Focus v. American ( 1993 )


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  •                 United States Court of Appeals
                        For the First Circuit
                                             
    
    No. 92-1758
    
                  FOCUS INVESTMENT ASSOCIATES, INC.,
    
                        Plaintiff, Appellant,
    
                                  v.
    
              AMERICAN TITLE INSURANCE COMPANY, ET AL.,
    
                        Defendants, Appellees.
    
                                             
    No. 92-1766
    
                  FOCUS INVESTMENT ASSOCIATES, INC.,
    
                         Plaintiff, Appellee,
    
                                  v.
    
              AMERICAN TITLE INSURANCE COMPANY, ET AL.,
    
                        Defendant, Appellant.
    
                                             
    
            APPEALS FROM THE UNITED STATES DISTRICT COURT
    
                   FOR THE DISTRICT OF RHODE ISLAND
    
         [Hon. Francis J. Boyle, Senior U.S. District Judge]
                                                           
    
                                             
    
                                Before
    
                       Torruella, Circuit Judge,
                                               
                   Campbell, Senior Circuit Judge,
                                                 
                      and Stahl, Circuit Judge.
                                              
    
                                             
    
    Steven E. Snow with  whom Partridge, Snow &  Hahn was on brief for
                                                     
    
    appellant/cross-appellee Focus Investment Associates, Inc.
    Max Wistow  with whom  Stephen P.  Sheehan and  Wistow &  Barylick
                                                                      
    Inc.  were   on  brief  for  appellee/cross-appellant  American  Title
    
    Insurance Company.
    William H.  Jestings with  whom Patricia A.  Buckley and  Carroll,
                                                                      
    Kelly & Murphy were on brief for appellees Tobak and Abrams & Verri.
              
    Robert S. Bruzzi was on brief for appellee Owen B. Landman. 
                    
    
                                             
    
                             May 11, 1993
                                             
    
              STAHL, Circuit Judge.   In these cross-appeals,  we
                                  
    
    explore,  inter alia,  the  parameters of  a title  insurance
                        
    
    company's duty  to disclose title  defects to its  insured, a
    
    lender-mortgagee.   The district court, finding  that no such
    
    duty existed, granted a  post-judgment motion for judgment as
    
    a  matter  of  law  in  favor  of  defendant  American  Title
    
    Insurance Co.  ("American"), thus  nullifying a  jury verdict
    
    awarding $286,000 in  negligence damages  to plaintiff  Focus
    
    Investment  Associates, Inc. ("Focus").1   Focus appeals that
    
    ruling,  as  well  as  others  related   to  it.    American,
    
    meanwhile,  argues that  the jury's  $49,000 damage  award on
    
    Focus's  contract claim  may  have  resulted  from  erroneous
    
    instructions  and  should  therefore  be vacated.    For  the
    
    reasons that  follow, we  affirm the judgments  against Focus
    
    and vacate the judgment against American.2
    
                        
    
    1.  See generally  Focus Inv. Assocs. v.  American Title Ins.
                                                                 
    Co., 
    797 F. Supp. 109
     (D.R.I. 1992).
       
    
    2.  Prior to trial, Fed. R. Civ.  P. Rule 50 had already been
    amended to abolish the  different designations between a pre-
    judgment "motion  for directed verdict"  and a  post-judgment
    "motion  for judgment n.o.v."  Both motions are  now known as
    "motions for judgment as a matter of law."  As the applicable
    standards under the two denominations do not differ, we will,
    for purposes of consistency, refer to the motions at issue as
    though they were submitted  and ruled upon under  the amended
    Rule.  See Davet v. Maccarone,  
    973 F.2d 22
    , 26 n.4 (1st Cir.
                                 
    1992) (discussing amendment to federal rule and  substituting
    appropriate nomenclature).
    
                                 -3-
                                  3
    
                                  I.
                                    
    
                           Background Facts
                                           
    
              Unless otherwise indicated, the following facts are
    
    undisputed.    Focus,   a  family-owned  and   operated  Ohio
    
    corporation,  invests money  from  a family  trust and  makes
    
    loans  secured by interests in  real estate.   On December 6,
    
    1988, Laurence  J. Shapiro, a now-deceased  Boston-based real
    
    estate   developer  and  mortgage   broker,  contacted  Focus
    
    President Edward  Sarbey3 to solicit placement  of a $250,000
    
    short-term  loan  to  George  Marderosian,  a  Rhode   Island
    
    attorney.    Shapiro  explained  that  Marderosian  was  lead
    
    attorney in  a real estate enterprise,  which urgently needed
    
    to fund  operational cash  shortfalls.  Shapiro  indicated to
    
    Focus that  Guardian Mortgage  Corp., a loan  company Shapiro
    
    operated,  would make and close the loan, and then assign all
    
    loan documents to  Focus, in return  for Focus's funding  and
    
    purchase of the loan.
    
              Shapiro represented to Focus that the loan would be
    
    fully secured by second mortgages on twelve condominium units
    
    valued at $1.14 million,  subject only to Attleboro Pawtucket
    
    Savings   Bank's  ("Attleboro")   first   mortgage  with   an
    
                        
    
    3.  Shapiro and  Sarbey became  acquainted when the  two were
    neighbors in  Boston, prior  to Sarbey's relocation  to Ohio.
    According  to  Sarbey, Shapiro  originally  recommended loans
    secured by  real estate as  a safe and  profitable investment
    idea.   Prior to the loan here at issue, Shapiro had arranged
    several other loans for Focus.
    
                                 -4-
                                  4
    
    approximate  balance  of $720,000.   As  additional security,
    
    Focus  was to  be given  a  second mortgage  on Marderosian's
    
    home, which,  according to  Shapiro, had  an equity  value of
    
    $100,000 to  $150,000 over and above The  Boston Five Corp.'s
    
    first mortgage.   Finally, Shapiro and  Marderosian agreed to
    
    personally guarantee  the loan, and  to assign  to Focus  the
    
    proceeds of  a consulting agreement between  Shapiro and Dean
    
    Street  Development, a  Marderosian client.   Based  on these
    
    representations, Focus agreed to purchase and fund the loan.
    
               Shapiro  hired defendant James Tobak, an associate
    
    of  defendant law  firm Abrams  and  Verri, to  represent the
    
    lender's  interests4 and close the loan deal.  On December 6,
    
    1988,  Tobak   transmitted  to   Sarbey  facsimiles   of  the
    
    promissory  notes,  mortgages,  and  guarantees  executed  in
    
    connection with the loan.  The following day,  Tobak informed
    
    Sarbey  that Focus's  mortgages  had been  recorded and  that
    
    title insurance had been obtained.  He  then requested Sarbey
    
    to  wire  the  loan proceeds  to  Abrams  and  Verri's escrow
    
    account, which Sarbey did  the same day.    The loan  closing
    
    took  place December 8,  1988.  The terms  of the loan called
    
    for  an annual  interest  rate of  20  percent, with  monthly
    
                        
    
    4.  Focus  claims  that  Tobak   was  hired  to  protect  its
    interests,  while  Tobak  claims  he  was  hired  to  protect
    Shapiro's and Guardian's interests.  We address this dispute-
    -which  turns on  the identity  of the  actual "lender"--more
    fully infra at 15.
               
    
                                 -5-
                                  5
    
    interest payments of $4,166.67  to begin on January  6, 1989.
    
    Final repayment was due on April 6, 1989.
    
              Among the loan documents, Focus received two  title
    
    insurance  policies  issued   by  American's   policy-issuing
    
    attorney, defendant  Owen Landman.  The  first policy insured
    
    Focus's second mortgage on 12 condominium units.   The policy
    
    showed title to the units to be vested in the  name of George
    
    A.  Marderosian, Trustee  of the  River's Edge  Realty Trust.
    
    Excepted  from coverage  under the  first policy was  a first
    
    mortgage with a  principal balance of  $720,000.  The  second
    
    policy insured Focus's second mortgage on Marderosian's home,
    
    excepting  a  first  mortgage  in  the  principal  amount  of
    
    $150,000.
    
              Near the  end of December  1988, Shapiro died.   In
    
    January, February and  March 1989, Marderosian made  payments
    
    to  Focus totalling  $23,200.   However, as  of the  April 6,
    
    1988, due date, the balance of the principal and the interest
    
    due under the terms  of the promissory note remained  unpaid.
    
    In the  course of  considering its response  to Marderosian's
    
    non-payment,  Focus discovered  that  its  mortgages did  not
    
    occupy  a  second  position   on  either  of  the  collateral
    
    properties.   With respect to the  condominium units, Focus's
    
    mortgage  was  in  fifth   position.    Focus's  mortgage  on
    
    Marderosian's home  was in fourth  position, behind mortgages
    
    held by C & K Investments ($100,000) and Bank of New England-
    
                                 -6-
                                  6
    
    Old Colony ($50,000), as  well as the first mortgage  held by
    
    Boston  Five Corp.  In addition, at the time Focus's mortgage
    
    was recorded,  title to the  condominium units was  vested in
    
    Capital Center Development, not  Marderosian.  Neither of the
    
    title  insurance policies  reflected  the  existence  of  the
    
    senior mortgages  nor did the condominium  policy reflect the
    
    actual ownership.
    
              The  title  insurance  policies  in  question  were
    
    issued by defendant Landman, whom American had appointed as a
    
    policy-issuing attorney  in April 1980.   Landman, who shared
    
    office  space with Marderosian, was listed as "Of Counsel" on
    
    the Marderosian law firm  letterhead.  Landman testified that
    
    he issued the  title policies at  Marderosian's request.   He
    
    conducted no independent title  search, but instead relied on
    
    Marderosian's  representations   as  to  the   ownership  and
    
    mortgage status of the collateral properties.
    
              In July 1989, Attleboro foreclosed its mortgage  on
    
    the  condominium  units.    The foreclosure  sale  price  was
    
    $220,000  less than  the  balance  of  Attleboro's  mortgage,
    
    leaving nothing for a  second mortgagee.  Shortly thereafter,
    
    Marderosian's  home  was  bid  in at  foreclosure  by  second
    
    mortgagee C & K Investments, which assumed liability for  the
    
    principal  balance  of  $150,000  remaining  on  Boston  Five
    
    Corp.'s first mortgage and paid an additional $49,000,  for a
    
    total purchase price  of $199,000.  Thus, $49,000 in proceeds
    
                                 -7-
                                  7
    
    remained  after  satisfaction   of  the  Boston  Five   Corp.
    
    mortgage.
    
              On  November  11,  1989,  Focus  filed  a diversity
    
    action  against  American, Landman,  Tobak,  Abrams &  Verri,
    
    Shapiro's estate,  and Marderosian.  The nine-count complaint
    
    sought  damages  from  American   for  breach  of  the  title
    
    insurance  contract, negligence in searching title, negligent
    
    hiring,  retention  and  supervision  of  Landman,  negligent
    
    misrepresentation of Focus's mortgage position, and bad faith
    
    refusal to settle.   Focus accused  Landman of negligence  in
    
    searching title and  negligent misrepresentation.   Tobak and
    
    Abrams & Verri were charged with negligent misrepresentation,
    
    legal malpractice, breach of contract and breach of fiduciary
    
    duty.    Finally,  Focus   sought  to  enforce  the  personal
    
    guaranties  tendered by  Shapiro and  Marderosian.   Prior to
    
    trial, Marderosian filed  a motion to dismiss, to which Focus
    
    did not object, apparently  because it thought Marderosian to
    
    be  judgment-free.   The district  court granted  the motion,
    
    with prejudice. 
    
         At trial,  Focus  argued that  the  terms of  the  title
    
    insurance  contract  obligated  American  to  pay  Focus  the
    
    $49,000  that would  have  been  available  to Focus  had  it
    
    actually been  the  second mortgage  holder on  Marderosian's
    
    home.    In  addition,  Focus  sought  to  recover  the  loan
    
    proceeds, plus costs  and interest from  defendants American,
    
                                 -8-
                                  8
    
    Landman,  Tobak,  et  al.,  theorizing  that  but  for  their
                             
    
    tortious conduct,  Focus never  would have made  the loan  to
    
    Marderosian.  
    
              At  the close  of Focus's  case-in-chief, American,
    
    Landman,  Tobak, and Abrams &  Verri moved for  judgment as a
    
    matter of law.   The court reserved decision on  the motions.
    
    The  defendants renewed their motions at the close of all the
    
    evidence.   Focus also moved for judgment  as a matter of law
    
    on American's affirmative defense of usury.  The court denied
    
    Focus's  motion  and  reserved  decision on  the  motions  of
    
    American and Landman.  The court granted the motions of Tobak
    
    and Abrams  & Verri, ruling  that Focus's failure  to present
    
    expert testimony  with respect  to an attorney's  standard of
    
    care under the relevant circumstances  was fatal to the claim
    
    of legal malpractice.
    
              The jury found American liable on both contract and
    
    negligence grounds, awarding damages of $49,000 and $286,000,
    
    respectively.   The  jury also  found Landman  negligent, but
    
    awarded  no damages.    Following trial,  American moved  for
    
    judgment  as a  matter  of  law  on  both  the  contract  and
    
    negligence counts.  The  district court, ruling that American
    
    owed  Focus no duty with respect to the title search, granted
    
    the motion on the negligence  count, while denying the motion
    
    on  the contract  claim.   On  June  18, 1992,  judgment  was
    
    entered in accordance with these rulings.
    
                                 -9-
                                  9
    
              Both  Focus  and American  appealed.   Focus claims
    
    that judgment  as  a  matter  of  law  was  improper  because
    
    American  was under a duty  to Focus to  perform a reasonable
    
    title search.   Focus  also  argues that  the district  court
    
    incorrectly ruled  that expert testimony was  necessary on an
    
    attorney's standard of care, and that even if  such testimony
    
    was required, it  was supplied via the testimony of attorneys
    
    Tobak and Marderosian.  American  appeals on the ground  that
    
    the district court incorrectly charged the jury that it "may"
    
    return  a  verdict  for American  if  it  found  the loan  to
    
    Marderosian usurious,  when in  actuality a finding  of usury
    
    would mean that a jury "must" rule in favor of American.5  
    
                                 II.
                                    
    
                            Focus's Appeal
                                          
    
    A.  Judgment as a Matter of Law
                                   
    
              The bulk of Focus's appeal is aimed at the district
    
    court's grant of judgment as a matter of law against Focus on
    
    its  various claims of negligence.   In reviewing  a grant of
    
    judgment  as a matter of law, the evidence and all reasonable
    
                        
    
    5.  Focus   also  argued   that  American   should  be   held
    vicariously liable  for the negligence of  its alleged agent,
    Landman.   The  district court  ruled  that Landman  was  not
    American's agent,  and Focus  appeals that decision  as well.
    The  only asserted  basis  for Landman's  negligence was  his
    failure to  independently search  title prior to  issuing the
    policies in question.   Because,  as will  be explained  more
    fully, infra, we find that a title insurer owes no duty to an
                
    insured with respect to  a title search, we need  not resolve
    the agency issue.
    
                                 -10-
                                  10
    
    inferences  therefrom  must be  examined  in  the light  most
    
    favorable to the nonmovant.  Lowe v. Scott, 
    959 F.2d 323
    , 337
                                              
    
    (1st Cir. 1992).  Judgment as  a matter of law is appropriate
    
    only  when the evidence, so viewed, is such that a reasonable
    
    jury could reach only one conclusion.  Id.   
                                              
    
    B. The Negligence Claims6
                            
    
         1.  The Title Search
                             
    
              Focus essentially argues, as  it did at trial, that
    
    American--via  its   agent,  Landman--failed  to   conduct  a
    
    reasonable title search prior  to issuing the title insurance
    
    policy  to  Focus.   Had  American  done  so, and  thereafter
    
    disclosed to  Focus the correct number  of superior mortgages
    
    on the proffered collateral, Focus claims it never would have
    
    made the loan to Marderosian.   At the heart of this argument
    
    is the question of  whether a title insurance company  can be
    
    held liable for  failure to search  title and disclose  title
    
    defects to its insured.  This is apparently an issue of first
    
                        
    
    6.  We note that the jury was not given separate instructions
    relative   to  each  of  Focus's  negligence  claims  against
    American--e.g.,    searching    title,     misrepresentation,
    supervision, etc.--but instead was given a verdict form which
    asked only, "Do you find American Title liable for negligence
    in issuing the title insurance policies?"  Therefore, because
    the record  does not  indicate which  theory the  jury relied
    upon to  make  its $286,000  negligence award,  we, like  the
    district court,  must examine each theory  individually.  See
                                                                 
    Welsh  Mfg., Div.  Of Textron  v. Pinkerton's, 
    474 A.2d 436
    ,
                                                 
    441-42 (R.I.  1984) (when multiple theories  of liability are
    submitted to a jury, which then is asked  to return a general
    verdict, each  theory must be tested  separately to determine
    whether submission to the  jury is appropriate) (citing Davis
                                                                 
    v. Caldwell, 
    429 N.E.2d 741
    , 742 (N.Y. 1981)).
               
    
                                 -11-
                                  11
    
    impression in Rhode  Island, and thus  we will seek  guidance
    
    from, inter alia, analogous decisions of other jurisdictions.
                    
    
    See  Sainz Gonzalez  v. Banco  de Santander-Puerto  Rico, 
    932 F.2d 999
    , 1001 (1st Cir. 1991) ("A diversity court faced with
    
    a paucity of  apposite decisional law may  look to `analogous
    
    decisions  . .  .  and any  other  reliable data  tending  to
    
    convincingly  show  how the  highest  court  in the  relevant
    
    jurisdiction  would decide the  issue.'")(quoting Redgrave v.
                                                              
    
    Boston Symphony  Orchestra, Inc., 
    855 F.2d 888
    , 903 (1st Cir.
                                    
    
    1988) (en banc)).   We  review de novo  the district  court's
    
    state law  determination.   Salve Regina College  v. Russell,
                                                                
    
    
    111 S. Ct. 1217
    , 1223-25 (1991).
    
              It is true, as Focus asserts, that some courts have
    
    concluded that  a title  insurance company  may be  liable in
    
    tort if it negligently fails to discover and disclose a title
    
    defect  to its  insured.   See,  e.g.,  Red Lobster  Inns  of
                                                                 
    
    America v. Lawyers Title  Ins. Corp., 
    656 F.2d 381
    ,  383 (8th
                                        
    
    Cir.  1981) (applying  Arkansas law);  Bank of  California v.
                                                              
    
    First American Title  Ins. Co., 
    826 P.2d 1126
    , 1128  (Alaska
                                  
    
    1992); White v.  Western Title  Ins. Co., 
    710 P.2d 309
    ,  315
                                            
    
    (Cal. 1985);   Ford v.  Guarantee Abstract &  Title Co.,  
    553 P.2d 254
    , 266 (Kan. 1976);  Heyd v. Chicago  Title Ins. Co.,
                                                                
    
    
    354 N.W.2d 154
    , 158 (Neb. 1984).  See generally Joyce Dickey
                                                    
    
    Palomar, Title Insurance Companies' Liability for Failure  to
                                                                 
    
    Search Title and  Disclose Record Title, 20 Creighton L. Rev.
                                           
    
                                 -12-
                                  12
    
    455  (1986-87).  In each  of those cases,  however, the title
    
    insurance company  either had  expressly agreed to  provide a
    
    title report or had issued to the insured a preliminary title
    
    report which failed to disclose a title defect which was then
    
    excluded from coverage under the policy.  In such situations,
    
              two distinct responsibilities are  assumed [by
              the insurer]; in rendering the  first service,
              the insurer  serves as an abstractor  of title
              and must  list all  matters  of public  record
              regarding   the   subject   property  in   its
              preliminary  report.   When  a  title  insurer
              breaches its duty to abstract title accurately
              it may be held liable  in tort for all damages
              proximately caused by such breach. 
    
    Ford, 553 P.2d at 266 (citations omitted).  
        
    
              In   the  absence   of  an   express   contract  or
    
    preliminary  title report,  however,  courts  have  uniformly
    
    declined  to hold  a  title insurance  company  liable for  a
    
    negligent  title search.  See, e.g., Brown's Tie & Lumber Co.
                                                                 
    
    v.  Chicago Title  Co., 
    764 P.2d 423
    ,  425-27  (Idaho 1988);
                          
    
    Roscoe v. United States  Life Title Ins. Co., 
    734 P.2d 1272
    ,
                                                
    
    1274  (N.M. 1987);  Grunberger v.  Iseson, 
    429 N.Y.S.2d 209
    ,
                                             
    
    210-11  (N.Y. App.  Div.  1980); Greenberg  v. Stewart  Title
                                                                 
    
    Guar. Co., 
    492 N.W.2d 147
     (Wis. 1992); see also Walker Rogge,
                                                                 
    
    Inc. v. Chelsea  Title and  Guar. Co., 
    562 A.2d 208
    ,  217-19
                                         
    
    (N.J. 1989) (collecting cases).
    
              Here, American neither contracted to  provide Focus
    
    with a  title report, nor  provided Focus with  a preliminary
    
    title report.  Thus, we agree with the district court that in
    
                                 -13-
                                  13
    
    trying to recover its  loan loss under negligence principles,
    
    Focus seeks  to expand its relationship  with American beyond
    
    the bounds of  the title insurance policy  and thereby impose
    
    upon American a duty neither undertaken nor imposed by  law.7
    
                        
    
    7.  The  cover sheet  of the  policies here  at issue  states
    that:
    
              SUBJECT TO THE EXCLUSIONS  FROM COVERAGE,
              THE  EXCEPTIONS  CONTAINED IN  SCHEDULE B
              AND THE PROVISIONS  OF THE CONDITIONS AND
              STIPULATIONS   HEREOF,   AMERICAN   TITLE
              INSURANCE COMPANY .  . .   insures . .  .
              against loss or damage, not exceeding the
              amount of insurance stated in  Schedule A
              .  .  .  sustained  or  incurred  by  the
              insured by reason of:
    
              1.   Title  to  the  estate  or  interest
              described  in  Schedule  A  being  vested
              otherwise than as stated therein;
    
              2.  Any defect  in or lien or encumbrance
              on such title;
    
                               . . . . 
    
              6.     The  priority   of  any  lien   or
              encumbrance over the  lien of the insured
              mortgage;
    
                               . . . . 
    
    Among  the  relevant  Conditions  and  Stipulations  are  the
    following:
    
              6.  DETERMINATION AND PAYMENT OF LOSS
                   (a)    The  liability of  [American]
              under this policy shall in no case exceed
              the least of:
                   (i)  the actual loss  of the insured
              claimant; or
                   (ii) the amount of  insurance stated
              in Schedule A . . . .
    
                               . . . .
    
                                 -14-
                                  14
    
    See  Horn v. Lawyers Title Ins.  Co., 
    557 P.2d 206
    , 208 (N.M.
                                        
    
    1976) ("The rights and duties of the parties are fixed by the
    
    contract  of title insurance.").8   In the absence  of a duty
    
    to  search title,  as  a  matter  of law,  there  can  be  no
    
    liability for failing to do so.  See Banks v. Bowen's Landing
                                                                 
    
    Corp.,  
    522 A.2d 1222
    , 1224-25  (R.I. 1987) (if  no duty runs
         
    
    from  defendant to plaintiff, an issue which is to be decided
    
    by  the court, the trier of fact  has nothing to consider and
    
    judgment  as a matter of law must be entered).9  Accordingly,
    
    we find that the district court correctly granted judgment as
    
                        
    
              11.  LIABILITY LIMITED TO THIS POLICY
                   This  instrument  together with  all
              endorsements  and  other instruments,  if
              any, attached hereto by [American] is the
              entire  policy  and contract  between the
              insured and [American].
                   Any claim of loss or damage, whether
              or  not based  on  negligence, and  which
              arises out  of the status of  the lien of
              the insured mortgage or  of the title  to
              the estate or  interest covered hereby or
              any action asserting such claim, shall be
              restricted   to    the   provisions   and
              conditions   and  stipulations   of  this
              policy.
    
    8.    To the extent that a title insurer searches title prior
    to issuing a policy, it does  so only for its own benefit, to
    ascertain its risk of  liability under the policy as  it will
    except from coverage any title defect it does discover and be
    liable for  damages caused by  undiscovered--and unexcepted--
    defects.  See Greenberg, 492 N.W.2d at 150. 
                           
    
    9.  To  the extent,  therefore,  that Focus  claims that  the
    existence  of a  duty was  a question for  the jury,  such an
    argument is legally incorrect.  Banks, 522 A.2d at 1225.
                                         
    
                                 -15-
                                  15
    
    a matter of law  on Focus's claim of negligence  in searching
    
    title.
    
         2.  Negligent Misrepresentation
                                        
    
              As  we  have  said,  each of  the  title  insurance
    
    policies here at issue excepted  from coverage only one prior
    
    mortgage,  thereby   insuring  Focus's  position   as  second
    
    mortgagee  on  both  the condominium  units  and  Marderosian
    
    residence.  Focus argues that the policies therefore amounted
    
    to a false representation  that its mortgages were in  second
    
    position,   which  representation   was  due   to  American's
    
    negligence.  Consequently, Focus argues, because it relied on
    
    these  representations  in  deciding  to  make  the  loan  to
    
    Marderosian,  American is  liable for  Marderosian's default.
    
    Although we agree with the district court that American, as a
    
    matter  of  law,  was  not  liable  to  Focus  for  negligent
    
    misrepresentation, our reasoning  differs somewhat from  that
    
    of the district court.   See Banco Popular de Puerto  Rico v.
                                                              
    
    Greenblatt, 
    964 F.2d 1227
    ,  1230 (1st Cir.  1992) (appellate
              
    
    court can  affirm a judgment on  any independently sufficient
    
    ground reflected in the record).
    
              We  have  stated  that   "[t]itle  insurance  is  a
    
    contract of indemnity, not guarantee."  Falmouth Nat. Bank v.
                                                              
    
    Ticor Title Ins.  Co., 
    920 F.2d 1058
    , 1062  (1st Cir.  1990)
                         
    
    (applying Massachusetts law) (citations omitted).  Therefore,
    
    by issuing a policy, "an insurer does not guarantee the state
    
                                 -16-
                                  16
    
    of the title, but rather, agrees to indemnify the insured for
    
    any loss." Id.  "Put another way, it is not the mortgage note
                  
    
    that  is insured,  but rather,  what is  insured is  the loss
    
    resulting  from  a  defect  in  the  security."  Id.  (citing
                                                        
    
    Southwest Title Ins. Co. v. Northland Bldg. Corp., 
    552 S.W.2d 425
    , 430 (Tex. 1977)).   Moreover, a title insurer  "does not
    
    guarantee either  that the  mortgaged premises are  worth the
    
    amount  of the  mortgage or  that the  mortgage debt  will be
    
    repaid."  Blackhawk Prod. Credit Assoc. v. Chicago Title Ins.
                                                                 
    
    Co., 
    423 N.W.2d 521
    , 525 (Wis. 1988) (citations omitted).  As
       
    
    the  title insurance  policies  issued by  American were  not
    
    representations of  title, they cannot,  as a matter  of law,
    
    form the basis of a claim of negligent misrepresentation.10
    
                        
    
    10.  Not only  are the district  court's decisions  regarding
    the title insurance  policies in accord  with those of  other
    jurisdictions, they are supported  by logic as well.   In our
    view, Focus's  position  is tantamount  to  a buyer  of  life
    insurance  claiming that  his policy  is a  guarantee against
    death.    Focus's  claim  that it  relied  on  the  insurance
    policies  as  evidence  that no  undisclosed  superior  liens
    existed  simply  flies  in the  face  of  the  fact that  the
    policies were issued to  protect Focus against losses it  may
    suffer   from  undisclosed  superior  liens.    Moreover,  an
    insured's losses are limited to situations where the security
    of  the insured lien is actually  impaired by the undisclosed
    superior lien.  "The  mere fact of an undisclosed  prior lien
    is  insufficient to establish this  claim; a showing that the
    prior lien renders  the insured lien `insecure'  must be made
    as  well."    Blackhawk,  423  N.W.2d  at  525-26.  (citation
                           
    omitted).   In other words, if  the lien held  by Focus would
    have  been  valueless  without  the undisclosed  lien,  Focus
    cannot  claim any loss due to the presence of the undisclosed
    lien.    This explains  the  jury's $49,000  award  under the
    contract, because between the two collateral properties, only
    that  amount--left  over from  the  foreclosure  sale of  the
    Marderosian residence--would have been  available to Focus as
    
                                 -17-
                                  17
    
         3.  Negligent Hiring, Retention and Supervision
                                                        
    
           In addition to claims of negligence in searching title
    
    and  negligent  misrepresentation,  Focus asserted  at  trial
    
    claims   directly  against  American  for  negligent  hiring,
    
    retention  and supervision  of its  policy-issuing attorneys,
    
    Landman and  Marderosian.  The  district court found  none of
    
    these theories to be legally supportable.  We agree.
    
              Rhode   Island  law   does  recognize   the  direct
    
    liability of  an employer to third parties for damages caused
    
    by employees or agents who were negligently hired, trained or
    
    supervised.  Welsh Mfg., 474 A.2d  at 438.  This liability is
                           
    
    based  on a failure to exercise reasonable care in hiring and
    
    retaining a person who  the employer knows or should  know is
    
    unfit for the job, and who therefore exposes third parties to
    
    unreasonable risks of  harm.  Id.  at 440.   With respect  to
                                     
    
    American's selection  and retention  of Landman as  a policy-
    
                        
    
    a second mortgagee.  With respect to the rest of  the loan to
    Marderosian, Focus was simply  insufficiently collateralized.
    In making this  last statement, we reject  Focus's claim that
    American's negligence  resulted in a confused  state of title
    that "chilled" the foreclosure  sales and thereby reduced the
    equity  available  to a  second  mortgagee.   Although  Focus
    presented  expert  evidence  at  trial  indicating  that  the
    collateral  properties  had  a  market  value  exceeding  the
    foreclosure sale price, those experts testified that although
    foreclosure  itself would  reduce a property's  market value,
    they  did not consider the  effects of a  foreclosure sale on
    the  value  of the  property at  issue  in arriving  at their
    appraisal.    Finally,  there   was  no  explanation  of  how
    American's  alleged  negligence--as opposed  to Marderosian's
    actions--created   the   title  confusion,   the  foreclosure
    situation or the resulting depressed value.  
    
                                 -18-
                                  18
    
    issuing attorney,  however, the record is  devoid of evidence
    
    that  American knew  or should  have  known that  Landman was
    
    unfit  for the position.  Nor was any evidence presented that
    
    Landman  exhibited  any job-related  deficiencies  during the
    
    nine-year period  he served  American.  Accordingly,  we find
    
    Focus's negligent  hiring and retention claims  to be legally
    
    insufficient.
    
              Focus next argues  that American's failure to  give
    
    Landman personal  instructions  or training  with respect  to
    
    title  insurance  or  title  searching,  failure  to  conduct
    
    seminars  or courses,  and  failure to  audit Landman's  work
    
    constituted negligence  and resulted  in Focus's loss  on the
    
    Marderosian  loan.    As  we have  stated  already,  however,
    
    American  was under  no duty  to provide  Focus with  a title
    
    report,  and  any  title  search  undertaken  by  Landman  or
    
    American was for  American's benefit, not Focus's.  Thus, any
    
    failure on American's part to train Landman is not actionable
    
    by Focus.  
    
              Finally,   to  support   its  claim   of  negligent
    
    supervision,  Focus  argues that  if  American  had a  system
    
    whereby it could have ascertained which property interests it
    
    already insured,  it would  have discovered the  senior liens
    
    not disclosed on the policies  issued to Focus, since earlier
    
    policies on  the same properties  showed additional different
    
    encumbrances.  Focus's  argument fails, however,  because, as
    
                                 -19-
                                  19
    
    American  correctly  points  out,  title policies  issued  at
    
    different times  may show different encumbrances  on the same
    
    property  simply because  the  encumbrances may  have changed
    
    over time due to refinancing or discharge.  Therefore,  Focus
    
    has failed to indicate how such a cross-checking system would
    
    have yielded any relevant information.
    
              In  the  end,  with   respect  to  all  of  Focus's
    
    negligence claims, Focus received what it bargained  for -- a
    
    title insurance policy which  promised to indemnify Focus for
    
    any  losses suffered as a result of Focus not having a second
    
    mortgage  on the relevant collateral properties.  As the only
    
    equity available to  a second mortgagee was  $49,000 from the
    
    foreclosure  of  the  Marderosian  residence,  that  was  the
    
    "actual loss"  within the  meaning of  the policy,  see supra
                                                                 
    
    note  7,  and thus  the only  loss  American was  required to
    
    indemnify.   Focus was not  legally entitled to anything else
    
    from American.
    
    C.  Legal Malpractice
                         
    
              The district court granted  judgment as a matter of
    
    law in favor of Tobak and Abrams &  Verri, holding that Focus
    
    needed to present  expert testimony to the  jury with respect
    
    to the duty of care owed  by an attorney in Tobak's position.
    
    Focus first argues that no such expert testimony was required
    
    because the standard of care of an attorney  "in representing
    
    a  lender" is  within a  layman's common  knowledge.   In the
    
                                 -20-
                                  20
    
    alternative, Focus  argues that  the jury was  presented with
    
    such  evidence  via  the  testimony  or cross-examination  of
    
    Tobak, Landman  and Marderosian.  After  careful analysis, we
    
    are unpersuaded by Focus's contentions.  
    
              As an initial matter, we  note that in arguing that
    
    no expert testimony was required relative to the duty owed by
    
    a lender's attorney, Focus has, in our view, misapprehended a
              
    
    critical concern of the district court.   In granting Tobak's
    
    motion,  the  court   emphasized  the  confusion  surrounding
    
    Tobak's  actual  role in  the  loan process,  and  found that
    
    Focus's failure to present  evidence which would have clearly
    
    established Tobak's  role was  a serious  matter, as  was its
    
    failure to  present evidence  indicating exactly what  is the
    
    standard of care for an attorney performing that role.11
    
                        
    
    11.  Specifically, the district court stated:
    
              My  understanding is that the argument is
              that  Mr. Tobac  (sic) allegedly  gave an
              opinion upon which  the Plaintiff  relied
              that  each of  the mortgages  in question
              were  second  mortgages.    There  is  an
              underlying factual issue here  of whether
              or not in the first  place the defendant,
              Tobac  (sic),  and   his  law  firm  were
              engaged  for the purpose  of providing an
              opinion with respect to the effect of the
              two mortgages.  I'm  satisfied . . . that
              this  is  a  circumstance  in  which it's
              necessary to have  available to the  jury
              expert opinion  with respect to  the duty
              of  an  attorney  in  Mr.  Tobac's  (sic)
              situation.   Particularly in light of the
              fact  that his  situation  is unclear  to
              begin with as to just exactly what he was
              hired to do.  What his engagement was.
    
                                 -21-
                                  21
    
         1.  The Need for Expert Testimony
                                          
    
              It  is well settled  under Rhode Island  law that a
    
    legal malpractice plaintiff must  prove the "want of ordinary
    
    care and skill"  by the defendant.   Holmes v.  Peck, 
    1 R.I. 242
    , 245  (1849).   While there is  no Rhode Island  case law
    
    addressing  the   issue  of  expert  testimony   in  a  legal
    
    malpractice case,  a review of other  jurisdictions indicates
    
    that  the  most  widely  accepted   rule  is  that  a   legal
    
    malpractice   plaintiff   must   present   expert   testimony
    
    establishing  the appropriate  standard  of care  unless  the
    
    attorney's  lack of  care and  skill is  so obvious  that the
    
    trier of  fact can resolve  the issue as  a matter  of common
    
    knowledge.  See generally, Michael A. DiSabatino, Annotation,
                             
    
    Admissibility  and   Necessity  of  Expert  Evidence   as  to
                                                                 
    
    Standards of Practice  and Negligence  in Malpractice  Action
                                                                 
    
    Against  Attorney, 
    14 A.L.R. 4th 170
     (1982) (and cases cited
                     
    
    therein).    Cases which  fall  into  the "common  knowledge"
    
    category  are  those  where  the  negligence  is  "clear  and
    
    palpable,"  or  where  no  analysis  of  legal  expertise  is
    
    involved.  See   e.g.,  Collins v. Greenstein,  
    595 P.2d 275
                                                 
    
    (Haw.  1979)  (no  expert  testimony  required  for  jury  to
    
    evaluate attorney's failure  to file  suit within  applicable
    
    limitations period); Suritz  v. Kelner, 
    155 So. 2d
     831 (Fla.
                                          
    
    Dist.  Ct. App.  1963)  (no expert  testimony required  where
    
    attorney  directed clients not to answer interrogatories even
    
                                 -22-
                                  22
    
    though judge had  directed clients  to answer  on penalty  of
    
    dismissal), cert. denied, 
    165 So. 2d 178
     (Fla. 1964); Olfe v.
                                                              
    
    Gordon,  
    286 N.W.2d 573
      (Wis.  1980)  (no expert  testimony
          
    
    required   where   attorney   failed   to   follow   client's
    
    instructions because claim was not based on exercise of legal
    
    expertise). 
    
              On the  other hand, in cases  where legal expertise
    
    is  an  issue, "a  jury  cannot  rationally apply  negligence
    
    principles  to professional conduct  absent evidence  of what
    
    the   competent  lawyer   would   have  done   under  similar
    
    circumstances .  . . "   Lenius v. King, 
    294 N.W.2d 912
    , 914
                                           
    
    (S.D. 1980).   See  also, Lentino  v. Fringe  Employee Plans,
                                                                 
    
    Inc., 
    611 F.2d 474
     (3d Cir. 1979) (where attorney was accused
        
    
    of malpractice for failing to  properly advise a pension fund
    
    on  the tax consequences of a  pension plan amendment, expert
    
    testimony would be  required due to the necessary analysis of
    
    the  tax code,  regulations,  and revenue  rulings) (applying
    
    Pennsylvania  law);  Willage  v.  Law Offices  of  Wallace  &
                                                                 
    
    Breslow,  P.A., 
    415 So. 2d 767
     (Fla.  Dist. Ct.  App. 1982)
                  
    
    (expert testimony  required where malpractice case  was based
    
    on  attorney's failure  to  call a  particular witness,  when
    
    attorney feared damaging cross-examination of witness).
    
              Here, Tobak testified that  he was hired by Shapiro
    
    and Guardian, together referred to as "the lender," to review
    
    loan  documents,  and  in  order  to  do  so,  he  relied  on
    
                                 -23-
                                  23
    
    information provided to him by his client.  He testified that
    
    nothing  he reviewed indicated to  him that the  loan was not
    
    proceeding as planned.  Sarbey also testified that it was his
    
    understanding that Tobak  was representing "the  lender," but
    
    because, in his opinion, Focus was the lender, Sarbey thought
    
    that Tobak was representing Focus.  Essentially, Focus argues
    
    that Tobak was employed by Focus and committed malpractice by
    
    relying  on the  documentation  he was  presented and  simply
    
    reviewing it without making an independent investigation.  In
    
    our view, regardless of who Tobak  represented, Focus's claim
    
    clearly implicates  the issue  of Tobak's application  of his
    
    legal  expertise to  the situation.  Accord, Fall  River Sav.
                                                                 
    
    Bank  v. Callahan,  
    463 N.E.2d 555
      (Mass. App.  Ct.  1984)
                     
    
    (approving  trial  court's  use of  supplemental  sources  to
    
    augment  expert  testimony   in  malpractice  trial of  title
    
    attorney).   Accordingly,  we  find that  the district  court
    
    decided  correctly  that  expert  testimony  was  required to
    
    establish the standard of  care applicable to an attorney  in
    
    Tobak's position.
    
         2.  Trial Testimony as Expert Testimony 
         2.  Trial Testimony as Expert Testimony
                                                
    
                On  appeal, Focus  asserts that  it "adduced  the
    
    requisite standards of  care of a  closing attorney, a  title
    
    attorney,  a settlement  agent  and a  fiduciary through  the
    
    testimony   of  James   Tobak,   Owen  Landman   and   George
    
    Marderosian."  This  argument misses the point, and serves to
    
                                 -24-
                                  24
    
    highlight the controversy  surrounding Tobak,  for Focus  has
    
    again, as  it  did  before  the  district  court,  failed  to
    
    indicate which role Tobak occupied.  Thus, even assuming that
    
    the testimony of the three defendants did adduce the  claimed
    
    standards, the jury could only speculate as to which standard
    
    applied to Tobak. See Lenius, 294 N.W.2d at 914 (jury may not
                                
    
    be  permitted to  speculate  as to  standard of  professional
    
    conduct).   Given  the parties'  dispute over  the employment
    
    issue, we believe that the district court correctly concluded
    
    that  the  jury should  have  been  presented with  testimony
    
    concerning the role assumed by--and concomitant duties of--an
    
    attorney  in Tobak's position; that is, hired by a party who,
    
    on paper, is the lender,  but in reality is a  broker through
    
    whom  the loan proceeds will  pass.  Because  Focus failed to
    
    clear  that hurdle, we need  not address the  adequacy of the
    
    testimony that  was introduced  at trial. Instead,  given the
                       
    
    factual and legal landscape, we find that  the district court
    
    correctly concluded  that expert  testimony on the  nature of
    
    Tobak's  role was  both required  and lacking,  and therefore
    
    properly  granted judgment  as a  matter of  law in  favor of
    
    Tobak and Abrams & Verri.12
    
                        
    
    12.  Focus  argues  for the  first  time on  appeal  that the
    district  court  erred  because if  the  jury  had  found for
    American  on its  usury  claim, then  Tobak  would have  been
    liable  to  Focus  for  failing  to   apprise  Focus  of  the
    illegality.    We  do  not  reach  this  issue,  but  instead
    reiterate  our familiar  position  that arguments  not raised
    before  the district court "cannot  be surfaced for the first
    
                                 -25-
                                  25
    
                                 III.
                                     
    
                          American's Appeal
                                           
    
    A.  Usury
             
    
              Under Rhode Island law, loans which call for annual
    
    interest  payments in  excess  of 21  percent are  considered
    
    usurious,  and are  therefore void  and uncollectible.   R.I.
    
    Gen.  Laws      6-26-2,  6-26-4  (1956)  (1992  Reenactment);
    
    DeFusco  v. Giorgio, 
    440 A.2d 727
    , 731-32 (R.I.  1982).  The
                       
    
    result is the same whether or not the lender intended to make
    
    a  usurious loan.   In  re Swartz, 
    37 B.R. 776
      (Bankr. R.I.
                                     
    
    1984).   Here, there is  no dispute that  the promissory note
    
    given  to  Guardian  by  Marderosian and  assigned  to  Focus
    
    provided for  20 percent  annual interest.   American claims,
    
    however,  that Shapiro's  assignment  to Focus  of a  $56,500
    
    consulting fee  paid to Shapiro by  Marderosian's client Dean
    
    Street    Development--an     assignment    which    occurred
    
    contemporaneously  with  the  Marderosian   loan  agreement--
    
    constituted  a  separate,  hidden  interest  payment  on  the
    
    Marderosian loan, bringing the actual annual interest rate on
    
    the loan to 88 percent.
    
              According to American's theory,  as a result of the
    
    usurious--and  therefore  void--mortgage,  Focus   failed  to
    
    acquire an insurable property interest and therefore suffered
    
                        
    
    time on appeal."   Goldman v. First National Bank  of Boston,
                                                                
    No. 92-1773, slip op. at 5, n.4 (Feb. 18, 1993).
    
                                 -26-
                                  26
    
    no damage  as a result  of any title  defects.   The district
    
    court denied Focus's motion  for judgment as a matter  of law
    
    with respect  to usury, and  allowed the  issue to go  to the
    
    jury, giving the following instruction in the context of  the
    
    contract claim:
    
                   Defendant  contends   that  payments
              under a consulting agreement  executed at
              the same time as  the loan agreement were
              in reality interest payments on the loan.
              If  you  find by  a preponderance  of the
              evidence  that  the consulting  agreement
              was  really a pretext  for the payment of
              an illegal rate of interest, then you may
                                                       
              find  that  the  loan  was  unlawful  and
              return  a verdict  for  Defendant on  the
              contract claim. 
    
    (Emphasis added).  American timely objected, arguing that the
    
    use of the word "may" impermissibly gave the jury  discretion
    
    to find for Focus even  if it found the loan to  be usurious.
    
    The court  did  not  change  the instruction,  and  the  jury
    
    awarded  Focus  $49,000  under  the  title  insurance  policy
    
    covering  the mortgage  on  Marderosian's home.   On  appeal,
    
    American  claims that  the  "may" instruction  was clear  and
    
    harmful error entitling  it to  a new trial.   After  careful
    
    review, we agree.
    
              Interestingly, Focus does  not directly dispute the
    
    central thesis of American's  appeal--the failure of the jury
    
    instruction  to conform to the law  of usury as it relates to
    
    insurable  interests.     Instead,  Focus   argues  that  (1)
    
    American,  or  anyone else  other  than  the borrower,  lacks
    
                                 -27-
                                  27
    
    standing to raise the  usury defense; (2) American  failed to
    
    establish  a  prima  facie case  of  usury;  and,  (3) it  is
    
    "obvious" that the jury found that the loan was not usurious,
    
    therefore  rendering  any error  harmless.    Finding all  of
    
    Focus's arguments unpersuasive, we address each in turn.
    
         1.  Standing
                     
    
              It is  ordinarily true, as Focus  asserts, that the
    
    defense  of usury  is  personal to  the  borrower or  one  in
    
    privity with  the borrower,  and unavailable to  strangers to
    
    the  usurious  transaction. See  generally,  45  Am. Jur.  2d
                                              
    
    Interest  and Usury    288 (1969) (and  cases cited therein).
                       
    
    This  custom allows a debtor who  does not wish to invoke the
    
    protections  of usury  laws to pay  off the debt  to which he
    
    agreed.   See DeFusco, 440 A.2d at 732 (although Rhode Island
                         
    
    usury  laws  manifest strong  public policy  against usurious
    
    transactions,  "we  do  not  believe  that   the  Legislature
    
    intended thereby to preclude a debtor from  waiving a defense
    
    of usury under all circumstances"). Focus relies on a host of
    
    cases, all  of which  restate the general  proposition stated
    
    above.   E.g., Securities Exch.  Comm'n v. First  Sec. Co. of
                                                                 
    
    Chicago, 
    366 F. Supp. 367
    , 373 (N.D. Ill. 1973); Iamartino v.
                                                              
    
    Avallone, 
    477 A.2d 124
    , 128 (Conn.  App. Ct. 1984);  General
                                                                 
    
    Electric Credit Corp. v. Best Refrigerated Express, Inc., 
    385 N.W.2d 81
    , 83 (Neb. 1986); Pinnix  v. Maryland Casualty Co.,
                                                                
    
    
    200 S.E. 874
    , 879 (N.C.  1939); Benser v. Independent Banks,
                                                                
    
                                 -28-
                                  28
    
    
    735 S.W.2d 566
    , 569 (Tex.  1987).  In  each of  these cases,
    
    however, the  party asserting the usury  claim was attempting
    
    to  avoid  repayment  of  a debt,  and  was  prohibited  from
    
    interposing  the claim.  See,  e.g., Pinnix, 200  S.E. at 879
                                               
    
    ("to allow a  stranger to interpose the defense of usury to a
    
    contract  with which the maker is  in all respects satisfied,
    
    and by the terms of which he desires to abide, and upon which
    
    he is liable for a deficiency judgment,  would be exceedingly
    
    unfair to a debtor who  desires to perform his contract. .  .
    
    .").  Unlike  the usury  theorists in  those cases,  however,
    
    American  is not  attempting to  step into  the shoes  of the
    
    borrower,  Marderosian,  and  void  the loan.    Rather  than
    
    asserting  usury as  a  defense  to  repayment of  the  loan,
    
    American  instead  argues that  the  usurious  nature of  the
    
    Marderosian   loan   rendered   Focus's   mortgage   interest
    
    uninsurable.  Indeed, there appears to be no dispute that had
    
    Focus  not acquiesced  to  Marderosian's motion  to  dismiss,
    
    Marderosian  would have  had the  right to interpose  a usury
    
    defense.   Thus,  while American's  claim does  implicate the
    
    question  of usury, Focus's  "personal defense" theory--while
    
    accurate--is, in  our view, misplaced.   Accordingly, we turn
    
    to the substance of American's argument.
    
              "In order for recovery  [on an insurance policy] to
    
    be  had, it  is  essential that  the  claimant show  both  an
    
    existing contract  of insurance and an  insurable interest in
    
                                 -29-
                                  29
    
    the property.   No insurable interest  existing, the contract
    
    is considered absolutely void . . . "  4 John A. Appleman and
    
    Jean  Appleman, Insurance  Law  and Practice,    2121  (1969)
                                                
    
    (footnotes omitted);  Cronin v. Vermont Life Ins.  Co., 
    40 A. 497
      (R.I. 1898).   In  what is  apparently the only  case to
    
    address the  issue, the Minnesota  Supreme Court held  that a
    
    usurious mortgage cannot give  rise to an insurable interest.
    
    Phalen Park  State  Bank v.  Reeves, 
    251 N.W.2d 135
    ,  138-39
                                       
    
    (Minn.  1977).   Phalen  was a  mortgagee's  suit on  a  fire
                           
    
    insurance policy.  The court accepted the insurance company's
    
    argument  that   the  bank,   by  charging  interest   on  an
    
    undisbursed  portion  of  the  loan,  effectively  charged  a
    
    usurious  rate  of  interest.    The  Phalen  court  used two
                                                
    
    separate analytical  paths to  reach its conclusion,  both of
    
    which  are applicable here and inevitably lead us to the same
    
    determination.
    
              First, Phalen  restated the general  rule that  one
                           
    
    has an  insurable interest in  property "by the  existence of
    
    which  he will gain advantage, or by the destruction of which
    
    he  will suffer a  loss."  Id.  at 139 (quoting  Harrison  v.
                                                              
    
    Fortlage, 
    161 U.S. 57
    , 65  (1896)); see also Appleman, supra,
                                                                
    
       2123,  2188.   Because,  however, a  usurious mortgage  is
    
    void, and the  mortgagee, therefore, has no  right to collect
    
    principal  or interest, no loss will occur if the property is
    
    destroyed.  Id.          The  second  rationale  employed  by
                   
    
                                 -30-
                                  30
    
    Phalen  follows from the premise  that where a  state views a
          
    
    particular legal scheme as reflecting the highest concern for
    
    public welfare, strict adherence to that scheme applies, even
    
    in  collateral  matters.    Thus, given  that  the  Minnesota
    
    Legislature  declared usurious  transactions to  be  void, an
    
    obvious  expression of  high public  welfare concern,  Phalen
                                                                 
    
    held  that no insurable interest  could arise from a usurious
    
    mortgage. Id.  The Phalen  court relied in part on   Mackie &
                                                                 
    
    Williams Food Stores, Inc.  v. Anchor Casualty Co., 
    216 F.2d 317
      (8th Cir. 1954), a case in which an automobile purchaser
    
    failed  to comply  with statutory  conveyancing requirements.
    
    Where Missouri's transfer documentation requirement was found
    
    to reflect public welfare  concern in preventing transfers of
    
    stolen automobiles, the court held that the purchaser did not
    
    obtain  an  insurable  interest.    Id.  See  also,  Cherokee
                                                                 
    
    Foundries,  Inc. v.  Imperial Assurance  Co., 
    219 S.W.2d 203
                                                
    
    (Tenn. 1949) (purchaser of real property pursuant  to an oral
    
    sales contract  did not  acquire  insurable interest  because
    
    contract was unenforceable under the statute of frauds).
    
              Here, under either approach,  a finding of usury in
    
    the   Marderosian-Focus  transaction   would   lead  to   the
    
    inexorable conclusion that the mortgages received by Focus as
    
    collateral were  not insurable  interests.   As to  the first
    
    theory, as  we have already noted,  usurious transactions are
    
    void under  Rhode Island law.   Thus,  if the loan  is indeed
    
                                 -31-
                                  31
    
    usurious,  Marderosian could  legally  avoid  repayment,  and
    
    recoup any  sums already paid.   Cf. Keenan v.  Coppa, 
    195 A. 485
     (R.I.  1937).  Therefore,  because a usurious  loan would
    
    leave  Focus with  no enforceable right  in the  mortgages at
    
    issue, a jury finding of  usury would necessarily leave Focus
    
    with no insurable interest. 
    
              As  to  Phalen's  second  path,  the  Rhode  Island
                              
    
    Supreme Court  has  unequivocally acknowledged  that  state's
    
    strong  public  policy  against  usurious  transactions.  See
                                                                 
    
    DeFusco, 440 A.2d  at 732.   Therefore, if Focus's  mortgages
           
    
    were acquired through a  usurious transaction, violative of a
    
    strong public policy, that public policy would apply to other
    
    matters.   Under  those  circumstances, Focus  would have  no
    
    insurable interest.   Accord Bankers  & Shippers Ins.  Co. v.
                                                              
    
    Blackwell,  
    51 So. 2d 498
     (Ala.  1951) (trucking company held
             
    
    to  have  no insurable  interest  in  freight where  carriage
    
    contract was illegal). See also, Mackie &  Williams, 216 F.2d
                                                       
    
    at  320;   Cherokee  Foundries, 219  S.W.2d  at 206.    Focus
                                  
    
    counters by arguing that Phalen is, by its own terms, limited
                                   
    
    to  its  facts,   and  that  a  later  Minnesota   case  both
    
    distinguished and  minimized the  importance of Phalen.   See
                                                                 
    
    Midwest Fed. Sav. and Loan Ass'n  v. West Bend Mut. Ins. Co.,
                                                                
    
    
    407 N.W.2d 690
     (Minn. Ct. App. 1987).  We are unpersuaded. 
    
              It is  true, as Focus  points out, that  the Phalen
                                                                 
    
    majority concluded its opinion  by stating: "[W]e stress that
    
                                 -32-
                                  32
    
    our  holding has resulted from  and is limited  to the unique
    
    facts  and circumstances presented in  this case.   We do not
    
    intend  by this decision to  depart from the  general rule in
    
    this  state  that the  defense of  usury  is personal  to the
    
    borrower."    Id. at  141.    Nowhere, however,  does  Phalen
                                                                 
    
    indicate   what  "unique   facts   and  circumstances"   were
    
    presented.    Irrespective   of  this  qualifying   language,
    
    however,  Phalen's  holding   remains  inescapable--that   no
                      
    
    insurable  interest can  arise  out of  a usurious  mortgage.
    
    Moreover,  as   we  previously  noted,   the  "general  rule"
    
    regarding usury is inapposite to this case, where American is
    
    not asserting a usury  defense, as such. Finally, even  if we
    
    were   to   accept  Focus's   argument   concerning  Phalen's
                                                                 
    
    limitations, we note that Phalen's conclusion with respect to
                                      
    
    usury  was but  a  small part  of  a broader  inquiry;  i.e.,
    
    whether  an insurable  interest can  arise out  of a  void or
    
    unenforceable contract.   The answer generally  appears to be
    
    negative.   See  supra  pp. 27-29.    Nor does  Midwest  help
                                                           
    
    Focus's cause.  In Midwest, the  court precluded an insurance
                              
    
    company  from asserting  a usury  defense in  an action  by a
    
    mortgagee seeking recovery under a fire policy.  Although the
    
    court  cited  Phalen for  the  "general  rule" regarding  the
                        
    
    personal nature of the usury defense, Id. at 695, the court's
                                             
    
    decision--and that  of the trial  court, see id.  at 695--was
                                                    
    
    based on a Minnesota statute which precluded all corporations
                                                                 
    
                                 -33-
                                  33
    
    from invoking a usury  defense. Id.  Notably,  the "insurable
                                       
    
    interest" aspect  of Phalen  was never addressed  in Midwest,
                                                                
    
    much less limited  or distinguished.  Finally,  to the extent
    
    that Midwest can be  construed to run counter to  Phalen, the
                                                            
    
    latter  remains  the  pronouncement  of  Minnesota's  highest
    
    court.   Based on the foregoing, we find that American could,
    
    under these circumstances, properly raise its usury argument.
    
         2.  Prima Facie Case
                             
    
              To support its claim of usury, American argues that
    
    Shapiro's assignment  of rights under  a consulting agreement
    
    with  Dean Street Development  constituted hidden, additional
    
    interest,  apart from  the  20 percent  rate  charged in  the
    
    Marderosian  loan documents.   Under  American's theory,  the
    
    actual  interest rate  was  88 percent.    Focus responds  by
    
    relying on the apparent separateness  between Marderosian and
    
    the parties to  the consulting fee.  Implicitly, the district
    
    court rejected Focus's prima facie argument, as it denied its
    
    motion for directed verdict on the usury issue.  We reject it
    
    as  well.    In  short, Focus's  argument  ignores  authority
    
    holding that
    
               "[u]sury is not  determined merely  from
              what    the    parties   represent    the
              transaction  to  be, but  the  court will
              look  to  the   whole  transaction,   the
              surrounding       circumstances,      the
              occurrences  at  the time  of  making the
              agreement,  and  the  instruments  drawn.
              Whether  a transaction legal  on its face
              is, in  fact, merely  a  device to  cover
    
                                 -34-
                                  34
    
              usury generally is a question of fact for
              the jury." 
    
    45 Am. Jur.  2d Interest  and Usury    112 (1969) (and  cases
                                       
    
    cited therein) (footnotes omitted).
    
              Here, there is evidence that the loan proceeds were
    
    intended for Dean Street Development, a Marderosian client in
    
    need  of "discreet" funding and there is no question that the
    
    assignment from  Shapiro to Focus  was finalized at  the same
    
    time as the loan from Focus to Marderosian.  Finally, the sum
    
    payable under the assignment  were due to be repaid  April 6,
    
    1989, the same  day as the loan.  Focus  argues that the loan
    
    and   assignment   were   entirely   separate   transactions,
    
    characterizing  the assignment as  nothing more  than Shapiro
    
    sharing his  broker's commission with  Focus, a  non-usurious
    
    transaction.   While the jury, of course, is entirely free to
    
    accept  either version of the  facts, it is  quite clear that
    
    American has at least made out a prima facie case of usury.
    
         3.  The Instruction
                            
    
              As the  above discussion makes clear,  if, in fact,
    
    the jury were to find the loan to Marderosian usurious, then,
    
    as a matter of law, Focus would have no insurable interest in
    
    the  collateral mortgages.  Therefore, the instruction, which
    
    used the  permissive "may,"  allowed for  both  a finding  of
                                                  
    
    usury and a verdict  for Focus on  its contract claim.   This
    
                                 -35-
                                  35
    
    was  error.13   Accordingly,  American is  entitled to  a new
    
    trial   on  Focus's  contract   claim,  accompanied   by  the
    
    appropriate instruction on usury.  
    
                                 IV.
                                    
    
                              Conclusion
                                        
    
              For the  reasons stated herein, the  judgment below
    
    is  vacated insofar  as it  awarded damages  to Focus  on its
        vacated
               
    
    contract claim, and affirmed in all other respects.
                        affirmed
                                
    
                        
    
    13.  We find  nothing in the  record to support  Focus's bald
    assertion  that the error was harmless because "it is obvious
    that the jury found that the loan was not usurious."
    
                                 -36-
                                  36
    

Document Info

DocketNumber: 92-1758

Filed Date: 5/18/1993

Precedential Status: Precedential

Modified Date: 12/21/2014

Authorities (38)

Harrison v. Fortlage , 161 U.S. 57 ( 1896 )

Salve Regina College v. Russell , 499 U.S. 225 ( 1991 )

MacKie and Williams Food Stores, Inc., a Corporation v. ... , 216 F.2d 317 ( 1954 )

frank-lentino-and-perry-flame-trustees-of-the-teamsters-local-158 , 611 F.2d 474 ( 1979 )

Red Lobster Inns of America, Inc. v. Lawyers Title ... , 656 F.2d 381 ( 1981 )

vanessa-redgrave-and-vanessa-redgrave-enterprises-ltd-v-boston-symphony , 855 F.2d 888 ( 1988 )

The Falmouth National Bank v. Ticor Title Insurance Company , 920 F.2d 1058 ( 1990 )

Dionisio Sainz Gonzalez v. Banco De Santander-Puerto Rico, ... , 932 F.2d 999 ( 1991 )

Lynn C. Lowe, M.D. v. H. Denman Scott, M.D. , 959 F.2d 323 ( 1992 )

Banco Popular De Puerto Rico v. David Greenblatt, the ... , 964 F.2d 1227 ( 1992 )

Richard F. Davet v. Enrico MacCarone , 973 F.2d 22 ( 1992 )

Willage v. Law Offices of Wallace & Breslow , 415 So. 2d 767 ( 1982 )

Suritz v. Kelner , 155 So. 2d 831 ( 1963 )

Brown's Tie & Lumber v. Chicago Title , 115 Idaho 56 ( 1988 )

White v. Western Title Ins. Co. , 40 Cal. 3d 870 ( 1985 )

Midwest Fed. Sav. v. West Bend Mut. Ins. , 407 N.W.2d 690 ( 1987 )

Bank of California v. First American , 826 P.2d 1126 ( 1992 )

Greenberg v. Stewart Title Guaranty Co. , 171 Wis. 2d 485 ( 1992 )

Ford v. Guarantee Abstract & Title Co. , 220 Kan. 244 ( 1976 )

Blackhawk Prod. v. Chicago Ins. , 144 Wis. 2d 68 ( 1988 )

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