Mackenzie v. Flagstar Bank

• Decision Date: 30 December 2013
• Docket Number: No. 13–1236.,13–1236.
• Citation: 738 F.3d 486
• Parties: Lynne MacKENZIE and James MacKenzie, Plaintiffs, Appellants, v. FLAGSTAR BANK, FSB, Defendant, Appellee, Harmon Law Offices, P.C., Defendant.
• Court: U.S. Court of Appeals — First Circuit

738 F.3d 486

Lynne MacKENZIE and James MacKenzie, Plaintiffs, Appellants,

v.FLAGSTAR BANK, FSB, Defendant, Appellee,Harmon Law Offices, P.C., Defendant.

No. 13–1236.

United States Court of Appeals,First Circuit.

Dec. 30, 2013.

Christopher R. Whittingham, for appellants.

Carol E. Kamm, with whom Jamie L. Kessler and Donn A. Randall were on brief, for appellee.

Before HOWARD, SELYA, and STAHL, Circuit Judges.

STAHL, Circuit Judge.

Appellants Lynne and James MacKenzie (“MacKenzies”) filed an amended complaint alleging eleven counts of state law violations related to the decisions of Flagstar Bank, FSB (“Flagstar”) to deny them a loan modification under the Home Affordable Modification Program (“HAMP”) and to foreclose on their home.¹ The district court dismissed the complaint. For the following reasons, we affirm.

I. Background

The MacKenzies own property located at 277 Williams Street in North Dighton, Massachusetts (“Property”). On May 24, 2007, they gave a promissory note (“2007 Note”) in the amount of $275,877.00 at the interest rate of 6.5% to Bankstreet Mortgage, LLC (“Bankstreet”) secured by a mortgage on the Property (“2007 Mortgage”). The MacKenzies executed the 2007 Mortgage with Mortgage Electronic Registration Systems, Inc. (“MERS”) as the nominee for the lender. The 2007 Mortgage granted the right of assignment and allowed for the severability of the mortgage and the note.

Bankstreet assigned the 2007 Note to Flagstar. Flagstar signed a Servicer Participation Agreement (“SPA”) with Fannie Mae (acting as the agent of the United States Department of Treasury), agreeing to participate in HAMP. SPAs require loan servicers to offer loan modifications and foreclosure prevention services pursuant to HAMP guidelines.

On July 21, 2009, the MacKenzies and Flagstar executed a loan modification agreement (“2009 Agreement”) reducing the interest rate to 5.75%, extending the maturity date, and capitalizing unpaid interest to arrive at a principal balance of $279,575.23. The 2009 Agreement identifies the 2007 Mortgage as the contract that it “amends and supplements.” On October 31, 2010, the MacKenzies submitted an application to Flagstar for a new modification. Flagstar denied that application on April 14, 2011. On April 19, 2011, the MacKenzies filed another application with Flagstar, this time for a loan modification pursuant to HAMP.

On May 3, 2011, MERS assigned to Flagstar the 2007 Mortgage as modified by the 2009 Agreement. The MacKenzies allege on the basis of a loan investigation that the 2007 Mortgage had been securitized into a Lehman Brothers trust prior to the assignment. On May 11, 2011, Harmon filed a notice with the Commonwealth of Massachusetts Land Court on behalf of Flagstar claiming authority to foreclose on the Property.

Thereafter, Flagstar inexplicably began pursuing two contradictory courses of action. Despite the May 11 notice, on August 31, 2011, Flagstar evaluated the MacKenzies for a loan modification under the HAMP guidelines and determined that they were eligible. Nevertheless, Harmon sent the MacKenzies a notice of foreclosure sale on October 4, 2011, stating that Flagstar would conduct the sale on or after November 3, 2011. On October 19, 2011, the MacKenzies filed a complaint in the Massachusetts Superior Court seeking injunctive relief to prevent the foreclosure. On November 2, 2011, Flagstar sent the MacKenzies a HAMP modification offer, but still scheduled a foreclosure sale for November 16. On November 8, 2011, Flagstar “closed” the HAMP modification offer. ² It then removed the pending state court case to federal court on November 14, 2011, on the basis of diversity jurisdiction. To date, as far as the record before us shows, a foreclosure sale has not taken place.

On February 10, 2012, the MacKenzies served Flagstar with a notice to rescind the 2009 Agreement. Flagstar did not accept the notice as a valid recission. The MacKenzies filed an Amended Complaint on February 14, 2012, raising eleven state law claims. Flagstar filed a motion to dismiss and a request for declaratory judgment, and the MacKenzies filed a motion for partial summary judgment. The district court granted the motion to dismiss and denied the request for declaratory judgment and the motion for partial summary judgment. The MacKenzies appeal the dismissal.

II. Analysis

The MacKenzies state on appeal that they “do not press Counts I, II, III, VI, VIII, and XI.” The remaining counts are breach of contract, based on violations of the implied covenant of good faith and fair dealing (Count IV); violation of the Massachusetts Consumer Credit Cost Disclosure Act (“MCCCDA”), Mass. Gen. Laws ch. 140D, § 10 (Count V); rescission (Count VII); negligence (Count IX); and promissory estoppel (Count X).

A. Implied Covenant of Good Faith (Count IV)

In Count IV, the MacKenzies allege that Flagstar “breached the implied obligation of good faith under the agreements,” and “breached the implied covenant that neither party shall do anything which will destroy or injure the other party's right to receive the fruits of the contract.” It is not clear on the face of the complaint whether the MacKenzies intended to raise these allegations pursuant to their mortgage with Flagstar or as third-party beneficiaries of the SPA between Flagstar and the federal government. The MacKenzies do not entirely clarify their position on appeal. On one hand, they state that they “were third-party beneficiaries of the SPA agreement [between the government] and the servicer, Flagstar.” They rely almost exclusively on In re Cruz, however, in which the court denied injunctive relief as to a third-party beneficiary claim but granted it with respect to a claim for breach of good faith, on the basis of the duty mortgagees owe to mortgagors. 446 B.R. 1, 4–5 (Bankr.D.Mass.2011).

The district court rejected both possibilities. It held that the MacKenzies are not third-party beneficiaries of the agreements between Flagstar and the government. With respect to the mortgage, it found that “Plaintiffs fail to allege any specific duty or right that was violated by Flagstar in the 2009 agreement between [the MacKenzies] and Flagstar.” It observed further that “under Massachusetts case law, absent an explicit provision in the mortgage contract, there is no duty to negotiate for loan modification once a mortgagor defaults” (internal quotation marks omitted). Instead, a mortgagee's duty of good faith when acting under a “power of sale” generally only extends to “reasonable efforts to sell the property for the highest value possible” (internal quotation marks omitted). Therefore, it concluded that the MacKenzies had not stated a claim for breach of the covenant of good faith and fair dealing.

1. Third–Party Beneficiary Claim

The district court was correct in deciding that the MacKenzies are not third-party beneficiaries of the SPA between Flagstar and the government. It is a well-established principle that “[g]overnment contracts often benefit the public, but individual members of the public are treated as incidental beneficiaries [who may not enforce a contract] unless a different intention is manifested.” Restatement (Second) of Contracts § 313 cmt. a (1981); see also Interface Kanner, LLC v. JPMorgan Chase Bank, N.A., 704 F.3d 927, 933 (11th Cir.2013); Klamath Water Users Protective Ass'n v. Patterson, 204 F.3d 1206, 1211 (9th Cir.1999) (“Parties that benefit from a government contract are generally assumed to be incidental beneficiaries, and may not enforce the contract absent a clear intent to the contrary.”); Price v. Pierce, 823 F.2d 1114, 1121 (7th Cir.1987).

District courts in this circuit, relying on Klamath, have applied this general principle in the specific context of disputes over HAMP modifications and have concluded that borrowers are not third-party beneficiaries of agreements between mortgage lenders and the government. See Dill v. Am. Home Mortg. Servicing, Inc., 935 F.Supp.2d 299, 302 (D.Mass.2013); Teixeira v. Fed. Nat'l Mortg. Ass'n, No. 10–11649, 2011 WL 3101811, at *2 (D.Mass. July 18, 2011) (“Although HAMP was generally designed to benefit homeowners, it does not follow necessarily that homeowners like the plaintiffs are intended third-party beneficiaries of the contracts between servicers and the government.”); Markle v. HSBC Mortg. Corp. (USA), 844 F.Supp.2d 172, 179–82 (D.Mass.2011); Blackwood v. Wells Fargo Bank, N.A., No. 10–10483, 2011 WL 1561024, at *6 (D.Mass. Apr. 22, 2011) (“Massachusetts courts have consistently rejected the argument that there is a private right of action under HAMP by intended third party beneficiaries.”); Speleos v. BAC Home Loans Servicing, L.P., 755 F.Supp.2d 304, 310 (D.Mass.2010).

The reasoning of these district courts is persuasive. In Teixeira, the court observed that the SPA in that case “does not give any indication that the parties [to it] intended to grant qualified borrowers the right to enforce the contract.” 2011 WL 3101811, at *2. Instead, the SPA “appears to limit who can enforce the contract's terms: ‘The Agreement shall inure to the benefit of and be binding upon the parties to the Agreement and their permitted successors-in-interest.’ ” Id. The SPA in this case contains identical language. While it is true that intended beneficiaries “need not be specifically named in the contract,” they must “fall[ ] within a class clearly intended by the parties to benefit from the contract.” Markle, 844 F.Supp.2d at 181 (internal quotation marks omitted). The decision of the contracting parties here specifically to identify themselves and their successors as the contract's beneficiaries evinces their intention to exclude third-party beneficiaries. Moreover, as the court in Markle noted:

If plaintiffs were third-party beneficiaries, every homeowner-borrower in the United States who has defaulted on mortgage payments or is at risk of default could become a potential plaintiff. Finding such a broad...