USCA1 Opinion

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT
____________________
No. 93-1464
AMERICAN TITLE INSURANCE COMPANY,
Plaintiff, Appellant,
v.
EAST WEST FINANCIAL, ET AL.,
Defendants, Appellees.
____________________
No. 93-1506
AMERICAN TITLE INSURANCE COMPANY,
Plaintiff, Appellee,
v.
EAST WEST FINANCIAL, ET AL.,
Defendants, Appellees,
__________________
BAY LOAN AND INVESTMENT BANK,
Defendant, Appellant.
__________________
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Ernest C. Torres, U.S. District Judge]
___________________
____________________
Before
Selya, Circuit Judge,

_____________
Bownes, Senior Circuit Judge,
____________________
and Cyr, Circuit Judge.
_____________
____________________

Max Wistow, with whom Stephen P. Sheehan, and Wistow & Barylick
__________
__________________
_________________
Incorporated were on brief for plaintiff.
____________
Howard E. Walker, with whom Hinckley, Allen & Snyder were on
_________________
________________________
brief for defendant, Bay Loan and Investment Bank.
____________________
February 22, 1994
____________________

BOWNES, Senior Circuit Judge.

BOWNES, Senior Circuit Judge.
_____________________
Title

Insurance Company

("American

Plaintiff American

Title") commenced

this

action under 28 U.S.C.

2201 and 2202 seeking a declaratory

judgment that it was not

liable under lender title insurance

policies
("Bay
West").

issued to

Loan") and

defendants Bay
East

Bay Loan and

contract and

Financial

& Investment
Corporation

Bank
("East

East West counterclaimed for breach of

bad faith

under the policies.

West

Loan

refusal to

pay

After a bench trial

and sought

payment

the district court

(Boyle, C.J.) found that defendants were entitled to coverage

under

the

insurance

judgment in their

policies,

favor.

The

counterclaims for damages were

without prejudice.
we

granted

declaratory

court found that

defendants'

premature and dismissed

a "total new

Judge Boyle had

trial on the merits"

improperly allocated the

proof on the issue of apparent authority.

Ins. v.
____

them

Both parties appealed, and in March 1992,

remanded the case for

because

and

East West Financial Corp., 959

__________________________

burden of

See American Title

___ ______________
F.2d 345,

349 (1st

Cir. 1992) ("American Title I").

________________
On remand the case was assigned to Judge Torres and
retried.
Title

It has now worked its way back up to us.

and

Bay

Loan

appeal from

judgment entered below.

We

aspects

of

the

See American Title Ins. v. East West

___ ___________________
_________

Financial Corp., 817 F.

________________
Title II").
_________

various

American

affirm

Supp. 251 (D.R.I.

the

-22

1993) ("American
________

district court's

ruling

on

liability

and its

claim under

dismissal with
____

one of the

dismissal without
_______

prejudice

of Bay

insurance policies, but

prejudice

of Bay

Loan's

Loan's

reverse its

claims

arising

under the remaining policies.

I.
I.
BACKGROUND
BACKGROUND
__________
We describe only those facts pertinent to the legal
issues presented on these appeals.

In the late 1980s, Peter

Brandon, one

Dean Street

of the

principals of

Company ("Dean Street"),

condominium units.
money

down

money; and
return

was

on

the

offered investors a deal

"Buyers

they would

initial

American Title I, 959 F.2d

_________________
Brandon and his
Loan

were promised

required; guaranteed

assured that

Development

purchase
at 346.

a deal

where no

could

not lose

they

receive a
price

for motel

in

five percent
five

years."

The deal collapsed and

associates were convicted of

defrauding Bay

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

____________________
1.

The

convictions were, in large part, affirmed on appeal.

See United States

___ _____________
Jan. 31, 1994).

v. Brandon, Nos.
_______

1447, 1465-71 (1st

Cir.

2. Although Dean Street purchased seven motels, only four

are at issue in this proceeding: The Charlestown Motor Inn,
The Hillside Motel, The Sand Castle Motel, and The Sandpiper
-33

It would then

"condominiumize" each motel and

market titles

to the individual units.

Dean Street arranged financing for

the

West

buyers

through East

originated the

loans and then

and

Bay

Loan.

sold them to Bay

East

West

Loan, which

actually advanced the funds.

Closings on
the

law offices of

Island.

the individual units were conducted at

George Marderosian in

Providence, Rhode

Although Marderosian's original involvement in these

transactions

was as Dean Street's lawyer, he eventually came

to represent

both

Dean

transactions.

All

arrangement.

Marderosian

or "closing attorney"

of

Street

and

the

buyers

the

buyers

consented

also served as

in

these

to

this

"settlement agent"

at the closings and

was an authorized

agent of American Title.

Because

Dean

Street

could

not

obtain

partial

releases on

its purchase money

number of condominium
to discharge the

units before enough funds

prior mortgages.

sold, closings were held on

the loans and sent them
documents
along

mortgages, it had to

were raised

enough units

were

each unit, and East West bundled

as a package to Bay Loan.

forwarded to Bay

with mortgages

Once

sell a

Loan were the

and title

Among the

closing documents

insurance

policies on

the

individual condominium units.

____________________
Motel.
-44

All
purchased
retained
this

the

of

this

loans from

the right

right.

was done
East

to reject any

When a

before
West.

Bay

Although

loan, it

loan was approved,

Loan formally
Bay

Loan

never exercised

Bay Loan would wire

the proceeds to East West, and East West would distribute the
funds to Marderosian's
mortgages had

not

trust account.

yet been

paid off,

Even though the prior

the title

insurance

policies issued by Marderosian were ostensibly "clean."

was, they

indicated that the

units were not subject

That
to any

prior defects, liens or encumbrances.

The parties
use

the loan

that Bay

orally agreed

proceeds to discharge

Loan's mortgage

discovered
discharged.

that Marderosian

that

the

This

the prior

would be primary.
prior

was

mortgages

because

would

mortgages so
Bay

were

Marderosian

Loan soon
not
had

being
been

"diverting" the loan proceeds to Dean Street instead of using

them to discharge prior mortgages.
Supp. at 255.

Dean

converted the funds

American Title II, 817 F.

_________________

Street, or more precisely, Peter Brandon

for personal use.

The

prior mortgagees

foreclosed, thereby extinguishing Bay Loan's mortgages.3

____________________
3. Bay Loan lost its security interest in all twenty-four
units at the Sand Castle Motel, two of the thirty-nine units
at the Sandpiper Motel, and seventeen of the thirty-three
units at the Charlestown Motor Inn. Bay Loan paid off the
prior mortgage at the Hillside Motel in order to preserve its
security interest in all thirty-seven units at that motel.
-55

Consequently, Bay Loan filed a notice of claim with

American

Title under

the

title

insurance

policies.

response American Title filed an action in the United

District

Court

declaratory
policies.

for

the District

judgment relieving
Bay Loan and

Rhode

States

Island seeking

it from liability

under the

East West counterclaimed for breach

of contract

and bad

dated April

10, 1991, Judge

was

of

In

faith refusal

to pay.

In an

Boyle held that

opinion

American Title

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

insurance policies

authority

on its behalf.

to

issue

"clean"

We held that

title

the burden

was on the defendants to prove the existence of Marderosian's

apparent authority.
found that Bay

premature.

the second

Loan's claim

policy relating to
Charlestown

After

Motor

trial, Judge

with respect

the unit owned by Norma

Inn

(the

"Kirschner

to the

Torres

insurance

Kirschner in The
unit"),

was

not

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
_______

under the remaining policies.

Bay Loan's

These appeals ensued.

II.

claims

II.

-66

DISCUSSION
DISCUSSION
__________
As

preliminary matter,

Torres' conclusion that

short of

the case was remanded

a "total new

Title II, 817

________
"alternative

we disagree

trial on the

F. Supp. at 256-58.
findings,"

and

not

with Judge

for something

merits."

See
___

American
________

Therefore, Judge Torres'

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.

Cumberland Farms Dairy, 972

_______________________
Under

this standard,

unless, after

we

P. 52(a);

F.2d 453, 457

must

reviewing the

Dedham Water Co. v.

_________________

affirm

the

entire record,

(1st Cir. 1992).

district
this court

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 (1948); see also Boston Beer Co. v. Slesar
___ ____ _______________
______

Bros. Brewing Co., 9 F.3d

__________________
that

175, 180 (1st Cir.

"the clear error hurdle is

Lenn v.
____

Portland Sch. Comm.,

___________________

1993)).

The same standard

and fact.
review.

given

. . . quite high." (quoting

998 F.2d 1083, 1087

however, are subject to

Boston Beer Co., 9 F.3d at 180.

_______________
local law, in

plenary review.

(1st Cir.

applies to mixed questions of law

Rulings of law,

questions of

1993) (noting

de novo

In diversity cases,

this case Rhode Island

law, are

See Salve Regina College v. Russell,

___ _____________________
_______

111 S. Ct. 1217, 1221 (1991); Blanchard v. Peerless Ins. Co.,

_________________
958 F.2d 483, 487 (1st Cir. 1992).

-77

A.
A.

Apparent Authority
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,
_______
__________________
(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

___ ____
Marshall Bldg., 539
_______________
apparent authority

A.2d

523,

Menard & Co. Masonry v.

____________________

526

(R.I.

arises from principal's

such authority to

party with whom

person's

that

belief

the

principal to the contract).

factual in nature.

628 (R.I. 1986)

agent

1988)

(agent's

manifestation of

agent contracts and

has

authority

to

that
bind

Of course, this determination is

Calenda, 518 A.2d at 618.

_______

____________________
4.

Hereinafter, references to Bay Loan apply equally to East

West.
-88

Bay
authorized

to

Loan presented

evidence that

Marderosian was

write title

insurance policies

for American

Title, that he possessed all of the necessary forms for doing

so, and
from
agent

that he carried

a "To whom

it may concern"

letter

American Title announcing his position as an authorized

of

that company.

American Title never

not empowered

is

undisputed that

informed Bay Loan that

Marderosian was

to issue clean

prior undischarged
them were

Moreover, it

in the

title policies in the

liens unless

the funds

agent's possession and

face of

required to
the lender

pay

was an

institution.
American
substantial
the

Dean

Title

argues

deviations from
Street

Marderosian's

authority

therefore his acts should not

because there

accepted business

transactions,

apparent

that,

Bay

Loan's
was

were

practices in
reliance

unreasonable

be imputed to American

on
and

Title.

See, e.g., Sheldon v. First Federal Savings & Loan Ass'n, 566
___ ____ _______
__________________________________

F.2d 805, 809 (1st Cir.

care

before

relying

1977) (third party must exercise due

on

Restatement (Second) Agency

American
the "usual methods

an

agent's

apparent

authority);

27 comt. a (1957).

Title illustrates

three departures

of conducting business":

from

(1) conducting

apparently final closings prior to Bay Loan's actual approval

of

the borrower, (2)

Marderosian's issuance of

policies to Bay Loan prior

clean title

to Bay Loan providing the funding

-99

to

discharge the prior mortgages, and (3) Bay Loan's receipt

of HUD 1's which indicated

that the seller would receive all

of the loan proceeds without diminution for amounts needed to

discharge prior mortgages.

The same arguments were presented

to the district court which found the following:

Here, there was no reason for East
West or Bay Loan to believe that there
was anything improper about issuing the
policies before prior
mortgages were
discharged. It was common practice among
title attorneys to use the proceeds of
purchase money mortgages to discharge
prior mortgages after closing. Although
it was less common for an attorney to

issue
a title
policy before
prior
mortgages were discharged, that practice
was acceptable when the attorney had
adequate
assurances
that
the funds
required to pay such mortgage would be
forthcoming and
that the
mortgagees
would, in fact, execute discharges.
In this case, East West and Bay Loan
had no cause to be concerned about the
availability of funds necessary to pay
prior mortgages because Bay Loan itself
was
the
source
of
those
funds.
Furthermore,
unless
the
funds were
advanced, Bay Loan would not have been at
risk because
it would have
had no
mortgages.
Finally, East West and Bay
Loan had no reason to doubt Marderosian's
assurances that the proceeds of their
loans would be used to discharge prior
mortgages.
Indeed,
it
would
be
unreasonable to conclude that they would
have made such loans if they suspected
otherwise.
In short, under the circumstances,
it was perfectly reasonable for East West
and Bay Loan to believe that Marderosian
was authorized to issue "clean" title
policies.

-1010

American Title II, 817 F. Supp. at 259.

_________________
exhaustive review

of the record

We have conducted an

and can find

no compelling

evidence to

the contrary.

Bay Loan

plausibly explained why

each "departure" was not sufficient

the time it occurred.

to raise any eyebrows at

The district court credited Bay Loan's

explanations.
With the
strung together
argues

that

hindsight American

distinct aspects

Bay

authority was

benefit of

Loan's

of these

belief in

Title has

transactions and

Marderosian's

clearly unreasonable.

The

apparent

question we

must

ask, however, is whether Bay Loan's reliance on Marderosian's

apparent

authority

reasonable in

to

issue

"clean"

title

light of what Bay Loan knew

policies

was

at the time.

The

district court found that it was, and we affirm.

B.
B.

The Policy Exclusion

The Policy Exclusion
____________________
As its second rationale for

argues that Bay Loan is

title policies
suffered,
Where an

not entitled to recovery because the

exclude coverage

assumed or

agreed to

insurance company

policy exclusion,
exclusion applies.

relief, American Title

for encumbrances
by

the insured

seeks to

"created,
claimant."

deny coverage

it carries the burden of

under a

proving that the

Pickering v. American Employers Ins. Co.,

_________
___________________________

282 A.2d 584, 587 (R.I. 1971).

The
this

defense.

parties agree that Rhode Island law applies to

Although

Rhode

-1111

Island

courts

have

not

interpreted this

clause, courts in other

jurisdictions have

generally held that "the insurer can escape liability only if

it

is established

resulted

from

dealings by
impliedly

that

some

the

lien

or

encumbrance

intentional misconduct

or

inequitable

the insured or

defect,

the insured either

expressly or

assumed or agreed to the defects or encumbrances."

Brown v. Saint Paul Title Ins. Corp., 634 F.2d 1103, 1107-08
_____
____________________________
n.8 (8th Cir. 1980) (Missouri
of Minneapolis v.
______________

law); see also First Nat. Bank

___ ____ _______________

Fidelity Nat. Tit. Ins. Co.,

___________________________

572 F.2d 155

(8th Cir. 1978) (under Nebraska law insurer must establish by

a preponderance
would

occupy

that the
a

insured agreed

secondary

position

to

that its
the

mortgage

preexisting

mortgage); accord American Sav. & Loan Ass'n v. Lawyers Title

______ __________________________
_____________
Ins. Corp.,
__________

793 F.2d 780

(6th Cir.

1986) (Tennessee

law);

Transamerica Title Ins. Co. v. Alaska Fed. Sav. & Loan Ass'n,
___________________________
_____________________________
833 F.2d 775 (9th Cir
of

1987) (Alaska law).

the exclusionary clause

This construction

comports with Rhode

Island law.

See Bartlett
___ ________
1991)

v. Amica Mut. Ins. Co., 593 A.2d

____________________

(exclusionary

interpretation
favorable

to the

Grenga, 556
______
provisions
construed
Ins. Co.,
_________

are

clauses
to

be

insured);

A.2d 998,
subject

subject
construed
see
___

to

more

528

A.2d

more
the

than
manner

Sentry Ins. Co.

________________

1989) (insurance

than

strictly against the

in

also
____

999 (R.I.

to

45, 48 (R.I.

one

one
most
v.

contract

interpretation

are

insurer); West v. Commercial

____
__________

339, 341-42

n.2

(R.I.

1987) (same);

-1212

Conanicut Marine Serv., Inc. v.

____________________________

Insurance Co. of N. Am., 511

_______________________

A.2d 967, 970 (R.I. 1986) (same).

After
district

stating

court found

burden of proof.

the

correct

that American

legal
Title had

standard,

the

not met

its

The court added that,

Marderosian had apparent authority to

issue "clean" title policies on behalf of

American Title. In doing so, he acted as

American Title's agent, not Bay Loan's
agent. Moreover, East West and Bay Loan
justifiably
relied
on
Marderosian's
representations that he would use the
loan
proceeds
to
discharge
prior
mortgages and were unaware that he did
otherwise.
Therefore the defects in
title against which the policies insure
were
neither
created,
suffered nor
assumed by East West or Bay Loan.
American Title II,
_________________

817 F. Supp. at

263.

district court that Bay Loan did not act

would

bar

recovery under

the

policy

We agree

with the

in the manner which

exclusion.

It

is

uncontroverted that Bay Loan relied on Marderosian to pay off

the prior mortgage and believed that it would be
the

normal course.

It

is

also undisputed

intended that the proceeds from its

the

prior mortgages,

encumbrances on the

and

that Bay

Loan

loans be used to pay off

that its

properties.

paid off in

mortgages

The continued

be the

only

existence of

the prior mortgages was unintended by Bay Loan.

On appeal American Title maintains that Bay Loan is
vicariously liable for
See Baker
___ _____

the acts of Marderosian as its agent.

v. ICA Mortgage Corp., 588

___________________

-1313

A.2d 616

(R.I. 1991)

(mortgagee's liability

for embezzlement by

rests upon proof of agency).

to

closing attorney

Three requirements are required

establish the existence

of an agency

relationship under

Rhode Island law:

(1) a manifestation by the principal that
the
agent will
act
for him,
(2)
acceptance
by
the
agent
of
the
undertaking, and (3) an agreement between
the parties that the principal will be in
control of the undertaking.
Lawrence v.
________
1987)

Anheuser-Busch, Inc.,
____________________

(citing Restatement

(1957)).
control

523 A.2d

864, 867

(Second) Agency

1(1) comt.

Further, the

principal

work of

the

agent,

and

the benefit

of the

principal.

the

primarily for

(R.I.

must have

the

the agent

right to
must

Id.
___

act

(citing

cases).
American

Title offered

testimony that,

generally

speaking, an attorney who serves as the "settlement agent" or

"closing agent" at a closing is an agent of the lender and is
responsible

for disbursing

behalf.

addition, Marderosian designated himself

HUD

In

form as

the

loan

"settlement

proceeds

agent."

on the

There

lender's

was

on the
also

testimony from representatives of East West and Bay Loan that

could have

supported a finding that Marderosian acted as Bay

Loan's agent at the closings.

On the other hand, our review of the record reveals

that there
Bay Loan

was no express

agreement in this

and Marderosian.

regard between

Furthermore, Bay

Loan did

not

control

over

-1414

provide

any

instructions

to

Marderosian, and Bay Loan did

or

the

first place.

was not Bay

In addition, the

record

Marderosian became the closing agent in

The district

Loan's agent.

views of the

any

not participate in the payment

of Marderosian as closing attorney.

is unclear as to how

exert

court found that Marderosian

"Where there

are two permissible

evidence, the factfinder's choice

between them

can not be clearly erroneous." American Title I, 959 F.2d 346

________________
(quoting
148,

Cumpiano v. Banco Santander Puerto Rico,

________
____________________________

152

(1st

quotation
district

Cir

1990)

marks omitted).

(quotation

omitted))

Accordingly,

we

902 F.2d
(internal

affirm

the

court's finding that the continued existence of the

prior mortgages was not "created, suffered, assumed or agreed

to" by Bay Loan within the meaning of the policy.
C.
C.

Damages
Damages

_______
The title policies insure Bay Loan "against loss or
damage
of .

. . . sustained or

incurred by the insured by reason

. . [t]he invalidity or unenforceability of the lien of

the insured

mortgage . . . [or t]he

priority of any lien or

encumbrance over the lien of the insured mortgage."

American

Title's liability is limited to the lesser of: (1) Bay Loan's

actual

loss;

indebtedness
the loss.
trial.

(2)

amount

of

insurance;

secured by the insured mortgage

Only
Both

the

or

(3)

the

at the time of

the first of these remained unknown prior to

parties and

the

district court

acknowledged

-1515

that, because

Bay Loan's

when

the prior mortgagee

each

policy

would

uncollectible from the

market

value of

be

mortgages were

rendered worthless

foreclosed, its actual

the

lesser

of

(1)

loss under
the

defaulting borrower, or (2)

the unit

at the

time the

amount
the fair

prior mortgagee

foreclosed.5
The

district court

dismissed, without

prejudice,

Bay

Loan's policy

claims

Kirschner unit on the

in connection

ground that its claims

under Falmouth Nat. Bank v.

___________________
1058 (1st Cir. 1990).
the district

with

all but

the

were premature

Ticor Title Ins. Co.,

____________________

920 F.2d

On appeal, American Title argues that

court should

have

reached the

merits of

Bay

Loan's damage claims with respect to all eighty units.

In Falmouth we held that a bank's claim for damages
________
under

a mortgagee's

because
The
title

title

the amount of

relevant provision,
policies,

definitely
__________
policy, the

insurance

the loss was

which also

provides:

"When

fixed in accordance
_____
loss or damage

between

Bay

premature

not "definitely fixed."

appears

in Bay

liability

has

Loan's
been

with the conditions

of this

shall be payable within

30 days

thereafter." (emphasis added).

difference

policy was

In fact, there is no material

Loan's

policies

and

the

policy

construed in Falmouth.
________
____________________
5. A more detailed explanation
of the "actual
loss"
calculation can be found in the district court's opinion.
See American Title II, 817 F. Supp. at 260-61.
___ _________________
-1616

In Falmouth, the insured

________
its

title

insurer

mortgagee's

for

to

the insurer by

Judicial Court (SJC)

moved

failure

title insurance policy

determined against

the case

brought an action against

loss

under

the Massachusetts Supreme

proceedings.6

the action

after liability had been

in a related action.

for further

to dismiss

pay

The SJC remanded

The insurance

for failure

to state

company
a claim

arguing that the bank's "actual loss" could not be determined

until the state court determined the value of the property on
remand.
by

The bank argued that liability was definitely fixed

the SJC's

liable

ruling,

and that

the

insurance company

was

for the principal and accrued interest outstanding on

the buyer's

mortgage note.

The district court

agreed with

the insurance company, and we affirmed.

In affirming the dismissal,
of the title insurance policy,

we construed the terms

focusing on the issue of when

a loss is "definitely fixed" and payable to the

insured.

We

distinguished owner's title insurance policies, in which loss

is measured by the decrease in market value caused by a title
defect, and mortgagee's title policies in which a bank's loss
equals

the lesser

____________________

of the

decrease in

market value

of the

6. In that action, as a result of the SJC's ruling, the

buyer of the mortgaged property was required to reconvey it
to the seller. The seller was required to remit the purchase
price with appropriate adjustments (e.g., passage of time and
____
improvements on the land).
The terms of the reconveyance
were the subjects of the remand.
-1717

bank's security caused by the title defect or the amount that

is unrecoverable on the borrower's defaulted notes.
With respect to the mortgagee's policies at issue
we held that "a mortgagee-insured's loss cannot be determined
unless
mortgage

the note

is

not

repaid and

proves inadequate. . . .

the

security for

Such is the case because

it is only after the insurer or the insured sues on

and the

debtor fails

determined."

to pay,

the

that the

the note

actual loss

can be

Falmouth, 920 F.2d at 1063 (citations omitted).

________

The bank

took

the

position

that

the

insurer

should

be

required

to pay the outstanding principal, interest and late

payments due on the debt, and subrogate to the bank's rights.

We rejected this

argument because the insurance

the insurer the option to

policy gave

either pay the bank's actual loss,

or

purchase the

rights against the

insurance

indebtedness and
mortgagors.

subrogate

to the

We held that

bank's

to require the

company to pay the indebtedness before the "actual

loss" is ascertained, "would have the

effect of amending the

policy by making subrogation mandatory rather than optional."

Falmouth, 920 F.2d at 1063.
________
We turn our

attention to the case at hand.

commencement of the second trial,

that

because

defaulting

it

had

commenced

borrowers, it had

At the

Bay Loan took the position

suits

against

satisfied the

all

the

requirements of

-1818

Falmouth at
________

least

with

respect

to

some

of

the

units.7

American Title was of

the opinion that Bay Loan would not be

able to prove the fair

market value of the individual units,

butthat evenifit could,itsclaims wereprematureunder Falmouth.

________
When the

district court

asked Bay

Loan what

the

court

should do

if

some but

not

all of

the claims

were

premature under Falmouth, Bay Loan responded as follows:

________
I think that the appropriate relief in
those circumstances if the Court rules
that Falmouth does apply in part to this
________
case, would be for the Court to make
appropriate
findings and
conclusions
which would be necessary as to those
borrowers for whom we have fulfilled the
requirements of Falmouth.
The same
________
findings and conclusions would ultimately
apply presumedly to the others.
Bay Loan added:
About the measure of the recovery . . .
we contend that the measure of recovery
is
the fair
market
value of
the
condominiums at the time they were lost
at the foreclosure of senior liens and we
are prepared to prove what that value
was.
If the Court finds that some other
measure would be more appropriate or if
the Court
should disagree
with our
valuation and decide they were worth some
different amount, you know, appropriate
findings and conclusions could be made so
that as litigation with other borrowers
is resolved, either by judgments or by
bankruptcies
or
however
they
get
resolved, both Bay Loan and American
Title would know what the other's rights

____________________
7.

The parties did not stake out positions on Falmouth prior

________
to the first trial because the decision in Falmouth was not
________
handed down until the day before that trial commenced.
-1919

are.
And I think
enough to do.
As the trial progressed, it

that

would be

became clear that Bay Loan would

not be able to prove the fair market value of

condominium
evidence Bay

units.

Sensing as

Loan admitted

under Falmouth.
________

easy

much, at

that its

the individual

the close

claims were

American Title responded that,

of the

premature
in order to

put an end to this litigation, it would concede that the fair

market

value of

uncollectible

each unit

debt

owed

would
by

always be

each

less than

defaulting

the

borrower.

American Title reiterated this point in its closing argument.

After all

was said

and done,

the district

court

held that,
the only

reasonable reading

of Falmouth
________
is that a mortgagee must pursue legal
action against a
defaulting borrower
until a reasonable lender would write off
the debt as uncollectible or, to put it
another way, until the anticipated cost
of
further
proceedings
against the
borrower would be greater than any amount
that is likely to be recovered.
American Title II, 817 F. Supp.
_________________

at 260.

It then found

Bay Loan had not reached this point on its claims.

Id.
___

that

American
appeal.

Title makes

First, it maintains

the district court

claims

since

borrower

two

that Falmouth did

________

from reaching

we have

is required

principal arguments

never

the merits

"held

before a

actual loss has been sustained

that

court may

on

not prevent

of Bay

Loan's

suit against

the

conclude that

no
__

on a title policy, based upon

-2020

the

insured's failure to

required

to make a

Brief at 42.

prove the other

claim of damages."

elements that are

Plaintiff-Appellant

Alternatively, American Title contends that the

district court abused its discretion in dismissing the claims

without
its

prejudice because the Falmouth issue was "mooted" by

________

concession that

borrowers

uncollectible

would always exceed

Because American
court's

the

Title is

balances

the value of

assigning error

due

from

the collateral.
to the

district

legal conclusion based upon its reading of Falmouth,

________

our review is plenary.

We note first that this

wholly

unlike Falmouth.
________

case proceeded in a manner

The present

case was

not decided

through a motion to dismiss for failure to state a claim made

by

the insurer.

the district

In contrast,

court reach

American Title advocated that

the merits

of Bay Loan's

claims.

Here, the insured's claims went to trial, and the insured was
afforded a full and fair

opportunity to prove the amounts by

which its collateral was impaired by the prior mortgages.

fact, as

we noted above,

at the commencement of

Bay Loan explicitly stated that

market

value of all

where its

the trial,

it planned to prove the fair

the individual condominium

claim in connection

In

with that unit

units, even
was premature

under Falmouth.
________
As evidenced by
trial, Bay

its remarks at

Loan anticipated

that the

the outset of

district court

the
would

-2121

make factual

findings as

to the fair

market value

of each

unit,

and

that those

future, on claims

findings

prove the

Furthermore,

be binding,

that were still premature.

its position clear, put its

to

would

fair

in

the

Bay Loan made

best foot forward, and attempted

market value

of

the individual

units.

it is apparent that, long before American Title

made its concession, Bay Loan recognized that the fair market
value of each unit would, in all likelihood, be less than the
uncollectible debt owed by the defaulting borrowers.
reflected

This is

in Bay Loan's statement that the fair market value

of each unit would be "the measure of [its] recovery."

Under

these

circumstances,

we

believe that

the

district court committed reversible error by rigidly applying

Falmouth to the present case, and failing to reach the merits
________
of Bay Loan's claims.

Falmouth was not intended to afford an

________

insured-mortgagee

second and

something that it

had otherwise been unable to

Bay Loan made

ahead

on

its position

all of

its

third

opportunities to

clear and

claims,

it

prove.

proceeded full

was incumbent

upon

prove
Once
steam
the

district court to adjudicate each claim on the merits.8

____________________
8. Moreover, we note that one of our principal concerns in
Falmouth was the bank's attempt to make subrogation mandatory
________
by
requiring the
insurance company
to purchase
the
outstanding indebtedness prior to a determination of the
actual loss. Here, Bay Loan has not advanced this argument,
but has acknowledged that its measure of recovery is the fair
market value of the individual units at the time the prior
mortgagee foreclosed.

-2222

Only

with respect to the claim under the Kirschner

policy did the district court

damages claim.

reach the merits of Bay Loan's

The court found that,

Bay Loan has been afforded every

opportunity to prove the amount by which
the value
of its
security in
the
Kirschner unit was diminished by the
title defects. Since it has failed to do
so, its counterclaim for damages under
the Kirschner policy is dismissed with
prejudice.
American Title II,
___________________
indication in the
units
respect

was, or

817

F. Supp.

anticipated that

261.

been, different

proof on

the

upon maturity of its claims,

is no

on the other

in

any material

Kirschner unit.

the district court

proven the fair market value for

Bay

would find that

Loan
it had

each of the units, and that

that value would be the measure

of its recovery under the title policies.

tried but did not

There

record that Bay Loan's proof

would have

from its

at

Since Bay Loan has

prove this value for any of

the units, it

should have to bear the consequences of its failure.

In

short

we

rule

that

the

district

court

misconstrued

the scope

of Falmouth
________

and that

Bay

Loan was

given every opportunity to prove damages but was unable to do

so.

This

is not a case where the

any avenues of proof.

district court foreclosed

There is no reason why Bay Loan should

be granted a third opportunity to prove damages.

There was another reason that compelled a dismissal
with

prejudice.

American

Title maintains that

it "mooted"

-2323

the Falmouth issue, and that Bay Loan's claims were therefore
________
ripe

for adjudication

merit.

Under the

on

the merits.

policies, the

This argument

has

Falmouth requirements
________

are

conditions precedent to the insurance company's obligation to

pay under

the policies.

Where,

as is

the case

here, the

insurer agrees to waive one of the conditions, this waiver is

effective, and the insurer becomes obligated to pay under the
policy.
Contracts

See
___

generally
_________

Arthur

L.

753 (1972) (condition to

Corbin,

3A

Corbin

on

party's duty to perform

can be eliminated

by a mere voluntary expression

of party's

willingness to waive it).

Moreover,

as

practical

matter, once

American

Title made its concession, Bay Loan's pending actions against

the debtors became irrelevant to the damages calculation.
other words, the
the

amount

of

In

resolution of those claims would not affect

Bay Loan's

Falmouth does not require

________

recovery

from

American Title.9

an insured to expend time,

effort

and

money in actions to collect against defaulting borrowers

as

prerequisite

to

establishing

damages

against

the

____________________
9. In fact, Bay Loan could have realized a windfall as a
result of this concession.
If Bay Loan had succeeded in
proving the fair market
value of a given
unit, and
subsequently
recovered
substantial
sums
from
the
corresponding debtor such that the fair market value of the
unit exceeded the amount still owed by the debtor, then Bay
Loan would have recovered more than it was entitled to
recover under its title insurance.
-2424

insurer, where

those actions

are wholly

irrelevant to

the

measure of the insured's recovery.

Thus,
merits

of

the district court

Bay

Loan's

claims,

should have
and

reached the

dismissed

them

with

prejudice.

We reverse the district court's without prejudice

dismissal

of

evidentiary
dismissal

of

conclusion.
district

these

claims.

issue

raised

the

Kirschner

Because

Our

on

Bay

Bay

Loan's

claim
Loan

disposition

would

did not

court's dismissal without

appeal
not

of

the

of

the

alter

appeal

this

from

the

prejudice of its claims,

even if we were to reverse the challenged evidentiary ruling,

only

the

Kirschner unit

would

enjoy the

benefit

of that

ruling.
D. The Kirschner Unit
D. The Kirschner Unit
__________________
As previously indicated,
that

Bay Loan's claim

Kirschner
that Bay
and

unit was

under the

the district court

title policy

not premature.10

But, the

found

covering the
court found

Loan was unable to prove its damages on this claim,

therefore dismissed it with prejudice.

this ruling primarily

on the ground that

Bay Loan appeals

the district court

improperly excluded the testimony of its expert appraiser.

Bay
losses

Loan's

arising

out

title
of

policy

"the

provides

priority

of

coverage
any

lien

for
or

____________________
10. With the consent of American Title, Bay Loan settled its
claim against Kirschner for $15,000.
American Title II, 817
_________________

F. Supp. at 260.
-2525

encumbrance over the lien of the insured mortgage." (emphasis

___ _______ ________
added).
an

Each

insured mortgage at issue

individual condominium unit.

required

to

prove its

individual condominium
unit.

Bay

appraiser

Loan
testify

actual

planned to
as

to

Accordingly, Bay
loss

unit --

the

this by
fair

case the

F. Supp. at

the admission of
more, the value of

261.

market

this testimony on the ground

each

Kirschner

value

expert
of

The

See American
___ ________

American Title

objected to
that, without

the motel was not probative of

of each individual condominium unit.

to

having an

Charlestown Motor Inn as an operating business.

Title II, 817
________

Loan was

with respect

in this
do

here corresponds to

the value

After allowing Bay Loan

to make an offer of proof, the court sustained the objection.

The court later explained:
Bay Loan did proffer evidence regarding
the value of The Charlestown Motor Inn as
an operating motel on the theory that the
value of each individual
unit is a

proportionate share
of that
amount.
However, that approach ignores the fact
that what American Title insured was
title to and the validity of Bay Loan's
mortgage liens on individual condominium
units. It did not insure the motels as
going
businesses
or the
value
of
individual
units
calculated
as
a
percentage of the motel's value.
Those
two values may differ just as the total
value of ten residential lots comprising
a
city
block may
be
considerably
different from the value of those lots
when combined to form one parcel of
commercial real estate.
Id. at 261.
___

-2626

Bay
discretion

in

Loan argues that the district court abused its

excluding the

proposed testimony

because it

should be allowed to value the individual units by looking at

the motel qua
___
best use for
of

motel, since that represented

the units.

Bay Loan also argues that the value

the motel represented the

value of

best available evidence of the

the individual units

independently

appraised.

the highest and

We

since the units could

address

these

not be

contentions

seriatim keeping in mind that a

________
exclude evidence
standard.

is reviewed

district court's decision to

under an

abuse of

Losacco v. F.D. Rich Constr. Co., 992

_______
______________________

discretion
F.2d 382,

385 (1st Cir.), cert. denied, 114 S. Ct. 324 (1993); Harrison
_____ ______
________
v. Sears, Roebuck & Co., 981 F.2d 25, 32 (1st Cir. 1992).
____________________
Bay
Although

condominium
motel, this

the validity

of

condominium units." Id.

___________ _____
___

units
is

district court pointed

and

is wide of

the mark.

it might be that the "highest and best" use for the

individual
operating

Loan's first contention

would

not

what was

out, what was

.

. .

be

mortgage

While it

as

rooms

insured.

in
As

insured was "title

liens on

is true that a

an
the
to

individual
__________
number of

these units were located in the same motel, the insurance was
not issued on

this basis and did not

units as potential
court's

rooms in a motel.

"city block" analogy

insure the condominium

We think the district

clearly illustrates

flaw in Bay Loan's approach.

-2727

the basic

Next,

Bay Loan

motel is admissible
value of

maintains that

the

value of

the

as the "best available

evidence" of the

the individual condominium units.

Even though the

"proportionate share" motel's

value (i.e., the value

____

of the

motel divided by the number of individual condominium units),

might be the best
_____

evidence of the value of each

not necessarily so.

See Allison v. Ticor Title Ins. Co., 907

___ _______
____________________

F.2d 645 (7th Cir. 1990).

A given unit might be worth

or less than the value of the

units.

It

was

evidence as to

Bay

indicates, Bay

evidence

which would

of

responsibility

to

the entire

Loan

did not

connect its
motel,

to

introduce

unit so that the

a determination of damages.

plainly

value

Loan's

more

motel divided by the number of

the value of each

court could make

unit, it is

As the record

intend

expert's
the

district

to offer

any

opinion on

the

value

of

individual

condominium units.11
Had Bay
testify

that,

individual

Loan's

although

expert witness
he

could

units, the proportionate

relevant in determining

not

been

prepared

to

directly

appraise

value of the

motel was

the value of the units,

we might be

____________________
11.

After Bay

Loan made its

offer of proof,

the following

dialogue took place:

THE COURT: And who is going to make
that link, me, the Court?
BAY LOAN:
Well, the Court is the
trier of fact in this case, that's true.
THE COURT:
Well, it has to have
facts to try, doesn't it?
-2828

inclined to side
Ins. Co.,
_________
district

with Bay Loan.

979

F.2d

court did

See
___

1187 (7th
not abuse

Cir.
its

evidence of lodge's value where

the lodge

was at

testified that he
in valuing the
case, we

Allison v. Ticor Title

_______
___________
1992)

(holding

discretion by

that

admitting

value of individual units in

issue, particularly

where expert

witness

looked at the proportionate value of lodge

individual units).

cannot see

Because this

how the court's

was not the

ruling amounted

to an

abuse of discretion.
Finally, Bay Loan contends that notwithstanding the
exclusion of this evidence, it
respect

to the

Kirschner

court's determination

still proved its damages with

unit.

of damages for

We review

the

district

clear error.

Soto v.
____

United States,
_____________
10,

No. 93-1158, slip

1993) ("[D]etermining

op. at 8-9 (1st

damages .

. .

Cir. Dec.

falls

sound judgment and discretion of the factfinder

within the
and will not

be overridden without substantial cause.").

The
to its
the

only evidence offered by Bay Loan with respect

damages on its

sale

price received

foreclosed

on seventeen

Charlestown
unit.12

claim under the Kirschner

Motor

Inn,

What Bay

by

the

of the
one

of

Loan fails to

policy was

prior mortgagee
thirty-three
which

was

realize is

when

units in
the

he
The

Kirschner

that the

sale

____________________
12. The prior mortgage on
The Charlestown Motor
Inn
originally covered the entire motel. After the condominium
declaration was recorded,
however, the prior mortgagee
-2929

price

obtained

by

the

prior

mortgagee

at

foreclosure

represents

the value of approximately one-half of the entire

motel, not

the

value of
the

seventeen

units.

In fact,

parties

mortgage

covering these seventeen

individual

stipulated that
units was not

condominium
the

prior

subject to

the

condominium declaration.

Because

Bay

Loan

introduce any evidence of a correlation between

one-half the
can

find

no

motel and the

error, clear

did

not

the value of

value of the Kirschner

unit, we

or

district

otherwise,

in the

court's findings and ruling.

III.
III.
CONCLUSION
CONCLUSION
__________
We affirm the judgment of

the district court as to

American Title's liability under the title insurance policies

at issue here.
with

We also affirm the district court's dismissal

prejudice of

policy.
prejudice

We reverse

Bay

Loan's

claim

under

the district court's

the

Kirschner

dismissal without
_______

of Bay Loan's claims under the remaining policies.

Those claims are ordered dismissed with prejudice.

____
No costs to either party.

____________________
released sixteen of the units from his prior mortgage. These
units are currently the subject of a quiet title action by
Bay Loan.
-3030