American Title Insurance v. East West Financial

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. Plaintiff American
BOWNES, Senior Circuit Judge.

Title Insurance Company ("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 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

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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

1. The convictions were, in large part, affirmed on appeal.
See United States v. Brandon, Nos. 1447, 1465-71 (1st Cir.

Jan. 31, 1994).

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

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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.

Motel.

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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

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.

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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.

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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 (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,

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

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

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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.

4. Hereinafter, references to Bay Loan apply equally to East
West.

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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 authorized

agent of that company. Moreover, it is undisputed that

American Title never informed Bay Loan that Marderosian was

not empowered to issue clean title policies in the face of

prior undischarged liens unless the funds required to pay

them were in the agent's possession and the lender was an

institution.

American Title argues that, because there were

substantial deviations from accepted business practices in

the Dean Street transactions, Bay Loan's reliance on

Marderosian's apparent authority was unreasonable and

therefore his acts should not be imputed to American Title.

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

F.2d 805, 809 (1st Cir. 1977) (third party must exercise due

care before relying on an agent's apparent authority);

Restatement (Second) Agency 27 comt. a (1957).

American Title illustrates three departures from

the "usual methods of conducting business": (1) conducting

apparently final closings prior to Bay Loan's actual approval

of the borrower, (2) Marderosian's issuance of clean title

policies to Bay Loan prior to Bay Loan providing the funding

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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.

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American Title II, 817 F. Supp. at 259. We have conducted an

exhaustive review of the record and can find no compelling

evidence to the contrary. Bay Loan plausibly explained why

each "departure" was not sufficient to raise any eyebrows at

the time it occurred. The district court credited Bay Loan's

explanations.

With the benefit of hindsight American Title has

strung together distinct aspects of these transactions and

argues that Bay Loan's belief in Marderosian's apparent

authority was clearly unreasonable. The question we must

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

apparent authority to issue "clean" title policies was

reasonable in light of what Bay Loan knew at the time. The

district court found that it was, and we affirm.

B. The Policy Exclusion

As its second rationale for relief, American Title

argues that Bay Loan is not entitled to recovery because the

title policies exclude coverage for encumbrances "created,

suffered, assumed or agreed to by the insured claimant."

Where an insurance company seeks to deny coverage under a

policy exclusion, it carries the burden of proving that the

exclusion applies. Pickering v. American Employers Ins. Co.,

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

The parties agree that Rhode Island law applies to

this defense. Although Rhode Island courts have not

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interpreted this clause, courts in other jurisdictions have

generally held that "the insurer can escape liability only if

it is established that the defect, lien or encumbrance

resulted from some intentional misconduct or inequitable

dealings by the insured or the insured either expressly or

impliedly 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 law); see also First Nat. Bank

of Minneapolis v. Fidelity Nat. Tit. Ins. Co., 572 F.2d 155

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

a preponderance that the insured agreed that its mortgage

would occupy a secondary position to the 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 1987) (Alaska law). This construction

of the exclusionary clause comports with Rhode Island law.

See Bartlett v. Amica Mut. Ins. Co., 593 A.2d 45, 48 (R.I.

1991) (exclusionary clauses subject to more than one

interpretation are to be construed in the manner most

favorable to the insured); see also Sentry Ins. Co. v.

Grenga, 556 A.2d 998, 999 (R.I. 1989) (insurance contract

provisions subject to more than one interpretation are

construed strictly against the insurer); West v. Commercial

Ins. Co., 528 A.2d 339, 341-42 n.2 (R.I. 1987) (same);

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Conanicut Marine Serv., Inc. v. Insurance Co. of N. Am., 511

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

After stating the correct legal standard, the

district court found that American Title had not met its

burden of proof. 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. We agree with the

district court that Bay Loan did not act in the manner which

would bar recovery under the policy exclusion. It is

uncontroverted that Bay Loan relied on Marderosian to pay off

the prior mortgage and believed that it would be paid off in

the normal course. It is also undisputed that Bay Loan

intended that the proceeds from its loans be used to pay off

the prior mortgages, and that its mortgages be the only

encumbrances on the properties. The continued existence of

the prior mortgages was unintended by Bay Loan.

On appeal American Title maintains that Bay Loan is

vicariously liable for the acts of Marderosian as its agent.

See Baker v. ICA Mortgage Corp., 588 A.2d 616 (R.I. 1991)

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(mortgagee's liability for embezzlement by closing attorney

rests upon proof of agency). Three requirements are required

to 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. Anheuser-Busch, Inc., 523 A.2d 864, 867 (R.I.

1987) (citing Restatement (Second) Agency 1(1) comt. b

(1957)). Further, the principal must have the right to

control the work of the agent, and the agent must act

primarily for the benefit of the principal. Id. (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 loan proceeds on the lender's

behalf. In addition, Marderosian designated himself on the

HUD 1 form as the "settlement agent." There was 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 was no express agreement in this regard between

Bay Loan and Marderosian. Furthermore, Bay Loan did not

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provide any instructions to or exert any control over

Marderosian, and Bay Loan did not participate in the payment

of Marderosian as closing attorney. In addition, the record

is unclear as to how Marderosian became the closing agent in

the first place. The district court found that Marderosian

was not Bay Loan's agent. "Where there are two permissible

views of the evidence, the factfinder's choice between them

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

(quoting Cumpiano v. Banco Santander Puerto Rico, 902 F.2d

148, 152 (1st Cir 1990) (quotation omitted)) (internal

quotation marks omitted). Accordingly, we affirm the

district 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. Damages

The title policies insure Bay Loan "against loss or

damage . . . sustained or incurred by the insured by reason

of . . . [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; (2) the amount of insurance; or (3) the

indebtedness secured by the insured mortgage at the time of

the loss. Only the first of these remained unknown prior to

trial. Both parties and the district court acknowledged

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that, because Bay Loan's mortgages were rendered worthless

when the prior mortgagee foreclosed, its actual loss under

each policy would be the lesser of (1) the amount

uncollectible from the defaulting borrower, or (2) the fair

market value of the unit at the time the prior mortgagee

foreclosed.5

The district court dismissed, without prejudice,

Bay Loan's policy claims in connection with all but the

Kirschner unit on the ground that its claims were premature

under Falmouth Nat. Bank v. Ticor Title Ins. Co., 920 F.2d

1058 (1st Cir. 1990). On appeal, American Title argues that

the district 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 title insurance policy was premature

because the amount of the loss was not "definitely fixed."

The relevant provision, which also appears in Bay Loan's

title policies, provides: "When liability has been

definitely fixed in accordance with the conditions of this

policy, the loss or damage shall be payable within 30 days

thereafter." (emphasis added). In fact, there is no material

difference between Bay 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.

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In Falmouth, the insured brought an action against

its title insurer for failure to pay a loss under a

mortgagee's title insurance policy after liability had been

determined against the insurer by the Massachusetts Supreme

Judicial Court (SJC) in a related action. The SJC remanded

the case for further proceedings.6 The insurance company

moved to dismiss the action for failure to state 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. The bank argued that liability was definitely fixed

by the SJC's ruling, and that the insurance company was

liable 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, we construed the terms

of the title insurance policy, 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.

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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 the note is not repaid and the security for the

mortgage proves inadequate. . . . Such is the case because

it is only after the insurer or the insured sues on the note

and the debtor fails to pay, that the actual loss can be

determined." 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 policy gave

the insurer the option to either pay the bank's actual loss,

or purchase the indebtedness and subrogate to the bank's

rights against the mortgagors. We held that to require the

insurance 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. At the

commencement of the second trial, Bay Loan took the position

that because it had commenced suits against all the

defaulting borrowers, it had satisfied the requirements of

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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.

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are. And I think that would be easy
enough to do.

As the trial progressed, it became clear that Bay Loan would

not be able to prove the fair market value of the individual

condominium units. Sensing as much, at the close of the

evidence Bay Loan admitted that its claims were premature

under Falmouth. American Title responded that, in order to

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

market value of each unit would always be less than the

uncollectible debt owed by each defaulting 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 that

Bay Loan had not reached this point on its claims. Id.

American Title makes two principal arguments on

appeal. First, it maintains that Falmouth did not prevent

the district court from reaching the merits of Bay Loan's

claims since we have never "held that suit against the

borrower is required before a court may conclude that no

actual loss has been sustained on a title policy, based upon

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the insured's failure to prove the other elements that are

required to make a claim of damages." Plaintiff-Appellant

Brief at 42. Alternatively, American Title contends that the

district court abused its discretion in dismissing the claims

without prejudice because the Falmouth issue was "mooted" by

its concession that the uncollectible balances due from

borrowers would always exceed the value of the collateral.

Because American Title is assigning error to the district

court's legal conclusion based upon its reading of Falmouth,

our review is plenary.

We note first that this case proceeded in a manner

wholly unlike Falmouth. The present case was not decided

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

by the insurer. In contrast, American Title advocated that

the district court reach 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. In

fact, as we noted above, at the commencement of the trial,

Bay Loan explicitly stated that it planned to prove the fair

market value of all the individual condominium units, even

where its claim in connection with that unit was premature

under Falmouth.

As evidenced by its remarks at the outset of the

trial, Bay Loan anticipated that the district court would

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make factual findings as to the fair market value of each

unit, and that those findings would be binding, in the

future, on claims that were still premature. Bay Loan made

its position clear, put its best foot forward, and attempted

to prove the fair market value of the individual units.

Furthermore, 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. This is

reflected 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 third opportunities to prove

something that it had otherwise been unable to prove. Once

Bay Loan made its position clear and proceeded full steam

ahead on all of its claims, it was incumbent upon 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.

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Only with respect to the claim under the Kirschner

policy did the district court reach the merits of Bay Loan's

damages claim. 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, 817 F. Supp. at 261. There is no

indication in the record that Bay Loan's proof on the other

units was, or would have been, different in any material

respect from its proof on the Kirschner unit. Bay Loan

anticipated that the district court would find that it had

proven the fair market value for each of the units, and that

upon maturity of its claims, that value would be the measure

of its recovery under the title policies. Since Bay Loan has

tried but did not 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 district court foreclosed

any avenues of proof. 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"

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

ripe for adjudication on the merits. This argument has

merit. Under the policies, the 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. See generally Arthur L. Corbin, 3A Corbin on

Contracts 753 (1972) (condition to party's duty to perform

can be eliminated by a mere voluntary expression of party's

willingness to waive it).

Moreover, as a practical matter, once American

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

the debtors became irrelevant to the damages calculation. In

other words, the resolution of those claims would not affect

the amount of Bay Loan's recovery from American Title.9

Falmouth does not require an insured to expend time, effort

and money in actions to collect against defaulting borrowers

as a 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.

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insurer, where those actions are wholly irrelevant to the

measure of the insured's recovery.

Thus, the district court should have reached the

merits of Bay Loan's claims, and dismissed them with

prejudice. We reverse the district court's without prejudice

dismissal of these claims. Our disposition of the

evidentiary issue raised on Bay Loan's appeal of the

dismissal of the Kirschner claim would not alter this

conclusion. Because Bay Loan did not appeal from the

district court's dismissal without 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

As previously indicated, the district court found

that Bay Loan's claim under the title policy covering the

Kirschner unit was not premature.10 But, the court found

that Bay Loan was unable to prove its damages on this claim,

and therefore dismissed it with prejudice. Bay Loan appeals

this ruling primarily on the ground that the district court

improperly excluded the testimony of its expert appraiser.

Bay Loan's title policy provides coverage for

losses arising out of "the priority of any lien 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.

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

added). Each insured mortgage at issue here corresponds to

an individual condominium unit. Accordingly, Bay Loan was

required to prove its actual loss with respect to each

individual condominium unit -- in this case the Kirschner

unit. Bay Loan planned to do this by having an expert

appraiser testify as to the fair market value of The

Charlestown Motor Inn as an operating business. See American

Title II, 817 F. Supp. at 261. American Title objected to

the admission of this testimony on the ground that, without

more, the value of the motel was not probative of the value

of each individual condominium unit. 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.

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Bay Loan argues that the district court abused its

discretion in excluding the proposed testimony because it

should be allowed to value the individual units by looking at

the motel qua motel, since that represented the highest and

best use for the units. Bay Loan also argues that the value

of the motel represented the best available evidence of the

value of the individual units since the units could not be

independently appraised. We address these contentions

seriatim keeping in mind that a district court's decision to

exclude evidence is reviewed under an abuse of discretion

standard. Losacco v. F.D. Rich Constr. Co., 992 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 Loan's first contention is wide of the mark.

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

individual condominium units would be as rooms in an

operating motel, this is not what was insured. As the

district court pointed out, what was insured was "title to

and the validity of . . . mortgage liens on individual

condominium units." Id. While it is true that a number of

these units were located in the same motel, the insurance was

not issued on this basis and did not insure the condominium

units as potential rooms in a motel. We think the district

court's "city block" analogy clearly illustrates the basic

flaw in Bay Loan's approach.

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Next, Bay Loan maintains that the value of the

motel is admissible as the "best available evidence" of the

value of 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 unit, it is

not necessarily so. See Allison v. Ticor Title Ins. Co., 907

F.2d 645 (7th Cir. 1990). A given unit might be worth more

or less than the value of the motel divided by the number of

units. It was Bay Loan's responsibility to introduce

evidence as to the value of each unit so that the district

court could make a determination of damages. As the record

plainly indicates, Bay Loan did not intend to offer any

evidence which would connect its expert's opinion on the

value of the entire motel, to the value of individual

condominium units.11

Had Bay Loan's expert witness been prepared to

testify that, although he could not directly appraise

individual units, the proportionate value of the motel was

relevant in determining 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?

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inclined to side with Bay Loan. See Allison v. Ticor Title

Ins. Co., 979 F.2d 1187 (7th Cir. 1992) (holding that

district court did not abuse its discretion by admitting

evidence of lodge's value where value of individual units in

the lodge was at issue, particularly where expert witness

testified that he looked at the proportionate value of lodge

in valuing the individual units). Because this was not the

case, we cannot see how the court's ruling amounted to an

abuse of discretion.

Finally, Bay Loan contends that notwithstanding the

exclusion of this evidence, it still proved its damages with

respect to the Kirschner unit. We review the district

court's determination of damages for clear error. Soto v.

United States, No. 93-1158, slip op. at 8-9 (1st Cir. Dec.

10, 1993) ("[D]etermining damages . . . falls within the

sound judgment and discretion of the factfinder and will not

be overridden without substantial cause.").

The only evidence offered by Bay Loan with respect

to its damages on its claim under the Kirschner policy was

the sale price received by the prior mortgagee when he

foreclosed on seventeen of the thirty-three units in The

Charlestown Motor Inn, one of which was the Kirschner

unit.12 What Bay Loan fails to realize is 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

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price obtained by the prior mortgagee at foreclosure

represents the value of approximately one-half of the entire

motel, not the value of seventeen individual condominium

units. In fact, the parties stipulated that the prior

mortgage covering these seventeen units was not subject to

the condominium declaration. Because Bay Loan did not

introduce any evidence of a correlation between the value of

one-half the motel and the value of the Kirschner unit, we

can find no error, clear or otherwise, in the district

court's findings and ruling.

III.

CONCLUSION

We affirm the judgment of the district court as to

American Title's liability under the title insurance policies

at issue here. We also affirm the district court's dismissal

with prejudice of Bay Loan's claim under the Kirschner

policy. We reverse the district court's dismissal without

prejudice 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.

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