Kansallis Finance Ltd. v. Fern

• Court: Supreme Judicial Court of Massachusetts
• Writing for the Court: Before LIACOS; FRIED
• Citation: Kansallis Finance Ltd. v. Fern, 421 Mass. 659, 659 N.E.2d 731 (Mass. 1996)
• Decision Date: 11 January 1996
• Parties: KANSALLIS FINANCE LTD. v. Daniel J. FERN & others. 1

Page 731

659 N.E.2d 731

421 Mass. 659

KANSALLIS FINANCE LTD. v. Daniel J. FERN & others. ¹

Supreme Judicial Court of Massachusetts Suffolk.

Argued Oct. 3, 1995.

Decided Jan. 11, 1996.

James W. Murphy (Arthur M. Gilman, with him) Boston, for plaintiff.

Erik Lund (Joseph S. Berman, with him) Boston, for Daniel J. Fern.

Before LIACOS, C.J., and ABRAMS, LYNCH, GREANEY and FRIED, JJ.

FRIED, Justice.

The United States Court of Appeals for the First Circuit has certified to this court, pursuant to S.J.C. Rule 1:03, as appearing in 382 Mass. 700 (1981), the following two questions of State law:

"1. Under Massachusetts law, to find that a certain act is within the scope of a partnership for the purpose of applying the doctrine of vicarious liability, must a plaintiff show, inter alia, that the act was taken at least in part with the intent to serve or benefit the partnership?

"2. May defendants be found vicariously liable for authorized conduct by their partner that violated Mass.Gen.L. ch. 93A, even if they were entirely unaware of and uninvolved with that conduct?"

Kansallis Fin. Ltd. v. Fern, 40 F.3d 476, 481-482 (1st Cir.1994).

In order that we may give the guidance that the Court of Appeals seeks, we offer the more extensive "discussion of relevant Massachusetts law" that the Court of Appeals invites in its certification order. See generally Wilkins, Certification of Questions of Law: The Massachusetts Experience, 74 Mass.L.Rev. 256 (1989).

The questions arise out of an appeal by Kansallis Finance Ltd. (plaintiff) from a trial in the United States District Court for the District of Massachusetts. The Court of Appeals stated that the first question concerns an issue on which an apparent conflict exists in Massachusetts precedent, and that the second question concerns a separate issue on which there is no controlling Massachusetts precedent.

I.

We summarize the facts relevant to the questions certified. See S.J.C. Rule 1:03, § 3(2). Stephen Jones and the four defendants were law partners in Massachusetts when, in connection with a loan and lease financing transaction, the plaintiff sought and obtained an opinion letter from Jones. In the order of certification, the Court of Appeals states that the letter, executed in Massachusetts and issued on "Fern, Anderson, Donahue, Jones & Sabatt, P.A." letterhead, "contained several intentional misrepresentations concerning the transaction and was part of a conspiracy by Jones and others (though not any of the defendants here) to defraud Kansallis." Although Jones did not personally sign the letter, he arranged for a third party to do so, and both the District Court judge and the jury found that Jones adopted or ratified the issuance of the letter. Jones was later convicted on criminal charges for his part in the fraud, but the plaintiff was unable to collect its $880,000 loss from Jones or his coconspirators.

In an effort to recover its loss, the plaintiff brought suit in the United States District Court for the District of Massachusetts seeking compensation from Jones's law partners on the theory that the partners were liable for the damage caused by the fraudulent letter. Advancing the claim on essentially three grounds, the plaintiff asserted that defendants are liable for the letter because: (1) the defendants gave Jones apparent authority to issue the letter; (2) Jones acted within the scope of the partnership in issuing the letter; and (3) the issuance of the letter violated G.L. c. 93A, under which the partners are vicariously liable. The District Court submitted the first two common law claims to the jury and reserved the c. 93A count to itself. Both the judge and jury, for different reasons, decided that defendants were not liable for Jones's conduct. The Court of Appeals affirmed both the judge's and the jury's factual findings and certified two questions to this court in order to resolve the legal issues.

On plaintiff's common law claims, the jury based their verdict on their findings that (1) Jones did not have apparent authority to issue the opinion letter ² and (2) that his action in issuing the opinion letter was outside the scope of the partnership. On appeal to the Court of Appeals, the plaintiff contended that the jury based their second finding on an erroneous instruction directing that, to find Jones's actions within the scope of the partnership, the issuance of the letter must satisfy a three-prong test. It must have: (1) been "the kind of thing a law partner would do"; (2) "occurred substantially within the authorized time and geographic limits of the partnership; and" (3) been "motivated at least in part by a purpose to serve the partnership." Although the jury did not indicate which prong the plaintiff failed to satisfy, the plaintiff objected to the addition of the third prong, and it is on the correctness of including this third prong in the test that the Court of Appeals now seeks guidance. The Court of Appeals found our law on this issue unclear because it found that two decisions, Wang Labs., Inc. v. Business Incentives, Inc., 398 Mass. 854, 859, 501 N.E.2d 1163 (1986), and New England Acceptance Corp. v. American Mfrs. Mut. Ins. Co., 373 Mass. 594, 597, 368 N.E.2d 1385 (1977), appeared to pull in opposite directions. The Court of Appeals therefore certified this first question to us.

On plaintiff's claim under G.L. c. 93A, the District Court based its ruling on its own independent findings of fact. In the certification, the Court of Appeals noted that, "[u]nlike the jury, [the judge] found that the partnership had clothed Jones with apparent authority to issue the letter on its behalf. Nonetheless, the [judge] went on to hold, as a matter of law, that 'innocent' partners may not be held vicariously liable under 93A for their partners' fraudulent acts. In other words, the [District Court] held that a partner, entirely unaware and uninvolved with another partner's fraud, is immune from vicarious liability under 93A, even when the conduct constituting fraud was authorized." ³ (Emphasis in original). The plaintiff argues that the judge based this conclusion on an erroneous premise, because "normal principles of vicarious liability as among partners should apply to make defendants liable for Jones's fraud." The Court of Appeals found no controlling precedent to guide it on this issue, and therefore certified this second question to us.

II.

A.

The parties have cited to us cases from this and other jurisdictions, as well as general principles set out in the Restatement (Second) of Agency and in the Uniform Partnership Act, codified at G.L. c. 108A. Whatever difficulties this array of authorities presents may in part be attributed to the fact that the issue of vicarious liability has engendered somewhat divergent formulations in the several different contexts in which it has arisen. The genus here is agency, and two of its species, for which there are special rules for determining vicarious liability, are partnership and master-servant.

In the context of a partnership, the person acting and the persons who might be held liable for his actions usually stand on an equal footing and may be thought of as equally implicated in a joint enterprise. Bachand v. Vidal, 328 Mass. 97, 100, 101 N.E.2d 884 (1951). By contrast, the law of the vicarious liability of a master for the acts of his servant grew up in circumstances where the actor was often in a subordinate position and had a limited interest in the enterprise which he assists. See Restatement (Second) of Agency § 218 introductory note, third par. (1957). See generally W.A. Seavey, Agency § 6(A) (1964) (explaining historical origins of the master-servant and principal-agent distinction); Restatement (Second) of Agency § 2 comment a, & § 218, Title B, Torts of Servants, introductory note (1957) (same). Yet both servants and partners are categorized as agents of their principals. See G.L c. 108A, § 9 (Uniform Partnership Act) (partners are agents of the partnership); Restatement (Second) of Agency § 218 Title B, Torts of Servants, introductory note, fourth par. (1957) (servants are agents of their master); Restatement of Agency (Second) § 14A comment a (1957) (partner is general agent for copartners and liable to copartners for any breach of fiduciary obligation); H.G. Reuschlein & W.A. Gregory, Agency and Partnership § 184 (2d ed. 1990) (under Uniform Partnership Act, each partner agent of partnership); W.A. Seavey, Agency § 2(B) (1964) (master and servant included in agency relation). In the partnership context, while each partner is the agent of the partnership, he also stands in the role of a principal--a reciprocity that is lacking in the master-servant relation. ⁴ Finally, there is an important practical distinction between determining vicarious liability for harms that come about through the victim's voluntary interactions with the purported agent--as in the case of contracts, of fraud and of misrepresentation--and those that are inflicted on a victim who has made no choice to deal with the agent, as in the case of an accident, an assault or a trespass. Only in the former instance is the inquiry into apparent authority particularly apt, since where the victim transacts business with the agent, the victim's ability to assess the agent's authority will bear on whether and in what ways he chooses to deal with him. See McCarthy v. Parker, 243 Mass. 465, 468, 138 N.E. 8 (1923). By contrast, where the victim has not chosen to deal with the agent by whose act he suffers harm--as in an automobile accident--the scope of employment seems the natural determinant of vicarious liability, and that is where the concept has had its most usual application. See Konick v. Berke, Moore Co., 355 Mass. 463, 467-468, 245 N.E.2d 750 (1969); Porcino v. De Stefano, 243 Mass. 398, 400, 137 N.E. 664 (1923); Douglas v. Holyoke Mach. Co., 233 Mass. 573, 576, 124 N.E. 478 (1919). See generally W. Prosser...