United States Court of Appeals
For the First Circuit
No. 08-1130
COMMONWEALTH LAND TITLE INSURANCE CO.,
Plaintiff, Appellant,
v.
IDC PROPERTIES, INC.,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Ernest C. Torres, District Judge]
Before
Lynch, Chief Judge,
Boudin, Circuit Judge,
and Schwarzer,* District Judge.
Thomas C. Angelone with whom Thomas Gonnella and Pannone Lopes
& Devereaux LLC were on brief for appellant.
Steven E. Snow with whom Robert K. Taylor and Partridge Snow
& Hahn LLP were on brief for appellee.
November 5, 2008
*
Of the Northern District of California, sitting by
designation.
SCHWARZER, District Judge. IDC Properties, Inc. (“IDC”)
appeals the judgment declaring the title insurance policy issued by
Commonwealth Land Title Insurance Company (“Commonwealth”) null and
void because of material misrepresentations by IDC. On this
appeal, IDC argues that the district court applied the wrong legal
standard for material misrepresentation. Finding that the district
court applied the correct standard, we affirm.
I. FACTUAL AND PROCEDURAL HISTORY
We provide a summary of the relevant facts which are
described in detail in decisions by the district court and Rhode
Island Supreme Court. See Commonwealth Land Title Ins. Co. v. IDC
Props., Inc., 524 F. Supp. 2d 155 (D.R.I. 2007); America Condo.
Ass’n, Inc. v. IDC, Inc., 844 A.2d 117 (R.I. 2004) (“America Condo.
I”), clarified and aff’d on reargument, 870 A.2d 434 (R.I. 2005)
(“America Condo. II”).
A. Master Declaration
In January 1988, IDC's predecessor, Globe Manufacturing
Co. (“Globe”), owned twenty-three acres of land on Goat Island, in
Newport, Rhode Island, which it planned to develop into a
condominium called “Goat Island South - A Waterfront Condominium.”
Globe recorded a condominium declaration dividing the property into
six parcels: three parcels that were existing residential complexes
(America Condominium, Capella South Condominium, and Harbor House
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Condominium),1 two undeveloped parcels (the West and South Units),
and another undeveloped parcel known as the “Reserved Area” (later,
the North Unit). In March 1988, Globe recorded a First Amended and
Restated Declaration of Condominium (the “Master Declaration”).
Five of the six parcels, all except the Reserved Area, were
designated “Master Units.”
The Master Declaration created a Master Association to
govern Goat Island South. The Master Association was controlled by
a Master Executive Board comprised of representatives from each
Master Unit. America, Capella South, and Harbor House were defined
as “sub-condominiums,” each with its own Sub-Association that was
controlled by its respective Sub-Association Executive Board. See
App. Ex. 7 at §§ 1.32-1.35; America I, 844 A.2d at 121-22.
Members of each Sub-Association Executive Board sat on the Master
Executive Board, acting as representatives for the individual
sub-condominium unit owners (i.e., the residents). As owner of the
West Unit, South Unit, and the majority of the individual
residential units in America, Capella South, and Harbor House, IDC
controlled the majority of votes on the Master Executive Board.
America I, 844 A.2d at 122.
The Master Declaration reserved the Declarant’s (IDC’s)
right to develop the West Unit and convert the Reserved Area into
1
America and Capella South each contained an apartment
building and Harbor House contained nineteen stand-alone waterfront
homes. America I, 844 A.2d at 120.
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a Master Unit and develop it through December 31, 1994. See App.
Ex. 7 at Art. 6; America II, 870 A.2d at 440. It also reserved the
Declarant’s right to improve the Master Units without any deadline
and the “unrestricted right, without the consent of the Owners or
Sub-Association Board Members or the Master Executive Board, to
construct, renovate, sell, assign, mortgage or lease any of the
Master Units or Units” owned by the Declarant. See App. Ex. 7
at §§ 10.2, 2.3. An “Owner” is defined as the Declarant or other
person owning a Master Unit that is not a sub-condominium. See
App. Ex. 7 at § 1.27.
The Master Declaration stated that except as otherwise
provided in the Master Declaration or the Rhode Island Condominium
Act (“Condominium Act”), R.I. Gen. Laws §§ 34-36.1-1.01 to 4.20,
amendments to the Master Declaration could only be made with the
approval of 67% of the voting interest of all Owners and Sub-
Association Executive Board Members. See App. Ex. 7 at § 10.1.
The Master Declaration further provided that an amendment changing
any Master Unit or Master Common Elements must be approved by all
Owners and Sub-Association Executive Board members of the affected
Master Units. See id.
In sum, under the Master Declaration, only owners of the
undeveloped West and South Master Units and representatives of the
three residential Master Units could vote to amend the Declaration,
not individual unit owners of America, Capella South, or Harbor
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House. The Condominium Act, however, requires unanimous consent of
the individual unit owners for amendments that “create or increase
special declarant rights, increase the number of units, change the
boundaries of any unit, the allocated interests of a unit, or the
uses to which any unit is restricted.” R.I. Gen. Laws
§ 34-36.1-2.17(d). Timothy More, IDC's counsel, stated in a
memorandum to Thomas Roos, IDC's president, that “an argument could
be made that the master unit structure of Goat Island, which
allowed the Declarant [(IDC)] to maintain control of all Master
Unit votes,” circumvented this requirement. See App. Ex. 17.
By the end of 1994, the Reserved Area had not been
converted to a Master Unit and it remained undeveloped along with
the West Unit. With the expiration of its development rights
looming, IDC attempted to extend the December 31, 1994, deadline
through a series of amendments to the Master Declaration
purportedly adopted between April and December 29, 1994.2 The
amendments initially extended the deadline for five years to
December 31, 1999, then extended it an additional sixteen years to
December 31, 2015. The Third, Fourth, and Fifth Amendments were
approved by more than 67% of the voting interest as prescribed by
the Master Declaration, but not by all of the individual unit
owners. IDC converted the Reserved Area to a Master Unit called
2
The Third Amendment was adopted April 29, 1994; the Fourth
Amendment on November 15, 1994; and the Fifth and Sixth Amendments
on December 29, 1994.
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the “North Unit” through its unilateral adoption of the Sixth
Amendment.
Before the Third Amendment was adopted, IDC's president
(Roos) was advised by counsel to IDC's predecessor that extending
the time for exercising development rights “could easily subject
[IDC] to litigation” on the ground that all individual condominium
owners had not consented as required under the Condominium Act.
See App. Ex. 14. But because IDC considered it likely that
unanimous consent of all unit owners was “impossible to obtain,” a
decision was made to assume an “aggressive posture.” See id.
B. Title Insurance
On October 21, 1994, after the Third Amendment had been
adopted, IDC obtained a $10 million title insurance policy from
Chicago Title Insurance Company (“Chicago Title”) covering IDC's
title and development rights in the West and South Units as well as
individual condominium units still owned by IDC. App. Ex. 12. The
policy did not cover the Reserved Area, later the North Unit. Both
Chicago Title and IDC's counsel (More) recognized that the Third
Amendment's purported extension of IDC's time to exercise its
development rights might be invalid because it was not approved by
all individual unit owners. See App. Ex. 13.
America, Capella South, and Harbor House each had a
governing condominium association of which all unit owners were
members. See App. Ex. 30 at ¶¶ 4-6. Sometime in 1997, these three
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associations (“Associations”)3 and individual unit owners
challenged IDC's right to develop the undeveloped Master Units
claiming that the time to exercise those development rights had
expired and the purported extensions of those rights were invalid.
Beginning in September 1997, several meetings were held involving
More, Roos, various individual owners, and the attorney for the
Associations. See App. Exs. 15, 17. In a memorandum dated October
9, 1997, More expressed to Roos his concerns that (1) the extension
of the Declarant’s rights required unanimous consent of all unit
owners and the voting structure may have circumvented the
Condominium Act’s requirements; and (2) the Declarant’s “endless
right” to construct improvements circumvented the Condominium Act
and was inconsistent with other provisions of the Master
Declaration. See App. Ex. 17.
Meanwhile, More was attempting to persuade Chicago Title
or Commonwealth to issue a policy insuring title to and development
rights in the North Unit, which was not covered by the earlier
Chicago Title policy. More sent to Michael Mellion of Commonwealth
copies of the Master Declaration, Amendments 1-6, the earlier
Chicago Title policy, and a memorandum dated November 17, 1997,
stating two theories on which IDC's claim to development rights in
the North Unit was based. See App. Ex. 20.
3
It is unclear whether the Associations that sued IDC in
state court are the Sub-Associations defined in the Master
Declaration.
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The first theory was that the Fifth Amendment, which
extended the time for exercising the development rights until 2015,
was adopted by unanimous consent of the Master Unit Owners and that
consent of the individual sub-condominium owners was not required.
Id. The memo also stated that, even if the Amendment was invalid,
the one-year statute of limitations should bar any challenge to it.
Id. The second theory was that under specific provisions of the
Master Declaration, as owner of the North Unit, IDC had the right
to develop it at any time.
The November 17th memo failed to mention that one of the
Executive Board Members who represented America Condominium
objected to amending the declaration or extending the development
rights and abstained from voting in what he deemed an illegal
proceeding. 524 F. Supp. 2d at 159-60; America I, 844 A.2d at 124-
25. The November 17th memo also did not refer to the threat of
suit from the Associations or individual unit owners. An earlier
draft of the November 17th memo, that was not sent to Commonwealth,
however, referred to questions regarding the validity of the
Amendment and other legal issues raised by the America Condominium
association. See App. Ex. 19; Ex. 40 at 257-61.
While its December 4, 1997, request to Commonwealth was
pending, IDC’s discussions with the Associations continued,
including negotiation of a mediation proposal to avoid “the
litigation that otherwise would be inevitable” and a tolling
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agreement. App. Ex. 21 (letter of Dec. 10, 1997). On January 5,
1998, IDC entered into a tolling agreement with the Associations,
which provided that any suit filed by the Associations on or before
June 30, 1998, would be deemed filed on December 1, 1997, “for
purposes of statute of limitations” or other “similar defenses.”4
App. Ex. 25. IDC concedes that its counsel More was aware of the
threat of litigation and the tolling agreement even before
Commonwealth issued the title insurance policy. Appellant Br. 41
n.25. “At no time did IDC disclose to Commonwealth that individual
condominium owners had threatened a suit challenging IDC's
development rights or that there was a tolling agreement extending
the time for bringing such a suit.” 524 F. Supp. 2d at 160.
On December 12, 1997, Commonwealth offered to issue a $5
million policy insuring IDC's title to and development rights in
the North Unit. App. Ex. 22.
On December 15, 1997, Chicago Title declined to issue
title insurance for IDC's development rights in the North Unit.
App. Ex. 23. In its rejection memo, Chicago Title disagreed with
IDC’s statements in the November 17th memo that it was “clear” that
4
The district court incorrectly notes that the tolling
agreement was entered on December 10, 1997. 524 F. Supp. 2d at
160. The Associations’ December 10th letter to More included a
proposed tolling agreement, App. Ex. 21, but the parties did not
execute the tolling agreement until January 5, 1998. App. Ex. 25.
The tolling agreement was subsequently extended three times to
apply to actions filed on or before May 31, 1999. America I, 844
A.2d at 125, 134.
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the Master Unit owners were the proper parties to vote on the
Amendment. Id. Chicago Title stated that it was aware of
“threatened litigation” and was concerned “that there is a
substantial risk that the sub-condominium unit owners may allege
that there was fraud in the manner in which this amendment was
created.” Id. Chicago Title also expressed its opinion that IDC's
development rights expired on December 31, 1994. IDC did not
provide Commonwealth with a copy of Chicago Title’s memo or
disclose the stated reasons for its rejection. 524 F. Supp. 2d at
160.
On January 13, 1998, Commonwealth issued title insurance
policy number 228716 (“Policy”), covering IDC’s title to the North
Unit and its rights to develop and construct improvements on the
North Unit. IDC then began constructing a function center known as
the Regatta Club on the North Unit. On February 7, 1998, at IDC’s
request, Commonwealth increased the Policy from $7 million to $12
million and added title coverage for the South and West Units. See
App. Ex. 28.
C. Litigation
Before the expiration of the tolling agreement, on May
29, 1999, the Associations sued IDC and Roos in Rhode Island state
court seeking a declaration that IDC's development rights had
expired on December 31, 1994, and that IDC no longer owned the
North Unit or any other undeveloped Master Unit. In June 2001, the
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Superior Court entered judgment for the Associations, declaring
that “IDC's development rights expired on December 31, 1994 because
the amendments purporting to extend the time for exercising them
were not unanimously approved by individual unit owners.” 524 F.
Supp. 2d at 160.
While IDC’s appeal to the Rhode Island Supreme Court was
pending, Commonwealth filed this declaratory judgment action on
August 24, 2001. Commonwealth sought declarations that any losses
resulting from the annulment or expiration of IDC’s development
rights were excluded from coverage under the Policy, that
Commonwealth was not liable to IDC for any such losses, and that
the Policy provides no coverage for IDC’s title.5 The district
court concluded that Commonwealth based its case on IDC’s failure
to disclose material facts. 524 F. Supp. 2d at 161. IDC
counterclaimed seeking a declaration that the Policy does cover the
loss of IDC's development rights and its title. This action was
stayed pending resolution of IDC’s appeal to the Rhode Island
Supreme Court.
In March 2004, the Rhode Island Supreme Court held that
(1) the amendments extending the time for IDC’s development rights
were void because they were not unanimously approved by the
5
The district court granted Commonwealth’s motion to amend
its complaint to specifically request a declaration that the Policy
provides no coverage for IDC’s title. 524 F. Supp. 2d at 165-66.
IDC does not challenge this on appeal.
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individual unit owners; (2) IDC’s development rights expired on
December 31, 1994; and (3) title to the North, South, and West
Units vested in the individual unit owners. America I, 844 A.2d at
130-33. After reargument, the Rhode Island Supreme Court
reaffirmed and clarified its first decision, holding that the
North, South, and West Units were never validly created because
they did not comply with the substantial completion requirement of
the Condominium Act. America II, 870 A.2d at 440-42.
After the second Rhode Island Supreme Court decision, the
district court conducted a three day bench trial and issued its
decision on December 21, 2007, from which IDC appeals.
II. ANALYSIS
Following a bench trial, “we review the district court's
legal conclusions de novo and its underlying factual findings for
clear error.” Federal Ins. Co. v. HPSC, Inc., 480 F.3d 26, 34 (1st
Cir. 2007) (citing Commercial Union Ins. Co. v. Seven Provinces
Ins. Co., 217 F.3d 33, 40 (1st Cir. 2000)); see Fed. R. Civ. P.
52(a). We have subject matter jurisdiction under 28 U.S.C. § 1332
and appellate jurisdiction under 28 U.S.C. § 1291.
The central issue on appeal is whether the district court
applied the correct standard for material misrepresentation.6 IDC
does not challenge any of the district court’s factual findings,
6
In view of our disposition of this appeal, we need not
reach Commonwealth’s policy exclusion argument.
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including its findings of materiality and misrepresentation.
A. District Court Opinion
The district court held that under Rhode Island law, a
material misrepresentation or omission in an insurance application
makes the insurance policy voidable and “need not be made with
fraudulent intent.” 524 F. Supp. 2d at 162-63. The district court
treated the failure to disclose material facts as an affirmative
misrepresentation, which IDC does not challenge. Id. at 162; see
Barry R. Ostrager & Thomas R. Newman, Handbook on Insurance
Coverage Disputes § 3.01[b] (14th ed. 2008). It found that IDC
“knowingly failed to disclose” to Commonwealth that (1) individual
condominium unit owners had threatened a suit challenging IDC's
claimed development rights; (2) IDC had entered a tolling agreement
with the unit owners extending the time for bringing such a suit;
and (3) Chicago Title had cited the litigation threat as one of its
reasons for declining to provide coverage. 524 F. Supp. 2d at 162-
63. Commonwealth was not aware of any of these facts and they were
not matters of public record. Id. at 163.
The evidence showed that IDC’s president (Roos) and
counsel (More) participated in meetings with the Associations and
individual unit owners where the challenge to IDC’s development
rights in the North Unit and the litigation threat were
specifically discussed. Id. at 163. The district court found that
Roos and More recognized that the challenge might succeed,
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demonstrated by More’s October 9th memo to Roos and IDC’s decision
to enter the tolling agreement to “settle or delay the litigation
until after the [title] insurance had been obtained.” Id. In his
October 9th memo to Roos, More expressed concern that IDC's
development and construction rights could be found to
“circumvent[]” time limitations under the Condominium Act and the
Master Declaration. 524 F. Supp. 2d at 165; App. Ex. 17.
The district court found, moreover, that the November
17th memo, which More sent to Commonwealth with IDC’s request for
title insurance, did not mention the individual unit owners’
challenge to the amendments or “IDC’s own assessment” that
unanimous consent of all individual unit owners was required to
extend the time to exercise IDC’s rights. 524 F. Supp. 2d at 163.
The district court determined that the omitted assessment was
inconsistent with one of the theories advanced in the November 17th
memo on which IDC’s claim to development rights in the North Unit
was based. Id. The district court also found the November 17th
memo failed to disclose that one of the Executive Board Members
objected to amending the declaration or extending the development
rights and abstained from voting in what he deemed an illegal
proceeding. Id. at 159-60. This Executive Board Member
represented America Condominium. America I, 844 A.2d at 124-25.
The November 17th memo further stated that, even if the Amendment
was invalid, the one-year statute of limitations should bar any
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challenge to it. 524 F. Supp. 2d at 160. Commonwealth was not
aware of the tolling agreement, which (1) IDC negotiated and
executed before the Policy issued, (2) IDC failed to disclose, and
(3) was not a matter of public record. See id. at 163-64, 160.
The district court found that the litigation threat,
tolling agreement, and substance of Chicago Title’s refusal were
material because Commonwealth would not have issued the Policy if
they were disclosed and they “bore directly on the nature of the
risk that Commonwealth was being asked to insure.” 524 F. Supp. 2d
at 162-63. The district court determined that the threat of
litigation alone was material to Commonwealth’s decision because it
“was real and it directly related to a risk covered by the Policy.”
Id. at 163.
The evidence showed that Commonwealth would not have
issued the policy had it known these facts. Mellion, who made
Commonwealth’s decision to issue the Policy, “explained that,
because the Policy required Commonwealth to defend against any
claims challenging IDC's insured interests[] and, because the
policy premium of approximately $5,000 would have covered only a
fraction of the cost of defending against litigation brought by the
individual unit owners, Commonwealth would have declined to issue
the Policy since it was not interested in ‘buying a lawsuit.’” Id.
IDC does not challenge the district court’s finding of materiality.
The district court held the Policy to be void based on
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IDC’s material nondisclosures and entered judgment in favor of
Commonwealth on both its claim and IDC's counterclaim. 524 F.
Supp. 2d at 162-63, 165, 166. Having found that the Policy was
void, the district court declined to reach Commonwealth’s claims
that IDC’s losses resulting from the annulment or expiration of its
development rights were excluded from coverage under the Policy.
Id. at 162.
B. Applicable Standard
Rhode Island law governs this diversity case where the
parties7 and district court applied it and choice of law is not at
issue. See Hershey v. Donaldson, Lufkin & Jenrette Securities
Corp., 317 F.3d 16, 20 (1st Cir. 2003) (“Where parties have agreed
to the choice of law, this court is free to ‘forego an independent
analysis and accept the parties' agreement.’”); Borden v. Paul
Revere Life Ins. Co., 935 F.2d 370, 375 (1st Cir. 1991) (applying
Rhode Island law for claims where the parties and district court
consistently did).
On appeal, IDC does not challenge the district court's
finding that the information it failed to disclose was material.
Rather, it argues that, absent fraud (which the district court did
not find), there is no obligation to disclose information to a
prospective insurer unless specifically asked questions on the
7
At oral argument, IDC confirmed that Rhode Island law was
controlling.
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point. Thus, IDC contends, the legal standard applied by the
district court was incorrect and the court erred in stating that
material omissions, as opposed to misrepresentations, were
sufficient to void the title insurance policy absent fraud.
Rules vary--even among different types of insurance--as
to whether there is a duty to disclose material facts to an insurer
absent a question, and Rhode Island law may not provide a clear
answer as to that question as to policies of the kind here
involved. But we need not decide how the Rhode Island courts would
resolve a bare non-disclosure issue because it is clear that a
half-truth or failure to speak when necessary to qualify misleading
prior statements does amount to a misrepresentation. See Nash v.
Trustees of Boston Univ., 776 F. Supp. 73, 83 (D.R.I. 1990), aff'd,
946 F.2d 960 (1st Cir. 1991); Restatement of Torts § 529 (1938);
see also Halpert v. Rosenthal, 267 A.2d 730, 734 (R.I. 1970)
(defining “misrepresentation” as “any manifestation by words or
other conduct by one person to another that, under the
circumstances, amounts to an assertion not in accordance with the
facts.”).
Here, IDC made affirmative representations about the
subjects at issue. For example, More sent the November 17th memo
stating two theories on which the development rights in the North
Unit were based, but he deleted information about the legal issues
raised by the American Condominium association and did not include
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information about the threatened lawsuit. Further, IDC failed to
clarify that its statements, that any claim challenging its
development rights would be barred by the statute of limitations,
were affected by the tolling agreement IDC entered with the
Associations before Commonwealth issued the Policy. Also, in an
effort to persuade Commonwealth to issue the title insurance
policy, More sent Commonwealth the earlier Chicago Title insurance
policy but later failed to disclose when Chicago Title refused to
issue a new policy based on the threatened litigation. A
prospective insured cannot select and present only favorable
information on a subject and delete less favorable information on
the same point, even if no follow up questions are asked.
Finally, having concluded that IDC made material
misrepresentations to Commonwealth, we need not resolve whether the
district court's finding that IDC "knowingly failed to disclose"
material information amounted to a finding of fraud. Rhode Island
law is clear that, in the case of a material misrepresentation,
fraud is not required to void a policy. Evora v. Henry, 559 A.2d
1038, 1040 (R.I. 1989); Guardian Life Ins. Co. of Am. v.
Tillinghast, 512 A.2d 855, 859 (R.I. 1986); see also Commercial
Union Ins. Co. v. Pesante, 459 F.3d 34, 38 (1st Cir. 2006).
We therefore hold that the district court applied the
correct standard and affirm.
Affirmed.
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