensive discovery."

These warnings exaggerate the risk and devalue Kolbe's

individual interest in obtaining a remedy for allegedly improper

and unfair treatment. This is an unusual contract case in that the

defendant, an outsider to the original agreement, argues that it

does not matter how the original parties understood their deal.

The case is therefore an ill-suited exemplar for generalizations

about contract-based class actions. In the ordinary contract case,

where the signatories to an agreement dispute the meaning of a

standard provision, an interpretive principle will likely be used

to resolve the case. Section 211 of the Restatement, cited by our

colleagues, is one such principle.38 But in the rare instance where

38
Our colleagues' "Tom Sawyer" characterization of our view
of section 211 is puzzling; we consider the principles it embodies
important and necessary when the original contracting parties
dispute the substance of their agreement.

-78-
both parties reasonably understood the ambiguous language the same

way (consistently with government policies), such interpretive

principles are unnecessary. Under basic contract law, the parties'

meeting of the minds is decisive.39

Any precedent set in this case would thus have limited

reach. Indeed, contract claims as a general category -- as opposed

to statutory or tort claims -- may be more difficult to bring as

class actions precisely because their foundation is the parties'

understanding. Without question, claims such as those Kolbe

originally sought to bring, based on assertedly unambiguous

standard language favoring the plaintiffs, are ideal from a

potential class action perspective. But when a court agrees that

the challenged language is unambiguous, this case will be

irrelevant and have no impact. On the other hand, where the

language is found ambiguous, and plaintiffs can prove that they and

their contractual partner held the same reasonable (and consistent

with policy) understanding, the principles we have outlined give

39
In disputing the limited impact of our approach, our
colleagues observe that it is "anything but 'rare' for a plaintiff
in a contract case to argue that the other party to the contract
could be found to have shared her subjective understanding." The
scenario to which we refer does not arise, however, every time a
plaintiff claims that the parties understood their agreement the
same way. Rather, we deem section 211 inapplicable in the context
of uniform provisions only where a breach-of-contract claim rests
on language determined by a court to be ambiguous and the
plaintiff's allegation of a shared interpretation is not disputed
by the other contracting party -- such as where, as here, the other
party is not a defendant in the action. Those are not typical
circumstances.

-79-
them the right to proceed. Inexplicably, our colleagues think it

is more favorable to plaintiffs for Kolbe to be allowed no claim at

all.

As our colleagues point out, looking to the contracting

parties' understandings to resolve ambiguity may delay decisions on

class certification until after discovery has taken place. Such

timing is not unusual. Courts must engage in "'rigorous analysis'"

to determine if the requirements of Federal Rule of Civil Procedure

23 have been met. Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541,

2551 (2011) (quoting Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147,

161 (1982)). That analysis "[f]requently . . . will entail some

overlap with the merits of the plaintiff's underlying claim," id.,

and thus require the presentation of evidence, see, e.g., id. at

2549 (listing three types of evidence offered to show presence of

common issues among all plaintiffs). The resulting delay is not

always bad. See Alba Conte, Herbert Newberg & William B.

Rubenstein, 3 Newberg on Class Actions §§ 7:2, 7:3 (4th ed. 2013)

(noting the potential advantages and disadvantages of early class

certification for both plaintiffs and defendants). Our colleagues'

concern about widespread future prejudice to contract-based class

actions is thus overstated.

The battle between the parties at this point is plainly

about Kolbe's right to discovery and the Bank's desire to avoid any

inquiry into its practices, which Kolbe challenges as motivated by

-80-
bad-faith profit-seeking. See Robert H. Klonoff, Class Actions and

Other Multi-Party Litigation in a Nutshell 146 (4th ed. 2012)

("Aggressive, thorough discovery is frequently decisive in class

certification battles."); id. at 147 ("In most instances, courts

will not grant or deny class certification without discovery.").

Even if this case turns out to be an individual action, Kolbe is

entitled to discovery. We certainly have no authority to terminate

a lawsuit that may turn out to be well-grounded on the merits based

on the rationale, as articulated by our colleagues, that it is

"without practical worth or purpose."

IV.

In sum, there is neither a legal nor -- as our colleagues

assert -- "pragmatically progressive" justification for dismissing

Kolbe's lawsuit at this early stage of the case. Indeed, it is a

considerable injustice to do so. Our colleagues abandon basic

contract law principles. They ignore the government's sloppy

drafting of Paragraph 4 and say that it does not matter that both

signatories to the mortgage agreement may have reasonably

understood the provision as Kolbe alleges he did. We do not

minimize the importance of section 211 as a mechanism for dispute

resolution. A rule specific to uniform provisions makes sense

where contracting parties disagree about the meaning of their

accord. But where the language is ambiguous, the parties construe

it the same way, and their interpretation does not conflict with

-81-
federal policy, it does violence to traditional contract law

precepts to allow the government's explanation of its murky

language to override the parties' meeting of the minds. Not

surprisingly, the caselaw relied upon by the Bank and our

colleagues does not speak to these circumstances.

By allowing the district court's dismissal of this case

to stand, our colleagues have, in effect, upended basic contract

law to advantage a massive financial institution over individual

homeowners whose circumstances necessitated resort to government-

insured financing. Kolbe and others like him may have sought a

fixed flood-insurance obligation to help offset the many

unpredictable costs of homeownership. Some of them are now facing

demands for increased coverage after more than a decade of fixed

coverage, with possibly dire consequences for their economic

security. Cf. Lass v. Bank of Am., N.A., 695 F.3d 129, 132 (1st

Cir. 2012) (involving a similar demand, though based on different

contract language, for approximately $145,000 in additional

coverage fifteen years after mortgage was obtained). It should be

unthinkable that Bank of America may rewrite agreements -- which

were consistent with a reasonable construction of Paragraph 4 and

federal law -- at the expense of such homeowners.

Thus, the district court's unwarranted dismissal of this

case should be vacated, and the action remanded for further

proceedings on both of Kolbe's claims.

-82-
 KAYATTA, Circuit Judge, with whom LYNCH, Chief Judge, and

HOWARD, Circuit Judge, join. My disagreement with the conclusion

reached by three of my respected colleagues that the contract

language is ambiguous even in context is not what prompts me to

write this separate opinion. Judges frequently disagree about such

matters, and Chief Judge Lynch's opinion well explains why a

careful reading of Covenant 4 in context precludes a finding that

the covenant can reasonably be read as Kolbe claims. Rather, I

write to highlight three other points. First, the opposing opinion

authored by Judge Lipez relies on a theory of the facts that is

unsupported by the allegations in the only complaint that is before

us, and was not even argued below by Kolbe. Second, in its

reliance on unstated subjective "understandings" of the parties as

a basis for rejecting what it concedes is otherwise the proper

uniform meaning of Covenant 4, the opposing opinion directly

rejects the wiser, consensus approach manifest in section 211 of

the Restatement (Second) of Contracts. Third, the cumulative

impact of the approach taken by the opposing opinion would, on the

margins, harm consumers who, unlike Kolbe, are the victims of a

breach of a standard contract term.

I.

The opposing opinion urges reversal by relying on what it

calls a "back-up" theory of the case: If the writing is indeed

ambiguous, then perhaps recourse to extrinsic evidence in the form

-83-
of the parties' subjective understandings will resolve that

ambiguity by showing that both parties understood the writing in

the same manner.

The initial problem with this theory is that it does not

fit the complaint. The only complaint before the court alleges

that the "contract that governs the rights and obligations of the

parties" is the "Mortgage Agreement," a written document attached

to the complaint as Exhibit 1. Compl. ¶ 17. The complaint quotes

language of the written agreement, id. ¶ 22, and cites federal

regulations, id. ¶ 23, to advance a single assertion: "pursuant to

the . . . quoted provision of the Mortgage Agreement and the

applicable FHA regulations Plaintiff was to maintain flood

insurance coverage for the Property in an amount equal to the

[lesser of $250,000 or the outstanding loan balance]." Id. ¶ 25.

The complaint concludes that, by demanding more flood insurance

coverage, BAC breached the "mortgage agreements" of Kolbe and

others. There is no allegation of any subjective understandings

concerning Covenant 4, shared or otherwise. Nor does Kolbe even

claim to be one of those unusual consumers who actually read

through all of the printed documents for a home loan closing,

forming understandings based on the types of nuanced textual

analysis often on display in appellate litigation.

To make certain that no one would read the pleadings as

suggesting that resolution of the case need turn on any examination

-84-
of individual understandings, the complaint also alleges

affirmatively that Kolbe is "typical" of "all other persons . . .

who are or were obligors on loans that are or were owned or

serviced by defendant BAC Home Loans . . . whose mortgage

agreements required flood insurance in an amount that was related

to the amount of the outstanding balance of the loan. . . ."

Compl. ¶ 35. Those other persons of whom Kolbe assures us he is

typical include those who did not even deal with his lender, Taylor

Bean. In this manner, putative class counsel put together a

pleading that simply cannot be read as seeking to enforce a

subjective understanding coincidentally idiomatic largely to Kolbe

and Taylor Bean, and perhaps a few other borrowers who, like

entangled particles, arrived at similar subjective understanding

through some uncertain mechanism. Instead, this is a complaint

that demands the uniform, class-wide enforcement of a standard

written covenant that neither party drafted nor, as far as the

complaint alleges, even read.

The limited span of the pleading is underscored by the

fact that Kolbe has never advanced the argument on which the entire

opposing opinion now rests. He did argue that he should prevail

even if the writing were ambiguous. Such an argument is implicitly

included (unless disavowed) in most breach of contract complaints.

In exercising his right to make this argument, however, he

carefully stayed away from arguing that the court should consider

-85-
the extrinsic evidence of Kolbe's own subjective understanding to

resolve the ambiguity. Rather, he urged that any ambiguity be

resolved by a common rule of construction, and that the court not

consider extrinsic evidence. Wrote his counsel: "courts should

not consider extrinsic evidence in the case of an ambiguous

adhesion contract because such contracts should be construed

strictly against the drafter." Plaintiff's Oppos. to Motion to

Dismiss at 13-14. And the only "back-up" position he stated was

that if a court did look at any extrinsic evidence, "the only such

evidence applicable here would be the 'conduct of the parties,'

which here is limited to the undisputed fact that at the time the

mortgage was entered into, Taylor Bean did not require the

Plaintiff to maintain flood insurance in excess of the balance of

his loan." Id. at 15, n.18.

I understand the concern of my respected and thoughtful

colleagues that we not demand undue precision at the pleading stage

of a lawsuit. Here, though, we have a complaint conspicuously

avoiding any hint that Kolbe had any subjective understanding

material to this case. And we have counsel waving "stop" signs

insisting that the district court not contemplate the possibility

that any such extrinsic evidence should be relied on here. I think

it eminently fair to follow that direction.

-86-
 II.

Even were we to find the opposing opinion's back-up

theory to have been pleaded and preserved, that theory would fail

because it relies on a supposed "understanding" shared by Kolbe and

Taylor Bean that conflicts with what the opposing opinion must

concede is the otherwise proper uniform interpretation of

Covenant 4. When private parties sign a contract containing a

covenant expressly labeled as uniform and mandated by the

government, they agree to be bound by the uniform meaning to be

given by a court to that covenant based on the government's

interpretation, at least where that interpretation is eminently

reasonable in view of the covenant's language, purpose, and

history.40

In resisting this conclusion, the opposing opinion takes

too cramped a view of section 211 of the Second Restatement of

Contracts. The opposing opinion justifies its approach in part by

claiming that the written agreement is ambiguous, even in context.

As stated above, I think not. But let's assume that it is. It is

40
Contrary to the opposing opinion's suggestion, the
government's purpose in drafting (and mandating the use of)
Covenant 4 has been consistent from the outset. Had Kolbe
researched the relevant federal policy in 2008 (a prospect that is
both unpled and unlikely), he could have found the ample evidence
of purpose and interpretation, from both HUD and FEMA, that Chief
Judge Lynch discusses in her opinion. All that is "new" is that
strained readings proffered in litigation have prompted the United
States to come forward and reject, as inconsistent with that
regulatory record, the position for which Kolbe now advocates.

-87-
precisely when a writing is ambiguous that the principle of

section 211 has its greatest practical utility. After all,

whenever the written agreement is plain and unambiguous, it will

have only one meaning anyway. The benefit of the section 211 rule

thus arises precisely in cases where the writing is sufficiently

ambiguous to raise the prospect of non-uniform interpretations. If

we were nevertheless to adopt the cramped view of section 211

proposed by the opposing opinion, we would reduce section 211 to a

sort of Tom Sawyer, showing up only after most of the work is done.

The opposing opinion resists this characterization,

reasoning that courts should circumvent section 211 only in "rare"

cases, such as this one, in which "both parties reasonably

understood the ambiguous language the same way." But it is, in my

experience, anything but "rare" for a plaintiff in a contract case

to argue that the other party to the contract could be found to

have shared her subjective understanding.41 My colleagues'

understanding of section 211 would therefore take that provision

out of play at the motion to dismiss stage in almost all cases,

precisely when the benefits of predictability and standardization

are most substantial. The limiting principle the opposing opinion

offers is therefore hardly a limitation at all.

41
Indeed, what is notable here is that Kolbe, seeking to
maintain a class action, went out of his way to disclaim any such
argument.

-88-
 The Restatement secures more work for section 211 by

rejecting what is the heart of the opposing opinion's analysis:

the contention that subjective understandings of the individual

parties might be employed to determine the meaning of this standard

written contract. Leaving no doubt about the matter, the ALI

drafters made that rejection express in section 211 itself. This

is what they wrote: "Such a writing is interpreted wherever

reasonable as treating alike all those similarly situated, without

regard to their knowledge or understanding of the standard terms of

the writing."

The opposing opinion does just the opposite: it not only

pays regard to the parties' understandings, but it actually treats

those understandings as controlling, relegating the uniform

covenants to varying and eccentric interpretations. And the

opposing opinion cites no authority for this rejection of

section 211. Instead, the opposing opinion tries to argue by use

of an analogy, suggesting that the unpleaded and unstated parallel

subjective understandings of Kolbe and Taylor Bean are materially

no different than a written supplemental agreement documenting such

an understanding. But a written supplementation on a subject

matter addressed by Covenant 4, apart from perhaps making the loan

non-conforming, would itself preclude a finding that the parties

manifested assent to a "regularly used" writing, rendering

section 211 inapplicable.

-89-
 Finally, the claim in the opposing opinion that we are

"retroactively" "rewriting" Kolbe's agreement with Taylor Bean

further evidences not just an unsupported hostility to the rule of

section 211, but also a misapprehension of the facts. The rule

today was the rule when Kolbe signed his mortgage. A party who

"manifests assent to a writing and has reason to believe that like

writings are regularly used to embody terms of agreements of the

same type . . . adopts the writing as an integrated agreement with

respect to the terms included in the writing." § 211(1). Here,

Covenant 4 was expressly labeled a "uniform" covenant that neither

Kolbe nor Taylor Bean could delete from the agreement without

imperiling financing. Even if we accept the contention that

Covenant 4, in context, was materially ambiguous (which I do not),

the controlling interpretative rule then, as now, was that the

uniform meaning of the integrated writing would be resolved

"without regard to" Kolbe's unwritten understanding. § 211(2).

Not a word in the agreement has been rewritten. Moreover, the

meaning of these words as a matter of law was the same then as it

is now. In short, the fact that Kolbe's subjective understanding

remains as irrelevant today as it was when he signed the agreement

simply does not mean that the agreement has been changed in any

way.

-90-
 III.

In rejecting the full force of section 211, and in

accepting a theory of the case not pleaded, the opposing opinion

would, at the margins, harm consumers in two respects.

First, by disfavoring standardization and predictability

in reading complaints and applying uniform agreements, the opposing

opinion cuts at the margins against cost savings that benefit all.

The ALI, which marshals the insights and perspectives not only of

judges, but of law professors and practitioners, points us in a

different direction. In the ALI's view, considerations of

predictability and practicality have weight, and rules supporting

those values are to be given effect. Id. cmt. a. ("Standardization

of agreements serves many of the same functions as standardization

of goods and services . . . . Operations are simplified and costs

reduced, to the advantage of all concerned."). The opposing

opinion, by contrast, inadvertently calls us to act in this respect

to the disadvantage of "all concerned," save perhaps this plaintiff

in this case. We rightly resist that call.42

Second, in the real world, interpreting standard

agreements uniformly, and especially applying mandated covenants in

accordance with their one, legally determined meaning will tend to

42
And common sense and experience suggest that, as a practical
matter, the "win" urged by the majority opinion would likely be
Pyrrhic for Kolbe, who clearly did not commence this class action
to recover a few hundred dollars.

-91-
facilitate class actions when contract terms actually are breached.

The overly creative manner in which the opposing opinion reads the

complaint, if applied even-handedly, would make it unnecessarily

difficult to maintain class actions in consumer contract cases. We

have before us a class action complaint drafted by experienced

counsel who recognize that, absent class certification, the case is

without practical worth or purpose. Counsel therefore

understandably went out of their way to make sure that no defense

counsel or court could plausibly read the complaint as alleging any

claims that in any way hinged on a nonuniform, extrinsic evidence

such as Kolbe's individual, subjective understanding. Otherwise,

even before the decision in Walmart, Inc. v. Dukes, 131 S. Ct. 2541

(2011), class certification in this case would have been hopeless.

If a court could nevertheless read even this complaint as

alleging a claim by Kolbe based on subjective and unspoken

understandings that could vary from borrower to borrower, then it

would become quite difficult for counsel to draft pleadings that

could not be read "to imply" individual issues. Such readings

could be used by defendants to justify putting off class

certification rulings until after extensive discovery. Nor could

plaintiffs avoid this problem by disavowing any such individual

understandings: defense counsel would simply turn the assertion of

broad affirmative defenses into fodder for further speculation

about individual interactions and glosses. Confronted with the

-92-
possibility that ambiguous and uniform contract language mandated

by the government might be interpreted contrary to a defendant's

reading, creating a class-wide, common breach, defense counsel

could urge that each class member's "understanding" need be

assessed individually to see if it paralleled that of the

defendant, thereby trumping the uniform interpretation that would

otherwise apply, and thereby cutting against class certification.

This is not to say that we reach the result we do in

order to facilitate the maintenance of class actions. Instead, I

simply point out that the claim in the opposing opinion that the

result in this case favors large institutions over ordinary

consumers represents an overly simplified analysis that ignores the

wider picture. Both doctrinally and pragmatically, the opposing

opinion's retooled and overly ambitious effort to rescue Mr.

Kolbe's individual claim (for which it is not clear he has any

damages) runs the risk of materially harming the interests of

consumers in a broad variety of actions.

IV.

In sum, the opposing opinion substitutes speculation for

pleaded allegations in reading the complaint, and then doubles down

by substituting unstated individual understandings for predictable

uniformity when interpreting a government-mandated, standard

covenant. In rejecting both efforts, Chief Judge Lynch's opinion

is both doctrinally correct and more pragmatically progressive.

-93-
 TORRUELLA, Circuit Judge, with whom LIPEZ, Circuit Judge,

and THOMPSON, Circuit Judge, join. I fully agree with the

arguments set forth by Judge Lipez in his opinion and thus join it.

Like him, I see this case as a classic contracts dispute between

two private parties. Common law contract principles clearly

dictate that, given Kolbe's evidently reasonable interpretation,

his case should have been permitted to go forward.

I am nevertheless compelled to write separately to

highlight the fact that the case garnered enough votes to convoke

an en banc court and thereafter, by evenly divided votes, set aside

the panel's decision, notwithstanding the clear mandate of the

Rules of Appellate Procedure. These rules establish that "en banc

hearing or rehearing is not favored and ordinarily will not be

ordered," except in the rare circumstances where such procedure is

warranted because it is "necessary to secure or maintain uniformity

of the court's decisions," or where we encounter a case presenting

a "question of exceptional importance." Fed. R. App. P. 35.

Clearly, en banc resolution was not required to maintain

the uniformity in our case law.

It is telling that the opposing opinion totally fails to

mention or explain why the issues decided by the panel are of

"exceptional importance" within the meaning of Rule 35 warranting

en banc consideration. This is indeed troublesome for it sends a

message that this court will rehear a case and set aside a panel's

-94-
well-reasoned decision whenever it is unhappy with the result or

would have simply decided the case differently. En banc

consideration is not for the purpose of correcting panel decisions.

Calderón v. Thompson, 523 U.S. 538, 569 (1998) (Souter, J.,

dissenting) ("[E]n banc rehearing process cannot effectively

function to review every three-judge panel that arguably goes

astray in a particular case."). Although it may seem that I am

being unnecessarily fastidious by pointing out what is well-

established jurisprudence, I am compelled to emphasize this point

given that these requirements are vital in ensuring that these

rules be equally applied to all litigants and issues raised by

them.

For some time now, I have been troubled by what I see as

the recurring unprincipled denial and granting of petitions for

rehearing en banc, without any attempt to define and apply a set of

objective criteria to determine when a case is of exceptional

importance. See Igartúa v. United States, 654 F.3d 99, 105 (1st

Cir. 2011) (Torruella, J., dissenting) ("Whether a question meets

the standard of 'exceptional importance' should be determined by

objective criteria, and should not depend -- as some have suggested

-- on whether it is exceptional in the 'eye of the beholder' or

because 'one knows it when one sees it.' Judging from a comparison

of the cases in which we have granted or denied en banc review one

cannot help but wonder if those are the criteria that are prevalent

-95-
in this circuit when considering en banc petitions."). See also

United States v. Vega-Santiago, 519 F.3d 1, 7 (1st Cir. 2008)

(Torruella, J., dissenting) ("The convocation of this particular en

banc proceeding highlights the whimsical and uneven manner in which

this circuit often applies the rehearing rules. Indeed, both the

granting and denying of petitions for these extraordinary

proceedings evince a double-standard with respect to which issues

are deemed meritorious of such review. . . . In this case, before

either the appellant or the appellee had the opportunity to seek en

banc review, the court undertook a rather unusual procedure and

ordered en banc rehearing sua sponte.").

A comparison of the issues involved in cases in which en

banc petitions have been rejected with those in which we have

allowed such revision clearly shows that we have had a double

standard in applying the "exceptional importance" Rule 35 criteria.

Compare SEC v. Tambone, 597 F.3d 436 (1st Cir. 2010), United States

v. Textron, 577 F.3d 21 (1st Cir. 2009), Aronov v. Napolitano, 562

F.3d 84 (1st Cir. 2009), United States v. Giggey, 551 F.3d 27 (1st

Cir. 2008), Vega-Santiago, and Conley v. United States, 323 F.3d

7 (1st Cir. 2003), with Colón-Marrero v. Conty-Pérez, 698 F.3d 46

(1st Cir. 2012), Donahue v. United States, 660 F.3d 523 (1st Cir.

2011), Dehonzai v. Holder, 654 F.3d 121 (1st Cir. 2011), Igartúa,

and Evans v. Thompson, 524 F.3d 1 (1st Cir. 2008). The present

-96-
case surely demonstrates this. To say the least, this is an

unsettling practice.

-97-
 APPENDIX

LIPEZ, Circuit Judge. This putative class action is one

of a number of breach-of-contract suits being brought against

financial institutions nationwide by mortgagors who claim that they

were improperly forced to increase flood insurance coverage on

their properties.1 The plaintiff in this case, Stanley Kolbe,

asserts that Bank of America's demand that he increase his flood

coverage by $46,000 breached both the terms of his mortgage

contract and the contract's implied covenant of good faith and fair

dealing. The district court concluded that the pertinent provision

of the mortgage unambiguously permitted the lender to require the

increased flood coverage and, hence, it granted the defendants'

motion to dismiss the complaint.

Having closely examined the mortgage language at issue

and the relevant context, we are persuaded that the mortgage is

reasonably susceptible to an understanding that supports Kolbe's

breach of contract and implied covenant claims. We therefore

vacate the judgment of dismissal in favor of the Bank.2

1
We address another one of these actions in a separate
decision also issued today, Lass v. Bank of America, N.A., No. 11-
2037.
2
Federal jurisdiction in this case is premised on the court's
diversity jurisdiction over class actions alleging aggregated
damages in excess of $5 million. See 28 U.S.C. § 1332(d).

-98-
 I.

The following facts are drawn from the allegations in the

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

43, 45 (1st Cir. 2011). In October 2008, appellant Kolbe borrowed

$197,437 from a mortgage company to finance the purchase of his

home in Atlantic City, New Jersey. The loan is guaranteed by the

Federal Housing Administration ("FHA"), an agency within the

Department of Housing and Urban Development ("HUD"), and Kolbe's

mortgage in all material respects tracks the FHA's Model Mortgage

Form for single-family homes. See FHA Single Family Origination

Handbook 4165.1, App'x II, available at

http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4165.1/416

51hbHSGH.doc (last visited Sept. 18, 2012); see also 24 C.F.R.

§ 203.17(a)(2)(i) (stating that FHA mortgages "shall be in a form

meeting the requirements of the [Federal Housing] Commissioner").

Paragraph 4 of both the model mortgage form and Kolbe's agreement

describes the borrower's obligation to maintain hazard insurance,

in pertinent part, as follows:

4. Fire, Flood and Other Hazard Insurance.
Borrower shall insure all improvements on the
Property, whether now in existence or
subsequently erected, against any hazards,
casualties, and contingencies, including fire,
for which Lender requires insurance. This
insurance shall be maintained in the amounts
and for the periods that Lender requires.
Borrower shall also insure all improvements on
the Property, whether now in existence or
subsequently erected, against loss by floods

-99-
 to the extent required by the Secretary [of
HUD].

Federal law required Kolbe to obtain flood insurance

because his property is located in an area designated as a special

flood hazard zone under the National Flood Insurance Act ("NFIA").

See 42 U.S.C. §§ 4001-4129.3 The minimum amount of such insurance

also is mandated by law. Under the NFIA, the flood coverage for a

residential property securing a mortgage issued by a federally

regulated lender must be in an amount at least equal to the

outstanding principal balance of the loan, or $250,000, whichever

is less. Id. §§ 4012a(b)(1), 4013(b)(2); 24 C.F.R. § 203.16a;

44 C.F.R. § 61.6. Kolbe's complaint states that he purchased

coverage in an unspecified amount in excess of the minimum. See

Compl. ¶ 26.

In August 2009, Kolbe's original mortgage company went

bankrupt, and appellee Bank of America took over Kolbe's loan.4

Through appellee Balboa Insurance Company, the Bank sent Kolbe

notices in October and November 2009 stating that he was required

to increase his flood insurance by $46,000 so that the total

3
Technically, the statute requires the lender to require the
borrower to obtain the insurance. See 42 U.S.C. § 4012a(b)(1).
4
BAC Home Loans Servicing, LP, a wholly owned subsidiary of
Bank of America, N.A., was the entity that originally took over the
mortgage. BAC has now been merged into the Bank, and we thus refer
to the defendant mortgage holder as "Bank of America" or "the
Bank." Defendant Balboa Insurance Company also is a subsidiary of
Bank of America. For convenience, we at times refer only to "the
Bank" when describing acts allegedly performed by both defendants.

-100-
coverage would equal the replacement cost of his property as

identified in his homeowner's insurance policy. The Bank warned

that it would purchase the additional insurance itself, at an

estimated cost to Kolbe of $237, if he did not acquire the

insurance by December 6. The Bank further advised that the

insurance it would purchase -- commonly known as "force-placed" or

"lender-placed" insurance," see, e.g., Williams v. Certain

Underwriters at Lloyd's of London, 398 F. App'x 44, 45 (5th Cir.

2010) (per curiam) -- might cost more and would likely be less

comprehensive than coverage Kolbe could obtain on his own. In

response to these notices, Kolbe bought the additional $46,000 in

flood insurance.

In February 2011, Kolbe filed this action against Bank of

America and Balboa on behalf of himself and others similarly

situated for breach of the mortgage contract and breach of the

contract's implied covenant of good faith and fair dealing. He

claimed that his mortgage contract did not permit the Bank to

demand increased coverage, and he alleged that the Bank had

implemented a nationwide policy of compelling borrowers to maintain

greater flood insurance than required by their mortgages or federal

law. Kolbe's complaint asserted that the Bank was profiting from

this improper policy because it often arranged for force-placed

insurance to be purchased through its own affiliated companies and

brokers.

-101-
 The defendants moved to dismiss the complaint on the

ground that Paragraph 4 of the mortgage unambiguously gives the

lender the discretion to determine the amount of flood insurance

the borrower must carry. In its written decision, the district

court agreed that the hazard-insurance provision can only be

reasonably interpreted to afford discretion to the lender. The

court concluded that the reference to "any hazards" in the first

sentence of the paragraph encompasses flooding,5 and, consequently,

it held that the second sentence gives the lender the right to

require that flood insurance, like other types of hazard coverage,

"be maintained in the amounts and for the periods that [the] Lender

requires." The court then considered the paragraph's third

sentence, which explicitly refers to flood insurance, and held that

it "merely specifies the required minimum coverage for flood

insurance" under federal law -- i.e., it imposes a floor on the

Bank's discretion to set the amount of flood insurance.

On appeal, Kolbe insists that Paragraph 4 addresses flood

insurance solely by means of the third sentence -- which explicitly

references such coverage -- and not by means of the generally

phrased "all hazards" language in the first sentence.

Alternatively, he maintains that this understanding is one of two

5
As reproduced above, the first sentence states: "Borrower
shall insure all improvements on the Property, whether now in
existence or subsequently erected, against any hazards, casualties,
and contingencies, including fire, for which Lender requires
insurance."

-102-
reasonable constructions of the paragraph. Kolbe asserts that his

interpretation supports his claim that the Bank breached the

mortgage agreement and violated the contract's implied covenant of

good faith and fair dealing by compelling him (and others similarly

situated) to purchase flood insurance in excess of the outstanding

loan balance. Hence, Kolbe argues that the district court erred in

dismissing his complaint for failure to state a claim.

II.

The issue in this case is one of straightforward contract

interpretation. Appellant Kolbe asserts that the hazard and flood

insurance sentences in Paragraph 4 are independent and, indeed,

mutually exclusive. Appellees maintain that the flood insurance

sentence is subordinate to the general hazard sentence, merely

limiting the Bank's discretion by incorporating the minimum

coverage required by federal law. Kolbe, in other words, argues

that the contract does not permit the Bank to demand insurance

beyond the amount "required by the Secretary," while appellees

argue that the Bank may require any amount so long as the

Secretary's minimum is met.

Whether the contract language at issue here is ambiguous

is a question of law, Nye v. Ingersoll Rand Co., 783 F. Supp. 2d

751, 759 (D.N.J. 2011),6 and, accordingly, our review of the

6
The parties agree that New Jersey law governs the state-law
issue of contract interpretation because Kolbe's residence is
located there, and Paragraph 14 of the mortgage provides that

-103-
district court's interpretation is de novo, Sumitomo Mach. Corp.

of Am., Inc. v. AlliedSignal, Inc., 81 F.3d 328, 332 (3d Cir.

1996).7 A contract is ambiguous if it "is susceptible of more than

one meaning or if it is subject to reasonable alternative

interpretations." United States v. Pantelidis, 335 F.3d 226, 235

(3d Cir. 2003) (citation omitted) (internal quotation marks

omitted); see also Chubb Custom Ins. Co. v. Prudential Ins. Co. of

Am., 948 A.2d 1285, 1289 (N.J. 2008). Under New Jersey law,

extrinsic evidence of context may be considered in determining

ambiguity if "such evidence provides 'objective indicia that, from

the linguistic reference point of the parties, the terms of the

contract are susceptible of different meanings.'" Am. Cyanamid Co.

v. Fermenta Animal Health Co., 54 F.3d 177, 181 (3d Cir. 1995)

(quoting Mellon Bank, N.A. v. Aetna Business Credit, Inc., 619 F.2d

1001, 1011 (3d Cir. 1980)). We must "consider all of the relevant

evidence that will assist in determining the intent and meaning of

the contract." Conway v. 287 Corporate Ctr. Assocs., 901 A.2d 341,

346 (N.J. 2006); see also SmithKline Beecham Corp. v. Rohm & Haas

Co., 89 F.3d 154, 159 (3d Cir. 1996) (stating that New Jersey law

requires "courts [to] interpret a contract considering 'the

objective intent manifested in the language of the contract in

"federal law and the law of the jurisdiction in which the Property
is located" govern.
7
Our review of a district court's dismissal of a complaint is
likewise de novo. See Román-Oliveras, 655 F.3d at 47.

-104-
light of the circumstances surrounding the transaction'" (quoting

Dome Petroleum Ltd. v. Employers Mut. Liab. Ins. Co., 767 F.2d 43,

47 (3d Cir. 1985))).

A. Breach of Contract

1. The Language

Kolbe argues that the first three sentences of Paragraph

4 plainly address hazard insurance and flood insurance separately

-- with hazard insurance covered by the first two sentences and

flood insurance covered by the third -- and that only the amount of

hazard insurance is left to the discretion of the lender. For

convenience, we again reproduce the pertinent language in full:

4. Fire, Flood and Other Hazard Insurance.
Borrower shall insure all improvements on the
Property, whether now in existence or
subsequently erected, against any hazards,
casualties, and contingencies, including fire,
for which Lender requires insurance. This
insurance shall be maintained in the amounts
and for the periods that Lender requires.
Borrower shall also insure all improvements on
the Property, whether now in existence or
subsequently erected, against loss by floods
to the extent required by the Secretary [of
HUD].

Multiple characteristics of the provision suggest that

Kolbe's interpretation is correct. Importantly, the paragraph is

structured to address two different categories of insurance, with

the first and third sentences containing identical introductory

language directing the borrower to insure "all improvements on the

Property, whether now in existence or subsequently erected." The

-105-
repetition arguably denotes two parallel statements of coverage,

each establishing a particular coverage requirement for the same

property. The first two sentences also are distinct from the third

because they address insurance required by the lender, while the

third sentence addresses insurance required by the Secretary. The

second sentence, referring to "This insurance," is written as a

modification of the first sentence, addressing the required amount

of the previously identified form of insurance. By contrast, the

next sentence, referring to flood coverage, contains its own

specification of amount -- "the extent required by the Secretary."

The view that Paragraph 4 imposes independent

requirements for hazard and flood insurance is lent force by the

title for the paragraph, which breaks out "fire" and "flood" from

all other hazards. Each of those two specifically identified

hazards is then explicitly referenced, separately, in one of the

two parallel sentences. The fact that both "fire" and "flood" are

mentioned in the title, but the "all hazards" sentence refers only

to "fire," further supports the view that the flood coverage was

handled by the separate, linguistically parallel third sentence.

Moreover, the word "also" in the flood-insurance sentence

reinforces the independence of the two requirements by suggesting

a separate, additional obligation -- i.e., in addition to the

hazard insurance that is left to the lender's discretion for most

types of hazards, the debtor must obtain flood insurance in the

-106-
requisite amount. Indeed, if the flood-insurance sentence were

meant merely to limit the discretion afforded in the prior

sentence, it arguably would have been framed in direct relation to

that sentence. For example, it could have said: "Notwithstanding

any requirements of the Lender, flood insurance must be obtained as

required by the Secretary." The sentence as drafted, however, is

not framed as a qualification on the previous sentence, but as an

independent, further requirement.

Bank of America argues that the first sentence in

Paragraph 4, which applies generally to coverage against "hazards,

casualties, and contingencies," must be understood to include flood

insurance because flooding is embraced by any reasonable

understanding of those terms. Thus, the Bank asserts, the mortgage

contract allows it to demand flood coverage as it chooses pursuant

to the sentence stating that the hazard (or casualty or

contingency) insurance "shall be maintained in the amounts and for

the periods that Lender requires." The third sentence, according

to the Bank, minimally cabins its discretion by requiring flood

insurance at least "to the extent required by the Secretary."

We think appellant has the better argument based on the

language and format of the paragraph. Nevertheless, we acknowledge

that the Bank's interpretation can also be deemed reasonable.

Floods unquestionably are a type of hazard, and they are thus

literally within the scope of the first sentence. Moreover, the

-107-
third sentence can be reasonably understood to declare the

borrower's obligation to obtain flood insurance as required by the

NFIA regardless of whether the lender requires any other form of

hazard insurance, but not to override the lender's exercise of

discretion to require more.

Because the language is not decisive, we consider what

the available extrinsic evidence tells us about the meaning of the

provision.

2. The Extrinsic Evidence

As a preliminary matter, we note that the mortgage and

certain public materials outside the complaint may properly be part

of our inquiry in reviewing the district court's disposition of a

motion to dismiss. See, e.g., Giragosian v. Ryan, 547 F.3d 59, 65

(1st Cir. 2008) (stating that a district court may consider

"documents incorporated by reference [in the complaint], matters of

public record, and other matters susceptible to judicial notice"

without converting a motion to dismiss into a motion for summary

judgment (internal quotation marks omitted) (alteration in

original)). We therefore refer liberally to publicly available HUD

materials.

The debate over the clarity of Paragraph 4 centers on

whether the reference to "any hazards" may reasonably be read to

exclude the serious hazard of flooding. Kolbe argues that flood

damage ordinarily is not covered by standard homeowners' hazard

-108-
insurance policies, and that it therefore is reasonable to conclude

that such coverage is excluded from the mortgage contract's hazard

insurance requirement. The Bank responds that the absence of any

explicit exclusion for flood coverage in the "any hazards" sentence

is the best evidence that flooding is a hazard within the meaning

of that sentence.

Kolbe's view is advanced by the distinctive treatment

routinely given to flood insurance by HUD, the agency responsible

for FHA programs. Kolbe's mortgage contract contains standard HUD

language specifying the mortgagor's insurance obligations.8

Appellant points out that HUD's handbook for the "Administration of

Insured Home Mortgages" treats hazard insurance and flood insurance

separately. For example, in a list of items linked to a home sale

that must be escrowed, hazard insurance is listed as the first item

and flood insurance is listed as the sixth item. See HUD Handbook

4330.1, ch. 2, § 2-1(D), available at

http://portal.hud.gov/hudportal/HUD?src=/program_offices/administ

ration/hudclips/handbooks/hsgh/4330.1 (last visited Sept. 18,

2012). The HUD handbook also contains a section labeled "Payment

of Bills and Taxes from Escrow Accounts" that lists the two types

of coverage separately. See id. ch. 2, § 2-8(D) (Hazard Insurance)

& (E) (Flood Insurance); see also id. at § 2-11(E) (separately

8
Paragraph 4 is one of sixteen "uniform covenants" included
in the FHA Model Mortgage Form for single-family homes. See FHA
Single Family Origination Handbook 4165.1, App'x II, supra.

-109-
listing "Dwelling Insurance," "Flood Insurance," and "Homeowner's

Policies" under "Types of Coverage"). Similarly, HUD's sample

settlement statement for a home purchase separately itemizes

"Hazard Insurance Premium" on Line 903 and "Flood Insurance" on

Line 904. See "Buying Your Home" (June 1997), Section III,

a v a i l a b l e a t

http://portal.hud.gov/hudportal/documents/huddoc?id=DOC_12893.pdf

(last visited Sept. 18, 2012).

HUD's practice of treating flood coverage separately

reflects Congress's specific concern about such insurance, which

led to the enactment of the NFIA in 1968. Following years of major

floods that required "unforeseen disaster relief measures and . . .

placed an increasing burden on the Nation's resources," Congress

identified a widespread gap in private flood insurance coverage.

42 U.S.C. § 4001(a); see also H.R. Rep. No. 90-1585 (1968),

reprinted in 1968 U.S.C.C.A.N. 2873, 2966-2967 (noting that

"[h]eavy losses over the years from hurricanes in the coastal areas

and from storms in inland areas of the Nation dramatize the lack of

insurance protection against flood damage"). The legislators found

that it was "uneconomic" for private insurers to make flood

insurance available "on reasonable terms and conditions,"

42 U.S.C. § 4001(b)(1), and they sought to bridge the gap through

a cooperative program between the federal government and the

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insurance industry, id. § 4001(b)(2).9 Thus, in effect, Congress

found that floods were not customarily among the hazards protected

by standard homeowners' insurance policies. See Mitchell F.

Crusto, The Katrina Fund: Repairing Breaches in Gulf Coast

Insurance Levees, 43 Harv. J. on Legis. 329, 335 (2006) ("The

insurance industry has generally excluded flood damage in a

homeowners policy because flood insurance is not commercially

viable."); US Gov't Accountability Office, GAO 07-1078, National

Flood Insurance Program: FEMA's [Federal Emergency Management

Agency] Management and Oversight of Payments for Insurance Company

Services Should be Improved, at 8 (2007) (noting that "flooding is

generally excluded from homeowner policies that typically cover

damage from other losses, such as wind, fire, and theft").10

9
Congress anticipated that the National Flood Insurance
Program ("NFIP") authorized by the NFIA would rely on a pool of
insurance companies "to assume a reasonable proportion of
responsibility for the adjustment and payment of claims for
losses." 42 U.S.C. § 4051(a)(2); see also id. § 4011 (authorizing
the program). Federal funds would subsidize the program. Id.
§§ 4054(a) (directing the Administrator of the Federal Emergency
Management Agency to make periodic payments to the pool to ensure
that "flood insurance [is] available on reasonable terms and
conditions"); 4055(a) (authorizing reinsurance provided by the
government for losses in excess of the pool's assumption of
responsibility); see also Suopys v. Omaha Prop. & Cas., 404 F.3d
805, 807 (3d Cir. 2005) (noting that "[t]he NFIP is underwritten by
the United States Treasury in order to provide flood insurance
below actuarial rates").
10
HUD also recognizes the standard industry practice in
guidance about flood insurance requirements that is provided on its
website:

Generally, homeowner and other property casualty

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 HUD's practice of treating flood insurance independently

is pertinent to our interpretation of Paragraph 4 of the FHA's

model language, see Pacifico v. Pacifico, 920 A.2d 73, 78 (N.J.

2007) (noting that the terms of a contract are to be examined "in

light of the common usage and custom"); Kearny PBA Local No. 21 v.

Town of Kearny, 405 A.2d 393, 400 (N.J. 1979) (listing custom and

usage among the "interpretative devices" for discovering

contractual intent), and Kolbe's interpretation has particular

force where, as here, the mortgage separately addresses flood-

insurance coverage. By contrast, if there were no explicit

reference to flooding as a specific harm requiring insurance

coverage, the assertion that flooding is not embraced by a

reference to "any hazards" would be considerably less potent. That

was the situation in Custer v. Homeside Lending, Inc., 858 So.2d

233 (Ala. 2003), on which the district court relied in rejecting

the ambiguity of the language in Kolbe's mortgage.11 The explicit

insurance policies do not provide coverage for potential
financial loss that may be caused by flooding damage.
Many of the private insurance companies are now marketing
policies offered by the National Flood Insurance Program
along with their own property casualty insurance
policies.

http://portal.hud.gov/hudportal/HUD?src=/program_offices/comm_pla
nning/environment/review/qa/floodinsurance (last visited Sept. 18,
2012).
11
The comparable provision in Custer stated:

"7. That [the Mortgagor] will keep the improvements now
existing or hereafter erected on the mortgaged property,

-112-
attention to flood insurance in Kolbe's mortgage materially

distinguishes that case from this one.

The Bank, however, reasonably asserts that it makes no

sense to read floods out of the "any hazards" sentence because it

would be unreasonable to bar a mortgage provider from requiring

more than the limited amount of insurance required by federal law,

i.e., the amount of the outstanding loan balance. It argues that

lenders have an interest in ensuring the long-term performance of

mortgage loans by protecting the replacement value of the property,

as it sought to do in this instance. It cites FEMA guidelines

advising lenders to require replacement-value insurance. See Fed.

Emergency Mgmt. Agency, National Flood Insurance Program: Mandatory

Purchase of Flood Insurance Guidelines 27-28 (2007), available at

http://www.fema.gov/library/viewRecord.do?id=2954 (last visited

Sept. 18, 2012). Interagency guidance makes explicit that lenders

may demand more flood insurance coverage than is required by law,

stating that "[e]ach lender has the responsibility to tailor its

own flood insurance policies and procedures to suit its business

needs and protect its ongoing interest in the collateral." 74 Fed.

insured as may be required from time to time by the
Mortgagee against loss by fire and other hazards,
casualties and contingencies in such amounts and for such
periods as may be required by the Mortgagee and will pay
promptly, when due, any premiums on such insurance
provision for payment of which has not been made
hereinbefore."

Custer, 858 So.2d at 237 (emphasis in original).

-113-
Reg. 35914, 35936 (July 21, 2009), 2009 WL 2143410 (F.R.) (Question

16);12 see also Notice, Loans in Areas Having Special Flood Hazards,

76 Fed. Reg. 64175, 64182 (Oct. 17, 2011) (Question 9) (noting

that, "[i]n cases involving certain residential . . . properties,

insurance policies should be written to, and the insurance loss

payout would be the equivalent of, [replacement cost]").

We acknowledge that lenders may have good reason to

require full replacement coverage. Nonetheless, in mandating

minimum coverage in an amount "equal to the outstanding principal

balance of the loan," 42 U.S.C. § 4012a(b)(1), Congress in the NFIA

appears to have incorporated an assumption that, at times, a more

limited amount of flood insurance may be reasonable and

appropriate. The view that the amount of mandatory insurance

should be kept to a minimum also is reflected in the insurance

coverage section of HUD's Handbook, which provides that "[t]he

mortgagee may not insist on more coverage than is necessary to

protect its investment." HUD Handbook 4330.1, ch. 2, § 2-11(B),

supra.13

12
The FHA is not one of the agencies that issued the guidance.
They were: Office of the Comptroller of the Currency, Treasury; the
Board of Governors of the Federal Reserve System; the Federal
Deposit Insurance Corporation; the Office of Thrift Supervision,
Treasury; the Farm Credit Administration, and the National Credit
Union Administration.
13
Of course, this statement may not mean that the insurance
should be limited to the amount of the outstanding balance because,
as discussed above, a lender may deem replacement-value coverage
"necessary to protect its investment."

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 Indeed, it is plausible that the FHA, which prescribes

Paragraph 4 as a "uniform convenant[] for national use," App'x at

31 (Kolbe mortgage), would have sought to balance the need for

privately funded disaster relief with a concern that insurance

costs not become a barrier to home ownership. HUD's mission,

carried out through the FHA and other programs, is in part "to

create strong, sustainable, inclusive communities and quality

affordable homes for all." See HUD Mission,

http://portal.hud.gov/hudportal/HUD?src=/about/mission (last

visited Sept. 18, 2012). From the perspective of facilitating

"affordable homes," Paragraph 4 as construed by Kolbe could

reasonably be understood to reflect a policy choice to cap

mandatory flood insurance at the amount of the outstanding loan

balance.14 See generally S. Rep. No. 87-281 (1961), reprinted in

1961 U.S.C.C.A.N. 1923, 1925-26 (discussing amendments to the

National Housing Act of 1934 ("NHA") that, inter alia, created "a

new FHA mortgage insurance program" to further "the national

housing policy of 'a decent home and suitable living environment

for every American family'"); Cienega Gardens v. United States, 503

F.3d 1266, 1270 (Fed. Cir. 2007) (noting that the 1961 amendments

14
Indeed, the model Paragraph 4 used in Kolbe's FHA mortgage
does not mandate any insurance for hazards other than floods, as it
leaves any such requirement to the lender's discretion. See HUD
Handbook 4330.1, ch. 2, § 2-8(D), supra ("While HUD does not
require mortgagors to carry hazard insurance, the mortgage does
permit mortgagees to require it.").

-115-
were designed to "'meet[] the housing needs of moderate-income

families'" (quoting S. Rep. No. 87-281, reprinted in 1961

U.S.C.C.A.N. at 1926)).

The dissent invokes the industry practice of limiting

"all-risk" policies by means of express flood-exclusion provisions

to argue that, absent such an exclusion in the FHA model mortgage,

"any hazards" in the first sentence of Paragraph 4 can only

reasonably be read to include flooding. That view, however,

reflects the dissent's basic flaw of ignoring the reasonable

arguments in Kolbe's favor. It is plausible that HUD responded to

the standard industry practice of treating floods as a distinct

hazard by developing a mortgage document that deals with flood

coverage separately from the coverage for other hazards. Indeed,

as discussed above, the repetitive format of the "any hazards" and

flood-insurance sentences in Paragraph 4 suggests parallel,

independent obligations. Hence, contrary to the dissent's

assertion, the general industry practice is no more helpful to the

Bank's position than it is to Kolbe's.15

The extrinsic evidence thus leaves us in much the same

place as our examination of Paragraph 4's text and structure. The

HUD documents showing that the agency routinely treats hazard and

15
It bears repeating that we are reviewing the grant of a
motion to dismiss. The Bank will have the opportunity to develop
a record in support of its position and, if appropriate, to seek
summary judgment.

-116-
flood insurance independently are persuasive evidence in support of

Kolbe's assertion that Paragraph 4 separately addresses the two

types of insurance and fixes the required amount of flood insurance

at the statutory minimum amount. At the same time, however, the

FEMA guidelines recommending replacement value coverage support the

Bank's view that Paragraph 4 is not reasonably construed to prevent

lenders from fully protecting their investments and, hence, must be

read to give the lender discretion to increase the requirement

above the statutory minimum.

The question, of course, is not what amount of flood

insurance a lender reasonably could require, but what this

particular HUD mortgage provision in fact permits the lender to

demand. See Hofstetter v. Chase Home Fin., LLC, 751 F. Supp. 2d

1116, 1127 n.3 (N.D. Cal. 2010) ("Simply because an agency

recommends that lenders maintain a certain amount of flood

insurance coverage does not mean that lenders have carte blanche to

do so without regard to the terms of their loan agreements with

borrowers."). As to that question, we conclude that a rational

jury could construe Paragraph 4 in favor of either Kolbe or the

Bank. Though the text of Paragraph 4 and the extrinsic evidence

both provide strong support for Kolbe's interpretation, his reading

is not the only reasonable one.16 See Morris v. Wells Fargo Bank,

16
Indeed, the dissent plausibly marshals support for the
Bank's interpretation of the mortgage language. It fails, however,
to give comparable respect to the factors that favor Kolbe's

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N.A., No. 2:11-cv-00474 (W.D. Pa. Sept. 7,2012) (denying motion to

dismiss breach of contract claim involving same language) (stating

that, "[a]t the very least, plaintiff's interpretation is

tenable"); Wulf v. Bank of America, 798 F. Supp. 2d 586, 588 (E.D.

Pa. 2011) (same); Skansgaard v. Bank of America, No. C11-988 RJB,

slip op. at 4 (W.D. Wash. Oct. 13, 2011) (same). Kolbe has

therefore stated a plausible breach of contract claim, and, hence,

the district court erred in dismissing his complaint on the ground

that the mortgage unambiguously permitted the Bank to demand the

additional $46,000 in coverage. See Ocasio-Hernández v. Fortuño-

Burset, 640 F.3d 1, 12 (1st Cir. 2011) (holding that "an adequate

complaint must provide fair notice to the defendants and state a

facially plausible legal claim" (citing Ashcroft v. Iqbal, 556 U.S.

662 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544

(2007)).17

interpretation.
17
Kolbe argues that any ambiguity in the mortgage should be
construed against the Bank as the "drafter" of the agreement. The
Bank argues in response that the doctrine giving the advantage to
the non-drafting party in a dispute over language does not apply
where the language at issue is prescribed by law. See Restatement
(Second) of Contracts § 206(b) ("The rule that language is
interpreted against the party who chose it has no direct
application to cases where the language is prescribed by law, as is
sometimes true with respect to insurance policies, bills of lading
and other standardized documents."). Kolbe acknowledges that the
"FHA required that the Mortgage Agreement conform to its
requirements," Compl. ¶ 18, and we thus reject the doctrine as a
basis for judgment against the Bank at this stage of the case.
Kolbe remains free to re-argue the issue as warranted upon further
development of the facts.

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B. The Covenant of Good Faith and Fair Dealing

Kolbe alleges that the defendants acted in bad faith and

consequently breached the implied covenant of good faith and fair

dealing by demanding flood insurance in an amount in excess of the

coverage required by his mortgage. The covenant, implied in every

contract in New Jersey, imposes a duty on each party to refrain

from "'destroying or injuring the right of the other party to

receive the fruits of the contract.'" Sons of Thunder, Inc. v.

Borden, Inc., 690 A.2d 575, 587 (N.J. 1997) (quoting Palisades

Props., Inc. v. Brunetti, 207 A.2d 522, 531 (N.J. 1965)); see also

Kalogeras v. 239 Broad Ave., L.L.C., 997 A.2d 943, 953 (N.J. 2010);

Restatement (Second) of Contracts § 205 (1981) ("Every contract

imposes upon each party a duty of good faith and fair dealing in

its performance and its enforcement.").

The New Jersey Supreme Court has described good faith

conduct as "conduct that does not 'violate community standards of

decency, fairness or reasonableness,'" Brunswick Hills Racquet

Club, Inc. v. Route 18 Shopping Ctr. Assocs., 864 A.2d 387, 395

(N.J. 2005) (internal quotation mark omitted) (quoting Restatement

(Second) of Contracts § 205 cmt. a), and that is "'consisten[t]

with the justified expectations of the other party,'" Wilson v.

Amerada Hess Corp., 773 A.2d 1121, 1126 (N.J. 2001) (quoting

Restatement (Second) of Contracts § 205 cmt. a). In New Jersey, a

showing of "'bad motive or intention' is vital to an action for

-119-
breach of the covenant." Brunswick Hills Raquet Club, 864 A.2d at

225 (quoting Wilson, 773 A.2d at 1130).

The Bank asserts that no jury could find that the Bank

acted in bad faith by taking the objectively reasonable step of

requiring insurance in the amount recommended by FEMA. We agree

that, given the ambiguity in Paragraph 4, requiring replacement-

value coverage would on its own fall short of demonstrating bad

faith. Kolbe's claim, however, does not rest solely on the demand

for increased coverage. The Bank warned Kolbe that if he failed to

purchase additional coverage, force-placed insurance would be

obtained, possibly through entities related to Bank of America, at

a premium that "may be more expensive and will likely provide less

coverage than . . . you can obtain on your own." App'x at 43

(Notice to Kolbe, Oct. 18, 2009).

This ultimatum could constitute bad faith under either of

two scenarios. The first would be if the Bank, notwithstanding our

conclusion that Paragraph 4 is ambiguous, had in fact believed that

the mortgage required flood insurance coverage only in the amount

of the outstanding principal balance of the mortgage (or $250,000,

if that were the lower amount) and, hence, did not authorize the

Bank's demand for additional coverage at additional expense to the

borrower. Evidence that the Bank made the demand despite this

belief, so that it might have the opportunity to gain financially

from the purchase of insurance through its related entities, would

-120-
plainly suggest the "bad motive or intention" that is at the core

of a breach of the implied covenant. See Brunswick Hills Raquet

Club, 864 A.2d at 225. A finding of bad faith also would be

supportable if the Bank had recognized the ambiguity in Paragraph

4 and, instead of acting out of concern for protecting its security,

had seized upon the ambiguity as a money-making opportunity. Again,

a decision to demand additional insurance for the purpose of

generating business for its affiliated insurance companies, and

thereby increase Bank profits, would reflect the improper motive

necessary to demonstrate a breach of the covenant of good faith and

good dealing.

We conclude that the allegations plausibly support such

a contention of improper motivation: Kolbe alleges that the Bank

demanded flood insurance in excess of his obligations under the

contract, see Compl. ¶¶ 13, 25-26, 32,18 that it did so in bad

18
These paragraphs allege, in pertinent part, as follows:

13. Defendants have a nationwide policy and
practice of requiring mortgagors of mortgages on real
estate located in geographic areas designated by the
United States government as having "special flood
hazards" to maintain flood insurance coverage in an
amount equal to the lesser of an amount established by
Defendants or the maximum flood insurance coverage
available under the National Flood Insurance Act of 1968
. . . . Defendants apply and enforce Defendants' Flood
Insurance Coverage Requirement even if it exceeds the
mortgagor's flood insurance coverage obligations and
Defendant BAC Home Loans' flood insurance rights under
the mortgage agreements.

25. [P]ursuant to the . . . provision of the

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faith, id. ¶ 55,19 and that the Bank or its related entities would

profit through the purchase of force-placed insurance, id. ¶¶ 15,

16.20 These allegations, in effect, amount to a claim that the

Mortgage Agreement and the applicable FHA regulations,
Plaintiff was required to maintain flood insurance
coverage for the Property in an amount equal to the
lesser of the outstanding balance on the Loan (less
estimated land costs) or the $250,000 maximum flood
insurance available under the Flood Insurance Act.

26. At all times . . . Plaintiff has maintained
flood insurance coverage on the Property in excess of the
outstanding balance of the Loan . . . . That flood
insurance coverage was greater than the amount of flood
insurance that Plaintiff was contractually obligated to
maintain on the Property pursuant to the Mortgage
Agreement and the above-referenced applicable FHA
regulations.

32. Defendants' requirement that Plaintiff purchase
additional flood insurance was neither required by, nor
permitted by, the Mortgage Agreement. . . . [T]he
Mortgage Agreement requires Plaintiff to maintain flood
insurance coverage of at least the outstanding balance of
the Loan less estimated land costs. Plaintiff was
already maintaining this level of flood insurance
coverage on the Property when the Defendants sent him the
October 18 and November 16, 2009 letters. Accordingly,
Plaintiff was fully satisfying his flood insurance
coverage obligation under the Mortgage Agreement and
fully fulfilling the Defendant BAC Home Loans' flood
insurance coverage rights under the Mortgage Agreement.
19
Paragraph 55 alleges:

By requiring Plaintiff and the Class to maintain and
pay for flood insurance coverage in excess of the
coverage required by their mortgage agreements,
Defendants acted in bad faith and breached the implied
covenant of good faith and fair dealing contained in the
mortgage agreements.
20
These paragraphs allege:

-122-
Bank's motivation for demanding additional flood insurance coverage

was to increase corporate profits by funneling new coverage to its

own affiliates.21 See, e.g., Abels v. JPMorgan Chase Bank, N.A.,

678 F. Supp. 2d 1273, 1276, 1278-79 (S.D. Fla. 2009) (declining to

dismiss claim alleging breach of implied covenant where plaintiffs

asserted that defendant "engaged in self-dealing by purchasing

insurance from one of its own affiliates"); cf. Artuso v. Vertex

Pharm., Inc., 637 F.3d 1, 9 (1st Cir. 2011) (holding that

"plaintiff's implied covenant claims founder because his complaint

15. Defendants enforce Defendants' Flood Insurance
Coverage Requirement by demanding that the mortgagors
obtain the amount of flood insurance coverage required by
Defendants. If the mortgagors fail to comply with
Defendants' demand, Defendants purchase flood insurance
coverage so that the total insurance coverage on the real
estate will meet Defendants' Flood Insurance Coverage
Requirement. Defendants then charge the mortgagors for
the cost of that additional insurance by either deducting
the insurance premiums from the escrow accounts
maintained by the mortgagors with Defendant BAC Home
Loans or by increasing the mortgagors' monthly mortgage
payments.

16. Defendants or their corporate subsidiaries or
affiliates profit when Defendants buy insurance for
mortgagors. Defendants often purchase the insurance from
Defendants' own affiliated insurance companies, including
Defendant Balboa, and/or place the insurance through
Defendants' own affiliated insurance brokers.
Defendants' affiliated insurance brokers receive
commissions on these insurance transactions and
Defendants' affiliated insurance companies, including
Balboa, receive the insurance premiums involuntarily paid
by the mortgagors.
21
Appellant argues that this alleged self-dealing would breach
the implied covenant even if the mortgage gave the Bank the
authority to require increased amounts of flood insurance.

-123-
contains only a threadbare allegation that 'the defendant terminated

[him] in bad faith . . . unaccompanied by any factual allegations

that might give rise to an inference of bad-faith conduct").22

The Bank contends that such a self-dealing claim fails as

a matter of law because Kolbe responded to the Bank's ultimatum by

purchasing the insurance himself, and the Bank therefore did not

benefit from Kolbe's acquisition of additional insurance. The Bank

cites no cases in support of its implicit contention that bad-faith

conduct designed to provide an opportunity for self-dealing cannot

constitute a breach of the implied covenant of good faith and fair

dealing under New Jersey law. Kolbe's decision under duress to

avoid the higher cost of force-placed insurance would seem an

inadequate defense if the Bank's motivation were improper. In any

event, in the absence of developed argument from the Bank, no more

needs to be said on this issue at this early stage of the case.

We thus conclude that the complaint alleges sufficient

facts to establish a breach of the covenant of good faith and fair

dealing that is "'plausible on its face,'" Iqbal, 556 U.S. at 678

22
The equivalent allegations in the other flood insurance case
we decide today, Lass v. Bank of America, N.A., No. 11-2037, are
more explicit. The plaintiff there alleged that the Bank had
breached the covenant of good faith and fair dealing by, inter
alia, "charging borrowers sham 'costs' for flood insurance that did
not reflect the true cost to Bank of America because a portion of
such 'costs' were retained by Bank of America and/or its affiliates
(or kicked back to them) as commissions or 'other compensation.'"
Compl. ¶ 75, App'x at 45.

-124-
(quoting Twombly, 550 U.S. at 570). Hence, the claim should not

have been dismissed.

III.

Defendants argue that the district court's judgment in

favor of Balboa should be affirmed even if the complaint is

reinstated against Bank of America. We agree. Balboa's alleged

involvement in the matters underlying Kolbe's lawsuit was limited

to preparing and sending the letters notifying Kolbe that he needed

to purchase additional flood insurance. See Compl. ¶ 29. Those

letters were sent on the letterhead of the Bank's predecessor, BAC

Home Loans Servicing, LP. The complaint is devoid of allegations

showing a contractual relationship between Kolbe and Balboa, and

Kolbe's bald assertion that Balboa "acted on its own behalf" in

"all of the actions described herein," id. ¶ 21, is inadequate to

state a plausible claim against the insurer for breach of contract

or breach of the implied covenant of good faith and fair dealing.23

Hence, we affirm dismissal of the complaint against Balboa.

IV.

For the foregoing reasons, the judgment of the district

court is affirmed in part, vacated in part, and remanded for

further proceedings consistent with this opinion. Costs are

awarded to the appellant.

So ordered.

23
Of course, the allegations concerning Balboa's role in
providing force-placed insurance at the Bank's behest remain
relevant to the implied covenant claim against the Bank.

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