Focus v. American ( 1993 )

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).
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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.
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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.
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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-
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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
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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,
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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.
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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.
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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)).
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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.
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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
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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 . . . .
. . . .
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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.
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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
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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
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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.
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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
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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
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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.
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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
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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
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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
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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).
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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
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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,
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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
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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
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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
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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
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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
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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
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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
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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."
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36