American Title Ins. Co. v. East West Financial

• Decision Date: 04 January 1994
• Docket Number: 93-1506,Nos. 93-1464,s. 93-1464
• Citation: 16 F.3d 449
• Parties: AMERICAN TITLE INSURANCE COMPANY, Plaintiff, Appellant, v. EAST WEST FINANCIAL, et al., Defendants, Appellees. AMERICAN TITLE INSURANCE COMPANY, Plaintiff, Appellee, v. EAST WEST FINANCIAL, et al., Defendants, Appellees, Bay Loan and Investment Bank, Defendant, Appellant. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 449

16 F.3d 449

AMERICAN TITLE INSURANCE COMPANY, Plaintiff, Appellant, v. EAST WEST FINANCIAL, et al., Defendants, Appellees.

AMERICAN TITLE INSURANCE COMPANY, Plaintiff, Appellee, v. EAST WEST FINANCIAL, et al., Defendants, Appellees, Bay Loan and Investment Bank, Defendant, Appellant.

Nos. 93-1464, 93-1506.

United States Court of Appeals First Circuit.

Heard Jan. 4, 1994.

Decided Feb. 22, 1994.

Max Wistow, with whom Stephen P. Sheehan, Providence, RI and Wistow & Barylick Incorporated were on brief for plaintiff.

Howard E. Walker, Providence, RI with whom Hinckley, Allen & Snyder were on brief for defendant, Bay Loan and Investment Bank.

Before SELYA, Circuit Judge, BOWNES, Senior Circuit Judge, and CYR, Circuit Judge.

BOWNES, Senior Circuit Judge.

Plaintiff American Title Insurance Company ("American Title") commenced this action under 28 U.S.C. Secs. 2201 and 2202 seeking a declaratory judgment that it was not liable under lender title insurance policies issued to defendants Bay Loan & Investment Bank ("Bay Loan") and East West Financial Corporation ("East West"). Bay Loan and East West counterclaimed for breach of contract and bad faith refusal to pay and sought payment under the policies. After a bench trial the district court (Boyle, C.J.) found that defendants were entitled to coverage under the insurance policies, and granted declaratory judgment in their favor. The court found that defendants' counterclaims for damages were premature and dismissed them without prejudice. Both parties appealed, and in March 1992, we remanded the case for a "total new trial on the merits" because Judge Boyle had improperly allocated the burden of proof on the issue of apparent authority. See American Title Ins. v. East West Financial Corp., 959 F.2d 345, 349 (1st Cir.1992) ("American Title I ").

On remand the case was assigned to Judge Torres and retried. It has now worked its way back up to us. American Title and Bay Loan appeal from various aspects of the judgment entered below. See American Title Ins. v. East West Financial Corp., 817 F.Supp. 251 (D.R.I.1993) ("American Title II "). We affirm the district court's ruling on liability and its dismissal with prejudice of Bay Loan's claim under one of the insurance policies, but reverse its dismissal without prejudice of Bay Loan's claims arising under the remaining policies.

I. BACKGROUND

We describe only those facts pertinent to the legal issues presented on these appeals. In the late 1980s, Peter Brandon, one of the principals of Dean Street Development Company ("Dean Street"), offered investors a deal for motel condominium units. "Buyers were promised a deal where no money down was required; guaranteed they could not lose money; and assured that they would receive a five percent return on the initial purchase price in five years." American Title I, 959 F.2d at 346. The deal collapsed and Brandon and his associates were convicted of defrauding Bay Loan out of millions of dollars by fraudulently representing the existence of down payments required by Bay Loan from the investors on whose behalf the loans were made. ¹

Dean Street bought operating motels in Rhode Island and used purchase money mortgages to finance each purchase. ² It would then "condominiumize" each motel and market titles to the individual units. Dean Street arranged financing for the buyers through East West and Bay Loan. East West originated the loans and then sold them to Bay Loan, which actually advanced the funds.

Closings on the individual units were conducted at the law offices of George Marderosian in Providence, Rhode Island. Although Marderosian's original involvement in these transactions was as Dean Street's lawyer, he eventually came to represent both Dean Street and the buyers in these transactions. All of the buyers consented to this arrangement. Marderosian also served as "settlement agent" or "closing attorney" at the closings and was an authorized agent of American Title.

Because Dean Street could not obtain partial releases on its purchase money mortgages, it had to sell a number of condominium units before enough funds were raised to discharge the prior mortgages. Once enough units were sold, closings were held on each unit, and East West bundled the loans and sent them as a package to Bay Loan. Among the documents forwarded to Bay Loan were the closing documents along with mortgages and title insurance policies on the individual condominium units.

All of this was done before Bay Loan formally purchased the loans from East West. Although Bay Loan retained the right to reject any loan, it never exercised this right. When a loan was approved, Bay Loan would wire the proceeds to East West, and East West would distribute the funds to Marderosian's trust account. Even though the prior mortgages had not yet been paid off, the title insurance policies issued by Marderosian were ostensibly "clean." That was, they indicated that the units were not subject to any prior defects, liens or encumbrances.

The parties orally agreed that Marderosian would use the loan proceeds to discharge the prior mortgages so that Bay Loan's mortgage would be primary. Bay Loan soon discovered that the prior mortgages were not being discharged. This was because Marderosian had been "diverting" the loan proceeds to Dean Street instead of using them to discharge prior mortgages. American Title II, 817 F.Supp. at 255. Dean Street, or more precisely, Peter Brandon converted the funds for personal use. The prior mortgagees foreclosed, thereby extinguishing Bay Loan's mortgages. ³

Consequently, Bay Loan filed a notice of claim with American Title under the title insurance policies. In response American Title filed an action in the United States District Court for the District of Rhode Island seeking declaratory judgment relieving it from liability under the policies. Bay Loan and East West counterclaimed for breach of contract and bad faith refusal to pay. In an opinion dated April 10, 1991, Judge Boyle held that American Title was liable under the title insurance policies, but dismissed defendants' counterclaims as premature. Both sides appealed.

We remanded the case for a new trial because Judge Boyle had erroneously burdened American Title with disproving Marderosian's apparent authority to issue "clean" title insurance policies on its behalf. We held that the burden was on the defendants to prove the existence of Marderosian's apparent authority. After the second trial, Judge Torres found that Bay Loan's claim with respect to the insurance policy relating to the unit owned by Norma Kirschner in The Charlestown Motor Inn (the "Kirschner unit"), was not premature. The court found that Bay Loan failed to prove its damages on that claim and dismissed the claim with prejudice. It, however, dismissed without prejudice Bay Loan's claims under the remaining policies. These appeals ensued.

II. DISCUSSION

As a preliminary matter, we disagree with Judge Torres' conclusion that the case was remanded for something short of a "total new trial on the merits." See American Title II, 817 F.Supp. at 256-58. Therefore, Judge Torres' "alternative findings," and not Judge Boyle's earlier findings are currently before this court for review.

We review the district court's factual findings for clear error. Fed.R.Civ.P. 52(a); Dedham Water Co. v. Cumberland Farms Dairy, 972 F.2d 453, 457 (1st Cir.1992). Under this standard, we must affirm the district court unless, after reviewing the entire record, this court "is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 541, 92 L.Ed. 746 (1948); see also Boston Beer Co. v. Slesar Bros.

                Brewing Co., 9 F.3d 175, 180 (1st Cir.1993) (noting that "the clear error hurdle is ... quite high.")  (quoting Lenn v. Portland Sch. Comm., 998 F.2d 1083, 1087 (1st Cir.1993)).  The same standard applies to mixed questions of law and fact.  Rulings of law, however, are subject to de novo review.  Boston Beer Co., 9 F.3d at 180.   In diversity cases, questions of local law, in this case Rhode Island law, are given plenary review.  See Salve Regina College v. Russell, 499 U.S. 225, 230, 111 S.Ct. 1217, 1221, 113 L.Ed.2d 190 (1991);  Blanchard v. Peerless Ins. Co., 958 F.2d 483, 487 (1st Cir.1992)
                

A. Apparent Authority

American Title appeals from the district court's finding that Marderosian had apparent authority to issue the clean title policies to Bay Loan. ⁴

"To establish the apparent authority of an agent to do a certain act, facts must be shown that the principal has manifestly consented to the exercise of such authority or has knowingly permitted the agent to assume the exercise of such authority; that a third person knew of the fact and, acting in good faith had reason to believe and did actually believe that the agent possessed such authority; and that the third person, relying on such appearance of authority, has changed his position and will be injured or suffer loss if the act done or transaction executed by the agent does not bind the principal."

Calenda v. Allstate Ins. Co., 518 A.2d 624, 628 (R.I.1986) (quoting Soar v. National Football League Players Association, 438 F.Supp. 337, 342 (D.R.I.1975), aff'd, 550 F.2d 1287 (1st Cir.1977)); see also Menard & Co. Masonry v. Marshall Bldg., 539 A.2d 523, 526 (R.I.1988) (agent's apparent authority arises from principal's manifestation of such authority to party with whom agent contracts and that person's belief that the agent has authority to bind principal to the contract). Of course, this determination is factual in nature. Calenda, 518 A.2d at 618.

Bay Loan presented evidence that Marderosian was authorized to write title insurance policies for American Title, that he possessed all of the necessary forms for doing so, and that he carried a "To whom it may concern" letter from American Title announcing his position as an...