Bagelmann v. First Nat'l Bank

• Decision Date: 16 November 2012
• Docket Number: No. 11–1484.,11–1484.
• Citation: 823 N.W.2d 18
• Parties: Henry A. BAGELMANN, Jr. and Mary Jo Bagelmann, Appellants, v. FIRST NATIONAL BANK and Iowa Bankers Mortgage Corporation, Appellees.
• Court: Iowa Supreme Court

823 N.W.2d 18

Henry A. BAGELMANN, Jr. and Mary Jo Bagelmann, Appellants,

v.FIRST NATIONAL BANK and Iowa Bankers Mortgage Corporation, Appellees.

No. 11–1484.

Supreme Court of Iowa.

Nov. 16, 2012.

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.

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.

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 Area (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 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.

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 determinationwhether they desired such coverage.³

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 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 ...