Opinion
Civil Action H-02-3039.
August 31, 2004
Opinion on Summary Judgment
1. Introduction.
A tropical storm damaged an apartment complex. The owner sued the servicer of its mortgage under state and federal law because it did not tell the owner that the complex was in a flood zone. The claims fail because the owner has no private cause of action under federal law and the servicer did not have a duty to notify the owner of the changes under state law.
2. The Event.
In June 2001, tropical storm Allison caused four million dollars of damage to the Woodside Village Apartments. Its owner, Wentwood Woodside I, L.P., held two insurance policies on the property. The primary policy was issued by Lexington Insurance Company, and an excess commercial property policy was issued by Royal Indemnity Company. Woodside filed claims with both; Lexington paid its one-million dollar policy limit, but Royal refused to pay because the property was located in a "special flood hazards area."
3. The Policy.
In April 2000, over a year before the storm, the federal government revised the flood zones for Houston. Federal flood zone maps are public and can be found, among other places, on the Internet, at public libraries, and at the Harris County Flood Control District. In the new designation, the Woodside property was within a flood zone.
Royal issued its policy approximately seven months after the zone revisions. The policy covers properties in flood zones if (a) they are listed as exceptions to the exclusions on the policy and (b) the insured pays additional premiums. Woodside did not identify the apartments for the schedule of exceptions. It says that it did not know that its property was in a flood zone.
4. The Mortgage.
Woodside's mortgage on the apartments is secured by a deed of trust and security agreement that requires Woodside to insure its property against flood damage. The mortgage — along with the mortgages of seven other properties — is part of a real-estate mortgage investment trust. GMAC services the mortgages of the trust. Each property is owned by a different partnership, but they are pooled as an investment portfolio. The partnerships are controlled by the same officers.
Two months before Woodside bought the Royal policy, GMAC told two of the partnerships that because their properties were now in flood zones, GMAC required — under the mortgage — that they send proof of flood insurance within the next 30 days or GMAC would secure coverage at their expense.
Although the other apartments had also been reclassified into a hazard zone, GMAC did not send a letter to Woodside. Woodside argues that if it had been notified, it would have included the information in the Royal application and paid the additional premiums. After the flood, in exchange for coverage, Woodside has never tendered the additional premiums that would have been due had the project been scheduled. Instead, it just sued GMAC.
5. Claims.
Woodside argues that GMAC voluntarily assumed a duty to investigate and notify Woodside of the apartments' flood-plain status when it told the other partnerships about the flood area revisions. In a variation on that theme, Woodside also claims that GMAC was negligent under state law because it failed to notify Woodside.
In addition, Woodside claims that GMAC breached a duty under federal law to notify it or to secure coverage on its behalf. See 42 U.S.C. § 4012a(e)(1), (2).
Woodside also claims that GMAC has converted $216,198.76 in payments under the Lexington policy that Woodside needed to repair the apartments. Woodside says this delay has reduced its revenue because the apartments are uninhabitable.
6. Assumed Duty.
Woodside says that by notifying two other partnerships, GMAC voluntarily assumed a duty to tell Woodside that its property was located in a flood zone. Woodside argues that all the property owners should be treated as one for the purpose of notification because they are under the common control of the same officers. Woodside claims that it was unreasonable of GMAC to inform some, but not all, of the properties of the flood revisions.
Separate partnerships do not merge into one simply because they share common management. It is not unusual for separate business entities to share directors or officers while maintaining distinct legal identities. These partnerships own separate properties. Woodside has offered no evidence that they share tax returns, leases, employees, or capitalization — common evidence of partnerships operating as a single business. In fact, Woodside probably would argue the opposite if one of the partnerships tried to impute liability to it.
Under these facts, GMAC did not assume a duty to notify Woodside by informing two other partnerships. When it sent the letters, it was dealing with those partnerships individually. GMAC had no reason to involve Woodside in those communications.
Conversely, if these people who were affiliated with Woodside knew of the changes because of GMAC's notice to them, they were alerted to the likelihood Woodside was now in a flood zone.
Woodside compares this situation to a good samaritan. If a person helps one injured person, he does not automatically create a duty to help all injured people. GMAC's communications with the other partnerships has no effect on its relationships with Woodside. Also, a volunteer does not have to help. The rule applies if he did help and was negligent in his aid. GMAC did not help Woodside, so it could not have helped negligently.
Woodside did not have to rely on GMAC. It could have investigated the maps. It could have gone to a library.
Further, although it claims otherwise, it is uncertain whether Woodside would have purchased flood insurance had it known of the property's designation. Of the partnerships GMAC notified, only one chose to insure its property for flood damage. Woodside cannot have it both ways. It cannot claim that it should be treated the same for notification purposes because of common ownership and then argue that it would have acted differently, despite having the same officers.
7. Contractual Duty.
Woodside argues that the pooling agreement created a duty of GMAC to notify or to secure coverage on its behalf. Woodside does not account for its obligations under the deed of trust.
In 1996, Woodside and its lender, Column Financial, Inc., executed the deed of trust and security agreement. Under that agreement, Woodside has the duty to monitor the flood zone status of the apartments and maintain proper coverage. Woodside's obligations under the agreement run to the lender's successors — in this case, the trustee of the mortgage trust.
The trustee hired GMAC to service the pooled mortgages in the trust for the benefit of the lenders — not Woodside. Moreover, Woodside is not a party to the trust or the pooling and servicing agreement. GMAC's obligations under the agreement were only to the trustee for its interest.
Under Woodside's theory, a loan servicer would be liable for a borrower's extra property taxes if it failed to monitor and notify the borrower of any increases in property tax assessments. This is clearly wrong. The borrower must pay the extra taxes in the event that tax assessments increase and escrow funds are insufficient. Servicers and escrow agents act for the benefit of the lender by protecting the lender's security interest in the property against the possibility of priority tax liens.
8. Statutory Duty.
Woodside argues that GMAC had a duty to notify it under federal law. See 42 U.S.C. § 4012a(e)(1). Although the statute does not authorize a private right of action, Woodside claims it can sue GMAC because it is a special beneficiary of the statute. See Cort v. Ash, 422 U.S. 66 (1975).
The primary purpose of the flood law is to reduce the financial burden on the federal government associated with flood disaster assistance. See Till v. Unifirst Fed. Sav. Loan Ass'n, 653 F.2d 152, 159 (5th Cir. 1981). Floods also implicate another form of federal insurance: deposit insurance. Because many lenders have their deposits insured by the national government, large flood losses threaten those lenders' solvency. In 1994, Congress amended the law to require the lender or servicer to notify the borrower of the need for coverage if the property securing the loan is in a special flood zone. If the borrower fails to get insurance, the lender or servicer must secure coverage at the borrower's expense. See 42 U.S.C. § 4012(a)(e), (h). Borrowers benefit secondarily and indirectly from the legislation by receiving notice of the flood risk and having insurance secured for them.
Despite these implicit benefits, borrowers are not a special class. See Till, 653 F.2d at 159; Hofbauer v. Northwestern Nat'l Bank of Rochester, 700 F.2d 1200 (8th Cir. 1983). The notice requirements protect the government's interest in reducing federal disaster assistance by helping the interested parties finance the risk privately. The notices may deter development in flood plains by making the developers pay the full costs of their projects, including that they finance the flood risks themselves. Congress intended to prevent federal funds from being used to finance indirectly flood-area development and then used again to rebuild. See Till, 653 F.2d at 159.
Moreover, the limitation on the amount of flood insurance required is evidence that Congress intended to protect lenders, not borrowers. Whether the insurance is purchased by the borrower, lender, or servicer, the amount only needs to equal the outstanding balance of the loan, not the owner's equity in the property. See Custer v. Homeside Lending, Inc., 858 So.2d 233, 244-45 (Ala. 2003). Also, borrowers ultimately pay for the insurance regardless of who secures the coverage.
Rather than being the object of congressional solicitude, Woodside is an example of the irresponsible developer from whom the statute was designed to protect the public treasury. Woodside has no claim under federal law.
9. Texas Statutory Duty.
Under Texas law, a statute may create a standard of care for use in measuring a duty. See Smith v. Merritt, 929 S.W.2d 456 (Tex.App.-Tyler 1995). Woodside claims that GMAC was negligent because it did not inform it of the flood zone changes as required by the federal law.
The federal law does not create a standard of care because Congress's primary intention was not to protect owners of apartment complexes with the notification requirements. See Carter v. William Sommerville Son, Inc., 584 S.W.2d 274, 278 (Tex. 1979). The law was designed to make sure the government would not have to bail out uninsured property owners if a flood damaged their property. The benefit of the statute to Woodside is minimal; it only gives Woodside the opportunity to secure insurance — presumably at rates agreeable to Woodside — before its lender insures the property at Woodside's expense. Moreover, the absence of a private cause of action shows that protecting Woodside is not the purpose of the statute. See 42 U.S.C. § 4012a(f), (g).
In addition, Woodside confuses duty with standard. See W. Page Keeton, et al., Prosser and Keeton on the Law of Tort § 53 (5th ed. 1984). Even if the federal statute created a standard of care, Woodside cannot show that GMAC had a duty to notify it about the flood zone changes under Texas law. GMAC's duties are governed by the contract. As the servicer for the investment trust, GMAC owed a duty to the trustee, not to Woodside.
Also, GMAC does not owe a Woodside a duty under federal law. GMAC owes the duty to notify to the federal government because it is the primary beneficiary under the statute. Woodside gets the benefit of the duty — notification — but GMAC is not a fiduciary of Woodside under federal law. If a company hires a consultant to run one of its divisions, the consultant owes duties to the company, not the division. Another analogy is a convenience store. It does not owe the duty not to sell beer to those underage to the purchaser, it owes the duty to the community.
10. Conversion.
Woodside does not have a conversion claim against GMAC. The deed of trust expressly assigns the insurance proceeds to GMAC. You do not "convert" an account at common law. The money in escrow is not chattel that can be converted. See Story v. Palmer, 284 S.W. 331, 332 (Tex.App.-El Paso 1926). This is an action on a contract — an insurance claim — not an action for the return or value of an object. There is no other plausible characterization of the dispute. It is not an action on debt, mis-payment, or anything other than special assumpsit. Woodside is better at naming legal theories than applying them to the rather simple facts of its problem. See Benjamin J. Shipman, Common-Law Pleading 3rd (1923).
11. Conclusion.
Woodside's claims fail because GMAC does not have a duty to notify it of the changes in the flood zone under state law, and Woodside cannot sue under federal law. Woodside will take nothing from GMAC.