Focus Inv. Associates, Inc. v. American Title Ins. Co.

• Decision Date: 07 January 1993
• Docket Number: Nos. 92-1758,92-1766,s. 92-1758
• Citation: 992 F.2d 1231
• Parties: FOCUS INVESTMENT ASSOCIATES, INC., Plaintiff, Appellant, v. AMERICAN TITLE INSURANCE COMPANY, et al., Defendants, Appellees. FOCUS INVESTMENT ASSOCIATES, INC., Plaintiff, Appellee, v. AMERICAN TITLE INSURANCE COMPANY, et al., Defendant, Appellant. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 1231

992 F.2d 1231

FOCUS INVESTMENT ASSOCIATES, INC., Plaintiff, Appellant, v. AMERICAN TITLE INSURANCE COMPANY, et al., Defendants, Appellees.

FOCUS INVESTMENT ASSOCIATES, INC., Plaintiff, Appellee, v. AMERICAN TITLE INSURANCE COMPANY, et al., Defendant, Appellant.

Nos. 92-1758, 92-1766.

United States Court of Appeals First Circuit.

Heard Jan. 7, 1993.

Decided May 11, 1993.

Steven E. Snow with whom Partridge, Snow & Hahn, Providence, RI, was on brief for appellant/cross-appellee Focus Inv. Associates, Inc.

Max Wistow with whom Stephen P. Sheehan and Wistow & Barylick Inc., Providence, RI, were on brief for appellee/cross-appellant American Title Ins. Co.

William H. Jestings with whom Patricia A. Buckley and Carroll, Kelly & Murphy, Providence, RI, were on brief for appellees Tobak and Abrams & Verri.

Robert S. Bruzzi, Providence, RI, was on brief for appellee Owen B. Landman.

Before TORRUELLA, Circuit Judge, CAMPBELL, Senior Circuit Judge, and STAHL, Circuit Judge.

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

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 Sarbey ³ 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 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 interests ⁴ 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 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-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. 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, 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.

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....