Henry A. Bagelmann, Jr. And Mary Jo Bagelmann v. First National Bank and Iowa Bankers Mortgage Corporation

IN THE SUPREME COURT OF IOWA
No. 11–1484

Filed November 16, 2012

HENRY A. BAGELMANN, JR. and
MARY JO BAGELMANN,

Appellants,

vs.

FIRST NATIONAL BANK and
IOWA BANKERS MORTGAGE CORPORATION,

Appellees.

Appeal from the Iowa District Court for Bremer County, Bryan H.

McKinley, Judge.

Borrowers appeal summary judgment denying their tort and

contract claims arising out of alleged violations of the National Flood

Insurance Act by their lender and loan servicer. JUDGMENT OF THE

DISTRICT COURT AFFIRMED IN PART AND REVERSED IN PART;

CASE REMANDED FOR FURTHER PROCEEDINGS.

Bruce J. Toenjes of Nelson & Toenjes, Shell Rock, for appellants.

William D. Werger of Leslie, Collins, Gritters & Werger, PLLC,

Waverly, for appellee First National Bank.

Deborah M. Tharnish and Sarah K. Franklin of Davis, Brown,

Koehn, Shors & Roberts, P.C., Des Moines, for appellee Iowa Bankers

Mortgage Corporation.
 2

MANSFIELD, Justice.

This case is part of the fallout from the June 2008 flooding that

caused so much destruction in our state. In 2001, the Bagelmanns

purchased a home in Waverly along the Cedar River. At the time, they

were told, incorrectly, that the property was not in a special flood hazard

area and that flood insurance would not be required as a condition of

their loan. The Bagelmanns received the same erroneous information

again in 2003 when they refinanced their loan to pay for remodeling. In

the spring of 2008, their loan servicer was advised that the property

actually was in a special flood hazard area. However, this information

was not passed along to the Bagelmanns until after their home had

flooded on June 10, 2008, and it was too late to buy flood insurance.

Although the Bagelmanns ultimately received a FEMA buyout equal to

the preflood appraised value of their home, they contend they suffered

substantial monetary damages. They have brought suit against the

2001/2003 lender as well as the 2008 loan servicer.

The district court granted summary judgment to the defendants,

and the plaintiffs have appealed. We agree with much of the district

court’s analysis and uphold its conclusions that: (1) the Bagelmanns

cannot use the requirements of the National Flood Insurance Act (NFIA)

as a basis for a state-law claim; (2) the defendants did not breach a

contract with the Bagelmanns (including the covenant of good faith and

fair dealing); and (3) the Bagelmanns do not have a viable negligent

misrepresentation claim. However, we find a claim could potentially exist

based on Restatement (Second) of Torts section 551(2) and reverse and

remand for further proceedings thereon.
 3

I. Facts and Procedural Background.

This is an appeal from a grant of summary judgment, so we

“(1) view the facts in the light most favorable to the nonmoving party, and

(2) consider on behalf of the nonmoving party every legitimate inference

reasonably deduced from the record.” Van Fossen v. MidAmerican

Energy Co., 777 N.W.2d 689, 692–93 (Iowa 2009).

Henry and Mary Jo Bagelmann decided in August 2001 to move to

Waverly, Iowa. They came across a property for sale—1501 Horton Road,

adjacent to the Cedar River—and began the process of securing potential

financing. On or before August 8, 2001, the Bagelmanns met with

Beverly Leisinger, a mortgage loan officer at First National Bank of

Waverly (FNB). The Bagelmanns signed a loan application at that time.

Leisinger also informed the Bagelmanns that FNB would have to secure a

flood determination for the bank’s compliance with federal law

requirements. 1 Leisinger told the Bagelmanns that FNB used a specific

firm on a regular basis and told them the price. She said that she could

order the determination right away and share that information with

them.

FNB arranged for CBE-CIGNA Flood Services, a predecessor of
LandAmerica One Stop, Inc., to provide a flood zone determination.2

After examining Federal Emergency Management Agency (FEMA) flood

maps created in 1990, LandAmerica concluded, erroneously, that 1501

Horton Road was in “Flood Zone X” and did not require flood insurance.

Unfortunately, the property was actually in “Flood Zone AE,” an area

1Namely, the National Flood Insurance Act, 42 U.S.C. §§ 4001–4129 (2006).
2We will refer to LandAmerica and its predecessors collectively as
“LandAmerica.”
 4

subject to the insurance requirement, not “Flood Zone X.” Unbeknownst

at the time, LandAmerica had looked at the wrong map—one that did not

include 1501 Horton Road at all.

On or about August 14, 2001, Leisinger received the written

“Standard Flood Hazard Determination” from LandAmerica stating that

flood insurance was not required. She shared this information with the

Bagelmanns. She told the Bagelmanns, “[W]e got the flood determination

report and you do not need flood insurance.” The Bagelmanns contend

they would not have moved forward with the transaction if they had

known 1501 Horton Road was in a special flood hazard area.

On or about August 16, 2001, the Bagelmanns made an offer to

purchase the property, and on August 17, the Bagelmanns executed a

purchase agreement with the seller for $238,500. The seller’s disclosure

statement noted that some water had seeped up into the crawlspace in

the 1999 flood. The disclosure statement also stated that the property

was not located in a flood plain.

Before closing, the Bagelmanns took several steps to investigate

the property themselves. Henry Bagelmann personally inspected the

crawlspace and reviewed photographs from 1999 to confirm the accuracy

of the seller’s disclosure about previous flooding. In addition, the

Bagelmanns consulted with their insurance agent, who reiterated (based

on the erroneous flood hazard determination) that they did not need to

obtain flood insurance. Finally, the Bagelmanns arranged for someone

to survey 1501 Horton Road to determine its elevation relative to a

nearby bridge. The house was higher than the bridge and therefore, the

Bagelmanns concluded, would be safe from floods because the state

would not likely build a bridge at a flood-prone elevation.
 5

At closing, the Bagelmanns received a copy of LandAmerica’s flood

insurance determination. They also received and signed a notice

provided by FNB stating that the property was not in a special flood

hazard area and that flood insurance was not required, but cautioning

that the home may be “near a [special flood hazard area]” and that “you,

or your lender, may want to consider the advisability of obtaining flood

insurance at reduced rates.” The Bagelmanns were told to “make your

own determination as to whether you desire any such coverage.” The

Bagelmanns also paid FNB a $22 fee at closing for LandAmerica’s flood

hazard determination. This was listed on the settlement statement as

“FLOOD MONITORING TO THE CBE GROUP, INC.”

Two years later, in 2003, after having performed extensive

remodeling on their home, the Bagelmanns sought to refinance their

mortgage with FNB. Again, FNB hired LandAmerica to make the

federally required flood hazard determination, and again LandAmerica

erroneously placed 1501 Horton Road outside the special flood hazard

area. The Bagelmanns maintain they would not have remodeled their

home had they known it was in a flood hazard area. The settlement

statement shows the Bagelmanns paid an $18 fee for this flood hazard

determination. The fee was described as “FLOOD DETERMINATION TO

THE CBE GROUP, INC.” At the 2003 closing, the Bagelmanns received a

copy of LandAmerica’s flood insurance determination and signed another

notice advising them to consider purchasing flood insurance anyway,

and to make their own determination whether they desired such

coverage. 3

3The erroneous LandAmerica flood hazard determination that the Bagelmanns
received in 2003, unlike the one they had received in 2001, contained the following
bold-type disclaimer:
 6

Shortly after closing on the 2003 refinancing, FNB assigned the

loan to the Iowa Banker’s Mortgage Company (IBMC), which in turn sold

the loan to Fannie Mae. IBMC remained the loan servicer. The

Bagelmanns knew FNB planned to assign the refinanced loan. After the

assignment, the Bagelmanns sent their loan payments to IBMC.

FEMA issued new flood insurance maps on March 4, 2008. After

reviewing the maps, on March 28, LandAmerica issued a new flood

hazard determination to IBMC, correctly placing 1501 Horton in a special

flood hazard area. The property’s status on the maps did not change

from 1990 to 2008; the only difference was that LandAmerica read the

correct map this time. In late May, LandAmerica transmitted lists of

properties with “changed” flood hazard determinations (including 1501

Horton Road) to FNB and IBMC. FNB and IBMC concede they knew by

then that the Bagelmanns’ property was in a special flood hazard area

and required flood insurance as a loan condition. IBMC acknowledges it

may have known this earlier; it cannot tell when it received the March 28

notice from LandAmerica.

On June 10, 2008, catastrophic flooding of the Cedar River

severely damaged the Bagelmanns’ home. The flooding also damaged or

destroyed some of their personal property. On June 12, IBMC mailed the

Bagelmanns a letter dated June 9 that said, “We have been informed that

your property has been reviewed and is now considered to be in a flood

zone.” The letter said, “Please contact your insurance agent immediately

and obtain the insurance. The insurance must cover your loan balance
_______________________________
This flood determination is provided solely for the use and benefit of the
entity named in Section 1, Box 1 [i.e., FNB] in order to comply with the
1994 Reform Act and may not be used for or relied upon by any other
entity or individual for any purpose, including but not limited to deciding
whether to purchase a property or determining the value of a property.
 7

of $221,035.49.” The Bagelmanns received this letter on June 14. For

its part, FNB never sent the Bagelmanns a notice concerning the revised

flood hazard determination. Had the Bagelmanns been notified earlier

than June 14 that they were in a special flood hazard area, they contend

they would have purchased flood insurance (which could have been

bound immediately) and would have avoided a substantial loss on the

property.

Despite the fact that the property lacked flood insurance, FEMA

paid the Bagelmanns the preflood appraised value of $415,000 for their

property plus a $10,850 moving/relocation allowance. After netting the

mortgage payoff to Fannie Mae, the Bagelmanns received $190,647.33

for their home. However, even with the buyout, the Bagelmanns

maintain they suffered $418,872.98 in monetary damages that could

have been avoided.

LandAmerica is now in bankruptcy. 4 On September 29, 2010, the

Bagelmanns brought an action in the Bremer County District Court

asserting the following claims against FNB and IBMC: (1) breach of

contract against FNB for the initial incorrect flood hazard determinations

in 2001 and 2003; (2) breach of contract against both FNB and IBMC for
failing to make subsequent determinations and for failing to notify them

of the correct March 2008 determination before June 10, 2008;

(3) breach of contract against FNB and IBMC based on the theory that

the Bagelmanns were third-party beneficiaries of the loan assignment

agreement between FNB and IBMC; (4) negligence against FNB and IBMC

for the erroneous initial determinations, failing to make subsequent

correct determinations, and failing to timely notify them of the March

4The Bagelmanns filed a claim in the bankruptcy.
 8

2008 determination; (5) negligent misrepresentation against FNB for the

erroneous flood hazard determinations in 2001 and 2003; (6) breach of

the covenant of good faith and fair dealing against IBMC; and (7) punitive

damages against IBMC.

Subsequently, both FNB and IBMC moved for summary judgment.

Both defendants disputed that they had ever contracted with the

Bagelmanns to provide them with accurate flood hazard determinations

or that the assignment of the mortgage from FNB to IBMC covered this

subject. Both disputed that they had any legal duty to provide accurate

flood hazard determinations. FNB also argued that its employees were

not negligent and any negligence was that of LandAmerica. Additionally,

citing numerous out-of-state authorities, IBMC argued that recognizing a

negligence cause of action against it would be inconsistent with

principles of federalism given the absence of a federal cause of action

under the NFIA for erroneous flood hazard determinations. Lastly, IBMC

argued that it could not be sued for breaching a covenant of good faith

and fair dealing unless there was an underlying contract on the subject.

The district court granted summary judgment to both defendants.

It first noted that there was no private right of action available under the

NFIA. Then, it observed that most states considering the matter have

rejected state common law claims by borrowers against lenders for

erroneous flood hazard determinations. It found that there was no

contract between the parties concerning flood hazard determinations.

Additionally, it found that plaintiffs’ good faith and fair dealing claim

could not succeed outside the context of a contract, and that plaintiff’s

claim for punitive damages failed because it was based entirely on the

good faith and fair dealing claim. Lastly, relying on the structure and

purpose of the NFIA, the absence of a private right of action under that
 9

statute, and principles of federalism, it rejected plaintiffs’ negligence

claims. This appeal followed.

II. Standard of Review.

We review a district court’s grant of summary judgment for

correction of errors at law. Van Fossen, 777 N.W.2d at 692–93.

Summary judgment is proper when “the pleadings, depositions, answers

to interrogatories, and admissions on file, together with the affidavits, if

any, show that there is no genuine issue as to any material fact and that

the moving party is entitled to a judgment as a matter of law.” Iowa R.

Civ. P. 1.981(3).

III. Legal Analysis.

A. The National Flood Insurance Act. The National Flood

Insurance Act was originally enacted in 1968 with the goals of providing

affordable flood insurance to home owners living in high-risk areas and

easing the burden that flood disasters place on the federal treasury. 42

U.S.C. § 4002 (2006). The NFIA basically put the federal government in

the flood insurance business.

In 1973, the NFIA was amended to prohibit federally regulated

lending institutions from making any real estate loans in a special flood

hazard area unless the property was covered by flood insurance. Id.

§ 4012a(b). 5 Lenders were authorized to charge borrowers a “reasonable

5That provision states:
Each Federal entity for lending regulation . . . shall by regulation direct
regulated lending institutions not to make, increase, extend, or renew
any loan secured by improved real estate . . . located or to be located in
an area that has been identified by the Director as an area having special
flood hazards and in which flood insurance has been made available
under the National Flood Insurance Act of 1968, unless the building or
mobile home and any personal property securing such loan is covered for
the term of the loan by flood insurance in an amount at least equal to the
outstanding principal balance of the loan . . . .
 10

fee” to cover the initial determination whether a home is in a special flood

hazard area, and subsequent “life-of-loan monitoring.” 12 C.F.R.

§ 339.8(a) (2010). When property is in such an area, the lender must

notify the borrower of the requirement to have flood insurance. 42

U.S.C. § 4012a(e)(1). 6 If the borrower fails to buy such insurance within

forty-five days of being notified, the lender is required to buy it for the

borrower and charge the costs back to the borrower. Id. § 4012a(e)(2).

Also, a lender that has a “pattern or practice” of violating the

requirements of this section shall be assessed civil penalties “by the

appropriate Federal entity.” Id. § 4012a(f)(1)–(2); see also id. § 4104a(1)

(providing that “[e]ach Federal entity for lending regulation . . . shall by

regulation require regulated lending institutions” to give advance notice

of the flood insurance requirement before closing on the loan); 12 C.F.R.

§ 339.3 (prohibiting federally insured state banks from making loans in

special flood hazard areas unless the property is covered by flood

insurance).

_______________________________
42 U.S.C. § 4012a(b).
6That provision states:
If, at the time of origination or at any time during the term of a loan
secured by improved real estate . . . located in an area that has been
identified by the Director (at the time of the origination of the loan or at
any time during the term of the loan) as an area having special flood
hazards and in which flood insurance is available under the National
Flood Insurance Act of 1968, the lender or servicer for the loan
determines that the building . . . securing the loan is not covered by flood
insurance or is covered by such insurance in an amount less than the
amount required for the property pursuant to paragraph (1), (2), or (3) of
subsection (b) of this section, the lender or servicer shall notify the
borrower under the loan that the borrower should obtain, at the
borrower’s expense, an amount of flood insurance for the building . . .
that is not less than the amount under subsection (b)(1) of this section,
for the term of the loan.
Id. § 4012a(e)(1).
 11

Federal courts, including the Eighth Circuit, have uniformly found

that no express or implied federal private cause of action exists under

these provisions of the NFIA. In Hofbauer v. Northwestern National Bank

of Rochester, 700 F.2d 1197 (8th Cir. 1983), the court considered a fact

scenario somewhat similar to the present one. The Hofbauers had

purchased a home in Rochester, Minnesota, financed by Northwestern

National Bank. The bank failed to tell them the home was in a special

flood hazard area, the Hofbauers did not purchase flood insurance, and

later they suffered losses when their home flooded. The Hofbauers sued

the bank for violating the NFIA. Hofbauer, 700 F.2d at 1198–99.

The Eighth Circuit noted that no express right of action exists

under the statute. Id. at 1199. It added that other courts had previously

rejected an implied private right of action. Id. at 1200 (citing Arvai v.

First Fed. Sav. & Loan Ass’n, 698 F.2d 683 (4th Cir. 1983); Till v. Unifirst

Fed. Sav. & Loan Ass’n, 653 F.2d 152 (5th Cir. 1981); R.B.J. Apartments,

Inc. v. Gate City Sav. & Loan Ass’n, 315 N.W.2d 284 (N.D. 1982)).

Turning to its own analysis, the Eighth Circuit then pointed out that the

provisions in question “seem[] primarily concerned with protecting

lenders, not borrowers”; that they “do not directly require lenders to do

anything” and are “directed instead to those federal agencies that

supervise lenders”; that they contain “an administrative enforcement

mechanism”; and that other flood-insurance laws have an express

private right of action, showing that when Congress wanted to provide a

private remedy, it knew how to do so. Id. at 1200–01. For these reasons

the court found that no implied private right of action existed. Id.

Other decisions since Hofbauer have reinforced this conclusion.

See Paul v. Landsafe Flood Determination, Inc., 550 F.3d 511, 513 (5th

Cir. 2008) (stating that “the Act does not create an implied private right
 12

of action for borrowers when a determination is erroneously made that

property is outside a flood zone”); Mid-America Nat’l Bank of Chi. v. First

Sav. & Loan Ass’n of S. Holland, 737 F.2d 638, 643 (7th Cir. 1984)

(“Absent any indication that Congress intended a federal cause of action

in favor of borrowers against lenders under Sections 4012a(b) and

4104a, this Court is not in a position to create such a cause of action.”).

But it should be noted that the Eighth Circuit did not terminate

the litigation in Hofbauer. Instead it granted the Hofbauers’ request to

remand the case back to state court, explaining,

[e]ven though the Hofbauers cannot assert a private cause of
action arising under federal law, the federal statutes may
create a standard of conduct which, if broken, would give
rise to an action for common-law negligence. That is a
question of Minnesota law best left to the courts of that
State.

700 F.2d at 1201.

We are confronted here with the question that the Eighth Circuit

left open in Hofbauer: Can a borrower sue a lender under state law in

negligence for failing to discharge a duty created by the NFIA? For the

reasons that follow, we believe the answer to this question is no.

B. State Law Negligence Duties Arising out of Failure to

Comply with the National Flood Insurance Act. The Bagelmanns

allege that FNB was negligent in its issuance of the flood hazard

determinations in 2001 and 2003, and that both FNB and IBMC were

negligent in failing to timely notify them of the March 2008

redetermination. A number of state courts, citing principles of

federalism, have barred state negligence claims based upon alleged

violations of the NFIA. In Highmark Federal Credit Union v. Hunter, a

homeowner whose house had flooded sued the lender for negligently

failing to warn her to purchase flood insurance. 814 N.W.2d 413, 414
 13

(S.D. 2012). After recognizing that Hofbauer left this issue unresolved,

the court considered whether the homeowner could proceed under South

Dakota law. Id. at 416. The court noted that while the action was for

negligence, the underlying duty still arose from the NFIA. Id. The court

then concluded, “If the NFIA does not create a private right of action,

then it follows that an individual cannot use the NFIA to establish a duty

in an individual civil claim.” Id. at 418.

Other courts have reached the same result. See Wentwood

Woodside I, LP v. GMAC Commercial Mortg. Corp., 419 F.3d 310, 323 (5th

Cir. 2005) (holding that “section 4012a does not give rise to a private

right of action under Texas law for negligence per se”); Lukosus v. First

Tenn. Bank Nat’l Ass’n, 89 F. App’x 412, 412 (4th Cir. 2004) (rejecting

claims charging banks “with various common law offenses based on their

failure to provide proper flood certification”); Ellis v. Countrywide Home

Loans, Inc., 541 F. Supp. 2d 833, 838 (S.D. Miss. 2008) (making an Erie

guess that the Mississippi Supreme Court would decline to recognize

state common law claims against lenders for allegedly erroneous flood

hazard determinations); Duong v. Allstate Ins. Co., 499 F. Supp. 2d 700,

703–04 (E.D. La. 2007) (rejecting a claim under Louisiana law for failure

to make a correct flood hazard determination); Dollar v. NationsBank of

Ga., N.A., 534 S.E.2d 851, 853 (Ga. Ct. App. 2000) (holding that a bank

“had no duty to [its customer] to accurately make” a flood hazard

determination); Mid-America Nat’l Bank of Chi. v. First Sav. & Loan Ass’n

of S. Holland, 515 N.E.2d 176, 180 (Ill. App. Ct. 1987) (declining to adopt

the NFIA as the standard of care in a state negligent misrepresentation

action against lenders in light of “the separation of powers doctrine and

the principles of federalism which militated against Federal courts

formulating a private cause of action”); Jack v. City of Wichita, 933 P.2d
 14

787, 793 (Kan. Ct. App. 1997) (rejecting a borrower’s negligence claim

against a lender as without merit because “the [NFIA] do[es] not create a

duty which would support a claim for negligence” and because the

borrower–lender relationship “is not the sort of ‘special relationship’

which justifies imposing a duty”); Guyton v. FM Lending Servs., Inc., 681

S.E.2d 465, 473–75 (N.C. Ct. App. 2009) (declining to recognize a North

Carolina common law duty arising from the NFIA, but recognizing one

under that state’s Mortgage Lending Act); R.B.J. Apartments, 315 N.W.2d

at 289–90 (declining to allow a negligence cause of action based on

violation of the NFIA); Pippin v. Burkhalter, 279 S.E.2d 603, 604 (S.C.

1981) (“It is clear that the provisions are intended to protect a class of

loans supervised, approved, regulated or insured by the federal

government and all those associated with such loans. There can be no

implied cause of action in the purchaser.”).

The Bagelmanns cite no reported case that has recognized a state

law negligence claim by a borrower against a lender relating to an

erroneous flood hazard determination. Cf. Klecan v. Countrywide Home

Loans, Inc., 951 N.E.2d 1212, 1215–17 (Ill. App. Ct. 2011) (allowing state

law negligence action to go forward against a lender’s subsidiary that

performed the determination); Paul, 550 F.3d at 515–19 (allowing a state

law negligence action to proceed against the company that actually made

the flood hazard determination). 7

7In Small v. South Norwalk Savings Bank, which neither party referred to in their
briefing, the Connecticut Supreme Court upheld a negligence verdict in favor of a
homeowner against a lender for failing to disclose the property she had purchased was
located within a flood zone. 535 A.2d 1292, 1296–97 (Conn. 1988). However, as the
South Dakota Supreme Court noted in Highmark, the defendant in Small failed to file a
timely motion to set aside the verdict and thus the Connecticut Supreme Court’s review
was limited to plain error. See Highmark, 814 N.W.2d at 418; Small, 535 A.2d at 1295–
97.
 15

Although “federalism” may not be the best label to apply, we agree

with the reasoning in the foregoing cases. 8 The circumstance they

present is not one where a legal duty (e.g., to manufacture a safe

product) would otherwise exist under state law, and where federal law is

only being invoked as a standard of conduct. Cf. Hofbauer, 700 F.2d at

1201 (allowing for the possibility that “the federal statutes may create a

standard of conduct which, if broken, would give rise to an action for

common-law negligence”). Rather, the alleged duty to advise customers

about flood insurance in these cases arose only because of federal law.

In the absence of a statute, banks normally would not have an

underlying obligation to tell customers whether they need flood

insurance or not. See Engstrand v. W. Des Moines State Bank, 516

N.W.2d 797, 799 (Iowa 1994) (“The banking-customer relationship does

not automatically create a fiduciary duty.”); Fed. Land Bank of Omaha v.

Woods, 480 N.W.2d 61, 67 (Iowa 1992) (holding that a bank did not have

a duty to learn of or disclose defects in title); see also Dollar, 534 S.E.2d

at 853 (noting that the lender and the borrower “were involved in an

arm’s length mortgage transaction” rather than a “confidential

relationship” regarding the need for flood insurance); Jack, 933 P.2d at

793 (observing that the borrower–lender relationship does not justify

imposing a duty to advise the borrower that insurance would be

needed). 9 We therefore agree it would be inconsistent with the lack of a

8“Federalism,central to the constitutional design, adopts the principle that both
the National and State Governments have elements of sovereignty the other is bound to
respect.” Arizona v. United States, ___ U.S. ___, ___, 132 S. Ct. 2492, 2500, 183 L. Ed.
2d 351, 368 (2012). Yet normally we think of preemption, in its various forms, as the
means by which national sovereignty is protected. Id. at ___, 132 S. Ct. at 2500–01,
183 L. Ed. 2d at 368–69.
9Asa general matter, Iowa has adopted the following rule governing a mortgage
lender’s duty of care to a borrower:
 16

private right of action under the NFIA to authorize a negligence action

based upon a duty that exists only because of the NFIA. As the North

Carolina Court of Appeals has said:

[T]reating 42 U.S.C. § 4104a(a)(1) as creating an independent
state law duty would have the practical effect of recognizing
an implied private right of action under that statute in all
but name. Like other courts that have considered this
approach, we believe that it would inappropriately
circumvent the widely-accepted understanding that
Congress did not intend to create a federal private right of
action under 42 U.S.C. § 4104a(a)(1) to directly utilize that
statutory provision as the basis for a state law claim. As a
result, we believe that a state law claim of the type that
Plaintiffs have sought to assert against Defendant, if any,
must rest on a legal duty arising under one or more
provisions of state law totally independent of 42 U.S.C.
§ 4104a(a)(1).

Guyton, 681 S.E.2d at 474–75 (footnote omitted).

The NFIA protects borrowers to a certain degree, but its main focus

is on protecting regulated lenders and the federal government. This is

evident in the actual requirements the Act imposes. The insurance only

needs to be sufficient to cover the outstanding principal balance of the

loan. 42 U.S.C. § 4012a(b)(1). “If Congress had passed the statute

primarily for the benefit of borrowers, it would have required that they
insure their equity in the home.” Hofbauer, 700 F.2d at 1200. Moreover,

if the law were designed to offer broad protection to homeowners in flood

zones, it would not have limited the insurance requirement only to those
_______________________________
“Ordinarily, there is no duty on the part of a lender to inspect the
mortgaged property to determine that the borrower is obtaining that
which he may have been promised by the vendor or that which he
believes he is obtaining. Unless some further obligation is assumed, the
lender’s inspection of the premises to be mortgaged is made only to
ascertain whether the property has sufficient value to secure the loan
and is made by the lender for its benefit only.”
Fed. Land Bank of Omaha, 480 N.W.2d at 67 (quoting Fed. Land Bank of Baltimore v.
Fetner, 410 A.2d 344, 348 (Pa. 1979)).
 17

homes financed by federally regulated lenders. 42 U.S.C. § 4012a(b)(1).

More specifically, the Act’s scope suggests that disclosure to borrowers

was not a principal goal. There is no requirement that lenders provide

any detail regarding flood risks, beyond a notification that a property is

in a flood zone and requires insurance. See id. §§ 4012a(e)(1),

4104a(a)(1).

If the lenders that the NFIA seeks to shield from financial harm

were subjected to common law liability derived from the Act, this could

be seen as undermining the purposes of the Act. Other state courts

share this concern:

The policy of protecting the Federal treasury would not be
furthered by holding federally insured lenders liable under
the Act. The statutes themselves do not directly confer any
benefit on borrowers, nor do they directly impose any burden
on lenders. The statutes, along with the regulation, are part
of a comprehensive administrative scheme. The proper
Federal agency has authority to issue cease and desist
orders against bank officials, terminate unsound practices,
impose administrative remedies including penalties, and
require affirmative action to prevent or correct violations.
The existence of such supervisory and enforcement authority
at the administrative level strongly suggests no broad private
remedies were intended. Furthermore, Congress expressly
provided for private rights of action under other provisions of
the Act. Congress balanced the competing interests of
borrowers, lenders, and the government through the use of
an administrative agency. Recognizing either a contract or
negligence action under the Act might upset this balance.

Lehmann v. Arnold, 484 N.E.2d 473, 481 (Ill. App. Ct. 1985) (citations

omitted) (declining to recognize a cause of action under Illinois law

against a lender for failing to comply with NFIA requirements).

C. The Bagelmanns’ Negligence Claims. None of this, however,

forecloses the possibility that an independent state law duty could exist

based upon something other than a violation of the NFIA. See Guyton,

681 S.E.2d at 475 (reversing dismissal of borrowers’ claims to the extent
 18

they “alleged conduct on the part of Defendant sufficient to establish a

violation of a legal duty established under North Carolina state law

independent of 42 U.S.C. § 4104a(a)(1)”).

The Bagelmanns advance one candidate for such a duty, the

“assumed duty” provision of the Second Restatement of Torts. See

Restatement (Second) of Torts § 323 (1965). 10 The Bagelmanns argue

that FNB (at least) undertook to render a service to them when it started

to advise them regarding the requirement (or lack of a requirement) for

flood insurance. Hence, it was required to perform that service with due

care. See id.

The problem with this argument is that only when the defendant

“intends to render services to another that are necessary for the other’s

protection is liability under section 323 even possible.” Wright v. Brooke

Grp. Ltd., 652 N.W.2d 159, 177–78 (Iowa 2002) (holding that statements

by tobacco companies that they would report on the results of their

research into the health effects of cigarette smoking were not an

undertaking within the meaning of section 323). Here FNB, and later

IBMC, were not trying to render a service to the Bagelmanns for the

Bagelmanns’ protection. They were complying with a federal law that

required them to determine whether the property was in a special flood

10This section provides:
One who undertakes, gratuitously or for consideration, to render services
to another which he should recognize as necessary for the protection of
the other’s person or things, is subject to liability to the other for
physical harm resulting from his failure to exercise reasonable care to
perform his undertaking, if
(a) his failure to exercise such care increases the risk of such harm, or
(b) the harm is suffered because of the other’s reliance upon the
undertaking.
Restatement (Second) of Torts § 323, at 135 (1965).
 19

zone and, if so, give notice and make certain that the property was

covered by flood insurance. See, e.g., Duong, 499 F. Supp. 2d at 704

(“Both Louisiana courts and federal courts agree that a flood zone

determination is undertaken for the benefit of the lender and not for the

benefit of the borrower.”); Dollar, 534 S.E.2d at 853 (noting that “[the

bank’s] determination as to whether or not [the borrower’s] residence was

in a flood hazard zone was made, not for [the borrower’s] benefit, but for

the purpose of protecting the bank’s interest in its collateral”). 11

A lender “undertakes” to notify a borrower regarding the need for

flood insurance because federal law requires it to do so. Hence, the

Bagelmanns’ section 323 argument becomes essentially another way to

try to convert the statutory requirements of the NFIA into a state

common law duty. If section 323 were a sufficient basis for imposing an

affirmative duty on lenders to exercise due care to notify borrowers

regarding the need for flood insurance, it could have been asserted in

any of the foregoing cases that rejected state common law claims. Based

on our prior reasoning, we do not believe section 323 constitutes an

independent ground for finding a state law duty here.

However, this case presents a wrinkle that did not exist in the

other state common law cases we have discussed above. Here the

Bagelmanns have provided evidence from which a fact finder could draw

an inference that FNB and IBMC knew (not merely should have known)

by at least late May 2008 that their property was in a flood zone, and

that prior representations to the contrary were incorrect. Is this a

circumstance that under Iowa law could give rise to a claim, even if the

11Neither party disputes that FNB’s representative told the Bagelmanns in their
initial meeting “that the Bank would have to secure a flood determination for the Bank’s
compliance with . . . federal law requirements.”
 20

NFIA did not exist? Restatement (Second) of Torts section 551(2)

provides:

(2) One party to a business transaction is under a duty to
exercise reasonable care to disclose to the other before the
transaction is consummated,

....

(c) subsequently acquired information that he knows will
make untrue or misleading a previous representation that
when made was true or believed to be so . . . .
Restatement (Second) of Torts § 551(2), at 119 (1977).
In other words, under the Restatement, there is a duty to exercise
reasonable care to disclose information that a party to a not-yet-

consummated business transaction knows will make untrue or

misleading a previous representation. This duty, we believe, could not

apply to FNB, since in 2008 it no longer had a banking relationship with

the Bagelmanns. See Dahlgren v. First Nat’l Bank of Holdrege, 533 F.3d

681, 697 (8th Cir. 2008) (rejecting the application of Restatement section

551 to “a transaction occurring after the bank is no longer financing the

customer”). However, in Wright, we held a manufacturer of cigarettes

could be liable under section 551(2) for failing to disclose to a consumer

“subsequently acquired information that would prevent a prior statement

from being false or misleading.” 652 N.W.2d at 175–76.

In Guyton, the court recognized the plaintiffs’ theory that the

lender “actively and intentionally withheld the information that the

property lay in a flood plain . . . in order to induce Plaintiffs to purchase

the property” could be an independent state law basis for liability. 681

S.E.2d at 475. Here, by contrast, the Bagelmanns have not alleged

fraudulent conduct, merely negligent conduct. Yet, in light of the

existence of section 551(2), we are not prepared to say at this time that
 21

they have no claim against IBMC over its failure to disclose the new flood

hazard determination before June 10, 2008.

We are not deciding that the Bagelmanns actually have a valid

§ 551(2) claim. Issues that have not been briefed to us need to be

addressed, including whether there was a “transaction” that was yet to

be “consummated.” Other legal or factual defenses may exist as well. It

would not be appropriate for us to decide these matters at the present

time.

Therefore, on the Bagelmanns’ negligence claim, we affirm the

grant of summary judgment to FNB, but reverse the grant of summary

judgment to IBMC and remand for further proceedings on a potential

claim based on Restatement (Second) of Torts section 551(2).

D. Negligent Misrepresentation. The Bagelmanns have asserted

a negligent misrepresentation claim against FNB only. They allege that

the erroneous flood hazard determinations they received from FNB in

2001 and 2003 amounted to negligent misrepresentations. Iowa has

adopted the definition of the tort of negligent misrepresentation found in

the Restatement (Second) of Torts. Pitts v. Farm Bureau Life Ins. Co., 818

N.W.2d 91, 111 (Iowa 2012). The elements are as follows:

(1) One who, in the course of his business, profession or
employment, or in any other transaction in which he has a
pecuniary interest, supplies false information for the
guidance of others in their business transactions, is subject
to liability for pecuniary loss caused to them by their
justifiable reliance upon the information, if he fails to
exercise reasonable care or competence in obtaining or
communicating the information.

(2) Except as stated in Subsection (3), the liability stated in
Subsection (1) is limited to loss suffered

(a) by the person or one of a limited group of persons
for whose benefit and guidance he intends to supply the
information or knows that the recipient intends to supply it;
and
 22
(b) through reliance upon it in a transaction that he
intends the information to influence or knows that the
recipient so intends or in a substantially similar transaction.

(3) The liability of one who is under a public duty to give the
information extends to loss suffered by any of the class of
persons for whose benefit the duty is created, in any of the
transactions in which it is intended to protect them.

Restatement (Second) of Torts § 552, at 126–27 (1977).

FNB points out that some out-of-state decisions have rejected

negligent misrepresentation claims filed against lenders over erroneous

flood hazard determinations, applying the same rationale that has led to

the dismissal of general negligence claims. See, e.g., Duong, 499

F. Supp. 2d at 704; Mid-America Nat’l Bank of Chi., 515 N.E.2d at 180.

The Bagelmanns note, however, that a North Carolina appellate case

appears to recognize negligent misrepresentation as a potentially viable

ground for a borrower to recover from a lender based on a mistaken flood

hazard determination. See Guyton, 681 S.E.2d at 478–79 (ultimately

denying the claim because plaintiffs alleged only that defendant “acted

intentionally without ever advancing an alternative allegation that

Defendant acted unintentionally or negligently”).

The Bagelmanns analogize the present case to Larsen v. United

Federal Savings & Loan Ass’n of Des Moines, 300 N.W.2d 281 (Iowa

1981). Larsen was a negligent misrepresentation case where we upheld a

jury verdict against a lender whose employee had negligently prepared an

inflated appraisal. 300 N.W.2d at 283–85. The borrowers had overpaid

for the house in reliance on the appraisal. Id. We specifically found the

lender owed a duty to the borrower under the circumstances of that case.

Id. at 285–88. We observed:

Even though the appraisal might be made primarily for the
benefit of the lending institution, the appraiser should also
reasonably expect the home purchaser, who pays for the
 23
appraisal and to whom the results are reported (and who has
access to the written report on request), will rely on the
appraisal to reaffirm his or her belief the home is worth the
price he or she offered for it. The purchaser of the home
should be among those entitled to rely on the accuracy of the
report and therefore should be entitled to sue for damages
resulting from a negligent appraisal.

Id. at 287.
Additionally, plaintiffs draw a parallel between this case and

Garren v. First Realty, Ltd., 481 N.W.2d 335 (Iowa 1992). In Garren, the

plaintiffs were not told the property they were buying was in a fringe

flood zone. 481 N.W.2d at 336. The property later was damaged by

flooding. Id. After settling with the appraiser, the mortgage lender, and

the sellers, the plaintiffs sued the real estate broker. Id. They obtained a

jury verdict, but it was reduced due to the apportionment of fault among

the settling parties. Id. at 337. The plaintiffs appealed the decision to

apportion fault. Id.

We held that fault was properly apportioned among those parties.

Id. at 339–40. The plaintiffs argued they had not relied upon the lender

and the appraiser to disclose flood zoning, but we found “it can be

properly inferred that plaintiffs relied on the lender and appraiser to

accurately appraise the property.” Id. at 340. As in Larsen, the plaintiffs

“paid the lender a fee to have the property appraised.” Id. “The

appraiser was required to determine whether the property was in a flood

zone.” Id. The plaintiffs certified in their loan application their

awareness of the appraisal amount. Id. Garren contains no mention of

flood insurance; like Larsen, it is a case where the theory of lender

liability was based on an inaccurate appraisal. Id.

The Bagelmanns contend that a flood hazard determination is

similar to an appraisal: While the document is prepared principally for

the lender, the borrower has to pay for it and should be able to bring a
 24

negligent misrepresentation claim if it is inaccurate due to the fault of

the lender. 12

Yet we need not resolve whether Larsen and Garren control the

duty question here, because the summary judgment record contains no

evidence of FNB’s negligence with respect to the 2001 and 2003 flood

hazard determinations. FNB moved for summary judgment below on the

alternative ground that it had not been negligent. It maintained that

“[n]o FNB employees actually performed either of the flood certifications”

and “[n]o FNB employees had any knowledge or could have reasonably

known that the flood certifications were not accurate.” Before us, it

makes the same arguments:

There is no allegation FNB did not use reasonable care
in securing a flood determination from a third party
according to the applicable federal law . . . . The provider of
an erroneous flood determination may have a duty under
Section 552 of the Restatement Second that would allow a
negligent misrepresentation claim, but the lender that
ordered the determination and does not have reason to know
it is inaccurate certainly would not.

See DeVoss v. State, 648 N.W.2d 56, 61 (Iowa 2002) (“We have in a

number of cases upheld a district court ruling on a ground other than

the one upon which the district court relied provided the ground was

12Additionally, in Sturm v. Peoples Trust & Savings Bank, despite finding no
private right of action under federal law to sustain a borrower’s claim against a lender
over a loan disclosure, we nonetheless separately considered the borrower’s negligent
misrepresentation claim. 713 N.W.2d 1, 4–5 (Iowa 2006). There the plaintiffs alleged
that the HUD-1’s they had signed failed to comply with the applicable federal law, i.e.,
the Real Estate Settlement Procedures Act (RESPA), and amounted to negligent
misrepresentations. Id. at 2 (“The gist of the Sturms’ suit against Peoples is that the
loan papers were deficient under federal statutes and common law.”). After finding no
private right of action under RESPA, we went on to address the plaintiffs’ negligent
misrepresentation claim, noting the plaintiffs’ contention that it “provided a basis for
recovery independent of their statutory claim.” Id. at 4. We ultimately upheld the
dismissal of that claim on other grounds. Id. at 5. Thus, we did not decide the
question whether a negligent misrepresentation claim could proceed if the duty to issue
the HUD-1’s arose only because of RESPA.
 25

urged in that court.”). We therefore may affirm summary judgment on

the negligent misrepresentation claim on this alternative ground.

Unlike in Larsen, where the bank’s own employee performed the

appraisal, here FNB hired a third party—LandAmerica—to make the

flood hazard determinations. 13 There is no evidence or allegation that

FNB acted negligently in retaining this company. Nor is there any

indication that FNB should have realized the information in

LandAmerica’s reports was incorrect. The only negligence alleged by the

Bagelmanns with respect to this time period—reading the wrong map

and reaching the wrong special flood hazard area conclusion—belongs to

another party. Accordingly, the district court properly granted summary

judgment to FNB on the Bagelmanns’ negligent misrepresentation claim.

E. Breach of Contract. We turn now to the Bagelmanns’ breach

of contract claims. If FNB or IBMC had entered into a contract to provide

the Bagelmanns with accurate flood hazard determinations, this could

result in the creation of an independent legal duty, notwithstanding the

absence of a private right of action under the NFIA.

The Bagelmanns are fairly clear as to what allegedly amounted to

breaches of contract, namely, the inaccurate 2001 and 2003 flood hazard

determinations and the failure to provide a correct determination before

June 10, 2008. However, they are less clear as to where the contracts

themselves can be found.

After reviewing their briefing, we believe the Bagelmanns are

potentially relying on the following transactions as relevant contracts:

(1) their $22 payment for the 2001 flood hazard determination, (2) their

13In Garren it appears the appraiser was not an employee of the lender.
However, the negligence of the lender was not at issue.
 26

$18 payment for the 2003 determination, (3) the mortgages, and (4) the

assignment agreement between FNB and IBMC. We will address these in

order.

As the Bagelmanns note, in 2001 and 2003 they paid fees at

closing for written flood hazard determinations performed by a third

party that were later discovered to be incorrect. However, both the 2001

and the 2003 determinations stated that they were prepared by

LandAmerica when the Bagelmanns received them. The Bagelmanns

had been advised that FNB was ordering these reports from a third

party. 14 The settlement statements indicated that the fees for these

determinations were being paid to that third party. The Bagelmanns

have no evidence that FNB guaranteed or warranted the accuracy of

these third-party determinations. See, e.g., Cardozo v. True, 342 So. 2d

1053, 1057 (Fla. Dist. Ct. App. 1977) (stating that a bookseller does not

impliedly warrant the material communicated by the book’s author or

publisher). In fact, the 2003 determination said in bold type that the

determination was provided solely for the benefit of FNB and “may not be

used for or relied upon by any other entity or individual for any purpose,

including, but not limited to deciding whether to purchase a property or
determining the value of a property.”

The 2001 mortgage is not in the record. Regardless, it would have

been discharged at the time of the 2003 refinancing. The 2003 mortgage

was an integrated contract that authorized the lender to require the

borrower to pay for “flood zone determination.” However, as noted above,

there was no warranty or guaranty of the accuracy of the flood hazard

14The
Bagelmanns claim they were not aware that FNB had failed to make an
independent investigation of the flood hazard status. However, they do not cite any
communication with FNB as leading them to that conclusion.
 27

determination. In fact, the flood hazard determination said it was “solely

for the use and benefit” of FNB and “may not be used for or relied upon

by any other entity or individual for any purpose.” The mortgage

contained no promise to notify the mortgagors of updated flood hazard

determinations. See Lass v. Bank of Am., N.A., 695 F.3d 129, 136 (1st

Cir. 2012) (indicating that the mortgage and the flood insurance

notification provided at closing should be read together as a single

contract); see also Sobi v. First S. Bank, Inc., 946 So. 2d 615, 616–617

(Fla. Dist. Ct. App. 2007) (noting that a construction loan agreement gave

the bank the right to require flood insurance but did not require it to

obtain a flood insurance certificate before funding construction draws).

The Bagelmanns have not shown a triable issue of fact as to whether

FNB (or IBMC) breached the 2001 or 2003 mortgages.

Finally, we cannot conclude that the Bagelmanns were third-party

beneficiaries of the assignment agreement between IBMC and FNB. A

third-party beneficiary claim requires that “ ‘the circumstances indicate

that the promisee intends to give the beneficiary the benefit of the

promised performance.’ ” Midwest Dredging Co. v. McAninch Corp., 424

N.W.2d 216, 224 (Iowa 1988) (quoting Restatement (Second) of Contracts

§ 302, at 439–40 (1981)). This one-page document does not include a

promise that IBMC would provide flood hazard determinations, let alone

indicate that such determinations would be for the benefit of the

Bagelmanns. The Bagelmanns argue, “Perhaps the biggest problem with

the District Court’s conclusion that there was no contract to notify the

Bagelmanns of changes in the flood hazard status is that IBMC did in

fact notify the Bagelmanns of the change in the flood hazard status in

June of 2008.” But as we have already discussed, federal law required

IBMC to do this. 42 U.S.C. § 4012a(e)(1).
 28

We are unaware of any out-of-state case recognizing that a lender

had an independent contractual obligation to accurately perform an

NFIA-required flood hazard determination. Instead, a few cases have

rejected breach of contract claims, albeit with limited discussion and

analysis. See Lukosus v. First Tenn. Bank Nat’l Ass’n, No. 2:02CV00084,

2003 WL 21658263, at *1–2 & n.3 (W.D. Va. July 9, 2003) (dismissing

breach of contract claim), aff’d 89 F. App’x 412 (4th Cir. 2004); Lehmann,

484 N.E.2d at 481 (upholding dismissal of both negligence and breach of

contract claims and stating that “[r]ecognizing either a contract or

negligence action under the Act might upset” the balance struck by

Congress).

For the foregoing reasons, we affirm the entry of summary

judgment on the Bagelmanns’ breach of contract claims.

F. Covenant of Good Faith and Fair Dealing. The Bagelmanns

also allege that IBMC breached an implied covenant of good faith and fair

dealing when it delayed in telling them about the 2008 flood hazard

determination.

We agree with the district court that this claim cannot succeed as

a matter of law. An implied duty of good faith and fair dealing is

recognized in all contracts. Restatement (Second) of Contracts § 205, at

99; Fogel v. Trs. of Iowa Coll., 446 N.W.2d 451, 456 (Iowa 1989). But the

covenant does not “give rise to new substantive terms that do not

otherwise exist in the contract.” Mid-America Real Estate Co. v. Iowa

Realty Co., 406 F.3d 969, 974 (8th Cir. 2005) (quoting Mattes v. ABC

Plastics, Inc., 323 F.3d 695, 700 (8th Cir. 2003)).

As we have already discussed, the 2003 mortgage (the 2001

mortgage was no longer in effect as of 2008) authorized the mortgagee to

charge for a flood hazard determination. But this section of the mortgage
 29

and the determination itself make clear that the determination was for

the mortgagee’s protection, not the mortgagors’. There was no promise to

notify (let alone update) the Bagelmanns concerning their flood zone

status, so any allegation of bad faith here lacks a contract term to which

it can be attached. We affirm the grant of summary judgment to IBMC

on this count. 15

IV. Conclusion.

For the above stated reasons, the judgment of the district court is

affirmed as to FNB. Regarding IBMC, we affirm as to all counts except

negligence (Count 4), where we reverse and remand for further

consideration of a possible claim based upon Restatement (Second) of

Torts section 551(2).

JUDGMENT OF THE DISTRICT COURT AFFIRMED IN PART

AND REVERSED IN PART; CASE REMANDED FOR FURTHER

PROCEEDINGS.

All justices concur except Zager, J., who takes no part.

15We also affirm the district court’s grant of summary judgment on the
Bagelmanns’ claim for punitive damages. That claim derives entirely from the breach of
the duty of good faith and fair dealing claim.