Opinion ID: 2647804
Heading Depth: 2
Heading Rank: 1

Heading: Implied Covenant of Good Faith (Count IV)

Text: 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 thirdparty 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 -5- 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.
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 -6- 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-cv-11649, 2011 WL 3101811, at  (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-cv-10483, 2011 WL 1561024, at  (D. Mass. Apr. 22, 2011) (Massachusetts courts have consistently rejected the argument that there is a private right of action under -7- 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 . 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 and indefinite . . . class of third-party beneficiaries would be inconsistent with the clear intent standard for government contracts set by the Restatement. -8- Id. at 182. Thus, the broadly accepted principle set forth in the Restatement, from which we see no reason to deviate, applies squarely to the circumstances of this case and forecloses the MacKenzies' argument that they are third-party beneficiaries of the SPA.3
Despite their explicit claim to be third-party beneficiaries of the SPA, the MacKenzies rely almost entirely on Cruz, in which the court found that borrowers are not third-party beneficiaries of SPAs, but nevertheless found a substantial likelihood that the plaintiff would prevail on his claim for breach of good faith. 446 B.R. at 3–5. Oddly, the court in that case relied on Speleos, which rejected the good faith claim but allowed a negligence claim to proceed. 755 F. Supp. 2d at 310–12. The court in Cruz held that the plaintiff's allegation . . . that Wells Fargo breached its duty of good faith and reasonable diligence is comparable to the negligence claim in Speleos. 446 3 The MacKenzies point to Parker v. Bank of Am., NA, a Massachusetts state court case that found a borrower to be a thirdparty beneficiary of an SPA between a mortgagee and the government. No. 11-cv-1838, 2011 WL 6413615, at  (Mass. Super. Ct. Dec. 16, 2011). The court in Parker relied on Marques v. Wells Fargo Home Mortgage, Inc., a district court case from California that reached the same conclusion. No. 09-cv-1985, 2010 WL 3212131, at  (S.D. Cal. Aug. 12, 2010). The court in Parker recognized, however, that every court in the District of Massachusetts (and as far as I know, elsewhere) to consider the issue has rejected the Marques holding. 2011 WL 6413615, at . Given the persuasiveness of the authority to the contrary, the holding in Parker does not change our analysis. -9- B.R. at 4. The court did not explain, however, how the two claims were comparable. A more clearly reasoned case that reaches the same conclusion as Cruz is Blackwood. 2011 WL 1561024, at . In that case, the court pointed out that [i]t is familiar law that a mortgagee in exercising a power of sale in a mortgage must act in good faith and must use reasonable diligence to protect the interests of the mortgagor. Id. (quoting W. Roxbury Co-op. Bank v. Bowser, 87 N.E.2d 113, 115 (Mass. 1949)) (internal quotation marks omitted). It decided not to dismiss the breach of good faith claim, because if the defendants foreclosed when they lacked the legal authority to do so, they acted in violation of their obligation to protect the mortgagor. Id. The problem with the decision in Blackwood is that [t]he concept of good faith 'is shaped by the nature of the contractual relationship from which the implied covenant derives,' and the 'scope of the covenant is only as broad as the contract that governs the particular relationship.' Young v. Wells Fargo Bank, N.A., 717 F.3d 224, 238 (1st Cir. 2013) (quoting Ayash v. Dana–Farber Cancer Inst., 822 N.E.2d 667, 684 (Mass. 2005)). Here, the 2007 Mortgage as modified by the 2009 Agreement is the only contract between the MacKenzies and Flagstar. And as the district court correctly pointed out, nothing in the mortgage imposes a duty on Flagstar to consider a loan modification prior to foreclosure in -10- the event of a default. See Peterson v. GMAC Mortg., LLC, No. 11cv-11115, 2011 WL 5075613, at  (D. Mass. Oct. 25, 2011) (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. (citing Carney v. Shawmut Bank, N.A., No. 07-P-858, 2008 WL 4266248, at  (Mass. App. Ct. 2008))). It is true that mortgagees have an independent duty at common law to protect the interests of the mortgagor in exercising a power of sale in a mortgage. Teixeira, 2011 WL 3101811, at . Typically, this entails mak[ing] reasonable efforts to sell the property for the highest value possible. Armand v. Homecomings Fin. Network, No. 12-cv-10457, 2012 WL 2244859, at  (D. Mass. June 15, 2012) (alteration in original) (internal quotation marks omitted). Thus, in the event of a foreclosure, the existence of a duty of good faith is tied directly to the mortgagee's contractual right to exercise a power of sale. But the implied covenant of good faith cannot 'create rights and duties not otherwise provided for in the existing contractual relationship.' Young, 717 F.3d at 238 (quoting Ayash, 822 N.E.2d at 684). It would therefore be an error to extend the implied covenant to encompass a duty to modify -11- (or consider modifying) the loan prior to foreclosure, where no such obligation exists in the mortgage.4 Because the MacKenzies are not third-party beneficiaries of the SPA, and because Flagstar had no duty to modify the MacKenzies' loan prior to foreclosure, the district court correctly dismissed Count IV.