Highmark Federal Credit Union v. Hunter

Citations: 2012 S.D. 37; 814 N.W.2d 413; 2012 SD 37; 2012 S.D. LEXIS 36; 2012 WL 1743098Docket: 26119

Court: South Dakota Supreme Court; May 16, 2012; South Dakota; State Supreme Court

Original Court Document: View Document

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Rachelle Hunter obtained a loan from Highmark Federal Credit Union in 2005 to purchase a manufactured home in a designated flood hazard area. Despite signing a “Standard Flood Hazard Determination” document that informed her of the need for flood insurance, neither Hunter nor Highmark purchased the required insurance. In 2007, a flood damaged the property, prompting Highmark to initiate foreclosure proceedings against Hunter for the loan balance. Hunter countered, claiming Highmark was negligent for failing to inform her about the insurance requirement and not purchasing it on her behalf.

Highmark sought summary judgment, arguing it had no statutory duty under the Flood Disaster Protection Act (FDPA) to ensure Hunter obtained flood insurance, which led to the circuit court initially denying the motion in 2008. In 2009, the parties stipulated to foreclosure, allowing Hunter's counterclaim to proceed. In May 2011, Highmark renewed its motion for summary judgment on the counterclaim, which the circuit court granted, leading to Hunter’s appeal. The summary judgment standard requires a de novo review, particularly when the court resolves the duty question in favor of the defendant.

The National Flood Insurance Act of 1968 (NFIA) created the National Flood Insurance Program (NFIP), which was amended by the Flood Disaster Protection Act (FDPA) in 1973. The FDPA mandates that flood insurance is required for loans secured by improved real estate in designated flood hazard areas, with lending institutions obligated to inform borrowers of this requirement. If a borrower does not secure flood insurance, the lender must obtain it at the borrower's expense.

Hunter's counterclaim alleges negligence, necessitating proof of duty, breach, causation, and injury. A statutory or common law duty can establish this. Hunter claims Highmark had a statutory duty to ensure flood insurance was in place and to purchase it if absent. The determination of duty lies with the court. Previous cases have shown that a violation of specific regulations can constitute negligence per se, establishing a legal duty, whether from common law or statute. 

Standards of conduct in negligence claims may derive from legislative enactments. A violation of such statutes, aimed at protecting individuals, can substantiate a negligence claim if other negligence elements are satisfied. However, whether federal statutes impose a standard of care for state claims is subject to interpretation under state law, as established in relevant case law.

Hunter's claim is characterized as based on common-law negligence, yet she acknowledges that any duty owed by Highmark stems from the National Flood Insurance Act (NFIA). The NFIA mandates that lenders notify borrowers when flood insurance is necessary and purchase it if the borrower fails to do so. This establishes that Hunter's claims are fundamentally linked to alleged violations of the NFIA. 

Court rulings in other states have concluded that the NFIA does not impose a duty, citing congressional intent and federal court interpretations indicating that the NFIA lacks an implied private cause of action. When enacting the NFIA, Congress recognized the personal and economic challenges posed by flood disasters and aimed to create a flood insurance program to mitigate future losses, thereby protecting lenders and the federal treasury rather than providing direct benefits to borrowers. 

The NFIA stipulates that flood insurance must cover the outstanding loan balance rather than the borrower's equity, suggesting that if the statute were intended to primarily benefit borrowers, it would have required coverage for their equity. The existence of potential 'special injury' to borrowers from violations does not automatically categorize them as intended beneficiaries of the statute.

The NFIA does not establish a duty in negligence cases because it does not create a private right of action, which is necessary for individuals to enforce regulations or statutes. Congress must explicitly provide a private right of action to enforce federal law, and federal courts have consistently ruled that the NFIA lacks such provisions, meaning borrowers cannot invoke it to establish a duty in civil claims. The North Dakota Supreme Court concluded that there was no intent for a common-law right of action arising from the NFIA, citing separation-of-powers and federalism principles.

Hunter's reliance on Small v. South Norwalk Savings Bank, where the plaintiff's negligence claim succeeded due to the bank's failure to disclose flood risk, is misplaced. The Connecticut Supreme Court focused on whether the plaintiff was part of the protected class under the statute, but the case differs significantly from Hunter's situation, as she acknowledged the need for flood insurance by signing the Standard Flood Hazard Determination. Consequently, Hunter's negligence claim fails because she cannot demonstrate that Highmark owed her a duty, justifying the summary judgment in favor of Highmark. The decision is affirmed by Justices KONENKAMP, ZINTER, SEVERSON, and WILBUR.