#26119-a-DG

2012 S.D. 37

                            IN THE SUPREME COURT
                                    OF THE
                           STATE OF SOUTH DAKOTA

                                   ****

HIGHMARK FEDERAL CREDIT
UNION,                                      Plaintiff and Appellee,

      v.

RACHELLE L. HUNTER,                         Defendant and Appellant,
 and
CREDIT COLLECTIONS BUREAU                   Defendant.

                                   ****

                  APPEAL FROM THE CIRCUIT COURT OF
                    THE SEVENTH JUDICIAL CIRCUIT
                  PENNINGTON COUNTY, SOUTH DAKOTA

                                   ****

                     THE HONORABLE JEFF W. DAVIS
                               Judge

                                   ****
RODNEY C. LEFHOLZ
Rapid City, South Dakota                    Attorney for plaintiff
                                            and appellee.

JAMES P. HURLEY of
Bangs, McCullen, Butler,
 Foye & Simmons
Rapid City, South Dakota                    Attorneys for defendant
                                            and appellant.

                                   ****
                                            CONSIDERED ON BRIEFS
                                            ON MARCH 19, 2012

                                            OPINION FILED 05/16/12
#26119

GILBERTSON, Chief Justice

[¶1.]        Rachelle Hunter received a loan from Highmark Federal Credit Union

to purchase a home and property. A flood damaged the home a few years later.

There was no flood insurance. Hunter argues Highmark was negligent in failing to

warn her to purchase flood insurance and in failing to purchase the insurance at her

expense. Hunter appeals from the circuit court’s grant of summary judgment.

                                      FACTS

[¶2.]        In 2005, Highmark made a loan to Hunter to purchase a manufactured

home and lot in Hermosa, South Dakota. Hunter signed a document titled

“Standard Flood Hazard Determination” that indicated the property was in a 100-

year flood area. The document included a section titled “Notice to Borrower about

Federal Flood Disaster Assistance.” Under that section, the following language

provided in part:

             The Flood Disaster Protection Act of 1973, as amended,
             mandates federally insured or regulated lenders to require the
             purchase of flood insurance on all buildings being financed that
             are located in [Special Flood Hazard Areas] of communities
             participating in the [National Flood Insurance Program]. The
             flood insurance must be maintained for the term of the loan. If
             you fail to purchase or renew flood insurance on the property,
             Federal law authorizes and requires us to purchase the flood
             insurance at your expense.

No flood insurance was purchased by either Hunter or Highmark. In 2007, a flood

damaged the home and the personal property inside.

[¶3.]        The Flood Disaster Protection Act of 1973 (FDPA), as amended, 42

U.S.C. §§ 4001-4129, and Code of Federal Regulations, 12 C.F.R. § 760, place

certain requirements on federally regulated financial institutions. Such institutions

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cannot make a loan secured by improved real estate in an area designated as a

special flood hazard unless the property is covered by flood insurance. Before the

loan can be made, the borrower must obtain the insurance. If the borrower does

not, the institution is authorized and required to obtain the flood insurance at the

borrower’s expense.

[¶4.]        After the flood, Highmark filed a foreclosure action against Hunter.

Highmark demanded the balance of the loan plus interest. Hunter counterclaimed,

alleging that Highmark did not inform her she needed to purchase flood insurance.

She also argued Highmark was negligent in failing to purchase the required flood

insurance and add the premium cost to her account. Hunter asserted that such

failure was a breach of Highmark’s statutory duty and was negligent as a matter of

law.

[¶5.]        Highmark moved for summary judgment, contending that there were

no genuine issues of material fact regarding its foreclosure complaint and it was

entitled to judgment as a matter of law. As to Hunter’s counterclaim, Highmark

argued that it had no statutory or common-law duty to Hunter under the FDPA so

Hunter’s counterclaim should be dismissed. The circuit court denied the motion in

October 2008. In 2009, the parties stipulated to foreclosure and a sheriff’s sale of

the property. Under the stipulation, Hunter’s counterclaim would continue.

[¶6.]        In May 2011, Highmark moved for summary judgment on Hunter’s

counterclaim. After a hearing, the circuit court granted the motion. Hunter

appeals.



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                              STANDARD OF REVIEW

[¶7.]         “Summary judgment is examined de novo: we give no deference to [the

court’s] ruling.” Adrian v. Vonk, 2011 S.D. 84, ¶ 8, 807 N.W.2d 119, 122.

“Summary judgment in a negligence case is appropriate when the trial judge

resolves the duty question in the defendant’s favor.” Hendrix v. Schulte, 2007 S.D.

73, ¶ 8, 736 N.W.2d 845, 847.

                                      ANALYSIS

[¶8.]          The National Flood Insurance Act of 1968 (NFIA), 42 U.S.C. §§ 4001-

4129, established the National Flood Insurance Program (NFIP). Congress enacted

the FDPA in 1973, amending the NFIA to require flood insurance for loans secured

by improved real estate located within a designated special flood hazard area. 42

U.S.C. § 4012a(b).1 Lending institutions must notify a borrower of the flood

insurance requirement; if the borrower fails to obtain flood insurance, the lender

must do so at the borrower’s expense. 42 U.S.C. § 4012a(e).




1.      42 U.S.C. § 4012a(b)(1), provides in relevant part:

              Each Federal entity for lending regulation . . . shall by
              regulation direct regulated lending institutions not to make . . .
              any loan secured by improved real estate . . . located or to be
              located in an area that has been identified by the Director as an
              area having special flood hazards and in which flood insurance
              has been made available under the National Flood Insurance
              Act of 1968, unless the building or mobile home and any
              personal property securing such loan is covered for the term of
              the loan by flood insurance in an amount at least equal to the
              outstanding principal balance of the loan . . . .


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[¶9.]        Hunter’s counterclaim is based on negligence. “In order to prevail in a

suit based on negligence, a plaintiff must prove duty, breach of that duty, proximate

and factual causation, and actual injury.” Hendrix, 2007 S.D. 73, ¶ 7, 736 N.W.2d

at 847 (quoting Fisher Sand & Gravel Co. v. S.D. Dep’t of Transp., 1997 S.D. 8, ¶ 12,

558 N.W.2d 864, 867). “A duty can be created by statute or common law.” Id.

(quoting Kuehl v. Horner Lumber Co., 2004 S.D. 48, ¶ 11, 678 N.W.2d 809, 812).

Hunter asserts that Highmark had a statutory duty to make sure there was flood

insurance on the property; if there was none, Highmark had a duty to purchase

flood insurance at Hunter’s expense. “As a general rule, the existence of a duty is to

be determined by the court.” Id. ¶ 8 (quoting Erickson v. Lavielle, 368 N.W.2d 624,

627 (S.D. 1985)).

[¶10.]       We have previously examined whether a state statute establishes a

duty in a negligence action. Albers v. Ottenbacher, 79 S.D. 637, 116 N.W.2d 529

(1962). In Albers, the plaintiff’s vehicle was struck by the defendant’s vehicle after

his brakes failed. Id. We determined that “when the driver . . . violates the specific

regulations as to brakes . . . he is guilty of negligence as a matter of law unless it

appears that compliance was excusable . . . .” Id. at 643, 116 N.W.2d at 532.

             Negligence is the breach of a legal duty. It is immaterial
             whether the duty is one imposed by the rule of the common law
             requiring the exercise of ordinary care or skill not to injure
             another, or is imposed by a statute designed for the benefit of a
             class of persons which includes the one claiming to have been
             injured as the result of nonperformance of the statutory duty.
             The measure of legal duty in the one case is to be determined
             upon common law principles, while in the other the statute fixes
             a standard by which the fact of negligence may be determined.
             With reference to the adoption of the requirements of a
             legislative enactment or regulation as a standard of conduct in

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#26119

             determining liability for negligence, we have said: “The violation
             of a statute or ordinance, designed for the benefit of individuals,
             is of itself sufficient to prove such a breach of duty as will
             sustain an action for negligence brought by a person within the
             protected class if other elements of negligence concur. The
             statute or ordinance becomes the standard of care or the rule of
             the ordinarily careful and prudent person.”

Id. at 531 (emphasis added) (citations omitted).

[¶11.]       Albers involved state statutes. In Hofbauer v. Northwestern National

Bank of Rochester, 700 F.2d 1197, 1201 (8th Cir. 1983), the Eighth Circuit Court of

Appeals held that it was for states to determine whether state common law adopted

as a “standard of conduct for negligence purposes the duties established by the

NFIA.” Whether federal statutes establish a standard of care, i.e. duty, in state-

based claims is a matter of state law. Id.; see also Mid-America Nat’l Bank of

Chicago v. First Sav. & Loan Ass’n of South Holland, 161 Ill. App. 3d 531, 535, 515

N.E.2d 176, 179 (Ill. App. Ct. 1987) (“The question of whether or not a Federal

statute establishes the appropriate standard of conduct for a state common law

cause of action is a matter of state law.”).

[¶12.]       Hunter argues that her claim is not based on violations of the NFIA

but simply on common-law negligence. However, she agrees that the duty arises

from the NFIA. The NFIA requires lenders to inform borrowers when flood

insurance is necessary and purchase the insurance if the borrower does not.

“Therefore, any duty [Highmark] owed to [Hunter] would have arisen from the

[NFIA], a breach of which would violate the [NFIA]. For this reason, [Hunter’s]

claims are based directly on alleged violations of the [NFIA].” Ford v. First Am.

Flood Data Servs., Inc., 2006 WL 2921432 at *5 (M.D. N.C. Oct. 11, 2006).

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[¶13.]       Other states have determined that the NFIA does not establish a

duty. R.B.J. Apartments, Inc. v. Gate City Sav. & Loan Ass’n, 315 N.W.2d 284, 290

(N.D. 1982); Pippin v. Burkhalter, 279 S.E.2d 603, 604 (S.C. 1981); Mid-America

Nat’l Bank of Chicago, 161 Ill. App. 3d at 537, 515 N.E.2d at 180. To reach such a

conclusion, those courts have generally relied on congressional intent and the

analysis of federal courts that the NFIA does not create an implied private cause of

action.

[¶14.]       When passing the NFIA, Congress found that:

             (1) from time to time flood disasters have created personal
             hardships and economic distress which have required
             unforeseen disaster relief measures and have placed an
             increasing burden on the Nation’s resources; (2) despite the
             installation of preventive and protective works and the adoption
             of other public programs designed to reduce losses caused by
             flood damage, these methods have not been sufficient to protect
             adequately against growing exposure to future flood losses; (3)
             as a matter of national policy, a reasonable method of sharing
             the risk of flood losses is through a program of flood insurance
             which can complement and encourage preventive and protective
             measures; and (4) if such a program is initiated and carried out
             gradually, it can be expanded as knowledge is gained and
             experience is appraised, thus eventually making flood insurance
             coverage available on reasonable terms and conditions to
             persons who have need for such protection.

42 U.S.C. § 4001(a).

[¶15.]       Based on congressional findings, courts have consistently held that in

adopting the NFIA, Congress meant to protect lenders and the federal treasury.

See Wentwood Woodside I, LP v. GMAC Commercial Mortg. Corp., 419 F.3d 310,

323 (5th Cir. 2005); Mid-America Nat’l Bank of Chicago v. First Sav. & Loan Ass’n

of South Holland, 737 F.2d 638, 642 (7th Cir. 1984) cert. denied, 469 U.S. 1160, 105

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S. Ct. 911, 83 L. Ed. 2d 924 (1984); Hofbauer, 700 F.2d at 1201; Arvai v. First Fed.

Sav. & Loan Ass’n, 698 F.2d 683, 684 (4th Cir. 1983); Till v. Unifirst Fed. Savings &

Loan Ass’n, 653 F.2d 152, 159-61 (5th Cir. 1981). “Although Congress intended to

help borrowers damaged by flooding, ‘the principal purpose in enacting the NFIP

was to reduce, by implementation of adequate land use controls and flood insurance,

the massive burden on the federal fisc of the ever increasing federal flood disaster

assistance.’” Audler v. CBC Innovis Inc., 519 F.3d 239, 252 (5th Cir. 2008) (quoting

Till, 653 F.2d at 159). “Section 4012a(b) requires flood insurance for the amount of

the outstanding loan balance and not for the equity of the borrower. If Congress

had passed the statute primarily for the benefit of borrowers, it would have

required that they insure their equity in the home.” Hofbauer, 700 F.2d at 1200.

“The fact that borrowers may suffer ‘special injury’ by violation of these statutes,

however, does not necessarily make them members of a class for whose especial

benefit the statute was enacted.” R.B.J. Apartments, 315 N.W.2d at 288.

[¶16.]       The next reason that the NFIA does not establish a duty in a

negligence case is that the NFIA does not create a private right of action. A private

right of action essentially indicates the right of an individual to bring an action to

enforce particular regulations or statutes. See Alexander v. Sandoval, 532 U.S. 275,

285-86, 121 S. Ct. 1511, 1519, 149 L. Ed. 2d 517 (2001). “[P]rivate rights of action to

enforce federal law must be created by Congress.” Id. Accordingly, statutory intent

to create a private remedy is determinative. Id. Federal courts have consistently




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determined that the NFIA does not create a private right of action for borrowers. 2

Wright v. Allstate Ins. Co., 500 F.3d 390, 398 (5th Cir. 2007) (concluding that the

NFIA did not expressly or implicitly authorize a private federal common law cause

of action for fraud or negligent misrepresentation); Hofbauer, 700 F.2d at 1201;

Mid-America Nat’l Bank of Chicago, 737 F.2d at 640; Arvai, 698 F.2d at 684. If the

NFIA does not create a private right of action, then it follows that an individual

cannot use the NFIA to establish a duty in an individual civil claim.

[¶17.]         After concluding that Congress did not intend a private cause of action

to arise from the NFIA, the North Dakota Supreme Court also concluded that a

common-law right of action for the violation of the statute was not intended. “The

separation-of-powers doctrine and principles of federalism militate against the

adoption of the federal statute as the standard of care in a state negligence action

when no private cause of action, either explicit or implicit, exists in the federal

statute.” R.B.J. Apartments, 315 N.W.2d at 290.

[¶18.]         Hunter relies primarily on Small v. South Norwalk Savings Bank, 535

A.2d 1292 (Conn. 1988). In Small, the plaintiff purchased a house located in a

special flood hazard area. The defendant bank failed to advise her of this and her

house was damaged by flooding. The jury returned a verdict for the plaintiff on her



2.       In addition to examining whether Congress intended for borrowers to be the
         protected class of the NFIA, federal courts also examined the enforcement of
         the NFIA. “The existence of an administrative enforcement mechanism
         suggests that no other remedy was intended.” Hofbauer, 700 F.2d at 1201
         (citing Transamerica Mortg. Advisors, Inc. v. Lewis, 444 U.S. 11, 20, 100 S.
         Ct. 242, 247, 62 L. Ed. 2d 146 (1979)).


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negligence claim. Because defendant’s objections were untimely, appellate review

was for plain error. Defendant argued on appeal that because the alleged duty was

statutory, “the only legitimate inquiry is whether the federal legislation expressly or

impliedly creates a right of action under either federal or state law.” Id. at 1296.

The Connecticut Supreme Court noted:

             Where a statute is designed to protect persons against injury,
             one who has, as a result of its violation, suffered such an injury
             as the statute was intended to guard against has a good ground
             of recovery. . . . Statutory negligence is actionable upon
             satisfaction of two conditions: (1) the plaintiff must be a member
             of the class protected by the statute; and (2) the injury must be
             of the type the statute was intended to prevent.

Id. at 1296-97.

[¶19.]       Small is distinguishable from this case. First, the Connecticut

Supreme Court reviewed for plain error. Id. While other cases analyzed whether

borrowers are members of the class meant to be protected by the statutes, the court

in Small did not engage in such analysis. Id. Finally, the suit in Small was based

on a plaintiff who had not been informed that the house was in a designated flood

hazard area. Id. at 1293. In the present case, Hunter signed the Standard Flood

Hazard Determination that explicitly provided that she needed flood insurance.

                                   CONCLUSION

[¶20.]       Hunter’s negligence claim fails as a matter of law because she cannot

show that Highmark owed her a duty. Accordingly, summary judgment was

appropriate. See Hendrix, 2007 S.D. 73, ¶ 8, 736 N.W.2d at 847. We need not,

therefore, examine whether material facts were in dispute. We affirm.

[¶21.]       KONENKAMP, ZINTER, SEVERSON, and WILBUR, Justices, concur.

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