Focus v. American ( 1993 )

  • USCA1 Opinion

    United States Court of Appeals
    United States Court of Appeals
    For the First Circuit
    For the First Circuit

    No. 92-1758


    Plaintiff, Appellant,



    Defendants, Appellees.

    No. 92-1766


    Plaintiff, Appellee,



    Defendant, Appellant.




    [Hon. Francis J. Boyle, Senior U.S. District Judge]



    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).



    Background Facts
    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.


    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.


    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


    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-


    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


    remained after satisfaction of the Boston Five Corp.


    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,


    Landman, Tobak, et al., theorizing that but for their
    __ ___

    tortious conduct, Focus never would have made the loan to


    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.


    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


    Focus's Appeal
    Focus's Appeal

    A. Judgment as a Matter of Law
    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.


    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
    B. The Negligence Claims6

    1. The Title Search
    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)).


    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.


    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


    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

    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

    . . . .

    Among the relevant Conditions and Stipulations are the

    (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 . . . .

    . . . .


    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


    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

    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.


    a matter of law on Focus's claim of negligence in searching


    2. Negligent Misrepresentation
    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


    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


    3. Negligent Hiring, Retention and Supervision
    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.


    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


    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


    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
    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


    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.


    1. The Need for Expert Testimony
    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


    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


    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


    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


    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



    American's Appeal
    American's Appeal

    A. Usury
    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).


    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


    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
    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,
    ______ _________________


    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


    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


    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


    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


    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


    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


    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
    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


    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
    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


    was error.13 Accordingly, American is entitled to a new

    trial on Focus's contract claim, accompanied by the

    appropriate instruction on usury.



    For the reasons stated herein, the judgment below

    is vacated insofar as it awarded damages to Focus on its

    contract claim, and affirmed in all other respects.


    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."


Document Info

DocketNumber: 92-1758

Filed Date: 5/18/1993

Precedential Status: Precedential

Modified Date: 9/21/2015

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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