Custer v. Homeside Lending, Inc.

• Decision Date: 14 March 2003
• Citation: 858 So.2d 233
• Parties: Raymond CUSTER and Elizabeth Custer v. HOMESIDE LENDING, INC.
• Court: Alabama Supreme Court

858 So.2d 233

Raymond CUSTER and Elizabeth Custer v. HOMESIDE LENDING, INC.

1011409.

Supreme Court of Alabama.

March 14, 2003.

W. Lewis Garrison, Jr., and W.A. Hopton-Jones, Jr., of Garrison, Scott, Gamble & Rosenthal, P.C., Birmingham; and Cecil G. Duffee III of Duffee & Associates, Birmingham, for appellants.

John E. Goodman of Bradley Arant Rose & White, LLP, Birmingham; and John C. Englander of Goodwin Procter, LLP, Boston, Massachusetts, for appellee.

HARWOOD, Justice.

Raymond Custer and his wife, Elizabeth, sued Homeside Lending, Inc. ("Homeside"), the current holder of a mortgage on residential property owned by the Custers, as well as WNC Insurance Services, Inc. ("WNC"), an insurance provider, on November 5, 1999. WNC had entered into a "Policy of Insurance Contract" with Homeside whereby WNC would "force-place"¹ flood insurance for certain Homeside borrowers. Pursuant to this agreement, WNC agreed to bind coverage on properties encumbered by Homeside mortgages, and, if needed, to force-place flood insurance with certain underwriters. WNC had also entered into a "Servicing Agreement" with Homeside pursuant to which WNC agreed to provide flood audit services² and Homeside agreed to purchase from WNC flood insurance Homeside forced-placed on the mortgages it serviced.

The action was filed as a class action pursuant to Rule 23, Ala. R. Civ. P., on behalf of a class of persons who, within the six-year period preceding the filing of the complaint, had had a mortgage loan serviced by Homeside and had had flood insurance force-placed under a WNC policy in an amount that exceeded the outstanding balance of their loans. As finally amended, the Custers' complaint sought compensatory and punitive damages on claims of breach of contract, unjust enrichment, breach of duty of good faith and fair dealing, negligence, fraud by suppression, breach of a duty to a third-party beneficiary, and breach of an implied contract.

Homeside filed a motion for a summary judgment as to all claims with supporting evidentiary materials. The Custers filed a response and later filed a supplemental response. WNC then filed its own motion for a summary judgment, without opposition from the Custers, which the trial court granted.³ Thereafter, the trial court entered a partial summary judgment in favor of Homeside on all claims except the Custers' breach-of-express-contract claim and third-party-beneficiary claim, without stating its reasons for denying the summary-judgment motion as to those claims. Homeside then filed a "Motion for Reconsideration and Renewed Motion for Summary Judgment" on the breach-of-express-contract and third-party-beneficiary claims. Subsequently, the trial court reconsidered Homeside's summary-judgment motion and, again without stating a rationale, entered a summary judgment on the case action summary sheet in favor of Homeside as to those claims as well. The trial court also denied class certification of the Custers' claims. The Custers then appealed.

The record reveals that the Custers own a residence in Birmingham, Alabama, which they purchased in 1970, executing a purchase-money mortgage for $18,150 to Cobbs, Allen & Hall Mortgage Company, Inc. ("Cobbs, Allen & Hall"), located in Birmingham. The mortgage did not require the Custers to maintain flood insurance on the mortgaged property. However, the mortgage contained the following relevant provisions:

"THIS MORTGAGE IS MADE, however, subject to the following covenants, conditions, and agreements, that is to say:

". . . .

"7. That [the Mortgagor] will keep the improvements now existing or hereafter erected on the mortgaged property, 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.

"8. If the Mortgagor fails to insure said property as hereinabove provided, or to pay all or any part of the taxes or assessments levied, accrued, or assessed upon or against said property of the indebtedness secured hereby, or any interest of the Mortgagee in either, or fails to pay immediately and discharge any and all liens, debts, and/or charges which might become liens superior to the lien of this mortgage, the Mortgagee may, at its option, insure said property and/or pay said taxes, assessments, debts, liens, and/or charges, and any money which the Mortgagee shall have so paid or become obligated to pay shall constitute a debt to the Mortgagee additional to the debt hereby specially secured, shall be secured by this mortgage, shall bear legal interest from the date paid or incurred, and, at the option of the Mortgagee shall be immediately due and payable."

(Emphasis added.) The record also shows that Homeside's loan-servicing portfolio consists of loans it originated as well as loans it acquired from other entities, many of which date back to the 1970s. Thus, there is no single standard form mortgage in Homeside's portfolio.

The Custer loan was transferred several times to various mortgage-loan-servicing companies over the course of its life; it was transferred to Homeside in 1989. At Homeside, the Custer loan became subject to the audits of Homeside's loan portfolio designed to determine if any of the properties in the portfolio were within a special flood hazard area ("an SFHA"). In the case of the Custers' loan, WNC used the services of Z.C. Sterling Corporation ("Sterling"), a company that sometimes conducted independent audits on properties in Homeside's loan portfolio. Once Sterling determined that a Homeside property was within an SFHA, it would notify WNC electronically, and a "binder"⁴ would be issued, to be later converted into a policy. In accordance with the "Policy of Insurance Contract" WNC had with Homeside, WNC would provide a binder, and if necessary, place the force-placed flood insurance with certain underwriters. The flood insurance force-placed on the Custers' property was issued and bound pursuant to the "Policy of Insurance Contract" between Homeside and WNC. The "Servicing Agreement" between Homeside and WNC had no connection to the flood insurance that was force-placed on the Custers' property. As stated in the deposition of Ofelia Chuante, the senior vice president in charge of compliance, underwriting and claims for WNC, during the period between 1993 and 2000, WNC issued approximately 6,000 force-placed flood-insurance policies on properties encumbered by mortgages serviced by Homeside as a result of Sterling's audits.

Homeside executed a separate servicing agreement directly with Sterling, then known as American Sterling, on June 4, 1994.⁵ Pursuant to the terms of that agreement, Sterling notified WNC that the Custers' property was deemed to be within an SFHA so that a binder could be issued.⁶

Sterling sent notification letters to the Custers in April, May, and June 1999. The April 1999 letter, written on Homeside letterhead and as required by the National Flood Insurance Act, 42 U.S.C. § 4001 et seq. ("the NFIA"),⁷ stated, in pertinent part:

"Dear R M Custer,

"We recently completed a review of your loan file to ensure that our information is complete and accurate. Unfortunately, we found that your file does not contain a current flood insurance policy.

"Please help us to complete your file by giving us a copy of your current policy, or providing the information requested on the attached form within the next 60 days."

(Emphasis in original.)

The Custers received a second letter, also written on Homeside letterhead, regarding flood insurance in May 1999; that letter stated, in relevant part:

"Dear R M Custer,

"About a month ago, you were notified by letter that your property is located in a federally-designated Special Flood Hazard Area (SFHA).[⁸] Our mortgage loan guidelines and/or federal law require you to purchase flood insurance. Our letter further advised that if you did not respond within 60 days, we would purchase our own flood insurance and charge you for our premium and a non-refundable service charge of $50.00, pursuant to the terms of your loan documents.

"Please note that we have not received an adequate response to our letter. Unless we receive a response within the next 30 days, we will purchase our own insurance and you will be charged accordingly. If you purchase your own insurance after the 30 day period, we will cancel our insurance and charge you only a prorated premium for the time our insurance was in effect.

"If you have not already purchased flood insurance, we encourage you to contact your local insurance agent. In most cases, your agent can provide insurance at the lowest cost available through the National Flood Insurance Program.

". . . .

"NOTICE: IF WE MUST PURCHASE OUR OWN FLOOD INSURANCE BECAUSE OF YOUR FAILURE TO RESPOND TO THIS NOTICE, THE COST OF OUR INSURANCE MAY BE SIGNIFICANTLY HIGHER THAN THE COST OF INSURANCE PURCHASED THROUGH YOUR OWN AGENT. IN ADDITION, COVERAGE FOR YOUR PERSONAL PROPERTY CAN ONLY BE PURCHASED THROUGH YOUR AGENT."

(Boldface in original.) The letter also contained a section that stated "Required Flood Insurance Amount: $79,000."

Thereafter, the Custers contacted their insurance agent in an effort to procure flood insurance. However, as Ms. Custer testified in her deposition, the agent failed to procure the requested insurance within the 60-day time limit set by Homeside in its April 1999 letter to the Custers.

In late June 1999, the Custers received a third letter written on Homeside letterhead; that letter stated that Homeside had procured flood insurance on the Custers' property as required by the mortgage agreement and by federal law.⁹ The letter explained that Homeside had procured flood insurance on the mortgaged property in the amount of $79,000; that the annual premium was $667; and...